It is a great pleasure to be with you today at the BoAo CEO forum. I am particularly honored to
be a speaker on a panel discussing Asia’s sustainable energy future here in Guangdong province,
where China will begin its first imports of clean liquefied natural gas (LNG) next year. As many
of you know, my company, Woodside Energy of Australia, is the operator of the Northwest Shelf
LNG project that will supply LNG to China’s first LNG re-gas terminal in Guangdong.
Today I would like to speak to you as an economist interested in the next phase of sustainable
development in Asia, and particularly in China. My argument today is a simple one: market
based prices and market pricing systems for energy are a critical component of any sustainable
energy and sustainable development program. This is not a new idea, but it is one that
sometimes gets pushed to the back of sustainable development debates, as we discuss more
exciting issues such as fuel choices, new technologies, and new experimental energy programs.
I’d like to highlight “market pricing” once again, and in doing so, focus attention on the issue of
integrating two pricing systems that are currently distinct: China’s emerging energy demand
markets on the one hand, and global and regional energy supply markets on the other. Certainly
the importance of prices in market economics is not a new idea. But we do not always think
about why prices are important.
When I was a young graduate student studying economics, I read an essay on the importance of
market pricing that made a deep impression on me. The essay was by Friedrich Hayek, an
Austrian economist who is often seen as the grandfather of neoclassical economics in the West.
Hayek might at first seem a strange choice for a discussion of sustainable development, but if we
define sustainability as a search for opportunities to avoid waste, I think that Hayek’s insights are
an appropriate starting point.
At the end of WWII, the great question that Hayek and other economists were struggling with was
about choosing the best path towards economic recovery and development: which was best way to
organize the world’s economies: by planning or markets? Hayek’s key insight was about what
prices really are: they are not just about cost plus a profit. They are concentrated forms of
information about supply, demand, quality, and timing. In a modern economy, information is
dispersed among millions of individual consumers and producers. Hayek showed that only
market pricing could efficiently coordinate economic activity among these diverse actors. No
single person or organization could ever possess all the diverse information in society, and because
they lacked this information, planners would find it very difficult to efficiently and effectively tell
producers what to make, and when. In contrast, market based prices concentrate all of these
multiple layers of information into one signal, that consumers and producers can use as a guide to
taking the most efficient and beneficial path towards growth and development.
For Hayek, the alternative to an economy based on market pricing is a wasteful economy.
Without proper signals, goods will not be supplied in a timely fashion at the lowest cost, firms and
consumers will suffer economic losses, resources will be used inefficiently, and opportunities to
improve people’s living standards will be lost. In the most fundamental sense, such waste is
unsustainable. Let’s look at the issue of price and sustainable energy development in China’s
economy, first from the energy demand side, and then from the energy supply side – in particular
the supply of clean fuels.
China’s incredible economic achievements since reform and opening up began are built in part on
a recognition of markets and market pricing as powerful tools for organizing the economy. The
graphic on top here shows part of the story of how China’s rapid growth has been made more
sustainable thus far: China’s energy intensity, or the amount of energy needed to produce one unit
of GDP, has declined by about two thirds since reforms began. The government’s wise leadership
has been critical to this success.
Broad based reforms, including market price reforms, helped China achieve this victory for
sustainable development. Although energy prices themselves were not reformed until the
mid-1990s, the indirect effect of constant, steady reforms of retail prices in the economy drove
Chinese firms to become much more efficient energy users, especially in their use of coal. But
today, China faces a new challenge: energy demand is now growing faster than GDP, and energy
efficiency gains have slowed. This is a sign that in recent years, energy consumers have not been
receiving the proper signals about the true cost of energy use. Although coal prices in China
have been partially market-ized, most other energy prices, including refined products, electric
power, and natural gas prices, are not yet market based. Continuing market price reforms for
producer goods, including energy, could be part of the solution to the challenge of ensuring that
growth is matched by gains in energy efficiency.
