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Overview: High-Quality Energyfor High-Quality Growth: China’sEnergy Revolution in the New Era

Xu Zhaoyuan and Mallika Ishwaran

In June 2014, General Secretary Xi Jinpingremarked at a conference of the Communist Partyof China’s (CPC) Central Leading Group forFinancial and Economic Affairs Commission that arevolution in energy production and consumptionwas needed to safeguard national energy security.New patterns in supply and demand, compoundedby changing trends in international energy devel-opment, were presenting China with opportunitiesto develop and drive a new energy era.

In December 2016, the Chinese governmentpublished its Energy Production and Consump-tion Revolution Strategy (2016–30), which setout the specific actions needed to promote theenergy revolution that President Xi had referred

to. In October 2017, the report of the 19th CPCNational Congress noted that:

Socialism with Chinese characteristics has crossedthe threshold into a new era. China’s economy istransitioning from a phase of rapid growth to astage of high-quality development.China must put quality first and prioritise perfor-mance; and China should make supply-sidestructural reform its main task and work hard toachieve better quality, higher efficiency, and morerobust drivers of economic growth.The new era provides a new background and posesnew requirements for China to deepen its study ofthe energy revolution. Global practices show thatall countries have undergone an energy transitionin the course of their development, albeit alongdifferent paths. From the perspective of the globalenergy system as a whole, the current energytransition towards a greener and more sustainableenergy system is significantly different from theenergy transitions of the past.China needs to learn from other countries’ practicesin promoting energy transition. It must keep up withthe latest trends in global energy transitions, takeaccount of the needs of economic, social and envi-ronmental development inChina, vigorouslydevelopenergy technologies, and conduct an in-depth studyon how to achieve China’s energy revolution.

1 Global Energy Transitions:Historical Experienceand the Latest Trends

The energy system is comprehensive in scope,integrating energy production, conversion,transmission, consumption and management intoa single system.

DRC Team Lead for the Overview:Xu Zhaoyuan, Research Department of IndustrialEconomy, DRC of the State Council of China.

Shell Team Lead for the Overview:Mallika Ishwaran, Global Business Environment, ShellInternational B.V.

Contributors:Zhou Yi, Research Department of Industrial Economy,DRC of the State Council of China.

X. Zhaoyuan (&)Research Department of Industrial Economy, DRCof the State Council of China, Beijing, Chinae-mail: [email protected]

M. IshwaranGlobal Business Environment, Shell International B.V.,The Hague, the Netherlands

© The Author(s) 2020Shell International B.V. and the Development Research Center (DRC) of the State Council of the People’sRepublic of China (eds.), China’s Energy Revolution in the Context of the Global Energy Transition,Advances in Oil and Gas Exploration & Production, https://doi.org/10.1007/978-3-030-40154-2_1

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Energy transition is a long-term structuralchange to the energy system, where entirely newcomponents arise or old patterns fundamentallychange. The energy system is in a constant state ofevolution. For example, China’s and India’s energysystems have been organised to date aroundlow-cost energy; France’s transition to nuclearpower in the 1970s was driven by the desire forsecurity after the oil price shocks of that decade;and Germany’s energy transition in the 2010s waspropelled by the desire for clean energy. Transitionalso occurs when new end uses require new formsof energy. For example, the development of electricvehicles changes the transport industry’s demandfor oil into the need for electric power.

1.1 Energy Demand Changeswith EconomicDevelopment

Countries generally go through an energy tran-sition as they develop. Energy demand can bedivided into three broad categories (Fig. 1). Inthe first category, countries with an income perperson of less than $5,000 in purchase powerparity (PPP) have less economic developmentand therefore low energy consumption. Second,countries with an income per person of between$5,000 and $15,000: as these countries industri-alise, energy demand growth accelerates due to

the high energy intensity of industrialisation,urbanisation and large-scale infrastructure con-struction. And third, countries with an incomeper person of more than $15,000: once thesecountries have industrialised, the growth rate ofenergy demand starts to slow down.

While there is a general trend of energy transi-tion that countries go through as they develop,national experience shows that the energy demandpath that a country follows can vary significantly.

The USA and Canada are typical examples ofhigh-income countries with high energy con-sumption. As Fig. 2 shows, the USA and Canadarapidly increased their energy consumption perperson between 1960 and the late 1980s, duringwhich time income per capita doubled. This rapidincrease in energy consumption was the outcomeof fast growth in energy-intensive industries andhigh domestic energy consumption. Energyconsumption in the transport sector was high dueto both countries’ low population densities. Sincethe late 1980s, incomes continued to grow, albeitmore slowly, while energy consumption wasrelatively flat.

Japan and major European countries experi-enced a slower increase in energy consumptionthan the USA and Canada. These countries havereached similar levels of income per capita as theUSA and Canada, but with around half the levelof energy consumption per person. In addition tohaving more light industry and less transport

Fig. 1 Countries go throughenergy transition as theydevelop. Note Average energysupply per capita since 1960of those countries that hadGDP per capita in one of fiveincome classes in 2015.Source Shell International

2 X. Zhaoyuan and M. Ishwaran

demands, these economies generally focus moreon energy efficiency, often driven by policy.Spain and Italy have lower energy use per personthan other developed economies. This is becausethey are more service-oriented, with fewerenergy-intensive industries and a Mediterraneanclimate that reduces the need for heating andcooling relative to other countries.

The data for Australia, SouthKorea and Swedenshow how countries with energy-intensive indus-tries can have higher energy consumption. Thesethree countries form a cluster between the USA andCanada, which have high energy consumption, andJapan and major European countries, which havelower energy consumption, as shown in Fig. 2.This is because although Australia, South Koreaand Sweden have large energy-intensive industries,they are more energy efficient than the USA andCanada. Australia has built an energy-intensiveindustrial system on its extensive natural resources,primarily non-ferrousmetals, iron and steel,miningand chemicals. It also has a high transport energyuse per person due to its low population density andlarge size. South Korea is an example of a countrythat has increased GDP per capita through high-value industrialisation, despite not having domesticenergy resources. Sweden is somewhat unique asits energy use is increased by a large pulp and paperindustry, which is very energy intensive, and a veryhigh level of energy use in buildings for heating.

1.2 Previous Global Transitionsin Energy Supply

The global energy system undergoes transitions.There have been three global energy transitionssince 1800 (Fig. 3). The first was the rise of coalto fuel the Industrial Revolution; the second wasthe use of oil for mass transport; and the thirdwas the rise of gas, hydropower and nuclearpower in electrification. In recent years, a fourthenergy transition has begun with the use ofrenewables to provide clean and sustainableenergy.

History shows that rising societal demand forenergy and advances in technology can lead toglobal energy transitions. For example, energysupply shifted from traditional biofuels to coal inthe 19th century to fuel industrialisation in theUK and other countries in Europe. After the oilprice shocks in the 1970s, many countries neededto secure energy supply, stimulating the transi-tion from oil to gas and nuclear power in elec-tricity. Since the beginning of this century,demand for clean energy is also driving anenergy transition. Transitions also occur whensignificant improvements are made in energytechnologies or when new energy carriers offerthe flexibility of providing a range of increas-ingly sophisticated services and end uses, aselectricity does for buildings and industry.

Fig. 2 Energy transitionpaths of various countries.Note Data are from 1960 to2015; note the log scale on theX axis. Source VividEconomics based on IEA data

Overview: High-Quality Energy for High-Quality Growth … 3

1.3 Energy Technologies areUndergoing SignificantChange

New energy and information technologies aredeveloping rapidly and having a significantimpact on energy production and consumption.

1.3.1 The Cost of Clean EnergyTechnologies is DecliningRapidly

Since the early 2010s, the cost of renewableenergy technologies such as wind and solar havefallen by more than half. Lithium-ion batteries,which have the potential for use in the transportand power sectors, have also seen similar costreductions (Fig. 4).

1.3.2 New Informationand CommunicationsTechnologies(Digitalisation) areIncreasingly Being Usedin the Energy System,with Several ImportantImplications

To begin with, digitalisation increases thedemand-response potential for electricity.According to International Energy Agency

(IEA) forecasts, digitalisation could increaseglobal electricity demand-response potentialfrom 3,900 terrawatt-hours (TWh) in 2015 to6,900 TWh in 2040, up 77%. This level ofdemand-response can free up some 185 GW ofgenerating capacity and reduce the need forinvestment in new generation, transmission anddistribution on a cumulative basis by $270 billion(calculated in 2016 $).

Second, digitalisation has improved the flex-ibility of the power system to integrate renewableenergy. For example, the IEA estimates thatdigitalisation and demand-side response tech-nologies can limit total wind and solar powercurtailment to less than 1.6%. By 2040, totalwind and solar curtailment will be 79% lowerthan in 2015. This will enable the global powersystem to accommodate 67 TWh of newrenewable energy annually by around 2040 andavoid about 30 Mt of CO2 emissions per year.

Third, digitalisation can help improve elec-trification in the transport sector. Smart chargingof electric vehicles can greatly reduce thedemand for power generation. With the addedflexibility that smart charging provides to powergrids, investment in grids can be reduced by$100 to $280 billion by 2040 (in 2016 $).

Fourth, digitalisation may affect the energyuse and consumption patterns of manufacturing.

Fig. 3 There have been fourglobal transitions in energysupply since 1800. SourceVivid Economics based ondata in energy transitions:Global and NationalPerspectives by Vaclav Smil(2017)


Industry 4.0—the trend towards greater use ofautomation and data exchange—will have asignificant impact on energy demand. As shownin Fig. 5, the adoption of 3D printing in UScommercial aircraft manufacturing can reduceenergy use in production and in flight, thanks tothe use of more lightweight components.

1.4 Main Characteristics of the NewGlobal Energy Transition

The global energy system is undergoing a majortransition, after a period of relative stability.Before 1985, the energy systems of the G7countries experienced significant changes as a

Fig. 4 The cost of many clean energy technologies isdeclining rapidly. Note Cost does not include subsidies.*The calculated cost of solar energy is based onutility-scale monocrystalline silicon solar panels. Source

The cost data of wind and solar energy are from Lazard(2016), while the **cost data of batteries are fromBloomberg New Energy Finance (2017)

Fig. 5 Industry 4.0 will have a significant impact on energy demand. Note The data above are based solely on theadoption of 3D printing in US commercial aircraft manufacturing. Source Huang et al. (2016)


result of oil price fluctuations, the discovery ofnew oil and gas reserves, the emergence of newenergy carrier networks and the development ofnew technologies like nuclear power. However,the global energy system has been relativelystable over the past 30 years, with little change inthe energy mix of the G7 countries (Fig. 6). Overthe next 30 years, digitalisation, new technolo-gies, decarbonisation, more stringent environ-mental requirements and new forms of economicactivity are expected to transform the energysystem.

1.4.1 Clean and Low-Carbon Energyare Driving the New GlobalEnergy Transition

The unprecedented attention paid by countries toclimate change and environmental protection,along with increasing consumer demand forcleaner energy services, is driving the globaltransition to clean and low-carbon energy.

