China follows California's lead on DSM initiatives
Beijing, 25.02.2008 - written by: Marianne Osterkorn
Not long after the Californian power outages of 2000-1, computer manufacturers Compaq and Hewlett Packard (HP) merged into one company. The recent fluctuations in energy supply must have been an unwelcome problem facing the two parties who, at the time of an ownership change, would have wanted to guarantee complete business continuity. The companies’ history of careful energy policies did not entirely shield them from the crisis, but helped them manage it.
Before the merger, both had cultivated an energy-conscious environment, culminating in a 16% cut in energy consumption in 2001 at Compaq’s facilities. Most notably, Compaq doubled the manufacturing space and occupancy at its Fremont plant without raising energy use. HP says it saves $2 million each year through a raft of measures including the installation of new energy-efficient chillers and changes to lighting.
These companies’ reforms are not unusual, and have been part of a bigger movement in California driven not only by the supply crisis but also by a relatively environmentally friendly culture and the energy thirst of some of its high-tech industries. There is recognition that decoupling power use from market growth is possible, lowers risk and cuts costs. As a result, this pioneering state has built up a portfolio of skills and techniques that have generated a globally unique statistic: stable per capita energy use over 30 years accompanied by a 40% growth in its economy.
A group of energy campaigners want to use that expertise to create a freely available US export, with China as its first port of call. Booming but struggling, China is in the middle of its own energy drama and trying to regain control over escalating demand. Barbara Finamore, director of the China Programme at the Natural Resources Defense Council (NRDC), a US-based NGO that has been leading the project, explains: “When the government looked at the results of our audit, they couldn’t believe there was so much energy efficiency potential available at such a low price. The Californian model is now one the Chinese really want to emulate.”
The NRDC’s unusual partnership with Chinese government officials and company managers over the last two years will not be confined to the rapidly growing fleet of power stations, unlike previous Chinese programmes. Instead, the consortium, working alongside the US-based Institute for Market Transformation (IMT) and the China-U.S. Energy Efficiency Alliance, is creating an unprecedented $11m demand side management programme centred in Jiangsu, a province in Eastern China, and is now spreading throughout the country.
The Renewable Energy and Energy Efficiency Partnership (REEEP) is supporting the newest phase of this initiative, which kicked off this summer with a Beijing forum attended by 300 people. Together, the agencies aim to cut into the heart of the energy use of 1000 manufacturers by 2010. While Chinese computer and component manufacturers will no doubt eventually benefit from experiences of companies like HP, the team will start with the particularly energy intensive chemicals, metallurgical and cement manufacturers, and will use sector-specific planning.
It is an extraordinary challenge, described by Cliff Majersik of the IMT as occurring “right at the frontline, where emissions are growing the fastest.” The International Energy Agency’s outlook report, produced in November, confirms these views. Urging China to restrain its oil use, it upped its previous 2030 energy consumption predictions by two billion tonnes and said China's oil demand would more than double to 16.5 million barrels a day by 2030. China’s energy use would play a major part in raising the planet’s total demand by 50% compared to today’s rates, it stated.
Things have not always been this way. Deng Xiaoping famously preceded his 1978 market growth programme with the words “Development is above all,” but created a reasonably balanced process, doubling energy consumption between 1980-2000 while quadrupling the economy. Problems crept in after this period, however, as energy growth began to overtake economic growth rates. In the early years of this decade, China’s energy use per unit of GDP was four times the world average.
Now the government has made an about-turn, embarking on one of the world’s most ambitious energy saving programmes: to cut energy intensity between 2006-2010 by 20%, or 4.36% each year, while quadrupling the economy. There is considerable direct foreign investment into China, while the government itself owns shares in many listed companies, though many others are nationalised. Policy innovations have been introduced, such as corporate rewards for meeting energy efficiency targets, rather than just economic development targets. China is now considering adding a surcharge to power rates with the aim of using new funds for energy savings activities.
The government’s 17th Party Congress, held in October, consolidated even more drastic measures already in progress because of intensified pollution and social welfare concerns: the closure of cement and steel works in major towns to cut energy use and allow workers to live in more harmonious surroundings. Real data have shown, however, that despite its efforts, China missed its target in 2006 and has thus far reduced its energy intensity by only 1.3%. However new estimates show that China has reduced its energy intensity by 3% in the first three quarters of 2007 according to the NRDC.
Hence, the NRDC, IMT and the Alliance are looking at a number of innovations that could include rewards, funds and taxation mechanisms. One incentive mechanism, adopted in California, is an interesting and very unusual technique. Accepted in September by the Californian Public Utilities Commission (PUC), it involves a sector whose interests so often conflict with customer energy efficiency: power stations. The new mechanism creates both rewards and penalties for utilities at the same time. If they exceed the energy savings thresholds set by the PUC, they share a small part (up to an annual total of $150m across the whole sector) of the net benefits the programme provides to users. If they fail to reach targets, they are penalised by the same maximum amount. Effectively, the new initiative disconnects the profit motive from the electricity sales of utilities.
While this would be an excellent mechanism to use in China, it would probably be one of the trickiest measures to implement, because China’s economic and political structure is so different from that of the USA. “Decoupling still has a long way to go there because all utilities in China are government-owned and thus their profits will be part of government revenue,” explains Bo Shen, who is also working on the NRDC programme. However, the possibility exists that the government could reduce the power station’s revenue commitment to the government, with the balance used to fund efficiency.
But other approaches are more immediately practical under current conditions. “Paying for efficiency incentives through utility revenues is the most sustainable option,” says Barbara Finamore. A surcharge that cannot be passed further down the chain is added to the utility bill and paid by everyone, so that the base unit price increases, although total electricity bills usually go down. “The thinking behind this is that energy efficiency will help improve the environment and thus is treated as a public benefit that everyone will enjoy,” says Bo Shen. Alternatively, a special surcharge is imposed on customers and used exclusively for energy efficiency. While this is possible in the USA, where companies have more freedom to choose, a surcharge in China cannot be added without central government approval.
Another approach is to create a savings fund. One is already in existence, as the Ministry of Finance (MOF) is allocating a special fund to promote energy efficiency during its 11th five-year plan. Seven billion RMB ($900 million) has been allocated for energy efficiency support in 2007 alone. However, this subsidy-based approach is being replaced by an incentive-based one, in which financial rewards are linked to the level of savings made by a company.
“Industrial facilities have their own personal programmes and targets, but they’re not succeeding because of structural problems in the system. They don’t have enough qualified people to do audits and it costs them a lot, even though it saves even more. It’s hard for them to justify the expenditure. Our programme wants to cut right through that,” says Barbara Finamore, who supports a strong push at local and national government levels to continue with financial incentive mechanisms. The NRDC programme, which could last through to 2010, will also produce budgets, carry out energy audits, train local executives, provide information about new technologies, and advocate related policy changes.
Numerous market barriers are in the way, including a lack of ready access to low-cost, long-term capital for long-lasting efficiency technologies, split incentives between owners and operators of buildings and lack of reliable access to highly efficient equipment throughout the supply chain due to low demand and high unit prices. Nevertheless, Cliff Majersik is positive. “The Chinese officials recognise that it’s in their interest and will promote good economic development. They’re even paying for their own delegates to USA forums. It’s an indication of the seriousness with which they take it. Our climate change fight rises or falls on whether we can succeed in making China more efficient,” he asserts.