China - Investment strategies for China's coal and electricity delivery system

Rvrptnrl Na. 1 21117-( HA China Investment Strategies for China's Coal CInd Electricity Delivery System Match i1, 1995 f r. iisl um wt ( )I ( r. itionis I )ivisin n ( 1ii.ni .I1f(I Mtv)fig(li.i I )D paln.1llf II I I .s1 i\si. l .ir(i i'.u iji R'gr(l di Cl OIli ( I (mioi ri Rt-tsii Ii ( enter SF I'L1. inning (01 11nhI%s 1(31n I p Re;ubI(l il (o China Document of the World Bank  Currency Equivalents Currency Unit = Yuan (Y) = 100 fen Exchange Rate 1980 1990 1992 1993 1994 US$1 = Y 1.5 US5i = Y 4.7 US$1 = Y 5.5 US$1 = Y 5.8 US$1 = Y 8.7 Fiscal Year January - December Weights and Measures dwt = deadweight ton kV = kilovolt g gram kw = kilowatt km = kilometer MW = megawatt GW gigawatt (101 kw) (1 (r kw) std ton = standard ton kwh = kilowatt hour (5,500 kcal per kg) kcal = kilocalorie tkm = ton-kilometer kg = kilogram TWh = terawatt-hour (I 9 kwh) Abbreviations AC - Alternating Current CIECC - China International Engineering Consulting Corporation COSCO - China Ocean Shipping Company CTS - Coal Transport Study DC - direct current El - Economic Institute ERC - Economic Research Center ER[ - Energy Research Institute FYP - five-year plan GDP - gross domesti; product GIS - Geographic Information System GNP - gross national product ICIT - Institute for Comprehensive Transportation MOC - Ministry of Communications MOCL - Ministry of Coal MOEP - Ministry of Electric Power MOR - Ministry of Railways NIC - National Investment Company PCBC - People's Construction Bank of China SDBC - State Development Bank of China SPC - State Planning Commission TSP - total suspended particulates UNDP - United Nations Development Programme Five-Year Plans 5FYP = 1976-80 6FYP = 1981-85 7FYP = 1986-90 8FYP = 1991-95 9FYP = 1996-2000 IOFYP = 2001-2005  i China Investment Strategies for China's Coal and Electricity Delivery System  iii China Investment Strategies for China's Coal and Electricity Delivery System TABLE OF CONTENTS Page No. CONTRIBUTIONS ...................................... ix EXECUTIVE SUMMARY .................................. xi Background ...................................... xi The Analysis Method ................................ xiii Main Conclusions and Recommendatiors by Sector .... ........ xiv Region-by-Region Summanry ........................... xix Past and Future Policy lmplications .... .................. xx 1. DEMAND AND SHORTAGES OF COAL AND ELECTRICy ... ... I Progress in Transport and Energy Development .............. I Coal and Electricity Shortages .......................... I Intensity of Energy and Transport Use .................... 2 Investment in Transport and Energy ...................... 2 Trends in Coal and Electricity Demand .................... 3 Coal and Electricity Demand Assumptions for this Study ... ..... 4 2. OVERVIEW OF THE COAL-ELECTrICITY SUPPLY CHAN: PROBLEMS AND OPPORTUNITES ..................... 7 Coal Production ................................... 7 Coal Benericiation .................................. 8 Coal Allocation and Pricing ............................ 8 Coal Transport .................................... 9 Coal Consumption and Conservation ...................... 11 Coal for Electricity ................................. 11 Environmental hnpact of Coal .......................... 13 3. PLANNING AND INVESTNENT FOR CHINA'S TRANSPORT AND ENERGY SECToRS ................................ 15 The Planing System ................................ 15 The Financing System ... ............................ 15 Problems in the Planning and Financing System .... .......... 16 The Changing Role of the State Planning Commission and its Analytical Needs .......................... 17 The CTS Network Optimization Model ............. ....... 18  iv Table of Contents 4. ANALYSIS OF INVEsTMENT STRATEGIES .................. 21 Overview .................2.... ....... .... 21 Prospects for Energy Shortages ......................... 22 Transporttion Sector Policy ImpUlations .................. 22 Nontransport Sector Policy Implications .................... 29 5. REGiONAL ANALYSIS ................................ 39 Northeast China ................................... 39 Central China ..................................... 39 Eastern China ..................................... 40 Southeastern Coastal China ............................ 40 Southwest Energy Base ............................... 40 Northwest China ............................ 41 6. PAST ANm FuTuRE POLICY LMPLICATIONS ................ 43 Policy Recommendations and Impacts of this Study .... ........ 43 Implications for the World Bank ........................ 45 Policy Issues to Be Addressed in the Future ................. 46 The Role of Intersectoral Modeling in the Market Economy ... .... 47 Action Plan for FIuture Use of the Coal Transport Study ... ...... 48 NOTES. .............................................. 48 ANWEE I Organization of the Coal Transport Study 2 Figures on Transport and Energy Annex 2 Flgures 2.1 Total Commercial Energy Flow in China 2.2 Investment in Transportation Relative to GNP and Traffic 2.3 Investment Structure of the Energy Sector, by Type of Energy 2.4 Coal Consumotion and Production Trends 2.5 Raw Coal Production, by Type of Administration, 1965-89 2.6 Maior Interregional Coal Flows, 1989-90 2.7 'Investment Structure of the Transportation Sector, by Mode 2.8 Investment Structure of the Electricity Sector 3 Background on Transport and Energy: Assorted Tables 3.1 China: Freight Traffic by Mode 3.2 International Trends in Commercial Energy Intensity 3.3 Internatonal Comparison of Reliance on Coal 3.4 Ilternz tonal Comparison of Transport Investment as a Percentage of GNP 3.5 Coal Supply and Demand Balance Sheet 3.6 Comparison of Coal Reserves-Soviet Union, United States, and China 3.7 Coal Production by Type of Coal, 1987 and 1991 3.8 Sulfur Content of Chinese Coal Reserves 3.9 Coal Output and Reserves, by Region, 1989 3.10 Interregional Coal Flows: 1980 and 1990  Table of Contents v 3.11 Steam Coal Washing 3.12 Plan vs. Market Prices for Steam Coal, 1989 3.13 E-volution of Coal Prices on the Free Market, 198690 3.14 Increases in Plan Coal Prices 3.15 Coal Traffic by Railway and Waterway 3.16 Indicators of Railway Asset Utilization: A Comparison between China, the Soviet Union, the United States, India, and Brazil 3.17 Combined Rail-Water Routes from Shanxi to East China 3.18 Share of Electricity in Total and Industrial Final Net Consumption of Energy in Selected Countries 3.19 Estimated Annual Emissions from Coal Use, by Sector 3.20 Ambient Concentrations in Major Chinese and Foreign Cities 3.21 Ambient Air Quality Standards 4 Planning and Investment for Coal, Transport, and Electricity Annex 4 Figures 4.1 Administrative Control System for Energy and Transportation 4.2 Planning System for Energy and Transportation S The CIS Analysis System Annex S Table 6 Figures and Maps on the CTS Analysis System Annex 6 Figures 6. 1 Generalized Network Diagram of the Coal-Electricity Delivery System in the Optimization Model 6.2 The CTS Coal Transportation Network with Mine Nodes 6.3 The CTS Coal Transportation Network with Demand Nodes 6.4 The CTS Electricity Transmission Network 6.5 CTS Data Flow 7 Description of 1993 Scenario Assumptions Annex 7 Tables 7.1 Comparison of Potential Capacity Increases: CTS Model versus Experts' Estimates 8 CTS Base Case (9 Percent GNP Growth): Calibration and Selected Results Annex 8 Tables 8.1 Comparison of Case 93-2 Outputs with Base Case Targets 8.2 National Totals of Coal Production 8.3 Regional Subtotals of Coal Production 8.4 Regional Breakdown of Coal Washing 8.5 Regional Coal Balance 86 Coal Transportation Q-D Table, in 2000 8.7 Electricity Transmission O-D Table 8.8 Power Plant Capacity 8.9 Ash and Sulfur Content of Delivered Coal, by Province 9 Sumnmary of Results for All 1993 Scenarios 9.1 Sunuary Solution Results 9.2 Coal Production Sector Results 9.3 Electricity Production Sector Solution Results 9.4 Electricity Transmission Solution Results 9.5 Transportation Sector Solution Results 9.6 Enviromnment Sector 10 Figures and Maps on Results of the Analysis  vi Table of Contents Annex 10 Figures and Maps (Figures for Medium Demand are from Case 93-2; Figures for High Demand are from Case 93-9) 10.1 Coal Shortages, 2000, Medium Demand 10.2 Electricity Shortages, 2000, Medium Demand 10.3 Coal Shortages, 2000, High Demand 10.4 Electricity Shortages, 2000, High Demand 10.5 Rail Bottlenecks, 2000, Medium Demand 10.6 Rail Bottlenecks, 2000, Hign Demand 10.7 New Transport Projects Built 10.8 Port Bottlenecks, 2000, Medium Demand 10.9 Port Bottlenecks, 2000, High Demand 10.10 Rail Coal Flow Map, 2000, Medium Demand 10.11 Optimal Interregional Coal Flows, 2000, Medium Demand 10.12 Optimal Coal Allocation by Heat Content, from Coal Base in the Year 2000 (6 percent GNP growth, Case 92-1) 10.13 Steam Coal Washing by Province, 2000, Medium Demand 10.14 Electricity Flow Map, 2000, Medium Demand 10.15 Electricity Flow Map, 2000, High Demand 10.16 Sulfur in Delivered Coal by Province, 1995-2005, Medium Demand 10.17 Ash in Delivered Coal by Province, 1995-2005, Medium Demand 10.18 Multiobjective Tradeoff Curve for Cost and Pollution 11 Description of 1992 Scenario Assumptions 12 Summary of Results for All 1992 Scenarios Annex 12 Tables 12.1 Summary Solution Results 12.2 Coal Production Sector Results 12.3 Electricity Production Sector Solution Results 12.4 Electricity Transmission Solution Results 12.5 Environment Sector 13 Shortage Cost Data Assumptions Annex 13 Table 13.1 Market Price of Coal in 1989 14 Coal Sector Data Assumptions Annex 14 Table 14.1 Coal Production Costs in the CTS Model, by Region and Ownership 15 Transport Sector Data Assumptions Annex 15 Table 1U.1 Shipping Costs in the CTS Model 16 Electricity Sector Data Assumptions 17 Environment Sector Data Assumptions 18 Methodology for Estimating Benefits by Comparing Scenario Costs: Steam Coal Washing, Electricity Transmission, Shenmu-Huanghua Railway Completion 19 Chinese Evaluation of the CTS (December 1991) 20 List of Participants at CTS Report Meeting (October 1993) 21 Background on Edelman Award 22 CTS hnplementation Conference and Franz Edelman Award Ceremony (October 1994)  Table of Contents vii .IAP. China: Provincial Coal Production and Consumption in 1992 (IBRD 26594) China: Provincial Electricity Production and Consumption in 1993 (IBRD 26596) China: Railway Network (IBRD 26857) China: Power Network (IBRD 26595)  ix CONTRIBUTIONS This report is a joint effort of the The World Bank team members State Planning Commission's (SPC's) comprised Chan Juemin (RMC), Peter Cook Economic Research Center and the Bank's (CTS Training Director), Zhou Dadi (who study team following ten missions by Bank later joined the CTS Team), Terry Friesz, staff and foreign experts to Beijing and a Michael Kuby (CTS Technical Leader), nine-month training mission and two shorter Susan Neuman, Xianliang Wang, Thawat missions by the Chinese to Washington, Wetanatada (Task Manager), and Huikang D.C. (see Annex 1). It builds on the model Xu (RMC). development and testing in Phase I of the The report was written primarily by Coal Transport Study (1989-91), and Michael Kuby (CTS Technical Leader) and incorporates new material from Phase II Thawat Watanatada (Task Manager) and was (July-October 1993). Financing was received based on the results of the analysis. Other from the Japanese Policy and Human written contributions came from Zhou Dadi, Resources Development Fund and the Xie Zhijun, Cao Wei, and Sun Xufei. Also, United Nations Development Programme. Yves Albouy, Sadhan Chattopadhya, antd The Coal Transport Study (CTS) Katleen Stephenson of the World Bank team of the Economic Research Center contributed background materials on ERC) was organized into two groups: the electricity, coal production, and coal Modeling Group and the Policy Group. The utilization, respectively. Zafar Khan of the Modeling Group members included Shi World Bank made valuable suggestions Qingqi (Study Director), Sun Xufei relating to financing. A supplemental report (Modeling Leader, Phase I and II; Deputy describing the CaS Analysis System was Team Leader, Phase II), Zbang Chuntai written primarily by Zhang Chuntai and (Deputy Leader, Training Phase; Computing Michael Kuby, with zontributions from Leader, Phase 1), Zhou Dadi (Leader, Susan Neuman and Xie Zhijun. Rebecca Training Team), Cao Wei, and Xie Zhijun. Kary assisted with editing and formatting the Part-time members included Rong Qiang, report. Maps were made by Eric Khandagle, Wang Xuesheng, and Gao Shenhuai. The Denise Bergeron, Jodie Cabezas, Jose Policy Group