How Will China Achieve Its Energy Efficiency

UNCLAS SECTION 01 OF 04 GUANGZHOU 032459

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USDOE FOR INTERNATIONAL AFFAIRS/DPUMPHREY/RSPRICE
USDOE FOR FOSSIL POLICY AND ENERGY/MSMITH/ADUCCA
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EPA FOR INTERNATIONAL/THOMPSON
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: ENRG ECON SENV CH
SUBJECT: How Will China Achieve Its Energy Efficiency
Target?

REF: A) Guangzhou 32430

(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR INTERNET DISTRIBUTION.

SUMMARY
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1. (SBU) China must use energy efficient products and
technologies, implement structural changes in its high
energy-consuming industries, and improve its management of
energy conservation efforts, according to government
officials and experts who gathered in Hainan Province in
November 2006 for the Forum on Implementing China's 2010
20% Energy Efficiency Target. Commercial and investment
opportunities exist for U.S. companies that provide energy
efficient equipment and services for the steel, cement,
glass, chemical, and power industries. Energy conservation
efforts will focus on the construction, transportation, and
industrial sectors. Challenges that will hinder Chinese
efforts include: local governments' motivation to pursue
higher economic growth rates rather than energy efficiency,
lack of proper methodology for disaggregating energy
efficiency targets, the presence of high energy-consuming
small enterprises that are hard to oversee, lack of proper
incentive strategies, and insufficient financing or
investment systems. China's energy demand will likely
reach 3.36 billion tons of coal by 2010, up 70.6% from the
2004 level of 1.97 billion tons of coal. END SUMMARY.

BACKGROUND
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2. (U) China's 11th Five-Year Plan calls for a massive
program to improve energy efficiency nationwide, including
a national energy intensity target which would reduce
energy consumption per unit of gross domestic product (GDP)
20% by 2010. The National Development and Reform
Commission (NDRC) is taking the lead on (1) allocating
reduction targets among provinces and industrial sectors,
and (2) adopting energy efficiency improvement criteria for
evaluating the job performance of local government
officials.


3. (SBU) The NDRC has signed "accountability contracts"
with 30 provincial, autonomous region, and municipal
governments, assigning them their respective targets. The
majority of contracts specify a 20% reduction in energy
intensity, while a few contracts specify higher or lower
targets depending on the particular circumstances of the
province or region.


4. (U) The Forum's sponsor, The China Sustainable Energy
Program, is the joint creation of The David and Lucile
Packard Foundation, The William and Flora Hewlett
Foundation, and the Energy Foundation. Participants in the
November Forum included officials from the NDRC, China
Academy of Social Sciences, Energy Research Institute,
State Council Research Office, Tsinghua University,
Ministry of Construction, State Environmental Protection
Administration (SEPA),and the National People's Congress
(NPC),among others.

THREE BASIC PRINCIPLES
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5. (U) Participants agreed that to achieve the Five-year
Plan targets, the government must combine market-based,
legal, and administrative mechanisms, couple short- and
long-term goals, and link the efforts of central and local
governments.

TARGETED SECTORS
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6. (U) Energy conservation efforts will focus on the
construction, transportation, and industrial sectors.
Companies in the steel, non-ferrous metal, coal,
electricity, chemical, petro-chemical, construction
material, textile, paper, and pulp industries are
specifically targeted for improvement.

TECHNOLOGICAL IMPROVEMENTS
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7. (SBU) Technological improvements suggested by the
Forum's participants could create export opportunities for
U.S. companies, particularly for companies that provide
energy efficiency equipment and services for the steel,
cement, glass, chemical, and power industries. However,
Tsinghua University's He Jiankun cautioned that China

SIPDIS
"cannot blindly import foreign technology and standards."


8. (SBU) Recommendations include:

a) Phase out outdated production processes, technology,
and equipment in the steel, cement, glass, chemical, and
power industries. Promote high-grade materials and blast
furnaces. Retrofit coal-fired industrial boilers and
kilns. Promote advanced flotation process and full
insulation furnace technology in the glass industry.
Develop large-scale combined cycle power plant technology.

b) Accelerate research and development for advanced
energy conservation technology and products, as well as
their dissemination and application.

c) Develop renewable and alternative energy technology.

d) Encourage international exchanges and cooperation.

STRUCTURAL ADJUSTMENTS
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9. (SBU) Recommendations for structural changes in China's
high energy-consuming industries include:

a) Promote the service sector; restrain the high energy
consuming manufacturing and industrial sectors. He
Bingguang from the NDRC's Department of Resource
Conservation and Environmental Protection used the phrase
"active readjustment" to describe this shift towards
tertiary industries.

b) Promote high-tech industries.

c) Diversify energy base; reduce coal consumption.

