1. The Driving Force of China Rural Electrification Research Center for Sustainable Development, CASS Beijing China March 18,2005

2. Contents Demand and Supply of China Rural Electricity Process of China Rural Electrification Overall Performance and problem of Rural Electrification Driving Force of Rural Electrification Concluding Remarks

3. 1-1a The Electricity Consumption Demand Function of Rural Residents Assume the Utility Function of Rural Residents is: U=U(B ， N) The budget restriction of consumers:Y=P b B+P e E+P s S Max L=U[B, N(E, S)]+M(Y- P b B-P e E-P s S) Let U=B f1 N f2 Let N=exp(S g1 E g2 ) E=KP s t1 P e t2 Y t3

4. 1-1b The Residential Electricity Consumption Demand Curve of Rural China Let E=F(R)X er P e E=P x X er =P x [E/f(R)] X er =h(R)P s t1 P x t2 Y t3 Where h(R)=Kf(R) -1-t2 Let t 2 =k 0 +k 1 lnP x X er =h(R)P s t1 P x (k0+k1lnPx) Y t3 lnX er =G(R)+t 1 lnP s +k 0 lnP x +k 1 (lnP x ) 2 +t 3 lnY (1)

5. 1-1c The Demand Function of Electricity for Production Purposes in Rural Areas Let X=F(K, L, M, Q 1, ···,Q n ; S’), Q e =Q e (P K, P L, P M ; P 1, ···, P n ; X; S’) Q e =Q e (P L /P K, P M /P K, P 1 /P K, ···, P n /P K ; X/P K ; S’) Let O=O(J, N) Min L=P e E +P s S+ P j J+M[O’-O(J, N(E,S))]

6. 1-1d 1-1c The Demand Function of Electricity for Production Purposes in Rural Areas Let O=J f3 N f4 Suppose N=exp(S g3 E g4 ) lnX ei =H(R)+r 1 lnP s +r 2 lnP x +r 3 (lnP x ) 2 +r 4 lnV i (2)

7. 1-1e Energy Consumption in Rural Areas 1980199120002002 Sub total Livin g Prod uctio n Subtot al LivingProdu ction SubtotalLivingProduct ion SubtotalLivingProduction Commercial energy Coal65.137.028.0197.7577.52120.23293.28118.01175.27353.16157.35195.81 Oil15.01.014.039.341.3338.0153.127.5745.5566.548.4858.06 Electr icity 19.03.016.040.8911.6329.2699.1334.4464.6975.9124.7651.15 Subto tal 99.041.058.0277.9890.48187.5445.53160.02285.51495.61190.59305.02 Non-commercial energy Wood112. 0 103.09.0123.65103.0320.6295.4880.5214.96138.31114.0124.30 Straw117. 0 162.13 123.6 141.47 Subto tal 229. 0 220.09.0285.78265.1620.62219.08204.1214.96279.78255.4824.3 Total328. 0 261.067.0563.76355.64208.12670.47370.0300.47782.79453.47329.32 Mtce

8. 1-1f Aggregated Electricity Demand Curve of Rural China The Aggregated Electricity Demand Curve of Rural China is obtained through summing the curve of electricity demand for consumption purpose in rural China and the curve of electricity demand for production purpose in rural China in the vertical direction and the horizontal direction P Q Xe Xei Xer

9. 1-2a Types of Counties with Electricity Supply in China YearElectricity Supply Mode at County Level Direct Supply Bulk Sale Self-support countries Small Hydropower Small Thermal power Subtotal 1993 1994 1995707 99656779646 1996716100457181652 1997727100558066646 1998775106551335548 1999 2000854113143320453 2001 2002 2003 (Source: China Electricity Yearbook)

10. 1-2b The Distribution and Implications of Direct Supply Counties and Bulk Sale Counties Source: China Electricity Yearbook China County Electrification Map

