China Renewable Energy and Sustainable Development Report 1

China Renewable Energy and Sustainable Development Report 1 August 2007: Vol. VIII China's extraordinary economic growth and heavy reliance on increasingly expensive foreign oil, the vast environmental toll that is one of the most apparent costs of China's economic success, persistent rural poverty in China and periodic power shortages all have impressed upon Beijing that renewable energy must be a large part of China's economy if China is to both complete its economic transformation and achieve "energy security." China rapidly has moved along the path of renewable energy development. In 2005 China had the world's largest total investment in renewable energy sources (excluding large scale hydropower plants) with expenditures of $6 billion U.S.D.and the largest installed capacity of renewable energy with 37,000 megawatts (MW) of installed capacity. With wind-power investment of $600 million U.S.D. in 2006 and total installed capacity approaching 5,000 MW, China is now the eighth largest wind-power producer in the world; Chinese analysts estimate that the total potential wind power generating capacity in China is in excess of 1 million MW, equal to the power generating capacity of 50 Three Gorges Projects and Chinese policymakers have set an ambitious goal of putting in place 30,000 MW of wind power by 2020. With an additional 3,000-5,000 MW of new wind capacity to be built in China during the 11 th Five Year Plan period, China will be well along to that goal by 2010; in those five years investment in wind power capacity development will exceed 10 billion Yuan/year. Biomass energy from agricultural waste, straw and waste from cities alone may exceed 500 million MT of coal equivalents. In the near-term China plans to develop 120,000 MW of renewable energy by the year 2020; this would account for 12% to 16% of China s total installed energy production capacity that year. China's ambitious growth target for renewable energy production will require an investment of approximately 800 billion Yuan (~$100 billion USD) by 2020. In the long-term China has set an objective of having 30% or more of its total energy requirements satisfied by renewable sources by 2050. 1 Our goal at the China Renewable Energy and Sustainable Development Report is to provide authoritative, timely, informative and useful information about the emerging renewable energy and sustainable development sectors in China for global companies who have products and services to sell to or buy from China's rapidly growing renewable energy and sustainable development sectors and other policy makers, NGOs and interested parties. Drawing from original Chinese language materials of Chinese companies, industry associations, central and local government agencies and non-governmental organizations, the China Renewable Energy and Sustainable Development Report will cover developments in China's solar, wind, bio-fuel, bio-mass, small hydroelectric and other renewable energy sectors, including regular features on investment, growth, local and national laws and regulations, leading Chinese companies, 1 2007 China Strategies, LLC.

industry meetings, tradeshows, exhibitions and conferences and business opportunities. For more information about subscribing to the China Renewable Energy and Sustainable Development Report, please contact us at lou@chinastrategiesllc.com. For more information about China Strategies, LLC, please visit us at www.chinastrategiesllc.com. China's Solar Power Industry At the Sichuan China---Spain Economic Exchange Conference held in Chengdu in early July 2007, it was revealed by Juan Miguel Villa Mir, the president of Ferroatlantica, the world s largest silicon producer, that the company will invest $150 million U.S.D. in Sichuan to construct a 150,000 tpy metallic silicon plant, the world s largest. Ferroatlantica, which now produces approximately 1.5 million tpy of silicon, presently is scouting locations for the new plant in Aba, Mianyang and other towns in Sichuan Province and expects to determine a location by September 2007. By 2010 metallic silicon output will reach 2 million tpy or more and China is expected to be one of the world s most significant producers. With the proliferation of cell phones, laptop computers, MP3 players and other mobile communications devices, solar digital mobile power supplies are fast becoming an important new product and the leader in the field is the Shenzhen Solar Power Science and Technology Co., Ltd. According to Xu Yuti, Shenzhen Solar Power s CEO, nearly 1 billion of these devices will be manufactured and sold in the next two to three years. The math of power savings from the use of mobile solar power supplies is compelling. To charge one cell phone requires 2.5 hours and 5W of power. Chinese