1, The Energy-Development-Enivronment Context

　　China is faced with finding a balance tetween the needs of socio-economic develo pment and environmental protection. As in other developing countries, the priori ty in China must be for development. Therefore, this creates an urgent need for a strategy to integrate development and environmental issues, and to define poli cies for implementation that will be effective at municipal, provincial and nati onal levels.

　　EEconomic Growth. Economic growth in China averaged 7.9% through 1988/92 and ove r 10% 1993. Energy consumption has also grown, but at a considerably lower rate due to a shift towards less energy-intensive industries and to more energy-effic ient technologies. Population growth and improving standards of living will fost er a steady growth in energy services for the foreseeable future.

　　Rural Development. Socio-economic growth in the rural areas raises important pro blems which must be addressed as a priority, because two-thirds of the populatio n live there. Economic loss and environmental damage is being caused by the unsu stainable use of bionass. Rural development needs to be supported by provision o f clean, low cost energy.

　　Urban Growth. The rapid growth of cities calls for the creation of infrastructur e in which energy and transport services can be supplied efficiently. One key co ncern is air pollution, which is a problem in most large cities, now caused chie fly by coal-burning for cooking and heating, and liable in the near future to be added to by vehicle emissions. Coordinated planning is clearly vital to ensure that every opportunity is taken to increase the use of clean energy sources such as electricity and gaseous fuels.

　　Environment. The extraction, conversion and use of energy leads to local, region al and global problems, such as urban air pollution, acid rain and climate chang e.

　　Energy consumption is projected to grow dramatically in China, from 1 billion to nne coal equivalent(Btce) in 1990, to 1.5 Btce in 2000, 2.4 Btce in 2020 and 3.7 Btce in 2050. If this more than tripling were to be based in fossil fuels alone , and especially on coal, already serious environmental problems would deteriora te further, even with the development of more efficient and cleaner technologies . Modern non-fossil fuel energy sources could also play a bigger part, and, in s o doing, help lessen the constraint on development now caused by the huge capita l needs of conventional energy systems.

　　The Working Group (WG) attempts, therefore, a scientifically based approach to t he provision of energy services, using modern technologies which are suitable to China's conditions. The WG recognizes the demanding geographic, financial and d emographic realities, but also sees a great opportunity for a rapid advance by C hina, which can avoid some of the environmental pitfalls experienced in many ind ustrialized nations.

　　2. The Approach

　　The key energy issues addressed by the WG are strategic, in that they are aimed at integrated energy systems compatible with sustainable development over the lo ng term. Such systems will integrate cost-effective improvements in efficiency ( on the supply and the demand side), with both renewable and cleaner conventional sources of energy.

　　The integrated approach embraces also the institutional capacity and human resou rce aspects needed to realize sustainable development. The primary emphasis is o n cost-effective development, in terms which include conventional, social and en vironmental costs.

　　First, the steps that can be taken immediately to improve the current situation are identified. Secondly, measures are shown which will expand the option portfo lio in the near and longer term, and which will have a more regional impact. In the case of the latter, actions are identified which are required now to make th is possible.

　　Good environmental policies and practice will aid davelopment, while the reverse will hinder it by allowing constraints to develop. It is common experience that environmentally positive technology benefits the economies of both enterprise a nd society. Therefor, a key goal is to find the right technologies and other mea sures which will provide a win-win situation for China, at all levels, from loca l to global. Success in this will highlight China's commitment to the aims of Ag enda 21.

　　In pursuing the above, the focus on the performance of new investments in terms of energy and the environment must remain central in such a fast-growing economy , At growth rates of 10% per yeat, the capital stock approximately doubles in a 7-year period. This illustrates the overwhelming, influence of the performance o f new investments on how the Chinese economy performs in the future.

　　Energy needs in China are different from those of the industrialized countries. In China the satisfaction of basic human needs and infrastructure building still takes priority, while in industrialized countries this phase is generally over. Where opportunities for innovation exist, particularly in the energy-intensive basic-materials industries, China should take the lead, since industrialized cou ntries will be slow in bringing forward innovations, because dcmand is no longer growing there.

　　In summary, the WG approach has four elements: (i) technological leapfrogging, s upported by human capacity building; (ii) efficient use of energy; (iii) cleaner sources of energy; (iv) "least cost" energy demand/supply options.

　　2.1 Technological and Institutional Leapfrogging

　　Technological and institutional innovation is needed to sustain economic growth in the long term, In some cases, China many need to follow the same path as indu strialized countries, but where technical capacity, financial and security facto rs allow, China can move more quickly to the latest, most advantageous technolog ies and institutional arrangements, by "leapfroging". At the same time, adaptati on to China's specific conditions will be called for, because most of the latest technologies, for example, will have been developed for industrialized countrie s.

　　In industrialized countries, where labour is expensive and capital relatively ch eap, new technology is labour-saving and captal intensive. In China, the reverse is true, which will affect the way new technology is realized.

　　The crucial importance of technological leapfrogging is not well understood in t he energy sector. This is especially true in developing countries, where energy planners find it difficult to accept the risk of innovation in exchange for what aopear to be only medium-term payoffs, and particularly the many who have had a disapointing experience in new technology-transfer. The sheer size of some conv entional energy projects also argues for caution, and this attitude is reinforce d by the major lending-agencies who insist on a proven track record in industria lized countries before financing.

