1
Energy Setting for China and the United States

Significant progress has been made in the past 20 years forecasting energy demand, and the increased complexity of modeling systems has resulted in greater accuracy of predictions. Models often are scenario-based and rely on three primary variables: growth in population, economic output, and energy technology characteristics. A rise in either population or economic output results in increased energy demand. Advances in technology and the substitution of more efficient technologies lead to a decrease in energy intensity (the unit of primary energy consumed per unit of economic output), which tempers the rise in energy demand. Availability of capital has a direct influence on how a nation can reduce its energy intensity. It is increasingly the case that the private sector—not the government—provides the capital for energy projects, and it does so by paying greater attention to returns than to societal needs or goals, such as the environment. Projects compete for limited capital on the basis of their potential economic performance: The government role is to shape these markets to best suit national goals.

The issues of natural resource constraints that dominated energy modeling 20 years ago have been superseded largely by the availability of investments in energy resources and infrastructure and by questions of local, regional, and global health and environmental impact from energy production and use. Technology has been responsive to resource constraints; given a market for a particular good or service, an adequate supply generally has been made available. Increased attention to externalities has driven the development of cleaner energy systems through taxation, regulation, and other incentives.

Historical trends have demonstrated a move toward cleaner, more efficient sources and use of energy, an increased share of electricity, and a more diverse



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Cooperation in the Energy Futures of China and the United States 1 Energy Setting for China and the United States Significant progress has been made in the past 20 years forecasting energy demand, and the increased complexity of modeling systems has resulted in greater accuracy of predictions. Models often are scenario-based and rely on three primary variables: growth in population, economic output, and energy technology characteristics. A rise in either population or economic output results in increased energy demand. Advances in technology and the substitution of more efficient technologies lead to a decrease in energy intensity (the unit of primary energy consumed per unit of economic output), which tempers the rise in energy demand. Availability of capital has a direct influence on how a nation can reduce its energy intensity. It is increasingly the case that the private sector—not the government—provides the capital for energy projects, and it does so by paying greater attention to returns than to societal needs or goals, such as the environment. Projects compete for limited capital on the basis of their potential economic performance: The government role is to shape these markets to best suit national goals. The issues of natural resource constraints that dominated energy modeling 20 years ago have been superseded largely by the availability of investments in energy resources and infrastructure and by questions of local, regional, and global health and environmental impact from energy production and use. Technology has been responsive to resource constraints; given a market for a particular good or service, an adequate supply generally has been made available. Increased attention to externalities has driven the development of cleaner energy systems through taxation, regulation, and other incentives. Historical trends have demonstrated a move toward cleaner, more efficient sources and use of energy, an increased share of electricity, and a more diverse

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Cooperation in the Energy Futures of China and the United States mix of primary energy inputs, for the most part using higher quality fuels and processes. ENERGY TRAJECTORIES FOR CHINA AND THE UNITED STATES The Committee on Cooperation in the Energy Futures of China and the United States (CCEF) examined existing projections of energy supply and demand through the year 2020. For each country and sector, highlights are presented in a baseline case, followed by alternate possibilities based on possible reshaping of the energy situation, and finally a look at current trends and existing collaborative efforts. A great deal of the U.S. energy baseline case summary is based on the Annual Energy Outlook prepared by the Energy Information Administration (EIA) of the U.S. Department of Energy (DOE); much of the Chinese energy sector information is taken from the China Energy Annual Review. Chinese data do not include estimates for Hong Kong, Macao, or Taiwan. Other sources are noted in the text. The alternative scenarios also are based on existing projections with sources noted in the text. A. ENERGY DEMAND AND END-USE EFFICIENCY 1. U.S. Baseline Case As shown in Figure 1-1, total energy consumption in the United States is expected to increase by about 1.1 percent per year between 1997 and 2020, from FIGURE 1-1 U.S. Commercial Energy Consumption by Fuel. U.S. Department of Energy, 1999

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Cooperation in the Energy Futures of China and the United States about 100 to 125 exajoules (EJ).1 This projection assumes that the United States will have a baseline growth in gross domestic product (GDP) of just over 2 percent per year to 2020, with faster growth occurring in less energy-intensive industries. Energy intensity2—the measure of primary energy consumption per dollar of GDP—will continue to decline gradually through 2020.3 [A number of factors influence the energy intensity—degree of employment of best available end-use technologies, adoption of energy-efficient technologies, as well as structural changes in the economy.] Technological advances and a deregulated, more cost-conscious and efficient electricity sector will result in lower electricity costs in the United States. End-use efficiency improvements will allow increased energy services without significant increases in energy use per capita. The U.S. transportation sector currently accounts for about two-thirds of total petroleum consumption, which is projected to rise to almost three-quarters in the 2020 time frame. The growth of energy use in the transport sector surpasses the growth of electricity use as the largest single component of increase in energy consumption over this period. Low fuel prices, the absence of new legislation promoting gains in fuel economy, a growing population, and increased travel per capita all contribute to this trend of over 2 percent per year increased demand. Alternative-fueled vehicles—using ethanol, compressed natural gas, liquefied petroleum gas, or electricity—are expected to comprise 8 percent of all vehicle sales in 2020 (about 1.2 million units). Low-emission vehicles are expected to reach 640,000 units by 2020, one-quarter of which will be electric. (EIA,1998). For commercial and residential buildings, energy use will grow approximately 0.7 percent per year through 2020. The projections are based on continuing relative growth of electricity use in buildings; a substantial increase in the number and intensity of use of plug loads; continuing increases in energy efficiency of space conditioning, appliances, and lighting equipment; and a continuation of current demographic trends (increased population, increased commerce, and larger houses). Energy demand in the industrial sector is projected to increase by 0.8 percent per year to 2020, with natural gas and electricity being the energy supplies of choice because of ease of handling. Growth in demand for electricity, natural gas, and petroleum by the industrial sector are all expected to rise, by about 30, 26 and 23 percent, respectively. Growth in electricity demand is projected to be met 1   One exajoule (EJ) = 0.948 quadrillion British thermal units (quads). Using higher heating values, 1 billion metric tons of oil equivalent equals 44.9 EJ, 1 billion metric tons coal equal 30.3 EJ, and 1 trillion cubic meters of natural gas equals 39.8 EJ. See energy conversion factors in Appendix. 2   In calculating energy intensity, electricity contributes to total energy consumption as both end-use consumption and as energy losses. 3   EIA projects a reduction in energy intensity at an average rate of 1 percent per year from 1997 to 2020, though such projections are difficult to characterize because of the number of variables involved. Other projections are less optimistic about reductions in energy intensity.