Compared with previous drivers of energytransition, climate change is a global concern, thesolution to which requires the engagement of allcountries. Both energy consumption and CO2

emissions per unit of GDP are now declining.There is a sign that energy consumption and CO2

emissions have been decoupling from economicgrowth increasingly rapidly since 2010. TheParis Agreement of 2015 shows that the world ispaying more attention to climate change andstrengthening its efforts to disconnect CO2

emissions from economic growth. In this respect,the European Union is in a leading position, withGDP increasing by 50% between 1990 and 2015and CO2 emissions dropping by more than 20%

over the same period. The USA and Japan havealso remained generally stable in CO2 emissions(Fig. 7), but the USA’s withdrawal from the ParisAgreement and President Trump’s new energypolicies bring some uncertainties.

1.4.2 Significantly More ElectrificationCharacterises the NewGlobal Energy Transition

To achieve the ambitions of the Paris Agreement,more electrification is required to decarbonise theglobal economy. This process is accelerating inthe major economies, especially in transport.Figure 8 shows growth in electric car registra-tions in several countries over recent years.Electric vehicles remain an important area ofgrowth, despite their current small market share(except in some Nordic countries).

Economic restructuring is also driving elec-trification. As developing countries like Chinamove towards a service-oriented economy, andconsumers are keen to get cleaner and moreflexible types of energy, such as gas and elec-tricity, electrification continues to increase. Dur-ing the current energy transition, this trend hasbecome more and more obvious—emergingeconomies such as China and Brazil haveachieved higher levels of electrification at alower level of per capita income—and is expec-ted to continue (Fig. 9).

1.4.3 Policy Plays a More ImportantRole in This EnergyTransition

While policy has been a key driver of previousenergy transitions, the scope of the policy

Fig. 6 Changes in the energy systems of G7 countries. Note Information on the energy mix change metric can befound in Special report 3 on the technology revolution. Source Vivid Economics


Fig. 7 Energy consumption and CO2 emissions per unit of GDP are declining globally. Note GDP data are calculatedin 2010 $; CO2 emissions refer only to energy-related CO2 emissions. Source IEA (2017) and World Bank (2017)

Fig. 8 Electrification in the transport sector is accelerating. Note BEV = battery electric vehicles; PHEV = plug-inhybrid electric vehicles. Source IEA, Global EV Outlook (2017)

Fig. 9 Electrification increases with income. Note Data for all countries except China are from 1960–2015; data forChina are from 1971–2015. Source Vivid Economics, based on IEA data


challenge this time is vast. This is because the goalof the new transition is to promote the develop-ment of clean and renewable energy. To level theplaying field, the negative environmental effects

of fossil fuels, such as air pollution and carbonemissions, compared to the positive environmen-tal effects of clean energy, must be reflected ineconomic decisions. Policy interventions are

Fig. 10 Carbon pricing is accelerating globally. Source World Bank, State and Trends of Carbon Pricing (2017)


needed to rectify the economic distortions causedby such market failures. In addition, the intro-ductory and growth periods of new energy needsupport policies. Due to the complexity of theenergy system, the energy transition must usemarket forces to promote innovation and findeffective and flexible ways to deliver desiredgoals. Many governments have realised this andare taking measures to ensure market failures arecorrected. Figure 10 shows the countries that haveimplemented, are about to implement, or areconsidering implementing carbon pricing (in theform of a carbon tax or emissions trading system).

1.5 Developing and EmergingEconomies Can LeapfrogAhead

International experience shows that while there isa general route for countries to follow in energytransition as they develop, the path that a countrytakes can vary significantly, depending on itseconomic structure, improvements in energyefficiency, consumption patterns, populationdensity and climate, among other things.

Countries such as China, Brazil and Malaysiaare at a crossroads. Their path to energy transitionmay diverge from international experience. Thesecountries need to choose between the energydevelopment paths available to them: whether tohave a level of energy consumption per personsimilar to that of the USA (high), South Korea(medium) or Spain (low) as income per capitaincreases. Alternatively, they can use policy toleapfrog historical patterns of energy systemdevelopment to achieve high income per capitaand lower and cleaner energy consumption.

By leveraging advanced technologies andlearning from, then adapting, the policies andinstitutional frameworks of other countries,developing and emerging economies can achievelower energy consumption and greenhouse gasemissions per capita earlier than high-incomecountries (as shown in Fig. 11). Developing andemerging economies have the potential to pro-vide advanced energy services without the neg-ative environmental impact that advanced

economies have had, and they can exploit theirlate-mover advantage in the growing globalmarket for energy services.

2 From Quantity to Quality: TheGoal and Approach of China’sEnergy Revolution

2.1 The Goal of China’s EnergyRevolution

In 2015, China’s 13th Five-Year Plan (2016–20)proposed to empower low-carbon cyclic devel-opment by promoting an energy revolution,accelerating energy technology innovation, andsetting up a clean, low-carbon, secure and effi-cient energy system. In 2017, the report of the19th National Congress of the Communist Partyof China noted that China’s economy has movedfrom a phase of rapid growth to one ofhigh-quality development. China, it said, mustfocus on improving the supply system andstrengthening the economy in terms of quality.Quality energy is an important part of the supplysystem and a key objective of the energyrevolution.

2.1.1 What is a High-Quality EnergySystem?

Based on the 13th Five-Year Plan, the report ofthe 19th National Congress of the CPC anddevelopment strategies such as Made in China2025 state that China’s high-quality energy sys-tem should feature the following threecharacteristics:

First, it should be clean and low carbon.A clean energy system is one in which the entireenergy life cycle—from production and conver-sion to transmission and consumption—achievesthe lowest possible levels of pollution andemissions. Low carbon is a key part of this. CO2

itself is not a polluting gas, but it has significantimpacts on the environment. Moreover, theChinese government has made a solemn com-mitment to the international community, as partof its nationally determined contributions, toreduce global carbon emissions. The energy


system is the largest carbon emitter, so low car-bon is undoubtedly an important characteristic ofa high-quality energy system.

Second, it should be efficiently priced andaffordable. Affordability means that the price ofenergy should be competitive internationally toallow manufacturing to compete with globalmanufacturing powers like the USA, Japan andGermany. China is now in an important period ofmaking itself a manufacturing power. Energycost is a key element of the real economic cost,so a high-quality energy system should be able tosupply energy at a competitive price. Efficiencymeans that existing technologies should beleveraged in energy production, conversion,transmission and consumption to save energyand improve efficiency.

Third, it should be secure and reliable. Securemeans that energy sources are diverse and thatthey ensure a stable supply for economic devel-opment, even during natural disasters or times ofgeopolitical change. Reliable means that as theamount of renewable energy increases, theenergy system has the flexibility to adapt andmaintain a sustainable and stable energy supplyfor the national economy.

2.1.2 Three Characteristicsof the Energy Revolution

(1) Clean and low carbonAccording to research by the Institute ofResources and Environmental Policy of theDevelopment Research Center of the StateCouncil, total emissions of major air pollutants inChina are likely to peak during the 13thFive-Year Plan (2016–20), after which thecountry’s energy system will be much cleaner.Total inhalable particulate matter (PM10) emis-sions have been declining since the 1990s. Sul-phur dioxide emissions reached their highestpoint in 2006, and have since declined steadily.Nitrogen oxide (NOx) emissions dropped for thefirst time (in 2012) since reliable databases wereestablished and are expected to flatten, then fall.The research initially concludes, therefore, thatair pollutant emissions have reached a turningpoint. Combined emissions of major water pol-lutants are estimated to peak in 2016–20, thenflatten, flowed by a gradual decline.

In terms of CO2 emissions, more effort isneeded to achieve a turning point by 2030.According to the Energy Production and Con-sumption Revolution Strategy (2016–30), by

Fig. 11 Low- and middle-income countries can leapfrog the historical patterns of energy consumption of high-incomecountries. Note PPP = purchasing power parity. Source Vivid Economics, based on World Bank and WRI data


2020, China’s CO2 emissions per unit of GDPwill decrease by 18% compared to 2015, and by2030 they will drop by 60–65% compared to2005. The findings of this report show that toachieve the goal of carbon intensity reduction,additional policies and measures—includingcarbon pricing and subsidies for non-fossilenergy sources—need to be gradually intro-duced to achieve tangible results.

In terms of the energy mix, the share of cleanenergy should increase significantly. According tothe Energy Production and Consumption Revo-lution Strategy (2016–30), the share of non-fossilenergy in China will be 15% by 2020, increasingto about 20% by 2030. In the Recommendedscenario of this report, in which the energy revo-lution is strongly promoted, the share of non-fossilenergy is expected to reach 15.7% by 2020, 22.5%by 2030, and more than 40% by 2050.

(2) Affordable and efficientAccording to the above-mentioned strategy,energy consumption per unit of GDP is expectedto drop by 15% by 2020 (compared to 2015),reach the current world average by 2030 (basedon current prices), and achieve stability by 2050.

In the Recommended scenario of this report,energy consumption per unit of GDP will be19.7% lower in 2020 than in 2015. This exceedsthe 15% reduction target of the Energy Produc-tion and Consumption Revolution Strategy(2016–30). Energy intensity in 2030 will be35.1% lower than in 2020, and 54.1% lower in2050 than in 2030 (Fig. 12).

Energy cost per unit of GDP, which reflects thequantity and price of energy consumed to produce aunit of GDP, needs to be reduced significantly.Energy consumption per unit of GDP is an indi-cator of energy consumption efficiency but does nottake price into consideration. In fact, energy pricehas an obvious impact on economic and socialdevelopment. On the one hand, the price of energycan incentivise the whole economy and society tosave energy. On the other hand, it constitutes amajor cost to the real economy. To sharpen China’sinternational competitive edge, energy cost per unitof GDP should be significantly lower.

Historical statistics show that China’s energycost per unit of GDP has followed an inverseU-shape path. It increased rapidly from 0.1 in1990 to 0.18 in 2005, up by 80%. It then peakedaround 2005 and decreased to 0.12 in 2012.

Fig. 12 Evolution pathways of China’s energy consumption per unit of GDP in two scenarios. Source Findings of theDRC research team


The current energy cost per unit of GDP inChina is comparable to that of South Korea, butnotably higher than the USA and Japan. SouthKorea’s energy cost per unit of GDP in 2011 was0.18, slightly higher than China’s. But the figurein Japan is only 0.09 and 0.08 in the USA, about66% lower than in China. Since 2011, energycost per unit of GDP in the USA declinedrapidly, down to 0.04 in 2016 (Fig. 13).

(3) Secure and reliableEnergy supply sources should be diverse. Toachieve energy supply diversity, China shoulddevelop new and unconventional energy sourcesdomestically by leveraging its own energyresources and reducing the use of coal, whileincreasing the share of clean coal facilities in itsfleet of coal-fired power plants. Externally, Chinashould seize the opportunities of economicglobalisation and diversify its internationalenergy supply sources, by increasing imports ofoil and gas from regions other than the MiddleEast to spread risk and secure supply.