currently have a total of 400 million cell phones, which collectively would require 2 billion watts for one charge. If cell phones are charged once a day, then cumulatively charging China s cell phones would require the expenditure of 800 million kwh of power. If instead a solar mobile digital power supply was used to charge all those cell phones, those 800 million kwh of power would be saved at a cost savings of perhaps 400 million to 600 million Yuan; if other mobile devices are also charged using solar digital power mobile power supplies, Xu Yuti of Shenzhen Solar Power estimates the total savings at upwards of 1.6 billion kwh/year. Despite the compelling case for use of solar digital mobile power supplies have not been embraced by the public. 2 A photovoltaic power system is being installed at the new Wuxi (Jiangsu Province) airport which is nearing completion. The system is being supplied by SunTech Solar, whose central offices are located in Wuxi. China s largest private solar power plant was recently completed and is now supplying power. The six million Yuan solar power plant, which will be able to generate approximately 110,000 Kwh/year, was developed by the Qidong Linyang New Energy Company. Besides supplying power for the Linyang Industrial Park, the remaining power will be supplied to the power grid. The solar power plant is located in Qidong, Jiangsu Province, just north of Shanghai. China s first private solar power plant with installed capacity in excess of 1 MW will be

constructed in the Longgang district of Shenzhen, Guangdong Province. The 1.2 MW power plant, which will occupy 15,000 square meters, is to be developed by the Shenzhen city Xintian (New Day) Sun Power Science and Technology Co., Ltd. for an estimated 80 million Yuan (~$10.5 million U.S.D.). To date this project is the largest private investment in a solar power plant and the largest private solar energy project to be connected to the power grid. According to Xiong Xiaoping, the region s chief executive, this project will help ameliorate power supply tightness in the region. This project is being supported by the Longgang government, which will contribute 30 million Yuan to support the project. The Yangze River Delta region (Shanghai, Jiangsu and Zhejiang Provinces) has become a locus of development of the Chinese solar industry. One such area within the Yangze River Delta where solar power capabilities are developing rapidly is the Jiangsu Province, Kunshan Renewable Energy Industry Demonstration District where the first stage, 240 MW, $20 million U.S.D. solar cell project is being built by the Maoyou (Suzhou) New Energy Co., Ltd. and is expected to be operating starting in 2008. Eventually when all the planned projects are built---including investments by U.S. companies---the demonstration district will be producing upwards of 2000 MW of solar cells. In addition, China s largest silicon wafer fabricator---the Hebei Jinglong Group--- invested 2 billion Yuan to construct a Solar Energy Science and Technology Industrial Park, including four, 25MW solar cells production lines; a $30 million U.S.D. investment was made in a solar cell production line in the Jiangning Science and Technology Park in Nanjing; and Jiangsu is the home to four PV manufacturers, including SunTech, which have gone public on stock exchanges in the U.S. GT Solar Incorporated has entered into a $171 million dollar contract with Glory Silicon Energy Co., Ltd., a relatively new company located in Yangzhou, Jiangsu Province. GT Solar will supply its new furnaces for the production of multi-crystalline silicon ingots weighing up to 400 or 450 kg. The Glory Silicon Energy facility will become one of the world s largest wafer factories with annual output of approximately 1500MW. China's Wind Power Industry The Netherland s Energy Center (ECN) has signed an agreement with China s Institute of Science providing for the parties to cooperate in conducting new energy research and development and for them to study the feasibility of establishing a wind power research center in Baoding. The ECN has committed 200,000 Euros towards the development of the feasibility study for the wind power research center. The Baoding region has China s first international-level new energy industry base and it leads the country with respect to wind energy research. Previously the government of Baoding had entered into a memorandum of understanding with ECN. The first stage of the Beijing Guanting Wind Farm is nearing the stage where equipment will be installed and it is expected that by the end of 2007 the wind farm will be connected to the grid and be generating power. After completion, when the wind farm is operating, it will produce 100 million Kwh of power and provide power to 100,000 homes (based on estimated per household use of power of 1000 Kwh/year. Before the end of 2010 Beijing will complete 3

