A consultation process on the draft Energy Law conducted by the Office of the National Energy Leading Group closed on 1 February 2008.

The draft law will shortly be presented to the Office of Law of the State Council and then be submitted to the National People’s Congress (NPC) for approval. The new Energy Law is targeted to come into force in 2009.

The principles and purposes of the new Energy Law

The Energy Law is intended to be the basic law to guide and co-ordinate other laws in China’s energy sector (Article 11). It will cover all forms of primary energy including coal, oil, natural gas, renewable energy and nuclear energy as well as secondary energy such as electricity, thermal power and petroleum products (Article 2) . It will overlay specific energy laws such as the Renewable Energy Law, Energy Conservation Law and the Electric Power Law and their associated regulations and measures.

The purpose of the Energy Law (Article 1) is to:

• standardise the development, use and administration of energy
• create a stable, economical, clean and sustainable energy supply and service system
• increase energy efficiency
• ensure energy security
• promote the development of a resource efficient and environmentally friendly society, and
• promote the co-ordinated development of energy, the economy and society.

Key guiding principles of the Energy Law are:

• sustainable development (Article 20)
• resource conservation (Article 3)
• market-based allocation of resources (Article 6)
• ensuring basic energy supplies and services for all (Article 7)
• equality, mutual benefit and co-operation to promote international energy co-operation (Article 9)
• unified administration and division of responsibilities (Article 10)
• public participation (Articles 14 and 15)
• incentivised and restrictive pricing policies for renewable and new energy (Article 90)
• tax incentives to encourage the development and use of renewable and new energy (Article 96), and
• tax restrictions on high-energy consuming products (Article 97).

Some observations and points of interest

Definitions and terms

The Renewable Energy Law (RE Law) came into force on 1 January 2006 and is a framework law that brought the regulation of renewable energy under one legislative umbrella. The Energy Law aims to reinforce the RE Law and its high level objectives and principles are directed at enhancing the development and use of renewable energy.

The Energy Law is of broader application and more detailed than the RE Law and contains a more extensive list of defined terms at Article 139 (contrast Supplementary Provisions of Article 32 of the RE Law).

Article 139 defines “new energy”, “renewable energy”, “clean energy”, “low carbon energy” and “high carbon energy”. The first four terms are often used interchangeably to refer to renewable or clean energy in the industry, with “high carbon energy” generally recognised to refer to energy derived from fossil fuels. While the defined terms appear to make sense when examined in isolation, care will need to be taken in practice as they do overlap.

Other parts of the Energy Law also make reference to “conventional” and “alternative” energy. It would be preferable for the final text of the Energy Law to consolidate these definitions and terms as far as possible to avoid confusion in practice.

The debate continues: a new Ministry of Energy?

There has been and will continue to be a great deal of debate as to whether a new and independent Ministry of Energy should be established to coincide with the introduction of the Energy Law. The institutional structure of the Chinese energy sector has changed considerably over the years and is fragmented.

Foreign and domestic energy and power specialists have consistently advocated that a single, unified and independent energy agency is essential to the proper and efficient oversight and administration of the energy sector in China. It is not however clear that a new and independent ministry will emerge, at least initially.

The issue of having a Ministry of Energy, might be discussed at the next NPC meeting in March. Assuming the NPC agrees that there is a need for such a Ministry, a new minister will be selected during the six months following such an agreement. It is unlikely, however, that this will be determined before the submission of the new Energy Law to the NPC, which might not be until 2009.

Article 12 of the Energy Law states:

“The department of the State Council having principal responsibility for the administration of energy shall undertake the task of the unified administration of energy for the entire country. Other relevant agencies of the State Council shall be responsible for the relevant work on the administration of energy within their respective scopes of responsibility…”

Article 12 does not provide that there will be a new, separate and independent energy ministry. Rather, as has been common drafting practice in more recent Chinese laws, reference is made to a “department of the State Council”, which can mean an existing ministry or its future replacement. It also allows for a change of the responsible ministry.

Further, “unified” administration does not mean that the ministry principally responsible for energy will have overriding authority and control over the Chinese energy sector. In fact, Article 12 makes it clear that other relevant agencies will have administrative responsibilities within their respective mandates.