The reliability of the energy system should beimproved. Efforts should be made to:

(i) promote Internet+ smart energy develop-ment and establish an Energy Internet by2025;

(ii) build smart wind farms and smart solarphotovoltaic power plants; a smart systemfor the recovery, processing and use ofcoal, oil and gas; and a cloud-based plat-form to enable intelligent energyproduction;

(iii) deploy grid-scale energy storage of appro-priate size at large-scale power generationsites to coordinate and optimise the opera-tion of energy storage systems, renewableenergy sources and power grids;

(iv) build smart homes, smart buildings, smartcommunities and smart factories, featuringsmart end-use technologies and flexibleenergy trading to help create smart cities; and

(v) strengthen demand-side management,popularise intelligent energy consumptionmetering and diagnostic technologies,accelerate the deployment of energymanagement centres for industrial com-panies, and build an Internet-based infor-mation service platform.

Fig. 13 Comparison of energy cost per unit of GDP between China and several major countries. Source Resultscalculated by the DRC research team based on the input-output table by country


2.2 To Achieve the EnergyRevolution, China Needsto Get Five Driving Forcesinto Play: Four Pillarsand InternationalCooperation

To achieve an energy revolution requires identify-ing, guiding and strengthening the driving forcesbehind it. Analysis of energy transitions in G20countries since the 1970s shows that the drivers ofenergy transition include four pillars and interna-tional cooperation. Often several drivers must be inplace before transition can develop momentum.Individually, these drivers are insufficient to startthe process of systemic change. The G20 energytransitions were driven mainly by economicgrowth, energy security concerns, new marketincentives or price shocks, with new technologyplaying a supporting role. They occurred primarilyin the upstream and midstream sectors, with theenergymix remaining relatively constant (Fig. 14).

SupplyHistorically, the abundance or scarcity of localenergy resources is a fundamental driver oftransition. The greatest transitions occur at theextremes, either when resources are plentiful or

extremely scarce. In the current transition, tech-nology is making unconventional and renewableenergy resources increasingly available andcompetitive, and doing so in geographies that donot have access to conventional resources.

DemandRapid economic growth is usually accompanied bya change in industrial structure, often to higheradded-value economic activities that favour a newenergy mix based on natural gas and renewableelectricity. Furthermore, consumers tend to choosecleaner and more flexible fuels as their incomerises. This is a major trigger of energy transition,especially when accompanied by new low-costsupplies of energy. Energy security is also animportant driver. For example, the oil crisis of the1970s and the shutting down of Japan’s fleet ofnuclear power plants following the Fukushimatsunami and nuclear accident in 2011 increasedpeople’s awareness of the need for energy security,resulting in significant energy transition events.

TechnologyMany energy technologies like nuclear powerrequire vast investment in research and devel-opment. Once deployed, such technologies cantransform the energy system through scaleeffects. International experience shows that gov-ernment deployment of capital-intensive tech-nologies is a common way to deliver energysystem requirements such as supply security.Technologies that can plug and play into existingnetworks tend to be more successful than thoserequiring new networks to be built, therebycontributing more to the energy transition.

MarketsMarkets have an important role to play. They canaccelerate the process of innovation and adoptionof new technologies through liberalisation andreform. Governments also have an important roleto play. They can ensure markets operate effi-ciently through pricing externalities and regula-tory oversight. Policies and institutions thatincrease the efficiency of markets like marketliberalisation and reform can help the energytransition progress faster.

Fig. 14 The drivers behind energy revolution: fourpillars and international cooperation. Source VividEconomics


International cooperationAn increase in a country’s participation in globalenergy trade can also trigger an energy revolu-tion. For example, new gas pipelines or liquefiednatural gas (LNG) infrastructure could increasetrade in natural gas. New technologies andinfrastructure can deepen international coopera-tion and have a transformational impact on futuredevelopment. For example, extra high voltagepower transmission enables long-distance powertrade between countries.

2.3 Accelerating the EnergyTransition Requires FourIntensifiers

Once the drivers for transition are in place, positivefeedback loops (intensifiers) can accelerate transi-tion or increase its scale. Our review of historicaltransitions concludes that while the four pillars andone cooperation can provide the necessary condi-tions for a transition and themomentum for change,these drivers only cause real transition when rein-forced by positive feedback (intensifiers). Policy-makers can often directly influence theseintensifiers and should use them to control thespeed and scale of transition (Fig. 15).

Preferences cause society to actTransition can be accelerated and intensified ifpeople’s preferences are influenced by the beliefthat energy transition is good. The reason is

simple: when some people think something isgood or bad, they can influence or persuadeothers, which can cause their preferences tospread. This creates a positive feedback loop,which makes the next action easier. Value pref-erences about what society should or should notbe doing have been powerful forces in pastenergy transitions. For example, Japan andFrance’s embrace of nuclear power was a signi-fier of a technologically advanced society,whereas Germany’s anti-nuclear movement sawthe same technology as an environmental threat.

Expectations cause consumers to actExpectations are also an intensifier: as more andmore people expect transition to happen, theywill act as if it is already happening. As withpreferences, when people expect the world tochange they will act accordingly and convinceothers that it will change. This creates a positivefeedback loop. An expectation describes what islikely to happen, while a preference is a viewabout what ought to happen. For example, aperson can expect something to happen even ifhe or she has no preference for it. Consumerexpectations were important in past energytransitions, as it is consumers who select andpurchase the products they expect to serve thembest in the future. For example, consumers in thepresent transition may purchase an electricvehicle in expectation of future climate policiesand legislation.

Fig. 15 The four intensifiers for transition act together. Source Vivid Economics


Private economics cause businesses to actEnergy transition may improve the private eco-nomics of businesses through positive spillovereffects, which encourage further action. Busi-nesses will act if it creates value for them, or if thebenefits from energy transition are greater than thecost. When businesses take action this can changethe private value of future action via externalities,positive spillovers or complementary goods. Forexample, the cost of wind power decreased asdeployment increased due to the positive spilloverof learning effects. Because action now increasesthe net private value of future action, thisencourages future action, which then furtherincreases the net private value of future action,creating a positive feedback loop.

Public good causes government to actGovernment tends to act if the economics or thepolitics of the transition improve.

If energy transition generates value for soci-ety, it will win the public’s backing, and in turn itcan generate national political support or directlydrive policy action. International political supportcan also modify national political support. Forexample, the Paris Agreement and the Interna-tional Energy Agency have affected nationalpolitical support for climate action and energysecurity respectively.

During energy transition, there is a strongpositive feedback loop between private eco-nomics and the public good. As Fig. 16 shows,private economics and the public good are clo-sely interrelated. If private actions by businessescan have positive externalities, such as reducingcarbon emissions, or negative externalities, such

as pollution, then government action willincrease net private value, thereby creating anadditional feedback loop between public andprivate action in a virtuous and reinforcing cycle.

The four intensifiers of the transition cometogether to accelerate and scale change. AsFig. 15 shows, social preferences, consumerexpectations, the private economics of businessesand the public good all contain positive feedbackloops that can intensify the motivation to act.Furthermore, these all work together so that if,for example, social preferences are causing peo-ple to act in a way (such as demandinglow-carbon energy and related products andservices) that makes a particular investment morevaluable, then businesses will act. This, in turn,may create political conditions and support forgovernment actions intended to promote energytransition.

2.4 Policy Plays a Crucial Rolein Effectively Leveragingthe Drivers and Intensifiersof Energy Transition

Compared with previous transitions, the currentenergy transition is more complex and hasstronger externalities. For example, in the currenttransition the increasing complexity of a diverseand decentralised power sector requiressystem-wide change to drive down the cost ofrenewables and integrate them effectively intothe power grid. The need for change affects theentire power value chain—flexible low-carbongeneration, dispatch, balancing and ancillary

Fig. 16 Private economics and the public good have strong positive feedback loops between them. Source VividEconomics


services, transmission and distribution networks,and consumer participation in retail marketsthrough mechanisms such as demand-response toprices—and the incentives to support a moreflexible and complex system.

In this case, policy plays a crucial role in sup-porting the drivers of transition. For example, poli-cies help shift energy demand to cleaner and moreefficient end uses, support a cleaner energy mix,develop efficient market mechanisms, stimulateinnovation in clean and efficient technologies, andsupport national energy transition by leveraginginternational energy cooperation and governance.

Policies accelerate transition by giving theintensifiers momentum. As shown in Fig. 17,given the policy-directed nature of the currenttransition, government must take action toaddress environmental market failures, encour-age change in consumer behaviour (and inbroader society) and prompt businesses to investin new low-carbon technologies. For example,subsidies or other policy tools could be offered toimprove businesses’ risk-return structure.

In short, policy plays a crucial role in energytransition. Perhaps a more important role forpolicy than giving the intensifiers momentum iskeeping the rate and scale of change in socialpreferences, consumer expectations, privateeconomics and the public good in sync as energytransition happens.

3 Adopt Multiple Measures:A Roadmap for China’s EnergyRevolution

3.1 Continuously Improve EnergyConsumption Efficiencyby Saving First

3.1.1 Optimise China’s IndustrialStructure by Reducingthe Proportionof Energy-IntensiveIndustries

As China’s economic development enters the laterstages of industrialisation, there is a drive toupgrade the country’s industrial structure, which,together with guiding policies, may lead to cleanerand more environmentally friendly industries.

It can be seen from the demand structure ofinvestment, consumption and export that the share ofinvestment in economicgrowthgraduallydeclines asthe share of consumption steadily grows. In thisway,China is undergoing a shift from production-drivento consumption-driven economic growth, leading toaccelerated industrial restructuring.

Moreover, there is great potential for adjustingthe energy consumption mix.

First, with mechanisation at saturation point,agricultural modernisation will shift focus tobiotechnology and digitalisation, which is

Fig. 17 Policy plays a crucial role in driving energy transition. Source Shell International


expected to further reduce the energy consump-tion per unit of added value (Fig. 18).

Second, optimisation of the country’s indus-trial structure and changes to production processeswill significantly improve the efficiency ofindustrial energy consumption. Starting with the13th Five-Year Plan (2016–20), the amount ofenergy-intensive products—such as steel, cement,glass, aluminium and synthetic ammonia—hasbegun to peak and may drop.

Third, energy consumption in buildings isexpected to grow steadily. Based on the experi-ence of developed countries, China’s urban resi-dential floor space per person is likely to peak atabout 40 square metres and public floor space perperson at about 20 square metres. Estimates basedon future population trends show that the floorspace peak in China should remain at about 90billion square metres.1 To ensure steady and sus-tainable development of the real estate industry,the peak should occur around 2040. However,with the development of energy-efficient

buildings, energy consumption per unit of build-ing area will be significantly reduced, even thoughthe total energy consumption of buildings inChina is expected to increase steadily.

Fourth, energy consumption in the servicesector is expected to continue to grow as it scalesup, but will be constrained by the total stock ofcommercial floor space. Based on forecasts ofadded value in the service sector and commercialfloor area, end-use energy consumption willincrease to 350 Mt of coal equivalent (Mtce) by2035 and 470 Mtce by 2050.