MANAGEMENT IMPROVEMENTS
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10. (SBU) Recommendations for China's management of energy
conservation efforts include:

a) Improve energy efficiency legal regulations and
standards. Amend the Energy Conservation Law; a proposal
will be submitted to the NPC Standing Committee for review
in 2007. Amendments will focus on the energy conservation
management system, primary energy conservation regulations,
energy savings incentives, liability issues, energy
conservation in commercial and residential buildings, as
well as in transportation.

b) Use energy conservation and environmental protection
targets to evaluate local government performance and
establish a dynamic evaluation and monitoring system.

c) Establish an energy efficiency evaluation framework

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for fixed-capital investment projects.

d) Strengthen energy efficiency management in energy-
intensive enterprises.

e) Improve energy efficiency labeling and product
certification. Implement compulsory energy efficiency
standards for household appliances, lighting, and
industrial facilities.

f) Strengthen demand-side management (DSM) and electric
power distribution management.

g) Reform the energy pricing system to reflect resource
availability, market demand, and environmental
externalities. Pricing reform would include electricity,
petroleum, natural gas, and coal. It would likely increase
the cost of energy consumption that exceeds a certain
quota.

h) Implement preferential energy efficiency tax policies.
Develop a list of energy efficiency products, discourage
exports of high energy intensity or highly polluting
products, develop a fuel tax system, and reform the
resource tax.

i) Strengthen oversight and inspection. Increase
pollution penalties such that the cost of polluting exceeds
the cost of cleaner production.

j) Implement emissions trading schemes.

k) Improve the collection of energy statistics. Increase
support for Statistics Departments, recruit more trained
staff, and improve statistical methods. Strengthen energy
intensity statistics audit and verification. Participants
mentioned several key indicators and statistics that should
be analyzed on the local, provincial, and national level:
GDP (total and per capita),energy consumption (total and
per capita),energy consumption elasticity coefficient,
energy mix, energy input/output, energy consumption per RMB
10,000 (USD 1,275),energy price, investment rate, and per
capita income.

l) Establish a national energy conservation center which
would integrate current institutions, carry out policy
studies, evaluate energy conservation aspects of capital
investment projects, disseminate energy conservation
techniques, conduct training, provide information, and
manage international exchanges and cooperation.

m) Improve energy efficiency in government agencies.
Retrofit government buildings' heating, air conditioning,
and lighting systems. Encourage government procurement of
energy conservation products. Integrate energy
conservation into daily work habits.

n) Broaden sources of funding to provide stable energy
efficiency investment. Opportunities for U.S. investment
in energy conservation projects will likely multiply.
Establish a special energy conservation fund. Encourage
enterprises to self-finance or use loans from international
financial organizations and foreign governments. Encourage
financial institutions to increase current lending for
energy efficiency.

o) Implement further energy efficiency publicity,
education, and training. Publish energy consumption
indexes.

CHALLENGES
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11. (U) Forum participants outlined several challenges that

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will hinder China's energy conservation efforts.


12. (SBU) Professor Yao Yufang from China's Academy of
Social Sciences estimated that structural and technological
improvements would only result in 13.7% energy savings by
2010, falling well short of the 20% goal. If no
improvements are made and the current economic growth
continues, energy intensity would increase by 4.6%,
according to Yao.


13. (SBU) Zhou Dadi from the Energy Research Institute
identified four main challenges: (1) lower levels of
government still had greater motivation to pursue higher
growth rates rather than focus on energy conservation, (2)
officials lack proper "scientific" methodology for
disaggregating energy efficiency targets, (3) energy
conservation information services cannot meet the demand of
local government and enterprises concerning energy-saving
technologies and products, and (4) high energy-consuming
and high polluting small enterprises are widespread and
hard to oversee; environmental pollution from
industrialization has spread from cities to rural villages.


14. (SBU) Zhou emphasized that local implementation of
energy efficiency measures is key, adding that China would
not likely meet the energy conservation target for 2006.


15. (SBU) Wu Yong from the Ministry of Construction noted
that developers lack the will or incentive to build energy
efficient buildings, and that residents do not actively
conserve energy. Wu also mentioned legal and financial
difficulties in retrofitting existing buildings, such as
varied types of building ownership and insufficient
financing or investment systems.

STATISTICAL PREDICTIONS
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16. (SBU) Zhou predicted that by 2010, China's GDP growth
rate will be 9.9%, the total energy demand will be 3.36
billion tons of coal (up 70.6% from the 2004 level),and
the energy consumption elasticity coefficient (an indicator
to show the relationship between the growth rate of energy
consumption and the growth rate of the national economy)
will be 0.52.

COMMENT
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17. (SBU) While the Forum was sponsored by NGOs, many of
the recommendations from its influential participants will
almost certainly be implemented. Some participants were
openly skeptical that the 11th Five-year Plan's ambitious
energy intensity targets will be met. The Forum provided
an opportunity for a frank discussion of methods and
challenges among officials, experts, and civil society.

GOLDBERG