This Month’s Top Story

China is the world’s largest producer of and the largest market for solar hot water heaters, accounting for 76% of the world’s installed base of solar hot water heaters. Moreover the number of installed solar hot water heaters is growing at the rate of 20-30% per year; as of the end of 2006 the amount of area covered by solar heat collectors totaled 90-95 million square meters, which resulted in energy savings of 13.5 million MT of coal equivalents and the reduction of CO2 by 25.2 million MT. The {Mid to Long-Term Plan for Renewable Energy} states a goal of having an installed capacity of 150 million square meters of hot water heater coverage by 2010 rising to 300 million square meters by 2020. If these goals were achieved, there would be a resulting savings of 22.5 million tpy of coal equivalents or 70 billion kwh of power savings; these savings would equal 3.9% and 7.2% of total energy consumption in buildings for, respectively, 2010 and 2020.

Yet despite these impressive statistics, the prevalence of quality issues has resulted in high consumer dissatisfaction and an adoption rate by Chinese consumers of solar hot water heaters that is relatively low. Surveys of consumer satisfaction of solar hot water heaters indicate that consumer confidence in the quality of solar hot water heaters is not high. It was reported that nearly 40% of all lawsuits that were filed by consumers relating to solar hot water heaters arose because the consumer was unable to find the original seller and after-sales service agents; the product couldn’t be used, there was no one to contact to provide service and there was no guarantee for the parts. The China Quality 10,000 Li Industry Promotion Committee has established a help center in Beijing to assist consumers who have purchased substandard quality solar hot water heaters; their phone number is 010-63155315.

In the cold climate of China’s Northeast consumers are advised to be particularly cautious in purchasing a solar hot water heater because the experience of consumers in such locations as Harbin indicate that more than 50% of solar hot water heaters that are used in China’s cold weather climates enter “hibernation” during winter. Surveys indicate that the reasons for solar hot water heaters malfunctioning during winter in China’s Northeast include freezing and cracking of pipes, discharge of water which freezes, failure of the insulation layer and inability of the vacuum tubes to collect heat. There have also been reports of solar hot water heaters in Harbin whose pipes froze resulting in leaking water and ice forming which in turn caused accidents that injured people. According to surveys taken by the China Consumers’ Association, though 87% of consumers wanted a high quality, reliable solar hot water heater that would work well in the winter, 51% of consumers surveyed indicated that their solar hot water heaters entered “hibernation” during the winter, 40% of consumers said that the pipes to the solar hot water heaters easily froze resulting in clogging and/or water leakage, 31% of consumers said that the hot water tanks didn’t keep water hot, 35% of consumers stated that the heat efficiency of the vacuum tubes was low and a combined 78% of respondents said that their evaluation was that the quality of their solar hot water heaters was “average” or “low”.

From the perspective of manufacturers of solar hot water heaters in China, technological assurances, production quality and after sales service are the three most important areas that they must address. Of the more than 5000 companies that manufacture solar hot water heaters, there are less than 20 brands that have the scale of operations and production capabilities to ensure quality products. The market share of the top 10 manufacturers of solar hot water heaters in China is only approximately 20%. According to a recent survey conducted by the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), many of the small and mid-sized enterprises that manufacture solar hot water heaters have quality issues related to substandard voltage resistance and heat supply. This is so because the majority of these companies merely assemble these products and put their own label on them, but do not have any R&D capabilities and the technological component of their products is low; as a consequence these manufacturers are not able to provide guarantees of their product’s quality and the after sales service becomes a “bad check”. Another problem that contributes to the lack of satisfaction among Chinese consumers of solar hot water heaters is the relative lack of industry standards, oversight, self-discipline and policy restrictions, which results in a very low barrier to entry into this industry and an industry which is chaotic.

Recently the State Administration for Environmental Protection issued national standards for the first time to address environmental protection standards with respect to solar hot water heaters and solar hot water collectors. The new standards address issues related to heat functioning, health and safety and sunlight pollution; the standards also provide technical requirements and inspection methods. These standards will go into effect on December 1, 2007. There are other efforts underway at the local level to bring about greater use of solar hot water heaters in new construction. The city of Xiamen, Fujian Province is now requiring that 9 or fewer story residential developments must include a design for solar hot water heating for the building. The city of Xiamen also is offering financial support for the development of solar hot water heaters in new construction.