consisted of Xu Zhen (Deputy Clavecillas, Jeff Lecksell, and Yung Koo of Director, ERC) and Liu Liru (Director, She Bank's Cartography Division, and by lCIl. Two special panels were set up to Barbara Trapido of Arizona State assist the MIodeling and Policy Groups. The University. Alice Moy and Tess Ortega were CaS Technical Panel consisted of Zhou invaluable dealing with administrative Fengqi (Director, ERI), Shi Qingqi, Zcu m&aen, and Bavani Krishnanrti helped to Yuan, Lin Fatang, and Yu Xiaodong (all of check and produce the final version of the El). The CTsS Consulting Panel was made report. up of Xu Zhen, Yang Zhenjia, Liang The Transport Operations Division Xiufeng, and Zhou Fengqi, and Liu Liru. Chief is Richard Scurfield, the Lead Other invaluable support was provided by Economist is Eliana Cardoso, and the Ga Ziyu and Gui Shiyong (Vice Chairmen Director is Nicholas Hope. Clell Harral was of SPC), Wei Liqun (General Secretary of instrumental in conceiving the study and the SPC), Huang Fanzhang (Vice Director getting the original financing. Over the last of ERC), Thou Cai Yu (lDirector, Economic several years, the study was supported by Institute), and Wu Youding (Mimistry of Bernard Montfort and Daud Ahmad as Railways, Chief Engineer, Railway Divisiorn Chiefs, Paul Stott as Acting Chief, Investment Study). Shahid Yusuf as Lead Economist, Shahid Javed Burki as Direrctr, and Zafer Ecevit as  x Contributions Acting Director. Pieter Bottelier, as Chief of cover report was reviewed in March 1994 the Resident Mission in China, provided by Eliana Cardoso (EA2DR), Zafer Ecevit support to the various missions. (EA2DR), Phil Anderson CTWUTD), Lou In China, the CTS has been Thompson (TWUTD), Richard Scurfield, reviewed in three conferences. The first, in Hernan Levy, and Toshiro Tsutsumi December 1991, was chaired by Guo (EA2TP), Jeffrey Hammer (EAPVP), Vinod Hongtao, Chairman, Central Advisory Thomas (EAPVP), Robert Taylor (EAIE), Commission, along with Sun Shangqing, Shigeru Kataoka (EA2IE), Richard Vice President, Development Research Newfarmer (EA2IE), Robert Burns Center, State Council, and Gui Shiyong, (SAZIN), and C. Hugh Bannister (Intelligent Vice Chairman, State Planning Commission, Energy Systems Pty. Ltd., Australia). among others (see Annex 19). A second Comments from several reviewers were conference was held in October 1993 to adapted for use within the report. introduce the latest results, and was chaired Training of Chinese team members by Wei Liqun, General Secretary of SPC, was coordinated by Peter Cook. Participants and attended by Xu Zhen, Huang Fanzhang, included David Bernstein, Enrique Ling Zoo, and Meng Guang, Deputy Fernandez, Terry Friesz, David Hirshfeld, Directors of Economic Research Center, Tu Jerome Kreuser, Michael Kuby, Susan Zuming, Director of Energy Department of Neuman, Karen Polenske, Samuel Ratick, SPC, and Lan Shiliang, Director of the Edgar Sibley, Howard Simkowitz, and Scott (Long-term) Planning Departnent of SPC, Sitzer (U.S. Department of Energy). among others (see Annex 20). A third conference in October 1994 included an Awards for the Coal Transport Study award ceremony for the Franz Edelman Prize Finalists and a discussion of In addition to the Robert McNamara implementation issues for the recommended Fellowship won by a CTS team member, the strategies. It was attended b' Gui Shiyong, study has been recognized in other ways. It former Vice Chairnan of the SPC and has been awarded a Finalist's Award as one Deputy President of the Administrative of the six finalists in the 23rd Annual Franz Institute of China, She Jianming, Vice Edelmnan Competition in Management Chairman of the SPC, Wu Jingru, Director Science Achievement by the College on the of the Electricity Bureau of the State Practice of Management Science of the Development Bank, and Li Qun. Director of Institute for Management Science. This is the Policy Bureau of the State Development the highest international honor for Bank, awong others (see Annex 22). management science projects that have been In the Bank, the CTS inception implemented and that have produced report was reviewed in November, 1989 by verifiable benefits for a client organization C1ell Harral and Yves Albouy, both (the SPC). The study also wDn the 1993 formerly with the China and Mongolia Applied Geography Citation Awaid given by Country Department, and Terry Friesz the Association of American Geographers. (consultant). The draft CTS Phase I Final Details about the Edelman competition and Report was reviewed in July 1991 by past winners are contained in Annex 21. Kathleen Stephenson (AS3IE), Fernando This is the first time a project by China has Montes-Negret (AS3CO), Renato Schulz been selected as a finalist. It is a (ASTIN), Hernan Levy (EA2TP), and confirmation to the Bank and the Chinese Gavan McDonell (University of New South about the efficacy and appropriateness of the Wales, Australia). The white cover report large-scale modeling effort they have was reviewed in April 1993 by Hernan Levy undertaken. It also symbolizes greater (EA2TP), Robert Taylor (EA2IE), Shigeru openness on the part of China. Renewed Kataoka (EA2IE), Shahid Yusuf (EAZTP), impetus for continuing and expanding the and Robert Burns (SA2IN). The yellow study may be one result of the recognition.  xi EXECUTIVE SUMMARY . "This report develops and and port bottlenecks. By rationalizing analyzes investment strategies and associated railway coal flows and by supplementing the policies for China's coal and electricity railway system with coal washing, long- delivery system, while also taking into distance electricity transmission, shipping, account the air pollution effects of the hydropower, coal imports, and energy different strategies. Financed primarily by conservation, the kind of debilitating energy the Japan Policy and Human Resources shortages experienced in the late 1980s can Development (PHRD) Fund, the Coal probably be avoided. However, if economic Transport Study (CTS) was a joint effort by growth continues in the double-digit range, the World Bank and the Economic Research severe shortages could result from Center (ERC-the policy research arm of insufficient long-distance energy-moving the State Planning Commission (SPC), capacity. Either way, the environmental China's long-term economic planning impact of the increased coal usage will be agency. This report is based mainly on extreme. The overall outlook has been Phase II of the CTS, conducted from July to improved by the Government's recent October 1993. actions to free most coal prices, raise ii. The study's original objective electricity prices and railway tariffs, focused on coal transport, but because of the decentralize many investment decisions, and interrelationships of investments in the coal, accelerate the construction of several transport, and electricity sectors, the important coal-hauling railways. However, objective gradually expanded to cover the to achieve the necessary volume and entire coal-electricity delivery system. The efficiency of energy deliveiy and utilization, study has produced two tangible fruits: an the Govermnent should continue to remove analysis system to assist the SPC with institutional barriers and subsidies, and decision-making for the coal-electricity develop and enforce market-based delivery system, and a set of policy analyses mechanisms for reducing air pollution. and recommendations proposed for the Chinese Government. Methodologically, the Background CTS developed a cost-minimizing, multisectoral, national-scale network model, iv. Shortages. China is the only similar to those used in western industrial country in the world to produce or consume countries, but well-grounded in China's real more than 1 billion tons of coal in a year, a production-transport-consumption situation milestone which they passed in 1990 and and the real options for its future expansion. which is expected to double by 2010. China The computer analysis is complemented by is also m.ore dependent on coal than any historical and policy analysis of: the causes other country, relying on it for 73 percent of of the problems; the Government and market commercial energy requirements. The forces acting on these sectors; and the policy upsurge of economiz activity since 1979 has changes needed to stimulate the put substantial pressure on China's energy recommended invesmnents. and transport systems. Since the mid-1980s, iii. The main conclusion of this China's economic growth has been study is that if economic growth during the periodically hampered by shortages of either rest of the 1990s continues in the forecast coal, electricity, or both, due to a shortage 8-9 percent range, delivery of enough coal of power-generating capacity and the and electricity should be possible to satisfy inability to transport enough coal from projected demands, despite prevalent rail where it is produced to where it is needed.  xil Executive Summary V. Currently, coal shortages in GNP. The slow growth of electricity most areas have abated and are now production during the 1980s reflects estimated at onlY 3 percent of demand. suppressed rather than slacking demand Howevor. there remains a shortfall of peak because China's power sector was being electricity of about 20 percent. Also, coal, planned to satisfy 6 percent growth. As which accounts for 42 percent of rail freight growth surpassed the 6 percent level, the tonnage, continues to saturate the capacities power sector was not able to rapidly of most of th. major coal-arrying railways. readjust. On the other hand, the moderation Bottleneck links on the railway network, of coal demand growth for nonelectricity where traffic in at least one direction reaches uses is thought to be real because there is 95 percent of capacity or more, leapt from less evidence of shortages. This phenomenon 7 percent of the network in 1985 to 37 is thought to be caused by increased coal percent in 1989. As a result, rationing is prices, structural change in the economy, used to control access to congested railway technical progress, the production of higher corridors. Underlying the railway congestion quality (and therefore higher value) goods are underinvestment in transportation with little additional energy consumption, infrastructure and fast-growing transport increased road transport, and the gradual demand. replacement of wasteful residential coal use vi. Demand. Coal transport by more efficient heating and cooking demand is derived from the need to satisfy methods. demands for anthracite, coking, and ix. Theofficial GNP growth target industrial steam coal, as well as steam coal for public infrastructure planning purposes for electricity. Coal flows are the product of was 6 percent until 1992 when the forecast the tradeoffs between coal origins, coal was raised to 8 to 9 percent growth, more in types, transport modes, and other sources of line with past growth. In this study, future electric power (and their respective prices). GNP growth was forecast at 9 percent, b'zt Coal and electricity demands have been low (7.5 percent) and high (10.5 percent) rsing with total and per capita gross growth rates were also tested. The following national product (GNP), thougb not as fast. table at the top of the next page summarizes From 1980 to 1990 the GNP grew at an the assumptions of the low, medium, and annual rate of around 9 percent, and has high energy demand forecasts used in this since increased to around 13 percent. Coal study. production grew by 5.3 percent during the X. Geography. Coal was once a 1980s, while electricity production grew by widely available resource in China, having 7.6 percent, both proportionately less than traditionally been mined in over half the the growth rate of GNP. counties in China. However, in the major vii. During the 1980s, coal prices industrial provinces of East, Northeast, and were partially decontrolled, and electricity Southeast China, economically recoverable prices raised; coal prices are now market- reserves are rapidly being depleted. The determined and consumer electricity prices eastern half of the country must rely now provide for fill recovery of investment increasingly on supplies from surplus- and interest. From 1980 to 1992, coal prices producing areas in the energy base of North increased by a total of 122 percent, and real and Northwest China, centered in Shanxi electricity prices by 75 percent. Real freight and its neighboring provinces: Henan, railway tariffs have been raised by 91 Shaanxi, Ningxia, and eastern Nei Mongol. percen since 1990 and now approximate In all, this region contains 80 percent of the long-run marginal costs. nation's economically