　　Fortunately, not all technological leapfrogging involves high-risk innovation, b ut it may involve the applicatio nof technology that has not hitherto been used in China. The risk attached to a specific leapfrog project need to be set agains t the potential reward to the industry and to the society as a whole. This appro ach will help in quantifying the justifiable scale of resource to be invested.

　　Also important is the definition of conducive corporate structures, for example public/private sector joint ventures, to stimulate activity. Yhe key cheallenge will continue to be that of obtaining sufficient financial backing, under accept able terms. The role and needs of lenders, be they international, national, mult ilateral, or bilateral, must be integrated into the total innovation package in any successful solution.

　　Technological innovation will only be effective in parallel will an upgrading of institutional management and entrepreneurship. These in turn can only come abou t when the human capacity is up to the necessary standard. When the means for si multaneous human capacity building are indeed found, there will be immediate val ue to the economy in the better use that can be made of capital, human, and natu ral resources.

　　Chinal has embarked upon the introduction of market principles in the economy. U nlike the situation in industrialized countries, where supply is efficient and c onsumption wasteful, in China the chief scope for improvement is on the supply s ide. Although the market outlook is already showing a shift towards efficiency, much remains to be done. The task is now to find ways to maintain the momentum t oward supply-side efficiency, but without introducing demand-side waste.

　　2.2 Efficient Use of Energy

　　Efficiency can be improved at each step in the energy chain from extraction and collection, through conversion, transmission/distribution to end use. Many relev ant and cost-effective means to do this exist today, and there are more improvem ents on the way. Overall, the treatest scope seems to lie at the point of end us e, as discussed in Section3.

　　2.3 Cleaner sources of Energy

　　Coal dominates the energy supply today, and is also the biggest single contribut or to China's environmental problems. To use coal more cleanly and more efficien tly is a clear priority. Increasingly in the future, cleaner alternatives to coa l, such as natural gas, renewable energy and nuclear energy, when used in an env ironmentally sound manner, could help reduce energy related environmental proble ms, as further discussed in Section 4.

　　2.4 Analytic Methods

　　Where resources are limited, priorities must be set. Integrated Resource Plannin g (IRP) is a powerful analytic method that has proven its ability to provide cog ent answers to this problem.

　　The aim of an energy system is to deliver the energy services for end uses such as illumination, a comfortable indoor climate, cold storage, transport and cooki ng, to take a few examples. This takes a complete "energy chain", which extracts /collects the primary energy, and converts it to carriers suitable for end-use(s ), that in turn are used in end-use equipment to provide the energy service(s).

　　The scientific IRP analysis is based on the chain as a whole, and therefore the potential for efficiency improvement of all realistic supply and demand side alt ernatives must be included in the analysis. Demand and supply alternatives can t hen be ranked according to cost (including social and environmental cost), in or der to find the true least-cost options. A prerequisite is a rational energy pri cing system.

　　The WG has organized two IRP workshops with the cooperation of the Energy Resear ch of the State Planning Commission, the International Energy Initiative and Tsi nghua University.

　　3. Energy Demand

　　Long term energy demand is determined by the growth and structure of the economy and by energy efficiency (specific emergy use). However, the overall developmen t of the economy is not a task for this WG. This discussion therefore addressed the specific energy use of the major activities which contribute to total energy demand.

　　Long term energy demand will be influenced by specific energy use and by structu ral changes in economy, Experience in industrialized countries is that increasin g affluence shifts consumption patterns towards more knowledge intensive product s and away from energy and materials-intensive products.

　　A few decades hence, energy demand in China will be dominated by new equipment y et to be put in place. There will be a myriad of new applications in industry, i n commercial and residential buildings, and in transportation systems and vehicl es. It is vital, therefore, in discussing energy efficiency, to focus on the ene rgy performance of new investments.

　　3.1 Potential Impact

　　Considerable progress in rationalizing the use of energy in China has been made in the past 15 years. Consumption has grown at only half the rate of GNP growth. This is a remarkable achievement for an industrializing country whose prime nee ds is for an energy intensive infrastructure and a durable goods manufacturing s ector.

　　Much still remains to be done, and large margins for improvement still exist in all sectors. The energy consumption for major products in China is still some 40 % higher than the corresponding figure in industrialized countries. Similar diff erences exist in electricity generation, and in the household and transportation sectors.

　　Up front it is important to assess the relative merits of retrofit versus new in vestment. It is noteworthy that the technical and economic potential for energy saving is typically 20-50% in the case of efficiency improvements in existing in stallations and 50-90% in the case of new intallations (as compared with the pre sent stock average specific energy use in industrialized countries). Form the po int of view of basic thermodynamics, the limits to efficiency improvements are f ar away.

　　The use of new technology is always associated with a cost for new equipment. Th is cost has to be added to the cost of the energy used and the total compared to that of the alternatives that could also provide the desired energy service. It is worth nothing that the cost of achieving a saving in energy use is often low er than the cost of supplying a similar amout of energy. In all cases, least cos t solutions should be sought.

　　3.2 Creating an Environment Conducive to Energy Efficient Development

　　A prerequisite for markets to deliver the most efficient use of resources is ac cess to information, education and training. This involves a cost(technically kn own as "transaction cost"). Transaction costs will only be kept at a reasonable level if implementation is properly designed. Experience has shown that transact ion costs associated with retrofits are higher for new installations.

