Energy in China: What If, What Else, and What Are the Odds – Session Notes

Tuesday, March 4, 2008 2:22
Posted in category Uncategorized

With snow storms reeking havoc on China’s power grids a few week back, it was clear that we needed to hold a session on energy, and as I mentioned in my post last week… we had a lot to discuss.

For me, this was a situation that was inevitable, and if you were following the news over the last 18 months it would have been pretty easy to see that energy was becoming a scarce resources.

So, without further ado, here are some of the highlights from the event. There were 5 people involved in this evening from industry, finance, law, and policy, and after 3 hours I think we were able to cover a lot of ground.

Feel free to post your comments on the below. they are cut down from the complete notes, but let us know how you see some of the issues. Energy is an issue that we are all going to have to keep a close eye on as it reaches into everything. Just today a few really interesting news stories (here, here, and here) were released indicating that steps are being taken in the right direction.. but it is clear that the margin for error has decreased and that more than ever it is important for progress to be made.

1) What were the causes of the recent outages in China, and what will be the administrative response

Primary causes include:

shortages of rail capacity, reduce hydro, inflation and prices controls, low stockpiles being held, poor grid system

Administrative response:

Expect supply side response – little chance of demand side

Unlike Taihu, there has yet to be a coordinated response to the problem. There is definately a higher level of awareness of the fact that energy problems are more severe than though, and that something needs to be done, but there is a lot of disagreement as to what should be done/ who should do.

2) Will the energy law (draft attached) be passed this year, will the events earlier this week catalyze the central party to push it, and what impact on the draft will the outages have?Not before March 2009. It is not on the docket for this year at March NPC, and it requires three reads. Still a lot of disagreement, with one party (of 13 ministries) still not signed on.

Impact will depend on local implementationLocal execution will be important – Xinjiang – will be waste, but improvement

3) Is China seeing a natural barrier to economic growth?Tom – China eats up raw materials; 11th 5th year plan has a huge amount allocated to infrastructure. China needs to switch to service economy, and that is key to this issue. If they are able to move, then their needs will reduce. The math and availability will depend on what is next.

Charlie – Huge amounts of waste that can be driven out.

Taihu/ snow storm impact –

Charlie – had some short term impact, and they did close some small/ medium groups, but they are not turning out large companies with big investment. Amendments to clean water act that should have addressed low penalties, but response was pretty underwhelming.

4) What is the likelihood of wide scale blackouts during the summer of 2008 in Southern regions, particularly the PRD region?

There will be continued black/ brown outs. Severity will depend on a number of issues related to environment, pricing, conservation efforts, etc.

5) Where must the central party invest over next 3-5 years to stabilize its energy infrastructure?• Biomass is something that China is not doing enough of
• Grid – ultra high voltage and smart grid
• Nuclear – they are committed, but it is a fraction – issue is waste management
• Wind – one of the most practical
• Solar – there is a business case and there is a return
Requires a balanced decision. You need a portfolio that matches supply and demand. Need cost effective storage.

6) Will China achieve its 2020 goal of 18% of all energy being renewable?

It is possible, but it will require “dropping the hammer” on China’s industrial sector.

Transportation accounts for under 10%, so will not garner the attention. The building industry, which consuming 40% of the energy, is too fragmented to control. Top 1000 companies are identified, and can be pressured more readily (in theory)

7) What are opportunities for foreign copmanies/ investors

Many, but if I advertised them I would be giving away our lead!

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2 Responses to “Energy in China: What If, What Else, and What Are the Odds – Session Notes”

  1. jim says:

    March 5th, 2008 at 1:12 am

    Just some questions:

    1) What’s the future for energy pricing in China? The price controls on gas to start with. If Chinese people and companies had to pay market prices, would that have an impact? Would the fallout (political or economic) be too uncomfortable for the government? I read somewhere (maybe here, not sure) that one of the reasons coal stocks were low at power producers was that they can’t pass on market prices to customers. Not sure if that’s true, but if so it raises concerns about the consequences of price mandates.

    2) What’s the likelihood of a carrot/stick tax policy to drive energy investment?

    3) China is making a mint off of CDM investments. Is that having any real impact on carbon emissions and is there potential for a domestic market?

  2. Rich says:

    March 8th, 2008 at 3:49 am

    Jim,

    Some interesting questions. I am not sure what the future holds (I wish I did), but my feeling is that they need to let pricing float upwards as one means of curbing usage. Perhaps now is not the best time given the inflationary pressures the gov’t is already wary of.. but at some point the gov’t will have to let the prices go up, or risk their energy companies going bankrupt.

    Here is an interesting report on the financing of alternative energy investments, but on a general level the gov’t is very pro energy investment (nuke, wind, and solar in particular.

    R