recoverable coal viii. Chinese experts expect that the reserves. The great distances between the low elasticity of coal production relative to locations of supply and demand add to the GNP will continue, but that electricity already great pressure on the transport demand will return to keeping pace with system. As a result, at the peak of the  Executive Summary xiii Forecasted Demands for 2000 vs. Historical Data Forecast for 2000 1221 LQw Medium Hih Electricity demard (billion kwh) 678 1,258 1,444 1,661 Nonelectricity coal consumption 786 885 906 926 (million tons of standard coal) Approx. total coal production required 1,087 1,510 1,640 1,780 (million tons of standard coal-5,500 kcal per kg) 1988-89 shortages, market prices fbr coal in pollution benefits. Hence, in developing Shanghai were reportedly seven times higher long-term strategic plans, the Government than in Shanxi. Thus, the centerpiece of must evaluate these measures on an Chinas's strategy is to increase the already economic basis while taking into account large coal production and transport capacity timing and environmental factors. from Shanxi and the nearby provinces of Henan, Shaanxi, Ningxia, and Nei Mongol to the rest of the country. The Analysis Method xi. Opportunities in the Coal- Electricity Supply Chain. Although xii. To perform its coordinating additional railway capacity is one of the role in the overlapping transport, energy, most important ways to solve tansport and environmment sectors, the main analytical bottlenecks, other options can reduce the task facing the Chinese Government is to demand for coal transport, such as coal integrate the strategic guidance provided to washing, minemouth power plants, long- the different sectors. These three sectors distance transmission of electricity, and have not always been well coordinated and substitution of nuclear power and hydro- have suffered from underinvestment because power, especially from water-rich Southwest of (a) the rigid institutional decision-making China. These alternative investment framework; (b) the outdated methods and strategies can be considered the "demand tools used for policy analysis; and (c) the side" of the transport equation because they difficult transition to the new market-based reduce the number of tons that need to be economy. Government organizations and transported and/or the distance over which enterprises urgently need modern systematic the coal must be transported. For the energy tools suitable to China's real situation to equation, however, these strategies can be assist with policy analysis, decision-making, considered the supply side because they are and information supply. In Phiae I of the different ways of satisfying the same final CTS, completed in December, 1991, a energy demand. Most oI these options decision support system to assist the involve significant outlays of capital. Some Government in this multisectoral analysis options can be developed significandy faster was developed and tested. The mixed-integer than railways. The coal washing and programming model minimizes the tota hydropower options also have sigiificant air discounted cost of delivering coal and  xiv Executive Summary electricity subject to demand and capacity is already breathtaking-China is likely to constraints and optional budget and experience more severe railway congestion, environmental constraints. At the heart of with combined shortages of coal and the model are multimodal transport and electricity exceeding 125 million tons per electricity transmission networks. Forecasts year. Even a policy of unlimited coal of demands for electricity and nonelectricity imports to coastal regions would still leave coal for the years 1995, 2000, and 2005 are a significant amount of coal and electricity inputs to the model, along with such inputs demand unsatisfied in the interior regions. as costs, capacities, new project options, Assuming greater than 10 percent growth, technological factors, and discount rates. energy shortages that would occur above and The main outputs are how much of which beyond a 9 percent growth situation are investments to build where and when; estimated at US$7 billion for the year 2000 optimal distribution patterns for coal and alone. This shortfall, expressed in 1993 electricity; and performance measures such prices at official exchange rates, is about as costs, pollution levels, shortages, three-fourths of 1 percent of the projected transport bottlenecks, and shadow prices. Chinese GNP. (Economic losses noted here The analysis system is designed to are valued in terms of replacement by coal complement, not replace, other analytical imports.) tools used for more refined economic or xiv. Railways. Rail flows are logistical analysis in the individual secors. predominantly from mines in the west to cities and ports in the east and northeast, Main Conc!usions and and from north to central. In any Recommnendations by Sector conceivable future scenario, all existing and planned railway capacity for coal being xiii. Impact of GCrowth. If the shipped out of the energy base would be economy grows at up to 9 percent per year, utilized. If growth exceeds 10 percent, more the analysis results suggest that it should be investment must be channeled to the possible, within existing constraints, to railways. The study results were used as a satisfy nearly all the coal and electricity basis to support the Govemrnment's recent demands by 2000. This can be achieved decision to accelerate the construction of the without creating major shortages and without second west-east line out of the energy base importing coal except in a few problem from Shenmu to the new port being built at regions, assuming that additional energy Huanghua. delivery strategies are carried out in xv. China in recent years has anticipation of that growth. However, if concentraed their railway investment more growth exceeds 9 percent by one or two on adding incremental capacity to existing percentage points, the planned railway lines than on building new lines, and as a network would likely be overwhelmed, result has one of the highest densities of despite railway services being priced traffic per Ikm of track in the world. As approxim:iately at long-run marginal costs. planned, China should continue expanding GNP growth significantly higher than the capacity of existing lines by 9 percent is not unrealistic given that during multiple-tracking, diesel traction, 1991-93 the economy grew at about 11 electrification, additional sidings and percent per year. In that case, even conversion to heavier axle loads. Such accelerated construction of substitute improvements generally offer lower measures, such as long-distance transmission investment cost per unit of capacity and and coal washing, would likely not be able relatively faster completion than new to alleviate the pressure on the railways. construction. This manner of capacity Unless extraordinary measures are taken to expansion, however, is not sufficient to accelerate railway planning, financing, and provide the needed additional throughput construction beyond the urrent pace-which capacity to rlve the problem of energy base  Executive Summary xv bottlenecks: brand new lines are desperately efficiently. Since rail tarifts have already needed. Of course, these new lines should approached long-run marginal costs, also take advantage of the low unit cost congestion pricing on bottleneck links should offered by unit train and heavy axle load be investigated for bringing in additional technologies. revenues to supply new capital investment, xvi. The study made two specific as well as for rationalizing demand for recommendations about new lines in addition railway transport. The efficiency of coal to the Shenmu-Huanghua ]ine, both of which distribution can be improved by shipping have since been acted on by the Chinese coal with higher calorific value over greater Government: a new line from Shenmu to distances. The estimated economic savings Xian (now under construction), and a third from Shanxi would be about US$25 million west-east line from Shexian to Handan to annua1ly compared with allocating coal Jinan (now planned). Heavy haul without regard to calorific value. Congestion technology, which the MOR is implementing pricing should also have the effect of to reduce the unit capital cost of capacity encouraging shippers to differentiate expansion, is an important part of the between types of coal. Congestion pricing railway strategy. It is not expected to have should also encourage users to consume an effect, however, until after 2000, except more coal locally without using the railway on the Datong-Qinhuangdao and Shenmu system, which would contribute to a more Huanghua mine-to-port lines. Because efficient coal distribution pattern. However, railway projects take a long time to plan and the inflationary impact must also be construct, many provincial governments are considered in investigating the use of tking matiers int their own hands by congestion pricing. Congestion pricing is not rapidly developing local coal and electricity uncommon internationally: railways in the projects to satisfy their immediate demand United States typically charge higher rates in for electricity. the congested Northeast corridor. xvii. Systemwide coordination is xix. The second area of policy another key to MOR's investment strategy. reform should be to reduce the The MOR must consider interdependencies administrative allocation of railway capacity. between different links and modes in Currently, 60 percent of capacity is allocated planning the expansion of its network. For by planning instead of by market bidding. A instance, bottlenecks leading out of the case in point is that reallocation of railway energy base may possibly cause capacity from passengers to coal appears to underutilization of the new port capacity have only limited potential to solve logistical being built at Huanghua, or on the existing problems without creating substantial Beijing-Qinhuangdao line. Similarly, unsatisfied passenger demands. The third bottlenecks on railways and ports en route to policy issue is service. The MOR is moving northeast China may cause underutilization toward offering not just "raw capacity" but of railway projects in the interior of the "quality capacity" for container transport northeast. and dedicated passenger transport. Coal xviii. The efficiency of the railway shippers may also be willing to pay more for system depends not only on decisions made fast and reliable service, which could by MOR, but on the responses by railway perhaps be provided by auctioning off users. Five policy reforms that would segments of capacity to long-distance, promote market efficiency are (1) higher railbased transport services companies that prices; (2) less allocation of capacity; (3) could offer rapid unit train services. This more services offered; (4) more competition; measure would also introduce more and (5) belter and more available competition, the fourth area for policy information. First and foremeost, the MOR reform. Price and entry deregulation in the must set prices high enough that shippers rail-water transport market would also foster will have the incentive to use railways competition. Fifth, more and better  xvi Executive Summary information is needed at the annual coal harbors and to develop a Panamax-class or ordering conference for coal buyers to sLupercollier fleet must take into account the consider rail and water prices and services, physical conditions at each port. While as well as coal quality. Chinese 9-meter ships are small compared to xx. Waterways. An important world standards, they are competitive with strategy for relieving pressure on the railway railways over long distances, and, in some system is to shift more coal flows onto the cases, they are the only possible direct coastal and inland waterways. Setting up supply route to some oceanside or riverside high-efficiency rail-port transport corridors factories and power plants that are not out of the coal base would create a powerfil connected to the railway system. incentive for major power and steel plants to xxiii. The recent removal of all price locate along the eastern and southern sea subsidies to railways for purchasing lanes. In the medium demand case for 2000, materials and energy supplies, and the nearly 140 million tons of coal (not potential use of market mechanisms (for including exports) would be shipped an example, congestion pricing) instead of average of almost 1,500 km along the coast, rationing to allocate scarce railway and port wbich represents a doubling of the tonnage, capacity, should help rationalize