Vol. 1 | Issue 1 July 2011 AN EXPLANATORY NOTE ON ISSUES RELEVANT TO PUBLIC-PRIVATE PARTNERSHIPS The Expansion of China’s Generation Capacity By Yijia Nan and Mark Moseley* I. Introduction Power is a crucial factor in economic growth and This note is intended to identify the quality of life, but building an adequate level of key entities involved in the dramatic recent generation capacity has proven difficult for many expansion of China’s generation capacity, and developing countries. A number of jurisdictions the legal relationships between those entities, have suffered from years of energy supply short- including the legislation and contractual agree- ages, and this inadequacy continues to hinder ments underpinning those legal relationships. The their development. note starts with a brief description of the context In the recent past, China’s generation capac- in which this growth occurred, and closes with ity grew at an extraordinary rate, and this has Section V, which comments on particular aspects drawn worldwide attention. For example, in 2009, of the Chinese experience (including the respec- China increased its generation capacity by almost tive roles of the private and public sectors), and 90 GW—more than the entire current total gen- Section VI, which offers some ‘lessons learned’ eration capacity of the United Kingdom. from the development of China’s power sector. II. Background A. UNPRECEDENTED GROWTH IN (approximately the current capacity of Spain) to GENERATION CAPACITY AND over 900 GW (almost the current total capacity of OUTPUT the European Union). Much of this growth took place in the last China’s power generation capacity has soared ten years. From 2000 to 2009, China’s installed in the last two decades, from 1989, when the capacity increased at an average annual growth total national installed capacity was 100 GW rate of 11.84%, with the addition of 550 GW of new capacity. At the same time, total electricity output reached 36812 TWh by the end of 2009. *Ms. Nan prepared this note while she was a legal intern for the The growth in output over the last twenty years is PPPIRC. The note was reviewed and edited by Mark Moseley, the PPPIRC team leader. set out in Table 1. PPP IN INFRASTRUCTURE RESOURCE CENTER FOR CONTRACTS, LAWS AND REGULATION (PPPIRC) www.worldbank.org/ppp www.worldbank.org/ppp 2 PPP INSIGHTS Table 1: National Total of Electricity Output Year 1990 1995 2000 2005 2007 2009 Total output (TWh) 6212 10077 13556 25003 32816 36812 Source: China Statistical Yearbook 2009, Published by China Statistics Press Table 2: Gross Domestic Product of China Year 1978 1988 1998 2007 2008 2009 GDP (RMB ¥ 365 1504 8440 25731 30067 33535 billions) Source: China Statistical Yearbook 2009, Published by China Statistics Press B. ELECTRICITY TRANSMISSION AND showed a quick recovery from both the Asian ACCESS financial crisis of 1998 and the global financial crisis of 2008. (Table 2) China is now operating the world’s largest This increase in economic output has spurred electricity transmission grid. By the end of 2009, a corresponding increase in electricity consump- China had a total of 399,400 km of high voltage tion. In 2004–5, the industrial sectors, especially transmission lines (220kV and above), with a in the east coastal provinces, suffered from signifi- total transforming capacity up to 1,762 GVA. The cant electricity shortages. Even with the major progress in rural electrification has been equally capacity additions since then, shortfalls continue remarkable, with 99.85% of rural families now to occur, particularly during the summer months. having access to electricity. In short, the growth of capacity, extraordinary as it has been, is still struggling to meet the continu- ing surge of demand. C. THE SURGING DEMAND IN In 2009, the total consumption of electricity ELECTRICITY reached 36595 TWh, an increase of 6.44% com- pared to 2008. The bulk of the demand came from China’s economy has maintained a remarkable primary and secondary industries, as illustrated in growth rate over last three decades and also Figure 1. Figure 1: Electricity TWh Wholesale and 35000 Consumption by Retail Trades, Hotels and 30000 Sector Catering Services 25000 Other Sectors 20000 Household 15000 Consumption 10000 5000 0 1990 1995 2000 2005 2007 Source: China Statistical Yearbook 2009, Published by China Statistics Press www.worldbank.org/ppp THE EXPANSION OF CHINA’s GENERATION CAPACITY 3 III. Major Stakeholders in China’s Power Industry A. A BRIEF HISTORICAL REVIEW Commission) as planner and policy-maker; the SERC (State Electricity Regulatory Commission) as The first Ministry of Electric Power Industry was the main regulator; and the CEC (China Electricity created in 1955, which was entrusted with the Council) as a