• China's Proposed Energy Law Would Create Comprehensive Energy, Regulatory Scheme
  • April 21, 2008
  • Law Firm: DLA Piper - Washington Office
  • During its upcoming meeting this spring, China’s National People’s Congress will consider enacting new legislation governing China’s energy sector (the Proposed Energy Law).

    If enacted the Proposed Energy Law would create a comprehensive energy policy and regulatory scheme governing all energy development, exploitation, and management activities within China.

    The Proposed Energy Law would have the status of a “basic law.” Such laws carry greater legal weight, because they generally relate to matters of public policy deemed to be of vital or strategic importance. Based on current drafts of the Proposed Energy Law, it appears that China intends for renewable energy sources to play a very prominent role in a comprehensive energy policy and regulatory scheme.

    Term “Energy” to Encompass All Sources

    As proposed in the new law, the term "energy" is all-encompassing and includes coal, crude oil, natural gas, hydro power, nuclear power, solar energy, geothermal, electricity, petroleum gas, and any other renewable energy sources.

    Against the backdrop of increasingly volatile energy prices, surging demand for crude oil imports, and the growing importance and strength of its automobile sector, China has in the past sought to establish a compulsory energy (oil and coal) conservation system. Such efforts have had mixed success, due in part to a lack of relevant legislation. Among other things, the Proposed Energy Law seeks to address some earlier shortcomings in energy conservation legislation, while also implementing a plan focused on a sound energy policy and its strategic implications.

    Policy and Regulatory Objectives

    From a regulatory perspective, the stated objectives of the Proposed Energy Law are to:

    • regulate energy resource development and usage;
    • establish a steady, cost-efficient, and continually developing energy supply and service system; and
    • maintain the safety and security of China's energy supply.

    From a policy perspective, the Proposed Energy Law focuses on the state's objectives for encouraging the development and utilization of:

    • highly efficient clean energy with low carbon emissions; and
    • renewable energy sources in place of fossil-fuel sources.

    Proposed Law May Restore Ministry of Energy

    The Proposed Energy Law would establish a department under the State Council tasked with supervising and regulating China's energy markets (the Energy Department). Some commentators have suggested that creating such an agency means China intends to restore its Ministry of Energy, established in 1988 and then abolished in 1993. No official confirmation has been made in this regard.

    The Proposed Energy Law would require that local energy authorities and local governments (i.e., county-level government or above) establish independent energy departments to work in concert with the Energy Department to manage and oversee local energy administration.

    Under the Proposed Energy Law, the Energy Department would also promulgate energy import/export policies as well as other energy administration rules intended to encourage the importation of clean energy, while overseeing the exportation of products with low energy efficiency.

    Energy Strategy

    The Proposed Energy Law stipulates that the State Council would be responsible for drafting and promulgating a national energy strategy over the next 20 to 30 years. In order to maintain flexibility and relevance, the national energy strategy and related policies would be reviewed and re-evaluated every five years.

    Energy Development and Exploitation

    The Proposed Energy Law provides that, as a general matter, all ore, water, and marine energy resources belong to the state, with the State Council exercising ownership rights over such resources. The Proposed Energy Law further stipulates that in several "key energy areas" (an undefined term), the state must hold a controlling interest in all enterprises.

    The Proposed Energy Law also classifies the level of authority for different energy projects in accordance with the following scheme:

    • any energy ore prospecting project or exploitation project with national security implications, such as oil, natural gas, or nuclear energy, would require the approval of the Energy Department;
    • any civil nuclear energy utilization project would require State Council approval;
    • any coal prospecting project or exploitation project, as well as any hydropower or marine energy development project would require the approval of the Energy Department or an appointed provincial-level energy administration department; and
    • any wind energy, solar energy, or biological energy development project (based on certain size and scope considerations) would require the approval of the provincial-level energy administration department.

    From a policy perspective, the lower approval levels required for renewable energy projects suggest an intent to favor expeditious exploitation of such resources. At the same time, this approval indicates that China will exert a high level of state scrutiny and control ove foreign investment in traditional energy resources.

    Potential Impact on Sino-Foreign Cooperation

    The state encourages Chinese enterprises to make overseas energy-related investments, and the Proposed Energy Law acknowledges China's commitment to strengthening cooperation with foreign countries in the areas of energy trade, energy transportation, energy technology, energy education, and energy security.

    The state is committed to protecting the legal interests of foreign citizens conducting energy development and exploitation activities in China, while emphasizing that relevant Chinese laws and regulations are to be abided by in connection with such activities.

    The Proposed Energy Law also provides that any potential restructuring or asset acquisition within the energy sector would be subject to the review and approval of the Energy Department.

    Conclusion

    Whether the Proposed Energy Law is ultimately enacted in its current form or undergoes significant revision, it is evident from the scope and tenor of the draft legislation that foreign investors should consider the implications these policies will have for new investment in green energy projects in China. The draft proposal indicates that China views renewable energy to be of vital long-term importance.

    Note: Although the public comment period for the Proposed Energy Law expired on February 1, 2008, the draft legislation remains under review by the State Council. Some commentators have suggested that the magnitude of the Proposed Energy Law makes it unlikely such legislation will be enacted during 2008.