　　It is vitally important that the communication effort is directed at the points of greatest leverage, in particular at manuafcturers of widely used products and equipment, and to decision-makers at national or provincial level. Massive camp aigns to educate all potential users are impractical and would result in high tr ansaction costs.

　　Some conrete suggestions for projects demonstrating energy efficient technologie s are made in Sections 3.4 and 4.11, for demand and supply-side installations.

　　Energy prices are the key to creating a climate conductive to energy efficiency. In order that the rull costs within the energy chain can be covered, and at the same time be controlled by competition, the market should be alloved to set pri ces. These will in consequence become rational. This innovation will create a cl imate of thrift in energy use, and promote incentives for efficient production. External costs of energy production and use, such as those implicit in environme ntal destruction, should be reflected in final prices by specific taxes and/or t hrough regulations. Where energy prices rise because of deregulation, to the ext ent of causing problems to consumers, non-price related measures can be taken to nitigate such effects.

　　Direct subsidies in conventional technologies obstruct the dissemination of new technologies and are economically inefficient. If used to make possible high pri ority pilot and demonstration projects, and to help create the capacity to marke t the technologies involved, subsidies can have a useful, temporary role.

　　Market-based energy prices will not on their own bring about least-cost supply o f energy services. Removal of non-price barriers to the diffusion of energy effi cient technologies is usually necessary, by the use of macro-economic measures, legislation, fiscal means, education and promotional campaigns. Some of these ba rriers can be grouped under the heading "market imperfections", for example the limited access by many consumers to accurate and relevant information, landlord/ tenant problems, access to capital on terms comparable to those for energy suppl y investments.

　　Energy efficiency will only come about permanently when there is a clear account ability of those responsible to the owners. Thus ownership structure reform is a n integral part of the process of achiveing energy efficiency.

　　Demand side management (DSM) should be reinforced in overall energy planning. Ex perience shows that the institutional and regulatory setting determines the rati onale for engaging in least cost energy services. Central and provincial governm ents need continually to attend to these issues.

　　Financial means can increase energy efficient investment. For example, the surre nt bias against providing capital to demand side projects, at the favorable rate s that are frequently available to supply side projects, is holding back respons ible innovation in the former. This is not logical considering that the value of the net saving in energy consumed ofter exceeds the additional cost of the conc essionary finance.

　　Regulatory processes are effective in getting inefficient products and practices off the marketn. Mandatory standards of energy efficiency can be set for all ki nds of devices, appliances, vehicles, buildings, and supply side technologies. T he procedure is complex, since it depends upon defined specifications, tests, la belling, certification, verification and control. The emphasis must, however, re main on the performance rather than on the desire to establish a particular tech nology.

　　The complementary issue is to get the energy efficient technologies into the mar ketn. Government and private sector procurement, in cooperation, has proven a ve ry effective route to achieve this. The procurement conditions will set the perf ormance goals and the incentive for participation.

　　Fiscal measures present another effective tool for implementing energy conservat ion and other policies to protect the environment. Differential fiscal loading c an steer the market toward demand side products with lesser environmental impact . For example, highly efficient equipment of buildings can attract lower taxes, and the highly inefficient examples much higher taxes, a "carrot and stick" poli cy that can result in winners all around.

　　Energy consumption should be metered and results compared with national best pra ctice. International benchmarking will become pssible, enabling better macroecon omic planning. Measurement makes possible target-setting for continuous improvem ent, aids promotion and the cultivation of a social climate where energy efficie ncy is the norm.

　　Environmental auditing will strongly reinforce the drive for efficiency. Perform ance in achieving environmental goals can be judged both against national standa rds and against the short term goals that an enterprise sets itself. Environment al audits will complement financial audits, and should be made regularly, e.g. a nnually by the internal audit departments of the enterprises, and bi-or tri-annu ally by external auditors. Professional auditors would need to be developed and would be drawn from central firms or Institutes, and from the National Environme ntal Protection Agency.

　　Enterprises in which energy consumption exceeds a certain threshold should, by l aw, appoint a professional energy manager. His duty is to ensure that all decisi on-makers are fully aware of the energy efficiency implications of their decisio ns, and also that they are informed in a timely fashion of the full array of opt ions that exist to improve the energy efficient performance of the enterprise be fore key decisions are taken. Typically, he acts as a channel for the diffusion of energy efficiency know-how throughout the organization, and would normally pl ay a major role, personally, as the key educator and trainer on this subject to staff.

　　Energy management companies should be encouraged. Typically, they will offer spe cialist advice to consumers, especially the larger ones, and the remuneration fo r their service is set at an agreed proportion of the energy saving that they ac hieve for the client company. To be paid, they must deliver. Such companies may be subsidiaries of an energy supplying ompany. If so, they have an opportunity o f developing good long term relationship with their key clients. This relationsh ip can flourish particularly well in a regulatory setting that is focussed upon encouraging the provision of least cost energy services.

　　3.3 Energy Use in the Transportation Sector

　　Energy use in transportation took only 4.6% of the total 1990 energy consumption in China, a much smaller proportion that in developed countries. This proportio n will increase in coming decades.

　　The railway, highway, water, and air transportation systems are overloaded. To i mprove their performance, it is crucial that congestion bottlenecks are identifi ed and removed, tariffs are normalized, and air pollution and energy waste are r educed. Along with the development of the economy, the urban transport systems a re at a crossroad. It must be decided whether the pattern prevailing in western countries should be followed, or whether an entirely new pattern should be creat ed.

