China’s energy utilisation is now a matter of global interest due to the massive growth in energy use, increasing exploitation of fossil fuels outside China and the fact that China is now the world’s largest emitter of carbon dioxide. The rapid growth in the economy, some 10% per annum over the last thirty years, has increased the standard of living such that some 300 million people are now considered middle class and are buying the energy consuming appliances and vehicles we have long been used to in the West, and this number is expected to top 600 million by 2025[i]. According to a report by the National Energy Bureau released in September, China consumed 434.4 GWh in August which was up 9.1% on 2010. For the first eight months of 2011 power consumption was 3,124 GWh, up 11.9% year-on-year. This relentless growth in electricity demand has resulted in spectacular levels of investment in new generating capacity, in 2009 China increased capacity by 90 GW, (for comparison the UK peak capacity is 80GW) and the average annual growth rate in installed capacity between 2000 and 2009 was 11.84%[ii]. Most of this capacity has been conventional, coal fired plant but there has also been a huge increase in the deployment of renewable capacity. Wind capacity in China grew from 0.3 GW to 42 GW between 2000 and 2010[iii]. The less well known side of the Chinese energy situation is the aggressive promotion of energy efficiency and energy services companies (ESCOs).
On a recent visit to Beijing at the invitation of the National Development and Reform Commission (NDRC – the body that drafts the five year plans) and CECEP, the state owned energy efficiency company, I was able to learn about China’s commitment to energy efficiency first hand. In the 11th Five Year Plan (FYP) which ran from 2006 to 2010. A target of reducing energy intensity (measured by energy per unit of economic output) of 20% was set. This was achieved although not all Provinces achieved their individual targets. In the 12th FYP (2011 to 2015) the government has proposed a target of reducing energy intensity by 16%. Such large reductions in energy intensity appear to be unparalleled by any other country.
Energy efficiency is a national priority. Rigorous standards have been imposed on all major industries and local officials have ordered less efficient factories to close and ordered new ones to install more efficient technologies. Indeed, the jobs of local officials can depend on them achieving energy efficiency targets. The government recognise that Energy Service Companies (ESCOs) are an important tool for helping to achieve energy efficiency targets. The ESCO concept was introduced to China in 1995 by the World Bank and three ESCOs were established in that year with World Bank support. Since then the ESCO market has grown exponentially with revenues increasing from $240m in 2006 to $4.2bn in 2010. There are currently 1,700 registered ESCOs and it is expected that there will be c.2,000 by the end of 2011. A recent estimate notes that in 2010 alone, the Chinese economy added at least $20 billion in annual energy savings from energy efficiency efforts[iv]. Based on figures from the China Electric Power Statistical Yearbook, 2009, energy efficiency in 2010 saved 20-25 times more energy than was generated by China’s massive and expensive development of the wind sector.
ESCOs are seen as a strategic growth industry. They are encouraged by a number of incentives including:
- exemption from corporate income tax for three years
- a 50% reduction in corporate income tax for a further three years
- exemption from VAT
Other policy measures to encourage the use of ESCOs include allowing state owned enterprises to pay ESCO service fees out of their energy budgets and allowing ESCO fees to be paid pre-tax.
Despite this blooming of the ESCO industry there are serious constraints which the NDRC are seeking to address. Firstly, of the 1,700 ESCOs, some 70% have a capital of less than 20m RMB, i.e. they are SMEs with limited technical and financial resources. There is undoubtedly scope for consolidation in the ESCO industry. Two of the larger ESCOs have gone public.
Finance remains a major blockage. ESCOs are dependent on equity and debt financing. Expanding equity to fund new projects is not viable. Debt finance is available from commercial banks but the banks often lack capacity in assessing projects. Furthermore lending tends to be short-term and requires collateral of 2 to 3 times the value of the loan. In addition, recent changes mean that much of the targeted support from International Financial Institutions such as the Asian Development Bank (ADB) is being funnelled through four major banks. These banks cannot effectively cope with the small average project size. The ADB is strongly committed to energy efficiency in China and throughout its region of operation – it currently invests $1bn per annum on energy efficiency and this will increase to $2bn in 2013.
One technological area that has received a lot of investment in China is Waste Heat to Power (WHP). Many high temperature processes such as glass and steel furnaces, have been retro-fitted with WHP installations using an ESCO model. It is reported that the total WHP capacity is 31GW, more than the $22bn, 22 GW Three Gorges hydro-electric project, the largest power station in terms of installed capacity. To date WHP has mainly been high temperature conventional rankine cycle technology but there is increasing focus on lower temperature cycles such as the Kalina cycle. This is an area that the West needs to consider encouraging.
China’s support programmes for ESCOs are more developed that any other country and are still developing. Although energy efficiency cannot stop the inexorable rise in energy demand that comes with increasing affluence, the government of China has recognised the large role that improved efficiency can, and indeed has to, play in China’s energy future.
Steven Fawkes
26 September 2011
[ii] The Expansion of China’s Generation Capacity
Yijia Nan and Mark Moseley
PPP in Infrastructure Resource Center for Contracts, Laws and Regulation (PPPIRC)
www.worldbank.org/ppp
[iii] Global Wind Energy Council
[iv] Financing Energy Efficiency in China: 2011 Update
William Chandler, Holly Gwin and Chen Shiping
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