non-governmental association bridg- dual responsibility of both the regulation and the ing the state-owned enterprises and governmental production of electricity. As part of a program of units. general economic reform, the government pro- The institutional reforms are illustrated in posed to separate the production function from Figure 2. the regulatory function. The activity of produc- tion was assigned to the State Power Corporation (SPC), founded in 1997 as a state-owned enter- B. REGULATORY INSTITUTIONS prise with an independent legal personality. However, besides operating large-scale power The main regulators of the power industry today plants, the SPC still held some quasi-regulatory can be divided into three tiers: the central level responsibilities, such as planning, construction, (including NDRC, SERC and other departments); monitoring and management of the national the local level; and the industrial level. power network; and operation, management and modulation of inter-regional power grids. In Central Level 2002, a further structural reform within the power 1. NDRC, a key organ of economic and social industry was approved by the State Council, administration, responsible for : with a key strategy of separating power genera- i. Planning: formulating and implementing tion, transmission and distribution. Through the strategies and plans of national eco- Generation Assets Reorganization Scheme, the nomic development, including annual assets and functions of the SPC were divided plans, medium and long-term develop- amongst two grid companies and five generation ment plans; the layout of key construc- companies. At the same time, the regulatory sec- tion projects and productivity; and tor of the Ministry of Electric Power was reas- structural and institutional reforms; and signed to several governmental units, including ii. Key Project management: approving, the NDRC (National Development and Reform authorizing, and inspecting key projects. Figure 2: Structural Reform of the Power China Southern Power Grid Sector Grid Co. State Grid Corporation of China China Datang State Power Corporation Corporation China Guodian China Electricity Corporation Council Ministry of Electric Power China Huadian National Generation Co. Development Group and Reform Commission China Huaneng State Electricity Group Regulatory Commission China Power Investment Corporation www.worldbank.org/ppp 4 PPP INSIGHTS There is an Energy Bureau established within is responsible for regulating foreign the NDRC, with a special focus on drawing up investment, including coordinating the plans, policies and strategies for the energy approval and administration of projects sector. involving foreign capital. iii. The Ministry of Finance (MOF), which 2. SERC, which is empowered by the State is responsible for formulating economic Council, performs the principal administra- and public finance policies plus revenue tive and regulatory functions in the power and tax policies; the administration sector, including: of public finance; and the manage- i. Planning: participating in the formula- ment of the expenditures of the central tion of development plans for the power government sector, including the development of iv. The Ministry of Environmental electricity markets; Protection (MEP), which is responsible ii. Market supervision: ensuring orderly for environmental policies; and the man- and fair competition in the market, and agement of key environmental issues, the regulation of transmission, distribu- such as emission reduction and pollution tion and non-competitive generation control. businesses; v. The Ministry of Land Resources iii. Administration: Development and (MLR), which is responsible for the enforcement of safety and technical stan- planning, administration, protection and dards; and the issuance and monitoring utilization of natural resources, includ- of business licenses; and ing land, mineral and marine resources; iv. Tariff Regulation: Proposing tariff and for regulating the assignment, lease, adjustments to the government pricing evaluation, transfer and acquisition of authority (the Development and Reform government lands. Commission) on the basis of market vi. The Ministry of Water Resources conditions1; and regulation of fees and (MWR), which is responsible for water charges for ancillary services. administration, including the formula- tion of development strategies and 3. Other Relevant Government Departments: policies for the water sector; integrated i. The State-Owned Assets Supervision water resources management; water and Administration Commission resource protection; water conversation, (SASAC), a ministry-level body which flood control and drought relief; and for handles the responsibilities of the state providing guidance