3
Conclusions and Recommendations

An appropriate strategy for meeting the energy-related challenges facing China and the United States would include several types of initiatives:

  • Promotion of U.S. and Chinese investments in frontier technology important now for the United States and soon to be important for China. This would include advanced power generation, greenhouse gas controls, environmental technology, and transportation efficiency.

  • Development of collaborative programs to accelerate the deployment of advanced technologies. There are significant opportunities in the oil and gas sectors, efficient and cleaner coal use, electrification, energy efficiency, and environmental controls. Priority should be given to technologies whose demonstration and deployment are feasible either in China or in the United States. Priorities should follow market conditions and energy sector needs, and programs should include both institutional and specific technical initiatives. The rapid development of the Chinese energy sector compared to the relative maturity of U.S infrastructure creates many opportunities for both countries.

  • Ongoing collaboration between key scientific and engineering institutions in the two countries, notably the Academies of Sciences and Engineering, to help guide the choices required for implementation of these initiatives.

These types of initiatives are presented in this section broken down by sector, as discussed in Chapter 1. The findings and recommendations presented here are those of the Committee on Cooperation in the Energy Futures of China and the United States (CCEF or the committee) and are intended for institutions in both countries.



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Cooperation in the Energy Futures of China and the United States 3 Conclusions and Recommendations An appropriate strategy for meeting the energy-related challenges facing China and the United States would include several types of initiatives: Promotion of U.S. and Chinese investments in frontier technology important now for the United States and soon to be important for China. This would include advanced power generation, greenhouse gas controls, environmental technology, and transportation efficiency. Development of collaborative programs to accelerate the deployment of advanced technologies. There are significant opportunities in the oil and gas sectors, efficient and cleaner coal use, electrification, energy efficiency, and environmental controls. Priority should be given to technologies whose demonstration and deployment are feasible either in China or in the United States. Priorities should follow market conditions and energy sector needs, and programs should include both institutional and specific technical initiatives. The rapid development of the Chinese energy sector compared to the relative maturity of U.S infrastructure creates many opportunities for both countries. Ongoing collaboration between key scientific and engineering institutions in the two countries, notably the Academies of Sciences and Engineering, to help guide the choices required for implementation of these initiatives. These types of initiatives are presented in this section broken down by sector, as discussed in Chapter 1. The findings and recommendations presented here are those of the Committee on Cooperation in the Energy Futures of China and the United States (CCEF or the committee) and are intended for institutions in both countries.

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Cooperation in the Energy Futures of China and the United States A. CROSS-CUTTING INITIATIVES China and the United States are large and influential countries, and the sum of their energy production in the next century will represent a major portion of world total. Energy issues and especially the implications of increased energy demand and use are of great concern, not only to each country but to the global community. Successful cooperation between China and the United States will help the energy industry in the world to develop along a more sustainable path. Many significant recommendations and initiatives for cooperation have been presented here for different fields, and both Chinese and U.S. experts have highlighted the technical areas in which opportunities might exist. There are many relationships and mechanisms for collaboration and the following institutions should be involved: government departments, ministries, and agencies; academic, scientific, nongovernmental, and trade association entities; private industry collaboration in the context of an expanded and deregulated commercial regime; and multilateral development banks. Continued Cooperation Among the Academies To promote cooperation between China and the United States, the Chinese Academy of Sciences, the Chinese Academy of Engineering, and the U.S. National Academies could help to sustain programs on the new and ambitious recommendations and initiatives suggested by the four Academies and others. A1) The Committee on Cooperation in the Energy Futures of China and the United States (CCEF) recommends that a standing committee be established among the four Academies to identify opportunities for research, development, demonstration, and deployment of cleaner and more efficient energy technologies. The Academies are well suited to this task because they maintain strong contacts with government, industry and the international lending community and have the capacity to evaluate the technical merits of particular energy approaches and the framework necessary to implement them. A mix of government and private support would need to be found to support such a standing committee. Such a standing committee should consider in particular the policy, regulatory, and incentive structure necessary to support clean and efficient energy production and use, one that clearly reflects external costs. Continued interaction on these issues is necessary because particular market conditions change rapidly as economies develop. Even if technologies well suited for Chinese markets are readily available, the institutional and regulatory environments may not be conducive to their use. To address barriers such as enforceable environmental requirements, confidence in protection of property rights, market pricing for en-

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Cooperation in the Energy Futures of China and the United States ergy, and advanced technology deployment, the Academies could provide expert input to policy makers on market and environmental reforms. The Academies could work with the World Bank, the United Nations, and others who are supporting reforms to ensure that advanced energy technology deployment is a part of economic reform programs. The Academies also could conduct seminars and expert analyses of these programs. A1a) The CCEF recommends that the four Academies create a subcommittee to collaboratively assess the design and implementation of energy efficiency policies and programs. For China, this group would need to consider the design of strategies to implement the recently enacted Energy Conservation Law. For the United States this group could assess a range of opportunities to strengthen energy efficiency policies and programs. Such a continuing collaboration should include public and private-sector participants (including legislative and administrative branches; federal, state, and provincial officials; and academic and research institutions) with a strong knowledge of energy conservation policies and practices. A1b) A subcommittee on the health impacts associated with energy production and use should be established—to include representatives from the Institute of Medicine and counterpart Chinese institutions—to provide quantitative input to decision makers in each government concerning health impacts associated with energy choices. This subject deserves early attention to address efforts to minimize the health impacts of energy use—particularly indoor air pollution in rural areas and the impact of the transport sector in urban areas—and could provide timely advice to agencies in both countries already working on this problem. A1c) The Chinese and U.S. Academies of Sciences and Engineering could provide an “Academies-Industry Forum” to convene top-level energy industry representatives, researchers, and government agencies from the United States and China. They would discuss issues relating to policy and regulatory decisions and project guidelines, and their resolution to permit acceleration of investment and progress in one or more specific energy sectors and regions in China. The goal would be to experiment and to try to set an example of what can be done if clear and stable policies and guidelines are available. Specific local and regional circumstances (e.g., coal quality and specific development goals) would be taken into account. Continued Cooperation Between Our Governments It is recognized that before technologies are widely deployed throughout the world, several plants must be built to reduce the risks and prove their economic, technical and environmental performance and particularly to bring down costs through learning. This technology introduction and maturation period can last decades. The risks and costs of such commercial demonstrations may be more than most companies are willing to consider.

