ENERGY EFFICIENCY FINANCING IN CHINA : CHALLENGES, WAY FORWARD AND ADB EXPERIENCE

Pradeep Perera Principal Energy Specialist East Asia Energy Department

Chinas Energy Sector in Global Context

World Primary Energy Consumption in 2009 ( MTOE)
China is the largest energy
consumer in the world with 19% share in global energy consumption. Chinese Energy Consumption is increasing at an annual rate of 8%. Coal contributes to over 65% of primary energy demand.

USA

Japan
OECD Europe Other OECD China India Brazil Russia Other Non OECD

China is a net energy importer and 10% of its primary energy supply ( mainly oil but increasingly coal and gas is imported.

Energy Efficiency in China

Chinas energy intensity measured in energy consumption per unit output is more than double the world average and OECD average.

However, Chinas energy intensity has reduced by 60% since 1990 and is less than India, Russia and Middle East
There has been a rapid decrease since 1990 to 2000, slight increase from 2000 2005 and again decline since 2005.

Importance of Energy Efficiency to Emission Reduction

China need to provide 30 % of global emission reductions required for 450 ppm case. End user efficiency improvement, fuel switching and supply side efficiency improvement are expected to provide 57% of these emission reductions.

Chinas Energy Consumption Mix

Industrial Energy Consumption
158 71 727 315 139 35 112 165 276

Housing

Commercial Buildings

Transport

Iron & Steel

Chemical

Aluminum

Cement

Other Indusry

Industrial Sector contributes to 57% of final energy consumption in China. Iron& Steel ( 22%), Petro chemical (11%) , cement ( 9%) dominate the energy consumption.

Chinas Strategy for Energy Efficiency Improvement 2006 - 2010

Set a National target of 20% improvement in energy intensity compared to 2005. Focused on Industrial Sector & 1000

Largest energy consuming enterprises. Provinces were given energy intensity targets and responsibility for implementing national energy conservation program. Provinces were held accountable for achieving the targets. Progress was tracked annually.

Organizational Structure for Supervicing energy savings in China

Chinas 1000 Key Enterprise Program

Covered the 1,000 largest energy consuming enterprises. ( More than 180,000 tce per year) The Provincial government expanded the coverage by lowering the threshold . Enterprises are required to enter into legally binding contracts with the government for implementing energy saving measures.

Undertaking Energy Audits and identifying energy saving opportunities Establishing enter price wide EMS systems with dedicated staff. Government monitoring of enterprise specific energy saving measures. Undertaking energy saving investments by replacing inefficient equipment and processors Quantitative targets for energy consumption was set based on industry wide benchmarks

Energy Efficiency Improvement Measures Cont.

Fiscal Incentive Program for energy efficiency

investments @ RMB 200 ( $ 29) RMB 250 ( $ 36) per tce of energy saved.
This amount o 10% - 20% of investment cost.
Limited to investments resulting in 10,000 tce. Provinces came up with supplementary

schemes to cover smaller investments.

Central government allocated over 100 billion

RMB ( $ 15 billion) and Provincial governments $ RMB 50 billion ( $ 7.5 billion) for these schemes.

Energy Efficiency Improvement Measures Cont.

Elimination of backward industrial capacity.

Focused on thermal power, iron & steel, cement, aluminum and coke industries Replacing small with large Additional electricity surcharges for backward plants. Subsidies to mitigate transition cost and incentives for early elimination Revoking production permits & credit squeezing

Industrial Technologies are classified as

encouraged, permitted, restricted and eliminated.

Energy Efficiency Assessment of new capacity

Developing Energy Service Industry

Third party service providers
o Energy audits, consulting & technology dissemination
o Energy efficiency project design and appraisal o Energy efficiency project investment & management

under EPC contracts. ( ESCO model)

o Undertaking monitoring & verification of energy savings

Chinas ESCO industry is the largest in the world

with over $ 4.5 billion EPC contracts resulting in energy savings of over 10 million tce in 2010.
Over 75% ESCO investments are in industrial

sector and over 60% of the contracts ESCO was responsible for mobilizing the investments.

