The Driving Force of China Rural Electrification

Research Center for Sustainable Development, CASS

Beijing China

March 18,2005

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

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=PbB+PeE+PsS

• Max L=U[B, N(E, S)]+M(Y- PbB-PeE-PsS)

• Let U=Bf1Nf2 • Let N=exp(Sg1Eg2)

• E=KPst1Pe

t2Yt3

1-1b The Residential Electricity Consumption Demand Curve of Rural China

• Let E=F(R)Xer

• PeE=PxXer=Px[E/f(R)]

• Xer=h(R)Pst1Px

t2Yt3

• Where h(R)=Kf(R) -1-t2

• Let t2=k0+k1lnPx

• Xer=h(R)Pst1Px

(k0+k1lnPx)Yt3

• lnXer=G(R)+t1lnPs+k0lnPx+k1(lnPx)2+t3lnY (1)

1-1c The Demand Function of Electricity for Production Purposes in

Rural Areas

• Let X=F(K, L, M, Q1, ···,Qn; S’),

• Qe=Qe(PK, PL, PM; P1, ···, Pn; X; S’)

• Qe=Qe(PL/PK, PM/PK, P1/PK, ···, Pn/PK; X/PK; S’)

• Let O=O(J, N)

• Min L=PeE +PsS+ PjJ+M[O’-O(J, N(E,S))]

1-1d 1-1c The Demand Function of Electricity for Production Purposes in

Rural Areas

• Let O=Jf3Nf4

• Suppose N=exp(Sg3Eg4)

• lnXei=H(R)+r1lnPs+r2lnPx+r3(lnPx)2+r4lnVi (2)

1-1e 　 Energy Consumption in Rural Areas

1980 1991 2000 2002

Subtotal

Living

Production

Subtotal

Living Production

Subtotal Living Production

Subtotal Living Production

Com

mercia

l energ

y

Coal 65.1 37.0 28.0 197.75

77.52 120.23

293.28 118.01 175.27 353.16 157.35 195.81

Oil 15.0 1.0 14.0 39.34 1.33 38.01 53.12 7.57 45.55 66.54 8.48 58.06

Electricity

19.0 3.0 16.0 40.89 11.63 29.26 99.13 34.44 64.69 75.91 24.76 51.15

Subtotal

99.0 41.0 58.0 277.98

90.48 187.5 445.53 160.02 285.51 495.61 190.59 305.02

Non-co

mm

ercia

l energ

y

Wood 112.0

103.0 9.0 123.65

103.03 20.62 95.48 80.52 14.96 138.31 114.01 24.30

Straw 117.0

117.0 162.13

162.13 123.6 123.6 141.47 141.47

Subtotal

229.0

220.0 9.0 285.78

265.16 20.62 219.08 204.12 14.96 279.78 255.48 24.3

Total 328.0

261.0 67.0 563.76

355.64 208.12

670.47 370.0 300.47 782.79 453.47 329.32

Mtce

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

1-2a Types of Counties with Electricity Supply in China

Year Electricity Supply Mode at County Level

Direct Supply

Bulk Sale Self-support countries

Small Hydropower

Small Thermal power

Subtotal

1993

1994

1995 707 996 567 79 646

1996 716 1004 571 81 652

1997 727 1005 580 66 646

1998 775 1065 513 35 548

1999

2000 854 1131 433 20 453

2001

2002

2003 (Source: China Electricity Yearbook)

1-2b The Distribution and Implications of Direct Supply Counties and Bulk Sale Counties

Source: China Electricity Yearbook

China County Electrification Map

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)

Year Total Thermal power

Hydropower

Nuclear power

Total Thermalpower

Hydropower

Nuclearpower

1980 65.9 45.6 20.3 301 243 58

1985 87.0 60.6 26.4 411 318 92

1990 137.9 101.8 36.0 621 495 126

1995 217.2 162.9 52.2 2.1 1007 807 187 13

2000 319.3 237.5 79.4 2.1 1369 1108 243 17

2001 338.5 253.0 83.0 2.1 1484 1205 261 18

2002 356.6 265.6 86.0 4.5 1654 1352 275 27

2003 1911

1-2d 　 Rural Electricity Supply Curve

• Short-term marginal cost curve (subject to production capacity restriction)

Ｑ

Ｃ

SRMC1

SRMC2

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+MC1Q1+MC2Q2)•(1+r)= P•(Q1+Q2)　　 in which ， r is return rate• Under certain production and technology conditions, the quantity of el

ectricity 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

2-1 Phase I (1949-1978) ： increasing rural electricity supply

De

Se Se’

Q

P

Pg

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

2-1b Developing Small Hydropower• Increases in rural electricity supply mainly rely on developing one sin

gle type of technology, e.g. small hydropower • The Chinese government has established a series of supporting polici

es: -- Encourage electricity development at 3 county, township, and villag

e 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

2-1c The Distribibution of Exploitable Small and Medium-sized Hydropower Resources in Different Chinese Regions