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Cooperation in the Energy Futures of China and the United States One method for accelerating the commercial introduction of the technologies is for governments to provide incentives to those willing to take the risks of new technology. Incentives can take the form of grants, low-interest loans, tax breaks, and other mechanisms. An insurance pool to cover new technology “make-good” should be also considered to facilitate project financing. A2) Considering the national importance placed on the reduction of greenhouse gases by many countries, including the United States, and on economic development and local and regional environmental control by China, our governments should initiate a dialogue on incentive programs to accelerate the deployment of advanced energy technologies, which would become cost-effective in the expected economic environment. Initial support for new and advanced technologies is necessary due to the difficulty in achieving immediate competitive economic results compared to costs of existing deployments. For example, the United States could provide incentives to U.S. companies in the form of tax breaks, low-interest loans, grants, or other mechanisms for undertaking demonstration plants for projects using advanced technologies. Such programs would help to reduce risks to a level acceptable to a private investor. At the same time, the Chinese government could provide incentives such as preferential electricity rates or other means to attract foreign partnerships in advanced energy technologies. The incentives would be provided only for the first few commercial demonstrations of each advanced technology. Thereafter, they would have to compete on a level playing field. Both governments are strongly encouraged to include industry in this dialogue. These types of incentives would be best developed jointly with full transparency on both sides. A2a) The CCEF recommends that both governments collaborate on a technology demonstration project to illustrate the mutual benefits of the Clean Development Mechanism (CDM). The CDM would allow United Nations Conference on Parties Annex I nations (including the United States) to earn credits for projects that reduce emissions in non-Annex I countries (including China). Such a demonstration project would set a valuable precedent in U.S.-China collaboration, one that could have a profound impact on the work being undertaken on global change. The initial demonstration project could be structured to be nonbinding for either side and would be intended to be a test of this new mechanism. Financial and other incentives would best be implemented jointly to enhance the effectiveness of such a project. A2b) This committee further recommends that the environmental protection agencies of both governments lead a broader governmental collaboration to address environmental degradation associated with fossil fuel burning. This collaboration would focus on better understanding of impacts, most efficient strengthening of emissions standards, creation of clean-energy tax incentives, and other financial and regulatory measures.

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Cooperation in the Energy Futures of China and the United States A3) The CCEF recommends a broad participation by agencies from both countries in energy cooperation, with financing agencies and facilities specifically emphasizing their support for energy efficiency, renewable energy, and other advanced clean-energy technologies that would become cost-effective in the expected economic environment. Initial support for new and advanced technologies is necessary due to the difficulty in achieving immediate competitive economic results compared to costs of existing deployments. The committee arrived at this recommendation on the basis of the size and the scale of China’s projected growth in the energy sector; the consequent importance of demonstration and deployment of desirable energy technologies; and in the local, regional, and global impacts of the energy sector on health and human well-being. A3a) This committee recommends that the U.S. Agency for International Development (USAID) be authorized to include China in its ongoing portfolio of activities. USAID and other key agencies and programs of the U.S. government could do much to assist in many elements of the proposed activities. Historically, USAID has undertaken activities such as institutional and market reform, technical training, and building and transferring experience with new technologies and management techniques. In particular, USAID works to promote renewable energy applications, energy efficiency, and other clean-energy technologies. These and other USAID functions are needed in China and would complement ongoing technical collaboration through the Department of Energy (DOE), the U.S. Environmental Protection Agency, and the financial vehicles of the Export-Import Bank and the Overseas Private Investment Corporation (OPIC). The CCEF further recommends that USAID broaden the operating jurisdiction for the U.S.-Asia Environmental Partnership (US-AEP) to include China. US-AEP is a public-private initiative jointly implemented by several U.S. government agencies, under the leadership of USAID. US-AEP currently works with government and industry in eleven Asian countries and is a proven vehicle for environmentally sustainable development. The exclusion of China from such an environmental partnership severely reduces the potential impact of this valuable initiative. A3b) The CCEF recommends that the U.S. Trade and Development Agency (TDA) and the Overseas Private Investment Corporation (OPIC) be authorized to conduct activities in China. About 15 percent of the current TDA budget is used in energy and energy infrastructure projects, and the agency is well positioned to expand these activities to include China. The prefeasibility studies, reverse trade missions, conferences, and technical assistance provided by TDA will aid penetration of established cleaner and more efficient energy technologies and will provide added incentive for U.S. private industry to become involved in the Chinese market. TDA involvement in the Chinese market will support existing initiatives such as the largely underutilized loan program34 established at the U.S. Export-Import Bank under the Energy and Environment Cooperation Initiative. 34   Originally funded at a maximum of $50 million, this program recently has been expanded to a $100 million cap. The first applications for loans under this agreement are being considered by the Export-Import Bank.