China's Solar Power Industry

Suntech is considering building solar cell manufacturing facilities in the United States. According to the president of Suntech America, Suntech has been in negotiations with the governors of three states that are courting Suntech.

Since 2000 Chinese companies have accounted for approximately 8% of new patents issued for technological advances in the solar power industry and the rate of increase in patents filed by Chinese companies has accelerated because of the increased investment by Beijing in research and development, particularly at the university level.

After two months of testing, Ningbo city’s first grid connected solar power plant went into operation in the Wangchun Industrial Park on November 1, 2007. The 700,000 Yuan installation, which is comprised of mono-crystalline silicon cells arrayed in 132 modules covering 170 square meters, will be able to produce 25,000 kwh/year.

On November 13, 2007 it was announced that Riqing Textiles, the large Japanese conglomerate would establish a joint venture company with the Jiangsu Yawei Machine Tool Factory to enter the Chinese market for solar cell manufacturing equipment. The new company is being established with 800 million Japanese Yen in registered capital; the Japanese company’s interest is 25%. Riqing hopes to increase its sales of solar cell manufacturing equipment to 6 billion Yen by 2008, double what it sold in 2006; Riqing has been in the solar cell manufacturing equipment business since 1998. Riqing is involved in textiles, paper products, automotive brakes, chemical products and electronics, among other businesses.

On November 13, 2007 the Xinao Group and Applied Materials Company of the U.S., had a signing ceremony in Shijiazhuang, Hebei Province for the establishment of thin film solar cell project. The new facility, which will be located in the Langfang Economic and Technological Development District in Langfang city, Hebei Province, will produce non-crystalline silicon thin film solar cells. The Xinao Group will be importing a complete production line of Applied Materials at a cost of approximately 14 billion Yuan. The project will be constructed in three phases; by 2010 the project will be producing 500 MW of thin film solar cells and is expected to have 20 billion Yuan/year in sales.


China's Wind Power Industry

On November 1, 2007 the First Shanghai International Wind Energy Technology and Equipment Exhibition was held at the Shanghai International Exhibition Center.

China is on-track to have a total of 5000 MW of installed wind power generating capacity by the end of 2007, three years ahead of the original objective, which was 5000 MW by the end of 2010.

According to a report entitled {China’s Wind Power Development Report 2007} issued by the Renewable Energy Committee of the China Association for Integrated Utilization of Natural Resources in collaboration with Greenpeace and the World Wind Power Council, with “energetic policy support” by the Chinese government, China’s installed capacity of wind power could attain 120,000 MW by 2020; this would account for 10% of the installed power generating capacity in China that year. If this amount of wind power generating capacity were achieved it would be equivalent to five Three Gorges Projects. Though the announced goals for wind power capacity in China have increased steadily over the past few years, the present goal set by Beijing for 2020 is 30,000 MW of installed capacity; {China’s Wind Power Development Report 2007} states that it is likely that without any significant policy changes installed capacity to produce energy from wind will attain 50,000 MW by 2020, or 4% of then installed power generating capacity. With minor improvements to policy, installed wind power generating capacity will attain 80,000 MW by 2020 says the report.

In early November the Development and Reform Commission of Shanghai released short-term (to 2010) and long-term (to 2020) objectives for wind power generation for the city of Shanghai. According to the plan, Shanghai will build a total of 13 land and sea based wind farms in Nanhui, Qinjian and three islands (Chongming, Changxing and Hengsha). By 2020 Shanghai will have a total of 1000 MW of installed wind power generating capacity, which will be sufficient to supply power to 4 million residents. Presently Shanghai has three wind farm projects operating, including the Shanghai New Energy Environmental Protection Engineering Co., Ltd.’s four wind turbines with combined capacity of 34 MW; the Shanghai Wind Power Development Co., Ltd.’s 21 MW wind turbines; and the 13 wind turbines located in Nanhui and Chongming which produce 42 Gwh/year combined.

