2
Perspectives and Commentary

China and the United States share four important challenges in achieving their energy goals. As very large economies, each lacking adequate domestic oil reserves, we share a dependence on petroleum and other imported fuels from world markets. We each depend heavily on fossil fuels—especially coal—despite the health and environmental problems that they cause. With regard to our use of commercial nuclear power we share a concern for costs, reactor safety, nonproliferation, and safe disposal of nuclear waste. We also face serious, although quite different, obstacles to the deployment of new energy technology: China’s research and institutional infrastructure inhibits its progress, while lack of demand for new energy sources inhibits the United States. Both countries face the challenge of market reform, especially in the power sector, and both share an interest in technology cooperation—the United States in exports, the Chinese in imports.

In addition, China faces the multiple technical and economic challenges of becoming a mature energy economy, which, from the experience of other countries, requires access to commercial, high-quality energy resources, low energy intensity, increased electrification, and greater attention to environmental control.

The United States, on the other hand, is a mature economy confronting the special challenge of mitigating the spillover effects of its energy demand and technological choices on the global commons—notably in the demand for liquid fuels and the production of greenhouse gases—and on the choices of other countries.

In this chapter, our two countries’ challenges and special needs are examined from their common roots, with differences noted in each broad area.



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Cooperation in the Energy Futures of China and the United States 2 Perspectives and Commentary China and the United States share four important challenges in achieving their energy goals. As very large economies, each lacking adequate domestic oil reserves, we share a dependence on petroleum and other imported fuels from world markets. We each depend heavily on fossil fuels—especially coal—despite the health and environmental problems that they cause. With regard to our use of commercial nuclear power we share a concern for costs, reactor safety, nonproliferation, and safe disposal of nuclear waste. We also face serious, although quite different, obstacles to the deployment of new energy technology: China’s research and institutional infrastructure inhibits its progress, while lack of demand for new energy sources inhibits the United States. Both countries face the challenge of market reform, especially in the power sector, and both share an interest in technology cooperation—the United States in exports, the Chinese in imports. In addition, China faces the multiple technical and economic challenges of becoming a mature energy economy, which, from the experience of other countries, requires access to commercial, high-quality energy resources, low energy intensity, increased electrification, and greater attention to environmental control. The United States, on the other hand, is a mature economy confronting the special challenge of mitigating the spillover effects of its energy demand and technological choices on the global commons—notably in the demand for liquid fuels and the production of greenhouse gases—and on the choices of other countries. In this chapter, our two countries’ challenges and special needs are examined from their common roots, with differences noted in each broad area.

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Cooperation in the Energy Futures of China and the United States A. IMPORT DEPENDENCE AND ENERGY SECURITY In the United States, concerns over energy security and import dependence are linked most closely to petroleum issues. The United States currently imports about half of its petroleum, and petroleum imports will rise to 65 percent by 2020. The Organization of Oil Producing Exporting Countries’ share of those imports will rise to about 50 percent in 2020. By 2020 the Persian Gulf region will produce about half the world’s oil, but imports from all regions are subject to concerns in varying degrees over transport and geopolitical implications.20 China likely will import about 40 percent of its oil and about a quarter of its natural gas by 2020. Although concerns over increasing imports are a key driver of China’s energy policy, energy security also means increased variety of fuel sources, especially diversification from China’s heavy dependence on coal (see sections on “Coal” in Chapter 1 and the following section in this chapter). China’s petroleum industry is facing unprecedented difficulties in meeting the surging domestic demand. Aging onshore oil fields, below-expectation offshore production, and slow development of new oil fields in the remote western region all contributed to only modest growth of crude oil production over the past 15 years. China has been a net oil importer since 1993, and net imports were about 1 EJ (over 20 million tons) in 1996, most of them oil products. China imported about half its crude oil from the Gulf region in 1997 and, as imports increase, so likely will the share from the Gulf region. China will need to make significant investments in the refining sector to accommodate this increasing share of high-sulfur crudes from the Gulf region. Chinese experts estimate that domestic crude oil production could peak at around 9 EJ (200 million tons) in 2020. The gap between demand and domestic supply likely will be 6 EJ (130 million tons). With natural gas expected to represent 10 percent of primary energy supply in 2020, China will use about 200 billion cubic meters (8 EJ), more than half of which likely will be imported. Liquefied petroleum gas (LPG) also is increasing; between 1994 and 1996, imports increased more than threefold, from less than 1 million tons in 1994 to almost 3.5 million tons in 1996. It is clear why the Chinese government has elevated energy security initiatives to a higher level of priority. Maintaining a strong domestic oil industry is considered by the government to be a partial safeguard against the unpredictable international market; achieving this goal without enduring too great a burden on the economy is a great challenge. These considerations add emphasis to the importance of alternative transportation options. Options should include mass transit systems, more efficient vehicles, and alternative-fuel and low-emission vehicles. Infrastructure planning should be also considered in this context. 20   Oil represents about 40 percent of total world energy supply and about 90 percent of energy traded between countries.