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Cooperation in the Energy Futures of China and the United States OPIC’s mission is “complementing the development assistance objectives of the United States” as it helps countries in the transition to market economies, and thereby increases opportunities for U.S. participation in emerging markets. OPIC works in over 140 countries and operates at no net cost to the U.S. taxpayer, as it generates exports and has recorded a positive income each year. In 1997, OPIC reported the potential for $44 billion foreign direct investment for China.35 TDA, OPIC, and other U.S. government financial support institutions could help to increase U.S. private-sector participation in the development of China’s energy sector by reducing financial risk to acceptable levels. Such modest financial assistance could significantly enhance advanced energy technology utilization opportunities. B. ENERGY USE AND END-USE EFFICIENCY There are considerable opportunities for and benefits of strengthening energy efficiency collaboration between China and the United States. China made a deep commitment to energy efficiency in 1980 and has experimented successfully with many different approaches to inculcate efficiency into its energy system over the past two decades. China continues to create and strengthen institutions to promote energy efficiency, and expects to maintain a growth rate of energy demand that is less than half that of its gross domestic product. The United States continues to play a leadership role in the development and dissemination of many energy efficiency technologies. Many of the technologies developed in the United States have been or could be adapted for Chinese markets. Both countries consider energy efficiency to be a cost-effective means of reducing the growth of greenhouse gas emissions as well as important local and regional pollutants, and trade and investment in energy efficiency between the two nations has the potential to yield benefits to both. Despite of the many interactions underway in the area of energy efficiency (see Chapter 1), there remain high-priority areas for increased collaboration, particularly on: incentives to encourage investment and trade in advanced energy efficiency technologies between the two countries, especially important for environmentally beneficial technology; cooperative R&D between China and the United States; policies and programs to further gains in energy efficiency; and

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Cooperation in the Energy Futures of China and the United States institutional mechanisms between the two governments. China has great potential for energy efficiency improvements in major manufacturing industries, power generation, power transmission and distribution, buildings, lighting, appliances, and transportation. A recent assessment concluded that China would be able to save 20 percent of the total current energy consumption by raising its industrial energy efficiency to advanced levels (World Bank, 1997a). China’s building standards are designed to cut the heating energy consumption of new centrally heated residential buildings to 30-50 percent of the level of existing buildings. The China Green Lights Program, launched in 1996, is expected to save 22 TWh of electricity, equivalent to 7.2 GW peak-load generation capacity.36 Of particular urgency is China’s need to find solutions to the energy demands and environmental problems caused by fast-growing automobile and other vehicle operations, especially in large cities. Energy Efficiency Policies and Programs The recent passage of the Energy Conservation Law in China, combined with the continuing process of reform of energy markets, means that China will be reinventing many of its policy and programmatic approaches to energy efficiency. The mechanisms that China develops in the coming years to enhance markets to energy efficiency (i.e., overcome market barriers) will have a profound effect on the evolution of its energy system. This situation provides a remarkable opportunity for collaboration between China and the United States to have great influence. The Energy Conservation Law provides only broad guidelines, to be implemented by the State Economic and Trade Commission, the State Development Planning Commission, and regional authorities. Key areas of fruitful collaboration include energy efficiency guidelines and standards for appliances; industrial products; technical guidelines and policy reform for cogeneration; electric utility reform; benchmarking of energy efficiency of new industrial processes; development and enforcement of building energy efficiency codes; supporting new concepts of energy service providers (as distinct from energy providers); and creation and/or modification of institutions to finance energy efficiency. See cross-cutting recommendations concerning support for joint efforts to assess the impact of energy efficiency policies and programs. 35   From the OPIC website (http://www.opic.gov). 36   The China Green Lights Program is a major energy conservation project in the Ninth Five-Year Plan intended to promote high efficiency lighting products; save electricity; develop a competitive efficient lighting manufacturing industry; and protect the environment. For more information contact the Beijing Energy Conservation Center (BECon).

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Cooperation in the Energy Futures of China and the United States Investment and Trade in Advanced Energy Efficiency Technologies The United States has developed many energy-efficient technologies that would be highly beneficial to the Chinese energy system. However, the trade and investment in these technologies has taken place far slower than is desirable for both countries. Some of the barriers include high costs of obtaining reliable information about technologies and markets, inadequately defined business terms (including intellectual property issues), high transaction costs for financing energy efficiency projects, inadequate expertise to evaluate or apply advanced technologies in key energy-using sectors in China, issues of intellectual property agreements in both China and the United States, lack of transparency in terms of commercial trade and investment between the countries, and the numerous barriers to energy efficiency associated with all energy markets. Additionally, there has been very little financial support for activities to broadly promote trade and investment in energy efficiency between the countries, either from private or public sources. There are compelling reasons at this time to focus increased attention on opportunities to promote commercial transactions in energy efficiency technology between China and the United States. Energy efficiency technologies are a central element of global efforts to reduce the growth of greenhouse gas emissions. The United States as a leading industrial economy and China as a leading developing economy could help to demonstrate the practicality and mutual benefit of bilateral programs to apply advanced technology to promote energy efficiency. Energy efficiency can also be promoted through training programs and control system modifications that enhance efficient operation and maintenance of existing technologies. As noted earlier, it may be possible to use the CDM proposed in climate-change negotiations as a mechanism for promoting Sino-U.S. trade and investment in advanced technology. The potential for energy efficiency technologies to reduce economic costs means that trade and investment could “take off”—yielding substantial business opportunities in both countries—if the barriers to successful business relations can be overcome. This suggests that a relatively modest investment in reducing market barriers may lead to large private-sector opportunities. B1) The CCEF notes the inadequate support to date for investment and trade in advanced energy efficiency technologies between the two countries and recommends that new resources be devoted to expanding these activities. B1a) Governments and international financial institutions should expand existing avenues of information exchange on energy efficiency technologies and policies, support selected training in energy efficiency, and facilitate investment, joint ventures and trade in energy efficiency. B1b) The committee recommends that a high-level bilateral special study of institutional innovations to promote financing of energy efficiency be carried