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Cooperation in the Energy Futures of China and the United States by an 80 percent contribution from natural gas power plants and about 10 percent from coal plants. In all of these sectors the government can play a key role in influencing energy demand by crafting policy and financial incentives to encourage investment in energy-saving technologies to overcome barriers to such investments. The United States has been a leader in many key technologies and an innovator in some major energy efficiency policies, including auto fuel-economy standards, appliance efficiency standards, and utility demand-side management (from mid-1980s through the 1990s). 2. China Baseline Case As shown in Figure 1-2 (a scenario developed by the Chinese Academy of Engineering), overall energy consumption in China is projected to grow by more than 50 percent4 by 2020, from about 45 to 77 EJ. The pattern of end-use energy consumption in China has been relatively stable over the past 20 years. In 1997, industrial energy demand continued to be strong, accounting for about 68 percent of energy end use. Residential and commercial energy demand has resulted in a rapid increase in the use of gaseous fuels and electricity, and the leveling off of coal use. Residential and commercial share of final energy use is about 19 percent.5 Transport energy demand, although rising quickly, will account for only 10 percent of energy end use by 2020. The agricultural sector has an additional 4 percent share. The U.S. end-use pattern differs dramatically in its much larger share of the transport sector (36 percent) and much smaller share of the industrial sector (36 percent). It is widely believed that China will eventually move closer to this pattern of consumption of the United States and other developed countries (Sinton, 1996). In recent years China has fallen short of its power capacity expansion plan, but has managed to stay ahead of rapidly increasing energy demand. Power shortages so common a few years ago are for the most part gone in most provinces. This feat can be attributed to significant closures at state-owned enterprises (traditionally large power users) and an impressive record of implementing energy-saving practices. China has maintained rapid economic growth while sustaining a steady decline in energy intensity. The quadrupling of GDP between 1980 and 1995 was achieved while only doubling the economy’s energy demand. This achievement has been associated closely with government policies in economic reform and comprehensive national energy conservation programs initiated in the 1980s. 4   This summary is based on commercial energy consumption and does not include the significant portion of energy from current non-commercial sources in China, estimates of which range from 9 EJ to 11 EJ. 5   This does not include traditional biomass consumption.

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Cooperation in the Energy Futures of China and the United States FIGURE 1-2 Chinese Commercial Energy Consumption by Fuel. Chinese Academy of Engineering, 1997 Although substantial success has been achieved, it is widely recognized that significant energy efficiency improvements are still obtainable as major energy-consuming sectors operate at about 15-50 percent less efficiently than OECD countries (Zhou, 1998). Continued commitment to energy conservation is crucial to China’s economic and environmental future, and energy efficiency can substantially reduce carbon dioxide emissions from what they otherwise would be. In numerous applications throughout its energy system, energy conservation can make the most cost-effective contribution to meeting China’s energy needs. China is a leading developing country in implementing energy efficiency, and the sum of China’s many successes includes reducing energy demand growth to half that of GDP growth since 1980. This is a spectacular achievement that deserves much broader recognition. Recognizing its rapidly growing transportation sector, China passed the Law of the Highway effective January 1, 1998, as a fuel-based taxation system intended to save energy, reduce pollution and promote automobile technology development. 3. Variations from the Overall Energy and Energy Efficiency Baselines The Institute for Applied Systems Analysis (IIASA) and the World Energy Council (WEC) in Global Energy Perspectives note that scenarios vary in terms of clusters of factors: performance and costs of future technologies; penetration rates of these technologies; availability of energy resources; and geopolitical and policy influences including technology transfer programs, trade, and regulation (WEC/IIASA, 1995). IIASA/WEC also attempts to quantify capital requirements in the energy sector for each of the scenarios and variants proposed. Another

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Cooperation in the Energy Futures of China and the United States group that addressed this difficult issue is the U.S. President’s Council of Advisors on Science and Technology (PCAST) Panel on International Cooperation on Energy Research, Development, Demonstration, and Deployment in their Powerful Partnerships (PCAST, 1999). In examining the variation from the baseline case for energy efficiency it is useful to look at energy intensity and technological change to see where the future might differ. Although energy intensity is tied very closely to the state of current technologies, it also includes such factors as structural changes in the economy (e.g., shifts to less energy-intense industries) and changes in energy systems (e.g., shifts from coal to gas). For the United States, possible variations in end-use consumption include a 25 percent decrease in residential energy consumption (assuming the most efficient technology is chosen, over most cost-effective efficient technology), an 11 percent decrease in commercial energy consumption (energy intensity decreases at 0.6 percent per year), and an acceleration of transportation efficiency that cuts energy use by about 8 percent by 2020.6 To provide perspective, in the case of China, it has been estimated that if domestically available advanced technologies and equipment were used to retrofit all backward equipment—much of this in the industrial sector—total energy savings would reach almost one-third of present energy consumption. The question remains, however, what portion of that work can and will be undertaken in the time frame of this study. Capital requirements will be the major determinant of what energy efficiency projects are undertaken, because there is a large stock of inefficient equipment and a long turnover period. Many of these opportunities offer a significant return on investment, though capital remains scarce and capital markets are undeveloped. China Energy Conservation Investment Corporation has recently provided soft money from the government through the State Construction Bank at a level of about $250 million per year (about half for cogeneration projects), though this money will not be available in the future because of fiscal reforms. In the commercial and residential sectors in China (which are developing quite rapidly, albeit from a much lower position than industry), there is the tremendous potential for the introduction of highly efficient products into a relatively young market. The case in the United States is somewhat different: here the market for such equipment is mature and efficient technologies will make it into the market as replacement goods, not as new stock. Buildings and transportation also both offer considerable energy efficiency opportunities in China. 6   These variations are taken from EIA’s alternative scenarios, which some characterize as conservative for two reasons: technology development potential is considered modest, and EIA methodology does not consider the potential impact of new legislation. A great deal of work has been done in characterizing advanced technology development opportunities, especially in the context of emissions reduction scenarios. See in particular the 5 and 11 lab studies and the work undertaken by the Intergovernmental Panel on Climate Change (IPCC).

