Challenges of achieving China's energy intensity targets sets in 12th FYP : ADBs Response & Role of ESCO

PRADEEP PERERA SENIOR ENERGY SPECIALIST EAST ASIA DEPARTMENT ASIAN DEVELOPMENT BANK

Energy Efficiency Challenges

PRC is the largest energy consumer and GHG emitter in the world and energy consumption grew at 6.0% p.a 1990 2007. PRC is increasingly dependent on energy imports. Over 56 % of energy in PRC is consumed in the industrial sector. Poor urban air quality due industrial air pollution. The per capita energy consumption in PRC is less than 20% of OECD average. However, the energy consumption per unit of GDP in PRC is significantly higher than the OECD average. Energy consumption per unit output in heavy industries in PRC is more 25% higher than OECD average.

Achievements during 11th FYP(2006 2010)

Energy intensity improvement target of 20% was set under 11th FYP and actual achievement was 19.1%. The growth in energy consumption was 6.6% p.a. compared to GDP growth of 11.2% during 11th FYP. The energy to GDP elasticity was reduced from 1.04 ( 10th FYP) to 0.59 during 11th FYP. However, Chinas energy consumption increased from 2,475 mtce in 2006 to excess of 3,100 mtce in 2010. ( 16% of global energy consumption) The energy savings achieved is in excess of 600 mtce compared to business as usual. ( more than combined energy consumption of South East Asia)
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Policy Initiatives under 11th FYP

1,000 key enterprise program targeting the largest energy consumers in the country. Energy Saving responsibility contracts with quantified energy savings to be achieved and penalties for non compliance. Establish corporate energy management units Adapt energy audits and energy metering. Establish dedicated energy management systems. Increase investments in energy efficiency Develop internal incentives and penalties. Provincial government expanded the program to include the second tier enterprises.
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Policy Initiatives under 11th FYP

Capital subsidies for energy efficiency investments. ( RMB 200 250 per mtce saved). More than $ 15 billion was allocated by government during 2007 2009. Provincial level monitoring and supervision systems were established. Regulations on phasing out and elimination of obsolete inefficient industrial capacity. Compensation for eliminating backward capacity Differential energy pricing and taxation for technologies earmarked for elimination. More stringent energy efficiency requirements on approval of new capacity.
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Opportunities for EE Service Industry

Undertaking energy audits for enterprises included in national and provincial programs. EE technology Dissemination EE project design & appraisal. EE Project management and maintenance Third party M & V of energy savings. Arranging financing for EE investments. Structuring energy performance contracts based shared savings and guaranteed savings

Is the EE Service Industry ready to accept the Challenge ?

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Challenges going forward

12th FYP has set a target for 16% improvement in energy intensity and 17% carbon intensity. Total investment requirement is more than $ 25 billion per year compared to $ 15 billion in previous 5 years. The commercial bank lending is limited to around $ 3 billion per year. The banks requires collateral and credit guarantees. Host companies would rather use the credit headroom for capacity expansion. Difficult to ring fence the cash flows associated with EE investments unless structured as energy savings contract through an ESCO.
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Types of Industrial EE Projects

Retrofitting existing plants with more efficient equipment
Variable frequency drives, green lighting, boiler replacement Usually $ 1- 3 million investment High FIRR, short payback but limited energy savings.

Industrial Process Conversion Projects

Heat recovery from by-product gases ( coke oven gas and blast furnace gas) Smelting gas residual heat recovery Conversion of cement grinding to dry processors Usually $ 5- 25 million investment Longer payback but substantial energy savings 8

What ADB is Doing in PRC to support EE

Guangdong EE MFF Facility approved in 2008 3 separate tranches amounting to $ 100 million
Supported 18 EE projects having a total investment of $ 240 million in initial financing. Total energy savings achieved is over 250,000 tce Mainly electricity saving retrofit projects in light industry.

Shangdong EE Project to be approved in August 2011.

