Energy Reforms Unfinished

China's new leaders will inherit a patchwork of ineffective energy policies, but they may move only gradually to pursue reforms, experts say.

As the decade-long government of President Hu Jintao and Premier Wen Jiabao draws to a close, it is leaving a host of energy problems and policy issues unresolved.

Despite periodic power shortages, the electricity sector continues to operate under state-controlled rates that have made production unprofitable.

Last year, the country's five major state-owned electricity companies lost 31.2 billion yuan (U.S. $4.9 billion) on thermal power generation, the China Electricity Council said in May.

Similar problems beset the fuel sector, which is dominated by huge monopolies that seek subsidies to offset losses from sales at set prices.

The combined losses on refining by state-owned Sinopec and CNPC PetroChina reached 97.7 billion yuan (U.S. $15.5 billion) last year, according to reports from Reuters and the official Xinhua news agency.

Premier Wen is well aware of the problems that China's mix of partially-marketized measures have caused.

"Controlling energy use and straightening out the energy pricing structure are key to energy conservation and reducing pollution," Wen told the National People's Congress (NPC) last March, according to the official English-language China Daily.

In 2004, Wen promised "dramatic reforms" within a year to realize "balanced and sustainable economic and social development," Xinhua reported at the time.

Half-measures

Yet, most of the changes in energy policy during Wen's tenure have been half-measures that fall far short of full market reforms.

The government has allowed more frequent changes in fuel charges to reflect fluctuations in oil costs on world markets, for example, but pump prices can change only with a 22-day delay and continued state controls.

The National Development and Reform Commission (NDRC) also tried to raise power prices for high-consuming households in July, but it set the limits so high that most users saw no increase at all.

As a result of the half-measures, the benefits for conservation and the environment have also been compromised.

In both the last five-year period through 2010, and so far during the current Five-Year Plan, energy efficiency efforts have fallen short of government goals.

Energy analysts say reform efforts appear to have fizzled out toward the end of the government's term.

"For a lot of Chinese, the last 10 years have been a disappointment on reform," said Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington.

Chow said Wen may have planned more ambitious moves, but none seem likely now that he is a "lame duck" with only months left in power.

"There is pent up demand in this society for not just carrying on as before, but tackling questions like why is the air so bad," said Chow in an interview.

For those reasons, China's new leaders are likely to set a new course on energy policy for the next 10 years, he believes.

"These issues are unavoidable," Chow said, although China will face many pressures for economic, political and social reforms.

"Among the ones that have to be at the top of the list are China's energy challenges and the limits they place on development if those challenges are not met," Chow said.

Speed of reforms

How quickly the incoming leadership will move is open to question. Next month's National Congress of the ruling Chinese Communist Party (CCP) is expected to name Vice President Xi Jinping and Vice Premier Li Keqiang to the nation's top posts.

Some analysts believe that the slower-growing economy has created new conditions for tougher decisions.

"The economic slowdown in China, if it persists, will reduce the stress on the domestic energy supply system and result in a surplus over demand, as we have already seen for coal," said Philip Andrews-Speed, principal fellow in the East Asia program of the National University of Singapore's Energy Studies Institute.

"In principle, this provides a window of opportunity for deepening market reforms in the energy sector by introducing competition and reducing energy subsidies and cross subsidies," he said in an email message.

But Andrews-Speed said the new leaders will have plenty on their plate with concerns about economic problems, foreign affairs and social stability.

Near-term changes to energy policy may be both a lower priority and an unwarranted risk.

"For this reason, I would not expect radical initiatives over the next year, rather just a continuation of the incremental reforms of the pricing mechanisms," Andrews-Speed said.

But Chow argues that a process for more sweeping changes will have to be started to get anything done.

"Whether you're going to get an announcement next year or not, that's a different issue," he said. "But they have to start thinking about how to tackle these fundamental challenges so that in a year or two, they can get some consensus on a program that would address these problems."

Last week, impatience with the slow pace of change under the outgoing government appeared to creep into an official report on reform of income distribution and monopolized industries.

After a long delay, the government is expected to publish a general plan this month for making citizens' earnings more equitable and addressing the problems of industries dominated by state-owned enterprises, Xinhua reported.

"China's general plan for income distribution reform has been in the works for the past eight years," the news agency said.