shipping 20 percent longer distance, and more than patterns. Because of the number of add-on doubling the fleet size compared with 1990. charges involved in securing port and ship The inland waterways also play a key role, access, ports are effectively charging carrying 22 million tons shipped an average congestion pricing already. The of 660 knm, which requires a 75 percent recommendee central Government role in increase in the barge fleet by 2000. the waterway sector is to work with the xxi. Constraints, however, will local port authorities to evaluate, and, if continue to limit the scope for the waterway economically justified, to provide deeper option, particularly railway bottlenecks en harbors for multicommodity ports, to route to the loading ports along the northern remove distortions from the pricing system, coast and not enough port capacity, and to decentralize more of the shipping especially at receiving ports. Shanghai will industry. Entry deregulation would need at least 25 million tons of new encourage price competition, investment in unloading capacity, while numerous other capacity, and improvements in vessel ports south of Shanghai and on the Yangtze technologies, information systems, and River will need up to 10 million tons of new service in general. Waterways are not likely capacity. Because of the shortaga of loading to fulfill their fill potential as a provider of and unloading capacity, coal is at present coal transport unless the issues related to sometimes transshipped at general cargo tariff structure, harbor depths, average ship ports lacking the specialized bulk equipment size, and limited mine-to-port railway necessary for efficient handling. capacity are addressed. xxii. Most harbors at receiving ports xxiv. Coal Production. The analysis are only deep enough to accommodate 9- results confirm the continuation of the meter draught, 20,000 dwt vessels or 9- current trend to shift more coal production meter shallow-draught 35,000 dwt vessels. to the Noih China energy base (an increase Of the main ports on the southern coast, from 43 percent of the nation's total in 1989 only Ningbo can accommodate 12-meter to around 52 percent in 2000). The results 50,000 dwt ships. Xiamen is now being also suggest that coastal regions maintain deepened to 12-meters (in a Bank-financed their absolute levels of coal production. This project), while the harbors of Wenzhou and westward shift represen-ts a sayings of more Fuzhou are only now being deepened to the than US$1 billion in coal mine investment minimal depth of 9 meters. None can match costs through 2000 relative to the alternative the 14-meter depth of Qinhuangdao, China's of mainuining the existing shares of coal major loading port. Options to deepen production across regions, which oDuld  Executive Summary xvii happen if railway capacity from the energy environmental measures and enforcement base is not expanded adequately. Imports have historically been weak. Third, the appear to be economically feasible, but are proper legal framework is necessary for logistically and financially feasible mainly in willing buyers and sellers to enter into coastal cities. These regional shifts and longterm contracts that will guarantee a import increases occur during a time when reliable market for the washery's products subsidies to producers and consumers are and a reliable supply for boilers designed to being phased out, coal mines are burn washed coal. Fourth, as long as the experiencing competitive price pressures on macroeconom.y remains overheated, users their products and inflationary pressures on cannot afford to be as choosy about the their inputs, mines are generally losing quality of their coal. money, and millions of mine workers may xxvii. Power Generation Because become unemployed. there are only a limited number of xxv. Coal Washing. The results inexpensive hydropower sites near load suggest that steam coal washing should be centers, hydropower's share of total increased from the current level of 7 percent capacity, currently 24 percent, may even fall to roughly 16 to 19 percent, and to nearly slightly, though in certain regions it can double that if ash and sulfur reduction at end economically generate the majority of the use points is a policy goal. This appears to electrici-y. Thermal power is likely to be be a robust finding because steam coal China's least-cost alternative for generating washing never dipped below that level in most of the electricity in most regions. any scenario analyzed, including those in Because of the many different services which washing costs were raised. The provided by a dam, the above conclusions beniefits of steam coal washing include reflect only the competition between thermal reducing transport costs for long-distance and hydropower on an energy cost basis. flows, lessening local bottleneck effects, xxviii. Transmission. Electricity achieving environmental goals, and reducing transmission from the regions that have a ash disposal and boiler maintenance costs. surplus of new coal or hydropower capacity The net present value (NPV) of economic should be increased North China has the savings in transport, ash disposal, and boiler opportunity to economically increase its maintenance costs (net of washing and share of electricity generation from less than incremental mining costs) is estimated at 18 percent in 1989 to nearly 20 percent by US$3.8 billion over 15 years (in 1993 2000 prior to completion of the Three prices). Based partly on the strength of these Gorges power plant. Nationally, three major results, the Govermnent recently announced sets of flows stand out consistently in a guidelines asking large, state-owned mines variety of scenarios: (a) from the coal base which export coal to other provinces to wash to the Beijing-Tianjin-Tangshan area, East their steam coal before shipping. China, Central China, and even South xxvi. The success of this policy will China; (b) from eastern Inner Mongolia to depend on four main factors. First, market- the Northeast; and (c) from the hydropower detennined prices for coal and rational base in Guangxi and Guizhou provinces to prices for railway transport services will Guangdong. Construction of six 500 kV make the benefits of steam coal washing long-distance intergrid transmission lines is more transparent and spread more equitably estimated to save China roughly US$1.5 among the parties in the supply-transport- billion in combined transport and energy user chain. Second, strong enforcement of operating costs through 2000, compared environmental regulations on air pollution with the alternative strategies that would has been the key to establishing demand for have to be pursued otherwise. This study's washed coal, as demonstrated in results have been used to support China's Organisation for Economic Co-operation and recent decision to move forward with several Development (OECD) countries. In China, transmission projects. Skyrocketing power  xviii Executive Summary demand, railway bottlenecks, and shorter total suspended particulates. To achieve construction lead times are helping to progress on the environmental side, the overcome years of disinterest in transmission Chinese Government will have to structure stemming from institutional, technological, its environmental policies to force firms to financial, and economic barriers. internalize the social costs of pollution while xxix. In recent years, several giving them as much latitude as possible on provinces were starting to move forward the means of response. Pollution taxes may with transmission projects with other be the most economically effective measure, provinces in a decentralized fashion. To help followed by tradeable pollution permits. In ensure smooth coordination of the regional the US, tradeable emissions allowances for and provincial grids, a regulation was passed sulfur introduced in the 1990s were priced in early 1994 that all transmission lines are by the market four times lower than the to be managed by the central Government, government's conservative estimate, saving while the market will control the power some $10 billion per year. Vigorous plants. By 2000, China will tie the regional enforcement of either measure is probably grids together into one national grid. Long- more important than which is ultimately term contracting to ensure reliable supply, adopted. demand, and financing between the local, XmXii. The level of taxation or the provincial, and central Government parties amount of credits should be high enough to involved is the key to this kind of force polluters to pay for the environmental interregional arrangement. damage they cause, yet the level must also XXX. Environmental Tradeoffs. consider what is economically feasible. As a Although evaluating the cost-effectiveness of partial answer to the question of feasibility, environmental protection measures was not the analysis found that reductions of 10 the primary purpose of this study, it was percent in the ash and sulfur content of the important to capture the fact that some coal to each province can be achieved for strategies for coal and electricity delivery only 3 percent more in cost by using better are less environmentally harmful than coal, washing more coal, and substituting others. For instance, using higher quality more hydropower for thermal power. coal, wasiiing more coal, and substituting Further reductions of 20 to 30 percent hydropower for thermal power in many (which would be needed to keep absolute cases can pay for themselves in terms of ash and sulfur levels from worsening) would reduced costs and reduced pressure on the be more expensive, costing 10 to 20 percent railway system in addition to reducing more. This increase would be a result of the pollution. In fact, increasing steam coal mounting costs for scrubbers, hydropower, washing up to a threshold of nearly and the need for energy conservation. 20 percent is a win-win proposition in terms Because numerous pre- and post-combustion of reducing both cost and pollution. For mitigation measures were not included in the these reasons, the enviromnental benefits analysis, these cost figures can be thought of were measured in terms of how much they as conservative upper bounds, achieved by reduce the ash and sulfur content of choosing from only a partial menu of delivered coal. technological strategies- The real costs xxxi. The analysis shows that the should turn out to be lower. absolute amount of ash and sulfur under 9 mauiii. Energy Conservation. Energy percent GNP growth would be about one- conservation has great potential to third higher than in 1990, despite the simultaneously reduce energy shortages, recommended increase in washing steam relieve pressure on railways, and protect the coal. This is a critically important finding eironment. Conservation investments were for a country that already bears the dubious not one of the options included in the distinction of some of the world's worst analysis system used for this study. A post urban air pollution from sulfur dioxide and hoc analysis, however, suggests some  Executive Summary xix tentative conclusions. Energy shortages in washing coal shipped in from the energy the model are demands that either could not base; increased mining of high-cost local be satisfied for less than the cost of imported coal; and construction of, and subsequent coal (Y 300 per ton in 1990, equivalent to transmission of electricity from, minemouth US$47 in 1993 prices) or could not be power plants on the eastern Inner Mongolia satisfied at any cost for logistical reasons. brown coal reserves. Imports are not a Given that the amortized cost of many practical solution with the exception of the energy conservation investments is less than costal port of Dalian. Y 300 per ton per year, the results suggest xxxv. Central China. Central that energy conservation investments could China-especially around the cities of reduce coal demand by as much as 100 Wuhan, Changsha, and Nanchang-is the million tons given double-digit GNP growth, next most problematic area. Its coal deficit and up to 30 million tons given growth of and highly-congested railway network are up to 9 percent. To realize these goals, somewhat offset by its central location, energy efficiency improvement must which gives it many supply options. Some increase by at least 7 percent per year, possible supplementary strategies include compared with the present rate of (a) constructing a new railway south from 3.6 percent per year. These conclusions Shennu toward Wuhan or other railway were confirmed strongly by some expansion projects; (b) producing more coal preliminary analysis using