　　Pertinent to this question is the fact that China is the only large country that does not yet have a large petroleum-based transport system in place. Countries that have one face severe internal-combustion (IC) derived urban air pollution, and in many cases are burdened with a heavy oil import dependency. To what exten t conventional private car use should be encouraged now needs to be carefully ex amined in the current generation of transport policy.

　　China is fortunate in that it has an important opportunity to leapfrog to transp ort technologies of the future. These are inherently much cleaner than IC engine technologies, and which match well with China's natural resource base. The fuel cell will eventually make it possible to use coal in a clean way for transport, at costs that are competitive with imported oil. This is possible because the h igher cost of the coal-derived fuel will be more than compensated for by the muc higher efficiency of the fuel cell vehicle compared to that of the IC powered v ehicle. Thus, China's fast growing demand for transport services provides a thea ter conductive to innovation in the transport sector.

　　The WG intends to carry out a study of transportation issues in the next phase.

　　3.4 Demand Side Demonstration Project

　　The WG proposes demonstrations of technology leapfrogging in the following selec ted areas:

　　1) Iron and steel-making technology.

　　2) Commercial buildings.

　　3) Fuel cell buses.

　　The experience of competitions is encouraging in Sweden, and in the USAA, in bri nging more energy efficient products to the market. Joint ventures should be env ouraged participants in the competitions. Assistance in funding these projects m ay be sought from the Global Environment Facility(GEF), and multi-and bilateral sources. Wwinners would build the facility in China in cooperation with Chinese partners, under Government guaranteed and legally protected intellectual ownersh ip.

　　Iron and steel technology demonstration: The WG recognizes the great importance of improving energy efficiency in the expanding energy-intensive basic-materials industry. The energy-intensive steel industry was chosen as the first sector fo r attention. Several international steel-making firms have new, clean and energy efficient technologies, which so far, have only operated at pilot or demonstrat ion scale. Steel demand in industrialized countries is not growing as in the pas t, due to changes in consumption patterns, and to the development of higher perf ormance steels of which less in needed for a given purpose. They are therefore n o good theaters for innovation.

　　The WG propose that such technologies be introduced into China, as part of the n eeded 50 Mt/year expansion of steel-making capacity over the next decades. An in ternational tender should be organized by a consortium of Chinese authorities an d the steel industry, to select the technologies to be demonstrated. Minimum env ironmental performance specifications for acceptable technology will be indluded in the invitation to bid, and these will include, interalia, maximum energy use and maximum permissible emissions per tonne of steel produced.

　　Commercial Buildings Demonstration: Commercial buildings are constructed at a ra pid rate in China, contributing to total electricity use and to peak utility dem and. Energy-efficient technologies exist and are being introduced in many countr ies. Special areas where attention is needed include cooling/hearting, lighting, ventilation, appliances and equipment, and the integration of these into the to tal energy system of a building. Competitive procurement as discussed above shou ld be considered as one approach also here.

　　Fuel Bell Buses Demonstration: Transportation is a sector facing rapid expansion , and given its early stage of development an excellent candidate for a technolo gical leapfrog. Recent technology breakthroughs in fuel cell technology has open ed the door to new and attractive options in transportation. Fuel cell techsnolo gy will become widely available to all modes of ground transportation, including trucks and trains.

　　Urban bus transportation particularly suitable for demonstration project, becaus e refuelling is easy, the of demonstration is low, and the visibility is high. A n individual fuel cell bus Fleet in Beijing and elsewhere can gradually be repla ced and expanded by fuel cell buses.

　　The fuel cell option offers near zero vehicle emissions (even with coal-derived fuels) and therefore has no need of pollution control technology. It offers inde pendence from oil, and can be economically viable using fuels derived from coal, biomass and natural gas. A preliminary feasibility study has been conducted by the WG. A demonstration project of a fleet of fuel cell buses can be pursued if the funding can be arranged. The capital required for a test fleet of 400 units is about 35 million dollars for the demonstration elements.

　　3.5 Summary of WG Recommendations on Energy Demand:

　　1) Energy prices should be market based.

　　2) External costs of energy production and use should be recovered through taxes and/or controlled by regulatory measures.

　　3) Performance standards should be developed and applied for energy end-use effi ciency.

　　4) Energy efficiency auditing be institutionalized as part of a broader environm ental auditing in the energy sector.

　　5) Integrated Resource Planning (IRP), and a reshaping of the regulatory structu re, to provide incentives for IRP and demand side managements (DSM), are both re commended.

　　6) Information, deucation, and training in efficient use of energy should be str engthened.

　　7) Energy managers should be required by law in all industries and entities usin g large amounts of energy.

　　8) Procurement competitions should be organized, with the cooperative perticipat ion of the government and the private sector, to bring new, energy-efficient tec hnology into the market, specifically in the iron and steel industry, in the des ign and construction of commercial and residential buildings, and in the transpo rtation industry.

　　4. Energy Supply

　　On 2nd March, 1994, the State Planning Commission, the State Science and Technol ogy Commission, and the State Environmental Technology Commission published a li st of priority areas and technologies for government support. In the energy and environmental area, nuclear power, oil extraction and coal industries were ident ified. The WG suggests that, in addition, natural gas(including liquefied natura l gas-LNG, for Combined Cycle power generation, in suitable coastal areas), hydr opower, cogeneration (in oil refineries, sugar cane industries and district heat ing), wind energy (small to medium sized wind farms), and long distance HVDC tra nsmission technoloy should also be given comparable priority.