11. 1-2c Source Structure of Rural Electricity A rural electricity source structure made up of complementary large electricity grids, rural small hydropower, small thermal power, and renewable energy has been created The Installed Generating Capacity and Electricity Output Structure of China Installed Generating Capacity (GW) Electricity Output (TW·h) YearTotalThermal power Hydropo wer Nuclear power TotalThermal power Hydropo wer Nuclear power 198065.945.620.330124358 198587.060.626.441131892 1990137.9101.836.0621495126 1995217.2162.952.22.1100780718713 2000319.3237.579.42.11369110824317 2001338.5253.083.02.11484120526118 2002356.6265.686.04.51654135227527 20031911

12. 1-2d Rural Electricity Supply Curve Short-term marginal cost curve (subject to production capacity restriction) Ｑ Ｃ SRMC 1 SRMC 2

13. 1-2e Rural Electricity Supply Function Consider a simple situation. Assume the aggregate costs of electricity supply are as follows: AC=FC+MC1Q1+MC2Q2 As in rural China, the peak hour electricity price is the same as in non-peak hours, P represents the comprehensive electricity price level of different regions, whereof (FC+MC 1 Q 1 +MC 2 Q 2 )(1+r)= P(Q 1 +Q 2 ) in which ， r is return rate Under certain production and technology conditions, the quantity of electricity supply is a function of electricity price and supply quality, e.g. Q=Q(P, R) R represents the quality of electricity supply Two indicators of rural electricity supply quality improvement: high power supply coverage rate and lower electricity loss. Consequently, electricity supply quality improvements will make the supply curve in Fig. 2-3a move rightward

14. 2-1 Phase I (1949-1978) ： increasing rural electricity supply DeDe SeSe Se’Se’ Q P P g

15. 2-1a Electricity shortage and the planned economy Low rural electricity supply capacity and insufficient supply. Solved the production and household electricity needs of rural residents; the problems lie in the poor quality and irrational distribution of rural electricity grid Because of the farmers’ low income level, the rural electricity demand was low It was estimated that between 1950 and1978, China milked around RMB 523.9 billion from the agricultural sector through price allocation instruments (creating the development gap between industry and agriculture). Under the planned economy, rural electricity was promoted to guarantee agricultural product supply and support industrialization

16. 2-1b Developing Small Hydropower Increases in rural electricity supply mainly rely on developing one single type of technology, e.g. small hydropower The Chinese government has established a series of supporting policies: -- Encourage electricity development at 3 county, township, and village level and adopt such policies as “whoever construct electricity projects will own and manage them” and “independence in construction and management”; -- As for fund, income from electricity projects are earmarked to support electricity projects and the central government offer 20% subsidy (150 RMB/kW) ； --Each province is encouraged to produce generating equipment for local use and the central government offer raw material support; --In terms of the relationships between large and small electricity grids, some grid linking measures are issued to protect the electricity supply areas of small hydropower

17. 2-1c The Distribibution of Exploitable Small and Medium- sized Hydropower Resources in Different Chinese Regions RegionSmall Hydropo wer Medium- sized hydropower TotalRegionSmall Hydropow er Medium- sized hydropower Total Beijing9.0044.8553.85Hubei403.60159.1562.71 Hebei93.9361.54155.47Hunan414.60279.82694.42 Shanxi58.1034.6092.70Guangdong416.60231.32647.92 Inner Mongolia38.70119.60158.30Guangxi232.20258.90491.10 Liaoning42.91102.89145.30Hainan39.7428.6368.37 Jilin188.79142.31331.10Sichuan587.801278.631866.43 Heilongjiang72.8077.78150.58Guizhou255.40364.05619.45 Jiangsu11.20 Yunnan1025.00717.581742.58 Zhejiang322.65117.25439.90Tibet1600.00234.801834.80 Anhui68.4545.05113.50Shannxi156.90153.30310.2 Fujian359.40272.49631.89Gansu108.90254.76363.66 Jiangxi308.33230.89533.22Qinghai200.00321.46521.46 Shandong21.50 Ningxia2.305.507.80 Henan103.1052.25155.35Xinjiang397.90728.771126.67 National total7539.86318.213858 Unit: 10000 kW

