China Energy Conservation Project (CECP)
Policy measure

The World Bank’s GEF introduced the ESCO concept in China in 1997, the so-called China Energy Conservation Project (CECP), through three demonstration ESCOs in Beijing, Liaoning and Shandong which were jointly funded by a GEF grant, an International Bank for Reconstruction and Development (IBRD) loan and financing from the EU (Lin et al., 2004).

Implementation

According to UN Energy (2009), “the three ESCOs participating in the China Energy Conservation Project (CECP) had [at the end of 2006] undertaken about 350 energy performance contracting projects, representing investments of about USD 170 million, mostly for building renovation, boiler/cogeneration, kiln/furnace, and waste heat/gas recovery projects.”


In 2003, a second CECP was initiated with additional GEF grant funding - this time designed to increase China’s ESCO business (UN Energy, 2009). According to Taylor et al. (2008), CECP II focuses on the development of a national loan guarantee programme to assist ESCOs in obtaining loans from local banks.

Challenges
Most of ESCO investment opportunities are currently unrealized due to a variety of market barriers. Lin et al. (2004) identified the main barriers as:
  • “Energy efficiency projects are not the main business activities for most companies.
  • Energy cost is only a small part of overall cost of business, thus of little interest to business owners.
  • Many companies lack technical and management personnel familiar with energy efficiency and the cost of acquiring such expertise is high.
  • There is a general lack of understanding of energy efficiency technologies, thus companies are not willing to take on the risks.
  • With capital scare, most business would deploy capital first to expand their market and production, not to invest in energy efficiency.
  • Companies lack information on energy efficiency opportunities.
  • Cost-savings are not directly apparent in corporate accounting.
  • There is a lack of financing from local banks for energy efficiency projects.
  • Most ESCOs have had difficulty in obtaining adequate financing from commercial banks because of their weak balance sheets and the perceived higher risks of loans dependent on revenues from energy savings
  • In term of financing barriers, Chinese banks typically do not have expertise on energy efficiency technologies and thus lack the ability to assess technical risks; benefits of energy savings are not easily separated from companies’ cash flows; energy efficiency investments are typically small and come with high transaction cost; collateral values of energy efficiency projects are relatively low; and EMCs lack adequate credit history.”
Outcomes

“Over the last few years, the three Chinese EMCs have undertaken over 300 energy efficiency projects, with a total investment of 450 million RMB. The average payback period for these projects is 1.3 years, with 90% of the projects having a payback period of less than two years. These projects demonstrate the huge potential of energy savings that can be captured through profitable energy efficiency investment in China – on the order of 30 to 40% of China’s current energy consumption” (Lin et al., 2004).


As reported by Zhao in 2007, China already had a large ESCO industry at that point, with an estimated 212 ESCOs involved in contracts valued at RMB 1.89 billion in 2006.

References

Lin, J.L., Goldman, C., Levine, M. and Hopper, N., 2004. Developing an Energy Efficiency Service Industry in Shanghai. Lawrence Berkeley National Laboratory. Available at: www.osti.gov/bridge/servlets/purl/827574-EwIweA/native/827574.pdf.


UN Energy, 2009. Policies and Measures to realize Industrial Energy Efficiency and mitigate Climate Change. Vienna. Available at: www.unido.org/fileadmin/user_media/Publications/Pub_free/UNEnergy2009Policies.PDF.


Zhao, M., 2007. EMCA and ESCO Industry Development in China. Presentation at the CTI Joint Seminar: Successful Cases of Technology Transfer in Asian Countries, 7-8th March, 2007, New Delhi, India.