system, monopoly in some segments,
pipeline-operation bundling, dispatch-operation
bundling and competition restrictions. Most
energy companies in China are large state-owned
enterprises, with few private investors, giving an
unbalanced mix of market participants. The
government still controls the licencing of coal,
oil and gas exploration and mining rights, and the
rules necessary to ensure consistent market
access and fair market competition are still not in
place. So, depending on their legal status, companies are not competing on the same level
playing field. Grid operators still have holdings
along the entire value chain of power transmission, distribution and sales, and a fair and
well-regulated market competition mechanism
has still not been put in place. Integrated operations encompassing exploration, development,
refining, transmission, imports and sales have
more or less been realised in the oil and gas
industry, but the industry still does not allow
diverse participants to compete in individual
sections of the value chain. A spot and futures
market for oil and gas products has not been
established, and regional international energy
markets are less and less influential in the wider
world.
4.2.2 The Energy Pricing Mechanism Is
Still Imperfect
The deregulation initiative has made slower
progress and there is still no fair pricing mechanism—the price of oil products, gas and electricity is still decided by the government. The
price structure is unjustified. The cost of infrastructure like pipelines is not systematically
checked, and externality costs related to the
environment have not been internalised. Price
distortion remains: electricity and gas prices for
residential use have been below cost for some
time, and cross-subsidies abound. The energy
taxation system is still imperfect, and the structure and levels of resource taxation are unreasonable. Other concerns to be addressed include:
poorly aligned fiscal and taxation policies for
coal, oil, gas and renewable energy; a restricted
range of incentives to support development of the
new energy industry, including subsidies,
financial discounts and tax incentives; and
incomplete pricing, fiscal and taxation systems
that fail to reflect the supply-demand relationship
in the energy products market, the scarcity of
energy products, and their environmental impact.
The government still intervenes in the energy
market and it is still impossible to deploy energy
resources by means of price. In a market system,
the most efficient information is the price signal—
precise and flexible price signals can successfully
adjust supply and demand, provide guidance for
investment and optimise resource allocation.
With the exception of coal, there is still no
market-based pricing mechanism for other types
of energy—grid and sales tariffs are still decided
by the government, and the price for oil products
is still not decided by market competition, though
it has been aligned with the international market.
Current energy prices in China do not reflect
supply and demand, resource scarcity and environmental impact, or provide guidance for consumption, investment and resource allocation.
Over the course of a decade of reform, the
monopoly in the coal sector has been broken up to
enable competition. However, state-owned
enterprises still maintain their dominance in the
oil and gas and power transmission and distribution sectors, and a diversified range of market
participants has still not materialised. The enterprises active in these sectors are less motivated to
improve productivity, and their resource allocation is inefficient.
4.2.3 Government Administration Still
Needs to Be Improved
The relationship between government and the
market still needs to be improved and the government needs to accelerate its transition to a
different role. On the one hand, the government
intervenes too much in the market and its
administration is too specific, especially when it
comes to project approval. The procedure for
project approval is relatively complex and some
of the initiatives to shift approval from upper- to
lower-level government have failed to achieve
the desired results. On the other hand, there has
not been enough research on energy strategy,
which is not clearly aligned with the goals of the
Special Report 4: China’s Energy System Revolution
449
pipeline-operation bundling, dispatch-operation
bundling and competition restrictions. Most
energy companies in China are large state-owned
enterprises, with few private investors, giving an
unbalanced mix of market participants. The
government still controls the licencing of coal,
oil and gas exploration and mining rights, and the
rules necessary to ensure consistent market
access and fair market competition are still not in
place. So, depending on their legal status, companies are not competing on the same level
playing field. Grid operators still have holdings
along the entire value chain of power transmission, distribution and sales, and a fair and
well-regulated market competition mechanism
has still not been put in place. Integrated operations encompassing exploration, development,
refining, transmission, imports and sales have
more or less been realised in the oil and gas
industry, but the industry still does not allow
diverse participants to compete in individual
sections of the value chain. A spot and futures
market for oil and gas products has not been
established, and regional international energy
markets are less and less influential in the wider
world.
4.2.2 The Energy Pricing Mechanism Is
Still Imperfect
The deregulation initiative has made slower
progress and there is still no fair pricing mechanism—the price of oil products, gas and electricity is still decided by the government. The
price structure is unjustified. The cost of infrastructure like pipelines is not systematically
checked, and externality costs related to the
environment have not been internalised. Price
distortion remains: electricity and gas prices for
residential use have been below cost for some
time, and cross-subsidies abound. The energy
taxation system is still imperfect, and the structure and levels of resource taxation are unreasonable. Other concerns to be addressed include:
poorly aligned fiscal and taxation policies for
coal, oil, gas and renewable energy; a restricted
range of incentives to support development of the
new energy industry, including subsidies,
financial discounts and tax incentives; and
incomplete pricing, fiscal and taxation systems
that fail to reflect the supply-demand relationship
in the energy products market, the scarcity of
energy products, and their environmental impact.
The government still intervenes in the energy
market and it is still impossible to deploy energy
resources by means of price. In a market system,
the most efficient information is the price signal—
precise and flexible price signals can successfully
adjust supply and demand, provide guidance for
investment and optimise resource allocation.
With the exception of coal, there is still no
market-based pricing mechanism for other types
of energy—grid and sales tariffs are still decided
by the government, and the price for oil products
is still not decided by market competition, though
it has been aligned with the international market.
Current energy prices in China do not reflect
supply and demand, resource scarcity and environmental impact, or provide guidance for consumption, investment and resource allocation.
Over the course of a decade of reform, the
monopoly in the coal sector has been broken up to
enable competition. However, state-owned
enterprises still maintain their dominance in the
oil and gas and power transmission and distribution sectors, and a diversified range of market
participants has still not materialised. The enterprises active in these sectors are less motivated to
improve productivity, and their resource allocation is inefficient.
4.2.3 Government Administration Still
Needs to Be Improved
The relationship between government and the
market still needs to be improved and the government needs to accelerate its transition to a
different role. On the one hand, the government
intervenes too much in the market and its
administration is too specific, especially when it
comes to project approval. The procedure for
project approval is relatively complex and some
of the initiatives to shift approval from upper- to
lower-level government have failed to achieve
the desired results. On the other hand, there has
not been enough research on energy strategy,
which is not clearly aligned with the goals of the
Special Report 4: China’s Energy System Revolution
449