Electricity Demand in the People's Republic of China: Investment Requirement and Environmental Impact

Abstract

This paper uses a macroeconomic approach to develop a long-run electricity demand model to analyze the main factors affecting electricity demand in the Peopleís Republic of China (PRC). As expected, the relationship among variables is more stable and significant after the PRCís economic reforms (1978), when all factors were more responsive to market forces. An error correction model provides an appropriate framework for forecasting the short-run fluctuations in aggregate electricity demand. The demand elasticity of gross domestic product (GDP) is estimated at about 0.8 after the 1978 economic reforms, lower than that of the pre-reform period (before 1978). The results show that although GDP is still the most important factor for electricity demand, electricity demand is negatively related to structural changes and efficiency improvement. This implies that in a fast growing economy such as the PRC, high GDP growth does not always come with high electricity demand and explains why in 1998, when the PRC had an economic growth rate of 7.8 percent, electricity consumption grew by only 2.8 percent. To meet the forecasted demand growth, the total install capacity incremental is estimated to be 187 GW between 2002-2010, while the required investment costs are estimated to be US$193 billion in 2002 prices. The continued growth of coal-fired power plants will increase the share of the power sector in total sulfur dioxide emission from 50 percent in 2001 to 53 percent in 2005.