In early November the CEO of Germany’s Nordex Corporation announced that Nordex China had obtained contracts to supply a total of 126 MW of windmills for wind farms in Ningxia, Liaoning and Inner Mongolia; the value of these contracts is in excess of 95 million Euros. The turbines, which are being supplied by Nordex, are each between 1.3 MW and 1.5 MW. Because of Nordex’s optimism about the Chinese market, it has located two of its three manufacturing centers in China and has established the company’s Asia headquarters in Beijing. Nordex expects to invest an additional 500 million Yuan and grow its business in China four-fold in the next three years. Foreign windmill equipment manufacturers, including also GE Wind, Denmark’s Vestas and Spain’s Gamesa combined have a 10% market share in China. According to the China Wind Energy Association, China’s market for wind power will grow by 300% in the future, second only to the United States in its rate of growth. Nordex’s CEO predicted that by 2011 the company would have a 15% or greater share of the Chinese wind power equipment market. Nordex’s CEO also noted that for certain classes of parts there are very few or no Chinese companies able to produce to their specifications; for example there are only 1 or 2 companies that are able to produce gearboxes for the 1.5 MW class turbines which Nordex produces.

In order for China to achieve the objective of having 30,000 MW of installed wind generating capacity by 2020, in the next 13 years China will have to put in place on average 2000 MW of new wind generating capacity each year. By 2020 wind power will account for approximately 20% of China’s demand for energy then (as much as 1.5 million MW). A conservative estimate of the amount of funds that will be spent in the development of wind generating equipment from 2006 through 2015 is 100 billion Yuan. It now appears that the vast majority of those funds will be expended with foreign wind power equipment manufacturers, as the Chinese domestic equipment industry for such equipment is insufficiently developed. In 2005 of the 498 MW of wind generating equipment which was sourced in China, Chinese manufacturers only accounted for 28%, primarily because the technological level, quality and reliability of Chinese made wind power equipment is weak; for this reason foreign manufacturers are able to charge higher prices for their products. Very few Chinese manufacturers produce MW class wind turbines; in 2006 the largest turbine which was installed was 0.93 MW. Foreign manufacturers on the other hand produce 1 MW to 2.5 MW turbines.

Ningbo city’s first wind farm is nearing completion. In early November installation began on the first of a total of 33 wind turbines, which when all fully operable at the end of July 2008 will begin to generate power and be connected to the power grid. The Ningbo Cixi Windfarm, which is an investment of 610 million Yuan, will have a total of 45 MW (15 MW x 33 units). Each wind turbine is 77 meters tall (including the tower and the blades) and each of the three blades is 37.5 meters long. In order to connect to the grid, the Ningbo Transmission Company will be constructing a 19,000 meter 110 kilovolt transmission line.

The State Power Grid Corporation, through the State Grid New Resources Joint Stock Co Ltd., which it controls, at present owns two wind farm projects: the 440 million Yuan, 495 MW Gansu Anxi Wind Farm and the 450 million Yuan, 495 MW Inner Mongolia Kangmianqiyi and Wusu Wind Farms. The latter project is expected to be operating by the end of 2007. New Resources also has invested in the Xinjiang Tianfeng Power Generating Company’s stage three 495 MW wind power project and the Inner Mongolia Guchifeng Xinsheng Corporation’s 493 MW wind power project. The State Power Grid Corporation also has a regulatory role that it is playing in the developing wind power industry: any wind power project that is 100 MW or greater must be examined and approved by the State Power Grid Corporation and any project that is 1000 MW or greater must begin with the approval of the project by the State Power Grid Corporation. The State Power Grid continues to monopolize the distribution of power in China. State Power Grid Corporation has said that it is only interested in developing renewable power generating capacity and that it has no interest in competing with the five electric power groups in coal-fired power or nuclear power.


China's Bio-Mass Energy and Bio-Fuels Industries

On November 20, 2007 the Ministry of Finance and the National Development and Reform Commission jointly announced a program to support demonstration projects in Sichuan Province for three types of biomass energy sources. The biomass energy projects include processing of biomass fuel pellets, energy production from methane from farm animals and energy production from gasification of biomass. Though each of these three types of biomass energy production exist already in Sichuan Province, their use is not widespread and the scale at which energy is produced from these three is very small. The central government already is providing financial support for fuel ethanol, bio diesel and other biomass energy production, so this new initiative is expanding the scope of Beijing’s financial support for biomass energy development. Though there will be subsidies, the Chinese government is requiring a substantial investment for each of these biomass energy projects; in the case of energy production from methane from farm animals, Beijing is requiring registered capital of at least 5 million Yuan and for the other two types of biomass energy projects the registered capital must exceed 10 million Yuan.