Fifth, residential end-use energy consumptionwill continue to grow, but could remain signifi-cantly lower than that in developed countries.With people’s living standards improving,household energy consumption is expected toreach 520 Mtce by 2035 and 660 Mtce by 2050.

3.1.2 Use New Technologies, Processesand Products to SaveEnergy

Efforts should bemade to promote the developmentof green and low-carbon buildings. In China,energy consumption in buildings accounts fornearly half of the country’s total energy consump-tion, far higher than that of developed economies.

Fig. 18 Forecast of China’send-use energy consumptionin agriculture. SourceFindings of the DRC researchteam

1China’s floor space stock in 2015 was close to 60 billionsquare metres, including 17.6 billion square metres ofurban residential floor space, 27.6 billion square metres ofrural residential floor space, and 14.0 billion squaremetres of urban commercial floor space.


Government ministries and agencies intro-duced a series of plans, including the 12thFive-Year Plan for Developing Green Buildingsand Eco-Cities (2012–17). However, furtherimprovements in green building systems andstandards and increased R&D of green buildingtechnologies and life cycle management of greenbuildings are required. Technology innovation ingreen buildings is currently focused on lightingand heating. Energy- efficient lighting is one ofthe most effective ways to reduce greenhouse gasemissions from buildings in almost all countries.The Roadmap for the Phase-out of IncandescentLamps in China, issued by the National Devel-opment and Reform Commission (NDRC), ban-ned the import and sale of incandescent lamps of15 W or more from October 2016. If all existingincandescent lamps are replaced with energy-efficient lamps, 48,000 GWh of power would besaved annually, equivalent to a reduction in CO2

emissions of 48 Mt. It is estimated that China’scumulative newly built urban residential areaswill exceed 5 billion square metres by 2020, andthat the newly added energy consumption fromheating in north China (the coldest part of thecountry) will be about 125 Mtce. If heating fromrenewable sources is deployed in all these newresidential areas, the resulting reductions in CO2

emissions would be 375 Mt.Centralised coal-fired power generation and

coal-fired combined heat and power(CHP) should be increased to save energy andreduce emissions. Currently, centralised coal-fired power generation at large power plantsaccounts for only 48% of total coal consumptionin China, compared to 99% in the USA. Theextremely large number of distributed,small-scale coal-fired facilities in China, whichdo not have the capability to treat pollutants,offers great potential for energy saving andemissions reduction. China needs to take severalmeasures to significantly shift coal use fromsmall-scale to large-scale centralised generation.This will reduce pollutant emissions from coalcombustion and improve the heat to electricityconversion efficiency of coal.

3.1.3 Introduce Carbon Pricingto Improve EnergyConsumption Efficiency

Carbon pricing can have a significant energy savingeffect as it increases the cost offossil fuels and causesa shift in the energymix towards lower-carbon fuels.The increase in the price of energy will also driveenergy efficiency and reduce total energy con-sumption—as the carbon price goes up, total energyconsumptionwill decrease. In the policy scenarios of$30 per tonne CO2 equivalent (tCO2e), $60/tCO2eand $90/tCO2e, total energy consumption will be7.4%, 14.0% and 19.4% lower respectively than inthe zero-carbon-tax scenario. Furthermore, theeffects of carbon pricing policy will become signif-icant over time.

3.2 Enable Cleaner EnergyConsumption by Using LessScattered Coaland by IncreasingElectrification

3.2.1 Substitute Electricity and Gasfor Scattered Coal

In 2015,China’s scattered coal consumption reached617million tonnes (Mt), mainly used in coal mining(120 Mt), household heating (93 Mt) and chemicalproduction (90 Mt). A further 260 Mt of scatteredcoal was used by light industries—food, textiles,equipment manufacturing and services.

To replace scattered coal in residential heat-ing, China will encourage central heating(gas-fired boilers, geothermal heating and wasteheat recovery) and increasingly substitute elec-tricity and gas for scattered coal (such aswall-mounted gas-fired heaters) in areas wherecentral heating is not possible. The measures forsubstituting electricity and gas for scattered coalin the industrial and commercial sectors includereplacing small coal-fired boilers with gas-firedboilers or installing waste heat recovery or otherintensive heating methods. According to theEnergy Production and Consumption RevolutionStrategy (2016–30), more than 35% of scattered


coal will be replaced by 2020 and about 70% by2030. In this way, scattered coal consumptionwill decrease to 400 Mt in 2020, 180 Mt in 2030and 60 Mt in 2050.

3.2.2 Speed Up Electric VehicleDevelopment to PromoteClean Energy Consumption

In the Recommended scenario, the number ofregistered electric vehicles (EV) in China willreach 3 million in 2020, 80 million in 2030 and270 million in 2050. However, the industry’scurrent strong momentum indicates the possibil-ity of faster development.

First, there is a global boom in EV R&D,mainly around such critical technologies as

batteries, automated driving systems andcharging facilities. New concepts in leasing,business models and financial services areexpected to accelerate developments in the EVmarket.

Second, as artificial intelligence technologiesevolve, automated driving +EV is expected tobecome a standard travel model in the future,extending vehicles from a travel tool to a homeon wheels. This new way of travelling can speedup the transition from conventional vehicles toEVs in the medium and long terms.

Third, EVs can serve as both a means oftransport and a distributed energy storage facility.With expanding battery (energy storage) size andsupport from smart grid technologies, EVs can

Table 1 Two EVdevelopment scenariosSource Findings of theDRC research team

Scenario Year

2020 2030 2050

Recommended scenario Ownership (million) 5.24 83 270

Proportion (%) 1.9 18.4 50.0

Accelerated scenario Ownership (million) 5.24 200 500

Proportion (%) 2.0 44 93

Vehicle ownership (million, including fuelvehicles and EVs)

272.23 450 540

Fig. 19 China’s total vehicle energy demand in two EV development scenarios


make the most of renewable energy and support itslong-term development.

To this end, and based on its findings in therecommended scenario, this report proposes anAccelerated development scenario in which weinvestigate energy demand in transport and itsimpact on China’s energy supply mix. EV devel-opment scenarios are set up as follows (Table 1).

Estimates for vehicle energy consumption inthe Accelerated scenario are shown in Fig. 19.They assume vehicle ownership remains unchan-ged and newly added EVs replace mainly dieseland petrol vehicles and do not affect the number ofnatural gas-fuelled vehicles. Petrol and dieselconsumption are expected to decrease by 100 Mtby 2030 and by 130 Mt by 2050. Meanwhile,electricity demand is projected to increase by200,000 GWh by 2030 and by 340,000 GWh by2050, compared to the recommended scenario.

3.2.3 Accelerate Electrificationby Decarbonisation

In 2014, electricity accounted for nearly a quarterof China’s end-use energy demand. The coun-try’s electrification rate is comparable to that ofmany OECD economies. As China’s society andeconomy develop, consumer demand for higherquality energy will grow, and technological andstructural shifts will drive further change. His-torical experience suggests that the electrificationrate in 2030 will grow by 5.5% compared to2015, thanks to higher incomes; and by 6.4% due

to technological progress; but shrink by −2.6%as a result of economic restructuring. Together,these factors may lead the electrification rate torise from 23% today to 32% by 2050.

Decarbonisation will further drive the processof electrification. The electrification rate isexpected to increase by 5–10% due to acceleratedEV development in the transport sector, by 2.5–5% from decarbonisation in construction projects,and by 0.5% from decarbonisation in industry,reaching more than 40% by 2050 (Fig. 20).

Through the rapid development of cleanenergy and the use of clean coal, the share ofelectricity in the end-use energy mix will grad-ually increase from 22% in 2015 to 30% by 2030and to around 40% by 2050, significantlyimproving the electrification rate.

3.3 Develop a Clean EnergyProduction Mode Featuringthe Efficient Developmentof Conventional Energyand a Combinationof Centralisedand Distributed EnergySystems

3.3.1 Increase the Proportionof Scientific Coal Capacity

Coal-dominated conventional energy will remainthe main energy source in China, both now and

Fig. 20 China’s electrification rate growth potential


in the longer term. To address the requirementsof the energy revolution, production needs to besafe, efficient and sustainable. In mining, coalproduction will shift from extensive developmentto intensive, green production. In conversion,priority will be given to upgrading coal-firedgeneration from high to ultra-low emissions.

Taking into account the geology, coalreserves, water resources and ecology of China’scoal-producing regions, the one-third of coalmines that meet the criteria for scientific capacitywill be retained, the one-third that fail to meet thecriteria will be upgraded, and the one-third thatare backward or not possible to be upgraded willbe gradually shut down.

3.3.2 Maintain Steady Developmentof Oil Supply Capacity

Although EV development can significantlyreduce future oil demand, in the Recommendedscenario China’s oil demand and oil processingcapacity peaks will exceed 650 Mt and 720 Mtrespectively in 2030. Even in 2050, China’s oildemand will still be around 650 Mt. Currently,China’s oil processing capacity has been close toits peak, so it is necessary to continue to con-strain total demand and accelerate the shift fromoil refining to chemical production.

3.3.3 Significantly Increase Gas SupplyCapacity

In the future, China’s natural gas demand isexpected to see fast growth. To ensure thatdemand can be met, which will increase as gas issubstituted for scattered coal, supply capacitymust be significantly improved. It is forecast that260 billion cubic metres (bcm), 450 bcm and 490bcm of natural gas will be needed by 2020, 2030and 2050 respectively.2 Therefore, China needs

to vigorously explore and exploit conventionalgas, tight gas, shale gas and coalbed methane,and drive research forward into natural gashydrate exploitation technologies.

3.3.4 Develop Clean Energy (MostlyRenewable Energy)in a Well-Planned Manner

China’s clean energy sources and load centresare located in west and east China respectively.As the energy supply revolution progresses, thedevelopment of clean energy in these two regionsshould be coordinated.

First, there needs to be coordination betweenrenewable energy generation and transmissionand distribution networks to connect regions richin renewables to demand centres, provide energystorage to manage intermittency, and optimisedemand (including the use of demand-sideresponse to manage peaks and intermittency).

Second, a mix of multiple sources of energyand technologies is needed to ensure a stablesupply of electricity. These would include smallwind farms; solar photovoltaic; combined cool-ing, heat and power plants; and others.

Third, collaboration across the entire elec-tricity supply chain (generators, grid operatorsand consumers) is essential to optimise supply,distribution and consumption.

Fourth, in west China, energy should begenerated at large utility-scale renewables plantsand connected to national and regional trans-mission and distribution networks. In east andcentral China, generation should be smaller scale—distributed renewables and low carbon inmicrogrids or community power grids.

3.4 Gradually Establish an EnergyMix Centred on Conversionto Electricity

In the end-use energy mix, electricity’s share willprogressively increase from 22% in 2015 to 30%by 2030, and then to around 38% by 2050. Thiselectricity-centred energy mix is made possiblemainly by the rapid development of clean powertechnologies and clean coal utilisation (Fig. 21).