18. 2-1d Structure of Rural Electricity Use for Production Purposes The structure of rural electricity use for production purpose has transformed from predominated by irrigation electricity use to main for county and township industrial production For instance, in 1978, among the more than 51 billion kWh of rural electricity consumption, over half went to county and township industrial enterprises, consequently, the rural electricity use structure dominated by irrigation electricity needs was broken.

19. 2-2 Phase II (1978-1997) ： Both Rural Electricity Demand and Supply Experienced Significant Increases Both the Supply Curve and the Demand Curve moved rightward Q P DeDe De’De’ SeSe Se’Se’

20. 2-2a Background Severe energy shortage in rural areas. In 1979, 2/5 of farmer families lacked commercial fuel for over 3 months. The living energy needs of rural households and the processing of many agricultural productions, such as tea baking and tobacco baking, mainly depended on wood and straw. The annual consumption of firewood and straw is more than 600 million tons; among the 250 million tons of firewood, 30-40% is obtained through excessive reaping. Rural energy shortage, poverty, and ecological degradation are interwove. Farmers’ income have seen some growth. China started rural economic system reform in 1978; township enterprises experience rapid development, which lead to increases both to farmer income and to rural electricity demand; 1979 –1990, through depressing the price of agricultural products, each year around RMB 40 billion was pumped into from the agriculture sector to the industry sector; but the country’s support to agriculture saw some increase and the annual net outflow from agriculture sector is RMB 8 billion Major governing authorities of the rural electricity: the Ministry of Water Conservancy and Power – the Ministry of Energy – the Ministry of Water Conservancy and the Ministry of Power

21. 2-2b The 123 Rural Hydropower Poverty Alleviation Program Carry out preliminary electrification county construction on the basis of small hydropower supply: built 109 rural hydropower preliminary electrification counties during 1986-1990; built 208 such counties during 1990-1995; planned to build 300 such counties during 1996-2000, also known as the rural hydropower 123 poverty alleviation program From 1985, the country each year offer RMB 100 million of “grant to loan” support, altogether the RMB 200 million offered only accounted for 13.8% of the total investment. The rest were obtained from social fund-raising, of which RMB 310 million from existing electricity projects, accounting for 21.4%. Continued to offer low-interest rate loans, and the term of these loans were extend from the original 3-5 years to a rollover to 10 years when necessary Preliminary electrification criteria before 1990: electricity supply available to over 90% of the households in a county; able to satisfy the electricity needs of agricultural byproduct processing, farming and husbandry production, and enterprises, and the county’s per capita electricity consumption exceeds 200 kWh, for husbandry areas, forest areas, and minority areas, this indicator can be lowered to 150 kWh; the average living electricity consumption of each household is more than 200 kWh (including public lighting, cultural activities, and entertainment) In 1997, RMB 4.07 billion was injected into building the 3 rd batch of rural hydropower preliminary electrification counties, accounting for 28% of the electricity construction investment in the Chinese water conservancy system in that year, of which RMB 250 million, or 6.1%, is central government subsidy, RMB 50 million more than in 1996; RMB 260 million of provincial subsidy, accounting for 6.4%; RMB 1550 million is raised by counties, contributing to 38.1%; the rest RMB 2010 million is bank loans, representing 49.4%. By the end of 1997, the accumulative investment on electrification construction has reached RMB 99500 million (including the investment in 1995), in particular the investment in 20 counties exceed RMB 100 million each.