an enhanced locally; (c) producing more local model (developed in the McNamara hydropower until the Three Gorges project Fellowship program) that incorporates data can be finished; (d) redistributing coal by on energy conservation options and their inland waterway; (e) transmitting electricity investment costs, efficiency improvements, from surrounding regions, especially from and potential savings. . The continuation of minemouth thermal plants in southeast reforms that expose energy users to market Shanxi via the Henan grid; and (t) discipline, that free up coal and electricity intensifying energy conservation efforts. All prices, and that open China to technology of these options could be made more imports should provide ample incentives for attractive with congestion pricing for conservation. Congestion pricing of rail bottlenecked railway links. transport and ports, along with enforced xxxvi. South and East C4ina. The pollution taxation, would further bolster southern and eastern coastal regions must these incentives. rely mainly on medium-quality local coal and on coastal shipments of high-quality coal Region-by-Region Sumunary from the energy base. Imports of high- quality coal and investments m energy xxmiv. Northeast China. This study conservation would help keep shortages and identifies problem regions where fast sulfur content under control in most eastern economic growth or other conditions could and southern cities. Also, because of the exacerbate shortages. It recommends further distance involved and the bottlenecks that investigation into energy supply options for intervene, these two regions are best each region. Principal among these is the positioned to benefit economically from Northeast, where either high demand or purchasing washed steam coal. The reduced allocation of transport capacity environmental benefits should be considered could lead to unsatisfied demand. The as an additional advantage Northeast must supplement its own supply xmxvii. However, in eastern China, with coal from the energy base, but is possible coal supply problems face cities, obstructed by two sets of bottlenecks: from such as in Anhui and the interior parts of the energy base to the Beijing area, and then Shandong, that are without the coastal or past the Great Wall to Northeast China. inland waterway alternative. Construction of TIreelargelydecentralized strategies include a railway from Handan to Jinan would be  xx Executive Summary one way to address Shandong's problem. A mostly self-supporting while continuing to strategy which has just been approved, on a supply some surplus coal to northern test commercial-scale basis, is a new coal Sichuan and central China. This region can slurry pipeline from Shanxi to Shandong. also export thermal electricity to the centra East China is particularly vulnerable to China grid and hydropower to the North electricity shortages in high-demand China grid. conditions. The electricity balance of the region can be helped tremendously by Past and Future Poflcy Implica.ons building transnmission capacity from mine- mouth plants in southern Shanxi to cities in xli. Past Policy Impacts of the Shandong and Jiangsu. Study. The CTS was reviewed at a high- xxxviii. Southeastern China does not level conference for Government officials in have the inland waterway option that eastern December 1991. Following that meeting and China has, but its industrial development has the upgrading of the GNP forecast in June historically been more confined to the of 1992, Government planning agencies coastal areas. Guangdong's electricity requested additional analyses of higher balance might be supplemented by growth rates. The results of these analyses transmission of thermal power from as far provided a basis for the National People's away as southern Shanxi, or from Congress to adopt the 8 to 9 percent annual hydropower plants in Guangxi. Other GNP growth rate for public infrastructre options for Guangdong's electricity situation planning,rather than 9 to 10 percent. might be new power plants using imported Nonetheless this represents a significant oil or coal, or new nuclear plants if they can increase from the 6 percent or so growth be built economically. rate adopted during the l980s. Subsequently, mix. Southwest C7hina. In the Phase II of the study identified strategies and Southwest, isolation contributes to its lack of projects that might make it feasible to satisfy flexibility. The Southwest is largely self- growth in the 8 or 9 percent range. These reliant in coal and electricity, and can expect latest CITS results were reviewed at another coal shortagea in the neighborhood of 10 high-level Chinese conference in October percent in conditions of rapid growth. For 1993. In April 1994, the model was used to coal, its ample reserves are generally high in analyze three different demand cases for the sulfur. For electricity, the massive Three 9FYP, the results and conclusions of which Gorges project is now under construction have been used for planning purposes. Most here. The Southwest may continue to rely on recendy, a conference was held in October its vast hydropower potential, but as more 1994 to discuss the reforms that would and more projects are developed, capital encourage the inplementation of the CTM costs become a concern. A related option is recommendations. to keep more of the power generated at xlii. S o m e o f t h e s e Southwestern hydropower plants within the recommendations are consistent with long- region instead of transmitting it to Central standing Government strategy of the last 5 to and Southeast China, or for Sichuan to 10 years. Other recommendations have receive power transmitted from Shaamxi to supported recent policy shifts of the last two the north. In the medium term, prior to to three years. Still other recommendations oDmpletion of the Three Gorges power are strategies upon which the Government project, authorities may deal with the lack of either has not acted, is still considering, or flexibility by planning and building more is going more slowly. By sbowing the dire railways and by promoting energy consequences of 9 percent GNP growth on conservation. infrastructure planned for a target of xl. Norhwesr Cina. Coal and 6percent growth, and by recommending hydropower resources are abundant in this strategies for overcoming them, the CTS area. In the future, this region can remain provided a basis for the recent Government  Executive Summary xxi decisions to, among others: (a) accelerate rationalize Iheir energy and transport railway construction on the Shenmu- decisions. Even after the transition phase, Huanghu, Shenmu-Xian, and Handan-Jinan the centrally-guided infrastructure lines; (b) urge steam coal washing for state- investments, such as railways and electricity owned plants; and (c) open the door for grid and, to a lesser extent, ports and dams, intergrid electricity transmission. Pursuing will still need to be coordinated with each these three strategies alone could save China other and with developments in the as much as US$7.1 billion (in 1993 U.S. decentralized sector. This role of indicative do'lars, discounted at 12 percent) over the planning is similar to the kind of issues next 15 years, as compared with the more analyzed by comprehensive network-type expensive strategies that would be necessary models in OECD countries. and greater shortages that would likely result dliv. In the near fiture, it is most if such strategies were not considered. important for the Government to analyze xiiii. Policy kssues to Be Addressed additional railway and waterway measures, in the Future. China is in the midst of an especially heavy haul rail technology, port impressive transition from a centrally- improvemens, transport congestion pricing, controlled economy to a dynamic, market- and power transmission. The Government driven one, which necessitates a change needs to continue comparing these measures from central to indicative or guidance with hydropower, and with decentralized planning. Guidance plaing requires a strategies involving coal mining, coal multisectoral and systematic method of washing, thermal power generation, frequenty and rapidly updatng public shipping, and others. The results may be investment priorities, testing plans, published to allow decentralized enterprises identifying potential shortages, and to make well-informed transport and energy generating new energy supply strategies. investment decisions based on a dear, long- The CaS decision support system should be tenr supply-demand-transport picture. With used to investigate public sector investment slight modifications to the analysis system, strategies that will consistently be cost- it could facilitate annuial coal distribution effective under a variety of future planning. With additional model circumstances. This investment evaluation development, the analysis system could also must be complemented by anaysis of policy be used to study oil and gas alternatives, measures and market mechanisms for energy conservation, carbon lioxide, and sending undistorted economic signals to the other environmental mitigation options. decentralized sector to induce them to  1 1. DEMAND AND SHORTAGES OF COAL AND ELECTRJCITY Progress in Transport coal shortages in 1987-88 were at least 30- and Energy Development 50 million to)ns (3 to 5 percent of total production) and electricity shortages at least 1.1 China has made remarkable 70-100 billion kwh (15 to 18 percent of total progress in developing its transport and production). The effects of shortages can be energy systems over the past four decades. seen in high prices for coal in the free From 1952 to 1993, the length of the market, idleness of power plants, and railway network increased from 22,900 increasing coal imports. route-km to 53,800 route-km and the length 1.3 Tran-sport capacity shortfalls of the highway network from 126,700 reached a low point in 1987-88. At that route-km to 1,083,500 route-km. Railway time, many orders for freight cars went traffic (in tkm) grew at an average annual unfilled, industrial plants in coastal cities rate of 7.7 percent (see Table 3.1, Annex were idle up to 30 percent of the time 3). During the same period, annual coal because of the lack of raw materials, and output increastd at an average rate of 7.8 some shippers were forced to truck coal percent, crude oil production increased at over distances of 1,000 km due to the lack 16.8 percent, and electricity output increased of railway freight wagons and lack of line at 12.6 percent. China now ranks third in capacity. Some industries were forced to the world in total volume of freight traffic, 'work three days and shut down four days" fourth in total volume of commercial energy due to lack of coal, according to one high- produced, and first in total coal production. level official. Coal accounts for 73 percent of China's 1.4 As a result of the scarcity of commercial energy needs, with oil (20 coal at a time when the economy was percent), hydropower (5 percent), and overheating, market prices for coal rose natural gas (2 percent) making up the sharply during 1986-89. Market prices in balance. These figures do not include areas like Shanghai and Jiangsu approached biomass, which, if commercially traded, or exceeded international levels. In coal- would add another third to the national total producing Shanxi Province, average market energy accounts (see Annex Figure 2.1). prices of coal rose from Y 55 per ton in Industry consumes 70 percent of commercial 1986 to Y 125 per ton in early 1989, while energy, followed by households (14 minemouth prices in Xuzhou rose at a faster percent), services (10 percent), and rate, from Y 90 per ton to Y 220 per ton. agriculture (5 percent). The gap in market prices between Shami and provincial producers suggests that coal Coal and Electricity Shortages shortages were caused by transport bottlenecks rather than by production 1.2 Despite the recent progress shortfalls. Bottlenecks and shortages, and the since 1980, China's economic growth has high market prices associated with them, been severely constrained by shortages of dropped from these high levels in 1990 coal and electricity, particularly in 198485 because of the economic slowdown. and 1987-88. Transport services, coal, and 1.5 Since 1992, as the economy electricity all were heavily rationed during heated up again, transport bottlenecks and this period. While shortages are not some electricity shortages have reappeared, but tiing for which the Chinese Government coal shortages have not reached the crisis (or, for that matter, any government) keeps proportions seen earlier. Chinese power an accurate accounting, it is estimated that officials currently estimate that there is a  2 1. Demand and Shortages of Coal and Electricity shortfall between peak demand and supply unit of economic output were several times of 20 percent, which has caused weekly higher than those of countries like India and blackouts in residential areas and caused Brazil (see Annex Table 3.2). While this industries to schedule round-the-clock work comparison is problematic due to shifts. Central and local authorities establish uncertainties of GNP measurement in China, quotas for allocating electricity and ration there is little doubt that their freight and new connections. The electricity shortages energy intensities are higher than those of today are caused more by lack of generating many developed countries. One reason is capacity than a lack of coal. that China relies heavily on coal as a sobrce 1.6 Prices of coal, electricity, and of energy. Most other kinds of fuel are railway services have all risen dramatically easier to transport and can be used more in recent years. From 1980 to 1992, real efficiently. Coal accounts for almost 73 coal r.rices (adjusted far inflation) have risen per cent of commercial energy a cumulative total of more than 120 percent, production-much larger than the shares for while real electricity prices have risen about most other countries (see Annex Table 3.3). 