I. Current Situation of Energy Development

Energy resources are the basis of energy development. Since New China was founded in 1949, it has made constant endeavors in energy resources prospecting, and conducted several resources assessments. China's energy resources have the following characteristics:

-- Energy resources abound. China boasts fairly rich fossil energy resources, dominated by coal. By 2006, the reserves of coal stood at 1,034.5 billion tons, and the remaining verified reserves exploitable accounted for 13 percent of the world total, ranking China third in the world. The verified reserves of oil and natural gas are relatively small, while oil shale, coal-bed gas and other unconventional fossil energy resources have huge potential for exploitation. China also boasts fairly abundant renewable energy resources. In 2006, the theoretical reserves of hydropower resources were equal to 6,190 billion kwh, and the economically exploitable annual power output was 1,760 billion kwh, equivalent to 12 percent of global hydropower resources, ranking the country first in the world.

-- China's per-capita average of energy resources is very low. China has a large population, resulting in a low per-capita average of energy resources in the world. The per-capita average of both coal and hydropower resources is 50 percent of the world's average, while the per-capita average of both oil and natural gas resources is only about one-fifteenth of the world's average. The per-capita average of arable land is less than 30 percent of the world's average, which has hindered the development of biomass energy.

-- The distribution of energy resources is imbalanced. China's energy resources are scattered widely across the country, but the distribution is uneven. Coal is found mainly in the north and the northwest, hydropower in the southwest, and oil and natural gas in the eastern, central and western regions and along the coast. But, the consumers of energy resources are mainly in the southeast coastal areas, where the economy is the most developed. Such a great difference of location between the producers and the consumers has led to the following basic framework of China's energy flow: large-scale transportation over long distances of coal and oil from the north to the south, and transmission of natural gas and electricity from the west to the east.

-- The development of energy resources is fairly difficult. Compared with other parts of the world, China faces severe geological difficulties in tapping its coal resources, and has to get most of its coal by underground mining, as only a small amount can be mined by opencast methods. Oil and gas resources are located in areas with complex geological conditions and at great depths, so advanced and expensive prospecting and tapping techniques are required. Untapped hydropower resources are mostly located in the high mountains and deep valleys of the southwest, far from the centers of consumption, entailing technical difficulties and high costs. Unconventional energy resources are insufficiently prospected, their development is neither economical nor competitive.

Since the reform and opening-up policies were introduced in China in the late 1970s, the country's energy industry has witnessed swift growth and made great contributions to the sustained and rapid growth of the national economy, with the following demonstrations:

-- The energy supply capability has been remarkably enhanced. Thanks to the efforts made over the past few decades, China has built an energy supply framework with coal as the main energy resource and electricity as the focus, featuring an overall development of oil, gas and renewable resources. A fairly complete energy supply system is now by and large in place. China has built a group of extra-large coalmines each with an annual output of over ten million tons. In 2006, the output of primary energy equaled 2.21 billion tons of standard coal, ranking second in the world. Of this, raw coal accounted for 2.37 billion tons, ranking first in the world. Daqing, Shengli, Liaohe, Tarim and other large oilfields have been successively built as oil production bases, and the output of crude oil has increased steadily, ranking China the world's fifth-largest oil producer in 2006, with 185 million tons in that year. The output of natural gas ballooned from 14.3 billion cu m in 1980 to 58.6 billion cu m in 2006. The proportion of commercial renewable energy in the structure of primary energy keeps rising. The electricity sector also reported speedy growth in 2006. The installed capacity reached 622 million kw, and the amount of power generated was 2,870 billion kwh, both ranking second in the world. A comprehensive energy transportation system has been developed quickly, with the transport capacity notably improved. Special railways transporting coal from the west to the east and relevant coal ports, and pipelines transporting oil from the north to the south and conveying natural gas from the west to the east have all been built. Now, the power generated in the west can be carried to the east, and the regional power grids have all been connected up.

-- Energy-saving effects are conspicuous. During the period 1980-2006, China's energy consumption increased by 5.6 percent annually, boosting the 9.8-percent annual growth of the national economy. Calculated at 2005 constant prices, the energy consumption for every 10,000 yuan of GDP dropped from 3.39 tons of standard coal in 1980 to 1.21 tons in 2006, making the annual energy-saving rate 3.9 percent, putting an end to the rising trend of per-unit GDP energy consumption. The comprehensive utilization efficiency in the processing, conversion, storage and end-use of energy was 33 percent in 2006, up eight percentage points over 1980. Per-unit product energy consumption has dropped noticeably, and the gaps between the overall energy consumption, the net energy consumption rate of electricity generation for steel and cement production as well as synthetic ammonia produced by plants with an annual output of 300,000 tons or more and the international levels are narrowing.

