As the largest developing country in the world, China's continuous rapid economic growth has attracted worldwide attention. As the world's second largest energy producer and consumer, China has become an indispensable part in the global energy market. The huge demand for energy is becoming one of the most important factors influencing the sustained economic development of China, which has also aroused great concern among the Chinese government and international community. Then, what effects will the national macro-regulatory policies have on the future development and investment opportunities in the electric power industry?

1. Power Generation Resources

From the perspective of the current technology, the resources that can be used to generate electricity include: nonrenewable fossil resources like coal, petroleum, natural gas; and renewable resources like water energy, wind energy and solar power, and others.

According to the statistics from China's Energy Conditions and Policies published in December 2007, there are 1034.5 billion tons of coal reserves in China. The remaining proved coal reserves account for about 13% of the earth's total, ranking the third in the world. The proved petroleum and natural gas reserves are relatively insufficient, while there is much untapped potential for the energy reserves of the non-conventional fossils like shale oil and coal-bed methane. The theoretical reserve of water power is equivalent to an annual power generating capacity of 6.19 trillion kilowatts, and the annual economic exploitable energy production is about 1.76 trillion kilowatts, which is also equivalent to 12% of the global water power resources, ranking No. 1 in the world. According to the theoretical valuation by the China Meteorological Administration on wind power at an altitude of 10 meters, the onshore capacity is 600 million-1 billion kilowatts, and the offshore capacity is 100 to 200 million kilowatts. Therefore, there are altogether 700 million to 1.2 billion kilowatts of wind power resources. In terms of solar energy, the annual total radiation amount exceeds 5.02 million kilo-joules per square meter, and the area with an annual sunshine time of more than 2,200 hours takes up over two thirds of China's territory, enjoying great potential in exploration and development as well as huge practical value. The geothermal reserve is also in a favorable condition, with its future reserve equivalent to over 200-billion-ton standard coals.

2. Structure of Electric Power in China

The structure of electric power of China mainly consists of the thermal, water, wind, nuclear and biomass energy. Of them, the thermal energy is the most important in China. According to the latest statistics issued by China Electricity Council (CEC) on January 12, 2008, the installed capacity of the thermal energy and wind energy account for nearly 100% of the market share. In particular, the thermal energy occupies a dominant position in the market. By the end of 2007, China's power equipment capacity in the electric power industry has successfully exceeded 700 million kilowatts, and reached up to 713 million kilowatts. Therein, the total installed capacity of thermal energy stood at 554 million kilowatts, representing 77.7% of the total; the total installed capacity of water energy 145 million kilowatts, or 20.4% of the total; the total installed capacity of nuclear energy 8.85 million kilowatts, 1.24% of the total; the total installed capacity of wind energy 4.03 million kilowatts, 0.57 % of the total. All these figures show that China still has a long way to go to optimize its energy structure and develop the cleaner energy.

 

It should also be noted that through years of efforts, China has made significant progress in optimizing its energy structure. In 2007, China's capacity of wind energy equipment increased by 94.4%, water energy by 11.5%, and thermal energy by 14.6%. The growth rate of the thermal energy was lowered by 9% compared with that of 2006.

3. Macro-regulatory Policies in the Electric Power Industry

3.1 Thermal Power Generation

The installed capacity of thermal energy by the end of 2007 accounted for 78% of the country¡¯s total. The effective macro regulation and control over thermal energy is of great importance to achieve the goal of energy conservation and emission reduction throughout the country. According to the statistics from the National Development and Reform Commission (NDRC), the coal used for energy consumption takes up half of China's total coal output, and the water used for thermal energy takes up 40% of the total industrial water, while the amount of the sulfur dioxide discharge accounts for more than half of the total, the amount of the smoke and dust discharge 20% of the total, and the amount of the cinder it generates 70% of the total. Therein, given the same generating capacity, the coal consumed by small thermal power generating units is 30%, sometimes even 50%, more than that consumed by large thermal power generating units,. Therefore, shutting down small thermal power generating units and stepping up the desulphurization renovation in old coal-fired power plants are of great practical significance.

It is explicitly stipulated in the Several Opinions Regarding Acceleration of Shutting down Small Thermal Power Generating Units jointly issued by the NDRC and the State Energy Office that in the next four years, the State will shut down more than 50 million kilowatts of small coal-fired generating units, 7 to 10 million kilowatts of oil-fired generating units. No small thermal power projects will be allowed to be launched in the future. Therein, the scope of the small thermal power generating unit to be shut down includes: regular thermal power generating units with a capacity of less than 50,000 kilowatts per unit; regular thermal power generating units operating for ten full years, with a capacity of less than 100,000 kilowatts per unit; other generating units exceeding the period of service, with a capacity of less than 200,000 kilowatts per unit; generating units with a high standard coal consumption of power supply, falling short of the standards for environmental protection and emission, and other generating units that should be shut down for some reason.

Key Points of Existing Policies for Energy Conservation and Emission Reduction:

(1) The incentive policies mainly include:

¡ö Enterprises that have completed the desulphurization renovation in accordance with the 11^th Five-Year Plan for SO2 Pollution Control of Existing Coal-Fired Power Plants should pay an extra RMB1.5 fen per kilowatt-hour on the basis of the existing on-grid price.

¡ö The on-grid price must comply with relevant state regulations for generating units using residual heat and pressure to generate electricity and other generating units conforming to the regulations on the comprehensive utilization of resources that are operating in parallel with the power grid.

