ASSESSING THE IMPACT OF IFC'S CHINA UTILITY-BASED ENERGY EFFICIENCY FINANCE PROGRAM Energy Efficiency Finance 55549 The World Bank Group WORKING FOR A WORLD FREE OF POVERTY The World Bank Group consists of five institutions--the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Inter- national Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environment by provid- ing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. The Independent Evaluation Group ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION T he Independent Evaluation Group (IEG) is an indepen- dent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (The World Bank) and IDA, IEG-IFC focuses on assessment of IFC's work toward private sector develop- ment, and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to the Bank's Board of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to rovide an objective basis for assessing the results of the Bank Group's work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. Assessing the Impact of IFC's China Utility-Based Energy Efficiency Finance Program Energy Efficienc y Finance 2010 The World Bank Washington, D.C. Copyright © 2010 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The find- ings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. This volume does not support any general inferences beyond the scope of the evaluation, including any inferences about the World Bank Group's past, current, or prospective overall performance. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomi- nations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Cover: Suntech engineers checking solar modules at Beijing National Stadium, also known as the Bird's Nest Olympic Stadium. Photo courtesy of Suntech. ISBN-13: 978-0-8213-8450-3 e-ISBN-13: 978-0-8213-8452-7 DOI: 10.1596/978-0-8213-8450-3 Library of Congress Cataloging-in-Publication Data have been applied for. World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Communication, Strategy, and Learning Telephone: 202-458-5454 E-mail: ieg@worldbank.org Facsimile: 202-522-1500 Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on recycled paper Table of Contents Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix Chairman's Summary: Subcommittee on Development Effectiveness (CODE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiii 1. Climate Change and Financing Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . 1 Climate Change and Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 IFC Engagement in Financing Energy Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. The China Utility-Based Energy Efficiency Finance Program . . . . . . . . . . . . . . 7 Energy Efficiency Challenges in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Design of the Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Implementation of CHUEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 CHUEE's End Users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Energy Efficiency Performance of Projects Supported by the Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Management and Organizational Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3. CHUEE's Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Evaluative Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Comparisons between Program Beneficiaries and Nonbeneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Government Policy and Energy Efficiency Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Unique Contributions of the Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Quantifying Overall Impacts and the Program's Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Issues and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Summary of CHUEE's Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4. Lessons and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Lessons from CHUEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Table of Contents | iii Appendixes A Chinese Government Policy to Support Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . .45 B CHUEE Funding Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 C Summary of Surveys Conducted for the Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 D Bank Survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 E Energy Management Company Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 F Cement Company Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 G CHUEE Cost Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 H Major Climate Change Projects in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 Boxes 1.1 Risk-Sharing Facility and First Loss Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Lessons from Past Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Economics of IFC Guarantees in Financing Energy Efficiency . . . . . . . . . . . . . . . . . . . .11 2.2 Why the Utility-Based Model Failed to Materialize. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figures 2.1 Program Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.2 Cumulative Disbursement Amount of Loans Supported by CHUEE Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2.3 Cumulative Loans under Guarantees against the Original Target . . . . . . . . . . . . . . . .18 2.4 Cumulative Investment Supported by Guarantees against the Original Target. . .18 2.5 Sector Distribution of Guaranteed Loans, by Amount . . . . . . . . . . . . . . . . . . . . . . . . . . .19 2.6 Use of HEECP Guarantee Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 2.7 RSEF Commitment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 2.8 World Bank ECP II Loans from ESCO Loan Guarantee Component, Actual . . . . . . .21 3.1 Total Energy Efficiency Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 3.2 Number of Companies that Have Received Energy Efficiency Loans. . . . . . . . . . . . .30 3.3 Number of EMCA Members in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 3.4 Total EPC Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 3.5 Distribution of Projects Supported by Guarantees, by Project Amount . . . . . . . . . .38 3.6 Distribution of RSF-Supported Loans by Number of Projects . . . . . . . . . . . . . . . . . . .39 3.7 A Ranking of Sectors by Number of Energy Efficiency Projects . . . . . . . . . . . . . . . . . .40 iv | Energy Efficiency Finance Tables 2.1 Logic Model for Banks, Market Partners, and End Users . . . . . . . . . . . . . . . . . . . . . . . . .13 2.2 Summary of IFC's Energy Efficiency Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2.3 Utilization of the Guarantee by Banks under CHUEE . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 2.4 Summary of CHUEE Network Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 2.5 Type of Activities under CHUEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 2.6 Summary of Loans Related to EMCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 2.7 GHG Emission Reduction Targets and Estimates of Results . . . . . . . . . . . . . . . . . . . . . .20 2.8 GHG Emission Reduction by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 3.1 Summary of Three Levels of Impact Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 3.2 Amounts of IB Loans Made to Energy Efficiency Projects . . . . . . . . . . . . . . . . . . . . . . .28 3.3 Number of Client Companies for IB Energy Efficiency Loans . . . . . . . . . . . . . . . . . . . .28 3.4 Amounts of BOB Loans Made to Energy Efficiency Projects . . . . . . . . . . . . . . . . . . . . .29 3.5 Number of Client Companies for BOB Energy Efficiency Loans . . . . . . . . . . . . . . . . . .29 3.6 Share of New Energy Efficiency Loans within Total New Loans among Banks with Energy Efficiency Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 3.7 Most Companies Would Invest in Energy Efficiency Irrespective of CHUEE Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 3.8 Implementation Status of Waste Heat Recovery Projects . . . . . . . . . . . . . . . . . . . . . . . .31 3.9 Small Companies' Projects and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 3.10 Factors Influencing Decisions on Energy Efficiency Investment (part I) . . . . . . . . . .32 3.11 Institutional Set-Up of Energy Efficiency Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 3.12 Factors Influencing Decisions on Energy Efficiency Investment (part II) . . . . . . . . . .34 3.13 Average Maturity of the Loan with CHUEE Guarantee, by Loan Size . . . . . . . . . . . . .35 3.14 Access to Financing among EMCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 3.15 Probit Analysis on Access to Finance among EMCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 3.16 Average Asset Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 3.17 China's Energy Efficiency/Renewable Energy Potential . . . . . . . . . . . . . . . . . . . . . . . . . .40 Table of Contents | v Abbreviations BOB Bank of Beijing CBRC China Banking Regulatory Commission CEEF Commercializing Energy Efficiency Finance Program CHUEE China Utility-Based Energy Efficiency Program CO2 Carbon dioxide ECP Energy Conservation Project EMC Energy management company EMCA Energy Management Company Association EPC Energy performance contract ESCO Energy service company GEF Global Environment Facility GHG Greenhouse gas HEECP Hungary Energy Efficiency Cofinancing Program IB Industrial Bank IEG Independent Evaluation Group IFC International Finance Corporation kg Kilogram NSP New suspension precalcinations RSEF Russia Sustainable Energy Finance Project RSF Risk-sharing facility SME Small- and medium-sized enterprise All dollar amounts are U.S. dollars unless otherwise indicated. vi | Energy Efficiency Finance Acknowledgments This report was prepared by a team led by Hiroyuki The evaluation was produced under the guidance of Stoyan Hatashima, drawing on research and contributions from Tenev, Head of Macro Evaluation, Independent Evaluation Izlem Yenice and Houqi Hong. Rosemarie Pena, Marylou Group­International Finance Corporation (IEG-IFC), and Kam Chong, and Richard Kraus provided general admin- Amitava Banerjee, Senior Manager, IEG-IFC, and under istrative support to the study team. This report was edited the overall leadership of Marvin Taylor-Dormond, Direc- by Heather Dittbrenner. Sid Edelman and Sona Panajyan tor, IEG-IFC. managed its production and dissemination. Director-General, Evaluation: Vinod Thomas Director, IEG-IFC: Marvin Taylor-Dormond Head of Macro Evaluation: Stoyan Tenev Task Manager: Hiroyuki Hatashima Acknowledgments | vii Foreword Energy efficiency finance is an integral part of the Interna- users supported by the program and other similar com- tional Finance Corporation's (IFC) focus on environmen- panies that were not. In China, as a result of government tal sustainability and climate change. As IFC is planning a intervention, there are several other programs that sup- significant scale-up in this line of business over the next port investments in energy savings. It appears likely that two years, it is important to review and assess its experience several end users supported by the IFC program would from past operations. have implemented energy efficiency projects even in the absence of support from the program. The evaluation This evaluation assesses the performance of IFC's energy also estimates that less than 10 percent of bank clients efficiency finance program in China aimed at stimulating would not have invested in energy efficiency without energy efficiency investments through bank guarantees the loans guaranteed by the program. The relatively and technical assistance. The program's significance is low additionality at the end-user level reflects the fact underpinned by the fact that China's size, rapid economic that most of the program's guaranteed loans were used growth, and inefficiencies in energy use make it one of the by large companies that already had greater access to fi- world's largest emitters of carbon dioxide (CO2.). The uti- nancial sources than smaller companies did; this was in lization of IFC's program has been rapid compared with contrast to the original plan of emphasizing small and other similar programs. The program started in 2006. As of medium companies. June 2009, the 98 energy efficiency investments supported by the program have reduced greenhouse gas emissions by Despite the modest additionality of the IFC program, the 14 million CO2 tons per year, slightly in excess of the target