Region Small

Hydropower

Medium-sized hydropower

Total Region Small Hydropower

Medium-sized hydropower

Total

Beijing 9.00 44.85 53.85 Hubei 403.60 159.1 562.71

Hebei 93.93 61.54 155.47 Hunan 414.60 279.82 694.42

Shanxi 58.10 34.60 92.70 Guangdong 416.60 231.32 647.92

Inner Mongolia 38.70 119.60 158.30 Guangxi 232.20 258.90 491.10

Liaoning 42.91 102.89 145.30 Hainan 39.74 28.63 68.37

Jilin 188.79 142.31 331.10 Sichuan 587.80 1278.63 1866.43

Heilongjiang 72.80 77.78 150.58 Guizhou 255.40 364.05 619.45

Jiangsu 11.20 11.20 Yunnan 1025.00 717.58 1742.58

Zhejiang 322.65 117.25 439.90 Tibet 1600.00 234.80 1834.80

Anhui 68.45 45.05 113.50 Shannxi 156.90 153.30 310.2

Fujian 359.40 272.49 631.89 Gansu 108.90 254.76 363.66

Jiangxi 308.33 230.89 533.22 Qinghai 200.00 321.46 521.46

Shandong 21.50 21.50 Ningxia 2.30 5.50 7.80

Henan 103.10 52.25 155.35 Xinjiang 397.90 728.77 1126.67

National total 7539.8 6318.2 13858

Unit: 10000 kW

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.

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

De

De’

Se Se’

2-2a Background• Severe energy shortage in rural areas. In 1979, 2/5 of farmer familie

s 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

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 3rd 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.

2-2c Electricity Poverty Alleviation and the

Construction of Rural Electrification Counties • The “Electricity Poverty Alleviation and Joint Well-life Seeking Program”, als

o 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.

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

Se

De’

De

Q

P

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

2-3a Background 2

• Rural electricity supply chains and price forming mechanism

2-3a Background 3

• Urbanization and rural population structure changes (including ecological migrants)

0

20000

40000

60000

80000

100000

78 80 82 84 86 88 90 92 94 96 98 00 02

Urban Villege

Population and Its Composition

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

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.

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%

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.

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.

3-1a Electricity Supply Coverage and Lacking at County and Lower Level in China

Year Electricity Supply Coverage Without Electricity Coverage

Town Village Farmer households

County Town Village Farmer households (10,000)

Population (10000)

1993 97.4% 93% 89.6% 26 1269 54858 2501

1994 97.8% 95% 91.3% 16 1071 37151 2214

1995 98.25% 96.06% 93.3% 16 828 29783 1731

1996 98.60% 96.72% 94.67% 11 649 24818 1404 7200

1997 99.03% 97.66% 95.86% 10 442 17462 1107

1998 99.20% 98.10% 96.87% 8 364 14042 881 5000

1999 98.31% 97.77% 97.43% 7 766 16509 706

2000 98.45% 98.23% 98.03%

2001 98.56% 98.53% 98.40% 3 629 10952 478

2002 98.54% 98.71% 98.48% 3 608 9303 458

3-1b The Quality of Rural Electricity Supply

Year Voltage 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%

1994 75% >20%

1995 80% >20%

1996 85% >20%

1997 92% >20%

1998 <12%

1999 <12%

2000 <12%

2001 90.03% 99.12% <12%

2002 91.21% 99.16% <12%

3-1c The Rural Electricity Supply Price of China

Year Share of Villages with rational electricity price

Counties with same electricity price in urban and rural areas

Electricity Price RMB/KWh.

1992

1993 75% 0.85

1994 80% 0.84

1995 0.84

1996 0.83

1997 85% 0.81

1998 0.71*

1999 0.655*

2000 0.62

2001 200 0.59

2002 934 0.56

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)

3-1d Rural Electricity Consumption

0

500

1000

1500

2000

2500

50 55 60 65 70 75 80 85 90 95

Rural Electricity Consumption (Under County)

2000

3000

4000

5000

6000

7000

8000

93 94 95 96 97 98 99 00 01 02

Rural Electricity Consumption(County and Under County)

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

3-2 Problem of Rural Electrification• Demand side: the per capita electricity consumption in rural China is very lo

w 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

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)

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 const

ruction• Township governments raise fund for electrification E.g., governments at various levels adopt supporting policies, increas

ing 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.

4-2 Market Force

0

500

1000

1500

2000

2500

50 55 60 65 70 75 80 85 90 95 00

Consumption ExpenditureIncome

China Rural Residents' Income (excluding transfer)and Consumption Expenditure

Increases in farmer income level

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

5-1 Main ConclusionSince 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.

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.