　　China's vast coal resources are mainly located in the north, and economic growth is largely elsewhere, in coastal areas and the south. Transportation bottleneck s are serious, underlining the attraction of finding new ways to transport coal. Use of coal-water mixtures (CWM), moved by pipeline and coastal tanker, is an i nnovative example. Another way to reduce coal transport is HVDC electricity tran smission from mine-mouth power plants. Carrying less non-combustibles, by deferr ing the use of high ash coals, will also reduce the transprot burden.

　　The support mix is likely to change in response to the problems caused by increa sed coal utilization. Oil reserves are comparatively small, and China is now adj usting to life as a net oil importer. Natural gas reserves are presently limited , but with prospects for large increases, especially of natural gas is allowed t o compete on a market basis with coal.

　　Renewable sources o energy already provide a significant frac-tion of total ener gy supply ,and there are prospects f increased con-tributions .To realize this p otential ,biomass use must be modernizzed ,and new technologies for using wind a nd solar energy need to be mo-bilized ,The use of hydropower hould also be expan ded ,In every case ,activities should be integrated ,in harmony with envir onmen tal and socio-economi conditions .,Again ,every activity should be founded in th e consis tent logic of least -cost solutions .

　　Acidification of the atmosphere ,rivers and lakes is now a reality requiring imm ediate countermeasures ,as an increasing toll is being taken in terms of quantif iable loss to GNP,.Southern China is more af-fected .becauuse of sensitive soil s ,and by the use there of the more suul-phur -bearing coals ,the cleaner northe rn coals being largely out of reach for transport reasons.The technologies neede d to commbat acid rain are well proven ,and are readily available.

　　4.1Cleaner and More Effcient use of Coal

　　Coal now contributead76%of commercial energy.30%is used for power generation ,wh ich is a very low ,share in comparison with coal's share in other major coal-usi ng countries.China ,is and will remain in the long term,a coal-dominated economm y.

　　The overall efficiency ,of coal use stems from the existence of a large legacy o f what are ,by modern standards,highly inefficient indus-trial boilers.The coal- fired electricity supply industry,also,has great scop for an efficiency upgrade ,to bring it to the internaional standard of 320grams coal/KWproduced.

　　Measures to achieve the above include selective rettrofittimg of simple ,proven equipment to a larger number of substandard plants (e.g.there are over 400,000 c oal-fired boilers in this category) that cannot, for the time being, be phased o ut because of the intense demand, in the current economic climate, for the elect rical and heat energy they produce. In larger plants, new log-NOx burners, conve ntional pulverized coal burning and desulpurization technology can bring immedia te benefits of better fuel economy and cleaner air quality.

　　Attention should be focussed on the 10-20,000 new boilers that are taken into op eration each year. Boiler manufacturers should combine forces to set higher effi ciency standards for new equipment.

　　In the longer term, oxygen-blown coal gasification offers important opportunitie s:(i) integrated coal gasification/combined cycle (IGCC)power generation; (ii)te chnology to make methanol and/or hydrogen from coal for transport applications ( these will probably be the leading candidate energy carriers for fuel cell vehic les); (iii) the provision of synthesis gas for direct gasoline and/or diesel man ufacture, and a wide variety of industrial chemicals.

　　Direct coal liquefaction seems to have limited economic potemtial and there are environmental impacts yet to be resolved. Further development of magentohydrodyn amics (MHD), seems to have been preempted by recent advances in gas turbine/comb ined cycle technologies, that now offer better performance at lower cost than ap pear attainable by MHD. Fluidized bde combustion technologies, now entering the market in some industrialized countries do not show the long term strategic adva ntages of oxygen-blown gasification, and is potentially problematic as regards o zone depletion and global warming, because of N2O emissions.

　　4.2 Oil

　　Oil now caters for 19% of commercial energy. Production growth is curtailed by g eological realties. The most rewarding areas for exploring are likely to be the proven, oil producing basins. In these areas, ever improving exploration technol ogies will reward re-exploration more or less indefinitely, albeit with individu al discoveries of decreasing size. The expanding production infrastructure will permit the commercialization of large numbers of small fields that are usually p resent.

　　Less explores basins exist, such as the intriguing Tarim Basin, in which there a re prospects for large discoveries. However, the hostile nature of this terrain and its huge distance from the market make this at best a medium term benefit, a nd one requiring major inputs of capital and other resources.

　　A strategic question presents itself with regard to the Tarim Basin. Given that petroleum reserves of China will always be low, on a per capita basis, self-suff iciency cannot be a realistic national goal, even with Tarim production.

　　Tarim production will always be costly, both in capital and operating terms, and there could be merit in regarding such high cost naional assets as a potential national reserve, to be prudently kept to offset external dependance on oil impo rts in any future oil emergency. While enormous stocks of competitively-priced i nternational oil are readily available, these should be the chief source of fill ing the gap between low-cost domestic oil production and demand. China should no t hesitate to import oil and other energy carriers, to the extent that these off er least-cost solutions.

　　4.3 Natural Gas

　　Natural gas (NG, otherwise known as methane) now furnishes 2% of commercial ener gy. It has not played a role anywhere near its geological potential so far in Ch ina. On any international comparison, there is scope for a large increase in the share it can command. Increased exploration should therefore be a priority, bot h because there is much still to find, and the fuel is particularly attractive i n its low environmental impact.