2Research on China's Gas Development Strategies, pub-lished by China Development Press in 2016 and bySpringer in 2017, forecasts China’s gas output to reach270 bcm in 2020 and 470 bcm in 2030.


3.4.1 Increase the Proportionof Renewable Energy(Mostly Wind, Solarand Biomass) and NuclearPower

Based on an optimal design of the future powersupply mix, the research team recommends thefollowing roadmap for clean energydevelopment:

• the proportion of wind power and solar pho-tovoltaic will increase from 4.9% in 2015 toabout 15% in 2030 and more than 25% by2050;

• the share of gas-fired power will increasesteadily from 3% in 2015 to 9% in 2030 andaround 10% by 2050; and

• although hydropower capacity will continueto grow, the rapid development of otherpower sources will lower its share of theenergy mix from 17% in 2015 to 14% in 2030and around 13.5% by 2050.

Overall, the proportion of clean power, notfuelled by coal or oil, will increase from 30% in

2015 to 38% in 2020 and 52% by 2030. By2050, non-fossil fuel generation will increase tomore than 70% of installed capacity and 66% ofpower output.

In the medium term, total consumption of coalas a primary energy source will not changegreatly, but its share of energy supply willdecrease sharply. The energy supply revolutionwill drive the shift from direct coal use to itsconversion into an electricity-oriented secondaryenergy source of efficient and clean coalutilisation.

3.4.2 Encourage the Substitutionof Non-fossil Fuel Energyfor Oil and Coal

Coal consumption will fall sharply from about44% in 2015 to 27% by 2050. Oil consumptionwill first increase and then decrease, returning toits current share of around 16% at mid-century.Natural gas, which is a cleaner energy sourcethan coal and oil, will enjoy rapid growth in themedium term, rising to 15% in 2030 and stayingstable thereafter. Non-fossil fuel energy willincrease substantially, rising to more than 20% in

Fig. 21 Changes in China’s end-use energy mix in the Recommended scenario. Source Findings of the DRC researchteam


2030 to replace oil as the second-largest energysource. By 2050, non-fossil fuels’ share of theenergy mix will be more than 40%, replacingcoal as the number-one energy source (Fig. 22).

3.5 Build an Internet+ IntelligentEnergy System

Internet+ is an intelligent energy system of thefuture that uses digitalisation to integrate agreater share of distributed renewables into thepower system. It will need to incorporate micro-,community and regional grids and coordinatetheir activities into a greater, harmonised whole.It will use energy storage and demand-sideresponse to manage solar and wind intermit-tency. And it will encompass a range oflow-carbon energy sources and technologies(horizontal integration), as well as the variousparts of the electricity value chain—generation,transmission, distribution and consumers (verti-cal integration). This will help manage theimpacts of intermittency that distributed renew-able energy systems can have on local grids and

provide a feasible pathway for connection ofdistributed renewable energy at large scale.3

3.5.1 Promote Intelligent EnergyConsumption

The development of smart homes, buildings, com-munities and factories featuring smart meters andflexible energy trading should be encouraged to helpcreate smart cities and leverage intelligent tech-nologies to reduce residential energy consumption.

A smart energy system, through the use ofsmart grids and smart meters, should be developedto enable real-time measurement, informationexchange and active control of energy consump-tion for electricity, heating and cooling. Theimplementation of such an intelligent andadvanced measurement system will be enriched toenable remote, automatic and centralised acqui-sition and collection of water, gas, heating andelectricity consumption data, thereby realisingmulti-meter integration. The networking structure

Fig. 22 Changes in China’s primary energy mix in the Recommended scenario. Source Findings of the DRC researchteam

3Gao Shiji and Guo Jiaofeng et al., Energy Internet BoostsEnergy Transformation and Institutional Innovation inChina, China Development Press, 2017.


and information interface of the advanced mea-surement system will be standardised throughoutthe whole system to achieve secure, reliable andfast two-way communication with all users.

Efforts should also be made to strengthendemand-side management and increase the use ofintelligent energy consumption monitoring anddiagnosis technologies. Additionally, the creationof energy management centres for industrial com-panies needs to accelerate and an Internet-basedinformation service platform should be built, so thatbusinesses can monitor and analyse energy con-sumption in each production process and intelli-gently dispatch water, electricity, gas and fuelwhenever changes in production parameters aremade. Thiswill enable real-timemonitoring, timelyadjustment, automatic alarm and other functionsthroughout the production process (from procure-ment to use), thereby realising intelligent energymanagement and tapping energy saving potential.

3.5.2 Establish Micro-BalancingSystems that Allow EnergyEnd Users to Participatein Energy Markets

Equipment, facilities and platforms need to beestablished to allow energy users—homes, busi-nesses, industrial parks and communities—toparticipate in the energy market and provide bal-ancing services to the microgrid or communitygrid to which they are connected. This would be inthe form of, for example, behind-the-meter stor-age, electric vehicle batteries as storage, ordemand-side response. It would promote flexibleand interactive energy use, support distributedenergy trading and feature multi-energy sourceintegration, openness and sharing, real-timetwo-way communication and intelligent control.

3.5.3 Accelerate the Constructionof Integrated EnergyNetwork Infrastructure

An integrated energy network, based on the smartgrid concept, should interconnect with other net-works such as those for district heating or cooling,natural gas distribution and various transport net-works. It would enable efficient conversion fromone energy form to another, such as natural gas

into heating or cooling, and allow centralised anddistributed energy operations to be coordinated ina single smart system. Deployment would initiallybe made in new urban areas, new industrial parks,or in districts affected by air pollution. Theobjective would be to create a highly integratedenergy system that provides flexible, controllable,safe and stable energy transmission.

3.5.4 Set up Internet+ IntelligentEnergy Development

In 2017–20: (i) distributed power generation andstorage technologies will be promoted anddeployed at scale; (ii) the digital multi-energytrading system will go live; and (iii) pilot anddemonstration projects featuring interconnectiv-ity among various energy networks, energysources and technologies will be launched.

In 2021–25: (i) optimisation across diversifiedenergy carriers will be gradually made possible,and distributed power generation and storagesystems widely deployed; and (ii) urban smartand diversified energy networks will be estab-lished to optimise energy from different sourcesand address various energy requirements.

In 2026–30: (i) new electricity microgrids andan interconnected non-fossil energy network thatfeatures multiple and complementary energysources and technologies will be promoted andconstructed across China; and (ii) an open andsharing smart energy ecosystem will take shape tosignificantly improve overall energy efficiency.

After 2030: (i) renewable energy will be widelyused in such sectors as agriculture, industry,transport, commercial and residential; and (ii) theindustry ecosystem supporting rapid and sounddevelopment of renewable energy will continue tofast-track renewable energy development.

3.6 Develop New Energy Technologiesthat Fully Support the EnergyRevolution

3.6.1 Continuously Promote the SmartPower Grid

The smart power grid is an important means tointegrate energy production and consumption, as


well as new technologies and system revolutions.It is also the enabler of the Energy Internet. InApril 2016, the National Development andReform Commission (NDRC) and the NationalEnergy Administration (NEA) published theirAction Plan for Innovation in the Energy Tech-nology Revolution (2016–30)4 and their Road-map for Major Innovation Actions in the EnergyTechnology Revolution,5 which launched a planto develop smart grid power transmission andsmart end-user devices.

To develop a smart grid, China will: (i) striveto make breakthroughs in key technologies andcore equipment that it currently imports fromother countries, especially in the fields of directcurrent, power electronics and renewable energy;and (ii) develop a national and industry standardssystem for smart grids as soon as possible tosupport the building of smart grids.

3.6.2 Develop New EnergyTechnologies

In wind power, China will work to achievebreakthroughs in fields such as aerodynamics,flow field analysis, load calculation, as well ashigh-end technologies like large wind turbinedesign, wind turbine bearings, and wind farmcontrol and pitch control systems. This willaddress the country’s current weakness in con-ducting basic research on wind power and criticalwind power equipment.

In solar photovoltaic, China needs to signifi-cantly improve photovoltaic conversion effi-ciency and make breakthroughs in areas likeinterdigitated back contact, heterojunction withintrinsic thin layer cells, passivated emitter cellsand rear cell technology, metallisation wrapthrough, bifacial modules and boost the effi-ciency of battery technologies.

In new energy technologies that have greatpotential in the short and medium terms—such assolar thermal power and ocean power—China

will continue to develop demonstration projectsto rapidly accumulate experience in planning,design, construction, operation and management.Such an approach will lay a solid foundation forpolicy studies and the development ofindustrial-scale technologies. It will also improveinternational competitiveness and reduce costs.

3.6.3 Increase Supportfor the Developmentof Energy StorageTechnologies

Energy storage technologies are the key to theelectricity revolution. They are also at the cuttingedge and the site of fierce competition. Currently,China sees severe wind, solar and hydro curtail-ment and nuclear power restriction, which result inmore than 100,000 GWh of wasted power output.Energy storage is an important means to use cur-rently wasted output and integrate unstable energysupply and consumption. Technologies such asphysical and chemical energy storage, hydrogenfuel cells and heat storage are at the forefront.Ultimately, one or two of these technologies willsurvive the competition and grow.

3.6.4 Prioritise Nuclear PowerDevelopment

Nuclear power is indispensable to China’sdevelopment and one of the energy pillars Chinamust secure strategically. To this end, China will:(i) invest more in scientific research to enhancebasic capabilities in nuclear technologies; and(ii) establish scientifically based decision-makingand interaction mechanisms to win the public’srecognition of the importance of nuclear powerand enable the safe development of nuclearenergy in China.

3.6.5 Make Unconventional Gasa Major Component of NewGas Capacity

China will increase its collaborative R&D effortswith overseas organisations to innovate advancedtechnologies, especially exploration and produc-tion technologies suitable for China’s uncon-ventional oil and gas resources. This will speedup the development and scale-deployment of

4NDRC and NEA, Action Plan for Innovation in theEnergy Technology Revolution (2016–30), 2016, p.6.5NDRC and NEA, Roadmap for Major InnovationActions in the Energy Technology Revolution, 2016,pp.67–69.


critical technologies with Chinese characteristics.Moreover, China will focus on the developmentof unconventional natural gas resources like tightgas, shale gas and natural gas hydrates.

3.7 Strengthen China’s EnergySecurity by ImprovingGlobal Energy Governance

3.7.1 Cooperate with and ReformExisting InternationalEnergy GovernanceOrganisations

Make sure energy security is in line with countries’interests. With the strengthening of its global influ-ence, China should participate deeply in globalenergy governance systems as soon as possible.This, to make them more widely representative andbetter reflect the interests of developing and emerg-ing countries, thereby promoting a global energycommunity with a common future. China shouldimplement international energy cooperation strate-gies that integrate multi-level international energycooperation partners, diversified internationalenergy cooperation forms, multi-channel interna-tional energy cooperation methods, multi-areainternational energy cooperation content andmulti-task international energy cooperation pro-cesses to adapt to the changes in the global energylandscape and meet its own development demand.High-quality development of China’s energy systemshould be promoted while accelerating the globaltransition to clean, low-carbon, affordable, efficient,secure and reliable energy.