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Cooperation in the Energy Futures of China and the United States Traditional fuel use in China—predominantly in rural areas—accounted for 9 EJ in 1996 and is expected to decrease gradually through 2020. 4. Framework for Collaborative Efforts Between China and the United States The U.S.-China Forum on Environment and Development chaired by Vice-President Gore and Premier Zhu Rongji has built upon the extensive history of interaction between China and the United States7 to provide a framework to promote cooperation in support of sustainable development. The Forum’s goals include the creation of cooperative mechanisms to address local, regional, and global environmental issues, increased deployment of sustainable technologies and practices, and the identification of private-sector opportunities. Four working groups—energy policy, environmental policy, science for sustainable development, and commercial cooperation—meet on a regular basis and have established detailed collaborations in many of the sectors listed below. The Energy and Environment Cooperation Initiative, signed in October 1997 by U.S. Secretary of Energy Federico Peña and State Planning Commission Vice Chairman Zeng Peiyan,8 further specifies four priority areas for collaboration between China and the United States: (1) urban air quality; (2) rural electrification and energy sources; (3) clean energy and efficient energy; and (4) Peaceful Use of Nuclear Energy—PUNT, as based on a 1985 bilateral agreement and later agreements. At the June 1998 Clinton-Jiang summit a number of achievements were announced, including the establishment of the U.S.-China Oil and Gas Industry Forum; commercial contacts for U.S. companies in both coalbed methane and electric power; a financing conference to be held in Beijing; and participation in China’s National Air Quality Monitoring Program. This paper will not present a detailed discussion of each initiative, but will mention some of the key agreements and actions undertaken in each sector. The considerable efforts undertaken on energy efficiency between China and the United States are worth noting. In 1993, the two governments began a process to establish a formal dialogue to share information and promote collaboration on a variety of energy efficiency issues. By 1995, the two countries had reached a formal agreement to pursue mutual objectives in energy efficiency through the establishment of the Sino-U.S. Working Group on Energy Efficiency (under the Energy Efficiency and Renewable Energy Protocol). This working group is composed of representatives of private and public interests in energy 7   Bilateral science and technology cooperation began with China in 1979, and the U.S. Department of Energy currently has over 20 protocols and annexes for cooperation with China on energy efficiency, renewable energy, fossil energy, nuclear energy, and climate change. 8   Zeng became Minister of the State Development Planning Commission in March 1998.

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Cooperation in the Energy Futures of China and the United States efficiency. The Working Group has 10 teams, each with co-leaders from China and the United States and a joint membership of 10 to 20 participants. These teams are: (1) energy policy, (2) information exchange and business outreach, (3) district heating, (4) cogeneration, (5) energy efficient buildings, (6) motor systems, (7) industrial process control, (8) lighting, (9) amorphous core transformers, and (10) finance. The Working Group and its teams have remained active and, with limited resources, have been able to sustain joint collaborations in their areas. There are very substantial multinational efforts in energy efficiency in China—especially the Global Environmental Facility (GEF)—with active public and private U.S. involvement. Some ongoing efforts are focused on creation of a privatized energy management industry, energy-efficient refrigerators, and boiler efficiency, all areas determined to have immediate need and opportunity for improvement. B. COAL 1. U.S. Coal Baseline Case Coal consumption in 1997 was 1,030 million short tons9 (28 EJ) and in 2020 will reach 1,275 million short tons (35 EJ), an annual growth of about 1 percent. Over 90 percent of coal used in 2020 will be in electricity generation. Coal will remain the largest source of electricity in the United States through 2020, though its share will be down overall. Coal-fired units will account for about half of total electricity generation. Coal-fired units will probably constitute about 9 percent of total capacity expansion (about 32 GW) between now and 2020 (EIA, 1999). There also will be modest increases of about 0.7 percent in overall industrial demand for coal rising to about 80 million short tons (2 EJ) in 2020. Coal use in the residential and commercial sectors will remain constant at about 1 percent of total U.S. coal demand. Based on experience coal prices will remain competitive through increased mine productivity, and production will increase through 2020. Rail rates for coal are expected to decline in real terms which, coupled with increased fuel efficiency and other increases in productivity, will lead to transportation costs for coal dropping by just over 1 percent per year (EIA, 1999). 2. China Coal Baseline Case China relies on coal for about 75 percent of its primary commercial energy use. In 1997 raw coal production was about 1,373 million metric tons of raw coal (31 EJ), ranking first in the world and accounting for almost one-third of coal production worldwide. Currently only one-third of China’s coal output is used in 9   One short ton (2,000 lbs.) equals 0.907 metric tons.

