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Draft Energy Law Points To Reform

Bruce Schulberg – Updated on Mar 31, 2008 – SCMP

The mainland’s new draft energy law is short on detail but big on signals.

While it remains a shell of a law waiting to be approved, it provides a glimpse of the talking points and the opportunities in coming years. With China now the world’s second-largest energy producer and consumer, the imprint of this law will be felt at home and abroad.

A law which grapples with the mainland drive to fuel its industrial development and ensure energy security, while confronting its environmental issues, is ambitious.

This is particularly so in the mainland context, where energy-related issues are the province of a multitude of government departments. With no central energy regulatory authority since the abolition of the Ministry of Energy in 1992, it is likely that the Energy Law will eventually open the way for a new ministry to implement the law.

The preparation of the draft law has been a lengthy process and the final law’s ultimate content is far from certain. The publication of the draft in December last year for public comment was only a first step in a lengthy legislative procedure.

Public feedback will help shape a revised draft. It will then go through an approval process, which includes the State Council, readings by the National People’s Congress Standing Committee, and finally submission to the congress for voting. It is hoped the final law will be in place in 2009.

The draft law hints at increased market access for domestic and foreign investors. While energy resources will continue to be owned by the state, the draft calls on the state to actively promote a market allocation of energy resources and encourage different ownership systems. This draft hints at new market opportunities for private capital and foreign investment in some energy-related areas in which state ownership is currently in the dominant or monopoly position.

There is also a decidedly green tinge to the draft law. References to sustainable energy sources, pollution control and conservation of natural resources are sprinkled throughout the text.

The draft proposes the adaption of financial incentives and mechanisms to achieve energy goals. A new fund is proposed to encourage, among others, energy conservation, and the development of new and renewable energies.

A tax regime is proposed to encourage the use of preferred energies and discourage the use of other energy sources. An energy consumption tax is contemplated to promote energy saving.

Preferential pricing is contemplated for renewable energies, with punitive pricing mechanisms for high-polluting, high-energy consuming technologies. The draft is not detailed, but developing the pricing mechanism will be a politically sensitive issue and a key to achieving mainland goals and encouraging the use of cleaner energies and technologies.

The Energy Law should ultimately provide the mainland energy blueprint, and there is much to be encouraged by. At present, the draft provides a structure for more cohesive regulation in the energy sector and a more modern and transparent energy policy, opens the door to possible foreign investment, and gives a healthy boost to the cleaner, greener energies.

Bruce Schulberg is a partner of Clifford Chance based in Beijing

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