Bulletin

Achieving growth in Saudi Arabia and China through joint leadership on industrial energy productivity

21 Dec 2017

By Nicholas Howarth, Research Fellow, KAPSARC

Dongmei Chen, Research Fellow, KAPSARC

Fu Guanyun, Researcher, ERI

While their economies differ regarding the scale and diversity of their energy mix, China and Saudi Arabia are both similar in that industry is the main driver of total final energy consumption accounting for around 58 per cent and 55 per cent in China and Saudi Arabia respectively.

Both countries have also recently deepened their engagement under China’s Belt and Road Initiative and Saudi Arabia’s Vision 2030 transformation plan. With this in mind, KAPSARC and the Energy Research Institute (ERI) embarked on a joint research project that included workshops in Riyadh and most recently in Beijing in December 2017. These focused on how greater economic growth can be achieved through joint leadership on industrial energy efficiency, industrial upgrading and structural economic reform.

What is the added value of focusing on energy productivity?

Energy productivity has gained prominence in several G20 countries with the U.S. and Australia setting national targets to double and increase by 40 per cent the value created (GDP) per unit of energy consumed by 2030 respectively. Germany also has set a target to increase energy productivity by 2.1 per cent per year as part of its Energiewende strategy.

These moves reflect a growing trend to focus on how energy can be used most effectively to drive economic competitiveness and prosperity. In addition to being a broad policy agenda, energy productivity also incorporates a number of specific indicators that integrate economic performance and energy consumption. At the macroeconomic level, energy productivity is equivalent to its mathematical inverse of energy intensity – or how much energy it takes to produce a unit of gross domestic product (GDP). At the microeconomic level, energy productivity focuses on the revenue produced per unit of energy consumed by a company or sector (Figure 1).

Figure 1: Areas of overlap and difference with the energy productivity and efficiency agendas.

Source: KAPSARC, based on Climate Works Australia.

Energy efficiency, on the other hand, is generally focused on the energy consumed per physical unit of output (e.g., GJ/tonne of cement). Because of this difference, energy productivity may provide a better foundation for industrial policy. Energy productivity more strongly incorporates industrial upgrading and structural reform, which are key drivers of competitiveness and higher value jobs. However, energy efficiency is still a core element of energy productivity.

What are the key energy productivity trends in China and Saudi Arabia?

The industrial sector is the prime driver of energy consumption in both Saudi Arabia and China. In China industrial energy consumption has recently begun to decline, even though its industrial value added continues to rise strongly. This shift is the major driver behind China’s overall rate of improvement in energy intensity of around a 5 per cent reduction per annum over recent years. This improvement rate is one of the fastest in the world and is significant in global terms. For instance, we estimate in 2016 around US$ 5 trillion has been added to China’s GDP than what would have been the case if its economy still functioned with the energy intensity it had in 2010.

By way of contrast, only recently has Saudi Arabia’s trend in energy intensity been improving. After potentially peaking in 2010, Saudi Arabia’s overall and industrial sector energy intensity has improved by 8 per cent. This change in the Kingdom’s trajectory coincides with the formation of the Saudi Arabian Energy Efficiency Program (SEEP) in 2010 as well as a shift towards less energy intensive industry. This compares with relatively consistent average annual reductions in energy intensity across the G20 of around 2.5 per cent per year over the period 2011-2016.

Figure 2: Industrial energy intensity in China, Saudi Arabia and the G20.

Source: KAPSARC based on Enerdata (Industrial energy consumption includes non-energy use).

How far can energy efficiency in energy intensive industry shift the needle?

Both Saudi Arabia and China have put in place energy intensity targets and programmes to improve energy efficiency in their biggest energy-consuming companies. China’s approach to improving industrial energy efficiency is on three levels: phasing out outdated inefficient capacity, mandatory improvement targets for existing plants and strict market entrance requirements for new plants. ERI estimates that the implementation of energy efficiency measures, especially the Top 10,000 Enterprises Program, resulted in energy efficiency improvements of between 5-20 per cent across the industrial sector for the period 2010-2014 and energy savings of 309 million tonnes of coal equivalent. Between 2003 and 2016, the energy service company (ESCO) industry grew at a rapid rate, generating over 652,000 jobs in over 5,800 businesses. Gross output value from the ESCO sector increased from around RMB 1.7 billion in 2003 to over RMB 356 billion in 2016, creating the world’s largest ESCO market.