the second stage of the wind farm project, whereupon total installed capacity will be a total of 100MW. Beijing hopes to have in place renewable energy sources by 2010 that will account for 4% of the city s total energy needs as of that date. The power generated by the Beijing wind farms will be part of the Beijing municipal power grid and every year the use of these wind farms will cause 50,000 MT of coal equivalents not be used The NDRC has approved a plan to develop a total of 6 wind farms that would have a cumulative total capacity of 1500 MW in Zhangjiagang, Hebei Province. Shandong Province is undergoing a boom in wind power development. There are five wind farms to be under construction in 2007, including ones in Rongcheng, Dongying, Zhanhua, Shougang and Weihai. In total these five wind farms are to cost 2.5 billion Yuan and provide a total of almost 300 MW of power generating capacity. Shandong Province s GDP is the second largest in China (after Guangdong Province). In 2006 Shandong province s GDP reached 2.185 trillion Yuan, up 156% since 2000. Shandong Province s industrial base is concentrated much more in heavy industry than Guandong Province and consequently has larger power requirements. Because of central government mandates, Shandong s provincial government closed approximately 4000 MW of small, heavily polluting thermo-power plants; that amounted to 17% of Shandong province s total power generating capacity of 22,720 MW as of 2006. Because Shangdong Province is a coastal province bordering the East China Sea, provincial officials estimate that the province has upwards of 67,000 MW of wind power resources; this is equivalent to 3 Three Gorges Projects. Long term engineers in Shangdong believe that there can be as many as 38 wind farms producing power in Shangdong. At present, provincial officials estimate, it costs 8000 to 10,000 Yuan to build one kilowatt of wind power generating capacity, double what it now costs to build a coal fired power plant. According to the provincial government s plan Shandong will have 1000 MW of wind power generating capacity by 2010 and 3000 MW by 2020; this would be approximately 10-15% of China s total wind power generating capacity. 4 On July 31, 2007 Lin Yuifu, the chairman of the Hainan Province Development and Reform Office said that Hainan will undertake to build an additional 3 wind farms in 2007 to help supplement the province s energy needs for 2008. According to the chairman of the Renewable Energy Development Center of the Power Research Institute of the National Development and Reform Commission, the NDRC and the Ministry of Finance presently are researching the formulation of a plan to support the development of an indigenous windmill and windmill parts industry. Presently China has the capability to produce 600kw and 750kw turbines, though the vast majority of windmill manufacturers in China are at the low end of the quality spectrum in terms of design and manufacturing; turbine manufacture in China is of a vintage 10 years behind developed countries. Consequently, the market for windmills and parts is dominated by imported machinery and equipment. According to one report domestically produced equipment accounted for only 25% of new wind power equipment put in place in 2004, while the remaining 75% was imported. In 2005 the imported amount was in excess of 70% and by

2006 the supply of wind power equipment continued to be 60% from imports. According to the {Mid to Long Term Plan for Wind Power Generation} formulated by the NDRC, China will generate at least 4000 MW of wind power by 2010, 10,000 MW by 2015 and 20,000 MW by 2020. China's Geothermal Industry During the 11 th Five Year Plan period an additional 25-50MW of geothermal power generating capacity will be built and by 2010 when 11-5 concludes there should be a total of 65-100MW of geothermal power generating capacity in operation in China. In this same period there will be developed 8-10 million square meters of geothermal heating for a cumulative capacity of 22-25 million square meters of geothermal heating throughout China. Based on geological surveys China has already discovered more than 3200 geothermal locations and has drilled more than 2000 geothermal fields; of that total there are approximately 255 fields with high heat levels that potentially can produce electricity. In all the total potential installed power generating capacity of geothermal power is 5800MW; at present there is only 30MW of geothermal power being generated in China. China's Bio-Mass Energy and Bio-Fuels Industries The city of Beijing has launched an initiative to use bio-diesel in 1000 public transportation vehicles (owned by the Xianglong Company). If the experiment is successful, Beijing anticipates