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Cooperation in the Energy Futures of China and the United States B. DEPENDENCE ON FOSSIL FUELS—ESPECIALLY COAL—AND THE ASSOCIATED ECONOMIC, HEALTH, AND ENVIRONMENTAL IMPACTS The United States is the world’s largest emitter of greenhouse gases, and 83 percent of all emissions come from energy production and use. By 2020 the United States will account for about 22 percent of total world emissions. Emissions from the U.S. energy sector are expected to rise by an average of 1.3 percent per year through 2020, from 1,480 million metric tons (Mt) in 1997 to 1790 Mt in 2020 (though relative share of world emissions remains constant). Fossil fuels, particularly petroleum (mostly used in the transport sector) and coal (used in power generation) are the major sources. Under the Kyoto Protocol, the United States would be committed to reduce emissions of six greenhouse gases by 7 percent from 1990 levels21 over the period 2008 to 2012. For the United States to actually meet the Protocol goals would require a radical change in energy policies or a major tradable emissions regime. The committee had not examined a detailed scenario for achievement of the goals. Possible emission reductions options include an emissions trading scheme and activities implemented jointly, perhaps through the Clean Development Mechanism (CDM) under which emissions credits would be received for projects undertaken in non-Annex I countries.22 A great deal of work has been done in the United States to quantify the external costs associated with energy production and use,23 though there has been little success in incorporating these costs in the price of energy (see “Barriers to Deployment of Advanced Technologies and Practices” later in this chapter). Major energy-related problems include water quality, waste disposal, coal mine disturbance, radioactive emissions and waste, and air emissions, including health effects of particulates and acid rain impact on agriculture and buildings. Because air pollution control is of the greatest significance to the Chinese situation, a brief overview of the U.S. experience is provided for context. Over the past 25 years the United States has succeeded in making significant reductions in air pollution through a three-part system of numerical standards, implementation agreements, and vigorous enforcement. Major components of the U.S. air pollution control system include limitations on SO2, particulates, tropospheric ozone, lead (from gasoline), CO, and NOx. Where elements of the 21   For the three synthetic greenhouse gases, 1995 levels may be used. 22   There have been several strategies developed to achieve emissions reductions in the United States beginning with the 1993 Climate Change Action Plan. Other efforts include Technology Options to Reduce U.S. Greenhouse Gas Emissions and Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy-Efficient and Low-Carbon Technologies by 2010 and Beyond. 23   See the report series prepared by Resources for the Future and Oak Ridge National Laboratory on estimating externalities of fuel cycles (ORNL/RFF, 1992-96).

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Cooperation in the Energy Futures of China and the United States U.S. program restricting these pollutants could be of benefit to China they are included. U.S. SO2 emissions have dropped by 8 percent since 1986, with corresponding benefits to health and reduction in acid rain. Emissions trading is a key element of this control system and one that might be of significant interest to China. U.S. particulate matter emissions dropped from about 13,000 tons in 1970 to about 4,000 tons in 1995 because of tighter regulations and technology requirements, with corresponding benefits to human health and regional visibility, another key concern to China. The health impacts from lead in gasoline are very well understood and lead as an energy-related source of environmental contamination has almost disappeared. Carbon monoxide, another pollutant coming from the transport sector, has been reduced in the United States through the introduction of catalytic converters. Nitrogen oxides are addressed through emission limit standards for fossil fuel plants as well as catalytic converters on cars. Carbon dioxide is not regulated or taxed and will need to be dealt with in the context of global emissions reduction targets. China currently accounts for about 13 percent of total world carbon emissions, second only to the United States, and is widely projected to surpass the United States over the next several decades. The industrial sector in China—which accounts for almost half of total gross domestic product (GDP)—produces about three-quarters of China’s SO2, flue dust, and wastewater and about 87 percent of solid wastes.24 In 1998 China expended about 1 percent of GDP on pollution prevention (China State Environmental Protection Agency, 1999). To date, China has achieved great success in decreasing water pollutants, so that total emissions actually have declined despite rapid industrial growth, but this is not the case with air pollution. To minimize emissions to the extent possible, given the projected growth rate of the Chinese economy, China will have to dramatically reduce air pollution intensity.25 The consequences of China’s serious air pollution are already apparent in human health impacts and decreased economic productivity.26 In 1997, China began the process of phasing out leaded gasoline by 2000, starting in Beijing. China addresses its current dependence on fossil fuels—especially coal—in three distinct manners: (1) decreasing coal use relative to total energy supply and increasing diversity and quality of primary energy supply, (2) increasing efficiency of energy production and use, and (3) moving to lower emissions limits on fossil fuel burning. 24   A detailed examination of the impact of industrial pollution in China was prepared by the World Bank (1997b). 25   Garbaccio et al. (1998) examine the effects of carbon taxes to reduce greenhouse gas emissions. 26   For a detailed discussion of air pollution abatement strategies see World Bank (1994). For a broader analysis of the economic impacts of pollution in China see Smil and Mao (1998).

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Cooperation in the Energy Futures of China and the United States Perhaps the most significant of these is decreased relative dependence on coal resources, as the implications of coal use are far-reaching and cover economic, health, and environmental performance. The move to higher-quality and more widely available commercial energy requires the development and deployment of advanced technologies. The second initiative, increased efficiency of energy production and use, involves current and future technologies to decrease energy inputs while maintaining economic growth. The third, lower emissions limits, has immediate benefits and provides incentives for the other two. Health, economic, and environmental considerations are some of the factors entering into the strong move to diversify fuel sources and decrease dependence on coal. In the time frame of this study, however, coal will remain the dominant fuel source, and even with major effort the reduction of dependence on coal will be only 75 percent to about 68 percent of total primary energy consumed. Given the magnitude of this medium-term burning of coal it is important for all countries involved to begin exploring approaches to sequestering CO2, and the committee strongly encourages these collaborative activities. Carbon sequestration is a real possibility, especially in a scenario in which a short term reduction in CO2 is required. The U.S. Department of Energy is currently expanding its programs in this area and there are interfaces with coalbed methane, enhanced oil recovery, and geologic disposal of CO2. Hydroelectric is an example of the effort to diversify fuel sources in China. In recent years it has contributed greatly to the increased electricity capacity in China and is projected to account for almost 70 GW of capacity by 2000 and 160 GW by 2020. China has already made impressive gains in the second activity of increasing energy efficiency, reducing energy intensity by 50 percent over the period from 1980 to 1995. Tremendous gains have been made, but the opportunities for improvement are still vast. The recent passage of the Energy Conservation Law provides the opportunity for China to promote the introduction of energy-efficient technologies in China in numerous ways. Natural gas has replaced coal in some of the most polluting applications—especially direct coal burning in the residential sector for cooking27—and is well positioned to make a strategic contribution to China’s energy sector in the 2020 time frame. As in the case of oil, the market conditions do not yet fully support economic development and exploitation of natural gas, nor are the institutional mechanisms in place. China is also undertaking improvements in energy infrastructure to support higher-quality energy systems. Notable efforts include recent natural gas pipeline projects, and plans to integrate its regional electric power grids (see “Energy Infrastructure” later in this chapter). 27   Direct use of coal and firewood for heating is still a common practice; about 90 percent of China’s population rely on solid fuels.