22. 2-2c Electricity Poverty Alleviation and the Construction of Rural Electrification Counties The “Electricity Poverty Alleviation and Joint Well-life Seeking Program”, also known as the Electricity Poverty Alleviation Project: in May 1994, the State Development Planning Commission, the State Economic and Trade Commission, and the Electricity Industry Ministry jointly launched the “ 电力 扶贫共富工程 ”, which was included in the “China 《国家八七扶贫攻坚计 划》. In 1994 along, China spent RMB 720 million for poverty alleviation and electricity supply coverage expansion, by 1996, the total expenditure had reached RMB 2.1 billion. By the end of 2002, the State Power Corporation had spent RMB 32 million on poverty alleviation in selected areas, mainly for expand electricity supply to villages where electricity supply is unavailable Rural electrification country construction. The electricity system: it was planned to build 400 rural electrification counties by 2000, but by the end of 1997, 500 counties had realized the target. The water conservancy system :build 400 hydropwer electrification counties during the 2000 to 2005 period, each year the state offer RMB 400 million of subsidies In 1993, national tax and local tax were separated. In 1994, the central government’s share of fiscal revenue was increased from 40% to 60%; local governments’ electricity development capability and motivation is intensified.

23. 2-3 Phase III (1998 hitherto) Standardizing the Rural Electricity Market through Institutional Instruments The Chinese government boosts market demand standardizing the rural electricity market SeSe De’De’ DeDe Q P

24. 2-3a Background 1 After the 1997 Asian financial crisis, China increased infrastructure construction and investment to stimulate domestic demand and maintain an annual GDP growth of 8% Electricity oversupply: the average utilization hours of electricity generating equipment

25. 2-3a Background 2 Rural electricity supply chains and price forming mechanism

26. 2-3a Background 3 Urbanization and rural population structure changes (including ecological migrants)

27. 2-3b Standardize the Rural Electricity Market The State Council issued the “Notice of the State Council’s Approval and Transmission to the State Economic and Trade Commission’s Proposal for Accelerating Rural Electricity System Reform and Strengthening Rural Electricity Administration (SC[1999] No. 2) “Two Reform and One Price Unification”: reform rural electricity administration regime, renovate rural electricity grid, and unify the urban and rural electricity price of a same grid

28. 2-3c Reform the rural electricity administration regime Set up electricity operating entities at national, provincial (power companies) and county (power supply enterprises) levels, stick to the principle of uniform planning and uniform construction in rural grid construction and the principle of covering a county’s electricity supply under the uniform management of an independent electricity supply enterprise, gradually reform the counties subject to directly supply and management into the wholly-funded subsidiaries of provincial power companies; turn the bulk sale and self-supply and management counties into wholly-funded subsidiaries or holding companies under the direct management of provincial power companies Reform the management regime of township electricity management stations and change them into electricity supply operations directly run and managed by county electricity supply enterprises, so as to change them into dispatched outlets subject to the uniform management of county electricity supply enterprises. Reduce the intermediate chains of rural electricity supply. By the end of 1999, the number of rural electricity workers were reduced by 112000. By the end of October 2000, 19704 township electricity management stations were cancelled, and 199308 rural electricity workers were laid off. In 2002, 27728 township electricity management stations were cancelled.

29. 2-3d Rural Grid Renovation End the long era of no regular state investment in rural electricity grid, the central government uniformly plans for rural grid construction and renovation, and the project capital is financed with treasury bonds, and the non-government financing comes from commercial banks loans; the focus is renovating 10 kV or less low- voltage electricity distribution grids, and implement uniform management on rural low-voltage electricity distribution grids, each rural household is equipped with a watt-hour meter, the electricity supply enterprises perform household-based management and meter data recording. Meanwhile, electricity supply enterprises are supported and encouraged to borrow and raise renovation fund via legal channels. The state decided to investment RMB 290 billion from1998 and spend 5 years to finish rural grid renovation. In principle, provincial power companies act as legal persons for rural electricity grid renovation projects and are responsible for conducting uniform planning, construction, management, and operation and the loan interest and principal repayment burden is shared by the entire grid. After renovation, the comprehensive wire loss of high voltage grid should be less than 10% while that of rural low-voltage grids shall be no more than 15%