China’s largest gasified crop stalks power plant will be built in Shayang County, Hubei Province for an estimated cost of 150 million Yuan. When completed the power plant will consume 150,000 tpy of crop stalks and produce 90 million kwh of power. The China Academy of Science Guangzhou Energy Research Institute recently obtained a patent for technology related to the generation of electricity through gasification of crop stalks. The Wuhan Liren Investment Co., Ltd. purchased the patent for the purpose of developing the Hubei Province gasified crop stalks power plant project. Compared with a coal-fired power plant, the Shayang County project will save 32,000 MT of coal/year and account for a reduction in CO2 emissions of 64,000 MT/year. Shayang County is a large agricultural county with plentiful output of cotton, wheat, rice and vegetables; collectively farmers there produce approximately 600,000 tpy of crop stalks each year. Farmers in Shayang County will be able to earn an additional 2000 Yuan/year or so from selling their crop stalks to the power plant.

Because of the widespread cultivation of cassava plants, the Guangxi Zhuang Autonomous Region has become China’s largest source of raw materials for China’s growing non-grain bio energy industry. According to the Office of Agriculture of the Guangxi Zhuang Autonomous Region, in 2006, the area devoted to cultivating cassava plants in Guangxi totaled 4,260,000 mu (equal to 284,142 hectares), which area produced between 6.5-7 million MT of cassava in 2006. The area under cultivation and output of cassava plants in Guangxi accounts for more than 60% of the total throughout China and there are more than 300,000 farm households in Guangxi that are engaged in the cultivation of cassava. In December 2007 the 200,000 tpy non-grain fuel ethanol refinery which the China Grain Group is building in Beihai City, is expected to begin operating. As a result of the imminent opening of the fuel ethanol refinery, the price of cassava in Beihai City already has risen to 500 Yuan/MT. The Beihai city refinery will be able to absorb approximately 1 million mu of cassava production (at an average of 3.56 MT/mu). It is estimated that in all farmers in the area growing cassava will have a combined total income of 300 million Yuan/year. From mid-December 2007 the Beihai and Guigang regions of Guangxi will begin selling fuel ethanol and all cars refueling there will refuel with a blend that includes 10% ethanol.

On October 26th the 20 million Yuan Jilin Province corn stalk biomass project started up. The new facility will process corn stalks into fuel pellets that can be used in furnaces, boilers and stoves to cook, provide heat, etc. Every 1.5 MT of stalks can be processed into 1 MT of fuel pellets; the estimated cost of the fuel pellets is 400 Yuan/MT. The btus of fuel pellets processed from corn stalk is said to be almost the same as the energy derived from coal, yet this biomass fuel source has the advantage of being non-polluting and easier to transport than coal. Surveys indicate that Jilin province alone produces approximately 40 million MT of stalks, of which total corn stalks account for approximately 20 million MT, the most of any province in China. In the past ~7 million tpy of stalks were simply wasted; if these 7 million tpy of stalks were collected and sold for processing into biomass fuel pellets, Jilin farmers would earn approximately a total of 700 million Yuan in additional income (calculated at 100 Yuan/MT). The Jilin biomass fuel pellet processing plant is expected to produce as much as 1 million MT of biomass fuel pellets by the end of 2009; this amount of output is expected to produce income of upwards of 400 million Yuan.

