October 26, 2011

Understanding China’s Energy Strategy – the Domestic Angle

Last month, I wrote a post trying to explain China’s energy
strategy in order to
make an observation about why China is so invested in protecting potential
hydrocarbon resources in the South China Sea
. That is, that China’s energy
strategy relies in part on developing a broad portfolio of energy sources that
does not overly rely on Middle East oil that must transit the Strait of Malacca
or overland pipelines from Central Asia that must pass through vulnerable
transit states like Burma and Pakistan. Indeed, for Beijing, the South China
Sea is one potential input into China’s broader energy strategy that can help
the Chinese mitigate their vulnerabilities elsewhere. Thus, China is determined
to protect its interests there, which means
challenging other states
that could potentially exploit the seabed resources
for themselves.

Yet, importantly, China’s energy strategy is based not just
on those external challenges it faces, but domestic energy challenges as well.
In recent years China has been investing heavily in coal development and
hydroelectric projects to generate energy from domestic resources in order to
reduce its dependence on oil imports. But these domestic energy resources themselves
have their own vulnerabilities that only reinforce China’s need to seek energy
abroad – and its assertive action to acquire those energy resources.

Last week, The Wall
Street Journal
reported that China once again faces an energy shortfall
this winter in part because of limited energy resources at home. The report
said that China’s State Electricity Regulatory Commission cautioned “that
falling hydroelectric power output and tight coal supplies could result in a
shortfall of at least 26 million kilowatts in the months ahead

Infrastructure seems to pose a particular challenge to
China’s coal development. According to The
Wall Street Journal
, “Each
year, China's creaky rail cargo network and inadequate regional road systems
get clogged up as millions of tons of coal are moved by train and truck from
mines in the west and north of the country to power stations serving the
industrial east and south.
” As a result, the report said, “the
State Grid Corp. of China warned that five provinces—Hubei, Hunan, Jiangxi,
Henan and Sichuan, along with the heavily industrialized Chongqing
municipality—could face a combined shortage of 17 million tons of coal this
winter and spring.

China’s hydroelectric generation poses its own challenges
and offers a more interesting look at the way in which broader environmental
trends affect energy production. The Wall
Street Journal
reported that “China's
National Energy Administration has said a prolonged drought in some regions
will likely cause hydropower capacity to decline between 30% and 40% this
.” This bleak outlook is a reminder of how inextricably linked
resource trends are with each other. (Learn more about the Chinese
energy-water nexus

These domestic energy shortfalls are likely to reinforce
China’s assertive behavior as it attempts to acquire assured access to oil
imports. Indeed, similar shortfalls last winter forced
China to increase its oil imports
. This will likely compel Beijing to
continue its effort to diversify energy sources, potentially increasing, from
Beijing’s perspective, the South China Sea’s strategic significance. Thus, for
analysts trying to understand China’s energy strategy and interests in the
South China Sea, it is important not to view just the external challenges
Beijing faces (i.e., the Straits of Malacca and vulnerable overland Central
Asian pipelines) but also the domestic challenges it faces with producing
energy at home.