Reaction to the new five-year energy plan that China released in late January has been mixed.

Private and foreign investors are happy with the plan because it opens new doors for investment. There should be more renewable and alternative energy projects. Some manufacturers of solar photovoltaic modules should start to see more cash flow in the near term.

On the other hand, local governments are now under pressure to limit their energy consumption as a percentage of domestic output so that the economy can continue growing without the need for more energy acting as a brake on growth. The monopoly positions and power held by state-owned energy companies, like the China National Petroleum Corporation, Sinopec and the State Grid, will come under challenge.

The plan sets energy development targets within China for the period through 2015.

In so doing, it also identifies potential opportunities for equipment vendors, developers and investors in other countries.

Total investment for the period is expected to reach RMB 13.5 trillion, of which RMB 8.5 trillion will be spent on additional generating capacity and RMB 5 trillion will be spent on energy storage and transmission and pipeline projects. The majority of these funds will be raised from private investors in the market.

The plan tells investors, developers and financial institutions how to play in the energy sector in China. Market participants face heightened strategic and policy risks by investing without understanding the plan. It is the 12th five-year plan. The plan incorporates more detailed sub-plans for specific sectors, such as coal, shale gas, wind and solar. Some sub-plans, such as for coal seam gas, are still in draft.

The plan tackles pollution by placing caps on total energy consumption and energy consumption intensity. This is expected to drive substitution of renewable and alternative energy sources for fossil fuel for generating electricity. The high rates of Chinese economic growth in the past 30 years have led to rapid increases in energy consumption, a lot of it tied to coal, and caused the serious environmental pollution.

Fundamental Principles

No Chinese government plan is without a set of fundamental principles. The plan lists eight. They will have to be reflected in rules and regulations issued by the various energy-related ministries under the State Council and local governments to implement the plan. As a legal matter, the fundamental principles override any contrary instructions by government ministries.

The eight fundamental principles are “giving priority to conservation, relying on domestic resources, encouraging diverse development, protecting the environment, promoting scientific and technological innovation, deepening reform, expanding international cooperation, and improving the people’s livelihood.”

These are the same principles that were in the Energy Policy 2012 published by the information office of the State Council in October 2012. The difference between Energy Policy 2012 and the five-year plan is the latter set specific targets and clarified the responsibility of energy-related ministries. The five-year plan has new sections on energy storage and transportation as well as a cap on energy consumption.


The plan set the targets for energy development by 2015 in seven respects.

There are targets for total energy consumption and energy efficiency by 2015. Both will be capped in an effort to limit air pollution. The target for total energy consumption is 4.0 billion tons of equivalent standard coal. Actual consumption was 3.25 billion tons of equivalent standard coal in 2010. The cap allows 4.3% growth annually from 2011 to 2015. As the barometer for economy, the electricity consumption will be capped at 6.15 trillion kilowatt hours in 2015, compared to 4.2 trillion kilowatt hours in 2010, or an 8% annual growth rate in load. (This compares an annual growth rate of 0.7% in the United States.) In 2012, the electricity consumption increased by 5.5% with 7.8% GDP growth. The projected 8.0% growth rate in electricity consumption is viewed in China as optimistic. Considering that the energy consumption per unit of GDP is projected under the plan to drop by 16% in 2015 compared to 2010, the consumption cap should not be an impediment to economic development.

There is a target for fuel sources. The primary energy supply capability will reach 4.3 billion tons of equivalent standard coal, of which 3.66 billion tons will come from domestic sources. This means that 85% of the primary energy will depends on self-supply. According to the plan, the percentage of imported petroleum as a share of total petroleum consumption has risen from 32% at the beginning of the 21st century to the present 57% in just 12 years. The latest information on the website of the National Development and Reform Commission (NDRC) shows a figure of 56.4% in 2012 based on 268.65 million tons of net imported crude oil in 2012. (Oil in China is measured in tons rather than barrels.) Experts believe that the real figure may be higher. The United States is expected to be a net oil exporter by 2030. These trends suggest China has a longer way to go to reach its goal of energy independence.

The plan also sets targets for energy structure optimization, construction of national comprehensive energy bases, eco-environmental protection, energy utilization by residents in urban and rural areas and reform of the energy system.