social benefits of the program significantly exceed its costs. set at the beginning of the program. This amount equals the This assessment is a partial and static recording of gains annual emissions of Bolivia, for instance, but it is small for from efficiency improvements alone, setting aside any China--less than 40 percent of the annual emissions of the downside from increased use of coal that greater efficiency largest emitter of CO2 among China's power plants. might lead to. A broader look is needed to also consider The difference made by the program is traced along the structural changes to measure the share of cleaner energy chain of interventions: (i) at the level of banks, the program sources. is narrowly based on one of the two partner banks, which, The evaluation recommends areas of improvement with the help of the program, expanded its energy efficiency to realize greater impact. First, the program needs to lending as a new business line; (ii) at the level of energy emphasize areas where the potential additionality is management companies, the program's technical assistance high, such as small enterprises. Second, the program improved the program participants' access to finance; and needs to concentrate more on activities that have the po- (iii) at the end-user level, it promoted the use of energy tential to reduce emissions significantly, such as energy efficiency investments that achieved reduction of green- efficiency for buildings. Third, the program's subsidy house gas emissions. elements need to be reoriented to the areas of market However, there is only a weak differentiation in behavior failure, with IFC increasing its coverage of first loss from surrounding energy efficiency investment between end its own resources. Vinod Thomas Director-General Evaluation viii | Energy Efficiency Finance Executive Summary The International Finance Corporation (IFC) and financ- IEG estimates that these investments reduced greenhouse ing energy efficiency. IFC's support to energy efficiency gas (GHG) emissions by 14 million CO2 tons per year, finance started in 1997 with a program in Hungary. It has slightly in excess of the target set at the beginning of the grown since then to include operations in Eastern Europe, program. This reduction is roughly equivalent to the an- the Russian Federation, and East Asia. Financing energy effi- nual emissions of a country such as Bolivia (USEIA 2009)1 ciency is now an integral part of IFC's strategic focus on sus- and amounts to 40 percent of the annual emissions of the tainability and climate change. The Corporation's goal over largest emitter of CO2 among China's power plants. Com- the next two years is to achieve a threefold expansion of its pared with other energy efficiency programs in China and energy efficiency investments. As IFC plans to scale up en- elsewhere, the program stands out for the quick utilization ergy efficiency business, it is important to review and assess of its guarantee facility. the experience accumulated through past operations. Focus on impact. This evaluation goes beyond objectives IFC's energy efficiency finance program in China. This and benchmarks as standards for assessing performance to evaluation by the Independent Evaluation Group (IEG) look at the impact that the program has made on energy effi- looks at the experience of IFC's energy efficiency finance ciency in China. It asks, "Is the program making a difference program in China--China Utility-Based Energy Efficiency in reducing GHG emissions by helping transform the market Finance Program (CHUEE). China's soaring demand for for sustainable energy efficiency finance in China?" It exam- coal to generate electricity and a surge in cement produc- ines the difference the program has made, compared with a tion made it one of the world's largest emitters of carbon situation without IFC intervention, traced along the chain of dioxide (CO2). Most Chinese industries are inefficient in interventions: the effects on banks' energy efficiency lending, their energy use. The Chinese government has recognized the actual implementation of these projects by end users, and this to be a major risk to China's sustained growth and has the GHG reductions the program caused. made energy efficiency a top national priority. Impacts at the bank level. The program has been working The IFC program, which started in 2006, is aimed at stim- closely with two partner commercial banks: Industrial Bank ulating energy efficiency investments in China through (joined in 2006) and the Bank of Beijing (joined in 2007). two main instruments: bank guarantees for energy effi- Driven by strong government commitment, financing energy ciency loans and technical assistance to market players, efficiency has been booming in China in recent years. Thus, it including utilities, equipment vendors, and energy service is very likely that without the program, the participant banks companies, to help implement energy efficiency projects. would have grown their energy efficiency business. Both types of interventions rely on subsides funded by However, with the program, Industrial Bank has grown at donors. An initial design aimed at promoting the switch twice the rate of comparator banks (controlling to the ex- from coal to gas and centered around a gas utility failed tent possible for initial conditions, such as level of commit- to materialize and was abandoned because of strategic ment to energy efficiency and preprogram levels of energy mismatches between the gas utility and the financial efficiency finance), and the quality of its energy efficiency intermediaries. lending portfolio has been good. Its faster growth relative Implementation to date. Program utilization has been to comparator banks was underpinned by the program's rapid, compared with objectives and the experience of support for establishing a dedicated department for en- other similar programs. As of June 2009, the program's par- ergy efficiency lending--a unique feature among Chinese ticipating banks provided loans totaling to 3.5 billion Chi- banks--the preparation of guidelines and procedures for nese yuan ($512 million). These loans financed 98 energy energy efficiency loans, and building