　　Natural gas prices are very low, in comparison with world market prices. Price r elaxation would allow a gas market to develop with competitive pricing, and this will stimulate exploration for new reserves. Even with much higher natural gas prices, the fuel will still compete successfully with coal in power generation, when coal plants are designed to neet tough environmental regulations.

　　Natural gas is an excellent fuel for power generation. There are distinctive adv antages inherent in gas turbines and combined cycle technology, which is a clean highly efficient process at low unit capita cost. In the longer term, gas turbi nes will be commonly used in coal IGCC plants, and in biomass integrated gasific ation/gas turbine facilities. China can establish a know-how and infrastructure base needed for such later applications by first introducing gas turbines and co mbined cycles with natural gas. Well-heated power plants can help in revenue-gen eration to assist in developing a natural gas infrastructure (transporting elect ricity is cheap reltive to the cost of gas transport by pipeline).

　　In addition to natural gas, liquid petroleum gas (LPG, sometimes known as refine ry gas), is clean and flexible fuel for domestic use in small homes, and on larg er scale for large apartment complexes, and light industry. Expansion of its use can be immediate, there being abundant supplies from neighboring countries (e.g . the Philippines), and some domestic sources.

　　Hand in hand with the development of natural gas resources, imported liquefied n atural gas (LNG) provides clean fuel for power generation and the possibility of piped gas fuel for thermal use both for residential and industrial use in coast al provinces and cities. There is a lead time required, given the need for upstr eam investments and construction of LNG storage facilities.

　　Natural gas imports, chiefly overland, from the vast gasfields of Siberia are of great long term interest to China, and would harmonize with joint goals of econ omic development protection.

　　4.4 Hydropower

　　Hydropower contributes 5% of commercial energy, and 17% of electricity. The tota l hydropower generation is 130 TWh per year. The resources are bout 2,000 TWh pe r year, most of which is located in the South-West of China. Development of smal l-scale hydropower should be envouraged together with carefully integrated large r-scale hydropower installations. Because of the geographical location, long ran ge HVDC transmission lines have to be built. This is established technology, whi ch may also be used in bringing energy from distant coal reserves to demand cent ers.

　　4.5 Biomass for energy

　　Biomass sources include rural and urban waste, agricultural and forestry waste, and biomass plantyations dedicated for energy. Biomass plays an important role, especially in the rural areas. The efficiency of its use is typically low, altho ugh improved cookin stoves have improvecd the situation significantly. Flurther improvements using modern biomass coversion technologies producing electricity i n the near term and liquid nd gseous fuels in the longer term would enhance the role of biomass. Here, we will only discuss two areas that the WG considers to b e particularly important, namely biogas and the use of sugar cane by-products fo r cogeneration of heat and electricity.

　　4.5.1 Biogas

　　Biogas is a valuable fuel that can be generated at little cost in different sect ors of the community. Particularly important opportunities exist the following:

　　· the rural / farm sector;

　　· the treatment of industrial wastes (such as distillery wastes);

　　· the treatment of municipal wastes;

　　· landfills.

　　It is estimated that the national biogas resource coulcd provide a significant c ontribution to China's energy needs, without the disadvntage of long range trans portation since the biogas potential is already dispersed throughout the communi ty.

　　It is noteworthy that biogas in the rural areas provides not only fuel but also good sewage treatment (by the biodestruction of pathogens by anaerobic-cum-aerob ic fermentatioon), ecologically sound agriculture (derived from fertilizer outpu t of biogas plants), and generation of electrictiy (based on biogas-driven gener ator sets).

　　In order to revitalize investment and penetration in the rural sector, attention should now be given to: location-specific solutions (paying heed to the variati ons in the north and south of China); technological advances in the design and m aterials of biogas plants; local participation; the software (policies, manageme nt, economics, financing, and training); widening the feedstock to all agricultu ral residues; the pricing of alternative fuels and of alternative products (such as fertilizer); and information campaigns at the community level.

　　It is also important that the cocal-craft approach to the dissemination of bioga s technology should now give way to a more industrial approach in which both lar ger scale schemes are planned and implemented and quality is enhanced.

　　In future, biogas must not be seen as separate from biomass-based energy. For in stance, the same engines-cum-generator sets that can be run on biogas can also b e run with gas obtained by gasifying woody biomass.

　　4.5.2 Exploiting the Sugar Cane Cogeneration Potential

　　Modern technology could open up the large potential for biomass fired electricit y generation. This can supply low cost electricity for supporting rural industri aliation and income generation in areas where cvoal is not easily available. The key process will be biomass integrated gasification coupled with gas turbine po wer generation (BIG / GT).

　　The logical place to start a biomass power development strategy is with cogenera tion in the sugar cane industry. The resource is available in the form of biomas s residues that are either not presently used, or used very inefficiently. Chine se manufacturers can supply high-pressure steam turbine technology for cogenerat ion in the initioal phase. In the next phase, integrated biomass gasification, w ith gas turbine power genertion, should be developed. This technology is being t ested in a demonstration project in Brazil, supported by the Global Environment Facility (GEF).

