China continues to face an energy bottleneck in the second half of this year. Although the central authorities' cooling measures will hold back wild investment in some sectors and ease the energy situation, China still needs to tackle many problems and challenges in this sector.

The electricity structure is yet to be made more rational to ease its pressure on coal production and transportation.

To resolve the current power shortages, many coal-fueled power generation projects have been launched, which will see the country's electricity generation capacity increase dramatically this year and next year. This will demand a 8-9 percent increase of coal production in 2004. The big increase may risk outstretching coal production.

The increase in coal and electricity demand will also lead to transportation stress.

In the first half of this year, coal transportation increased by 12.2 percent year on year, but still failed to meet the demand.

The pricing regime of coal and electricity, which are highly interdependent, is flawed. The price of coal is market-oriented. But the price of coal for power production, which accounts for 50 percent of the overall coal supply, is very low since the price of electricity is controlled by the State and cannot be adjusted in accordance with market conditions. Sometimes the price gap can be as high as 150 yuan (US$18.1) per ton.

Although the State raised the price of electricity twice in the first half of this year to bridge the gap, the market price of coal supply has risen further, nullifying the policy adjustment.

As the country's power demand soars, many provinces and regions have begun constructing power plants. However, many plants have been started without adequate financing. The State also lacks a comprehensive framework to govern such activities.

The State has carried out macro-economic regulative policies to cool down investment in some sectors, especially high energy-consuming plants, such as those producing steel and cement. Many enterprises, however, have launched their own power-generating facilities independent of the national grids. Such facilities often consume exorbitant energy and operate with low efficiency.

In terms of oil, China will see its dependence on imports grow steadily. China needs to devise measures to cope with the adverse impact from oil price fluctuations in the international market.

In the last decade, China's oil consumption grew by 5.5 percent year on year on average. It is expected 280 million tons of oil will be consumed this year in China. Despite its status as the world's second largest oil consumer, China has a disproportionately small bearing on the pricing of oil in the international market. Further rise in oil import prices will have an adverse impact on the Chinese economy.

Experts estimate that a 1 percent hike in oil price lasting one year would pare 0.01 percentage points off China's gross domestic product (GDP) growth. It must map out favorable strategies to ease the impact of rising oil prices on its economy.

Another problem is the failure to control energy-wasting industrial enterprises in the Southwest China.

Since the second half of 2002, China has begun to suffer from energy shortages. However, many high energy-consuming industrial enterprises still enjoy preferential power prices, which worsen the situation and contaminates local ecological systems.

In developed economies, demand-side management is widely adopted. While ensuring normal living standards and production abilities, it uses efficiency-improving techniques to reduce energy consumption. China is yet to develop a economic incentive mechanism to encourage energy saving.

In the long term, China should encourage private and corporate consumers to change their consumption behavior to save energy.

A scientific development mode should also be stressed to solve the problems.

The irrational GDP-centred economic growth has led to excessively high-rate growth of some sectors, such as steel, cement and aluminium, which menaces the country's sustainable development. A scientific development mode must be emphasized to save energy. Industrial and investment policies should be reformed and the energy-saving mechanism should be enhanced to this end.

On the other hand, the traditional official appraisal system that values only contribution to GDP growth must be reformed. The government should lead society to promote the public consciousness about saving energy.

The government should also reform the energy management system. Currently, different government departments are in charge of statistics collecting and analyzing, industrial marketing, pricing, taxation and corporate management. The segmentation of management functions has affected management efficiency.

A unified energy management department should be established to handle a long-term energy strategy.

Currently, our energy strategy overstresses the importance of coal. Although China's coal production in the first half of this year increased by 15 percent over the same period last year, most coal mines have reached their production limit. We should not be too optimistic about future coal production capacity.

Multiple energy resources should be tapped to change the unilateral policy line. While coal production should be expanded, nuclear technology should be adopted to generate power. In the process, monopoly of the nuclear energy market should be broken to ensure faster development of the industry.

The market reform of the energy sector needs to be accelerated. State monopoly has made the investment, pricing and management systems fail to meet societal demands. Taxation policy, environmental protection incentives and price regulations should also be employed to help form a rational pricing regime of different energy types and optimize energy structure.

A comprehensive oil reserve system is also indispensable. Active participation in global and regional energy co-operative organizations will help provide stable oil supply for the country

(China Daily October 23, 2004)