Anyone looking for opportunities can find them in the list of tasks identified in the plan.

The plan lifts hurdles for foreign and domestic private investment in energy supply, transmission, utilization and efficiency, although foreigners are required in most cases to have local partners who retain control.

The coal industry is expected to go through a period of both consolidation and expansion. The government wants 20 coal producers to reach a larger scale. This will be done through consolidations and acquisitions. The government would like 10 major coal producers with 100 million tons of coal production capacity and 10 with 50 million tons of coal production capacity to be formed by 2015. These 20 coal producers are expected to account for 60% of the total coal production in China. There were seven existing coal producers with production above 100 million tons in 2012. Shenhua Group ranks first with its 407 million tons of coal production, which is more than twice that of the second producer, China Coal Group. Small mines with production capacity below one million tons (the threshold in Shanxi) will be shut down or merged. Each province sets its own threshold. Small mines, no matter whether privatelyowned or state-owned, will be under heavy pressure to close. They must either invest more funds to increase their production capacity or sell their mines to larger producers.

The Chinese government has made mine safety a priority and believes that the bigger the mining company, the safer its mines will be. Mine safety is the key driver behind the consolidation and expansion. The State Administration of Coal Mine Safety has published a list of 643 coal mines scheduled to be shut down. Critics charge that the forced shutdowns violate domestic laws protecting the ownership of property.

Unrestricted domestic coal production would be expected to reach 4.1 billion tons. The plan will limit output to 3.9 billion tons. Domestic oil production is expected to stabilize at around 200 million tons, and natural gas is expected to stabilize at around 130 billion cubic meters.

Unconventional Gas

Shale gas is an emerging industry and presents opportunities and risks for investors.

China will strengthen the exploration and development of coal-bed methane and shale gas. Two coal-bed methane industrial bases will be built in the Qinshui Basin and east of the Ordos Basin. China will accelerate its resource survey in order to improve estimates of domestic shale gas deposits. Like the US, China is wrestling with the challenges of developing shale gas, such as environment pollution and water consumption. China hopes to confirm additional proven reserves of 600 million cubic meters of shale gas and one trillion meters of coal-bed methane and to be producing 6.5 billion cubic meters of shale gas and 20 billion cubic meters of coal-bed methane a year by 2015. China imports natural gas from Turkmenistan and Kazakhstan. The additional shale gas and coal-bed methane will not displace any imported gas since China is still wrestling with energy shortages and coal-fired power plants may convert to gas.

China plans to open its shale gas industry to foreign and domestic private investment.

In the second round tender for 20 shale gas blocks last year, most of the winning bidders were not traditional oil and gas companies and only two of them were private companies. Any independent domestic legal entity or Sino-foreign equity joint venture (in which a Chinese party holds majority of shares) with at least RMB 300 million of registered capital could participate in the tender. Bidders had to have some experience in oil or gas exploration or partner with someone who does. Winning bidders in the second round tender committed to spend at least RMB 12.8 billion on exploration in the first three years.

No foreign investors (through Sino-foreign joint ventures) were selected in the past two rounds. None of the winners seems have the technology required for exploration or development of shale gas, which is held mostly by foreign firms. The Chinese companies who won the bids will have to resort to cooperation with foreign firms in order to push the shale blocks into operation.

Some major international players are eager to share in the potential. ConocoPhillips joined hands with CNPC for an exploration study of shale gas potential in the Sichuan Basin. EU energy giant Total and US firm Carrizo are also seeking partners to enter into the Chinese market and propose either to provide technology or own the shale blocks. Regulatory barriers, institutional conflicts, foreign exchange risks, financial grants and connections to pipelines are still the big concerns of foreign investors.

Renewable Energy

China is trying to increase the amount of renewable energy as a percentage of total energy consumption and help domestic wind turbine and solar panel manufacturers, some of whom are on the verge of bankruptcy, restore normal operations.

A worldwide glut of manufacturing capacity of solar panels and wind turbines, the anti-dumping and countervailing duties levied by the United States and the ongoing anti-dumping investigations by European Union are dragging Chinese firms in the sector into an abyss of losses.