Since December 1, 2006 when the Dan County demonstration biomass power plant that was developed by the State Power Grid Corporation went into operation, this power source that relies on “grey” agricultural crop stalks (i.e., cotton stalks and forest waste) has produced a total of 175 million Kwh of green power. In mid-October 2007 the State Power Henan Jun County wheat and corn stalks direct burn power project, which also was developed by the State Power Grid Corporation, but which relies on “gold” agricultural stalks, was connected to the power grid. Through the end of September 2007 the State Power Grid Corporation had already constructed and grid connected 7 biomass power plants, with a combined capacity of 175 MW producing 500 million Kwh of power with 600,000 MT of agricultural matter and which saves 250,000 MT of coal equivalents while reducing CO2 emissions by 300,000 MT. In addition to the Shandong Province Dan County and the Henan Province Jun County biomass power plants, the State Power Grid Corporation also has developed biomass power plants in Shandong Province’s Gaotang County and Hebei Province’s Wei County. According to estimates, a 25 MW biomass power plant can handle 200,000 tpy of agricultural waste and replaces 90,000 MT of coal for a similarly sized thermal plant; this would save on the discharge of approximately 100,000 MT of CO2. A plant this size would be able to satisfy the electric power needs of 400,000 rural households for a full year. Surveys of biomass resources in China indicate that in the short-term biomass resources are equivalent to 500 million MT of coal equivalent/year and in the long term equivalent to 1 billion MT of coal equivalent/year. If China were able to use 500 million tpy of biomass to generate power, estimates are that that level of power generation would satisfy 20% or more of China’s current energy consumption, which in turn would bring about a reduction in CO2 emissions of nearly 350 million tpy, among other pollutants. The other benefit would be to spur the development of “fuel forest industry”, which will have the added benefit of helping to arrest soil erosion and desertification, which is a significant problem in China. The employment and other economic benefits of a 25 MW biomass power plant is also significant: Chinese analysts estimate that more than 1000 people would be employed collecting, processing, storing and transporting biomass materials for power plants and that a power plant will have direct and indirect expenditures of 70-80 million Yuan, most of which would become additional income for farmers.

In late October 2007 construction began on a $125 million U.S., 500,000 tpy, bio-diesel refinery that is being developed by the China Petroleum Shanghai Enterprise Group Co. in the Jiangsu Province, Dafeng Harbor Economic Zone. The first stage of the project, which will have 100,000 tpy of bio-diesel output, is expected to go into operation by March 2008. One of the advantages of locating this new bio-diesel refinery at Dafeng Harbor is that palm oil imported from Malaysia will be used as a raw material along with locally produced oils.

Laws and Policies Governing Renewable Energy and Sustainable Development in China

There have been several efforts undertaken by Chinese government ministries to foster the movement towards clean vehicles. During the 10th Five Year Plan period, which ended in 2005, the Ministry of Science and Technology spent a total of more than 1 billion Yuan on projects to develop technologies, which would enable the use of electric cars and other clean cars. In the 11th Five Year Plan period, the Ministry of Science and Technology initiated the “863” Plan, which includes fostering energy conservation and the development of new energy vehicles. Over the last several years the State Administration for Environmental Protection has formulated 30 odd emissions standards for vehicles, has issued many technical policies, and within the framework of the {Atmospheric Pollution Prevention Law} has put in place relevant pollution control requirements. In addition to these other efforts, the Chinese government also has pushed the development of clean automotive fuels and in the future the State Administration for Environmental Protection will issue additional fuel standards for vehicles. The NDRC, among other things, formulated the {Administrative Regulations On New Energy Automotive Production}, which went into effect as of November 1, 2007 and which is aimed at helping state-owned auto manufacturers to establish their own innovation systems in the course of developing and producing new energy autos. The NDRC and the Ministry of Finance are presently also researching the formulation of a system of tax policy rewards and punishments with regard to automotive discharge standards.

There continues to be a policy and legal ferment which will likely result in a series of tax preferences, subsidies and funds to support China’s renewable energy industry. The {Mid to Long Term Development Plan for Renewable Energy} (reported on in the October report) more details which recently passed clearly enshrined fiscal investment and preferential tax policies as core principles. From these core principles there will soon be specific regulations. Specific regulations will include the creation of a fund to help with up-front costs in setting up a renewable energy manufacturing enterprise. It is also possible that the VAT for wind and small hydroelectric projects soon will be set at 6% and that a similar tax policy for solar power also will be put in place. In addition to adjustments to the VAT, it is expected that Beijing will formulate regulations that provide preferential tax rates for enterprise income taxes respecting renewable energy enterprises and reduced import duties for imported renewable energy equipment. Additionally, regulations likely will be issued soon which will mandate that Chinese power companies produce a certain percentage of all power generated in renewable energy, i.e., renewable portfolio standards.

Local regulations addressing renewable energy, environmental and energy conservation issues continue to be issued widely. Since the {Energy Conservation Law} (reported on in the October report) was issued in late October, Beijing, Shanghai, Shaanxi, Liaoning and Shangdong all have issued energy conservation regulations. Other provinces and cities, including Heilongjiang and Fushun city have issued measures for the management of energy in farming villages.