gradually expanding the program to as many as 10,000 vehicles. During the 10 th Five Year Plan period (2001-2005) a total of 600 million Yuan was invested in Hunan Province to develop convert waste agricultural matter into clean energy. There are now 1.6 5 million farming households in Hunan Province that are currently using clean energy to boil water, cook food and for light; this number of households is approximately 12% of total households in Hunan Province. The savings from the use of renewable energy by Hunan Province households is equal to 10 million MT of coal equivalents/year. During the 11 th Five Year Plan period (2005-2010) Hunan Province intends to invest 1 billion Yuan to add an additional 1.5 million households which are able to use clean energy. In the next four years Hunan Province intends to develop 5000 or so large and mid scale methane projects as well as expand the development of waste agricultural matter to clean energy production. Based on the provisions of the {Provisional Measures for the Administration of Sharing of Costs in the Price of Generation of Renewable Energy} which was promulgated last year, there is an additional 0.25 Yuan/kwh added to the price associated with coal fired energy that enters the grid for biomass produced renewable energy that is sold through the grid. This subsidy will last for 15 years for bio-mass produced energy at which time it will be eliminated. Currently, though, the cost of bio-mass generated power is 50% greater than the cost of coal fired power or hydropower. Waste to Energy Industry The World Bank has signed its first agreement in China to support a project to produce electricity from methane in waste landfills. The Tianjin Shuangkou Waste Landfill Methane Power Generation

Project will use household waste from Tianjin s first modern landfill. The Shuangkou landfill collects approximately 800 to 1000 tpy of household waste; through the end of 2006 the Shuangkou landfill had accumulated more than 1.6 million MT of household waste. The developer of the project is the Tianjin Clean Energy and Environmental Projects Company (TCEE). According to the agreement with the World Bank, TCEE will sell 635,000 MT of carbon emission reductions to the Spanish Carbon Fund, which is administered by the World Bank; the project developers are now preparing to register this project with the CDM board. Development is this project, which already has obtained the approval of the NDRC, is expected to get underway in early 2008 and when operational the power that is generated will be sold into the North China Power Grid. China has 87 cities whose population exceeds 1 million persons so the potential for further development of landfill methane to energy projects is significant. China s Construction Industry and Sustainable Development China is now building approximately 2 billion square meters of buildings every year, which is nearly 50% of all construction occurring worldwide. Presently China has a total inventory of some 40 billion square meters of buildings. The construction of residential buildings alone accounts for 20% of energy consumption, 32% of water consumption, 20% of steel production and 17.6% of concrete output nationwide. On average residential housing occupies 30% of the land of most cities. Consequently the construction industry is central to China s efforts to conserve resources and reduce expenditures of energy. The goal of reducing energy consumption in the construction industry and in the operation of buildings is being given impetus from a variety of sources, including regulations and plans, such as are in place in Shanghai, which seek to bring about a 50% reduction in energy consumption in new construction of public buildings and upwards of a 65% reduction in energy construction in residential developments. The National Development and Reform Commission has established an objective of having a total of 300 million square meters of buildings covered by solar hot water heaters by 2020; at this level solar hot water heaters would supplant 40 million MT of coal equivalents/year. Despite these goal, the movement towards installation of solar hot water heaters in China on a larger scale is stymied by a number of factors, including regulations that prohibit the installation of solar hot water heaters because of safety and aesthetic concerns and a failure to effectively coordinate the incorporation of solar hot water heaters into the design of new construction. 6 Laws and Policies Governing Renewable Energy and Sustainable Development in China Despite the requirement in the {Renewable Energy Law} that power transmission companies must provide access to the grid of energy generated from renewable sources, some renewable energy companies are finding that they are facing obstacles to getting access to the grid.