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Cooperation in the Energy Futures of China and the United States China has recognized the need to revitalize its pollution levy system to make it more responsive to changing market conditions, to include more pollutants, to raise its penalty rates to provide necessary incentives, and to allow some flexibility in how provinces handle pollution controls.28 When fully implemented, these changes will bolster China’s ongoing efforts to introduce coal washing and other clean coal technologies. C. NUCLEAR POWER CHALLENGES AND OPPORTUNITIES Opportunities for nuclear power are distributed broadly around the world, and nuclear power can help to address concerns over sustainable energy resources. This is very significant for the United States and China, whose dependence on coal is a shared concern and in a world now considering limiting the release of carbon dioxide. The challenges of nuclear power are widely recognized to be four: cost (particularly large initial capital costs), operational safety, the safe disposal of nuclear waste, and the prevention of the proliferation of nuclear weapons. The nuclear programs in China and the United States face specific challenges and opportunities in the years just ahead, but the contrasts between them are considerable. The U.S. nuclear program of about 100-GW generating capacity is the largest, most mature in the world, but one which suffers from public neglect and lack of governmental support despite a continual improvement in plant performance and safety in recent years. China, in contrast, has only recently launched its nuclear program, which now includes a 300-MW Chinese pressurized water reactor (PWR) and two French 900-MW units. China views nuclear power as an important alternative to coal among its electric power generation resources. A closer examination of the two programs will help to demonstrate the magnitude of our shared interests and the importance of collaboration. The U.S. problems are closely associated with the Three Mile Island accident, which led to the decline of public support for nuclear power, with environmental groups being particularly outspoken. Although the plant was a total loss, there was essentially no offsite damage or injury. The later Chernobyl accident, in contrast, occurred at a plant without a containment system and led to widespread radioactive fallout, loss of life, and damage and contamination throughout the plant, the nearby countryside, and to the surrounding region. This event rocked Europe and the Soviet Union and further compromised the future of nuclear power in the United States and many other countries. Asia was less affected by these events, in part because nuclear power did not play a prominent role in countries other than Japan, but the lesson for Asian nations now turning to nuclear power should be clear: public support is fragile 28   For a detailed discussion, see Chinese Research Academy of Environmental Sciences (1997).

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Cooperation in the Energy Futures of China and the United States and cannot be taken for granted. Safety is an imperative in nuclear operation and, as the United States has learned, an accident anywhere affects all operators in our open and networked societies. Through the Institute of Nuclear Power Operations and the World Association of Nuclear Operators, these and other lessons learned have been shared among U.S. and other operators. Although safety records have been good, plants have experienced problems affecting reliability and plant economics that need to be shared with new operators, including China. Generic problems, such as steam generators in PWRs have been a major problem.29 Much has been learned not only by the owners and operators, but also by regulators, environmental and financial communities, and governments at all levels. China can benefit from these lessons as it launches its nuclear era. China recognizes the growing greenhouse gas concerns around the world and is paying increased attention to both CO2 and methane emissions. Nuclear power presents many advantages to China as a complement to coal, which, as a relatively remote resource in China with respect to population centers, has created serious congestion problems for rail, road, and water transportation systems. In particular, nuclear power is an attractive option for meeting the energy needs of the dense population centers in eastern and southern coastal regions. Nuclear power as an alternative to coal use can ease Chinese environmental problems as well as global concerns. However, as noted earlier, nuclear power is not only technically sophisticated, but is also capital intensive. The latter factor remains a challenge that has led China to seek investment as well as to assess options beyond its own PWR design.30 In addition to French PWRs, China has entered arrangements with Canada for two 700-MW CANDU reactors and with Russia for two 1,000-MW PWR units. China intends to continue development of its own PWR design now targeted for 1,000 MW as its highest-priority effort in nuclear power. China probably could benefit from both the U.S. advanced PWR design and the French-German advanced PWR at 1.5 GW. China’s approach can be informed by the successful French program that standardized and periodically upgraded designs but all units were identical in each generation. Customization of units for the U.S. market by global vendors contributed to problems, some operational, but also economic. China’s plan calls for major projects using the Chinese design at the 300-, 600-, and 1000-MW levels for development early in 2000 with 20-30 GWe operating by 2010 and 40-50 GWe by 2020. The U.S. outlook is complicated by the ongoing restructuring in the electric industry. As the early plants approach the end of their 40-year licenses, decisions 29   Some advanced nuclear designs will not suffer from this problem, as they have eliminated steam generators entirely. 30   Other advanced designs, including second generation helium-cooled plants offer significant improvements in efficiency, safety, and resistance to proliferation.