¡ö Developing preferential policies on the utilization of coal ash and providing financial support.

¡ö Encouraging the local enterprises to shut down small generating units and focus on the construction of large generating units, implementing the principle of "promoting the use of large generating units and shutting down small ones".

(2) The restrictive policies mainly include:

¡ö The newly-built thermal power plants approved by the NDRC, with a coal-fired sulfur of more than 0.7%, must be installed with the flue gas desulphurization facilities.

¡ö It is prescribed in the Administrative Regulations on the Collection and Use of Pollutant Discharge Fees that the pollutant discharge fees should be imposed upon nitrogen oxides, at RMB 0.63 yuan per kilogram.

¡ö For newly-built power plants, the concentration of the smoke and dust discharge must be less than 50mg per cubic meter.

¡ö Establishing a standard on water-drawing quota for thermal power. A high water price shall be imposed upon enterprises exceeding the quota standard. Enterprises failing to reach the standard shall be ordered to make corrections within a time limit. The obligatory indicator defined in the outline of the "11^th Five-Year Plan" is a 30% decrease for water consumption of the unit industrial added value.

¡ö Upgrading the standards for the emission of dust pollutant, and demanding that enterprises, if possible, must use the coal ash as raw material.

¡ö By 2010, the comprehensive utilization rate of industrial solid waste should reach 60% or above, and the sewerage treatment rate is no less than 70%.

3.2. Power Generation with Renewable Energy

In order to save energy and protect the environment, the State has given priority on the development of the power generation with renewable energy (including water, wind, biomass, solar, geothermal and marine energy), issued the Renewable Energy Law, worked out a number of policies for power generation with renewable energy, like enjoying on-grid priority, full acquisition, preferential prices (for details, see the Relevant Provisions for the Administration of the Generation of Electricity Using Renewable Energy Resources issued by the National Development and Reform Commission in 2006), established special funds for the development of the renewable energy to support resources investigation, technological research, construction of pilot demonstration projects, and development and utilization of the renewable energy in rural areas. The Medium- and Long-Term Development Plan for Renewable Energy has also defined long-term goals for the consumption of the renewable energy, which is expected to reach 10% of the total energy consumption by 2010 and 15% by 2020.

4. Trends and Investment Opportunities in the Electric Power Industry in China

The analysis above shows that our basic policy for the development of electric power is to improve energy efficiency, protect ecological environment, expand power networks construction, vigorously exploit hydroelectric power resources, optimize the development of coal and electricity, promote nuclear power construction, wisely use the natural gas for power generation, and encourage power generation with new and renewable energy in order to spur growth in equipment manufacturing industry and deepen restructuring reform. In view of the current status of China¡¯s electric power industry and the state plan for the future development of the electric power industry, we think that the future development of China¡¯s electric power industry will be characterized by:

4.1. Putting a premium on Energy Conservation, Improving Energy Efficiency and also Taking Environmental Protection into Consideration

With the rapid economic growth in China, the demand for energy will be substantially increased. The problems of environmental protection like energy waste, increase in the emission of greenhouse gases will come their way subsequently. In China's future development of the electric power industry, more attention should be paid on energy conservation, improving energy efficiency and at the same time taking environmental protection into consideration. In terms of thermal power, China will actively develop the thermal-electrical production and make further efforts to shut down small thermal generating units, gradually develop higher standards for the energy conservation and emission reduction of power plants, and concentrate on developing large-scale high-efficiency environment-friendly generating units.

4.2. Making Great Efforts to Develop Renewable Energy

On June 7, 2007, the State Council adopted the Medium- and Long-Term Development Plan for Renewable Energy which was formally issued by the NDRC. The Plan requests that the consumption of the renewable energy should account for 10% of the total energy consumption by 2010 and 15% by 2020, and the technical installations for renewable energy with independent intellectual property rights be formed. The Plan also demands that great efforts should be made to develop hydroelectricity, biomass energy, wind energy and solar energy, etc.

4.3. Promoting Scientific and Technological Innovation

Scientific and technological innovation is a key to promote the development and utilization of energy. In the future, China will fully rely on scientific and technological progress in energy, improve its capability of independent innovation and ability to absorb introduced technologies and achieve re-innovation, clear away the technical bottleneck of the energy development, raise key technologies and major equipment manufacturing level and create new ways on the development and utilization of energy.

In respect to the investment opportunities in the electric power industry, we believe that in the aspect of thermal power generation, at present, five major power generation groups in China, e.g. China Huaneng Group, China Datang Group, China Huadian Group, China Guodian Corporation, and China Power Investment Corporation, have firmly occupied most of the domestic market share, each actively expanding itself on a nationwide scale and fighting over power generation resources. The investment funds from outside the industry are, however, difficult to be directly injected into the power-generating enterprises. On the other hand, it is more likely to find appropriate investment funds in the field of energy conservation and emission reduction, like desulphurization, denitrification, electrical dust-removing and automatic control, which are essential to the electric power industry. So far, the technology of power generation with renewable energy is comparatively developed. Small hydroelectricity, wind energy and solar energy have the condition of industrialization; the biomass power generation (including garbage burning generation, garbage landfill gas generation, poultry excrement biogas generation, agricultural stalk generation, etc.) has already been connected to power grid. In the context of a global energy shortage and global initiation of cleaner energy, with the development of technology, domestic production of key equipments and availability of more new ways of energy use, China¡¯s renewable energy development will be facing unprecedented investment opportunities and prospects.