Results achieved 2006 2010

Chinas energy intensity has improved by 19.1% compared to 2005. The total energy savings achieved as a result of EE investments was 340 million tce. ( i.e. 5 3 % of energy savings required for 19.1% improvement in energy intensity).

More than 47% of energy intensity improvements are due to structural changes in the economy.
Total investment mobilized was RMB 844 billion ( $ 130 billion).

Central government : RMB 102 billion( US $ 16 billion)

Local government : RMB 48 billion ( US $ 7.5 billion).

Host Enterprises : RMB 169 billion ( US $ 27 billion) Commercial Banks : RMB 488 billion ( US $ 77.5 billion) ESCO Industry : RMB 20.5 billion ( US $ 3.25 billion)

International Funding : RMB 18 billion( US $ 3 billion)

Results Achieved 2006 - 2010

Sustainable institutional framework was

established for achieving further energy savings.

Most of the Energy Savings 56% were achieved in Industrial Sector. Targets were achieved mainly using administrative mechanisms with strong top- down approach. Energy saving performance contracts provides a platform for government to closely monitor the energy consumption in main energy consumers.

Industry

Buildings

Transport

There is less reliance on market forces such as energy pricing and carbon pricing

Challenges of Financing Energy Efficiency during 2006 -2010

Most of the bank financing was for capacity expansion

projects .
Small Scale Retrofit Projects and ESCO projects find

difficult to access bank financing.

Banks as well as enterprises consider transaction costs

are too high for EE retrofit projects.

Banks demand collateral and enter prices are reluctant

to provide collateral for EE retrofit projects.

Low standalone collateral value of EE retrofit assets.
Difficulty in ring fencing the cash flows associated with

EE retrofit projects.
Preference of Chinese banks to finance large projects

and thresholds on minimum project size.

Poor credit ratings of SMEs and ESCOs.

Targets for Energy Efficiency Improvement in 12th FYP 2011- 2015

China has set a target of 16% of improvement of

energy intensity and 17% improvement of carbon intensity over 2010.

The measures initiated in the previous program will

be implemented with increased coverage.

Supervision and Monitoring mechanisms to verify energy savings will be strengthened.

Development and promotion of new EE technologies.

Further Developing energy performance contracting.

Instituting corporate energy management systems in key enterprises.

Provincial Energy Intensity Improvement Targets under 12 FYP

Strategy for Energy Efficiency Improvement in 12th FYP

ADBs Contribution to Energy Efficiency Improvement in China

ADBs energy efficiency investments focused on the three provinces having the largest energy consumption in China. ( Shangdong, Hebei and Guangdong) . ADBs ability to provide low cost funds with long grace and repayment period enabled the establishment of revolving fund to provide sustainable financing.

ADBs first energy Efficiency Project in Guangdong, approved in 2008.

ADB has supported 19 SME projects. Mobilized RMB 1.3 billion ( $ 200 million).

Achieved energy savings of 275,000 tce.

The second round of subprojects utilizing the revolving fund is about to commenced. Capacity building on energy saving monitoring and industrial policy formulation for energy conservation.

ADBs Response : Hebei & Shangdong Energy Efficiency Projects

ADB has approved Shangdong and Hebei Energy Efficiency Loans in 2011. Use similar structure to Guangdong but make effective partnerships with middle level commercial banks. Focus on Medium to Large scale enterprises for Industrial process conversion projects. Provides Capacity Building for Energy Manager Training in Shangdong. A GEF Project for remote monitoring of energy savings, third party M&V agency capacity building and energy management system certification in Hebei Province is under preparation. The first round of projects are expected to realize energy savings of around 250,000 tce each in Shangdong and Hebei. ADB intend to structure future energy efficiency projects with enhanced leveraging and risk sharing with commercial banks.

Issues and Challenges for next 5 years.

China intend to Mobilize RMB 1,500 billion ( $ 240

billion) for EE investments during 12th FYP to achieve energy savings of 670 mtce. This involves scale up of Provincial energy efficiency programs and implementation and monitoring capacity will be an issue. Channeling the required financing from the banks to enterprise for EE investments require special efforts and incentives. Need for more market based approaches such as emission trading, sectoral trading of energy efficiency and tradable energy efficiency certificates. Further expanding the capacity of energy service industry. Further expanding the enterprise energy management capacity.