Meanwhile, by 2015, domestic installed generating capacity in China from wind is expected to reach 100,000 megawatts, installed PV capacity is expected to reach 35,000 megawatts and installed biomass power capacity will reach 13,000 megawatts (of which 3,000 megawatts will come from urban household garbage).

China increased its target for domestic PV generating capacity from 21,000 to 35,000 megawatts on January 29, 2013, only six days after the new five-year plan was published on January 23. Estimates are that installed PV capacity will increase by 10,000 megawatts in 2013. The experts believe that the 35,000-megawatt target is conservative and that total installed PV capacity will reach more than 40,000 megawatts by 2015. Local governments may drive the additional installations.

In “three norths” (central northern China, northeast and northwest), China will accelerate the development of new wind farms. However, overall attention will shift from onshore wind to offshore wind. The wind power bases along the coasts in Shandong and Jiangsu will be built up. Another 79,000 megawatts of new wind capacity is expected to be installed between now and the end of 2015.

Installed conventional hydropower and pumped-storage hydropower will reach 260,000 megawatts and 30,000 megawatts respectively by 2015. China is facing both internal resistance as well as complaints from its neighbors to building massive new dams. There are issues about displacing people and debates about the potential for such projects to cause geological damage and to pollute the environment. Chinese neighbors, like India, have also expressed concerns.

China is planning to build another 27 nuclear power plants along coastal areas. In the immediate aftermath of the Fukushima Dai-Ichi plant meltdown in Japan in 2011, China suspended approval of construction permits for new nuclear power plants, but the moratorium was lifted last October. By 2015, Chinese installed nuclear generating capacity is expected to reach 40,000 megawatts, with 18,000 megawatts of new plants under construction. There are 16 nuclear power plants currently in operation in China. The Hong Yan He plant is the largest in northeastern China. The Shi Dao Wan nuclear power plant, currently under construction, will use fourth-generation technology and will become the biggest in all of China after it is completed.

New Technologies

China is keenly interested in advanced technologies for using coal to generate electricity, including ultra-supercritical, cycle fluidized bed and high-efficiency water-saving technologies. The latest five-year plan calls for construction of another 300,000 megawatts of coal-fired power plants. Of that number, 70,000 megawatts will be combined heat-and-power projects and 50,000 megawatts will use low-Btu coal for fuel. China hopes to reach efficiencies of energy conversion of coal to gas, coal to liquids and coal to olefin of 56%, 42% and 40% respectively. It is expected to build another 30,000 megawatts of new gas-fired power plants. Some old coal-fired power plants will be converted to run on gas. The gas turbines manufacturers, such as Dong Fang Electric (China), General Electric and Siemens, will have opportunities for growth in China.

CNPC, Sinopec and CNOOC will have to upgrade their crude oil refineries. All three were criticized by the public after fog and haze attacked middle and eastern areas of China repeatedly over the winter. The poisonous PM2.5, which comes partly from auto emissions, is considered the prime culprit. They have been lobbying the governments to defer deadlines for upgrading refineries to meet lower emission standards. By 2015, Chinese crude oil processing capability will reach 620 million tons and refined oil product output will reach 330 million tons. Energy consumption to process one ton of crude oil will drop to 63 kg of standard oil and water consumption of 0.5 tons. Chinese consumers are expected to face rising costs for moving to cleaner fuels in the future.

Distributed Energy

Distributed energy should be the next hot area. China is expected to accelerate construction of natural gas lines to load centers. Coal-bed methane and shale gas projects that are small scale or not connected to pipelines have no choice but to find a local purchaser for the gas. By 2015, around 1,000 distributed gas energy projects will have been completed.

Rooftop solar installations are also taking hold and are expected to reach 10,000 megawatts by 2015.

Energy supply infrastructure required to support electric cars is being built in model cities like Beijing, Shanghai and Chongqing. By 2015, charging stations for electric vehicles should support as many as 500,000 electric vehicles. China is actively encouraging research and development of high-quality batteries and other forms of energy storage. Wanxiang, a Chinese company, just completed the acquisition of US battery maker A123. Fisker Automotive, a US green car manufacturer that was up for sale, attracted only two bidders, Geely and Dongfeng Motor, both of which are Chinese, with additional interest shown by three other Chinese companies: BAIC Group, China Grand Auto and Wangxiang. (The company may be headed for bankruptcy.) One can feel the thirst of Chinese companies in this field.