30. 2-3e Unify the Rural and Urban Electricity Price of Each Grid Carry out uniform costing on urban and rural low-voltage electricity distribution grids and charge uniform price on urban and rural users. Separately calculate the high voltage transmission cost and low-voltage distribution cost of each grid, on such basis fix the wholesale price of high- voltage transmission grid and the retail price of low-voltage distribution grid. The interest and principal of rural grid renovation investment is included in grid cost and amortized into nationwide electricity price. The investment and principal of rural grid construction and renovation projects are repaid through increasing the sales price of electricity To solve the problem of rural grid loan interest and principal repayment and the amortizing the price difference in rural and urban areas, in 2000 use the space created by abolishing the 0.02 RMB/kWh of electricity construction fund and the space from lowering the grid access price of generating units which have paid off their loans and re-determine the grid access price of generating units which have not finished loan repayment based on their remaining operating period and current interest rate. The operation and maintenance costs of rural low-voltage grids, which were undertaken by farmers, are not included in the national catalog electricity price and amortized grid-wide (cross compensation?). The transparency of electricity consumption is improved.

31. 2-3f Rural Electricity Grid Renovation in the Water Conservancy System By 2002, the water conservancy system finished Phase I of its rural electricity grid renovation project, phase II of the project, rural grid renovation and county seat grid renovation planning is going on smoothly, covering 7 provinces.

32. 3-1a Electricity Supply Coverage and Lacking at County and Lower Level in China YearElectricity Supply CoverageWithout Electricity Coverage TownVillageFarmer households CountyTownVillageFarmer households (10,000) Population (10000) 199397.4%93%89.6%261269548582501 199497.8%95%91.3%161071371512214 199598.25%96.06%93.3%16828297831731 199698.60%96.72%94.67%116492481814047200 199799.03%97.66%95.86%10442174621107 199899.20%98.10%96.87%8364140428815000 199998.31%97.77%97.43%776616509706 200098.45%98.23%98.03% 200198.56%98.53%98.40%362910952478 200298.54%98.71%98.48%36089303458

33. 3-1b The Quality of Rural Electricity Supply YearVoltage qualification rate at rural household end Electricity supply reliability rate (share of villages with farmers’ living electricity needs guarantee rate at 80% or above among villages with electricity supply) Wire loss rate 1993>20% 199475%>20% 199580%>20% 199685%>20% 199792%>20% 1998<12% 1999<12% 2000<12% 200190.03%99.12%<12% 200291.21%99.16%<12%

34. 3-1c The Rural Electricity Supply Price of China YearShare of Villages with rational electricity price Counties with same electricity price in urban and rural areas Electricity Price RMB/KWh. 1992 199375%0.85 199480%0.84 19950.84 19960.83 199785%0.81 19980.71* 19990.655* 20000.62 20012000.59 20029340.56 2003 Electricity price fixation formula: before the electricity price was unified on grid basis in 1998, on average rural electricity cost is 0.20 RMB/kWh higher than in urban areas. The rational price level for rural electricity is 0.80 RMB; the irrational price level is assumed as RMB 1; after the price of each grid was unified in 1999, rural electricity cost is 0.10 RMB/kWh higher than the urban cost; the unified price is assumed to be RMB 0.50/kWh; where the price is unified, the rural price is assumed to be RMB 0.60/kWh. The Doorstep Electricity Price for Rural Farmers (* Data from China Electricity Yearbook, the rest of data are obtained from calculations by the author)

35. 3-1d Rural Electricity Consumption

36. 3-1e Rural Electrification County Construction By 1997, the State Power Corporation had completed the construction of 500 rural electrification counties The Ministry of Water Conservation plans to build 400 rural hydropower electrification counties during 2001 to 2005

