China’s electricity sector has been under the authority of a single, large state-owned enterprise,the State Power Corporation.
Ongoing regulatory reforms aim to break up SPC’s monopoly control over generation, and break the company into regional transmission and local distribution companies. Grantees are working to help facilitate this process with the goal of tapping electric utility revenues to deliver public benefits, including energy efficiency and renewable energy.
The Institute of Economic System and Management (IESM), which was affiliated with the former State Council Office for Restructuring the Economic System (SCORES) and is now under the National Development and Reform Commission (NDRC), coordinated a multiministerial project to design and recommend an independent regulatory body to oversee national regulatory reforms and to coordinate policies to maximize the public benefits of sector reforms,particularly stimulating utility investment in energy efficiency and renewable energy. Based on IESM’s report, the State Council issued a decree in March 2003 establishing China’s new State Electricity Regulatory Commission (SERC).

Since then, per SERC’s request, grantees have provided support for SERC’s capacity building.The Regulatory Assistance Project (RAP) has provided full-time assistance to IESM and has assisted SERC’s capacity building, particularly personnel and regulatory training. So far, SERC has established six regional and a number of provincial offices, with a total of around 1,000 staff.IESM’s work in 2005 will focus on assisting SERC to formulate regulations that encourage clean generation and demand-side management, and will help develop institutional capacity for the regional regulatory agencies.

China’s leadership has expressed strong interest in energy efficiency as a means toward meeting the country’s escalating power demand. Yet China’s DSM progress to date has largely focused on load management (shifting demand to off-peak) rather than energy efficiency (investment in technology that uses less energy). The State Power Economic Research Center (SPERC) and the Beijing Energy Efficiency Center (BECon) have worked with international DSM experts from
the Natural Resources Defense Council (NRDC) and RAP to tackle implementation barriers to utility-financed DSM programs. However, strong barriers to energy efficiency investment still exist in China, particularly the lack of mechanisms for funding efficiency programs through electricity rates. SPERC, BECon, NRDC, and RAP continue to assist central government policy decision-makers to deepen their understanding of DSM and its strategic importance in improving
energy efficiency and building a well-off society.

With the assistance of SPERC, BECon, NRDC, and RAP, local pilot programs in Jiangsu,Shanghai, and Guangzhou are generating significant electricity savings. For example, since 2002, Jiangsu provincial authorities have provided over 140 million RMB (US $17 million) to support DSM and have leveraged more than 900 million RMB (US $110 million) in private investment from enterprises. Altogether, more than 180 DSM projects have been implemented in Jiangsu, resulting in electricity savings of more than 700 million kilowatt-hours (kWh) annually.

With joint funding from the Asian Development Bank (ADB), the international and Chinese experts have developed an Energy Efficiency Power Plant (EPP) concept in Jiangsu and Shanghai. An EPP is a bundled set of energy efficiency programs designed to deliver the energy and capacity equivalent of a large conventional power plant. By implementing EPPs, Jiangsu and Shanghai could cut peak electricity demand by over 600 megawatts (MW) each at only a quarter of the cost of building new power plants. ADB has proposed to finance the development of the EPPs. Grantees are working with NDRC, local authorities, and the utilities to perform indepth analysis and implementation arrangements.

Generation performance standards cap power plant emissions on an electricity production basis,thereby encouraging energy efficiency and cleaner generation. Through two years of efforts,CRAES and local grantees have made GPS a well-accepted concept in China. The Chinese Research Academy of Environmental Sciences (CRAES), under the guidance of SEPA and in cooperation with local Environmental Protection Bureaus (EPBs), conducted local generation performance standards (GPS) pilots in Zhejiang, Shangdong, Shanxi, and Jiangsu provinces during 2002-03. In 2004, building on previous achievements, CRAES developed the framework for a GPS-based sulfur dioxide emissions allocation program as well as designed a GPS policy and regulatory framework that emphasizes adequate monitoring and enforcement.

CRAES is currently (1) working with SEPA to build a total emissions control mechanism based on GPS aimed at limiting thermal power plant emissions for the 11th Five-year Plan; designing an emissions trading program based on GPS and conducting provincial-level emissions trading pilots; and (3) developing certification, monitoring, and enforcement procedures and training programs for provincial officials.

China’s power tariffs have two main drawbacks. First, they do not take into account the environmental and public health externalities caused by fossil fuel-fired power generation.Second, rate designs typically provide a disincentive for utilities to pursue demand-side management (DSM) and other energy saving programs. The Chinese Research Academy of Environmental Sciences (CRAES) developed several options for internalizing environmental costs into electricity tariffs, including management methods, and submitted its findings and policy recommendations to SEPA, NDRC, and SERC. The report is an important reference for NDRC and SEPA in designing a new tariff mechanism that will help utilities recoup the costs of investing in demand-side energy saving technologies.

Building on previous efforts, the Institute of Economic Research of NDRC and CRAES are designing a power tariff mechanism that levels the competitive playing field for clean power generation and end-use efficiency. The project team made recommendations to NDRC on providing pricing incentives to coal-fired power plants fitted with sulfur scrubbers and on discriminative pricing options to inefficient industries. These recommendations have been adopted in the latest Implementation Methods on Power Tariff Reform by NDRC.