the capacity for ap- efficiency projects, such as heat and gas recovery power plying project finance tools to energy efficiency finance. generation and the introduction of efficient production Regarding the Bank of Beijing, the program has not yet left systems. The steel, chemical, and cement industries are the a clear mark of impact. The Bank of Beijing has been ac- largest beneficiaries. Based on engineering calculations, tively engaged in a World Bank program that started before Executive Summary | ix CHUEE and focused on financing energy service com- suming in effect that even though participating banks panies (ESCOs). CHUEE added a few energy efficiency would have grown their energy efficiency finance business loans that are a fraction (less than 10 percent, by number without the program, they would not have reached the type of loans) of the Bank of Beijing's overall energy efficien- of small and medium enterprises that were facing collateral cy lending and are of similar type as the loans supported constraints in the absence of the program's guarantee. The by the World Bank program, although somewhat larger. relatively low additionality at the end-user level reflects the Furthermore, the Bank of Beijing's overall growth in energy fact that most of the program's beneficiaries have been large efficiency finance has been less than that of comparator companies, in contrast to the original plan to emphasize banks. Thus, the program has provided relatively weak ad- small and medium companies. The original expectation ditionality and incremental impacts to the Bank of Beijing was that 60 percent of the guaranteed loans would be small so far. The program is therefore narrowly based on one of (about $0.2 million). In reality, the average loan size was the partner banks as the main conduit of the guaranteed $5.7 million, and loans of $0.2 million or less constituted loans. The introduction of other banks has been delayed less than 10 percent of the actual portfolio. because of regulatory hurdles. Moving down market to smaller companies remains a key Impact at the energy management companies level. The challenge, as these companies are the ones with limited ac- program facilitated access to financing for the key mar- cess to finance for energy efficiency projects. Although the ket players--energy service companies--through techni- program's additionality is strong with these borrowers, the cal assistance for capacity building and by brokering new size of their projects tends to be smaller than average for the relationships with banks. The CHUEE-supported energy program as a whole, and their impact on GHG reduction management company (EMC) network has 135 members. is correspondingly more modest. Moving down market Given the nature of the program, not surprisingly, the com- therefore needs to be accompanied by scaling up for maxi- panies that participated in the program had a better chance mum impact on CO2 reduction. of securing bank loans than those that did not participate. In addition to the public benefits related to GHG reduction, We estimate that controlling for other relevant factors, the projects that were facilitated by CHUEE have also gen- membership in the network enhanced EMCs' chances of erated private benefits in the form of energy savings that are obtaining bank financing by 31 percent. Independently captured by the implementing enterprises, the financiers, of membership in the network, technical assistance (from and other involved parties. any source) increased the probability of projects obtaining Overall impact. The overall impact of the program consists financing by 27 percent. Network participants also had a of the GHG reduction and the private benefits generated by higher growth than the nonparticipants. projects that would not have happened without the program, Impacts at the end-user level. A survey of cement compa- plus nonquantifiable benefits related to demonstration and nies (the third largest group of beneficiaries) that were not spillover effects. The latter appear to be emerging--according supported by the program but that shared the same charac- to results of an IEG survey on the impact of CHUEE, the teristics as CHUEE's end users reveals widespread awareness program is well known in China, and there is interest among of and interest in implementing energy efficiency projects. banks to learn from its approaches to the end users--but However, smaller companies are about half as likely as large are hard to estimate. The real quantifiable impacts from companies to implement such projects. They also have sig- the guaranteed loans are estimated at $384 million over a nificantly lower rates of using bank loans to finance energy 10-year period since inception of the program. It is possible efficiency projects than the larger companies. It is among that the impact is underestimated--more than 68 percent such smaller companies that the program's impacts are found. of borrowers indicated in the IEG survey that without the Based on program data, interviews, and surveys among users program they would still have implemented their energy and nonusers, an estimated 9 percent of banks' clients who efficiency projects but on a smaller scale or over a longer benefitted from the program would not have implemented time frame. The critical factors that affect the magnitude of their energy efficiency investments without the loans that the benefits are the program's additionality at the bank level, CHUEE guaranteed. These are relatively small companies banks' additionality with end users, the size of average CO2 facing constraints in their access to finance largely because emission reduction per project, and the prices of CO2 and of their inability to meet collateral requirements. The addi- coal (for the energy-saving calculations). tionality of these loans can be linked directly to the program's Costs. The social costs expended to derive the benefits con- guarantee, which lowered the banks' collateral requirements sist of (i) project investments costs; (ii) the costs of running and facilitated access to credit for these borrowers. the program, including the costs of the technical assistance In estimating the overall impact, the