37. 3-2 Problem of Rural Electrification Demand side: the per capita electricity consumption in rural China is very low and compressively building a well-off society will inevitably lead to rapid increases in electricity demand The per capita electricity consumption in China is only equivalent to 1/3 of the world average and 1/9 of the OECD countries. Moreover, the rural per capita electricity consumption is far lower than the national average. Supply side: China faces increasing energy pressure and electricity shortage It is unrealistic to completely rely on large grids for electricity supply (mainly fossil fuel-fired); renewable energy is of low economic return and difficult to realize wide commercialization in the near future Electricity market monopoly. In 1998 in the course of rural electricity market standardization, the State Power Corporation obtained and was commissioned to manage the bulk sale counties and some self-support and management counties, placing the rural small hydropower development in a even more unfavorable condition China faces ever increasing GHG emission reduction pressure, but the energy demand of rural electrification may constitute an importance carbon emission source

38. 4-1a Central Government Boost rural hydropower development mainly via administrative power; Direct national subsidy: such fund support as shifting from grant to loan support, channeling electricity revenue into electricity projects, low-interest rate loans, electricity-based poverty alleviation; as for raw materials, during the era of planned economy, the state offered raw material support Preferential taxes: VAT is 6% for rural electricity projects; farmers do not have to pay tax for the electricity they generate for own use Lower rural electricity cost: reform the rural electricity administration system and shorten the intermediate chains in rural electricity supply; renovate rural grids to reduce wire losses; include the operation and maintenance costs low voltage rural grid (which was shared among farmers) in the national catalog electricity price and share them over the who grid Market optimization fails to solve some fundamental problems and most of the market measures are not effectively implemented ; Deregulate ownership control on hydropower projects; raise the grid access price of small hydropower projects (price policy); as for the relations between large and small grids, issue some policies to protect the electricity supply areas of small hydropower projects (product market policies)

39. 4-1b Local Government Local governments’ motivation for developing local economy Provincial governments: regulatory system standardization and direct subsidy County governments: carry out county-wide rural electrification construction Township governments raise fund for electrification E.g., governments at various levels adopt supporting policies, increasing fiscal investment, plus the fund raised by electricity users, the total energy construction investment in rural China had increased from RMB 37 million in 1981 to RMB 3427 million in 1996, increased 92 times. In 1996, the grants and loans offered by provincial governments and municipal governments is RMB 77 m, prefecture and county governments, RMB 221 m, RMB 250 m by district and county governments, and RMB 2879 million raised by users, of which RMB 220 million is offered in monetary forms, the other RMB 678 million by means of labor input.

40. 4-2 Market Force Increases in farmer income level

41. 4-3 Interest Groups 1998: a period for rural electricity market standardization, competition between the State Power Corp. and the Ministry of Water Conservation (the central government mainly relies on administrative intervention) Since 1996, the State Power Corp. faces production capacity redundancy ; As the rural electricity market is in disorder, the potential demand can not be turn into actual demand

42. 5-1 Main Conclusion Since 1949, the driving forces behind China rural electrification mainly come from the administrative power and the local governments’ motivation for developing local economy The development history of China rural electrification indicates that government promotion alone can not guarantee the steady and effective implementation of rural electrification Market-oriented rural electricity reform provides the necessary institutional condition for China rural electrification; the government should shift from mainly relying on administrative intervention to depending the functioning of market mechanisms, the electricity market monopoly has to be broken and the commonweal nature of rural electricity has to be manifested. Vigorously promoting renewable energy is the inevitable route for rural electrification. The government should establish preferential policies and guarantee the development of renewable energy with institutional framework.

43. 5-2 Further Work Quantitative analysis: some parameters in the electricity demand model need to be estimated, the model may needs some correction; based on the above work, forecast future rural electricity demand Field investigation: further investigate into the driving forces behind China rural electrification The prospects of commercializing renewable energy resources in rural China, their GHG emission mitigation potential scenarios, and relevant cost analysis.