China will remain a significant importer of oil and gas. It plans to accelerate construction of oil and gas pipelines between China and Kazakhstan, central Asia, Russia and Burma. These cross-border pipelines will have to be connected to other pipelines within China for domestic distribution. By 2015, 8,400 kilometers new oil pipelines, 210,000 kilometers of oil product pipelines and 44,000 kilometers of gas pipelines will be built. The oil product transportation capability will increase by 190 million tons.

The second phase of the China-Kazakhstan oil pipeline will be completed in November 2013. Two new gas pipelines between China and central Asia (Turkmenistan, Uzbekistan and Kazakhstan) with capacity to import 45 billion cubic meters of gas into China were completed at the end of 2012. A third gas pipeline to the region is expected to be complete by the end of 2013. A fourth line is under discussion between CNPC and counterparties in other countries.

Capacity on the existing China-Russia oil pipeline will be expanded, as agreed in meetings between Wang Qishan, the Chinese vice premier, and Igor Sechin, the president of Rosneft, on February 17 and 19, and Arkady Dvorkovich, the deputy prime minister of Russia, on February 25 in Beijing. Rosneft is seeking US$30 billion, which is called “loan for oil,” from China in order to complete its takeover of TNK-BP from BP. A gas pipeline between China and Russia is also under discussion between the two governments, with the focus on the pricing, and is expected to be in operation in 2015. Russia will supply 38 billion cubic meters of gas each year to China via the east gas pipeline. Energy cooperation between China and Russia is expected to increase.

Oil and gas pipelines between China and Burma started construction in 2010. The gas pipeline is expected to be in operation in June this year and the oil pipeline will be completed in 2014. Once the pipelines are operating, oil shipped from the Middle East will no longer have to cross the Strait of Malacca and can be discharged at the port of Kyaukpyu and transported to China via pipeline, which will save time and money and alleviate concerns about safety of ship travel through the Strait. The ethnic war in Burma could affect the timetable. The project has also attracted environmental critics.

Deepening International Cooperation

China encourages its enterprises to “go outside” to secure more energy supplies.

Chinese companies will participate in the overseas oil and gas exploration and actively cooperate with foreign partners in the refining, storage and transportation sectors. The major firms are supported by the government in their efforts to develop coal resources overseas. The expectation is that development of fossil fuel reserves will create demand for exports of equipment and engineering services from China. The most recent example is CNOOC, the biggest offshore oil developer in China, received approval in mid-February from CFIUS, a US government inter-agency panel that reviews proposed acquisitions for national security concerns, for a $15.1 billion acquisition of Nexen, and the deal closed in late February. Sinopec, the largest oil refiner in Asia, signed an agreement with Chesapeake, the second-largest gas producer in the United States, to acquire Chesapeake’s stake in the Mississippi Lime oil and gas properties in Oklahoma for $1.02 billion.

The International Energy Agency predicts that China’s state-owned oil enterprises will produce three million barrels a day abroad in 2015, double their 2011 overseas output of 1.5 million barrels a day and equal to Kuwait’s total annual oil output.

Moving to renewable energy, Chinese enterprises may be more active in cross-border acquisitions. This is one way to acquire new technologies. For example, Hanergy, China’s largest private clean energy company, acquired MiaSolé, a US solar energy company, in January in order to acquire copper indium gallium selenide technology for making solar panels.

Meanwhile, China welcomes foreign investors who want to participate in the exploration of complex onshore oil and gas fields as well as deep-sea oil and gas fields in China.

Maintaining good relations with the current foreign oil and gas suppliers is as important to China as prospecting for new supplies. The oil trade volume is expected to increase to support economic growth at home.

More transparency, clarification and certainty are required by the market. The new five-year plan sets targets for China as a whole. Each sector of the energy industry and province has its own sub-plan. The relevant departments under the State Council, such as the NDRC, NEA, Ministry of Finance, Ministry of Land and Resource and MOFCOM, will draft implementing rules based on the plan. China still faces conflicts between economic growth and caps on energy production and consumption, but such tensions are no different than in any other country.