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Cooperation in the Energy Futures of China and the United States electric power generation; industry, coke plants, and the commercial sector together account for about 60 percent of coal consumption. Coal production in 2020 will likely be around 1,600 million tons of raw coal (36 EJ). China recognizes its large dependence on coal use and has adopted numerous measures to limit production, diversify fuel sources, and move to cleaner generation. About 85 percent of China’s CO2 emissions are from coal burning, as are 90 percent of SO2, 60 percent of NOx and 70 percent of total suspended particulates (Zhou, 1998). Most of China’s coal resources also are located far from population centers and areas of high energy demand. China’s energy infrastructure is best developed around the coal industry, but this system already is stretched to maximum capacity to deliver sufficient energy resources. To demonstrate a level of scale, coal is transported 558 km on average before use. About 50 percent of all freight rail traffic in China is dedicated to coal use, and over 70 percent of coal is moved by rail. Coal also is moved by water and highway, the latter method representing a major new infrastructure capacity. Coal represents about one-quarter of total freight traffic on highways (State Economic and Trade Commission, 1997). China’s rapidly increasing energy needs will compound the already excessive strain on transportation systems. 3. Variations from Coal Baselines There are several scenarios under which coal production and use are affected in the 2020 time frame: The major variance from a reference-case coal trajectory, however, would arise from possible new stringent emission reduction agreements. For the United States, if a 5.5 percent Renewable Portfolio Standard (RPS) were implemented, new wind, biomass and, to a much lesser extent, geothermal plants could replace coal-fired plants. By 2020 wind generation could reach 52 billion kWh (rather than 8 billion kWh in the reference case), biomass could reach 180 billion kWh, versus 90 billion kWh, and geothermal consumption 34 billion kWh, versus 23 billion kWh (EIA, 1998). In this case coal consumption would decrease by about 100 billion kWh. Carbon emissions are reduced in this case by over 20 million metric tons per year.10 In a high energy demand scenario in the United States, however, coal-fired electric generating capacity might be needed to fill a portion of an additional 113 GW of demand growth. Coal could meet about 16 percent of this need under this scenario, and total coal consumption would increase by 12 percent. 10   The emission reduction benefits of a deregulated electric power market incorporating an RPS are impressive: about 60 million metric tons of carbon savings per year. Reductions come from a combination of heat rate improvements, renewable energy, energy efficiency, and distributed generation; increases in emissions come from additional capacity, nuclear retirements, and lower prices (Office of Economic, Electricity and Natural Gas Analysis, 1999).

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Cooperation in the Energy Futures of China and the United States In China, a program of energy diversification and continued emphasis on higher quality energy resources in the baseline case for 2020 could reduce dependence on coal to about 68 percent of total primary energy consumed. An even more rigorous program of diversification might reduce coal consumption to as low as 56 percent of primary commercial energy used. 4. Current Coal Policies and Collaboration China is moving to rationalize its coal industry by limiting production from inefficient mines and banning the use of lower quality coal, as well changing the way it uses coal, with a particular effort addressed to lowering consumption of coal in areas in which harmful effects can be minimized or mitigated, such as in electric power generation. Smaller, inefficient coal-fired plants (less than 100 MW) are targets for early retirement to minimize pollution. Mine-mouth plants (so-called coal by wire projects) will take on new importance in the 2020 time frame, as will foreign participation in the coal sector in general. China has been actively pursuing a variety of advanced coal technologies, including coal gasification and liquefaction, coalbed methane production, and coal slurry projects. Approximately 25,000 small coal mines in China, mostly in towns and villages, are scheduled to close in 1999 due to concerns over mine safety and small mine inefficiencies. In the short term, these closures will act as a means of cutting excess production and stockpiles and are also representative of China’s desire to rationalize the coal industry over the longer term. As an abundant and relatively inexpensive energy resource in the United States, coal is used to produce over half of all U.S. electricity. It is, however, a major source of air pollution. As a result of new and proposed air pollution control laws, the cost of building and operating coal-fired power plants is likely to rise relative to other options. Therefore, U.S. policy on coal focuses on research, development, and demonstration of advanced, clean, efficient, and cost-competitive technologies and on the deployment of the technologies domestically and in the major coal markets of China, India, and other countries. U.S. government support for the development and deployment of clean coal technologies have gone through significant changes over the past 25 years. Initial efforts were aimed at building large-scale demonstration and near-commercial plants using up-front funds provided by the federal government. This strategy failed in part because of the lack of financial incentives for private industry to carry the projects to completion, and in part because of the great uncertainties in the energy marketplace in the late 1970s and early 1980s. More recent programs that call for the government and industry to share the costs and risks of large-scale demonstration projects and for industry to gain the intellectual property from such projects have been more successful. Commercial deployment of some of the clean coal technologies (CCTs) was supported by regulatory (primarily environmental) requirements. However, some of the technologies have not been

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Cooperation in the Energy Futures of China and the United States economically viable in the highly competitive U.S. electric power market, though technologies such as integrated gasification combined-cycle (IGCC) are enjoying market opportunities in other sectors (e.g., oil refining). Regulatory incentives to expedite the initial commercial use of the technologies have been considered but not implemented because they are costly and skew market-based choices. The following are examples of ongoing cooperative initiatives in the coal sector: The U.S.-China Experts Report on Integrated Gasification Combined-cycle Technology (DOE and CAS, 1996). The United Nations Development Program/Global Environment Facility project and the collaborations between the U.S. Environmental Protection Agency and the China Coalbed Methane Clearinghouse to transfer coalbed methane technology to China. The Japanese Green Aid program to provide low-cost SO2 scrubbers to China. Analyses by the World Bank to prioritize CCTs for China. Exchanges between the U.S. DOE and Chinese institutions on CCTs (Annex IX of the Fossil Energy Protocol). U.S./China Energy and Environmental Technology Center to encourage the responsible development and use of energy in China with an interest in improving the quality of life. C. NATURAL GAS 1. U.S. Natural Gas Baseline Case In 1997 natural gas consumption in the United States was 22 trillion cubic feet11 (25 EJ) and is projected to meet almost 30 percent of U.S. energy demand in 2020, reaching 33 tcf (37 EJ) by 2020, increasing particularly in the industrial sector (a 26 percent rise by 2020). Gas will fill much of the expansion of the electricity capacity (about 88 percent likely will be combined-cycle or combustion turbine technology fueled by gas or oil and gas) and overall will account for a third of total electricity generation capacity in 2020. Additions to domestic U.S. reserves of natural gas could well continue to exceed production through 2020 as a result of increased drilling, higher prices, and productivity gains (Simpson, 1999). The United States has a relatively mature natural gas pipeline infrastructure; however, with natural gas use increasing, more than 75 pipeline expansion projects have been proposed for development over the next few years (EIA, 1998a). 11   One cubic foot roughly equals 0.0283 cubic meters.