evaluation therefore provided; and (iii) the subsidy embedded in the partial loss does not discount the additionality at the borrower level cover by the Global Environment Facility (GEF), which un- given by the program's additionality at the bank level, as- derpinned the guarantee facility. x | Energy Efficiency Finance Of these costs, the valuation of the first loss cover presents economic impacts that in turn can result in an increase in methodological difficulties. Given the lack of actuarial energy consumption (see Geller and Attali 2005). data, and in the absence of a market in similar guarantee or Such perverse macroeconomic impacts can be achieved by insurance products, the estimates are based on the expected two means: making energy appear effectively cheaper than default rate at the inception of the program. This represents other inputs and increasing economic growth, which pulls an estimate of the willingness to pay for the protection up energy use. Empirical research has found that there is given by GEF. The base case default rate was expected to validity to the claim that widespread energy efficiency im- be 4 percent, and the GEF subsidy was used to cover these provements can lead to macroeconomic impacts that erode potential losses. This GEF first loss cover catalyzed the IFC some of the direct energy savings from energy efficiency guarantees and supported the energy efficiency lending by improvements, but these impacts tend generally to be small Industrial Bank. The program collected $1 million in guar- (Geller and Attali 2005). Nonetheless, these macroeconomic antee and other fees. The cost of running the program so impacts need to be taken into account by policy makers and far is $4.8 million, including $3 million in technical assis- development institutions in the design of national or regional tance provided, without explicit fees levied to beneficiaries. programs and interventions in energy efficiency. These Efficiency. The real rate of return of the program is con- macroeconomic impacts also highlight the importance of servatively estimated at 38 percent per annum--a high rate pursuing, in addition to energy efficiency, structural changes given the seemingly modest rate of additionality at the level aimed at increasing the share of cleaner sources of energy, of end users. The estimate assumes that 9 percent of proj- such as renewable energies and natural gas in the overall ects are additional and reflects their net benefits, but it in- energy balance. China places strong emphasis on increas- cludes the entire costs of CHUEE and technical assistance ing the proportion of energy that comes from renewable so far, as well as the costs of the first loss cover. The private sources and natural gas. IFC is supporting China's goals in return in the form of energy savings from this program is this regard, and in its original design, CHUEE was intended 20 percent, based on total project costs and energy savings to be part of these efforts. However, because of difficulties measured using international energy prices. Social benefits in matching partners' interests, CHUEE failed to implement in the form of carbon emission reductions are about one- the original plan to support the switch from coal to gas. third of total quantifiable benefits. The relatively high rate of return reflects the win-win nature of energy efficiency Summary of Lessons from the Program's investments, which can generate both significant social and private benefits, and indicates a functioning model focused Experience So Far on leveraging and mobilizing commercial-based lending Careful selection of private sector partners is needed to for financing energy efficiency projects. Although the size- meet strategic program objectives. The program experi- able public benefits suggest that even a modest additional- enced different outcomes between the two banks--Industrial ity can be sufficient to justify the subsidies involved, high Bank and the Bank of Beijing--in terms of portfolio growth private returns argue for a more discriminate use of subsi- and the ability to use the guarantee. Earlier IFC energy effi- dies for energy efficiency projects. ciency programs in other countries also experienced varied The broader setting. It is important to note that the per- usage of financial facilities. Obviously, a guarantee by itself formance of the program was heavily influenced by the is not an adequate incentive to increase energy efficiency government's policies and the earlier efforts of other play- lending, and the program needs to find the right balance ers. The Chinese government has demonstrated a strong between the banks' strategic objectives and the program's commitment to moderating the country's expanding en- objectives. Industrial Bank, for example, combined the ergy consumption. It is putting substantial pressure on marketing of energy efficiency loans with a strategy of re- large industries to improve energy efficiency. Noteworthy taining customers. Thus, it made energy efficiency loans is the World Bank assistance to local EMCs, which helped largely to existing clients, whereas the Bank of Beijing tar- establish the whole energy industry. The program, relying geted new clients and faced difficulty in growing its energy mainly on commercial funding through IFC's guarantees, efficiency loan portfolio. builds on these efforts. Flexibility is needed in program design to respond to The analysis presented here is partial and static. Given the unexpected challenges and opportunities. The program small size of the program in the overall market for energy experienced complete modification of its business model efficiency projects, the analysis does not attempt to capture and responded with additional resources when confronted the indirect impacts of improved energy efficiency on the with larger-than-expected market demand for investment. final demand for energy and, ultimately, coal in China. This situation indicates that programs require some flex- Some energy analysts have argued that energy efficiency ibility to respond to new developments in the market or to improvements on a large scale can lead to broader macro- changes in regulations. Executive Summary | xi Government policies and market readiness are impor- companies, but not all reductions can be counted tant factors in determining program design and success. as impact. The program needs to orient activity to In China, the timing for the program was right, as the gov- the areas where additionality is potentially most ernment was putting significant emphasis on promoting significant. The program activity should be more energy efficiency activities. It had already put various policy strategically focused on areas where IFC could have a measures in place for energy efficiency. Also, the World unique role, such as working with small and medium Bank initiatives for the EMCs paved the way for further as- enterprises, residential housing, and commercial sistance by IFC and other development organizations. The buildings. This requires that IFC consider and design program built on these market conditions. new approaches and work with different types of partners, not just extend already existing types of The combination of private and public benefits in energy program activities. efficiency projects suggests the need for a more discrimi- nate and dynamic approach to subsidies in the energy ef- 2. Enhance the CO2 emission reduction impact of ficiency business. As the sector matures and certain types projects financed through the program by moving of energy efficiency projects become well established, sub- into areas identified as having high potential, but sidies need to shift to less mature areas with high growth not addressed currently by market participants. potential and significant social benefits. Indiscriminate use Despite the explosive growth of energy efficiency of subsidies impedes the commercialization of energy ef- finance in China, the most important areas for ficiency finance. emission reductions are currently not adequately addressed by market participants. The China Caution is needed in applying a utility-based energy ef- National Development Reform Commission showed ficiency finance model in emerging markets. Utilities may that the most significant emission reduction should not have incentives to curtail energy consumption or ex- come from industrial boiler retrofitting, followed by pand their market through energy switching when there are energy savings in building (for example, using less enough potential customers. It is important to assess incen- energy because of better insulation). Banks so far tives, policy environments, and the degree of match between have not provided financing in those areas identified a utility's clients and partner banks' market strategies. as having high potential. Moreover, in these areas An exit plan is critical. Many of the efforts to promote there are many small and dispersed users, and access financing of energy efficiency focus on generating invest- to finance and technical services is more challenging ments rather than on the sustainability of maintaining en- than for the large enterprise energy users. Thus, ergy efficiency investments after a program has completed. additionality is also high in these areas of high energy Moreover, there is little practical information on how to saving potential. terminate a program or how to shift its focus when com- 3. Reorient subsidies to areas with a market failure and mercial energy efficiency operations are emerging and increase IFC's involvement in first loss guarantee. starting to compete with the program. One of the factors The program has reduced the first loss cover under behind the quick build-up of Industrial Bank's energy ef- the GEF grants, but IFC continues to rely on GEF to ficiency loan portfolio was the technical reviews of external provide first loss guarantees. Furthermore, there is no consultants funded by CHUEE. However, the overreliance assurance that the banks will continue to lend without on external consultants has undermined the program's sus- substantial collateral in the absence of the program's tainability by reducing incentives to build internal capacity guarantees. for such reviews. Efforts are also being made to charge for technical assis- Areas for Improvement and tance. These measures need to be pursued with existing Recommendations and new partners, as they can both provide a market test of additionality and enhance sustainability. The program Although the social benefits exceed costs by a significant should prepare a plan to ensure the sustainability of en- margin, the relatively modest additionality indicates room ergy efficiency lending activities. It should design a work- for improvement. The analysis of the factors affecting return able plan to hand off technical appraisal functions to cli- suggests several ways to enhance impact and efficiency: ent banks and encourage risk taking. These efforts need to 1. Increase additionality at the level of banks and be supplemented by policy work of the World Bank Group end users. to promote market-based practices in financing energy The program has supported substantial emission efficiency and more discriminate use of subsidies at the eductions mainly through projects by larger sectoral level. xii | Energy Efficiency Finance Chairman's Summary: Subcommittee on Development Effectiveness (CODE) On March 31, 2010, the Informal Subcommittee of the Main issues discussed Committee on Development Effectiveness (CODE) consid- Findings from the IEG impact evaluation report ered an Independent Evaluation Group (IEG) report enti- Many members noted the role of country ownership and tled Energy Efficiency Finance: Assessing the Impact of IFC's commitment in achieving the overall results of the CHUEE China Utility-Based Energy Efficiency Finance Program. program. A few members observed that the report could have elaborated on the lessons learned regarding the role Summary of the state in the context of market failures and regulatory frameworks to promote energy efficiency. Some members The Committee welcomed the IEG impact evaluation re- sought clarification regarding overall methodology to ana- port, which provided useful insights and is relevant to the lyze the impact of the program, the basis of determining growing energy efficiency initiatives that are part of the the reduction in