75 percent. More than 75 percent of all coal 1.9 Besides the heavy reliance on is now sold at market prices. By the end of coal, China's freight and energy intensities 199', real coal prices were fully market- can be attributed to several other factors: the determined, and consumer electricity prices small service sector; the large heavy had risen to include complete cost recovery. industry sector; the lack of preprocessing of The Ministry of Railways (MOR) now raw materials; and the low energy efficiency purchases all materials and energy at market of outdated end-use technology; and cold prices, awl real railway tariffs have been weather in the northern areas. With the raised by 86 percent from 1990 to 1992, phasing out of the allocated system, approximating long-run marginal costs. The underpricing of energy is no longer a major effect of raising these prices so substantially problen, but it will take many years to should be greater efficiency of end use in all replace the existing inefficient energy-using three sectors. equipment that was built during times of low 1.7 After the coal market was allocated prices. In addition, freight tends to opened up, prices of coal at the minemouth be hauled over longer distances than in the energy base actually fell instead of necessary, partly because of the vertical rising, despite the nearly nationwide integration of Chinese industry and partly shortage of electricity. This anomaly was because of the heavy reliance on rationing in caused by most major railway lines leading the distribution of coal and raw materi.ls. out from the energy base being heavily congested, thus preventing energy base coal Investment in Transport and Energy mines from selling all their production. It would not be accurate, however, to say that 1.10 China's transport and energy coal shortages have been eliminated: rather, systems have expanded significantly since there are surpluses in the upstream energy- the onset of reforms in 1979, but this producing areas, and sporadic shortages in expansion has been outstripped by the the downstream areas. Downstream explosive growth of demand. Since 1955, shortages were evidenced by the fact that investment in transportation, although coal stockpiles were drawn down by 32 having grown almost 15-fold, has seriously million tons in 1993. lagged behind GNP, which has increased almost 17-fold, and behind total traffic Intensity of Energy and Transport Use volume, which has grown almost 24-fold (see Annex Figure 2.2). Government- 1.8 It is widely believed that sponsored transport investnent, only 1.3 China's transport and energy intensities in percent of GNP during 1980-89, increaw ed terms of freight traffic and energy use per to 1.9 percent in 1992, but is still below iat  1. Demand and Shortages of Coal and Electricity 3 of other major countries, such as Japan, the of denand of 0.55. The elasticity of Republic of Korea, Brazil, India, and the electricity consumption with respect to GNP former Soviet Union, where transport was 0.85 for the 1980s, which is investment ranges from 2 to 4 percent (see exceptionally low for any country over a Annex Table 3.4). In short, the two reasons sustained period, especially an for China's transport shortages are explosive industrializing one such as China. The growth of demand on one side and elasticity for coal is expected to continue underinvestment in transportation on the falling in the future, but the elasticity for other. electricity is considered unreasonably low. 1.11 Energy infrastructure 1.13 The resulting lower-ihan- investment was 3.3 percent of GNP in 1992, planned elasticities reflected suppressed and has been shifting steadily away from demand as well as gains in energy coal and toward electricity (see Annex efficiency. Consumption is limited by a lack Figure 2.3). Coal's share of the energy of available capacity. New power plant investment pie fell from over 42 percent in construction during the 1980s was planned 1953 to 27 percent in 1985 and to 1 for an elasticity greater than 1.0, but GNP percent in 1990, while electricity's share growth consistently surpassed the planned rose fromi. 42 percent in 1953 to 53 percent rate by several percentage points. For the in 1985, and accelerated to 60 percent in 1980s, China planned for 6 percent GNP 1990. Despite this boost, China remains growth, but grew at 9 percent- The underinvested in the capital-intensive electricity sector could not speed up electricity subsector, in part because construction to keep pace because it was a electricity's share of total commercial energy planned sector requiring large investments requirements grew from 20 to 25 percent and long lead times. The supply of between 1979 and 1990. This trend can be electricity was constantly fbrced to play expected to continue. (The electricity share "catch-up" during this period. Further in the United States is 36 percent.) Overall evidence that the electricity elasticities investment in the coal production, coal reflect suppressed demand lies in the fact transport, and electricity sectors for the that they moved in the opposite direction of 8FYP, 9FYP, and 1OFYP is estimated to be GNP growth (and unmeasured shortages). at least US$200 billion Cin 990 prices, not From 1981 to 1985, when GNP growth including rail transport for other averaged 10 percent, the GNP elacticity of commodities or local distribution of power). electricity demand was 0.64. FrGin 1986 to 1990, during which times GNP growth Trends in Coal and Electricity Deannd averaged a much slower 7.7 percent, the elasticity was 1.16, and averaged 1.59 1.12 The demand for coal and during the slowdown of 1989-90. electricity in China has grown rapidly since 1.14 Suppressed demand or not, the 1980; growth is expected to remain strong relatively slow-growing electricity, coal and through the IOFYP. From 1980 to 1990, railway capacity must have, in some sense, coal and electricity consumption grew by 5.3 satisfied enough demand for the GNP to and 7.6 percent per year, respectively. Both grow at nearly 9 percent, or, by definition, of these figures are lower than the average the economy would not have grown so fast. GNP growth rate of 8.9 percent over the Can hypergrowth continue -without same period. The GNP elasticity for coal increasing the investments in these three demand (computed as the percent change of sectors? While a definitive answer is not coal consumption divided by the percent possible, evidence suggests that it cannot, as change in GNP) was 0.6 from 1980 to 1990. argued below. If the coal used for electricity is separated 1.15 First, what little slack there out, final coal demand grew at only 4.9 was in the coal and electricity delivery percent, which translates to a GNP elasticity system has been mostly squeezed out: more  4 1. Demand and Shortages of Coal and Electricity railway segments are at capacity, more drive the production and distribution factories are running round-the-clock, and activities on the supply side. While not an more baseload thermal plants are running at equilibrium model per se, the sensitivity of higher capacity utilization factors and the recommendations to these assumptions postponing maintenance. Second, there has may be incorporated by using low, medium, been some relatively simple, low investment and high demand projections (see Annex 5). measures to increase the capacities in related 1.17 Demands for three kinds of sectors. In coal mining, the percentage of nonelectricity coal (anthracite, coking and coal mined by township mines, with their steam) are specified in tons for 49 zones in very low investment cost and technological 1995, 2000, and 2005. Coal demand for the level, increased by 98 percent from 1983 to electricity sector is not exogenously 1989, while state mines (planned for specified, but is an indirect result of the 6 percent growth) increased only 26 percent. demand for electricity, in kwh, at 38 zones, For railways, some minor improvements to which pulls electricity from hydropower, yards and signalling and such have been able nuclear or thermal power plants. The to increase throughput. Third, there has thermal plants in turn pull coal to those been even more structural change in the plants from mines, through washeries, and Chinese economy than anticipated, meaning across the transport network. Needless to that the unanticipated portion of the GNP say, transport demand in this study is also a growth may have come largely from high derived demand: the actual coal flows are an value-added industry and services, which are endogenous result of the tradeoffs between less energy intensive. Fourth, energy types of power, coal origins, coal types, conservation has made great strides in recent transport modes, and so on. years, in part because of the rationing, price 1.18 Electricity demand in 2000 reforms, and openness to outside technology ranges from 1,258 to 1,444 to 1,661 billion and management. The reforms have made kwh in the low, medium, and high forecasts. enterprises focus on profits, and have forced Nonelectricity coal demand in 2000 ranges them to reduce waste. While the latter two from 885 to 906 to 926 million tons of trends can continue, the former two are standard coal in the low, medium, and high problematic. There may not be as much forecasts. However, since most readers do scope for these adaptions in the future as not normally separate out nonelectricity there was in the past. Also, many adaptions coal, a more meaningful estimate of demand were costly, risky, or short-sighted. For would be the model's total national coal instance, oil power plants using imported oil production in 2000 plus coal shortages plus in coastal regions is costly; putting off electricity shortages converted to equivalent power plant maintenance is risky; while amounts of coal. This works out to about to township mines are short-sighted in the about 1.51 billion tons in the low scenario, sense that they end up leaving a much 1.64 billion in the medium scenario, and higher percentage of the minable reserves in 1.78 billion tons in the high scenario. the ground rendered unobtainable because of However, it should be kept in mind that the unscientific way they exploit the deposit. these latter figures are model outputs, not inputs; more or less electricity demand could Coal and Electricty Demand have been satisfied by hydropower or Assumptions for this Study nuclear power. 1.19 The SPC energy demand 1.16 The analytical model used as forecasts used in this study are based more the basis for this study (see paragraphs 3.14- on GNP forecasts and G3NP elasticity of 3.18) is primarily a supply-side cost- demand than on price elasticity of demand; mnmizing model for investment planning demand curves simply --innot be estimated and network opdmization. Demands for coal with any degree of ceririnty for each time and electricity are exogenous inputs that period, region, or coal type in China.  