On August 1, 2007 the Electric Power Control Commission issued the {Measures for the Supervision and Management of Power Grid Companies Purchasing All Renewable Energy Power}, which makes clear the requirement that power grid companies are required to purchase all of the renewable energy which is produced and sent into the grid. The Measures which go into effect on September 1, 2007, also make clear that the power grid companies and the designated regulatory entities are responsible for ensuring that renewable energy gets on the power grid. The Measures also provide that the price of renewable energy will either be set or guided by the central government. Whether there should be a mandate that a certain percentage of total power generation be derived from renewable energy sources is something that will be considered in the next stage said a spokesperson for the NDRC. A number of national and industry standards for the Chinese photovoltaic industry were released in July 2007. The standards broadly concern solar cells, controls for PV systems, inverters and use of DC power, tandem wind and solar systems and storage batteries for PV systems. Business Opportunities in China's Renewable Energy Industry According to Xu Yongsheng, the chairman of the Central Government Department s Government Purchasing Center, the 97 ministries and departments under the State Council purchased a total of 8.55 billion Yuan worth of goods and services; of that amount more than 30% were green products. Xu predicted that the percentage of green goods and services that the central government purchases will increase as green purchases by central government ministries and departments become mandatory; at present green purchases are voluntary. In October 2006 the Ministry of Finance and the State Environmental Protection Administration jointly issued the {Opinion Concerning the Implementation of Government Purchasing of Environmentally Designated Products} and a {List of Environmentally Designated Products for Government Purchase}. 7 CDM Projects and Other Foreign Participation in China s Renewable Energy Sector The EU and China have launched the EU-China Facilitation Project, which is intended to support CDM projects in China through improved research, capacity development, technical exchange and training. The project will continue until 2010. The CDM Project Management Center of the NDRC has approved more than 500 Chinese CDM projects and of those 500 approved projects, as of August 2, 2007 102 Chinese CDM projects have been approved by the Executive Board of the U.N. Framework Convention on Climate Change. The total number of CDM projects which have been approved by the EB of the UNFCCC as of August 2, 2007 was 752. Since early June 2007 there have been roughly 20 additional Chinese CDM projects which were approved by the EB of the UNFCCC. Approximately 10 of the approved projects were hydropower projects and five were wind power projects. The remaining projects included a biomass project in

Shandong Province, a couple of cement plant energy conservation projects, including a waste-recovery project in a cement plant in Gansu Province, and a project composting organic waste in Wuzhou. Renewable Energy and Sustainable Development Conferences The 2007 China (Qingdao) Building Energy Conservation and Renewable Energy Building Technology, Products and Equipment Exhibition will be held beginning on August 21 in Qingdao. By the end of 2006 there had been constructed within Qingdao a total of more than 20 million square meters of energy efficient buildings. Developments in Environmental Protection and Energy Conservation in China According to estimates from the Chinese Environmental Protection Industry Association as of the end of 2006 there were approximately 35,000 companies that were engaged in industries related to environmental protection; these businesses employed some 3 million workers and had income of about 600 billion Yuan and profits of approximately 52 billion Yuan in 2006. During the 11 th Five Year Plan period the association estimates that output value among companies engaged in environmental protection businesses will rise by 15%/year to 1.1 trillion Yuan by 2010. In late June 2007 the Ministry of Commerce released the {Notice of the Ministry of Commerce Concerning Launching Energy Conservation Activities in the Retail Sales Industry }. The Notice requires that emphasis will be placed on energy conservation efforts by large supermarkets, department stores and specialty stores having 10,000 square meters or more of space. Initially these efforts will be tested in the following ten cities: Beijing, Tianjin, Shanghai, Chongqing, Taiyuan, Shenyang, Qingdao, Wuhan, Guangzhou and Xian. According to a report issued by the State Statistical Bureau, Beijing was the only location in China in 2006 that accomplished the objective of lowering energy consumption per unit of GDP by at least 4% (1/5 th the total objective of 20% energy reduction per unit of GDP for the full 11 th Five Year Plan period). In Beijing s case the city was able to lower energy consumption by 5.25% per 10,000 Yuan of GDP created. Of the 30 provinces, autonomous regions and directly administered cities, there were 17 which were able to accomplish a 3% or better reduction in energy consumption per unit of GDP produced, while 6 regions accomplished a 2-3% reduction in energy consumption per unit of GDP produced and another 6 regions had reductions of 1-2%. The average nationwide was a 1.33% reduction in energy consumption per unit of GDP produced; though less than the objective, 2006 was the third year in a row where energy consumption per unit of GDP produced didn t rise. Estimates for Beijing for the first quarter of 2007 were that the city had accomplished a reduction of energy consumption of 4.9% per unit of GDP. 8 A report issued by the Dutch Environmental Assessment Department in mid June 2007 indicates that in 2006 China s emissions of carbon dioxide totaled 6.2 billion MT, overtaking U.S. emissions of carbon dioxide totaling 5.8 billion MT in 2006. On a per capita basis, China s carbon dioxide emissions at 3.5 MT/person are much less than England at 10 MT/person and the U.S., which has the most per capita emissions of any country at 20 MT/person.