3.7.2 Seek G20 Support to Facilitatethe Energy Transitionby Aligning Global Energyand Climate Governance

Attempts should be made to get the G20 to attachmore importance to the energy transition andreach agreement on the transition to a low-carbonand secure energy future. This could be achievedby the G20 issuing statements and commitmentson energy security and long-term decarbonisationand by making collective efforts to raise theambitions of nationally determined contributions

(NDCs) to reduce greenhouse gas emissions.Long-term G20 ministerial conferences onenergy should be set up and institutional capacitybuilt by establishing energy secretariats in rele-vant international organisations.

3.7.3 Reduce the Risk of Investingin Partner Countriesto Improve China’s EnergySecurity

Over the past decade, China’s Go Out strategy toencourage its enterprises to invest abroad hasrapidly increased foreign direct investment(FDI) in overseas energy sectors. In the comingdecade, the Belt and Road Initiative (BRI) willfurther channel Chinese capital into energyresources and infrastructure. It is necessary forChina to ensure good energy sector governance inthose partner countries where it invests. This willmitigate the risk of instability and underinvest-ment in those countries, enhancingChina’s energysecurity as a result. China can also cooperate withpartner countries to support them through theenergy transition, especially by providing accessto China’s low-carbon technologies.

In-depth cooperation on energy betweenChina and the BRI countries should bestrengthened. Through its cooperation in theBRI, China plays a unique role in low-carbonenergy, energy security and the energy transition.A framework for FDI and energy infrastructuredevelopment in clean energy technologies shouldbe created. At the same time, China should workwith others to enhance the governance andtransparency of energy sector investment.

The way that China invests in countries in theBRI will be a measure of its commitment togreen and sustainable growth, both at home andabroad. The risk of investment disputes with hostcountries would be minimised by learning fromhistorical experience, adhering to high standardsof social and environmental governance, anddeveloping appropriate risk management tools.

3.7.4 Strengthen Global ElectricityCooperation

One of the principal solutions to achieve powersupply security, reduce curtailment and ensure


balance in power systems with a high penetrationof renewables is to increase electricity tradingthrough interconnected grids. As the largestbattery manufacturer and generator of renewablepower in the region, China could take the lead incooperation and governance reforms to facilitatecross-border grid interconnections with neigh-bouring countries.

China and its regional partners should har-monise national electricity markets to enable powertrading through such interconnections. Connectinghigh renewable supply areas with load centresrequires regional planning to avoid lock-in offossil-based assets and infrastructure and lock-outof renewables. Further, as electricity marketsbecome increasingly interconnected the risk ofcyberattack is best mitigated by strengthening andharmonising regulations across jurisdictions.

China can benefit from the opportunities toexport surplus electricity and reduce electricitycosts through grid interconnections and balanc-ing: regional electricity trading saves consumersmoney and decreases the capacity marginrequirements for China and its partners. Coop-eration on energy interdependence can build trustamong partners, creating wider benefits.

Regarding electricity market reform (EMR),regional differences in capacity, dispatch andbalancing and political willingness to alignreforms may be difficult to overcome. A steppedapproach to EMR could be adopted, so that thebenefits of progressive reform are tangible toeach partner country.

4 Systematically Builda High-Quality Energy System:Policy Suggestions for Promotingthe Energy Revolution

4.1 Structural Change Is Necessaryfor China’s EnergyRevolution

China’s strategic goal of supporting high-qualityeconomic development with high-quality energyrequires China to create a global and modern

energy system with effective market mecha-nisms, moderate macro-control, vibrant enter-prises and clean, low-carbon, economic, efficient,secure and reliable energy. To achieve this, thegovernment has a key role to play in setting thepolicy framework that levels the playing fieldbetween low- and high-carbon sources of energy.Once the government does this, markets will seekout the cheapest energy sources and drive inno-vation in low-carbon technologies and invest-ment in enabling infrastructure.

4.1.1 Strategic Goals

• Well-designed market system. The objective isto create a modern energy market system basedon harmonisation, openness and orderly com-petition. Market monopolies will be eliminated.Instead, a market will be shaped comprisinglarge energy companies cooperating, coexistingand competing fairly with a range of companiesof different scale and ownership across theenergy value chain—in energy production,transmission and sales. This will address issuessuch as themisallocation of resources caused bythe unequal status of market players and dis-orderly competition.

• Sound price mechanism. In competitive seg-ments, prices will be decided by the market. Innatural monopoly segments such as pipelinetransmission, prices will be controlled by thegovernment. A price mechanism and a fiscal andtaxation system that truly reflect market supplyand demand, resource scarcity and environmen-tal impact will be created to address currentunreasonable price formation mechanisms.

• Well-regulated government management. Toclearly define the boundary between govern-ment and market and the new round of gov-ernment reforms, several high-level,consolidated and independent energy man-agement authorities will be created, integrat-ing functions such as industrial development,Five-Year Plans, and energy policies andregulations. They will operate according tothe principles of “what is not mandated by thelaw shall not be done, what is not prohibited


can be done, and what is defined as legalresponsibility must be done”.

• Effective market regulation. Unified, inde-pendent and specialised regulatory authoritiesand a modern energy regulation system willbe established. The latter will demonstrateclear rights and responsibilities, fairness andimpartiality, transparency and efficiency, andeffective regulation. It will address issuessuch as policymaker-regulator overlaps,decentralisation, the current lack of regulatoryfunctions and the shortage of regulatory per-sonnel and powers.

• Well-developed legal system. A system ofregulations and standards will be developed—based on the Energy Law and supported bylegislation in the power, coal, oil, and gassectors—to ensure national energy securityand sustainable development. It will addressissues across the energy system such as thelack of consistent guidelines and principles forlegislation, and the present inconsistency andlack of alignment of the current legal system.

4.1.2 Strategic PrioritiesA modern energy market system should be cre-ated by:

(i) separating natural monopoly enterprisesfrom competitive businesses, improvingmarket access and encouraging investorsto enter the energy sector in an orderlymanner;

(ii) establishing and enhancing an energytrading system that integrates the nationalmarket with multiple regional markets andapplies consistent rules, complementaryfunctions and multi-level coordination;

(iii) establishing power system operators withindependent scheduling and trading toeffectively separate ownership and opera-tion of power transmission and distribu-tion networks;

(iv) encouraging oil and gas pipeline operatorsto gain exclusive rights, separating pipe-line transport services from downstreamretail sales, and providing fair access forthird parties to pipeline networks; and

(v) accelerating the development of smartenergy systems and an integrated energyservices market, and building an energysystem where centralised generation, dis-tributed energy, energy storage anddemand-side load management enjoyequal access.

The energy market’s price mechanism shouldbe reshaped by:

(i) applying the principle of “allowable costsplus a reasonable profit” to naturalmonopolies like pipelines, as this incen-tivises monopoly industries to reduce pri-ces and other companies to innovate;

(ii) deregulating market prices in competingsegments to achieve a market-determinedprice mechanism;

(iii) implementing an electricity price mecha-nism—that controls power transmissionand distribution and deregulates powergeneration, sales and use—by establishinga well-designed, independent andperformance-based power pricing system;

(iv) determining the methods needed to dis-close power transmission and distributioncosts and pricing;

(v) deregulating the price of oil and naturalgas (which will be based on market com-petition) and taking steps to deregulatepricing in infrastructure like oil and gaspipelines (but not gas distributionnetworks);

(vi) establishing and improving directionalsubsidy and relief mechanisms for peoplein need and some non-profit industries;and

(vii) eliminating cross-subsidies in energyprices.

The energy management system should beimproved by:

(i) establishing and strengthening regulatoryauthorities to better manage state-ownednatural resources and monitor naturalecosystems. This should be in line with the


new round of institutional reforms toimplement responsibilities relating topublicly owned natural resources;

(ii) defining the boundary between govern-ment and the market, standardising andsimplifying approval procedures, andreducing the administrative burden oncompanies subject to these approvals;

(iii) addressing grid integration of renewablepower and the need for inter-provincial andinterregional power transmission and dis-tribution under the national energy strat-egy; as well as fully deregulating the powergeneration sector and ensuring all regionspurchase and use the legally binding min-imum number of hours of wind and solarpower generation annually; and

(iv) improving peak shaving and the backupauxiliary service market mechanisms,upgrading thermal power flexibility andincreasing energy storage power sources.

The energy regulatory system should beimproved by:

(i) promoting policymaker-regulator separa-tion, setting up independent, unified andspecialised regulatory authorities, andimproving the regulatory system at thenational and provincial levels;

(ii) defining regulatory responsibilities(mainly for economic regulation), andstrengthening social regulation to ensurecompetitive outcomes in natural monopolysegments such as network infrastructure(mostly pipelines); and

(iii) improving regulatory capabilities, inno-vating regulatory approaches, improvingregulatory effectiveness and maintaining afair and competitive market.

A modern energy legal system should beaccelerated by:

(i) developing the Energy Law to provide abasis for the creation and revision of otherlaws and regulations in the energy sector;

(ii) revising the Electric Power Law, devel-oping the Oil and Gas Law, improving theCoal Law as soon as possible, and clari-fying the basis for the creation, imple-mentation, assessment, supervision andadjustment of plans and strategies forelectricity, coal, oil and gas;

(iii) implementing the Energy ConservationLaw and the Renewable Energy Law, andestablishing consistent regulatory, coordi-nation, decision-making and social par-ticipation mechanisms; and

(iv) developing energy regulations and estab-lishing and improving existing energyrules, requirements, approaches andprocedures.

4.2 Create a Nationally Unifiedand Dynamic CarbonTrading Market

China has announced the launch of a nationallyunified carbon trading market, covering keycarbon-emitting industries such as steel, elec-tricity, chemicals, building materials, paper andnon-ferrous metals. From the progress of ongo-ing pilot programmes, the following challengeswere observed.

First, the failure to achieve market-basedelectricity pricing is preventing the carbon trad-ing market from working effectively. Chinahasn’t yet established a new mechanism thatenables the market to determine electricity prices.Electricity price control limits the power sector’spotential to tap low-cost emissions reduction.

Second, current regulations on carbon emis-sions are not sufficiently advanced to support thecreation of an effective carbon trading market, asthere are no uniform standards yet on assessmentand approval, trading and settlement, and theireffective supervision is not possible.

Third, the regional carbon trading mecha-nisms are immature. Domestic products are iso-lated from the international carbon tradingmarket. It is still under discussion whether Chi-na’s future national carbon trading market should


choose centralised trading at a single exchange ordecentralised trading at several exchanges.

Fourth, the liquidity of the carbon tradingmarket needs further improvement. Pilot carbontrading markets experience the same problem ofpoor liquidity, with both low volume and lowturnover.