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Cooperation in the Energy Futures of China and the United States out. To be effective, such a study group should have representatives from a variety of public and private financial institutions in order to be able to implement their innovations. Difficulties in establishing mechanisms for financing energy efficiency—because of small size of most projects, high transaction costs, and related market barriers—seriously inhibit technology application. Research, Development, and Demonstration of Energy Efficiency Technologies There are many technologies in different stages of R&D for which joint activities between China and the United States could be mutually beneficial.37 There is a particular need for adaptive R&D, that is, the engineering research necessary to modify a technology for successful application in the circumstances particular to an individual country. Such R&D can, for example, enable the technology to function with low power quality or incompletely processed fuels and simplify its operation or maintenance, integrate technology components into Chinese systems and/or design systems solutions that fit local Chinese conditions and fuel characteristics. China presently has active demonstration programs on energy efficiency in such diverse areas as lighting, control systems for buildings, utilization of industrial waste, district heating and cooling, and new industrial processes. Both public and private benefits could result from joint demonstration programs. In some areas of advanced R&D—e.g., the application of information technology to energy efficiency—joint long-term projects composed of Chinese and U.S. researchers could be highly beneficial. Such R&D programs can be stimulated through research exchanges between leading Chinese and U.S. institutions. B2) The CCEF recommends significantly strengthening and expanding the existing program of collaborative precompetitive research, development, and demonstration of energy efficiency technologies between the two countries. To date, there has been very little cooperative R&D on energy efficiency between China and the United States. Such R&D can profitably focus on many different areas of energy efficiency in buildings, industry, and transportation. It would be desirable to increase the exchanges between researchers from the two countries, particularly in areas that are highly valued by both countries. B2a) The CCEF endorses the activities of the Sino-U.S. Working Group on Energy Efficiency and its subgroups and recommends expanding and strengthening this Working Group as a means of carrying out the initiatives on technology research, development, and demonstration and policy assessment described 37   See the PCAST (1999) report on international cooperation in energy research, development, demonstration, and deployment for a thorough discussion of these issues as they relate to China.

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Cooperation in the Energy Futures of China and the United States above. Consideration should be given to expansion of the number of teams in the Working Groups to encompass transportation energy efficiency, including work on improving battery and fuel-cell technologies. The move away from petroleum–based transport systems is a logical next step considering our ability to use clean coal technologies, advanced nuclear power and renewable energy sources. C. CLEAN COAL The opportunity exists through Sino-U.S. collaborations to deploy a wide variety of clean coal technologies (CCTs) to reduce emissions, improve project performance, and improve the overall system economics of coal use in the United States and in China. This can be done by learning from the U.S. experiences in using some of the technologies, by adapting technologies to suit China’s market, and by creating the right market conditions in the United States and China to deploy promising technologies that are not yet used commercially. Table 3-1 summarizes in broad terms the commercial status of the key CCTs. The United States has had significant experience with most of the technologies in the demonstration and commercial stages, the fruit of a long-term research, development and demonstration program, as well as regulatory requirements and incentives that have created the necessary market conditions for their use. For example, acid-rain control requirements, local siting constraints, and other factors have led to the use a variety of NOx and SO2 control devices, configured to meet the requirements of each project. Technologies like coalbed methane recovery (CBM) have been driven both by technology development and regulatory TABLE 3-1 Commercial Status of U.S. CCTs Technology State of Development Efficiency Cost Percent of SO2 Reduction Percent of NOx Reduction Coal Cleaning ***** ↑ — 20-50 — Pulverized coal/ scrubber/NOx ***** ↓ + + 70-95 20-70 CFBC ***** — + + 50-95 20-50 Supercritical **** ↑↑ + + + 70-95 20-70 PFBC *** ↑↑ + + – 70-95 70-95 IGCC **** ↑↑↑ + + + 80-99 80-98 Vision 21a * ↑↑↑↑ + + + + 99 90 aVision 21 is a program intended to greatly increase generating and thermal efficiencies with near zero emissions of traditional pollutants and greenhouse gases. For more information contact the office of Fossil Energy, U.S. Department of Energy. See also http://www.fe.doe.gov/coal_power/fs_vision21.html

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Cooperation in the Energy Futures of China and the United States TABLE 3-2 Chinese Technical and Economic Evaluation of Different Desulfurization Measures for High-Sulfur Coal Technical Method Sulfur Removal Rate (%) Cost for Removing 1 ton of SO2 (yuan/t) Coal cleaning 30-40 500-600 Household briquette 40-50 1500-2000 Industrial briquette 50-70 2000-3000 CFBC desulfurization 85-90 1000-1500 Flue-gas desulfurization 90-95 1700-2200 incentives.38 Other technologies such as circulating fluidized-bed combustors (CFBCs) have been used extensively in industrial applications because they are economically competitive on the basis of cost penalties for emissions, especially when using low-cost coal and coal wastes. China also has some commercial experience with CCTs, notably, atmospheric fluidized-bed combustion, pollution control systems, and gasification systems. Some of these experiences have been with advanced CCT technologies, though applications have been limited and usually with the support of government subsidies, not in true market conditions. In the United States current interest in CCTs is in retrofitting and repowering of existing coal capacity to improve environmental performance. In addition, U.S. industry is interested in developing experience with and reducing the costs of advanced technologies such as pressurized fluidized-bed combustors (PFBCs), integrated gasification combined-cycle (IGCC) in combination with advanced gas turbines and fuel cells, and other technologies that will allow coal to be used more efficiently, cleanly, and economically. However, at least for the foreseeable future in the United States, very little private-sector interest exists to build or invest in research, development, and demonstration on these advanced coal-based systems because of the high risks and long payback of the investments compared to natural gas-based systems. China, on the other hand, has a near-term interest in using the wide range of CCTs but has difficulty in paying their higher costs or taking the risks associated with them (see Table 3-2 for costs of removing sulfur). In addition, China lacks a strong market pull from environmental regulations and competition. As a result, even with its interest in and need for advanced CCTs, few commercial projects are expected to be undertaken. The Chinese market is projected to grow rapidly, and retrofitting and repowering could bring substantial benefits. This market therefore would benefit sub- 38   In the United States the Internal Revenue Code “Section 29 production tax credit” legislation gave rise to the development of the CBM industry by effectively providing a higher than market price for gas produced from certain nonconventional sources.