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Cooperation in the Energy Futures of China and the United States Decreasing costs of enhanced oil recovery (EOR) techniques in tertiary recovery Matching technologies for cost-effective and economic development of low and extremely low permeability oil fields Development technologies for special hydrocarbon accumulations Technologies of steam injection and ultra-heavy oil development for heavy crude oil Natural gas injection exploitation methods for gas condensate reservoirs Geological modeling technology and reservoir simulation, and commercialization of reservoir numerical simulation software Research on the distribution of remaining oil and potential exploitation technology Reservoir protection technology Interpretation technology of test wells Problem of high-temperature resistance of water shutoff agent Advanced Drilling Engineering Unbalanced drilling and completion techniques for low-permeability hydrocarbon reservoirs Multilateral drilling techniques Long-distance reach drilling techniques Slim-hole drilling techniques Drilling techniques for high-temperature and high-pressure conditions and for ultra-deep wells to go online in 2003, and Tian Wan (Lianyungang, two Russian 1000-MW PWRs) expected to go online in 2004 and 2005. Although small by comparison with other developed nuclear programs, this program represents a significant commitment to nuclear power as an important component of China’s future energy mix. Nuclear power plays a strategic role for the densely populated coastal areas. China is aggressively developing its own 1,000-MW PWR design to serve as the backbone of this program early in the next century, and hopes to increase nuclear capacity to 20 GW by 2010 and 40 GW by 2020, though capital constraints could prove daunting. China’s policy is to reprocess its spent fuel and a pilot processing facility is under construction. China intends to recycle plutonium as MOX fuel in PWRs or

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Cooperation in the Energy Futures of China and the United States in breeder reactors. China has elected to construct four regional low- and intermediate-level waste facilities and is contemplating vitrification and geologic isolation of high-level waste. China’s National Nuclear Safety Administration (NNSA) regulates nuclear safety in concert with the International Atomic Energy Agency (IAEA). China is also a signatory to the Nuclear Non-Proliferation Treaty. China is expected to play an active role in the World Association of Nuclear Operators (WANO), which will accelerate the ability to safely operate the different reactor systems under construction. 3. Variations from Nuclear Baseline Cases Nuclear power could play a more significant role in a high economic growth or a high world oil price case for the United States. In such cases it is possible that nuclear power in 2020 could increase slightly to contribute about 360-375 (of a total 4,450 to 4,800) billion kWh. The U.S. interest in nuclear power could also increase if CO2 controls are imposed and nuclear power could contribute to reduction of NOx and SO2 emissions under the Clean Air Act. Existing plants would be more highly valued, and more plants would likely seek 20-year license extensions. Interest would likely increase in consolidating ownership to lower operating cost, and new orders for U.S. plants could occur before 2020. Under a carbon constraint scenario, existing nuclear plants could gain immediate economic benefit from selling CO2 credits to coal plants that would have to buy credits or control CO2 emissions. Chinese nuclear plants could also benefit in the establishment of CO2 markets with credits to offset either foreign or domestic CO2 releases. These credits could help meet the capital requirements necessary to realize China’s ambitious nuclear power goals. Outside of the time frame of this study, potential variations from the baseline case vary widely. For example, the ecologically driven scenarios developed by the IIASA/WEC team put nuclear power contribution at a crossroads: in one variant nuclear is assumed to be a transient power source and will ultimately be phased out (though well beyond the limit of this study); in the other variant a new generation of safe, modular reactors (150 to 300 MW electric) fills the electricity needs of densely populated urban areas where conversion of renewable energy to electricity is impractical. The latter variant requires significant reduction in capital costs and public acceptance of nuclear power—the conditions for which are discussed elsewhere in this paper. 4. Current Nuclear Policies and Collaboration The Agreement on Intent of Cooperation Concerning Peaceful Uses of Nuclear Technology (PUNT), signed by the United States and China in October

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Cooperation in the Energy Futures of China and the United States 1997, established the framework to, among other things, exchange technical information—including joint research and development (R&D) projects—on current and advanced light water reactor technologies; improve plant design, safety, and economic performance; address fuel and waste treatment and storage; and technology develop to enhance international nuclear safeguards. U.S. policy now permits U.S. companies to sell commercial nuclear power technology in China. The U.S. Department of Energy’s Office of Nuclear Energy, Science and Technology is emphasizing a Nuclear Energy Research Initiative (NERI) in response to recent recommendations made by PCAST. The basic premise is that if issues of cost, safety, proliferation risk, and waste disposal can be resolved, nuclear energy can make a positive contribution to the U.S. energy future: by addressing carbon emissions and other environmental impacts associated with energy production; by decreasing reliance on imported energy sources; and by increasing exports of energy technologies. The initiative will address proliferation-resistant fuel cycles, new reactor designs, advanced nuclear fuels, new technologies for waste management, and fundamental nuclear science. A peer-review selection process will consider innovative proposals from universities, national laboratories, and industry, based on their technical excellence and relevance to the following long-term strategic needs: developing new reactor and fuel concepts, maintaining U.S. leadership in nuclear technologies, and promoting and maintaining nuclear science to help meet future challenges. The Institute of Nuclear Power Operations (INPO) oversees operator training and performance to ensure that best practices are communicated among all parties. Periodic plant ratings provide an indicator of plant performance to owners and the public and contribute to the Nuclear Regulatory Commission’s independent assessments. WANO provides international oversight and provides a means of sharing good practices. The IAEA provides an independent assessment of national nuclear power programs with respect to safety. It also has produced guidelines with regard to security of fissionable material. Given the high profile of any nuclear incident and its effect on public confidence in nuclear power, the role of the IAEA is important and well supported by the international community. The Chinese National Nuclear Safety Administration (NNSA) and the U.S. Nuclear Regulatory Commission began collaborating in 1984. This has led to the mutual exchange of expert individuals for training, consulting, and exchange of experiences. These activities augment U.S. and Chinese participation in WANO and the IAEA. The nuclear energy industry in the United States and Japan also has been actively collaborating with Chinese institutions to design plants suitable for the Chinese market. The European advanced PWR also has potential for the Chinese market, given the early Chinese commitment to PWR technology.