CO2 emissions, and the rates of return. A overall effort to address climate change. In considering the member suggested the need for modesty and caution re- International Finance Corporation's (IFC) involvement in garding project impact, given the challenges of determining the China Utility-Based Energy Efficiency (CHUEE) pro- the counterfactuals. On the question of whether the origi- gram, the critical need to keep in mind its additionality-- nal project design could have anticipated the mismatch particularly in terms of knowledge, capacity building between the utility and financial intermediary partners of support, and financial leverage--was highlighted. While the initial utility-based model, management stressed the acknowledging the importance of addressing energy effi- importance of flexibility in project design to adjust to the ciency of small and medium-sized enterprises (SMEs) and changing market context, which allowed the initiative to the building sector, some members wondered whether IFC ultimately achieve the positive results. Regarding the delay should shift its focus to them as recommended by IEG. in effectiveness of the second guarantee facility approved by They saw the benefit of working with a limited number of the Board in December 2007, this was attributed to the time larger, higher emitters of CO2, where results achieved may needed to register the guarantees with the State Agency for provide a positive demonstration effect for both end users Foreign Exchange. and participating banks. Moreover, concerns were raised about the relative complexity of reaching large numbers of SMEs and residential housing and commercial buildings. IFC's additionality Other comments and questions raised included, among Many members emphasized the importance of ensuring others, IFC's role in addressing market failures, the need IFC's additionality through its interventions, based on its to adjust the program during implementation, assumptions comparative advantage. Interest was expressed in learn- used to assess impact and IFC contribution, and replicabil- ing about IFC's approach toward achieving the highest ity of the CHUEE program. More generally, members em- level of additionality, taking into consideration the op- phasized the importance of tailoring support to the country erational challenges and risks. With regard to future IFC environment and ensuring government ownership of and interventions, some members suggested that IFC should commitment to achieve positive results. focus on a limited number of large producers of CO2, especially where energy efficiency initiatives are at a na- scent stage; IEG recommended that IFC's follow-up sup- Recommendations port focus on SMEs, residential housing, and commer- and Next Steps cial building to increase additionality. It noted the high The Subcommittee recommended that management keep potential development impact in terms of reducing CO2 in mind IFC's additionality in its future support for energy emissions and the positive demonstration effect through efficiency initiatives. such successes. Chairman's Summary | xiii Future support CO2 emission. IFC was encouraged to compare different Many members remarked on the increased complexities models of engagement in other countries and to draw les- and higher costs of working at the level of SMEs and with sons from them for consideration in other countries. the housing/building sector and expressed interest in the Replicability direction of future IFC engagement. They commented on Responding to some members' interest regarding the rep- the possibility of lower total CO2 reductions achievable per licability of the CHUEE program, management comment- intervention, longer time needed to achieve results, and ed on its ongoing work in Indonesia, the Philippines, and higher transaction costs. Management acknowledged the Vietnam. In addition, management is reviewing the pos- challenges of working with SMEs and the housing/building sibility of applying the CHUEE finance and risk-sharing sector and the possible lower outcomes. At the same time, method to support financing of water saving investments they noted the growing interest of smaller banks in work- in enterprises to address water scarcity issues in China. The ing with SMEs and changes in the regulatory framework potential use of funds other than the Global Environment that allow for short-term assets to be taken as collateral. In Facility (for example, from the Clean Development Fund or this context, management commented on the opportunity the Climate Investment Fund) to support similar initiatives to help the government broaden the acceptance of financ- was encouraged. ing greater energy efficiency among SMEs and to address policies to incentivize energy efficient buildings, which are expected to have an overall long-term impact in reducing Giovanni Majnoni, Chairperson xiv | Energy Efficiency Finance Chapter 1 Photo by Curt Carnemark, courtesy of the World Bank Photo Library. Climate Change and Financing Energy Efficiency Improving energy efficiency in developing countries can increase energy availability while reducing greenhouse gas (GHG) emissions. However, it faces many obstacles, including financing constraints. Consequently, many energy efficiency projects with prospects of good financial return remain unimplemented. There is a need for market development assistance in de- for energy is the single largest source of GHG (57 percent of signing, packaging, and financing projects that would help total greenhouse gas in 2004) (IPCC 2007, p. 5). realize such investment. The International Finance Corpo- Energy efficiency improvements have the potential to ration (IFC) has been developing and implementing pro- reduce GHG emissions. Improvements are possible in the grams aimed at promoting commercial financing of en- whole energy chain, from generation (supply-side energy ergy efficiency projects through local financial institutions efficiency), to transmission, to distribution to energy consum- since 1997. Financing energy efficiency is now an integral ers (demand-side energy efficiency). Examples of demand- part of IFC's strategic focus on sustainability and climate side energy efficiency measures