Practically, given the strong interaction and interdependence between existing Chinese agencies and offices such as the National Development and Reform Commission (NDRC), Office of the National Energy Leading Group, Ministry of Land and Resources and State Electricity Regulatory Commission (SERC)) and consensus decision making between them, it is difficult to see a new and independent energy ministry emerging without substantial changes in the governance structure and practice of the Chinese Government.

Strategies and national plans

As with all laws central to the economic, social and environmental development of the country, China has incorporated the strategic goal and principles of sustainable development into the Energy Law. Article 20 of the Energy Law provides:

“The national energy strategy is the overall strategy that plans and guides the sustainable development of the nation’s energy resources and safeguards its energy security. It is the fundamental basis for the formulation of energy plans and energy policies.”

The national energy strategy is intended to extend for a term of 20 to 30 years, to provide certainty. It will be assessed and amended every five years (Article 22). National energy plans are to be used to implement the national energy strategy (Article 23) and will have a duration of five years (Article 26). Local energy plans are also envisaged under the Energy Law (Article 29). These will have to be consistent with national plans, and both must in turn be consistent with the national strategy.

Tackling climate change

Article 5 of the Energy Law specifically encourages renewable energy and low carbon energy, which is defined under Article 139 to mean energy that produces low or zero carbon emissions, to address climate change. This provision is in line with China’s National Climate Change Programme, which contains the detailed policy position and action plan of China in relation to climate change and sustainable development .

Encouragement of foreign investment in energy efficiency, clean and alternative energy

The Energy Law furthermore encourages energy efficiency, the development of clean and low carbon energy and the replacement of conventional energy with new energy and high carbon energy with low carbon energy (Articles 35 to 37).

Notwithstanding this broad encouragement, it is important to remember that there is already a Renewable Energy Guidance Catalogue and a Catalogue for the Guidance of Foreign Investment Industries (Revised 2007) which lists different types of investment activity. Foreign investors should check these catalogues to ensure the target investment is indeed encouraged and is not prohibited or restricted.

Article 111 of the Energy Law requires relevant government departments to formulate new industry guidance catalogues and relevant policies for foreign investment activities in energy development. Further guidance may be provided for foreign investment in clean energy under this provision in the future.

Market mechanisms for the conservation of energy

Article 61 of the Energy Law introduces energy management contracts and voluntary energy conservation agreements, and encourages governments at all levels to establish these market mechanisms for the conservation of energy. Article 139 of the Energy Law describes both an energy management contract and a voluntary energy conservation agreement but more detailed guidance on the form and content of these contracts will need to be provided by the relevant government agency in due course.

Open standing?

In certain common law jurisdictions, open standing is the principle under which any person may make a legal claim in respect of a matter even if they have no personal or special interest.

Article 118 of the Energy Law provides:

“Any entity or individual shall have the right to report, expose, and bring charges for an activity that violates this Law or relevant energy laws and regulations. The relevant departments should attend to the matter promptly after the receipt of the report, exposure or charges.”

While China is a civil law jurisdiction and Article 118 is not strictly or technically equivalent to the concept of open standing, it does expressly give any member of the Chinese public the right to challenge violations of the Energy Law without necessarily having suffered any loss or damage themselves.

Impact on renewable energy

It would appear that the RE Law and its supporting measures will continue to operate essentially unchanged after the Energy Law comes into force, assuming it is enacted more or less in the form of the draft for the solicitation of opinions issued in December 2007.

As such, renewable energy specific pricing, administration and grid connection will be dealt with under measures specific to renewable energy such as the Provisional Administrative Measures on Pricing and Cost Sharing for Renewable Energy Power Generation (NDRC Price [2006] No.7), Renewable Energy Surcharge Level Regulation (NDRC Price [2006] No.28-33) and Measures on Supervision and Administration of Grid Enterprises in the Purchase of Renewable Energy Power (SERC [2007] Order No.25).

However, it would be prudent to assess now whether new high level principles and obligations introduced by the Energy Law are satisfied by compliance with regulations and rules directed at renewable energy and whether the Energy Law increases or extends those obligations, requiring further steps to be taken by an entity engaging in the business of renewable energy. Apart from assessing and addressing these risks, consideration should of course be given to new business opportunities that the Energy Law will create for these entities.