On June 18, 2007 the State Council issued the {Notice Concerning Establishing a State Leadership Group to Address the Work of Climate Change and Energy Conservation/Emissions Reductions}. The Leadership Group s chairman was appointed by State Council Premier Wen Jiabao and its 29 members are comprised of representatives from almost every State Council ministry. Ma Kai, the chairman of the NDRC and the Energy Resources Office was appointed to be chairman of the secretariat of the Leadership Group while Zeng Peiyan, a vice-premier of the State Council and Tang Jiaxun, a member of the State Council were appointed as vice-chairmen of the Leadership Group. The importance of this effort is underscored by the important central government officials who were appointed to the Leadership Group. Eight investigative groups comprised of personnel from eight central government ministries, including the NDRC, are fanning out across several provinces to conduct investigations of the of those industries which have yet to have their power prices, land acquisition prices and taxes and fees readjusted to eliminate previous preferential treatment for industries that are heavy polluters and large consumers of power. According to Xie Zhenhua, a vice chairman of the NDRC, this investigation is governed by the {Notice Concerning Launching a Special Investigation to Take Stock of Heavy Polluting and High Energy Consumption Industries issued by the secretariat of the State Council. In the first quarter of 2007 six industries (including electric power generation, steel, non-ferrous metals, building materials, crude oil processing and petrochemicals) which are heavy polluters (accounting for nearly 70% of sulfur dioxide discharges nationwide) and users of power (also accounting for nearly 70% of energy use nationwide) expanded too quickly (average growth was 20.6% in Q1), according to the NDRC. In mid-july 2007, the chairman of the State Statistical Bureau said that China would not likely issue a Green GDP Accounting anytime soon. He said that there are no international standards for reducing GDP by expenditures of natural resources and creation of pollution to arrive at the Green GDP. China has previously produced an energy account and an emissions account; trial efforts to develop a national land, forest, mine and water resources accounting was done in 2000. The State Statistical Bureau in conjunction with the State Bureau of Environmental Protection also has been working on developing an environmental pollution accounting and an accounting of the value of environmental pollution damages. 9 China s Energy Production and Consumption The Southern (Nanfang) Power Grid has launched an effort which will idle upwards of 13,000 MW of small coal-fired power plants during the 11 th Five Year Plan period. Through 2010 the Southern Power Grid will put into operation 80,000 MW of new installed capacity so that by the end of the 11 th Five Year Plan period total installed capacity managed by the Southern Power Grid will reach 165,000 MW; of that total the Southern Power Grid expects

36.3% of power generating capacity to be derived from hydropower, wind power and other renewable energy sources (though not stated nuclear power is likely included in what they describe as renewable energy sources). By 2010 the percentage of total power generating capacity supplied by power plants having at least 300 MW will increase from 34% today to 54%. Over the next several years Fujian Province will be adding a batch of coal-fired power plants, gas-fired power plants, LNG power plants and nuclear power plants to keep up with the growth of its economy, which experienced 14.3% GDP growth in H1 2007. Fujian Province s energy needs have grown in recent years at a rate of 10% or more, but energy supply has not kept pace with GDP and energy demand growth. According to the {Fujian Province 11 th Five Power Development Program} which was released earlier in 2007, by 2010 Fujian Province s installed power generating capacity will total 32,680 MW. Among the projects that are being constructed are two hydroelectric plants (the Youxi and the Ningde Hongkou Hydroelectric Plants), the #1 and 2 Jiangyang thermal power plants, the Jinjiang and Xiamen LNG power plants; many of the regulatory approvals for the Ningde Nuclear Power Plant already have been obtained and planning is proceeding on construction of the Fuqing Nuclear Power Plant. In the first half of 2007 China imported 99.59 million MT of oil worth $42.663 billion U.S.D. Of the total 81.54 million MT of the oil imports were of crude oil and