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Cooperation in the Energy Futures of China and the United States must be made with respect to license extension. Units must pass an inspection, and many likely will require additional investment to qualify. Decisions likely will be made on a plant-by-plant basis, with many single-plant owners likely to sell to operators who hope to lower average unit costs by expanding their interests in nuclear power. Plants likely will face retirement when plant performance or high projected cost assessments indicate that they cannot compete economically. U.S. natural gas prices projected for the next 20 years will make natural gas plants very attractive alternatives to new nuclear orders. However, a significant carbon tax or CO2 emission target would give an economic advantage to nuclear power, particularly in comparison to coal, but also, to a lesser extent, to natural gas. The challenge of preventing proliferation is one faced by the United States, China, and the world community in general. Thus, common priorities are for research and international institutional cooperation on protecting, controlling, and disposition of fissile material. The challenge of safe disposal of nuclear waste is also one of common concern, about which China, the United States, and other countries can learn much through cooperative efforts. The commercial nuclear power industry in China and the United States would benefit greatly from mutual cooperation: A rejuvenated market for nuclear technologies will lead to faster development of better designs and increased technological capability. In the short term the United States stands to increase exports of equipment, and China would benefit from increased power capacity and transfer of technology. An extensive nuclear program implies the need for measures—both technical and institutional—to ensure that the threat to security is not increased. As noted in Chapter 1, a framework agreement that would allow this type of cooperation is already in place between both governments. D. RENEWABLE ENERGY SYSTEMS The following is a brief overview of the status and trends in the renewable energy area in both China and the United States. Because the market, institutions, and technology for hydropower development are well understood and mature in both countries, this discussion focuses on biomass, solar, and wind, renewables that have promising futures, but are facing special barriers (such as implications for land use, intermittent availability, or need for storage) in their ascendance to become efficient and economic energy sources for both countries. Barriers specific to China are presented in Box 2-1. In the time frame of this study renewable energy technologies are important in a strategic role, often in conjunction with fossil fuels, conventional hydropower, and nuclear energy, or in remote applications if cost and energy storage problems can be successfully addressed. In their present state of development they are not a solution to large-scale energy supply. China and the United States have among the world’s largest endowments of

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Cooperation in the Energy Futures of China and the United States BOX 2-1 Challenges to China’s Renewable Energy Development a China’s renewable energy program, although sufficiently coordinated at the central government level, is undertaken by relatively isolated small research and design institutes or local government departments, and has been met with a host of challenges in its effort to grow: Institutional fragmentation and uncoordinated project efforts hinder the development of market-oriented commercial companies, and hamper effective networking with commercial/financial establishments and private and foreign investors. Insufficient market regulation and the lack of industry standards suppress demand because of widespread product quality and service problems. Weak linkages with the financial community and underdeveloped government financial policies/regulations result in a dearth of credit and venture capital for even worthy projects and commercial applications. Insufficient commercial experience prevents the renewable energy industry from delivering its products and services efficiently. Awareness of potential and opportunities for commercial applications is lacking among decision makers and interested parties outside the renewable energy community. Information exchange is lacking among practitioners and access to advanced technologies is insufficient. Insufficient assessment of resources affects investment decisions and project finance. China also faces major technical problems: Applications are small and scattered, and suppliers of equipment are saddled with outdated manufacturing technologies and are incapable of achieving economies of scale. Funding for R&D is inadequate, partly because of low demand, and relative isolation from the international community hinders technological advancement. Inexperience in project design and implementation and the lack of market orientation increase construction costs and cause operational problems. A clear strategy is needed on how best to combine China’s comparative advantages and international state-of-the-art technologies to further long-term development goals and how best to reduce costs. a   Adapted from a Chinese Government and World Bank study on China’s renewable energy development strategy (World Bank, 1998).

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Cooperation in the Energy Futures of China and the United States biomass, solar, and wind resources. Large-scale deployment of advanced applications of these renewables may be an important long-term energy strategy for both countries because they are alternatives to fossil fuels and produce zero net carbon emissions. However, for these renewables—especially solar and wind—to become significant sources of energy, each country will have to overcome its own set of challenges. This effort could benefit greatly from close cooperation. Reducing costs and nurturing the market for renewable energy technologies are significant tasks for both countries, but China faces particular difficulties. It lags behind the United States in technology development and manufacturing capability and has the double duties of developing the market infrastructure for renewables while making the transition to a market economy. Sustaining and expanding the market development of each renewable energy technology also has its own special challenges. Biomass Biomass electricity generation is the largest source of non-hydropower renewable energy in the United States, with a capacity of about 10 GW. Forest products and agricultural residues and waste long have been used for cogeneration of electricity and heat on the order of 7 GW. Several U.S. electric utilities also have demonstrated in recent years that these products can be used with acceptable technical and economic performance in specialized conditions—in larger size plants with greater operating efficiencies, when both steam and heat are needed and when fuel costs are attractive. Biomass co-firing is the burning of biomass fuels with coal in existing plants without the need for new boilers or gasification systems. Significant benefits of co-firing include reduced plant emissions and disposal of a waste product. Biomass gasification plants in the United States currently being developed and demonstrated might offer the greatest benefits: higher thermal efficiency, scalable applications from 5 to 100 MW and increased fuel flexibility (EPRI/ DOE, 1997). Municipal solid waste and landfill gas plants in particular have promising futures as efficiency levels rise with combined-cycle technologies, if costs can be decreased for both fuel and the production facilities. In the longer term, biomass gasification fuel cell systems might be an attractive application in the United States and abroad, especially in smaller applications as part of a distributed energy strategy. The importance of efficient stoves notwithstanding, the primitive and inconvenient use of solid biomass in rural China has been declining steadily as modern fuels, including coal and LPG, have made great inroads in the past 10 years. Disposing of surplus crop stalks by burning them in the fields has become a serious problem in much of the northern rural areas, causing acute local air pollution, and serious visibility reduction. Biomass gasification is in an early stage of development in China. Several research institutes design, manufacture, and mar-