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Cooperation in the Energy Futures of China and the United States ronmental and energy factors and to define the research that needs to be done to ready these technologies for the Chinese market. C2a) On the basis of preliminary analysis of priority areas for Chinese application of CCTs, the committee suggests the following high-priority areas for cooperative research, development, demonstration, and deployment in the mid term: coal-fired combined-cycles such as IGCC; increased efficiency and cleaner combustion of low-heating-value fuels; lower-cost SO2 control technologies (addressing both the manufacturing costs for flue-gas desulfurization equipment and plant operational costs); cleaner combustion, desulfurization, and dust removal in small and medium-size coal-fired boilers; and techniques to maximize the contribution of CBM while reducing environmental and safety hazards. Because of the large variety of coal, some of which is of poor quality, circulating fluidized bed technology will be of great interest to China. For the inter-mediate term, the hybrid CFB-based combined-cycle holds promise, especially if these can be retrofitted to the fleet of existing CFBs to increase capacity and efficiency. Advanced PFBC and IGCC will be pursued in the near term only in specific limited applications under specific market conditions. The committee also identified several issues specific to development of CBM resources that bear greater scrutiny; these are covered in Recommendation D1 and in Box 1-1. D. NATURAL GAS The natural gas sectors of the United States and China are very different in their scale and technical development, though each country will be relying more on gas resources in the time frame of this study. Cooperation between the two countries would bring new business opportunities to the United States and capital, technology and business knowledge to China. Historically, natural gas has lagged in China’s energy development, although recently growing concerns about severe air pollution in urban areas have made natural gas a high priority for displacing urban coal consumption. Natural gas also could play an important role in reducing carbon dioxide emissions in the short to medium term if leak-tight technologies are employed. In the longer term, gas from various sources figures prominently in all scenarios for successfully and cleanly meeting energy needs. Some of the advantages of natural gas include lower capital costs, decreased emissions, shorter plant construction times, modular and scalable units, and increased reliability compared to coal. Consideration of joint initiatives thus should pay greater attention to the issues and challenges in increasing the demand and supply of natural gas.

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Cooperation in the Energy Futures of China and the United States For natural gas to have a significant role in China’s energy future, a great deal more natural gas is needed, and for environmental reasons, needed sooner rather than later. There is little doubt that China’s natural gas resources would be able to support a demand much larger than the current level. China also may choose to import natural gas to supplement its domestic production. There are high hopes for much greater use of natural gas in China, but the challenges are many and large. On the supply side, China needs to locate more ready-for-development natural gas reserves, and to accelerate their development. The transmission, distribution, and storage infrastructure has to be greatly expanded to ensure that produced and imported gas reaches the market. This would require huge capital investments as well as acquisitions of a great amount of technology and business knowledge in a relatively short period of time. China would need foreign participation to meet these challenges, however, the current natural gas sector policy framework is not conducive to significant outside participation. Major obstacles include: a lack of clear rules, regulations, and consistent approval procedures for foreign investments in the oil and gas sector; the lack of access to high-quality exploration areas and crucial data and information; restrictions on foreign equity investment in pipelines; and gas prices that are artificially controlled below their market clearing levels, creating difficulties for both domestic and foreign investors in recovering their costs. D1) The CCEF recommends that both governments work collaboratively to explore possibilities in developing an overall strategy for accelerated natural gas development in China that includes production of domestic natural gas and CBM, and imports of piped natural gas and liquefied natural gas. Such a strategy also would address the associated infrastructure improvements—transportation, distribution, and use—which represent many of the challenges and investment costs of the natural gas industry. The policy framework for this development needs to be market driven, with transparent incentives and regulations. As a world leader in natural gas and CBM development, the United States could be a very useful partner for China in this arena. D1a) The committee wishes to highlight specific portions of this overall strategy that would benefit from increased near-term technical and institutional collaboration (some of these issues are addressed in a more general context in the cross-cutting recommendations above): assisting in exploration and resource assessments for the varying geological conditions of Chinese gas reserves;

