Thursday, February 11, 2010

China forms "Super Ministry" in move toward coordinated energy policy

China forms "Super Ministry" in move toward coordinated energy policy

On Jan. 28, 2010, the Chinese central government officially announced the formation of the National Energy Commission.

February 9, 2010
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China’s newly formed National Energy Commission (NEC) will be headed by Premier Wen Jiabao and will consist of 22 other high-level government officials, including Vice Premier Li Keqiang (who will serve as deputy head) as well as the top leaders of the National Development and Reform Commission (NDRC) and the ministries of finance, environmental protection, land and resources, and foreign affairs.

The seniority of the NEC members is a clear indication of the central government’s commitment to overcoming the bureaucratic infighting that has made it difficult to secure cooperation among the relevant players – including government agencies and large state-owned energy companies – on energy initiatives considered vital to sustaining China’s economic growth.

With the meteoric rise of its economy, beginning with the advent of the Reform and Opening Up policy in December 1978, China has become both a major energy producer and consumer. Not surprisingly, this rapid development has also been accompanied by growing pains. In attempting to meet the ever-increasing energy demands of a population of 1.3 billion fanned out over an area of 3.7 million sq mi (9.6 million sq km), China’s government and domestic energy industry have faced a multitude of challenges. How these challenges have been handled has led to a great deal of criticism, domestically and internationally.

On the domestic front, China’s leaders have had to contend with the increasingly boisterous outcry from its population regarding, among other energy-related matters, environmental degradation on a massive scale, coal mining accidents, fuel shortages, and rolling brownouts. Criticism from some influential members of the international community has also been heard as a result of China’s perceived reluctance to adopt international norms, including its stance on the reduction of carbon emissions and its willingness to overlook the darker side of some of its business partners while it conducts an aggressive campaign to secure overseas energy supplies.

It is fair to say that much of the criticism has been a result of the fragmented nature of China’s system for managing its energy policy. For example, unlike most countries that consume and/or produce energy on a similar scale, China does not have a ministry of energy. In fact, prior to the creation of the NEC, the existing government authorities handling energy-related matters at the national level have been the relatively low-ranking National Energy Administration (NEA), under the NDRC (China’s main planning agency), and the National Energy Leading Group, under the State Council (China’s Cabinet). The combined total staff of these organizations is approximately 200. (By contrast, the US Department of Energy has about 4,000 employees dedicated to energy matters.)

It is fair to say that much of the criticism has been a result of the fragmented nature of China’s system for managing its energy policy.

China’s minimal capacity, coupled with a lack of political clout, has led many experts to deem these authorities unable to cope with the scale of energy issues that China faces. Furthermore, various energy sectors, including those respectively dedicated to coal, oil, and gas, are controlled and operated by other powerful government authorities and large state-owned enterprises. These various actors often have differing strategic interests that at times have led to clashes that ultimately have harmed Chinese consumers.

The fuel shortages experienced in China at the end of 2007 provide an instructive example. Because of the record high cost of crude oil at the time and an inability to pass on that cost to the consumer because of government controls, Chinese oil companies did not expand their refining activities despite the increasing demand for fuel. As a result, fuel supplies ran low, leading to long lines at gas pumps and the disruption of trucking services throughout the nation.

Partly in response to the negative fallout from this fuel-shortage debacle, in March 2008 the People’s Congress approved a proposal to create two new bodies - the aforementioned NEA (which was established in March 2008 and replaced the now defunct Energy Bureau under the NDRC) and the NEC, which was initially intended to replace the National Energy Leading Group. It was reported that the NDRC initially resisted the attempt to set up an authority as powerful as the NEC. (Although the precise reasons for the NDRC’s reluctance remain unclear, the fact that it took nearly two years to formally announce the formation of the NEC readily illustrates the depth of the power struggles at play.)

Out of this background, the NEC has been established as a “super-ministry” charged with taking the reins and exerting control over the relevant actors.

Implications for China’s energy industry
According to a notice released by the general office of the State Council, the NEC will be in charge of formulating energy development strategy, reviewing energy-security policies and coordinating international cooperation. Moreover, the existing NEA will be subordinate to the NEC, but will continue to be responsible for the drafting and implementation of energy plans, industrial policies and standards.

The NEC also will outrank all other government departments and state-owned enterprises that are currently in charge of the various energy sectors. Although NEC decisions will still require approval by the State Council, given the seniority of its members it is well positioned to coordinate all such decisions made concerning energy policy.

There are two areas where the introduction of the NEC will likely create an immediate impact: renewable energy and energy security.

Since the United Nations Climate Change Conference was held in late 2009 in Copenhagen, China has issued a series of policies and regulations in an effort to boost the country’s renewable energy sector. As a result of its plenary powers, the NEC will have the heft to push forward many of the green initiatives that otherwise might have stalled prior to its formation.

Another top priority of the NEC will relate to energy security. Given China’s concern over being too reliant upon energy imports (it became a net importer of oil in 1993), it is anticipated that the NEC will spur the development of additional onshore energy projects as well as the acquisition of offshore energy projects by large state-owned enterprises. In particular, the NEC will be instrumental in facilitating the completion of the various administrative formalities required to approve and finance such plans.

In sum, as the NEC begins to flex its administrative muscle in various sectors, such actions will provide telltale signs as to what China’s leaders have deemed to be their top priorities within the energy field.

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