By Liu Shijin, Development and Research Center of the State Council

Research Report No.058, 2007

Never before has China's energy issue aroused so much concern by the public and the reasons are as follows. First, China has entered and will remain at the stage for quite a long period of time, during which the consumption of resources including energy will "climb up". No major economy could avoid or jump over such a stage with the existing technological line. During this period, the share of the energy-consuming heavy industry will rise by a fairly big margin and the "structural factor" will become more prominent in terms of increased energy consumption. This feature may well explain why China's energy consumption for per unit output has been on the rise while the technical indicators of its energy consumption have been declining. Second, the effect of "super-large scale", which emerged after 1.3 billion people entered the middle and late periods of industrialization, will surpass the historical experience of any single industrialized country in the past. This also finds a concentrated expression in energy consumption. Although China's per capita energy consumption is still very low when compared with international levels, the total amount of energy consumption has far gone beyond people's expectation. Third, China has made some progress in energy conservation over the years, but on the whole the level of energy consumption is still fairly high. In addition to the above-mentioned structural factor and the technological and conceptual factors, the primary cause rests mainly on our systems, mechanisms and policies. Energy consumption can vary widely from enterprise to enterprise, even though they are in the same industrial sector and they have roughly the same technological conditions. This is a good case in point. Finally, while China claims to be a big country with rich resources, its per capita levels in a majority of important resource endowments including energy are below the world levels. Opening to the outside world has made it possible for China to utilize foreign resources, but a growing dependency on foreign supply of some important resources cannot but cause public concerns over the country's "energy security". For example, China is relying on import to meet over half of its increased oil consumption.

Under the joint action of the above factors, resource constraint and especially energy constraint are posing a grave challenge to the sustainability of China's economic growth. We must be fully aware of the seriousness and urgency of this problem. More importantly, we must have a correct approach when observing, analyzing and solving this problem. For example, the so-called "resource constraint" has never been a new problem. From the economic perspective, a "resource constraint" will exist as long as there is more one person in the world. So the real issue is not a resource constraint. The real issue is what system, mechanism and policy will be taken to deal with such a resource constraint. Discussions on China's energy strategy and policy against this background can proceed from several major perspectives. One of them is structural optimization. And hydropower development in the western region constitutes a major step in optimizing China's energy structure in the new era.

I. Treat Hydropower Development from an Overall and Strategic Perspective

Coal occupies a dominant position in the structure of China's energy supply, and currently accounts for about three-fourths of the primary energy supply. The country has relatively abundant hydropower resources, with the exploitable hydropower resources accounting for about 15% of the world total. In terms of the per capita level, China's per capita possession of hydropower resources is equivalent to about 70% of the world average level, which is well above its ratios for oil and natural gas (respectively 11% and 4.5%) and is close to that for coal (79%). China re-investigated its hydropower resources during the 2001~2003 period. The results indicated that the country ranked first in the world in terms of the theoretical reserve of hydropower resources, the technologically exploitable generating capacity and the economically exploitable generating capacity. However, China is noted for a fairly low degree of hydropower resource development. At the end of 2004, China's ratio between the hydropower generating capacity and the technologically exploitable hydropower resources was only 20.0%, ranking around 80th place in the world and staying below the world average level (18.4%). It was far lower than the level of hydropower resource development in the developed countries (50%~100%) and was also lower than the levels in Brazil, India, Vietnam, Thailand and other developing countries.

China's lagging hydropower development is directly attributable to its understanding of hydropower development. A universal concern is that hydropower development can produce unfavorable environmental and ecological impacts. Hydropower development can contaminate water bodies and cause siltation, and have a certain impact on biodiversity. Cascade development of river basins can undermine the completeness of rivers and can produce undesired impacts on groundwater resources and geological structures. Construction of reservoirs can inundate cultural relics and historical and cultural sites, and can change the way of life of the local residents. In particular, irrational planning, designing and construction in the course of hydropower development can cause even more harmful effects. That is why we always place a special emphasis on environmental and ecological protection and on adopting all measures to minimize the unfavorable impacts arising from the development of hydropower resources. On the other hand, we should also see the positive impacts of hydropower development on the environment and the ecology, for example, in preventing floods, improving the living environment for fish and improving the quality of downstream water. In particular, the considerable returns arising from hydropower development can provide financial support for active environmental and ecological protection.

The above analysis only touches upon the "micro-environment", which is directly related to hydropower development. But if we view this issue from the perspective of the "macro-environment" of the whole national economy, hydropower development has far greater positive impacts on the environment and the ecology. Take the substitution of coal-generated power by hydropower as an example. One of our studies indicates that in the 25 years from 1980 to 2004, the hydropower industry produced 1.13 trillion kilowatt-hours of power less than it should due to the slow progress in hydropower construction and the insufficient exploitation of hydropower potentials. That means an additional 570 million tons of raw coal was consumed during that period. If hydropower development is accelerated in the next stage so that the hydropower generating capacity can account for a rational proportion of the total generating capacity, power supply can increase by 3.47 trillion kilowatt-hours during the 2006~2020 period. In 2020 alone, the hydropower generation will reach 1.03 trillion kilowatt-hours, which means 519 million tons of raw coal will be saved. In contrast to slow development, accelerated hydropower development can generate an additional 0.515 trillion kilowatt-hours in 2020, which means an additional 260 million tons of raw coal will be saved. Hydropower development can reduce coal consumption and hence reduce the emission of CO2, SO2 and other hazardous gases arising from coal-fired power generation. If hydropower development is accelerated, coal consumption saved by hydropower generation in 2020 will be equivalent to reducing CO2 emission by 1.05 billion tons and cutting the CO2 emission in the year by 15%. So in the microeconomic sense, hydropower development has both unfavorable and favorable impacts on the environment and the ecology. But in the macroeconomic sense, the favorable impacts will far outnumber the unfavorable impacts. The industry still argues over whether hydropower is a clean energy. But in light of the "clean effect" of substituting coal-fired power generation, hydropower should be regarded as a clean energy.

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