　　A preliminary assessment shows that the potential for cane power is large and th at the local conditions for overcoming barriers and exploiting the potential are not obviously detrimental. The WG recommends that (i) an assessment be carried out, on a county by county basis, to determine the cogeneration potential export able to the utilitty grid with currently available technology for both improved steam utilization and power generation, (ii) an assessment be made of the altern ative options for producing power in the off-season, (tops and leaves of the sug ar cane plant, plantation biomass, other), including an assessment of land avail ability for growing additional biomass, if needed, (iii) a detailed economic ana lysis be carried out of the costs of cogeneration during the milling season and during the off-season, as well as the value of this electricity to the utility, and (iv) an assessment should be made of the institutional barriers to cane powe r gerneration and of alternative options for overcoming them. Esecially the rule s regulating small-scale generators sale of electricity to the grid are improtan t.

　　These assessments should be carried out by teams organized like our Working Grou p. with both Chinese and international members who are experts in the relevant s ugar cane / power generating technologies, and in the financial and institutiona l issues that must be dealt with. The international members of these teams shoul d include representation from those developing countries with the most experienc e in this area.

　　The technologies for sugar cane cogeneration and BIG / GT should now be demonstr ated.

　　4.6 Wind electricity

　　China has vast wind resources, both close to the demand centers in the south-eas t, and in distant areas. Modern wind technology (500 kW units) supplies wind ele ctricity at costs comparable to conventiona. p[ower sources. Steps should be tak en to demonstrate and introduce modern wind energy technology.

　　In the longer term, the large-scale exploitation of distant wind resources is be coming of interest, coupling wind energy to hydropower or using compressed air e nergy storage to baseload HVDC transmission.

　　Detailed wind maps should be developed to facilitate an evaluation for exploitin g near and remote wind energy cost-effectively.

　　4.7 Photovoltaics

　　Photovoltaic (PV)) power is presently much too expensive for grid-connected apli catins. Actiions are needed to reduce costs. The present strategy in other parts of the world is to exploti nicht markets, such as stand-alone systems for illum ination and water pumping. This contributes to volume market build-up and learni ng curve cost reductions.

　　At present, PV applications in rural areas for lighting and water pumping are im portant niche markets with a high development profile. The financing arrangement s, not the cost per se, constitute a major barrier at present. Demonstration par ks in major cities for PV and other renewable energy technologies woulcd help br idging the information gap and reduce transaction costs.

　　It is also attractive to consider the investment needed for a faster market expa nsion, and compare it to the benefits obtained through a much earlier cost reduc tion of PV power than could otherwise be expected. China would benefit from work ing together with the international community to expand PV markets.

　　4.8 Solar energy

　　Active and passive solar heating and cooling should be further encouraged.

　　4.9 Nuclear energy

　　The prospects for nuclear power in China are still uncertain. It is presently to o expensive per kWh, as compared to other energy supplyalternatives. Successful develpoment of nuclear energy will require cost reductions. and a well coordinat ed programme to deal with safety and waste issues.

　　The cost of nuclear energy in China in the future will to some extent depend on the future of nuclear energy worldwide. There is uncertainty with respect to sca le and choice of nuclear technology, safety, waste, and cost issues. In the year s ahead these issues should be clarified as ongoing projects move ahead. In the meantime, there are risks in going ahead with major programmes.

　　Successful nuclear energy programmes in the world are large scale, e.g. the Fren ch programme, and nuclear energy requires an infrastructure of regulation and co ntrol, that is difficult to put in place effectively on a small scale. In additi on, copital costs are high.

　　The WG observes that there is presently no convincing rationale in pursuing more speculative nuclear ideas, such as plutonium recycling and fusion, as there are large reserves of low-cost uranium, available, and plutonium recycling is expen sive and brings no advantage from the point of view of nuclear waste management.

　　4.10 Ebnegy conversion and transmission

　　The conversion of primary energy resources to higher quality energy carriers off er oportunities for higher overall energy efficiemcies and less costly transport ation of energy. The latter is particul;arly im,portant in China, as coal and hy dro reserves by and large are located far from demand centers, as are future pow er generation options as wind and natural gas.

　　With respect to coal, there exist three main options: (i) pulverization and mixi ng with water to a coal-water-mixture (CWM) that can be pumped in pipelines and burned with higher efficiency. CWM have been transported both in pipelines and b y tanker from Shandong to Japan. Considering China's shape, piping CWM to the co ast and then distributing he fuel southward by sea to coastal provinces appears to be an interesting idea warranting further study; (ii) electricity generation at mine-mouth and HVDC transmission; (iii) gasification followed by the producti on of liquid or gaseous fuels. This route is spearheaded by highly efficient com bined weight by the prospect of clean liquid fuels, when cost barriers are overc come.

　　4.11 Supply-side demonstration projects

　　In order to bring new, efficient supply side technologies to the China market, t he WG recommends the estabilshment of three demonstration projects for key techn ologies:

　　Sugar Cane Cogeneration, as discussed in section 4.5.2.

　　Biomass for power. Stand-alone biomass gasification / gas turbine power generati on, based on all kinds of biomass resources, including dedicated energy plantati ins.

　　Coal Gasification. Gasification of coal is a long-term strategic technonloy, as disussed in section 4.1.

　　4.12 Summarty of WG Recommendations on Energy Supply:

　　1) Energy supply projects should only be pursued after rigorous analysis of soci etal and environmental impact. Least-cost solutions, where cost evaluations incl ude social and environmental aspects, should be sought.