-- The consumption structure has been optimized. China is the world's second-largest energy consumer. In 2006, its total consumption of primary energy was 2.46 billion tons of standard coal. China pays great attention to improving its energy consumption structure. The proportion of coal in primary energy consumption decreased from 72.2 percent in 1980 to 69.4 percent in 2006, and that of other forms of energy rose from 27.8 percent to 30.6 percent, with that of renewable energy and nuclear power rising from 4.0 percent to 7.2 percent. The shares of oil and gas have increased. The end-use energy consumption structure is noticeably optimized, and the proportion of coal converted into power increased from 20.7 percent to 49.6 percent. More commercial energy and clean energy are being used in people's daily life.

-- The scientific and technological level has been rapidly enhanced. China has scored conspicuous scientific and technological achievements relating to energy. The fundamental research findings, represented by the "continental hydrocarbon generation theory and its application," have greatly promoted the development of the scientific theory of oil geology. A fairly complete system of exploration and development technologies has taken shape in the oil and gas industry, with prospecting and development techniques in geologically complicated regions and the recovery ratio of oilfields leading the world. Large coalmines of the world's advanced level have been built, and the totally mechanized mining of key coalmines has been noticeably improved. In the power industry, advanced generating technology and units with large capacity and high parameters are widely used, and the designing, engineering and equipment manufacturing of hydraulic power plants have reached the world's advanced level. China is now able to independently design and build million-kw pressurized water reactors, and has made outstanding breakthroughs in the development of high-temperature gas-cooled reactors and fast-neutron-breeder reactors. The technologies to deal with pollution such as flue gas desulphurization (FGD) and renewable energy development and utilization are quickly being improved. Models of ¡À500 kv DC and 750 kv AC electricity transmission projects have been completed and put into operation, and pilot ¡À800 kv DC and 1,000 kv AC extra-high-voltage electricity transmission projects are under way.

-- Progress has been made in environmental protection. The Chinese government sets great store by environmental protection, and has made it a fundamental state policy to strengthen environmental protection. Public awareness of environmental protection has been raised. After the 1992 UN Conference on the Environment and Development, China worked out its "21st Century Agenda," and has reinforced environmental protection in an all-round way through legislative and economic means, making positive progress in this regard. China's energy policies give priority to the reduction and rehabilitation of environmental damage and pollution resulting from energy development and utilization. In 2006, coal-fueled generating units reported a nearly 100-percent installation rate of dust-cleaning facilities and a nearly 100-percent discharge of waste water up to relevant standards. The amount of smoke and dust discharged in 2006 was almost the same as that in 1980, and the dust emission per-unit electricity had decreased by 90 percent. The installation capacity of thermal power units with FGD built and put into operation in 2006 totaled 104 million kw, exceeding the combined total of the previous 10 years. Such thermal power units accounted for only 2 percent of all thermal power units in 2000, but the proportion had risen to 30 percent by 2006.

-- The environment of energy market is gradually improved. The environment of China's energy market is gradually improved, and the reform in the energy industry is proceeding steadily. Breakthroughs have been made in restructuring energy enterprises, and a modern enterprise system has by and large taken shape. The investors are diversified, energy investment is growing rapidly, and the market is expanding. Market competition has been introduced into the production and distribution of coal. In the power industry, government administrative functions and enterprises' management have been separated, so has power production from power transmission, and supervisory organizations have also been established. In the oil and gas industry, the upstream and downstream sectors have been integrated, so have the domestic and international trades. Energy pricing reform has been constantly deepened, and the pricing mechanism has been improved continuously.

Along with China's rapid economic development and the acceleration of industrialization and urbanization, the demand for energy keeps increasing, and the construction of a stable, economical, clean and safe energy supply system faces the following challenges:

-- Prominent resources restraint and low energy efficiency. China's relative dearth of high-quality energy resources hinders its supply capability; its imbalanced distribution makes it difficult to secure a continued and steady supply; and the extensive pattern of economic growth, irrational energy structure, unsatisfactory energy technology and relatively poor management have resulted in higher energy consumption per-unit GDP and for the major energy-consuming products than the average level of major energy-consuming countries, thus further intensifying the energy supply-demand contradiction. Consequently, an increase solely in supply is hard to meet the rising demand for energy.

-- Increasing environmental pressure caused by the consumption of energy, mostly coal. Coal is the main energy consumed in China, and the energy structure with coal playing the main role will remain unchanged for a long time to come. The relatively backward methods of coal production and consumption have intensified the pressure on environmental protection. Coal consumption has been the main cause of smoke pollution in China, as well as the main source of greenhouse gas. As the number of motor vehicles climbs, the air pollution in some cities is becoming a mixture of coal smoke and exhaust gas. If this situation continues, the ecological environment will face even greater pressure.

-- Incomplete market system and emergency response capability yet to be enhanced. China's energy market system is yet to be completed, as the energy pricing mechanism fails to fully reflect the scarcity of resources, its supply and demand, and the environmental cost. Order in energy exploration and development must be further standardized, and the energy supervisory system improved. Coal production safety is far from satisfactory, the structure of power grids is not rational, the oil reserves are not sufficient, and an effective emergency pre-warning system is yet to be improved and consolidated to deal with energy supply breakdowns and other major unexpected emergencies.