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Cooperation in the Energy Futures of China and the United States ket gasifiers, but these are scattered efforts that fall far short of building a commercial infrastructure for a potentially huge market in efficient modern use of biomass. China has perfected anaerobic fermentation technologies in its large-scale rural household biogas program and has used them to treat a limited amount of industrial wastewaters. Increasing the use of anaerobic digesters in industries such as distilleries, sugar, and pulp and paper would generate great environmental benefits while producing energy. Bagasse cogeneration has a potential to add 700 to 900 MW of cost-effective generating capacity to the grids in China’s sugar-producing provinces. However, technical as well as financial difficulties have restricted bagasse cogeneration to in-mill use only. Solar Solar photovoltaic (PV) electricity generation is used in niche, off-grid applications where its strengths—versatility, reliability, and absence of harmful emissions—outweigh its significant economic cost.31 The need for storage systems or backup options to address intermittent availability is also a significant challenge. The transition of PV technology to widespread more economically competitive applications, however, is not entirely clear, and grid-competitive PV electricity in the United States may lie outside of the 2020 time frame for this study. A new trend in PV deployment—building-integrated, in which PV equipment is included in the actual building materials—may be the key to decreasing installation costs. This approach has received significant attention in the U.S. government and in other governments elsewhere. Solar thermal energy technologies were first deployed in the United States in the 1980s under a program of state and federal incentives to foster development of emerging renewable energy technologies. Over the past decade, considerable experience has been gained with these technologies, and costs have decreased significantly. Solar thermal in combination with natural gas may be an attractive option in distributed applications where there is a rapidly growing need for electric power. Quality of products and customer services are a common problem of solar applications in China and undermine the efforts to increase market demand. Market demand also is affected by a lack of mechanisms to provide consumer credit in a high capital-cost application. The production scale of PV cells and modules in China is small, contributing to higher prices. Production was less than 2 MW in 1996, compared with a total shipments of 35 MW in the United States for the same year. China’s solar thermal collector industry is fragmented, with small and outdated production lines and is insufficient to meet demand in 31   Relative to conventional grid electricity, solar PV electricity is about 5 to 10 times more expensive (EPRI/DOE, 1997).

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Cooperation in the Energy Futures of China and the United States quantity and quality, especially for large-scale commercial and industrial applications. Wind Wind power systems in the United States have benefited greatly from government incentives over the past 20 years, and costs have continued their downward trend. In the past few years, wind technologies have neared the point at which they can provide competitive peak power. The U.S. experience has been mainly with large wind farms connected to a transmission grid through a dedicated substation, though interest is increasing in distributed facilities in which units are connected to a utility distribution system, a common model in European wind applications. China’s efforts to tap its large wind power potential are limited by its lack of widespread technical and financial know-how. Domestic manufacturers are capable of producing 100-W to 5-kW mini turbines and have begun to produce 200-kW turbines, but larger and more efficient turbines must be imported, and high costs have limited their use in demonstration projects. The wind power industry also lacks experience in design, construction, and operation of large wind farms. The government has yet to promulgate clear and conducive policies/regulations to make large wind power investment financially attractive to utilities or independent power producers. These are areas in which the United States has had substantial experience and could provide crucial assistance. E. ENERGY INFRASTRUCTURE The energy infrastructure that links energy resources to customer energy services involves extraction, processing, conversion, waste disposal, and transportation through pipelines, railways, waterways, roads, ports, and electrical grids. The U.S infrastructure is well developed for a fossil-based energy economy with rails, pipelines, and roads providing the major transport for coal, oil, gas, and refined fuels, while electricity moves to market over high-voltage grids. China’s developing infrastructure has components similar to those of the United States but is less developed at this point and its components have different relative importance. These modes of energy transport probably will not continue to offer optimal efficacy in the future. Already both the United States and China—the largest transporters of coal by rail—are experiencing congestion on the railroads. The inability of the U.S. government to agree on how to fulfill its obligation to accept waste from U.S. nuclear plants is one of the factors compromising the viability of nuclear power in the United States. The electric grid in the United States generally has provided reliable service, but not without controversy in regard to envi-