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Cooperation in the Energy Futures of China and the United States developing a market infrastructure, including physical facilities and institutional arrangements for an efficient and reliable gas supply system; undertaking further environmental policy reform to better allow natural gas to compete with coal; developing high-priority areas specific to CBM, including techniques for exploration, drilling, testing, evaluation, and reservoir protection of CBM resources, as they differ from natural gas deposits (see also Box 1-1). D1b) The CCEF strongly emphasizes the importance of CBM to China’s efforts to diversify its future energy supplies. Extracting CBM increases mining safety, reduces greenhouse gas emissions, and provides a low-pollution energy supply. The benefits are substantial, but to bring CBM to large-scale commercial utilization, China must deal with development problems associated with natural gas in general, as well as specific issues concerning CBM. Exploration and resources assessment for CBM are at a very early stage in China. CBM reservoirs tend to be fragmented and smaller than those of conventional natural gas, raising the costs of development. In this regard, successful CBM policies need to be more creative and incentive-laden than those for natural gas. China has made great progress in development of CBM resources thus far and is well positioned to continue this trend. Such an upgrading of China’s technological capacity to assess, develop, and efficiently utilize CBM would be a valuable component of broader policy and regulatory initiatives aimed at fostering the development of a complete CBM industry and the necessary infrastructure to support it. Neglect of these considerations leading to the release of the large amount of methane could seriously compound greenhouse gas problems. The committee also notes that increased activity in the coalbed methane industry in China could speed the development of China’s natural gas industry because the two industries share many of the same techniques and infrastructure, both physical and institutional. Also, China is gaining valuable experience experimenting with financial incentives and more flexible contracts for development of CBM (e.g., tax holidays and reduced royalties, as well as freedom to select individual exploration areas, as opposed to preselected lots), which also can be transferred to a burgeoning natural gas industry. Cooperative research, development, and demonstration in several key technology areas would help to ensure the rapid development of China’s CBM industry. The first set of CBM projects undertaken in China faced difficult geological conditions and were hampered by the inexperience of the Chinese oilfield services industry in adopting CBM drilling and testing techniques (Stevens, 1999). These are outlined in Box 1-1. D1c) In developing an overall natural gas utilization strategy, the CCEF recommends China consider distributed electric power generation options using remote sources of natural gas or CBM from smaller fields to meet the energy

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Cooperation in the Energy Futures of China and the United States needs of remote populations currently without access to commercial energy and to augment existing services through increased reliability and lower total cost. Distributed generation might prove to be less of a challenge in the short term than embarking on large-scale natural gas infrastructure projects. Should further exploration reveal sizable natural gas resources, infrastructure could be developed to add natural gas to the coal, nuclear, and hydro that already supply electricity to large urban areas. E. PETROLEUM The petroleum sectors of China and the United States also differ greatly in scale, technical development, competitiveness, and openness to the international market; and each country has different priorities. Each country, however, is facing an increasing reliance on imported petroleum products and shares common concerns for energy security (see “Import Dependence and Energy Security” in Chapter 2). In China the costs of crude oil production have increased rapidly in the past decade because of efforts to maintain output from the dwindling pools of held reserves. Inefficient management and technology constraints also have contributed to reduced productivity of many onshore oil fields. Greater exploration efforts are needed to materialize the promises of western China, and huge investments will be required to develop those oil resources and to bring them to the eastern consumption centers. Increasing demand for imported crude oil, especially that from the Gulf region, will put great pressure for China’s refining industry to upgrade and adjust production and pollution control facilities. Most of the existing refineries were designed to handle low-sulfur and relatively heavy Chinese crude and will not be able to easily process the high-sulfur Gulf crude. The refining industry has begun the process of phasing out leaded gasoline production, and this process needs to be accelerated for important public health reasons. E1) The CCEF endorses the objectives of the ongoing “Oil and Gas Forum” whose activities are outlined in Chapter 1 and recommends that the following major areas for cooperation in the petroleum sector between China and the United States be on the agenda of this continuing bilateral dialogue: petroleum sector restructuring, focusing on building market institutions, reforming corporate/enterprise management, and improving customer services; long-term sector strategies on indigenous oil development, international operations, oil imports, and strategic reserves; exploration and resources assessment; refining technologies, phasing out of leaded gasoline, and alternative transport fuels; and

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Cooperation in the Energy Futures of China and the United States environmental protection in the oil development, production, and consumption chain, in a system that reflects real costs. E2) The CCEF found common energy security concerns that stem from each country becoming more dependent on petroleum imports and recommends two action items: E2a) China and the United States should collaborate in a comprehensive analysis of the potential and merits of national and regional strategic petroleum reserve systems. Development of a strategic petroleum reserve for China could ease concerns over energy security and also help to insulate China from temporary price fluctuations in the international oil market. In collaborating to examine the needs for and experience with the U.S. strategic petroleum reserve, both countries stand to gain. Further, both governments are strongly encouraged to work closely with the International Energy Agency on this topic. E2b) Both governments should collaborate in a strategic study of the macroeconomic impact of fluctuations in the world petroleum market, and institutions and measures to minimize these disturbances, including the influence of oil future and spot markets. E3) The CCEF recommends that the U.S. and Chinese governments and industry establish a dialogue on light transport vehicles, including alternatives to petroleum transport fuels, and cooperate on both technology development and market creation. This dialogue would identify specific collaborative opportunities for more detailed work in coal-based multigeneration systems, coal and biomass liquefaction, fuel cells, and battery technologies. E3a) The committee also noted the need for a broader examination of urban transportation systems in China and the United States. Alternative options to provide necessary mobility could have profound consequences for the energy sector, especially in petroleum use. The Organisation for Economic Cooperation and Development (OECD) has undertaken efforts to examine transportation systems in light of sustainability concerns, and could provide valuable insight.39 F. RENEWABLE ENERGY The Chinese government’s strategy for greater utilization of renewable energy technologies is outlined in the New and Renewable Energy Development Program, 1996-2010, jointly issued by the State Economic and Trade Commission, the State Planning Commission, and the State Science and Technology Commission. To ensure the realization of the program goals and to make renewables 39   See the work undertaken by the OECD Environment Directorate project on Environmentally Sustainable Transport (http://www.oecd.org/env/trans/) and earlier work by the OECD/European Council of Transport Ministers Working Group on Urban Travel and Sustainable Development.

