China's energy report card

An assessment of China's latest energy data suggests the country is making good progress in reducing energy intensity and increasing the share of renewables and nuclear power.

Strategic analysis company Rhodium Group has published China’s 2012 Energy Report Card, an assessment of China’s progress against its three energy and carbon emission reduction targets set out in the government’s most recent Five Year Plan.

These are to achieve by 2015 relative to 2010 levels:

1. A reduction in the energy intensity of the economy by 16 per cent;

2. An increase in non-fossil energy (nuclear and renewable) to 11.4 per cent of total supply; and

3. A cut in the carbon intensity of GDP by 17 per cent.

The end conclusion is that while progress is not unambiguously positive, in 2012 China made important strides towards its targets.

Energy intensity of GDP

The achievement of the energy intensity goal was not looking good in 2011 as coal consumption went up by 9.7 per cent, but in 2012 it grew by only 2.5 per cent - a dramatic reduction in growth. Overall energy demand growth was brought down to 3.9 per cent, which was the lowest growth rate China has experienced in more than a decade.

So China is now tracking reasonably closely to its target as illustrated below.

Energy intensity of GDP – actual and target
(tonnes of coal equivalent per million real RMB)

Graph for China's energy report card

Source: CEIC and Rhodium Group estimates

An important aspect to note is that the energy intensity reduction is being achieved not just via energy efficiency improvements, but also structural change in the economy. China’s economy and energy consumption is heavily and unusually skewed towards energy-intensive industrial production of materials like metals and cement. 

Beijing policymakers are deliberately engineering a rebalancing of their economy away from basic materials (steel, cement, aluminium) and construction-driven growth, to a more sustainable model where household consumption and services play a greater role.

As the chart below illustrates China’s electricity demand is very closely tied to production of basic materials.   As the economy restructures there will be a noticeable reduction in energy intensity.

Basic materials production drive energy demand
(YoY, 3month moving average)

Graph for China's energy report card

Source: CEIC and Rhodium Group estimates

Increase the share of nuclear and renewables in energy supply

2012 was an exceptional year in relation to the 2nd target, with 94% of electricity generation growth made up of renewables and nuclear power.  

However as the chart below illustrates, 2011 was very different to 2012 and a lot of the growth in 2012 was a function of a recovery in hydro generation.

Power generation growth
(YoY in billion kilowatt-hours, note: solar generation is mainly distributed and not measured)

Graph for China's energy report card

Source: CEIC and Rhodium Group estimates

Of course, coal power remains the overwhelming source of power generation with significant numbers of new coal stations still being built.. Nonetheless the balance is starting to shift with 39% of new capacity in 2012 being non-fossil fuelled. Most of the capacity was wind and hydro with nuclear still to play a prominent role at less than a gigawatt added, and pipped by solar PV.

Looking forward the chart below illustrates the government plans for substantial growth in wind, nuclear and solar PV capacity.

Chinese non-fossil power capacity – actual and government projections
(Gigawatts)

Graph for China's energy report card

Source: CEIC and Rhodium Group estimates

Carbon intensity

China aims to reduce carbon emissions by 17 per cent of 2010 levels by 2015. Again 2012 was better than the previous year because carbon emissions rose by 3.2 per cent compared to 9.3 per cent in 2011. Therefore, despite the reality of carbon emissions rising year-on-year, the rate of this rise is retreating. The achievement of this target relies heavily on major progress with the other two goals.

Carbon intensity of Chinese GDP
(Tonnes of CO2 per million RMB)

Graph for China's energy report card

Source: CEIC and Rhodium Group estimates

The sheer enormity of China’s industrial economy and the still large number of its populace with low levels of income means it’s unrealistic to expect massive decreases in coal power generation or carbon emissions within the short-term.

Instead, in pursuit of long-term, sustainable GDP growth, policymakers are steering a gradual transition from a coal and heavy industry economy to one more reliant on services and low carbon energy sources.

But the key message from the Rhodium Group report is China is truly making progress with its goals to reduce energy and carbon intensity.

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