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Cooperation in the Energy Futures of China and the United States F. ELECTRICITY 1. U.S. Electricity Baseline Case In 1998, total electricity generating capacity in the United States was 778 GW, producing 3,620 billion kWh of electricity. In 1998 coal-fired plants accounted for about 52 percent of total electricity generation, nuclear 18 percent, natural gas 15 percent, hydro 9 percent, petroleum 4 percent, and renewables about 2 percent. In the United States, electricity demand is projected to be 4,345 billion kWh by 2020. This will require a total of 363 GW of new capacity, of which 126 GW will replace retired units and 237 GW will reflect demand growth. Residential and industrial electricity demand will rise; commercial demand also will rise, but efficient equipment, particularly lighting, motors, heating, cooling, industrial processes, and building materials will temper increases in demand in this sector. The cost of electric power generation through 2020 probably will decrease by almost 1 percent per year, resulting in projected prices for residential, commercial, and industrial customers being 15 to 20 percent lower than in 1997.15 In the case of coal-fired plants, steadily declining fuel costs have reduced generating costs by almost half over the period 1980 through 1996. Fuel prices for natural gas have increased and are expected to continue to do so, though additional efficiency gains have offset these costs, lowering generating costs by 25 percent from their peak in 1984. 2. China Electricity Baseline Case China’s electricity generation capacity is second only to that of the United States, reaching 250 GW in 1997 and total electrical production reached 1,081 TWh. In the short-term China is experiencing an excess in capacity and has taken this opportunity to close many small, inefficient, and environmentally damaging thermal power stations. Major power construction projects have been deferred for three years. Over the next half century, China is expected to continue large-scale expansion in electric power to meet targets of modernization. According to original planning, the targeted installed capacity is scheduled to reach 290 GW by the year 2000, 500 GW for the year 2010 (of which hydropower accounts for 115 GW, nuclear power contributes 20 GW), and probably 700 GW for the year 2020. Recent economic difficulties as a result of the Asian economic crisis, limitations on capital availability, and other factors, however, will slow this ambitious plan of power capacity expansion. About 14 percent of exploitable hydro resources have been developed in 15   An increase in retail competition for electric power is expected to contribute to lower electricity costs, partially through efforts to streamline utility operations and partially from deployment of advanced technologies to lower operating costs.

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Cooperation in the Energy Futures of China and the United States China, and in 1998 hydropower accounted for over 8.4 TWh of increased generation. The Three Gorges Dam is the largest hydropower project under construction; when completed it will add 18 GW of electric power capacity. Some of the significant obstacles to increased development of hydropower are high capital costs, long payback periods, inaccessibility (i.e., distance from population centers and energy demand) of hydro resources, and site-specific concerns over ecological consequences. Household electricity consumption in China is 330 kWh per household per year, or about 10 percent of U.S. consumption. More than 860 million Chinese (about 70 percent of the population) live in rural areas with inadequate access to commercial energy, and, among them, in 1998 about 40 million have no access at all to electricity (Chinese State Power Corporation, 1999). This segment of the population depends heavily on biomass energy and suffers from the consequent negative health and environmental impacts from burning of these traditional fuels. The Chinese government is making a large investment to provide electric services in rural areas to alleviate this problem. One impediment to this objective of providing commercial energy to rural areas is that the development of the power transmission and distribution (T&D) network is far from complete. Compared with power grid systems in developed countries where meshed networks have been formed, the power networks in China (six regional networks and several independent grids) are still in the early stages of development. The framework of the system is not strong enough in either system security or capacity. It is necessary to strengthen the T&D system by constructing new lines as well as upgrading old ones. Growth in the urban electric power distribution network in the 1990s was between 14 and 18 percent per year, reflecting China’s urbanization, unprecedented in scale. Overloading of the network remains the bottleneck of meeting reliable power supply: updating and upgrading this system is an urgent need. The Chinese government is currently undertaking a program to upgrade the urban distribution system with an investment of about 200 billion RMB (about U.S. $24 billion). Electricity transmission line losses were reduced from almost 9 percent in 1981 to 8 percent in 1990, though this figure does not include losses in low-voltage networks and in the supply networks owned by large consumers which could be as high as an additional 7 to 8 percent. Taking into account power plant energy use, only about 75 percent of generated electric power reaches the end users in the worst case. The distribution network suffers from the same problems, especially in rural areas where distribution line losses, including nontechnical losses, can be as high as 25 percent.16 16   In the United States, energy used at the plant is about 5 percent and line losses generally range from 5 to 8 percent.