2 large industrial process conversion projects having a total investment of $ 141 million. Energy Savings of 160,000 tce

Hebei EE Project to be approved in 1st Quarter 2012

- 8 sub projects in iron & steel industry for process conversion and waste heat recovery with investments of over $ 200 million. - Total energy savings of over 600,000 tce.
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ADBs Existing Lending Modality to EE

Each Loan is a separate loan focusing on a particular province Provincial Government borrows ADB loan proceeds from MOF and is responsible for repayment. Provincial Government appoint a FI to act as the fund manager. Each sub loan is approved by the Provincial Government. Provincial government obtain credit guarantees from lower level governments. A revolving fund is set up to recycle proceeds of sub loan repayments as payback period ( 4 years) of sub projects is short compared to the grace period of ADB loan ( 15 years)
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ADBs Existing Lending Modality to EE

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Proposed Financing Framework for EE Financing

NDRC will decide on the provinces to take part in the MFF program. Each Tranche of the MFF will be earmarked for a particular province. NDRC & MOF will select a commercial bank as the FI. MOF will on-lend MFF tranches to FI without any guarantees from provinces. The provincial PMO will be responsible for short-listing the subprojects and monitoring the implementation. The FI will undertake the credit appraisal of the subprojects taking into account the host company viability, collateral and subproject viability. FI is not expected to depend on guarantees from local 12 government.

ADB Support for Capacity Building in EE in PRC

ADB has provided TA to develop policies and regulations for Efficient power plants( EPP). ADB is also supporting the capacity building of EE service industry and energy managers in industrial plants in Guangdong and Shangdong provinces. ADB has provided a TA to explore foreign capital utilization in EE. In Hebei ADB is preparing a large TA covering
To prepare a policy incentives to achieve 12th FYP targets for energy intensity. Capacity building in ESCO industry, formation of super ESCO and third party M & V agencies. Mobilizing commercial bank financing and developing risk sharing mechanism 13

MFF Modality for EE Financing

ADB Coordinated by Provincial DRC with support from TA Ministry of Finance
Coordinated by NDRC with support from TA

National Level FI/

Tranche 1
Province A Debt Facility

Tranche 2
Province B Debt Facility

Tranche 3
Province C Debt Facility

$100M onlending

$200M cofinancing by FI

$150M onlending

$300M cofinancing by FI

$150M onlending

$400M cofinancing by FI

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Overview of ESCO industry in PRC

There are 560 ESCOs registered in China. ESCO business grew from $ 100 million in 2003 to $ 240 million in 2006 and then from $ 870 million in 2007 to $ 4,250 million in 2010. ( largest in the world). By 2010 ESCO have entered into energy saving contracts of over 10 million tce. Characteristics of ESCOs in China
More than 50% of ESCOs have a capital of less than $ 1 million Only 20% of ESCO had a capital of more than $ 5 million. Most of the ESCOs has technical expertise, proprietary technology or promoted by vendors but limited experience in financial structuring. Some have started as subsidiaries of large industrial groups while others spun off from government energy conservation centers.
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Characteristics of ESCO industry in PRC

Primarily based on industrial enterprises from private sector. Clients are driven by off-balance sheet financing provided by ESCOs. The energy savings are usually guaranteed by the ESCO. The ESCO is paid a fixed fee if the guaranteed savings are achieved. Simple to monitor compared to north American shared saving contracts. The assets could be either financed and owned by ESCO or by the host company. The out-sourcing contracts are gaining ground. Where ESCO finance and operate an asset ( i.e. waste heat recovery power plant) over a period of time for a fee.
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Characteristics of ESCO industry in PRC

In industrial projects, about 50% are ESCO financed while the balance is financed by the host company. However, the host company financed projects are more prevalent in larger projects. Average size of ESCO financed projects is 1.0 million while the host company financed projects is $ 2.2 million. The share of ESCO financed projects in increasing. The larger ESCOs and ESCOs backed by vendors can undertake ESCO financed projects as it is difficult for smaller ESCOs to mobilize financing. The outsourcing projects are larger but not very common.
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Future for ESCO Industry

Since 2010, the ESCOs will be eligible for government subsidies for EE investments. Only ESCO financed projects are eligible having energy savings less than 10,000 tce. Tax exemptions. (VAT, turnover tax and partial income tax relief etc.) Policy support for integrated large ESCOS Encourage bank lending to ESCOs including guarantee products. The ESCO industry in China is expected to maintain the raid growth. However, institutional capacity, access to finance remains a major challenge.
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