1. Demand and Shortages of Coal and Electricity 5 However, price assumptions do enter into plant demand) assumes an elasticity of the crucial GNP elasticity assumption, along around 0.20, which is less than the 0.55 with several other factors. First, the SPC elasticity of the 1980s. The elasticity of total forecasts assumed that all coal prices would coal demand works out to about 0.45, which be completely market-determined and all is also lower than that experienced in the electricity prices raised to near rheir long- 1980s (0.60). Both, however, are in line run marginal costs (they were) by the end of with the long and short term downward 1994. Second, the potential for technical trends (see Annex Figure 2.4). As the improvements in energy efficiency in Chinese economy develops, a continued shift factories and steel plants is included, but away from coal and toward oil, gas, and mostly in terms of routine replacement of electricity (of which nearly 75 percent old equipment rather than installation of comes from coal) is ekpectedto continue. In highly advanced equipment. Third, the the first and second FYPs, coal accounted forecast anticipates structural change in the for nearly 95 percent of conmmercial economy. In particular, the expanding energy, which fell to around 70 percent in tertiary sector is less energy intensive than the 5FYP. While China increased its primary and secondary sectors, though more dependence on coel to 76 percent in the reliant on electricity on a percentage basis. 7FYP, this was considered to be supply- Fourth, a wealth effect can be seen in the driven rather than demand-driven, and it has increased energy use and increased failen since then to 74.2 percent. In fact, the preference for electricity by households in GNP elasticity for coal consumption for modern residences. Fifth, the growth of road 1990-92 was a low 0.16, despite an increase transport and the development of China's of 50 million tons of coal used by power oil-producing capacity will contribute to plants over those two years. While this substitution away from coal. elasticity is probably an aberration due to 1.20 In the early stages of this overreporting of coal production before study, the official Government target for 1990 and underreporting of it afterwards, it ezonomic growth was 6 percent, but during is still astonishingly low. 1992, after Deng Xiaoping's much 1.22 For comparison purposes, the publicized trip to Guangzhou, the CTS's low demand forecast of 1.51 billions Govermment raised the target to 8 to 9 tons of coal to be produced in 2000 is percent. The medium demand forecast similar to what the National People's assumes approximately 9 percent annual Congress officially endorses. On the other GNP growth through 2000, while the high hand, the Bank's Industry and Energy and low forecasts are for 10.5 and 7.5 Operations Division, China and Mongolia percent, respectively. Department, is forecasting 1.7 billion tons, 1.21 The future GNP elasticity for which lies between the CTS's medium and electricity demand is assumed to be 1.0. high scenarios. Their forecast assumes a 0.4 This assumed elasticity is higher than the elasticity for nonelecticit-y coal, 0.5 for all historical rate for the 1980s, which did not coal, 0.9 for electricity, and 9.6 percent represent satisfying all demand, as argued in GDP growth. With this much uncertainty paragraph 1.13. Anything less than 1.0 is about future energy demand, it becomes atypical of industrializing countries. The important to look at the entire range of coal demand forecast (not including power demand scenarios.  7 2. OVERVIEW OF THE COAL-ELECTRICITY SUPPLY CHAIN: PROBLEMS AND OPPORTUNITES 2.1 The process of getting coal out 2.3 Coal is mined in over half the of the ground, beneficiating it, transporting Chinese counties. In many arcas, coal is it, and burning it to produce thermal, obtained from mines close to the market or kinetic, or electrical energy, the latter of within the same region. However, in major which can be transmitted to other places, industrial centers in East, Northeast, and can be thought of as links in a chain. This Southeast China, regional and local supply chain terminates with the final production cannot satisfy demand, and consumption of coal and electricity by end economically recoverable reserves are users, and with the emission of ash and rapidly being used up. These three regions sulfur pollutants into the atmosphere. currently mine a combined total of 30.3 Measures for alleviating coal shortages and percent of coal, but have only 10.9 percent reducing pollution are available at all links of the remaining reserves, whi,Jh occur in in the chain. (Tables and figures increasingly less economic locatic-.s, depths, accompanying this chapter can be found in seam thicknesses, anl amount. The coal Annexes 2 and 3.) deficit in the East grew by 153 percent between 1982 and 1989. Coal Production 2.4 These large cc- uming regions in the eastern half of the co'ntry rely 2.2 China is the largest coal increasingly on supplies from surplus producer in the world, with total raw coal producing areas in North China, placing production of 1. 1 16 billion tons in 1992 (see pressure on the transport network. Shanxi is Annex Table 3.5). China's current coal the main province able to produce a surplus shortage certainly is not due to any lack of for shipment outside its borders; it now coal reserves. China's approximately 800 accounts for more than a quarter of national billion tons of economically recoverable coal production (see Map IEBRD 26594). Shanxi reserves are the largest in the and the nearby provinces of Inner Mongolia, world-approximately one third of the Ningxia, and Shaanxi all have large reserves world's total (see Annex Table 3.6). The of high-quality, low-cost coal. A centerpiece majority of the reserves are high-quality of China's energy and transport strategy is bituminous coal, with a carbon content of to continue to increase the already large about 60 percent, used for coking or steam production from this region (see Annex coal, depending mainly on calorific value, Tables 3.9 and 3.10). sulfur, ash, moisture, and volatility (see 2.5 However, an important Annex Tables 3.7 and 3.8). There are also ancillary strategy for relieving shortages is sizable anthracite reserves, with a carbon to continue or accelerate mining in select content generally over 80 percent, used eastern areas in order to buy time or fill mainly for residential purposes and the gaps while the transport capacity out of chemical industry. There is also some North China is expanded to reach all parts lignite, or brown coal, in the Northeast and of China. The tradeoff in cost is that Inner Mongolia, with a carbon content of production from the limited eastern coa around 30 to 40 percent, which is mainly reserves is increasingly expensive and of burned in minemouth power plants because poorer quality. of its low weight-to-energy ratio. 2.6 In 1990, the central Government operated about 600 mostly  8 2. Overview of the Coal-Electricity Supply Chain mechanized underground mines, which around I percent, which is generally low by generated 45 percent of total production. world standards, but which ranges up to The remaining 55 percent of total production 4 percent and higher in Sichuan and came from over 60,000 mines operated by Guizhou. provincial or county governments (hereafter 2.9 Mechanical coal washing is a referred to as local mines) and by townships more expensive method that removes some or villages (hereafter referred to as township of the gangue (rock and dirt mine waste), mines) (see Annex Figure 2.5). A few ash, and pyritic sulfur (not chemically provincial mines use modem mining bonded to the coal) by a coal-specific methods, but many local and township mines combination of crushers, screens, jigs, work shallow seams or outcrops with labor- flotation tanks, and even centrifuges. The intensive pick-and-shovel operations. net result is a cleaner-burning coal that Encouraged by price and investment yields more energy and less pollution per reforms, local and township mines can ton. Although coal washing offers provide the local work force with income environmentai and transport benefits, plus and local energy users witi coal without lower disposal and boiler maintenance costs, relying on the overcommitted railway some carbon is also lost in the process. In system, and with minimal investment and power plants, washed coal can be more short construction lead times. efficient than raw coal if the boiler is 2.7 The Government could decide designed for it. About 18 percent of coal to continue encouraging local and township (but 37 percent of state-produced coal) was mine growth so as to increase production washed in China in 1991 (see Annex Table rapidly and free up investment for other 3.11), compared with more than 50 percent sectors, but there are several negative side in most Western countries. All coking coal effects: dangerous working conditions; poor (127 million tons) and some anthracite for coal quality; environmental degradation; the chemical fertilizer industry (10 million and, often, wasting of reserves because the tons) are washed by necessity. Only 69 unscientific way they exploit the reserves million tons (7 percent) of steam coal were often leaves large quantities of coal further washed in the 71 existing plants. However, below unaccessible by future mining. These almost none of the plants used for washing local and township mines generally supply steam coal were designed for that purpose; local markets and transport their coal by they are mostly plants designed for washing truck. A strategy involving greater anthracite and coking coal that are no longer production from such mines would have to needed for those purposes. include provision of railway spurs to larger 2.10 Coal fines can be lost either by local mines andlor collection of coal by being sucked up the flue or falling through truck from smaller mines. the bottoni grate of industrial boilers. Coal screening is an inexpensive but effective Coal Beneficiation method for separating lump coal from coal fines, so that the fine coal can be distributed 2.8 Methods for improving the to power plant boilers that are designed to quality of the run-of-mine coal are not use pulverized coal, or so that it can be routinely practiced, but they are often made into honeycomb briquettes. About 19 technologically simple and can play a percent of coal is screened. valuable role in eliminating coal shortages. The steam coal supplied to many users, Coal Allocation and Pricing particularly small users, can be poor-containing stones, 20 to 30 percent 2.11 The dual price system for coal, ash by weight, and a high percentage of coal featuring large differences between low fines (small particles). The sulfur content in state-determined in-plan prices on the one the North China energy base averages hand and higher open market or negotiated  2. Overview of the Coal-Electricity Supply Chain 9 prices on the other (see Annex Tables 3.1Z Coal Transport to 3.14), is now extinct. Since the dual price system w3s introduced in the mid-1980s 2.13 Railways are the predominant (replacing the preceding fully-controlled mode of transport for moving coal in China system), in-plan prices have increased in (see Annex Table 3.15). There are no major real terms (20 percent in 1991). Perhaps navigable rivers emanating from the North more importantly, the percentage sold in- China energy base. However, at least part of plan was cut in half in January 1993, and the journey to Northeast and Southeast now accounts for less than one quarter of all China can be made by water, either by coal. As of the end of 1994, the rest was coastal shipping, the Grand Canal, or by the sold at free market prices, with the possible Yangtze River. About 626 million tons of exception of a few consumer categories. For coal were shipped by rail in 1990, and of instance, the MOR now buys all of its coal this, 139 million tons were transshipped to at market prices and its electricity at state-owned water transportation (see Annex nonsubsidized prices. In East China, coal Figure 2.6). However, if locally-owned prices are now close to or above shipping is included, 210 million tons moved international price levels, while in the by water. Trucks carried an estimated 161 Northeast, some producers of low-quality million tons. Trucks are used to deliver coal coal are unable to sell their entire to users near the mines, to collect coal from production. Although the dual price system scattered mines and deliver it to railheads, was phased out in 1994, its aftereffects in and to distribute coal in cities. The the form of inefficient boilers, power plants, remaining coal was consumed locally buildings, and so forth, will linger on for without being transported, and was many years. consumed at minemouth power plants. The 2.12 The allocation of coal between railways handled 341 billion tkm, state- sellers and buyers continues to be organized owned water carriers 182 billion tkm, and through an annual conference involving roads only 10 billion tkn. Since the 1950s, producers, large consumers, and central railway investment as a percentage of total Government agencies. This conference transport investment has fallen (Annex serves the function of a not very efficient Figure 2.7). commodities market, with the interjection of 2.14 Because of the increasing the transport providers into the mix. The reliance on nordtern and western coal, the quantity and quality of coal to be supplied average transport distance for railways has are negotiated between participants who increased from 530 to 545 km from 1988 to have had longstanding supply relationships. 