On the supply side, a key question for Asia’s sustainable energy future is whether suppliers will
get the appropriate signal to supply clean energy resources to Chinese markets. This includes
international suppliers who may want to export energy to China.
To use one example, natural gas is potentially one part of a sustainable energy mix. Natural gas
is a very attractive fuel: fewer emissions of GHGs, SO2 and particulates than coal, competitive
pricing vs. oil, and high efficiency. It is also safe, and it is available from stable countries in the
Asian region. (This graphic shows CCGT vs. a medium sized coal fired power plant with no Flue
Gas Desulphurization (FGD) equipment – typical of plants in China. But even against the most
efficient coal technologies, CCGT plants produce 30% less CO2, and CCGT produces no
particulate emissions).
China has already recognized the attractiveness of NG. However, China’s domestic NG
resources will not be sufficient to meet China’s anticipated demand for these clean fuels. Imports
will be required. Fortunately, global natural gas resources are abundant, and imports will be
available from both pipelines and via LNG ship.
But international suppliers exist in a market price environment, and are driven by economic
incentives. They also must make choices. Currently, there is a significant difference between
global energy markets, and Chinese domestic end-user markets. Global and regional markets are
characterized by market-based prices, while China’s domestic markets are characterized by
government-guided prices.
There are important historical reasons for these differences. The key issue is how to go forward,
and how to link these markets in a way that will ensure that China has access to the energy it
needs to fuel continued growth in the most efficient and sustainable way.
Putting domestic energy prices on a market basis will be an important next step on the road to a
sustainable energy future in China. And of course China’s choices will deeply affect the
prospects for continued sustainable development in Asia.
China has many choices on the road to a sustainable energy future. These will be choices about
which fuels to use, which technologies to develop, and which suppliers to select to participate in
China’s growth. Market price signals will be a beneficial tool in making these choices, and
China’s continuing growth and rising incomes make the choice to move to market prices possible.
Prices are information: they are signals to both consumers and suppliers. For consumers: prices
are incentive to conserve, to choose appropriate fuels, and use them wisely.
For suppliers,
prices are an incentive to supply clean fuels to Chinese consumers, and to search for least-cost
technical and market solutions. Put another way, placing domestic energy prices on a market
basis is one tool China can employ to help secure energy resources from international suppliers,
thus enhancing China’s own energy security.
The difficulty is that today we have mixed signals. Chinese companies are now facing an
important disadvantage. They are “stuck” between two systems as they seek to import energy
supplies. They may need policy assistance and further price reforms to compete for supplies and
to satisfy demand. This is true not only for oil supplies, but also for clean fuels such as natural
gas. International suppliers want to supply clean energy to China, but the question is how can
they do this and still survive in the international marketplace? How to integrate the domestic
system of natural gas and electric power prices with the global and regional supply systems for
NG and LNG?
More Hayek can be part of the answer…more market-determined energy prices can be part of a
sustainable energy future for China. This can be done in a steady, constant way.
The government is already taking steps. The reform vision is forming first in coal and oil. But
timing is an issue. The timing problem for NG is different than the problem for oil and other
forms of energy. Gradual pricing reforms have worked well in the past and will continue to work
well in many cases, but NG and LNG imports must be contracted years ahead of when they will
arrive. For example, today, companies across the Asia-Pacific region are negotiating contracts
for LNG that will not be supplied until after 2010. So China is now competing for this supply,
but many Chinese companies are only considering today’s domestic price levels for NG and
electric power, and today’s domestic price system – not current regional market prices, and not the
domestic prices and pricing system that may exist 5 to 6 years from now. This puts them at a
disadvantage in competing for clean energy imports in the international marketplace. Early
recognition of market based pricing would help China’s energy companies secure access to energy
supplies, and enhance China’s energy security by attracting clean fuels to China.
Market based pricing is one path towards a harmonious, well-off society. Ultimately, market based
pricing has benefits for all.
Thank you.