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Cooperation in the Energy Futures of China and the United States 3. Variations from Electricity Baseline Cases The trend of increased use of higher quality energy through electrification is one that pervades all energy trajectories; consumers are increasingly demanding cleaner and more convenient forms of final energy. Another trend is the increased efficiency of combustion, with goals of having coal-fired electricity attain 45 percent efficiency, and gas reaching about 60 percent. High economic growth projections for the United States17 could lead to an increased electricity consumption of about 350 billion kWh in 2020. For both the United States and China decentralized markets also could play a larger role in alternative trajectories, especially using renewables (addressed in the next section) and natural gas and CBM (considered above). Use of petroleum as a utility fuel likely will disappear almost entirely (from an already insignificant level). Overall, an optimistic trajectory for introduction of electricity in China could envisage meeting the goal of 700 GW of installed capacity by 2020, combined with major progress in extension and quality of transmission and distribution systems. 4. Current Electricity Policies and Collaboration The current trend in electric power markets in both China and the United States is toward a deregulated competitive system. Though the two countries are at different stages in their restructuring, both intend to separate generation facilities from transmission and distribution networks. This situation presents an important opportunity for collaboration between our two countries. There is also the need to coordinate closely with international financial institutions who are providing support to China in efforts to create a competitive generation market, one that includes independent power producers. Additional discussion of deregulated energy systems is found in Chapter 2. As a major feature of the Energy and Environment Cooperation Initiative, electricity supply, especially for rural populations, is a high-priority item for U.S.-Chinese collaboration. Many of the DOE agreements and protocols in place also address development of cleaner electric power through both fossil fuels and renewable sources. The Federal Energy Regulatory Commission has also conducted exchanges and activities with Chinese counterparts, as has the Electric Power Research Institute (EPRI). China currently is participating in EPRI’s R&D and services programs. 17   In the Energy Information Administration high economic growth case, GDP increases at an annual rate of 2.6 percent compared to 2.1 percent growth in the reference case.

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Cooperation in the Energy Futures of China and the United States G. RENEWABLE ENERGY 1. United States Renewable Energy Baseline Case In the United States, nonhydropower renewable energy is expected to contribute 3 percent of total electric capacity by 2020, up from 2 percent in 1997. Rapid growth is expected by 2020 in biomass (20 percent increase to 90 billion kWh), geothermal (an increase of nearly 50 percent), and municipal solid waste (increased to 30 billion kWh). Wind electric generating capacity in the United States declined in the mid 1990s but a resurgence of new construction since 1998 is expected to add about 1 GW by 2000 to the 1.88 GW of 1997 grid-connected wind power capacity. In the 2020 time frame, growth is expected to continue at about 3 percent per year to contribute a total of about 3.6 GW by 2020. Solar energy consumption in the United States remained flat in the past five years because of a lack of new installations in a market undergoing deregulation (EPRI/DOE, 1997) However, shipments of solar photovoltaic (PV) cells and modules and solar thermal collectors have increased sharply, largely because of a strong export market. Neither solar thermal nor solar PV is expected to make a large contribution to grid-connected electricity supply by 2020, though their application in niche markets will continue to grow. Conventional hydropower, which supplied about 10 percent of U.S. electricity in 1997 (360 billion kWh), is expected to gradually reduce its share to about 7 percent in 2020 (330 billion kWh). Because of the reduced share of hydropower, when grouping all renewable energy sources (including conventional hydro) overall share of electricity supply from renewable sources will probably drop from 12 percent in 1997 to 10 percent in 2020. See Table 1-2 for renewable energy generation predictions. TABLE 1-2 U.S. Baseline Case Renewable Energy Generating Capacity (thousand MW) Energy Source 1997 2020 Conventional hydro 77 78 Geothermal 3 3.5 Municipal solid waste 3.4 4.3 Wood, other biomass 1.7 5.6 Solar thermal 0.4 0.5 Solar photovoltaic 0.01 0.6 Wind 1.9 3.6 TOTAL 88 97

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Cooperation in the Energy Futures of China and the United States 2. China Renewable Energy Baseline Case Since the 1970s the Chinese government has recognized the importance of active development and application of renewable energy for off-grid rural and remote areas, and this work has been included in the national five-year plans. Through a continuous effort over 20 years, significant progress has been achieved. However, renewable energy resources are not anticipated to make a significant contribution to on-grid electricity capacity by 2020. Table 1-3 shows the current status of renewable energy deployment in China. Table 1-4 shows another set of renewable energy development projections for China to 2020. In comparison to the United States, China’s wind power development is small but growing rapidly. In 1998 grid-connected capacity was 240 MW, compared to 167 MW installed capacity in 1997 and 57 MW in 1996. There are also about 17 MW of off-grid small wind units in operation. China has world-class wind resources with an estimated technical potential of 250 GW, although much of it is far from population centers. Initial site assessment has identified 3-8 GW. Further development of wind power resources will be dependent on advances in energy storage or backup systems to account for the inherent intermittent nature of this resource. China has the world’s largest and fastest-growing market for solar hot water heating. Over 5 million m2 (heat-absorbing area) of solar water heaters had been TABLE 1-3 Development Status of Renewable Energy in China (Institute of Electrical Engineering, Chinese Academy of Sciences) Energy Item Present Situation Biomass Biomass digesters Firewood forest About 5.25 million sets, 1.47 109 m3/year About 5.4 million hectares Mini-hydro Power stations >60,000 stations, about 17,000 MW 34.3 billion kWh Tidal Power station 8 stations, 11MW Geothermal Power stations Direct use 5 stations, 28.78 MW 1.6981 x 104 TJ per year Wind Mini-Generators Water lifting machines Wind farms 150,000 sets, 15 MW >2000 sets, 2.11 MW 19 farms, 167 MW Solar PV cells Hot water heaters Solar houses (passive) Greenhouses Dryers Cookers ~8.8 MW ~5 million m2 2.7 million m2 0.342 million hectares 20,000 m2 150,000 sets

