China‘s energy transition: is it really under way?

In the first two months of the year China’s government published preliminary data for 2014 on the economy as a whole and on energy production and consumption. This appears to show that China is indeed undergoing both an economic and an energy transition.

Gross domestic product (GDP) rose by just 7.4%, lowest level since 1990. Growth of investment in fixed assets was up 15.7%, the lowest since 2001, and, within this category, investment in real estate was down from 20% in 2013 to 10.5 % in 2014. Steel output rose just 1% in 2014 compared to 7.5% in 2013, and could even decline this year.

The preliminary data indicates that the slowing rate of increase of GDP was accompanied by a decline in the growth of energy consumption from 3.7% in 2013 to 2.3% in 2014. The relative decline of heavy industries was reflected in the figures for energy intensity which show a fall of 4.8% in 2014, ahead of the target of 3.9%. This compares to a decline of 3.7% in 2013. So the country should meet or even exceed the target of reducing energy intensity by 16% between 2010 and 2015.

Coal continues to account for about 65% of China’s primary commercial energy supply and 75% of electricity output. The preliminary data indicates that total consumption of coal may have fallen by a small fraction of one percent in 2014. Production also appears to have dropped, from 3.7 billion tonnes in 2013 to 3.6 billion tonnes in 2014. Annual imports also fell, from 327 to 291 million tonnes.

Electricity consumption rose by just 3.8% compared to 7.5% in 2013. Industrial consumption, which accounts for 74% of total demand, grew 3.7%. In contrast electricity consumption in the service sector rose faster at 6.4%. At the same time that demand slowed, the installed capacity continued to expand, reaching 1,360 gigawatts (GW), up 8.7% on the year. The largest percentage rises were seen in nuclear (33%), wind (26%) and grid-connected solar PV (67%) which reached capacities of 20 GW, 96 GW and 26 GW respectively.

Thermal capacity accounts for about 67% of the total, sharply down from 78% in 2008. Hydro-electric capacity rose nearly 8% to 302 GW. Renewable energy as a whole now amounts to 25% of generating capacity, but this is only 1% above the level ten years ago, in 2014. Its share of electricity output reached just 20% of the total on account of the intermittency and curtailment of wind and solar and the sensitivity of hydro-electricity to fluctuations in rainfall. But this still marks a significant improvement on 2004 when the share was just 16%

Oil continues to account for about 18% of total primary energy consumption, and implied oil demand was up 3% in 2014 to about 10 million barrels per day. Oil production rose by less than 1% to 4.2 million barrels per day and, as a result, crude oil imports were up 9.6 % on 2013, averaging 6.2 million barrels per day, and reaching peak of 7.15 million barrels per day in December.

Natural gas continues to disappoint with consumption rising just 5.6% to about 183 billion cubic metres (bcm), well below target of 193 billion bcm for the year. The target for gas consumption in the year 2020 was reduced in November 2014 to 360 bcm from an earlier target of 400 bcm announced in April 2014. It could be reduced further to 310 bcm. In both the transport and power sectors the switch to gas from oil and coal respectively has been constrained by the relatively high level of gas prices. In addition, some factories have switched from natural gas to liquefied petroleum gas

In contrast, gas production reached 133 bcm further, up 10.7% from 2013 and marginally above the target of 131 bcm. Shale gas and coal-bed methane provided just 5 bcm. The balance of the national supply of gas came from imports which rose 13.5% from 52 bcm to 59 bcm.

Whilst all these figures are subject to later adjustment and ratification, the main uncertainty lies in the data for coal. In the late 1990s when economic growth had slowed to similar levels, unreported domestic production and consumption of coal probably exceeded 200 million tonnes, meaning that actually levels were 15% above those reported. This uncertainty is complicated by changes in stocks levels as well as by possible unreported imports of coal. If indeed coal consumption in 2014 was significantly higher than initially reported this would require an adjustment of total energy consumption, energy mix and energy intensity.

Looking ahead to the next year or two, a number of questions arise. First, to what extent will the change in economic structure and relative share of energy intensive industries be sustained, or will this trend be reversed by an economic stimulus which could be driven by central or local governments or by a resurgence in the global economy? Second, will the apparent decline in the share of coal in the energy mix be sustained in the light of current energy prices and the expanding capacity of mines in the west of the country, especially if the economy does grow more rapidly? In the longer term, the switch away from fossil fuels depends on the continued success of hydro-electricity, with its dependence on seasonal rainfall and glacier melt, and on the future success of the nuclear energy programme.