1990. The average waterway distance (state- Central authorities arrange for the transport owned) has increased from 1,175 km to of allocated coal. Sometimes, coal supplies 1,310 km in just 2 years. Trucking is are not well matched to consumer inefficient for long-distance transport of bulk requirements because of inflexibility and coal, thus averaging just 63 km per trip. inadequate responsiveness to changing However, there were reports of trucks market needs in the coal and transport moving coal as far as 1,000 km during the allocation system (see Chapter 6, Policy worst coal shortages. Issues to be Addressed in the Future). By 2.15 Coal represents about 42 the end of 1994, mines in the coal-rich percent of the total tonnage of freight regions of Northwest, Northeast, and South- handled by the railways. China's density of west china had been mostly freed of state freight traffic on the railways is much higher distribution plans, with the exception of coal than that of the United States and India and for some power plants for which the price is nearly on par with that of the former Soviet still controlled by state or local Union (see Annex Table 3.16). In 1993, governments. freight traffic in China averaged nearly 22 million net tkm per route-km, which  10 2. Overview of the Coal-Electricity Supply Chain represents a fairly high level of operating coastal waterways between the northern and efficiency and asset utilization. Still, there is southern seaports. Extra distance added by room for improvement. the waterway leg of the trip is not an issue 2.16 The effective strategies for for many coastal cities in East China (see increasing railway capacity from the energy Annex Table 3.17). As an example, base can be divided into two categories: distances from Shanxi Province to Shanghai building more line capacity, or increasing are nearly the same by combined rail-water the throughput of existing assets. A number routes as by the shortest rail-only routes. of new lines are being constructed, most China has 15 major ports. Qinhuangdao notably a west-east railway from Shenmu in alone loaded 54 million tons in 1991, nearly Shaanxi Province to Huanghua, a major new 70 percent of the coastal coal shipping. port south of Tianjin, and a third north- Some port capacity currently goes unused south corridor from Beijing to Guangzhou. because of railway bottlenecks leading to the The MOR is also considering adding a new ports or because of the mismatched capacity dedicated passenger line from Beijing to of receiving ports. Shanghai to the existing double-track, mixed 2.19 Many investment strategies freight-passenger line. This will separate exist for expanding water transport of coal freight and passenger traffic between the two in China. Modem port facilities are not only lines and thereby boost the combined more efficient, but they decrease the throughput capacity of both lines. turnaround time of ships in ports. The use of 2.17 There is a spectrum of self-unloading ships can reduce the cost of investments for increasing throughputs on building handling facilities at a user's dock, existing lines (see Map [BRD 26857). New especially if the annual volume is low. m.arshalling yards, longer and more frequent Pusher-barge system, in which barges can be sidings, and better signaling and used on the open seas or on the inland management can incrementally increase waterways (or both, without transshipment) capacity. For larger increases in capacity, have the advantage that the pusher units are there are some possibly very cost effective separable from the barges, thus maximizing strategies such as the use of unit trains, or their at-sea utilization. replacing existing rails and wagons with 2.20 Generally speaking, larger those designed for heavy hauls. Unit trains, vessels are significantly cheaper per ton than Marshalled as a single unit that continually smaller vessels. In this study, per unit loops from origin to destination and back investment costs fall from Y 6,000 per dwt again, is being used on the Datong- for 9-meter ships to Y 4,300 for 12-meter Qinhuangdao line and is planned for the ships and to Y 3,000 for 14-meter ships. Shenmu-Huanghua line. For heavy haul With the exception of Qinhuangdao, China's technology, the MOR recently decided to ports are not deep enough to accommodate increase maximum freight car axle loads on 14-meter (100,000 dwvt) post-Panamax 10 to 20 percent of its freight cars from 21 supercolliers. Likewise, their fleet of ships to 25 tons per car over the next 10 years. consists mainly of domestically-produced This step, which can increase net tonnage shallow draft vessels 9-meter (35,000 dwt) throughput capacity of a line by up to 30 or smaller. For many years, small ships and percent, could offer significant help on shallow ports have jointly constrained the capacity-constrained lines. However, the Chinese shipping industry from changing to effects of existing, less efficient, rail larger ships like in the international coal technology can be expected to last through Wade. However, a new generation of 50,000 2000.. Finally, the options for expanding the dwt shallow draft ships is under capacity of existing lines by the largest development for 2000 and beyond. Potential amount are multi-tracking or electrification. exists for long-distance transport of coal 2.18 China has the potential to from a single, deep-water northern port expand greatly the coal transport capacity on (e.g., Qinhuangdao) to a single, deep-water  2. Overview of the Coal-Electricity Supply Chain 11 southern port (e.g., Gaolan, near Shenzhen), Reform of coal prices will encourage some which could serve as a terminus for routes of these activities. Another important by 100,000 dwt ships and as a hub for a strategy on the coal consumption side is to fleet of smaller vessels making deliveries to accelerate the trend to channel more users. However, the high cost and industrial growth toward the coal producing environmental impacts of port construction areas. Several factors are working against and dredging, and the total lack of large 14- this, such as the existence of industrial meter domestic supercolliers, have placed linkages in existing industrial areas, and a this option on the Government's back less developed technical work force in the burner, perhaps until the Hong Kong coal regions. takeover is complete. 2.24 Some Chinese experts think 2.21 Slurry pipelines are a that over the last 10 years, about 70 percent promising technology for long-distance bulk of energy conservation has been contributed transportation, but they are untested in by adjustment of industrial structures and China. Arid conditions in the north central enhancement of energy management. The area limit the potential for coal slurry pipe- latter includes employing more engineers lines, as do their relatively small capacities. responsible for energy efficiency in A coal slurry pipeline is being built by a enterprises, and setting up special offices in Sino-foreign joint venture from Yuxian in charge of energy conservation in state, Shanxi province to Weifang in Shandong provincial, and local governments. The province. Some of the proposed pipeline remaining 30 percent of energy conservation projccts plan to ship washed coal. in China camne from introducing new technology, changing processes, using new Coal Consumption and Conservation materials, and replacing outdated equipment or facilities with advanced ones. Most such 2.22 In 1991, 1.104 billion tons of projects are designed to achieve multiple coal were consumed, of which industries benefits. Expansion of production capacity, accounted for 78 percent (see Annex Figure improvement of product quality, and 2. 1). Power plants used 27 percent of all environmental protection are generally coal, steel plants used 8 percent, and other combined with energy conservation industries used 43 percent. Of the measures. Some sample surveys show that remainder, residential buildings used 15 the investment required per unit capacity of percent, commercial buildings used 1 energy saving continua'ly increases year to percent, transport used 2 percent, agriculture year, but up to now, a marginal production used 2 percent, and building construction curve or function for energy conservation and others used 3 percent An estimated 3 to has not been estimated for China. 4 percent (30 to 40 million tons) was lost 2.25 Officially, 1.23 million tons of during handling and transport. Less than coal were imported in 1992, mainly to the 2 percent, or 20 million tons, was exported. seaports of Dalian, Shanghai, and 2.23 Many strategies could slow the Guangzhou. As the economy is opened and rate of growth of coal consumption even reformed, coal imports can play an more than the current projection. Several important role in balancing supply and Bank reports suggested many promising demand in coastal areas with little avenues for energy conservation through investment or lead time. technological advancement; operating changes; district heating; co-generation; Coal for Electricdty larger-scale industrial plants; substitution of other energy sources (for example, oil, gas, 2.26 Since 1949, China has become solar, wind, hydro, nuclear, and biomass) the fourth largest producer of electricity in where appropriate; and more emphasis on the world, with a total output of 754 TWh in high value-added industries and services.' 1992. Power in the country is distributed  12 2. Overview of the Coal-Electricity Supply Chain through nine major grids (see Map IBRD On the positive side are the air pollution 26595). In 1992, total installed capacity was reduction, irrigation, flood control, and 166 GW; about 76 percent of this was possibly navigation and recreation benefits. thermal and 24 percent was hydropower. A On the negative side are the loss of miniscule percentage of the thermal capacity agricultural land and the need for relocation is fired by oil or natural gas. From the and resettlement of villages. There are 1950s to the 1970s, the thermal share of several enormous hydropower projects in the total electricity sector investment fell while 8FYP and 9FYP, including the Three that of hydropower rose, until the 1980s Gorges reservoir and power station on the when the trend was reversed sharply (Annex Yangtze River between Wuhan and Figure 2.8). Industry is by far the largest Chongqing, approved by the State Council user of electricity, accounting for 77 percent in 1992. of consumption in 1992. Approximately 96 2.29 Local energy resources are also percent of the nation's villages and 80 relied on to meet local needs, especially in percent of rural families now have access to isolated areas. In 1989, mini-hydro, small electricity. thermal, and diesel generating sets had a 2.27 The electricity sector's 8 total installed capacity of 18.7 GW and percent share of final net energy generated 60.4 TWh. In addition, China consumption is one of the lowest in the commissioned its first nonmilitary nuclear world, but is likely to go much higher as the power plant (300 MW) in the Shanghai area service and residential sectors use more (see in 1992. In Guangdong, the Daya Bay Annex Table 3.18). One prominent nuclear plant (2x900 MW) will send 70 investment strategy is to develop more percent of its power to nearby Hong Kong. minemouth thermal power plants, thus Known uranium reserves could sustain seven avoiding the transport bottlenecks. At times more nuclear power production for 30 present, about 40 percent of all thermal years, and contingency plans include several power plants are located at minemouths additional plants. (within 50 km distance). However, with a 2.30 Since the start of economic few exceptions, most electricity transmission reforms in 1979, China has made significant is intra-provincial; the self-sufficiency of progress in modernizing its power most provinces in terns of electricity generation and transmission technology. production is evident in Map 26596. Mine- Between 1979 and