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Cooperation in the Energy Futures of China and the United States ronmental and aesthetic concerns and occasional disruptions ranging from power quality issues to outages. Recent trends in deregulation of power supply activities are creating new challenges for transmission and distribution system control. The technology behind the moving of energy must be improved to lessen environmental concerns and improve the efficiency and operability of these systems, particularly in electric power. Although it seems reasonable to assume that superconductivity, flexible alternating current transmission (FACTs), better insulation and undergrounding capabilities can help to improve electrical grid performance and acceptance, some new technologies such as distributed generation, including renewable sources like solar and wind, can bypass all or much of conventional transmission and distribution (T&D) systems. Distributed generation involves small generators—25-kW to several-megawatt gas turbines, internal combustion engines, or fuel cells—that offer onsite generation potential. These systems do not rely on the transmission grids that have been the backbone for getting today’s central power station coal and nuclear electricity to the distribution networks. Rather, they are able to use natural gas or liquid fuels and generate power close enough to customers that waste heat utilization becomes more attractive. Such systems will offer opportunities to both China and the United States—particularly in rural areas where service is less developed. Similarly, renewable resources such as solar, wind, biomass, and small-scale hydro often can be sited at or near loads so as to bypass the high-voltage grid, though it is advantageous to provide larger energy production sources with grid access to ensure full utilization of power production during optimum conditions. Solar photovoltaic and biomass both offer localized energy sources and can be combined with either storage (which needs more development) or two-way grid connections. As increasing attention is given to distributed generation, and as long as gas prices remain attractive, the energy transport investments likely will favor pipes over wires. Renewable-fueled distributed generation also could lessen dependence on electrical grids if energy storage technology improves. The increased use of distributed energy sources in nodes of concentrated energy use also has possible implications for the reliability of the balance of the interconnected system. However, for countries or regions heavily dependent on coal, mine-mouth power has certain advantages: It permits generation in remote areas where it may be possible to localize waste disposal and sequester carbon, and it reduces rail congestion and urban pollution. Coal-by-wire would require a cooling water source and decreases the number of cogeneration possibilities. These points deserve attention as both the United States and China upgrade their infrastructures. Mine-mouth plants could offer significant environmental benefits, and today’s high-voltage grids offer improved delivery capability. It will become increasingly important that future system planning take these factors into account to ensure that existing plants and future sites will offer attractive

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Cooperation in the Energy Futures of China and the United States investment opportunities for generators, including opportunities to market waste heat and minimize environmental costs. Similarly, current design nuclear plants require remote sites with adequate cooling, grid-access, and adequate spent fuel storage space. In the United States, new gas combined-cycle electricity generators are being built by independent power producers where grid access maximizes access to markets. Similar considerations will apply to investors in China, and it will be important to discuss both pipeline and grid configurations with potential power plant investors, as new investments are planned. China built its first gas transportation main line in the 1960s, and by 1996 had a total network of about 3,700 km (of pipe diameter over 426 mm). Transportation of commercial natural gas reached 10.4 billion m3 per year in 1996. China’s natural gas pipeline transportation industry is still in its early stages: The geographic distribution is uneven, and a national system is incomplete. Low utilization of pipelines is due in part to the following situations: traditionally oil exploration has taken precedence over gas exploration, with corresponding development of infrastructure; historically, the trend has been to connect a single gas source to a single user, rather than connecting to a network; and there has been a lack of gas storage facilities to adjust peak demand. In order to vigorously develop natural gas, it is necessary first to invest in a modern pipeline system, and plans are in place to do so by 2010. About 40 percent of China’s national rail capacity is devoted to coal transportation. The system is heavily stressed and upgrades are extremely expensive. The status of China’s electrical grids has already been discussed. The upgrading of this system is an urgent priority. F. BARRIERS TO DEPLOYMENT OF ADVANCED TECHNOLOGIES AND PRACTICES The deployment of new energy technologies on a large scale is a major challenge to governments in both China and the United States, though the specific situations in the two countries are somewhat different. Rapid economic growth has created an urgent priority to meet rising energy demand in China, which, coupled with the movement toward market reforms and decentralized political as well as economic spheres, makes for a complex task for government entities at several levels. The downsizing and decentralization in the Chinese government is occurring on an unprecedented scale. While these are complex tasks, restructuring is taking place. Deregulation of the Electric Power Industry The United States has a much more developed energy infrastructure than China, though the issues of privatization and deregulation are resulting in some

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Cooperation in the Energy Futures of China and the United States sweeping changes in how this country meets its energy needs. Many have been concerned that deregulation will cut back or eliminate efforts such as utility-driven demand-side management, integrated resource planning, and load management programs and thus result in an increase in energy demand. Others suggest deregulation simply will shift the incentive to save energy to the end user, as evidenced in the growing energy services company (ESCO) industry in the United States and in Europe. Implementation of international global climate initiatives, however, could provide strong incentive to further develop competitive energy-efficient and renewable energy systems. Deregulation of the electric power sector in the United States has the potential to negatively affect the development and deployment of competitive renewable energy systems and energy efficiency. Efficiency goals have been driven largely by utilities, and increased application of renewable energy systems traditionally have been promoted by regulators. In a deregulated system where price of electricity is the primary factor, renewable energy systems at their current level of technology can compete only in niche applications, usually in remote areas off-grid or in highly specialized applications. Demand side energy efficiency may not be a priority to a power marketer if the result is to limit sales of its products and services. A further concern is that private research and development (R&D) funding for commercially competitive renewable systems also could decline if current price of power were the only driver. Utility-driven R&D programs also would tend to focus on near-term goals, rather than a long-term strategic objective. Thus, the challenge will be to provide the proper incentives to develop economically viable renewable energy systems without re-regulating the industry. The role of government-funded R&D remains important for precompetitive technologies in the deregulated electricity markets. Within the context of deregulation, however, some attempts have been made to shape the industry in the United States. The Renewable Portfolio Standard (RPS)—mandating that a certain percentage of a utility’s electricity be generated or purchased from non-hydro renewable sources—is being implemented in some states and may help to secure modest contributions from renewables to grid-based systems. Such a mandate increases interest and investment in renewable energy systems. The potential positive environmental impacts in the entire United States could be significant: A contribution of 5.5 percent of electric capacity from non-hydro32 renewable energy would account for a reduction of over 20 million metric tons of greenhouse gases in 2010 (DOE/PO-0059, 1999). The creation of this standard is controversial and likely will lead to considerable political debate within the U.S. government. 32   U.S. electricity generation from conventional hydropower decreases by 0.3 percent per year through 2020 and thus is not included in this account of CO2 reductions from renewable sources.

