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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
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