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Cooperation in the Energy Futures of China and the United States TABLE 1-4 Projections for Renewable Energy Development in China (Institute of Electrical Engineering, Chinese Academy of Sciences) Source 1990 2000 2010 2020 Solar Thermal Utilization Water heater   Mm2 1.5 9.0 15.0 30.0 Solar house   Mm2 0.4 10.0 20.0 100.0 Thermal Power Generation GW — — 0.1 2.0 TWh — — 0.2 4.0 PV Power Generation GW 0.002 0.015 0.3 3.0 TWh — 0.05 0.9 7.0 Wind Power Generation GW 0.02 0.35 1.1 6.0 TWh 0.05 0.95 3.0 17.4 Geothermal Utilization mtce 0.35 0.8 2.0 6.0 Power Generation TWh 0.1 0.3 0.5 1.0 Biomass energy mtce 263 240 260 290 Traditional Technology 262 236 240 200 New Technology 1 4 20 90 Power Generation GW — 0.05 0.3 3 TWh — 0.2 1.2 12 Ocean Energy GW 0.01 0.05 0.6 5 TWh — 0.1 1.6 15 TOTAL mtce 264 242 296 315 Power Generation GW 0.04 0.5 2.6 20.0 TWh 0.15 1.6 7.6 60.4 installed as of 1996. Other solar thermal applications include passive solar-heating houses and solar cookers. The PV market in China is small but growing quickly, with about 8.8 megawatts-peak (MWp) power in 1996. About 50 percent of existing PV power is used for telecommunications, 10 percent is used for industries, and most of the rest supplies electricity for remote areas without grid coverage. Solar thermal power generation is still in the R&D stage. China has made great efforts to improve the efficiency and technology of biomass utilization through national programs for efficient stoves and rural house-

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Cooperation in the Energy Futures of China and the United States hold biogas digesters and, more recently, commercial applications in bagasse cogeneration and biogas power generation. Total biomass consumption amounted to about 9 EJ in 1996, over 90 percent of it firewood and crop stalks burned for household energy needs. The United States consumes about half as much biomass fuel, but in more modern applications. Among the about 3 EJ consumed in the United States in 1996, 75 percent was used in industry, and 22 percent was consumed by households for space heating. About 27 percent of the U.S. biomass fuels are used for electricity generation. 3. Variations from Renewable Energy Baseline Cases Electric power from renewable energy sources often is envisioned as the long-term goal of a nation’s energy development, though the time frame in which such a transition can occur remains unclear. The major factors influencing the widespread use of renewable energy resources are price and policy measures to better balance energy needs with local and regional environmental objectives and the framework of a national and global regime to address emissions of greenhouse gases. Even in an accelerated worldwide renewable energy deployment scenario, the contribution to be made by renewable sources is more gradual in the near to midterm (WEC/IIASA, 1995). Under an aggressive system of policy and financial incentives as well as significant technology transfer efforts and international cooperation, renewable energy can make a large contribution beyond the time frame of this study (perhaps by 2050), but in order to do so, R&D, investment, financial incentives, and collaboration on policies and technologies must begin now. There is a possibility in the United States, through an aggressive program of incentives and R&D, of almost doubling non-hydro renewable energy contribution to electricity capacity to 6 percent by 2020, adding, in particular, over 20 GW of wind power rather than the 3.6 GW in the reference case. Greenhouse gas emission reductions under this scenario would be significant: a 70-million-ton reduction, or 3.5 percent. New programs to boost solar energy use are being implemented by the United States. DOE launched the Million Solar Roofs Program in 1997, and local projects for solar PVs are being launched. China’s New and Renewable Energy Development Outline from 1996 to 2010 requires that commercial renewable energy consumption increase from the current level of less than 2 mtce to about 120 mtce by 2020.18 Biomass comprises the bulk of the energy provided (about 90 mtce), followed by solar thermal appli- 18   This figure does not include current noncommercial use of renewable energy. According to the IEE projection, traditional biomass energy use will decrease to about 200 mtce by 2020.

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Cooperation in the Energy Futures of China and the United States cations (totaling 8.5 mtce), then wind energy (6 mtce), ocean energy (5 mtce), and solar PV and geothermal (each at 2.5 mtce). 4. Current Renewable Energy Policies and Collaboration The Chinese State Science and Technology Commission-DOE 1995 Protocol on Energy Efficiency and Renewable Energy and its six annexes provide a number of opportunities for collaboration in solar, biomass, wind, hybrid systems, geothermal, electric vehicles, and so on. In 1998, U.S. funding for the program increased to about $1 million, compared to $400,000-$600,000 in previous years. As part of the Energy and Environment Cooperation Initiative noted earlier, part of a now $100 million loan program at the U.S. Export-Import Bank has been earmarked for U.S. companies interested in developing renewable energy projects in China (other projects eligible under this program include energy efficiency and small-scale clean coal projects).19 Other ongoing efforts in renewable energy include: World Bank/Global Environment Facility demonstration of wind (~290 MW) and solar power systems, under way since 1996 and funded at over $400 million; U.S. DOE-Chinese Ministry of Agriculture: biomass cooperation under way since 1996; Energy Research Institute-National Renewable Energy Laboratory collaboration: under the Renewable Energy Protocol, Annex 1 (Center for Renewable Energy Development); UNDP/GEF renewable energy project of over $25 million half the funding of which is designed for pilot projects in biogas, bagasse, and hybrid village power, the other half of which is for technical assistance, training, codes, standards, resource assessment in solar, wind, geothermal, and biomass; and Asian Development Bank funding prefeasibilty studies and assessments in biogas and wind at about $1 million. In addition to ongoing collaboration with the United States, China also is receiving bilateral assistance in renewable energy technologies from Denmark, Holland, Germany, Spain, and Japan. Australia and Spain are also co-donors to the UNDP project. 19   The committee recognizes the controversy surrounding this initiative and later in this report offers suggestions on how to make better use of this facility.