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Cooperation in the Energy Futures of China and the United States Chinese electric power reform also is taking place at a rapid pace. The Ministry of Electric Power has been replaced by the State Power Corporation, a nongovernmental body that owns half China’s electric power generation facilities and all of the T&D network. The next step is the separation of generation from T&D and the creation of competitive markets. Three test areas—the independent Sandong power grid whose installed capacity in 1998 was over 17 GW, Zhejiang power grind and the Shanghai power grid within the East China Power Network whose installed capacity in 1998 was over 46 GW, and the North-East China Power Network with a capacity of over 37 GW in 1998—have been selected to demonstrate an independent power market; power rates in these areas are expected to decrease and service quality improve. If these test areas proceed as planned, a wholesale power market could be created in China as early as 2010, the year in which China plans to complete the interconnection of its six regional and five independent power grids. In the three test areas for deregulation there is no provision to promote cleaner energy sources, nor are there penalties for heavily polluting electricity suppliers. Investments and Market Reforms Needed To Promote Advanced Technology Deployment Investments in energy technology improvement may be categorized into three types: large investments in new facilities and processes; large investments in retrofitting existing facilities and processes; and small investments in new or existing facilities. The first type may include investments in new production processes, new power plants, and new buildings and vehicles. Embodiment of advanced and energy-efficient technologies and designs in new construction is very important in China’s energy conservation efforts, considering that most of the capital stock for 2020 is yet to be accumulated. The second type involves investment in modernization of existing facilities, such as upgrading production processes, rehabilitating old power plants and T&D systems, and improving coal preparation. Because there is enormous potential for cost-effective improvements in energy efficiency—especially in the industrial sector in China—such investments are crucial in the short to medium term and would be recurring activities in the long run as long as they have positive economic effects. Energy efficiency per se often is not the main purpose of the above two types of investments, which are relatively large and are usually intended to expand production, increase productivity, improve product quality, or decrease emissions. Special policy incentives are needed to create more favorable market conditions for private investment in the deployment of energy-efficient technologies. The third type includes a variety of relatively small investments, including personal investments—primarily for saving energy—such as measures to improve small boiler combustion efficiency and recover waste heat, as well as installing

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Cooperation in the Energy Futures of China and the United States efficient lighting equipment, or spending additional money to purchase more energy-efficient refrigerators. The energy savings of individual investments tend to be small, but the aggregate savings can be substantial and the payback period relatively short. Many of these investments have quite high returns, but constraints to implementation are sometimes quite strong—mostly high up-front capital costs and transaction costs. Market-oriented reforms and rising income have greatly changed the incentives and constraints to investments in advanced energy technologies for enterprises and individuals alike. The Chinese government recognizes the need to improve the effectiveness of policies and strongly supports the development of market-based initiatives; energy prices now are largely market-driven, and ESCOs are being introduced with assistance from the Global Environment Facility and the World Bank. Regulations have been strengthened to correct market failures. Air pollution controls have been tightened, and in 1997 China passed a comprehensive Energy Conservation Law. Continuously adjusting and updating energy policy approaches within changing overall economic systems is important to maintaining the momentum of energy improvements in China’s transitional economy. The challenges to implementing cost-effective energy programs, and policies should not be understated. Barriers to Investment Despite the progress made, there are still major barriers to investments in advanced energy technologies, many pertaining to institutional and regulatory reforms necessary to create the proper framework for energy projects. Specific examples of these barriers for China can be found in Box 2-2: They are presented in the context of energy efficiency investments, but many have broader significance. Externalities and the Failure of Energy Prices To Reflect the Full Cost of Energy Use In a market-based economy, one function of government is to protect the public from the actions of parties who are motivated only by the private costs that are reflected in market prices—at least when the divergence between private and societal costs is large and the matter is of major significance. These conditions can exist with regard to energy production, conversion, and consumption; absent government action, these processes may be “underpriced” when their full costs are taken into account. The difficulty is in finding acceptable methods to accomplish this objective that are practical and that do not cost more than the conditions that they are designed to remedy. First, the benefits of energy use are manifest and the unpaid costs sometimes are hidden, in the future, and/or widely dispersed. These make the political diffi-

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Cooperation in the Energy Futures of China and the United States BOX 2-2 Barriers to Investment in Energy Efficiency in China Unfinished economic reforms, especially those affecting productivity and investment decisions, such as state-owned enterprise reform and financial sector reform. Underdeveloped policy framework for market-based energy efficiency incentives. Many of the administrative measures previously used to promote energy conservation are becoming inapplicable in a changed economic environment. Insufficient institutional capacity to support market-based energy efficiency initiatives. China’s existing energy conservation system, although extensive, was originally set up to help the state-owned industries, and has not changed adequately to provide the kind of push and support that enterprises and individuals may need in a market-oriented economy. Underdeveloped industrial/building standards and related testing, monitoring and enforcement capacity. Lack of effective policies/mechanisms to improve the technologies of China’s many small industrial enterprises, which have been the driving force behind China’s industrial growth. Lack of information about the financial aspects of energy-saving investments and about opportunities and best practices. Inadequate technology dissemination due to the lack of effective mechanism and insufficient efforts. Small energy (and cost) savings and high discount rates often override the long-term benefits of individual energy efficiency investment, inhibiting the implementation of many cost-effective measures. Real and perceived high transaction costs and risks. Reliability and consistent performance is highly valued in China, discouraging enterprises or people from trying unfamiliar new products and new technologies, especially those without reputable names. Difficulties in arranging financing because banks are unfamiliar with the financial aspects of energy efficiency investments. Insufficient internalization of the health and environmental costs of energy consumption, especially those associated with coal production and use. culty of gaining acceptance of such actions very serious. Even when such externalities are clearly manifest, e.g., urban air quality in the Los Angeles region a decade ago, they are difficult to address. Second, instruments to intervene to address externalities are inherently difficult to precisely implement with regard to cost and to implement in ways that are