In Saudi Arabia, the Saudi Energy Efficiency Center (SEEC) has established baselines and benchmarking frameworks for over 180 industrial plants covering 59 different production processes. SEEC has agreed on aspirational energy intensity targets for 2019 and reviewed energy efficiency improvement plans for 42 companies. Saudi Arabia’s scheme for industry separates existing plants from new plants. Companies must submit energy efficiency improvement plans for their existing plants which identify the energy savings potential. New plants must target the average energy efficiency in the first quartile of the relevant global benchmark for their sector. From 2011 to 2015, SEEC reports that energy efficiency has improved in the petrochemical sector by around 2 per cent, and by around 3 per cent for cement. Overall, these initiatives are expected to save around 9 per cent of total industrial energy consumption by 2019, compared to a 2011 baseline.

What is the importance of industrial strategy for managing structural economic change?

Between 2005 and 2015, the value added of manufacturing industries in China grew from around USD 700 million to more than USD 2 trillion (in constant 2005 prices). Of this, the value added of high-tech manufacturing grew to USD 500 billion in 2014 from a small base of just USD 50 billion in 2000. In Saudi Arabia, manufacturing value added also grew strongly, doubling from USD 30 billion in 2000 to over USD 60 billion in 2015. High-tech manufacturing also rose strongly from a base of around USD 100 million in 2000 to USD 350 million by 2014.

It is not preordained that economies will naturally move up the value chain from simply exporting mineral resources and basic commodities to high-value growth models of advanced manufacturing and services. Using energy productivity as a framework for industrial strategy involves achieving a competitive, energy-efficient energy intensive industrial base and building local supply chains to support higher value added activities.

In China, industrial transformation dominates economic policy-making, shaping everything from the government’s efforts to reduce excess industrial capacity and increase energy efficiency through to programmes to reign in excessive debt and lower corporate costs. Transformation to higher value production will depend on developing a professional skill base, research and development, and higher incomes to support domestic demand. In Saudi Arabia, energy intensive industry still dominates the industrial landscape. Plans to grow new economic sectors through a National Industrial Strategy, building on the Kingdom’s competitive advantage in energy intensive industry, is an area of ongoing development.

Conclusions

Greater efforts to share international experiences on industrial energy productivity can help achieve greater prosperity and the Sustainable Development Goals. Areas for exchange between China and Saudi Arabia are particularly rich in the areas of: energy price reform and energy efficiency, benchmarking, establishing an industrial energy efficiency service company (ESCO) market, and district cooling initiatives as well as building competitive high value industrial ecosystems.

The economic transformation desired by both China and Saudi Arabia will involve a transformation of their energy sectors. In China, this process is being managed through a systematic programme of national and provincial energy intensity targets, energy efficiency benchmarking at the technology and process levels, and energy price and market reform as well as structural change and industrial upgrading policies. While their starting points are very different, there is clear scope for exchange and policy learning between both countries, especially as they enter this deeper phase of bilateral engagement.    

KAPSARC and ERI would like to thank IPEEC for their support of their workshop series. A joint report will be released in early 2018 which will be accessible at www.kapsarc.org. For further information contact: nicholas.howarth@kapsarc.org.

 

Dr. Nicholas Howarth is a research fellow at KAPSARC leading work on energy productivity. He is an applied economist with 20 years of experience working with governments and industry. He has a D.Phil. from Oxford University in economic geography specializing in energy, technological change and climate change.

 

 

Ms. Dongmei Chen is a research fellow at KAPSARC for China-related policy study and partnership coordination. She has more than 20 years of experience working in the energy and climate field in China, acting as head of the Institute of Industrial Productivity China Office and director of the Climate Change and Energy Program for WWF China before she joined KAPSARC.

 

 

Mr. Fu Guanyun has been working in the Energy Efficiency Center of the Energy Research Institute, National Development and Reform Commission of China since July 2010. He mainly focuses on energy consumption and energy efficiency policies research and quantitative analysis in the industry sector.