To overcome these challenges, efforts need tobe made to:

4.2.1 Improve the System of Lawsand Regulations to IncreaseRegulatory Capacity

Relevant legislative procedures should be strictlyimplemented and the legal system for carbontrading improved. In particular, the systemdesign for the national carbon trading marketshould be based on experience from pilotschemes. The rights and obligations of carbonemission allowance trading participants, tradingmethods and rules, dispute resolution mecha-nisms, type and extent of penalties for violations,and legal authorisation from jurisdictions shouldbe clarified—based on the Measures for theAdministration of National Carbon EmissionTrading issued by the NDRC.

Moreover, a regulatory mechanism for a car-bon emission allowance trading market should beestablished and a dedicated regulatory authorityset up to supervise market operations and par-ticipants. The building of a comprehensive riskcontrol system for the carbon trading marketshould be explored to prevent illegal operationsand maintain a well-functioning carbon tradingmarket. A legal supervisory system coveringvarious parties—including the government, ser-vice providers, trading platforms and businesses—should be developed. While fulfilling its reg-ulatory role, the government should avoid con-trolling and commanding the market directly.Rather, it should focus on macro-policy planningand supervision and leave the market to play itsintended leading role.6

4.2.2 Coordinating the Cap and QuotaStructure Correctly

The initial allocation of carbon trading quotas isa core function of a carbon trading market. Theregional quota cap should be determined by acombination of factors, including greenhouse gasemissions, economic growth, industrial structure,energy structure, and inclusion of the businessesthat fall within the emissions trading scheme.Some quotas should be reserved for auction, heldin reserve to regulate the market if needed, andfor major projects.

First, the cap should take into account eco-nomic growth, technological progress and emis-sions reduction targets, and follow the principlesof “rigid cap, flexible structure, tight stock andoptimal increment” in the functioning and evo-lution of the carbon trading market. Given eco-nomic volatility and the uncertainty oftechnological progress, an adjustment mecha-nism should be designed to deal with theseuncertainties.

Second, industries vary in their emissionsreduction costs, emissions reduction potential,competitiveness and carbon leakage effects,which should be taken into account whendesigning industry-specific emissions controlcoefficients.

Third, the design of a 3–5-year trading cycle,early determination of cap and adjustment mea-sures, and a quota-relevant reserve system, arenecessary to meet long-term market expectationsand businesses’ inter-temporal quota manage-ment needs and hence reduce compliance costs.

4.2.3 Establish a Unified TradingPlatform and PricingMechanism

A unified carbon trading platform should includeregulatory, trading and support systems. Giventhe inconsistencies in trading rules, trading pro-cedures and price control in different carbontrading markets, it is necessary to improve thepricing mechanism (Fig. 23).

Auctioning initial carbon emission rightsenables the fair and effective allocation of thoserights. Government can set the minimum priceand businesses can acquire emission allowances

6Liu Huiping, Song Yan, Challenges for Launching theNational Carbon Emission Rights Trading Market andSolutions, in Economic Review, 2017, (01):pp.40–45.


through bidding. Given the status quo of Chinesebusinesses, the creation of a pricing mechanismfor auctioning initial emission rights will need toevolve from mostly free allowances to a growingnumber of auctioned allowances.

4.3 Create a Unified, Efficientand Flexible ElectricityMarket

4.3.1 The Goal of Electricity MarketReform

Electricity market reform is intended to:

(i) design a unified nationwide electricitymarket to allow the free flow of resourcesacross the country, integrate provincialmarkets in a phased manner and eliminatethe barriers to energy trading betweenthem;

(ii) increase the types of energy tradedbetween provinces and regions, andenlarge the number of participants in themarket;

(iii) create a market mechanism that promotesinter-provincial and interregional grid

connections for the exchange of cleanenergy; and gradually introduce auxiliaryservice market mechanisms, likeinter-provincial and interregional peakshaving, to increase clean power tradingvolumes across domestic borders;

(iv) expand the size of the electricity marketthrough mergers or fusions to reduce theconcentration ratio of power generators;and

(v) develop a variety of power products suchas contracts for difference and medium-and long-term contracts and futures tomitigate fluctuations in electricity pricesand ensure stable revenues for all marketparticipants.

4.3.2 Establish an Efficient PricingMechanism

• Deregulate prices. Price deregulation shouldproceed step by step. It could start upstreamand develop into downstream, beginning withinput fuels and progressing through to gen-eration and network access and eventually toretail.

Fig. 23 China’s carbontrading market system


• Harmonise trading arrangements betweendifferent transmission systems. Use price todetermine flows between interconnectedprovincial and regional transmission systems,signalling which provinces or regions couldbenefit from new investment. Price canstimulate lower-cost power plants to respondmore efficiently to demand.

• Implement time-of-use pricing. Time-of-usepricing gives consumers the flexibility torespond to variations in electricity prices anddemand.Again, it can proceed gradually, startingwith larger consumers, such as industrial facili-ties with flexible production schedules, andending with smart household appliances.

4.3.3 Launch Market TrialsProgressively

• Carry out small-scale trials. Carry outsmall-scale trials to competitively procurenew transmission investments in non-networkalternatives like microgrids or distributedenergy resources, ancillary services and soon. Use competitive bidding or auctions forthe trials. These could provide valuableproof-of-concept experience, as well asinnovative and cost-effective solutions. To besuccessful, procurement must be open andtransparent.

• Progressively introduce market-oriented pro-curement. If the competitive procurement trialsare successful, they can be scaled up and widermarket procurement progressively introduced,where appropriate, across each electricitysystem. Market procurement can reveal infor-mation about the relative cost and benefits of arange of power generation technologies.

4.3.4 Optimise the Power ManagementStructure

The power management structure includes anenhanced role for market procurement and a

regulated transmission system operator (TSO) orindependent system operator (ISO). Interna-tional experience of the regulated TSO or ISOmodel is yet to reveal the best performer of thetwo, so it is more important to adopt a goodquality model early than to choose between theoptions.

4.4 Reform and Improve New EnergySubsidy Policies

4.4.1 The Combination of CarbonPricing and New EnergySubsidy Policies CanDeliver Better Results

The present study shows that the implementationof carbon pricing policies will have a significantimpact on total energy consumption. As the ini-tial carbon pricing level increases, total energyconsumption will decrease. The effects of carbonpricing policies will be evident in the short termand become significant over time.

In contrast to carbon pricing policies, theintroduction of renewable energy subsidies willincrease total energy consumption. Subsidypolicies will have a less significant impact ontotal energy consumption than carbon pricingpolicies. In the scenario that incorporates bothcarbon pricing and renewable energy subsidies,total energy consumption will be higher than inthe pure carbon tax scenario but lower than in thesubsidy policy scenario.

The scenarios reveal an important insight. Ifgovernments are concerned that the introductionof carbon pricing will have a significant negativeimpact on energy consumption, they can intro-duce non-fossil energy subsidy policies at thesame time. This will increase non-fossil energyconsumption and reduce fossil energy use,thereby ensuring a smooth transition in theoverall level and patterns of energy consumption(Fig. 24).


4.4.2 Continuously Improveand Implement Non-fossilEnergy Subsidy Policies

With the introduction of carbon pricing andnon-fossil energy subsidy policies, the proportionof non-fossil energy in the energy mix will

increase. Non-fossil energy subsidies will have agreater impact on energy mix adjustment thancarbon pricing. This may be due to the slowerreduction in cost of non-fossil energy technolo-gies in the absence of policy support. Even thoughcarbon pricing policies reduce fossil energy

Fig. 24 Influence of carbon pricing and non-fossilenergy subsidies on total energy consumption and theenergy mix. Note BAU represents a carbon- andsubsidy-free baseline scenario. T90, T60 and T30

represent three carbon price scenarios ($90/tCO2e,$60/tCO2e and $30/tCO2e respectively). S30 and S20represent two scenarios (non-fossil energy price subsidyof 20% and 30% respectively)


consumption, if non-fossil energy subsidies arenot introduced the widespread use of non-fossilenergy would be difficult to achieve and theadjustment of the energy mix would be slow.

In the combined policy scenario, fossil energyconsumption can be reduced and subsidy supportgiven to non-fossil energy. Under the joint actionof the two policy types, the effects of energy mixadjustments can be very significant. Modelanalysis results show that by combining carbonpricing at $30/tCO2e with subsidies of 30%, theproportion of non-fossil energy in the energy mixcan be increased to 50% by 2050. This indicatesthat a combined policy mechanism is botheffective and necessary to promote future energytransformation and an energy revolution.

4.5 Build a New System for Oiland Gas Managementand Operation

In line with the overall requirements of SeveralOpinions on Deepening Oil and Gas SectorReform published by the Central Committee ofthe CPC and the State Council, China will pro-mote market-oriented reform throughout theentire oil and gas value chain. The objective is tobuild a modern oil and gas market system thatfeatures fair competition, openness and orderli-ness, a strong legal foundation and effectiveregulation by around 2030.

4.5.1 Reform the Mining RightsManagement Systemfor Oil and Gas to HelpCreate a Mining RightsMarket

Reform the franchise system for oil and gasexploration and production and deregulate themining rights market in an orderly manner.While single-level mining rights managementcontinues, a shift from allocation to tenderingshould be made. In high-risk areas, explorationrights may be freely transferred by means ofinvitation for bids, open bidding, explorationplans or investment, or joint venture/cooperation.

In proven or low-risk areas, mining rights shouldbe transferred (sold) according to their valuation.

Set a reasonable cost of ownership for miningrights and resolve the relationship betweenresources and income. Different minimumexploration investment standards should be setfor different regions, different minerals and dif-ferent oil and gas resource areas at differentstages of exploration. In particular, the minimumexploration investment thresholds for the firstand second years should be raised, while thosefor the third year should be raised if needed.

Establish an exit compensation mechanismand speed up the transfer of mining rights andreserves to improve resource utilisation. Toacquire the exploration rights after a licenceholder exits, the prospective owner (the relevantnational government authority or other applicant)should compensate the licence holderaccordingly.

Reform the franchise for joint operation withoverseas companies and improve domestic oiland gas capacity. China will deregulate thefranchise of the three major state-owned oil andgas companies (CNPC, Sinopec and CNOOC)for cooperation with foreign companies inonshore exploration and allow other companiesto make independent decisions consistent withgovernment regulations. The franchise for off-shore cooperation should also be steadilyderegulated.

4.5.2 Accelerate Reform of the NaturalGas Pipeline Networkand Build an Independentand Diversified Oil and GasInfrastructure Market

Take steps to promote orderly pipeline indepen-dence. In the medium and long terms, pipelinetransmission companies will take steps towardsfinancial, legal and ownership independence toaccelerate the separation of pipeline manage-ment, sales and storage. This will ensure openand fair access to third parties and improvepipeline utilisation.

Improve laws and regulations and strengthensupervision to ensure fair access. The Measures


for the Regulation of Fair and Open Access toOil and Gas Pipeline Networks and the Measuresfor the Administration of Natural Gas Infras-tructure Deployment and Operation will beimproved, and the Rules for the Implementationof Fair, Open Access to Natural Gas Infrastruc-ture will be developed. These rules and regula-tions will define how infrastructure operators willmaintain independent operation and providevarious services, such as pipeline transmission,to all users in a fair and just manner. They willalso define rules for pipeline access, informationdisclosure requirements and legal liability forbreach of fairness and openness.