CDM Projects and Other Foreign Participation in China’s Renewable Energy Sector

On November 9, 2007 China launched a CDM Fund to raise funds for new projects and to generate revenues from existing projects. The National Development and Reform Commission already has approved more than 850 CDM projects and the Executive Board of the UN-sponsored CDM has registered nearly 130 of those Chinese CDM projects. China is the largest beneficiary of the CDM program, which was created by the Kyoto Protocol. If all of the CDM projects which have been approved by the NDRC were to be registered by the Executive Board of the CDM, there would be a resulting avoidance of CO2 emissions totaling 1.5 billion MT and the value of those CDM credits would total $15 billion U.S.

Developments in Environmental Protection and Energy Conservation in China

On November 26, 2007 the {11th Five Year Plan Program for Environmental Protection} was issued. The cornerstone of the Program for Environmental Protection is the requirement that 1.35% of China’s GDP is to be devoted to environmental protection investment. The Program for Environmental Protection noted that in the 10th Five Year Plan period (2000-2005) there was a worsening in China’s environment: among other indices, sulfur dioxide emissions increased 27.8% during the 10th Five Year Plan period compared with 2000 levels. The Program for Environmental Protection will be placing a greater emphasis on having polluting enterprises assume responsibility for the environmental pollution that they cause. During the 11th Five Year Plan period, the Program for Environmental Protection anticipates collecting 75 billion Yuan in pollution discharge fees, which will be used for environmental remediation projects. The Program for Environmental Protection lists 10 environmental protection projects which Beijing will pursue; these include projects to develop systems for the handling of dangerous waste (including medical waste), water pollution in cities, garbage in cities, remediation of pollution in key rivers in China, reducing the amount of sulfur dioxide emissions from coal-fired power plants and steel mills, etc.

The Aluminum Company of China (Chalco) intends to show a 20% reduction in energy consumption per 10,000 MT of product produced between 2005-2010. Chalco also plans to bring about a 20% reduction in energy consumption for each 10,000 Yuan of industrial value added produced, accomplish a 30% reduction in water discharges per 10,000 Yuan of value added and bring about a 2% increase in the reuse of water in its industrial processes. By 2010 the company aims to have reduced its overall energy consumption in the output of alumina by 32.5% and to have average electric current ratio reaching 94%, a 1% increase over 2005 rates. Among other goals that the company has set is the goal of increasing the life of an electrolytic pot to more than 1800 days and possibly reach the international standard of 2000 days. Compared with 2001 results, in 2005 Chalco’s per MT energy consumption for the production of alumina declined 16.2%; this would amount to a total savings of 1.5 million MT of coal equivalents, which in turn is equal to a full year’s output for a medium-sized coal mine. With respect to primary aluminum smelting, in 2005 the company saved a total of 530 million kwh of power consumption. In the first six months of 2007 across alumina, primary aluminum, primary copper, copper products and aluminum products production the company saved 564,600 MT in coal equivalents through its energy savings programs.

In remarks at a conference in early November 2007 Liu Yangmin, Chalco’s Vice-Chairman emphasized the large savings to the Chinese aluminum industry from relatively small gains in efficiency. For example, Liu pointed out that if there was a 1% decrease in energy consumption for each MT of primary aluminum produced in China the energy savings on 10 million MT of primary aluminum (the amount which is was produced by the Chinese aluminum industry in the first ten months of 2007) would amount to1.5 billion kwh. As a further example, Liu Yangmin said that if the China used 3 million tpy of secondary aluminum instead of primary aluminum, this would bring about a savings of 42 billion kwh of energy consumption£¬ equal to the output of seven Longyangxia Hydropower plants. And if in the process of producing alumina there was a 1% increase in the recovery rate, this would result in an industry-wide savings of 200,000 MT of bauxite, which would save the equivalent of a year’s output at an 100,000 tpy alumina refinery.

At a conference held on river pollution prevention, the Chairman of the State Environmental Protection Administration reported that in the first three quarter of 2007 China experienced a decline for the first time in the level of pollution discharges, including that amount of sulfur dioxide discharge declined 1.81%.