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Cooperation in the Energy Futures of China and the United States a commercially viable energy source in the long term, China must overcome the technical and institutional barriers, discussed in previous chapters, through a strong and steady effort. With timely and targeted international assistance, this process could be accelerated and the costs could be reduced. The U.S. experience—much of it of limited success—has shown that for renewable energy technologies to become self-sustaining in a market economy, targeted government assistance in developing market infrastructure, improving information access, increasing commercial capabilities, and supporting R&D is crucial. Using market-based incentives where and when necessary, such as the time-restricted tax credit for wind-generated electricity in the United States, is often an effective way to attract investment and speed commercialization. Government policies should strive to increase the demand for promising renewable energy technologies and to clarify environmental objectives. The importance of collaboration is clear: Although developed nations currently dominate in experience and development of renewable energy resources, the longer-term market for these energy technologies will largely be in developing countries (WEC/IIASA, 1995). The issues and obstacles surrounding technology transfer are not trivial: Widespread deployment of renewable technologies will require significant technological adaptation to local needs and uses. The key to the deployment of renewable energy technologies in any significant capacity is collaboration. F1) The CCEF finds that U.S.-Chinese cooperation in the following renewable energy areas would be especially helpful: setting up a market-oriented policy framework for sustained expansion of renewable energy applications, especially in the areas of financial incentives, credit policy, market regulations, and industry standards; determining commercial priorities through technology and market assessments; strengthening R&D cooperation and trade and investment in advanced renewable energy technologies, including scholarly exchanges, technology demonstrations, and joint ventures; and training renewable energy practitioners and entrepreneurs. The committee also notes that USAID, TDA, and OPIC have a great deal of experience in the area of renewable energy technologies and cleaner energy systems, and could work within established programs to further the goals listed earlier. Cooperation in these areas would be of significant mutual benefit. (See also Recommendation A3.) F1a) To ensure that these large-scale renewable energy technologies are available for widespread deployment in the middle of the next century, the CCEF recommends that the governments of the United States and China consider a

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Cooperation in the Energy Futures of China and the United States long-term R&D public-private partnership program taking advantage of the strengths of both countries’ institutions. This partnership should consider that the most important approach to increase the use of renewable energy in both China and the United States will be to lower the cost per unit of energy delivered, and this should be the first priority of a collaborative program. F1b) The committee found that collaboration, trade, and investment in the following advanced renewable energy technologies may have significance in the time frame of this study: design and implementation of large-scale, grid-connected wind farms; advancement of the solar photovoltaic (PV) and solar thermal collector industries, with a goal of improving quality, increasing efficiency, and, most importantly, lowering costs; demonstration of surplus biomass cogeneration for grid-connected plants; identification of promising feedstocks and applications for biomass gasification; technical assistance in the commercialization of biomass gasification technologies; development of anaerobic fermentation technologies in power generation and wastewater treatment; and hydroelectric power projects for China. The committee found that the focus of collaborative efforts for commercial and near-commercial technologies—such as solar water heaters, small PV, and wind power—should be on lowering costs of production, which is primarily an industrial responsibility. For demonstration technologies—such as solar thermal (both dish and trough), rooftop PVs, biomass, and municipal waste technologies—the focus should be to organize projects in China to introduce their advantages to potential implementing institutions and to reduce costs through scale-up and experience. Perhaps the most significant cooperation in the renewable arena will be in pre-competitive cooperative R&D in China and the United States in areas such as new PV cells, hydrogen energy, and storage components in renewable systems: These technologies represent the eventual transition away from fossil fuels and are of considerable importance outside of the time frame of this study. Research on these and other advanced renewable technologies are sometimes beyond the scope of commercial R&D and might benefit from government-supported activities. F2) The CCEF recommends that both governments establish periodic reviews of renewable energy collaboration to better meet strategic objectives of both countries. Renewable energy programs are being carried out by different government agencies, international organizations, and research institutes. A regular review of the progress of renewable energy collaborations—including solar, wind,

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Cooperation in the Energy Futures of China and the United States biomass, and hydro—and frequent information exchange among institutions would result in better coordination of international programs G. NUCLEAR ENERGY The near-term focus in the United States is on keeping nuclear plants currently in existence operating safely to the end of their current 40-year license periods, and, if the economics of these plants are deemed competitive, for an additional 20-year period through a relicensing process. To a country such as China, which is just now embarking on a commercial nuclear power generation program, the economics of nuclear power improve if plants can be shown to operate safely beyond their original design life. China and several other Asian nations view nuclear power as a necessary option for ensuring energy security and environmental improvement. Globally, nuclear power must be viewed as an option having potential significance in both a sustainability and an environmental context in the first half of the next century. Operational performance and economics of nuclear power plants continue to improve, with International Atomic Energy Agency (IAEA) and the World Association of Nuclear Operators (WANO) both playing important roles. Advanced light water reactor (ALWR) designs have been introduced for both pressurized water reactors and boiling water reactor technologies to further enhance the safety of future plants. Other designs, such as gas cooled reactors, also show promise for enhancing safety of future nuclear plants. These positive developments over recent years notwithstanding, there are no prospective orders in the next several years in the United States or Europe and few in Japan. In the United States, orders for natural gas power plants will dominate in the next several years given the combined effect of lower capital costs, relatively low-priced fuel, and a highly efficient combined-cycle technology. Should greenhouse gas controls be imposed, though, the attractiveness of nuclear power would rise, and the option to expand its use should be maintained.40 G1) The CCEF found that the following priorities for our governments concerning commercial nuclear power programs are very similar: the ability to confidently prevent proliferation of fissile materials and handle spent fuel and waste; safety in the design and operation of nuclear plants; and a desire to improve the economics of nuclear plants. Without resolution of these three issues and, in the United States, increased public acceptance, the future of nuclear fission remains in doubt. Given the need to resolve these issues this committee articulated some fundamental principles in our common interest. 40   Nuclear power becomes economically competitive with fossil fuels and renewable energy sources in an Energy Information Administration policy case in which emissions must be reduced 3.5 percent from 1990 levels.