Progressively eliminate restrictions to diver-sify investment. Restrictions will be progressivelyeliminated to allow and encourage the invest-ment of private capital in pipeline deploymentand operation.

Strengthen the supervision and approval oftransmission and distribution pricing to reducetransmission and distribution costs. Followingthe principle of “controlling power transmissionand distribution, and deregulating power gener-ation, sales and use” in the power industry, apricing system should be established to verifyindependent gas transmission and distributioncosts. It should be based on allowable cost, plusreasonable profit, and include constraints andincentives,

Create standards and plans to interconnectpipeline networks. The government should makeplans regarding investment, construction, opera-tion and pricing criteria for crude oil, natural gasand oil product pipelines.

4.5.3 Improve Oil and Gas PricingMechanismsand ProgressivelyDeregulate Oil and GasPricing

Improve the oil product pricing mechanism. It isadvisable to deregulate domestic oil productpricing step by step, allowing it to be determinedby supply and demand.

Progressively deregulate natural gas pricing.In the near term, China will:

(i) carry out pilot programmes to deregulatethe end-use retail price of natural gas;

(ii) introduce price incentive policies, such asinterruptible supply pricing and peak andoff-peak gas prices;

(iii) determine the relationship between resi-dential and non-residential gas prices andgradually eliminate cross-subsidies betweenresidential and industrial/commercial gasconsumption; and

(iv) improve directional subsidy and reliefmechanisms for the most vulnerablehouseholds and some non-profit industries.

In the medium to long terms, once upstreamoperators are diversified, third parties have fairaccess to infrastructure, and prices at the naturalgas exchange reflect supply and demand, Chinawill fully deregulate gas supply and sales pricing,leaving it to be determined by the market.

4.5.4 Standardise GovernmentAdministration and Createan Effective RegulatorySystem for Oil and Gas

China will:

(i) promote policymaker-regulator separation;set up independent, unified and specialisedregulatory authorities; and improve thevertical regulatory system at national andprovincial levels;

(ii) consider setting up an independent cen-tralised energy supervision system withinthe National People’s Congress, defineregulatory responsibilities (mainly eco-nomic) and strengthen social regulation toensure fair competition in natural mono-poly segments such as network infras-tructure (mostly pipelines); and

(iii) improve the efficiency of governmentregulation; give regulatory priority toprocesses and activities such as marketaccess, trading behaviour, monopoly seg-ments, tax payments, pricing, security andenvironmental protection; and use a com-bination of approaches including laws,


administration, regulation and publicengagement to enable collaborativesupervision.

4.5.5 Improve China’s EnergyEmergency ResponseSystem and Increase ItsStrategic Oil Reserves

China should accelerate its introduction of thelaws and regulations on energy emergencyresponse and strategic reserve management toimprove coordination and command in responseto energy emergencies and the ensuing risk toenergy security. Energy emergency responsetools should be strengthened. The use and stor-age of strategic oil reserves should be improved,as should supervision, post-event evaluation, andinformation, technology and capital managementsystems. Private capital’s desire to enter thecommercial reserve sector should be stimulatedwith a reasonable reserve price mechanism.

4.6 Deepen Reform of the CoalIndustry

4.6.1 Restructure National CoalAuthorities

Government should guide and serve the coalindustry. By grasping the opportunities providedby “deepening CPC and national institutionalrestructuring”, national coal authorities should berestructured to better implement coal industryand market strategies and reduce administrativeintervention in individual entities.

4.6.2 Improve the Regulatory SystemFirst, the coal industry regulatory system shouldbe strengthened and include input from regula-tory and government authorities, central andlocal governments, trade associations and socialorganisations.

Second, the regulatory regime should coverthe various parts of the coal market. In additionto coal quality, the regulation of commercialtransactions, logistics, capital and informationflow should be considered.

Third, regulation should efficiently target keyprocesses, such as quality standards, environ-mental protection, performance of contract, creditsupervision, risk supervision, flow rate and flowdirection control, and coal mine safety.

Fourth, supervision of coal mine safety needsto be aligned with reform of the state-ownedcapital management system. Information andsmart technologies should be used to do this. Thelimits of corporate governance should be definedto reduce the burden of management on share-holders and investors.

4.6.3 Build a Market InformationNetwork

First, coal circulation (from mine to end user)should become increasingly smart to provideinsights into logistics and processing, deliverimportant information on the coal market, andenable key performance indicators to be measured.

Second, smart technologies should be used tocreate integrated coal distribution parks, andcentralised real-time data acquisition pointsshould be set up at different distribution nodes.

Third, administrative silos should be disman-tled and the regulatory IT platform should beable to aggregate data from different authoritiesand local government departments.

Fourth, cooperation between coal industryassociations and big data companies should beenabled to create an intelligent coal marketinformation network and enhance coal distribu-tion regulations.

4.6.4 Deepen the Reformof State-Owned CoalCompanies

China should seize the policy opportunities pro-vided by the structural reform of the coalindustry and the state-owned capital managementsystem to speed up the optimisation of capitalstock and eliminate inefficiencies.

At the same time, efforts should be made topromote the two-wayflowof capital, coordinate theexit of inefficient assets, facilitate the entry of newcompanies, optimise the industry’s structure,improve the operation of coal companies, and


accelerate innovation and transition throughreform. A disposal platform for inefficient assetsshould be created to promote their repackaging andrestructuring. Financial policies to reduce capacityshould be used to their full extent. The ability to exitcapital should be made easier and in conformitywith market principles by leveraging the reforms tothe state-owned capital investment managementsystem and through mixed ownership.

4.7 Speed Up Reform of State-OwnedEnergy Companies

4.7.1 Accelerate Reformof State-Owned EnergyCompanies by ImprovingInvestment Efficiency

The government’s responsibilities as the investorof state-owned capital should be defined toachieve a shift from corporate management tocapital management. Within the framework ofreforming the state-owned capital managementsystem, state-owned energy companies shouldset up state-owned capital investment and oper-ations companies as soon as possible. Theyshould also establish modern corporate systemsand internal mechanisms adapted to the newmanagement system and carry out mixedstate-private ownership reforms.

4.7.2 Help State-Owned EnergyCompanies BecomeStronger and MoreCompetitive

To ensure national energy security and social sta-bility, state-owned energy companies have a socialresponsibility to become stronger and better. Theyshould make the most of the country’s strongindustrial base. Issues such as high interest on debt,weak operational ability and low profit marginsshould be resolved to strengthen their businessesand improve their global competitiveness.

4.7.3 Make Reform Breakthroughsby Tackling Key Issues

First, a mechanism for state-owned capital’s exitfrom inefficient and ineffective energy assets

should be created. State-owned energy compa-nies could limit losses by exiting state-ownedcapital to become leaner and fitter. The centralgovernment, local government, businesses andthe general public should work together toresolve the issues of “where will the laid-offworkers go, how will the debt be paid, and howwill the value of assets be managed”.

Second, the pace of reform in the power and oiland gas industries should be accelerated. A dy-namic and unified market system should be cre-ated by eliminating the impact of existing interestson conventional businesses. Energy marketsupervision and regulation should be rapidlyintroduced to improve energy supply capability.

Third, the investment management capability ofstate-owned energy companies should beimproved, and the investment function ofstate-owned capital given full play. More peopleshould be employed by state-owned energy com-panies, especially those with capital investmentexperience. To help state-owned energy companiesbecome dynamic, their internal management sys-tems should be optimised and incentives increased.

Fourth, mixed ownership reform should bedeepened. Given the strategic significance of theenergy sector, state-owned holdings will con-tinue to exist in the long term. But investmentopenness and collaboration between state-ownedand private capital should be realised at differentlevels and in different ways. Most importantly,the different capital governance and managementmechanisms that apply to public and privatecompanies respectively should be aligned.

4.8 Enhance China’s Engagement inGlobal Energy Governance

4.8.1 Develop Strategies for,and Engage Deeply in,International EnergyGovernance Organisations

It is in China’s interests to firmly adhere tomultilateral norms and international rules, seizeopportunities and address challenges togetherwith the international community, and activelyparticipate in global energy governance.


China should:• establish comprehensive strategies and a

roadmap for participation in global energygovernance; assess the cost, benefits and risksof its participation in global energy gover-nance in different scenarios; and define thedifferent methods for participation and thesupport systems required;

• respond actively to the expectations of theinternational community on China’s partici-pation in global energy governance byadopting the International Energy Agency’soil emergency response mechanism, improv-ing data quality and integrating internationalenergy strategies;

• establish an internal conference and consul-tation mechanism to reach agreement onmajor international energy issues and berepresented at international conferences toexpress China’s point of view in a morepowerful way;

• decide which international energy confer-ences and activities to participate in andidentify the departments and officials toattend and the goals to be achieved;

• release transparent national energy policies ona regular basis. This means publishing anational energy white paper at regular inter-vals and publicising China’s domestic energypolicies and external energy relations; and

• set up a minimum supply and emergencysystem (like strategic oil reserves) for poten-tial energy security problems (like wars).

4.8.2 Strengthen China’s Capacityto Participate in GlobalEnergy Governance

China’s ability to modernise its energy gover-nance is a prerequisite for its participation inglobal energy governance. China should:

• work actively on the international energyagenda, especially those issues that affectemerging economies and developing coun-tries (soft power);

• develop the ability to apply internationalenergy rules expertly and be familiar with the

laws and regulations of international energytrade and financial investment;

• reform the domestic energy governance sys-tem and international energy cooperationmechanism and introduce a modern gover-nance structure for energy diplomacy;

• develop a pool of expertise on internationalenergy governance;

• improve the ability of energy companies toparticipate in international energy marketactivities (hard power); and

• form discussion platforms with the help ofnon-official and international organisationsand enhance research in—and build capacityto participate in—global energy governance.

4.8.3 Create a Spirit of Openness andAccept that the InternationalEnergy Market Can EnsureEnergy Security UnderNormal Conditions

In the future, China and the world will beincreasingly open towards each other in globalenergy governance. China should be more awarethat the international energy market can ensureenergy security under normal conditions andsupport efficient and competitive global markets.

There is global consensus that the interna-tional energy market can ensure energy securityunder normal conditions. Dependence onimported energy (mainly oil and gas) no longermeans weak energy security. In the future ofglobalisation, thanks to mutual opening up, theglobal energy transition and China’s energyrevolution, the effects of an energy shortage maynot be as critical as before and energy com-modities procured from the international marketmay be cheaper than those produced in China.

Win-win energy development can be achievedby identifying areas for international cooperation,learning from international energy developmentexperience, applying advanced technologies, andusing foreign investment to make the domesticenergy market more competitive. China’s furtherintegration into the global energy market willcontribute to the energy security of the wholeworld, not only to China and East Asia.


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