the remaining 18.05 million MT were of refined oil. China s reliance on foreign oil is now in excess of 50% of total demand. Since the severe energy shortages which occurred in 2002, there has been a rapid increase in installed capacity in China. Installed power generating capacity increased on average 60,000 MW/year or 15%/annum between 2002 and 2006, from a total of 353,000 MW in 2002 to 580,000 MW as of October 2006. The power plant building boom in the 2002-2006 period, though predominately coal fired plants, were larger in scale (300-1000 MW) and equipped with sulfur scrubbing equipment. In this period hydropower was developed with installed capacity totaling in excess of 100,000 MW, including the world s largest hydroelectric plant--- Three Gorges---which already has 9800 MW of its planned total of 18,200 MW of generating power operating. Chinese experts estimate that the total potential hydropower which can be generated is 400,000 MW, four times what is being generated presently. At present coal fired plants account for 76% of total power generating capacity while hydropower accounts for another 22.4% and nuclear accounts for 1.34%. China plans to increase the proportion of total installed power generating capacity that nuclear power accounts for to 4% by 2020. 10 On July 24, 2007 the five principal state-owned power generating groups in China once again petitioned the State Development and Reform Commission to agree to an increase in power prices to reflect increases in coal prices. In 2005 the Chinese central government instituted a policy which linked increases in power prices to increases in coal prices. If within six months in any year the average price of coal has increased 5% or more, then power prices are to increase correspondingly. The China Power Companies Joint Association and the Coal

Industry Association were each given authority to calculate increases in coal prices and power prices. In 2005 and 2006 there were two tandem increases in coal and power prices; the 2006 increase was 8% or 25-30 Yuan/MT of coal. According to the calculations of the China Power Companies Joint Association the price of coal used in power generation has increased 9% compared to last year; according to the calculations of the Coal Industry Association, overall coal prices have increased 4.67% and price of coal that is used for power generation increased 13%. According to analysts, as soon as the mechanism for the tandem increase in coal and power prices takes effect, the price of coal will increase 20 Yuan/MT and power prices generally will increase 1/100 th of a Yuan/kwh. The places where there have been the largest increases in prices of coal for power generation include Shangxi, Guizhou and the Southern coastal provinces. The contract that was signed in early 2007 governing the price of coal for power generation was 31.39 Yuan/MT higher than the previous year. Despite petitioning the government twice previously, Beijing has not approved an increase, primarily because of concerns about inflation; in June 2007 principally on the basis of increases in grain prices and pork, China s CPI increased 4.4%. This was a new 33 month high. The fall is a period of highest power consumption in China. Consumers, however, account for only 10% of total energy use in China, while industry accounts for 76% of total consumption of power; according to analysts that industry accounts for such a large percentage of consumption of power in China is the trump card of the power generating companies in their petition for increases in power prices. In the first half of 2007 the rate of growth of power consumption in the central and western regions of China exceeded average growth of power consumption throughout China and in those regions heavy industry consumed 70% or more of total power consumption; Qinghai exceeded 90%, while Ningxia was 88% and Shanxi was 81%. Though consumption of power by residents is a fraction of power consumption by industry in China, as soon as there is a permitted increase in power prices in China, residents will feel the increase also. In 2006, for example, when power prices increased Beijing residents power costs increased from 0.48 Yuan/kwh to 0.4883 Yuan/kwh. According to estimates, the supply and demand picture in China for energy is basically in balance, though at peak loads it is estimated that there will be shortages of 5000 to 6000 MW and the areas of the country which will experience the most pronounced tightness in power supply include Guangdong, Hainan and central China, which shortages in Guangdong potentially severe. 11