　　2) Strong efforts should be made by the coal industry to achieve "best practice" international standards for cleaner and more efficient use of coal. Guideline s tandards should be agreed with in dustry and set by central authorities regardin g permissible effluent levels and energy efficiency targets.

　　3) Mandatory requirement for efficiency and environmental audit should be introd uced for all enterprises above a threshold level of energy consumption, to be de fined, in which performance against the above guidelines standards is examined.

　　4) In the coal-burning power generation industry pulverized coal technology (PC) should now be pursued as the prefferred option, pending its replacement in time , by integrated coal gasification combined cycle technology (IGCC), which has th e best identified potential to achieve desired efficiency and cleanliness goals.

　　5) Boiler manufacturers for the industrial market should adopt higher efficiency standards.

　　6) While retrofit has an important role to play in low-cost cleanup technology t o reduce air pollution and acid rain, it will not deliver needed efficiency gain s at acceptable cost. For the latter, China must look to inherently more efficie nt technology in new investments.

　　7) Oil exploration and development in the proven oil producing oil basis will gi ve the fastest and lowest cost return in new reserves.

　　8) The price barriers to the take off of natural gas should be removed. A growin g national gas grid should be aimed at as a long term goal. Imports of Siberian gas coulc play a major role.

　　9) LPG should be encouraged to play a larger role in the domestic urban resident ial and light industry market.

　　10) The main renewable energy sources should play a growing role for in China - hydropower, biomass (including biogas), wind power, and photovoltaics.

　　11) The use of biomass must be successively modernized, for example with advance d technologies such as BIG / GT.

　　12) A proposal for a nuclear programme should be carefully analysed, including c omparisions with step-by-step alternatives such as electricity from natural gas, including LNG imports, and biomass, on the grounds of costs, foreign-exchange r equirements, and investment requirements.

　　13) Demonstration projects are especially important for biomass power generation , and coal gasification.

　　5. Next Steps for the Working Group

　　A detailed demand and supply scenario analysis for the Chinese energy ststem by 2030 was considered to be highly desirable in order to be able to illustrate the potential imact of the various options studied by the WG, Scenario analysis wil l be attempted by the WG, building on the outcome from the IRP workshop organize d for May 30-June 8, 1994.

　　It was greed to organize a workshop on biogas technology and applications. The w orkshop is scheduled to take place in Bweijing, November 28-29, 1994.

　　A workshop will also be organized on sugar-cane cogeneration in south China, whi ch is the natural starting point for biomass power generation, because the resou rce exists, and Chinese technology for cogeneration can be embployed.

　　The WG work on the iron and steel industry will be expanded to other energy-inte nsive industries, including paper and pulp, cement, and the chemical industry.

　　The WG considers the transportation sector central to the CCICED objectives. Chi na is going to build an extensive infrastructure for transportation. The WG plan s to study the sector in an integrated approach, addressing transportation needs , modes of transportation energy carriers and engines, and environmental impacts .

　　The WG will develop pre-feasibility proposals for the three demand-side demonstr ation proects and the three supply-side demonstrations projects. This will inclu de a preliminary investigation of the financiability of these projects.

　　The WG has organzied two workshops on Integrated Resource Planning, and will att empt to create a network in China for the IRP methodology.

　　Chinese Members:

　　Professor YANG Jike (Co-Chairman)

　　Professor MAO Yushi

　　Professor QIN Tongluo

　　Mr. XIE Shaoxiong

　　Professor ZHOU Fengqi

　　Professor ZUO Hu

　　International Members:

　　Professor Thomas B.JOHANSSON (Co-Chairman)

　　Dr. Timoth BRENNAND

　　Professor Ugo FARINELLI

　　Professor Amulya REDDY

　　Dr. Robert WILLIAMS

　　Mr. Keiichi YOKOBORI

　　Mrs. Martha Duenas-Johansson (Assistant)

　　List of supporting documents prepared as part of the WG activities:

　　Energy Consumtion and its Effieiency of Irom and Steel Industry in

　　China, by Professor Yang Jike and Mr.Keiichi Yokobori

　　Energy Conservation in China, by Mr. Xie Shaoxiong and Professor

　　Ugo Farinelli

　　Renewable Sources of Energy in China-Potential and Policies,by Mr.

　　Xie and Professor Thomas B. Johansson

　　Development and Utilization of Natural Gas in China, by Professor Qin

　　Tongluo and Dr. Tim Brennand

　　The nuclear Energy Program of China: Perspectives and Elements of

　　International Relevance, by Professor Ugo FARINELLI ANd Professor

　　Zuo Hu

　　Cleaner Coal Technology, by Professor Zhou Fengqi and Dr. Tim

　　Brennand

　　A Fuel Cell Bus Demonstration Project for Beijing, by Dr. Robert

　　Williams and Professor Yang Jike

　　Integrated Resource Planing, by Professor Zhou Fengqi and Professor

　　Amulya Reddy

　　Intergated Resource lanning, Report on the May 30 June 8,1994

　　CCICED-IEI-ITEESA Workshop, by Professor Qiu Daxiong and Professor Amulya Reddy

　　Integrated Resource Planing, Report on the Workshop in Beijing,

　　January 21-22, 1994, by Professor Zhou Fengqi and Professor Amulya Reddy

　　Acknowledgements

　　The WG would like to acknowledge financial and in kind support from CCICED, ENEA , the International Energy Initiative, the Rockefeller Foundation, and Sarec.