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UCMA EUCMA EUCM Making Energy Efficiency Pay Off By Tristan Edmondson Consider this: to produce one unit of GDP, China uses an amount of energy two-and-a-half times the world average. This places energy efficiency as a key priority for China, both in simple bottom-line and environmental terms. It also creates great opportunities for market-based solutions. Energy Service Companies (ESCOs) stand to benefit from China's increasing focus on the environment. ESCOs install energysaving technologies and methodologies primarily in factories for free and then share the resulting savings with the customer, thereby paying off the capital investment. China's ESCO market has been largely initiated by international development institutions, mainly the World Bank and its commercial arm, the International Finance Corporation. A clear example of an ESCO project was undertaken by Honeywell at Asahi's Shenzhen brewery. Energy saving methods, including upgrades to heat recovery, cooling and control systems, and the resulting energy savings, are shared between Honeywell and Asahi. After the energy performance contract expires Asahi will continue to enjoy reduced energy bills at no cost. Despite some successes, China's ESCO market is now at a critical moment. There are a tremendous number of energy inefficiencies and a large pool of waiting capital, but there are also serious challenges. Dr. Stephane Grand, managing partner at SJ Grand, a financial advisory firm, is a fan of the ESCO model. “China's growing ESCO sector is a fascinating industry, not just because of the commercial opportunities, but because of the many economic, legal, technology and policy issues that impact the industry's development. Every ESCO project is a real test of whether China's legal structures can stand up to such complex contracting. Whereas the market seems extremely promising, the structural issues can be daunting for a foreign player.” The key question is whether China's ESCO market can move beyond reliance on financial and technical assistance from development institutions and become a fully-functioning, organic and selfperpetuating industry. 18
A EUCMA EUCMA The engineering technology firm ABB has an ESCO practice in Beijing which conducted a pilot ESCO project for a paper mill. “We focused on introducing a systematic energy strategy, carrying out on-site work flow and energy analysis, from which we produced a feasibility study and recommendations for reducing energy use,” says Jiang Haibo, country service manager and vice president for ABB China. ABB's project is a flagship installation to help build its ESCO practice in China. Yet, while international engineering firms such as Honeywell and ABB have been carrying out ESCO projects in China for some time, there is now a growing domestic industry. Dongying Shengdong EMC (DSE) is an ESCO that installs electricity-producing boilers that burn waste gases such as coal mine methane or waste gas from coking plants. Clients provide waste gas to act as a feedstock, and buy the on-site electricity from DSE at a lower cost than grid electricity. Revenue-sharing arrangements, usually lasting 10 years, enable DSE to recoup its capital in about two years, and then maintain a profitable operation and maintenance relationship for the remainder of the contract. The biggest problem for ESCOs doing business in China, however, is getting hold of the capital to carry out an energy efficiency project. The size of typical ESCO loans is often too small to be worthwhile to Chinese banks; loan amounts usually range from USD 1 million to 6 million, which is much smaller than the large infrastructure projects and production expansion loans that loan officers typically appraise. Instead, ESCOs must lend their own money, or find investment funds elsewhere, which is often difficult for smaller Chinese firms with limited financial expertise. Stephane Grand places an emphasis on international collaboration to stimulate China's ESCO market. “The potential in China's energy efficient market is large but in need of partnership from overseas firms who can introduce both technology and funding,” he says. Grand focuses on the industrial sector, “such as the overhaul of existing equipment like boilers and mechanical and electrical systems.” He warns, however, that projects must be “pooled together to make them attractive to investors.” Development institutions have sought to make the Chinese ESCO industry attractive to investors through loan guarantees, financial and technical assistance to banks and ESCO companies, EUCMA as well as helping to bundle up ESCO projects to reduce loan transaction costs. A USD 200 million World Bank loan together with a USD 13 million Global Environment Facility grant is the basis for a program to train Chinese banks for ESCO lending and partly guarantee ESCO loans. In addition, a joint effort between the US Environmental Protection Agency and the Chinese State Environmental Protection Administration is helping Hong Kong-based ESCOs pursue opportunities in the Chinese mainland through loan guarantees from the Asian Development Bank. The International Finance Corporation manages a fund that guarantees non-stateowned Chinese banks that they will not lose more than 25% of their loans for the first ESCO projects. However, despite the considerable work done by these institutions, China's ESCO industry is still worth fewer than USD 1 billion dollars a year. One Chinese manager for an international company, who asked to remain anonymous, expressed doubt about whether the traditional ESCO model was the right one for China. “Chinese companies have had their expectations raised to the wrong level. They want an ESCO company to come along with the money and technology in hand, wave a magic wand and save energy. In any country, an ESCO project needs a serious investment of time and effort from the customer, but in China, with all the cultural and structural barriers in place, customers must work twice as hard.” His suggestion is that China needs a localized model. “Customers could offer to guarantee loans, or partially finance ESCO projects themselves,” he says. “ESCOs need to have worked with the company before to build understanding and strong trust before attempting a full-service ESCO project.” China's ESCO market is a useful proxy for China's economic development. Whether it will take off depends on the extent to which China can develop sophisticated market institutions and capabilities; whether Chinese companies can capture the fullservice capabilities of their American and European counterparts; and whether ESCOs can adjust their contracting methodologies for the Chinese market. To a large extent, the likelihood that China can develop from a low-cost manufacturing economy to a high technology and knowledge-based economy depends on many of these same factors. Tristan Edmondson graduated from London School of Economics and Political Science. He is an entrepreneur with a background in international business, especially in China. His work experience has leant towards project management, research and sales where he has developed his communication skills. Currently Mr. Edmondson is a partner at Mint Research, a Beijing-based clean technology consultancy and works on projects including a market report on China's Energy Service Company (ESCO) industry, a feasibility study for a solar farm and a CDM benchmark database project. (www.mintresearch.cn). Tristan Edmondson METP 3 19
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Page 4 and 5: 项目简介推动中欧商
Page 6 and 7: Fourth EU-China Networking Day in B
Page 8 and 9: Pre-selection and Selection of Appl
Page 10 and 11: China has performed exceptio Interv
Page 12 and 13: UCMA EUCMA EUCM Letter from the Pre
Page 14 and 15: UCMA EUCMA EUCM EUCMA Elections 201
Page 16 and 17: UCMA EUCMA EUCM them. I would recom
Page 20 and 21: Chinese Experiences in Europe On th
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Page 24 and 25: Bloomberg/Christophe Bosset APA/EPA
Page 26 and 27: Continuous Improvements to METP’s
Page 28 and 29: METP welcomes new Team Members D r.
Page 30 and 31: Who are you really negotiating with
Page 32 and 33: Airbus welcomes METP O n 27 Novembe
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