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Cooperation in the Energy Futures of China and the United States transparently fair. Indeed, they will always fail the test if absolute equity and efficiency are the standards—the best that can be achieved is to get the system approximately right, with the minimum disruption to market forces. Therefore, not only must difficult actions be taken, not only will their benefits be somewhat veiled, but they also will be difficult to defend in particulars as meeting tests of fairness and efficiency. Third, such interventions themselves are costly and a drain on the economy. These costs include the resources absorbed in creating, administering, complying with, and enforcing the regulations and must be considered along with the costs of the externalities themselves. They also include the “cost” in political will required to decide upon, gain acceptance of, and then carry out what always seem to be highly unpopular measures such as fuel taxes or increases in electric utility rates. In addition, required measures inevitably will lead to unpopular economic dislocations, for example, from reduced employment in some geographic areas and industrial sectors. The impact of these dislocations can be reduced if taxes are introduced gradually. These interventions are costly because of mistakes and failure to perform on the part of the authorities imposing the interventions. The “market failures” that occasion intervention are mirrored by the “government failures” that make the interventions themselves less than optimal. Finally, social objectives are constantly changing, as new information becomes available and as public priorities change, for example CO2 emissions were not on the policy agenda 20 years ago. The conclusion is that rational energy pricing for both China and the United States is both difficult to achieve and important to accomplish; perfection is not attainable. Governments have an array of methods to minimize environmental and safety hazards, including laws, regulations, permitting, and taxes. In the United States this range of actions has succeeded in internalizing many of the costs associated with electricity production. The United States has done particularly well in reducing SO2 and particulates and has made progress in reducing NOx. Addressing externalities associated with energy production and use, however, is a continuing challenge. The important matter is to reduce gross distortions such as those that lead to large costs from local and large-scale environmental damage. Further, it is critical to avoid well-intentioned but destructive policies that subsidize energy use to achieve other goals such as improved personal income distribution, industrial development, or export promotion. Beyond that, the goal should be policy choices that are robustly directionally correct, within the context of a free market, even though they cannot be fine-tuned to cover all of the “unpaid costs” of energy production, conversion, and consumption. China has been experimenting with and developing approaches for internalizing costs. This committee applauds these efforts and supports continued progress.

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Cooperation in the Energy Futures of China and the United States G. GLOBAL RESTRUCTURING OF THE ENERGY INDUSTRY The role of government in the energy sector has been undergoing rapid change in recent years throughout the world. Many centrally planned economies are turning to market systems to meet the needs of underserved and growing populations. Developed countries with well-established markets and private ownership are finding that deregulation of gas and electricity production and sales offers the promise of significant economic benefits. Only the T&D systems remain regulated. As these changes progress governments are rewriting the rules of engagement to ensure open competition and transparent markets, to attract investment, and to provide reliable, affordable services to customers in all markets. These changes are occurring in both China and the United States at varying paces. In recent years some Chinese state-owned enterprises have been restructured to perform better under reformed market conditions. Private investment is increasing rapidly in energy supply, much from international ventures. Given the size of China’s unserved population, a continuing government presence will be necessary to ensure that commercial energy services reach outlying areas, and China’s policy is to increase the availability and quality of energy services to all of its population as rapidly as possible. The World Bank and other international financial institutions will play an important role in developing essential infrastructure to entice service providers and fuel and equipment suppliers to develop projects in new markets. In the United States, deregulation eventually will eliminate monopoly providers and create competitive markets for both generation and power market services. Healthy cash flows and repositioned capital is being used by U.S. utilities to build critical-mass investments around the world in both generation and market services, two quite different businesses. These opening markets are attracting oil and gas companies as major players as well. Recently a major oil company and an engineering/architectural firm announced a partnership that likely will become a major global generation provider. Others already exist and many more will follow as the synergies between refining and generation are pursued. At this stage of deregulation the consequences seem possible, but these developments are subject to a variety of changeable factors. Utilities, like oil companies, have split their businesses into upstream and downstream components as technology services become increasingly specialized and important.33 Advances in both seismic sophistication and directional drilling technology have revolutionized the upstream portion of the oil and gas business. Because of mergers and acquisitions, fewer global companies likely will dominate this part of the business, and they will continually compete to ensure that 33   As noted earlier, China’s oil industry has recently integrated upstream and downstream companies.

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Cooperation in the Energy Futures of China and the United States they have cutting-edge technology. Increased partnering among established and emerging players provides financing and risk sharing as they move offshore and into deeper water. The refining and marketing sector is consolidating as it enters more competitive markets with tighter profit margins and more stringent environmental regulations. These changes could have an impact not only for the United States, but for China as well. Electricity providers, much like oil and gas companies, are seeking global opportunities. Mergers, acquisitions, strategic partnering, and alliances by which companies seek to position themselves to use technology resources and access markets are taking place at an accelerating pace around the world. China’s opportunities to partner with global generating companies to provide optimal use of their natural resources may provide very valuable benefits to the developing Chinese utility system.