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Cooperation in the Energy Futures of China and the United States G1a) The committee suggests that to minimize future risk and costs an important consideration is to simplify and standardize the design of future plants. This is a lesson learned from the U.S. and European experience with nuclear power plant operations.41 This committee saw an opportunity for collaboration on the joint design and construction of a 1000-MW ALWR specifically intended for the Chinese market. This plant would be first-of-a-kind project and would strive for simplicity and standardization to improve the economics as well as safety in operation. G1b) The committee found that the successful demonstration and acceptance of a long-term disposal and storage option that would handle either spent fuel or waste is needed for a continued commercial nuclear power program. This would remove one of the uncertainties or challenges of nuclear power without prejudging what the future choices will be—based on security, economic, and environmental considerations—on the closure of the fuel cycle. G2) Our governments and industry should play a leadership role in international organizations such as the International Atomic Energy Agency and the World Association of Nuclear Operators to assure that international commitments, regulations, and appropriate measures are defined and implemented. The IAEA International Nuclear Safety Advisory Group, the Institute for Nuclear Power Operations, the OECD Nuclear Energy Agency, and the Nuclear Suppliers Group would benefit from strong leadership. The committee also notes the importance of the role played by these organizations in efforts to improve the quality of information available to the public with regard to nuclear power. Such an effort should present a balanced discussion of the costs and benefits—notably environmental—associated with nuclear fission. G3) The committee emphasizes the importance of bilateral cooperation and endorses the framework of the Agreement on Intent of Cooperation Concerning Peaceful Uses of Nuclear Technology (PUNT) signed by both governments in 1997. The committee encourages Chinese scientists and regulators to use this framework agreement to establish a formal relationship with counterparts in the United States to address technical issues, to exchange views on policy and regulatory controls in commercial nuclear power, and to coordinate the development and training of personnel for regulation of nuclear power in China and the United States. This initiative requires strong leadership and commitment from within government, but also should encourage the active participation of the private sector in exploring these issues. G3a) The CCEF recommends that the U.S. DOE consider expanding the Nuclear Energy Research Initiative (NERI) to cooperative efforts involving China 41   In the United States there are 80 different plant designs from 4 different vendors.

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Cooperation in the Energy Futures of China and the United States and other countries, as appropriate. The U.S. and China share many long-term goals and are each working with the same set of technologies and issues. Such a cooperative approach would make the best use of each country’s R&D budget, and would allow tailoring of technologies and techniques to the specific conditions in which they are expected to be deployed. G3b) To address vocation training, the committee recommends that each country consider the model and practices of the National Academy for Nuclear Training to further the goal of ensuring high-quality personnel and safety standards at each country’s nuclear facilities.42 Universities should be encouraged to promote interest for, and expand university level courses in, nuclear engineering to ensure a steady pool of scientific talent to staff the nuclear energy industry. The Chinese government has also specifically articulated the goal of increasing education and training in nuclear science and engineering, and these remain high priority items. H. ELECTRICITY TRANSMISSION AND DISTRIBUTION SYSTEMS Both China and the United States are moving to cleaner, more efficient energy systems, and electricity is the most appealing choice. China’s electricity use per capita is about half of that of Brazil and one-fifteenth that of the United States. Electrification is an urgent priority in China for economic, social, health, and environmental reasons: Energy intensity in many countries has decreased with increased electrification; and the harmful effects of direct coal use—particularly the significant environmental impacts—can be avoided through increased electrification. Electrification also can provide commercial energy to unserved populations. H1) The CCEF recommends that the governments of the United States and China collaborate on measures to foster the development of a successful electric power sector, including: planning for interconnection and further development of the electric power grid support for and/or initiation of financing by the World Bank, Asian Development Bank and other international financial institution for the electric power grid in China; 42   The National Academy for Nuclear Training (NANT) was formed under the auspices of INPO in 1985 to focus industry efforts on a nationwide basis to continue improvements in training and promote professionalism of nuclear plant personnel. NANT integrates the training resources and activities of all U.S. nuclear utilities and an independent 20-member accrediting board.

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Cooperation in the Energy Futures of China and the United States study of the legal limitations of foreign participation in, and financial support for, electric power transmission facilities in China to promote increased interest in independent power production in China; and exploration of options to improve the adequacy, quality, and reliability of electric power and the reduction of line losses in transmission and distribution. China is facing a difficult task in the interconnection of the six regional power networks and could benefit greatly from collaboration with institutions in the United States. Specific technology expertise is needed, which includes many aspects of establishing and maintaining a reliable interconnected power grid, such as techniques for load leveling and load profile improvement, power quality, and the upgrading of distribution systems. A structured exchange between the Electric Power Research Institutes in each country would provide significant opportunities for information exchange, and could provide insight into advanced technology deployment in the United States especially in flexible AC transmission (FACTs), performance of clean coal technologies, and distributed generation deployment. Such a relationship could also provide the connection necessary to build on the experience gained in the United States in providing power to outlying rural areas. The CCEF recommends that both governments consider initiating a project that demonstrates the potential for programs in demand-side management, load management, and integrated resource planning, starting from a market-based approach to energy pricing. The committee noted the wealth of expertise in the U.S. utility and power services industries on these techniques, which, if adapted to local conditions, could play a significant role in China. The United States is moving away from these activities as it deregulates its electric power industry; the timetable for China’s eventual move to deregulation, however, is unknown, and that decision will be based on its experience in several trial areas. H2) The CCEF also found that China and the United States share an interest in developing more economically viable distributed power sources for remote areas, as noted in the recommendation on natural gas. China’s ongoing efforts to provide energy services to its large rural population provide a significant opportunity to examine the role of non grid-connected systems, especially those that incorporate a renewable energy component. Efforts of international financial institutions to provide electric power services in China are encouraged to look at opportunities in distributed generation in China.