China’s Energy Saving Service Sector Is on the Rise

China energy efficiencySHANGHAI — In 2007, Ren Junjie, an energy service company executive, came up with an idea for a business. He intended to persuade Chinese factories to use his money and technology to improve energy efficiency. Then the factories would pay him back with part of the saved energy costs.

At first, his plan went nowhere. His clients had a hard time understanding such a service, and giving them brochures didn’t help. So Ren dragged along a set of books and taught his new clients what amounted to Economics 101. They learned how much more money might go to their bottom lines if they saved energy.

Now, when Ren goes to business meetings, he no longer needs to bring his books with him. “Most Chinese know what energy service companies do,” Ren said. And his company, Volt Tech, has made a large number of deals with factories to retrofit systems and share the benefits from lower utility bills.

The idea, known as energy performance contracting, was introduced to China in the 1990s. The government, together with two international groups, tried to seed it through a multimillion-dollar financing package. But as the funds ran out, so did support for the approach. Recently, however, China’s leaders have set out to revive it.

Market-based energy saving plans fit with a number of their policy concerns. They eased worries about energy dependence on other countries and helped them impose tougher energy efficiency targets.

Reaching their goals, however, hasn’t been easy. Chinese leaders aimed to shut down thousands of inefficient factories. In 2010, they just missed their target for cutting energy use per unit of economic output, and hitting their 2015 target, experts say, will be harder unless more measures can be adopted.

One problem is that big companies are armed with their own financial muscles and government subsidies to help them upgrade equipment, but smaller businesses have few resources to do so. But that is where energy performance contracting could change things, said He Ping, who leads China’s industry program at the Energy Foundation, a U.S.-based nonprofit that specializes in advancing energy efficiency.

In theory, the amount of energy China could save is breathtaking. Chinese estimates show that recycling waste heat from energy-intensive industries alone could recover electricity equivalent to three times the annual electric output of the Three Gorges Dam, one of the world’s largest hydroelectric projects.

Backing from Premier Wen

Perhaps lured by that potential, in 2010, Chinese Premier Wen Jiabao hosted a Cabinet-level meeting to discuss how to develop energy performance contracting. The sector also landed on the priority list of the country’s development plan for the next five years.

The Chinese central government has already offered tax breaks and cash rewards to companies that provide and accept energy services under energy performance contracting. Beyond that, municipal and provincial governments created fiscal incentives to give an extra push.

Several Chinese cities and provinces, from Chongqing in the southwest to Jilin in the northeast, have subsidized part of the retrofitting expenses for projects through the mechanism. In Beijing, the subsidies from local authorities alone cover up to 30 percent of the project costs.

“The government support has played a significant role in ramping up the use of energy performance contracting in China,” said Zhao Ming, deputy director at the Energy Service Company Committee of the China Energy Conservation Association, the country’s leading promoter of energy saving practices.

“Since those policies rolled out, we have been seeing an obvious growth in the sector, from its workforce scale to its output value,” Zhao added. In 2011, one year after Chinese officials stated their support, the number of companies that use energy performance contracting expanded by about five times. Their total revenue increased by nearly half to more than $6 billion, the organization’s statistics show.

The public awareness of energy performance contracting also grew. Now, factories call and ask, “Hey, can you do energy saving projects for us through EPC [energy performance contracting]?” Zhao said.

Tailor-made financial products

Besides attracting phone calls from factories, the idea got banks interested.

Through energy performance contracting, energy service companies pay for investment needed to adopt more efficient solutions. Those companies often have to apply for loans to do that, but many of their applications are rejected.

Zhu Lin, who is in charge of finance at the China Energy Conservation Association, explained that Chinese bankers, like many others in the nation who have barely heard of energy performance contracting, lacked the ability to judge whether a company’s know-how would work.

Since then, Shanghai Pudong Development Bank, for one, has trained its investment officers how to evaluate the impact of energy-efficient technologies. When bankers there examine investment risks of an energy saving project, they make a decision based on how much energy the technology is likely to save, rather than how many assets the service provider could put up as collateral, according to Zheng Dawei, a bank executive.

In the past two years, Shanghai Pudong Development Bank invested hundreds of millions of dollars in projects under energy performance contracting. And it isn’t alone. Beijing Bank announced it would provide the sector with credits worth more than $1.5 billion by 2015.

“These innovative financial products from Chinese banks can help answer the needs of energy service companies,” Zhu said. She added that other investor groups in areas such as venture capital have also welcomed energy performance contracting projects.

Arguments over how much energy is saved

Stronger political backing and rising financial support have sped up the use of energy performance contracting in China. But as the number of projects increase, so do disputes.

He Sheng, a veteran lawyer in the energy service sector, said the core of those disputes is how much energy a project can actually save. Although China issued a regulation for energy performance contracting, the regulation only points out a direction and gives few instructions on how to calculate the amount of energy saving. As a result, arguments often spark between service providers and their clients.

Chinese policymakers have been working hard to complete the regulation. But He, one of the legal advisers involved, said that a more detailed regulation still cannot avoid all the disputes. When an extremely hot summer leads to increased use of air conditioners in an office building, its landlord and energy service provider have to revise the method of calculating, and the two sides may run into arguments during that process.

Yang Liming, a lawyer at W&H Lawyers in Beijing, believes one solution is bringing more professionals into the sector. So far, a typical energy performance contracting project involves only the service provider and its clients. But if legal workers and third-party energy audits will also engage, Yang says, they can provide a neutral opinion when disputes rise.

“A lot of energy service companies are considering to try this,” Yang said. “The beauty is that it can quickly solve disputes from the very beginning and avoid going through years-long lawsuits — a block that has already put many projects on hold.”

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