China’s Energy Production and Consumption

On November 15, 2007 Sinopec confirmed that it had increased its price of natural gas by 50% for industrial users of its natural gas (excluding the fertilizer industry and natural gas used for heating purposes) in accordance with the directive of the National Development and Reform Commission; the price per cubic meter rose 0.4 Yuan/cubic meter to 1.2 Yuan/cubic meter from 0.8 Yuan/cubic meter. Various localities in China, having the right to determine the price of natural gas independently, have raised natural gas prices by different amounts. For example, the pricing bureau of Shanghai also increased the price of industrial use natural gas by 0.4 Yuan/cubic meter, but also raised the price of compressed natural gas for automotive use by 1.4 Yuan/cubic meter from 2.15 Yuan/cubic meter to 3.58 Yuan/cubic meter; this latter increase is a 65% increase. Chengdu increased the price of industrial gas by 0.43 Yuan/cubic meter from 1.23 Yuan/cubic meter to 1.66 Yuan/cubic meter, a 35% increase. There was speculation that the rather modest (though greater than the 10% increase which was expected) increase in industrial use natural gas that was directed by the NDRC is a consequence of a rather high CPI that was recently announced. When the risk of continued inflation abates, it is likely that the NDRC will continue to increase energy costs. Because the Chinese economy increasingly is reliant on imported natural gas, whose price is set by world markets, Beijing is trying to gradually increase the artificially low price of domestic natural gas to approximate world prices. This is the first adjustment of natural gas prices since 2005 and in the interim the difference between domestic and international prices has grown larger. It is estimated that by the end of the 11th Five Year Plan period in 2010, China’s demand for natural gas will be in excess of 100 billion cubic meters/year and in the following 20 years Chinese demand for natural gas will grow an average of 15%/annum; the deficiency between supply and demand in 2020 is expected to reach 100 billion cubic meters. The price of natural gas in China is approximately $5-6 U.S./BTU as contrasted to the world price, which is $8-10 U.S./BTU.

According to a report from the Shanghai Oil Exchange, with the 500 Yuan/MT increase in refined oil which the National Reform and Development Commission approved as of the beginning of November 2007, Chinese refineries, such as Sinopec, could continue to make a profit if the price of oil was $85/barrel, and with oil at $97/barrel the Chinese refineries losses from refining imported oil would not exceed losses from stopping refining; continued increases in the price of crude oil would increase losses amid decreases in refining. The Shanghai Oil Exchange report estimates that demand for refined oil will grow by 5% in the fourth quarter of 2007 in China, but supplies of refined oil will be tight in the fourth quarter, making the supply and demand picture less than optimistic.

In the fourth quarter of 2007 Chinese crude oil production is expected to be approximately 15 million MT/month, a less than 2% increase y-o-y.

The State Council has approved the {State Nuclear Power Development Special Plan (2005-2020)} that was drafted by the National Development and Reform Commission. The Nuclear Power Development Plan calls for installed capacity of nuclear power to increase from approximately 9000 MW to 40,000 MW, which would produce 260-280 million kwh/year; if this increase in installed capacity is achieved, by 2020 nuclear power’s contribution to total installed power generating capacity in China will increase from 2% to 4% (worldwide nuclear energy accounts for 17% of total installed energy production capacity). The Nuclear Power Development Plan estimates that in the next 15 years China will invest 450 billion Yuan (~$60 billion U.S.) to develop nuclear power. Nuclear power development will continue beyond 2020; the NDRC estimates that there will be an additional 18,000 MW of nuclear power plants under construction in 2020. Since 1991 when China’s first nuclear power plant went into operation, China last opened a total of 6 nuclear power plants with 11 reactor units. At present there are an additional 8 reactor units under construction that will increase installed capacity by approximately 7900 MW (these projects include the Lingao Second Stage Reactor, the Qinshan Second Stage Reactor and the Hong Yan He Reactor).

According to Yang Zhendong, the chairman of the Guizhou Province Coal Mine Design Institute, the recovery rate of coal from mining nationwide is only 30%, approximately one-half the rate of recovery from coal mining in developed nations. In 2006 China’s coal output totaled 2.3 billion MT; based on this amount of coal mined, Yang Zhendong estimates that China failed to recover approximately 1 billion MT of coal in 2006. Yang Zhendong also points out that though energy consumption per 10,000 Yuan of GDP produced in China in 2006 was 1.206 MT of coal equivalents, if the low recovery rate of coal was also factored in, the already high energy consumption for the level of GDP would be even higher. With the price structure of coal presently in place, many mines will take only the coal that is the most easily mined and least costly to mine and leave the rest.