include fuel-efficient trans- change. IFC's goal over the next two years is to achieve a portation, building more energy-efficient buildings (that threefold expansion of its energy efficiency investments. As use better lighting, electric appliances, heating/cooling, IFC is planning to scale up energy efficiency business, it is and insulation), and more efficient use of heat and power in important to review and assess the experience accumulated industrial plants. Efficiency gains that generate more eco- through past operations. nomic outputs with less energy input are beneficial not just for cost savings and climate change mitigation, but also for Climate Change and Energy Efficiency reducing emissions that are harmful to human health (such as particulate matter and sulfur and nitrogen oxide). Also, Access to energy is critical to economic development and lowering the cost contributes to improving energy supply poverty reduction. However, continued economic growth security and economic competitiveness. results in rising energy demand. Use of fossil fuels for energy generation is highly correlated with human-induced climate Such benefits have the potential for win-win solutions in terms change, which is having broad-reaching effects on the planet. of economic and environmental impacts. There is a wealth of A 2007 assessment report compiled by the United Nations straightforward energy saving investment opportunities that Intergovernmental Panel on Climate Change confirms that many energy users can afford to adopt. Most of these demand- global warming is a reality, which is evident from observa- side opportunities are in industrial (40 percent), residential tions of increases in global average air and ocean tempera- (26 percent), and commercial (13 percent) sectors (Farrell and tures, widespread melting of snow and ice, and rising global Remes 2009). Developing countries can benefit from such in- average sea level (IPCC 2007). The report concludes that vestment in particular, as 65 percent of available positive-return increases in anthropogenic GHGs such as carbon dioxide opportunities to boost energy productivity are located in (CO2), methane, and nitrous oxide, which absorb and emit developing regions (Farrell and Remes 2009). infrared radiation and trap heat within the Earth's surface- However, many energy efficiency projects with pros- troposphere system, have caused most of the increases in pects of good financial return remain unimplemented. average global temperatures since the mid-20th century. In In many rapidly industrializing countries, such as Brazil, 2004, the global annual emissions of anthropogenic GHGs China, and India, the key impediments to energy efficiency increased by 70 percent from the 1970 level. CO2 accounts investments are the intertwined market failures: problems for about 70 percent of GHGs, and CO2 from fossil fuel use of high transaction costs, perceived high risks that may 2 | Energy Efficiency Finance drive up the discount rates associated with projects, and dif- the market failures by combining both investment and ad- ficulties in structuring workable contracts for preparing, fi- visory services to local financial institutions with advisory nancing, and implementing energy efficiency investments. services for capacity building to companies and EMCs. The Many argue that these constraints are institutional. Such in- intervention is to reduce information gaps about the ben- vestments thus require market development that addresses efits of energy efficiency. The program is also expected to the constraints to designing, packaging, and financing en- generate demonstration effects. The programs are typically ergy efficiency projects. Taylor and others suggest three re- cofinanced by the Global Environment Facility (GEF) and quirements that must be fulfilled within that environment: other donors. So far, all programs are supported by GEF, es- marketing/technical assessment, financing, and incentives pecially those that provide technical assistance and a guar- (Taylor and others 2008, p. 65). antee facility to banks. IFC is also providing a standalone energy efficiency credit line and guarantees to individual First, sufficient technical capacity is needed to identify, de- banks and EMCs (appendix H). sign, and implement energy efficiency operations. Second, investments in energy efficiency improvement require fi- GEF grants play an important role. All of IFC's energy ef- nancing, in particular to capture the flow of benefits that ficiency programs include grants from GEF for risk-shar- can be converted into investment opportunities. Third, ing facilities (RSFs; see box 1.1) and technical assistance. there must be sufficient incentives for energy users as well Actually, GEF solely funded the first operation in 1997-- as other involved parties to make the investment. Efforts to HEECP I. IFC has been cautious about the energy efficiency promote energy efficiency investments, therefore, require lending operation because of lack of experience and expertise, devising new institutional mechanisms that can bring to- an unfamiliar business model, and high transaction costs. gether technical and financial specialties in aligned inter- Earlier project documents indicated that IFC would not en- ests and incentives. gage in this business because of the risk, and grants from GEF were critical to providing services, in both guarantees and technical assistance. Moreover, IFC would not provide IFC Engagement in Financing the riskiest type of guarantee, the first loss coverage, unless Energy Efficiency the risk was passed to the other parties. GEF's monitoring IFC support to energy efficiency started with its advisory and evaluation requirement also helped IFC accumulate services operations and then expanded through partner- project performance records and revise the business model ship programs with commercial banks, utility compa- for the subsequent operations. Energy efficiency finance is nies, energy management companies (EMCs), and energy now a mature product line, and IFC now has seven stand- efficiency equipment suppliers. The first such program alone energy efficiency finance projects in addition to the was launched in Hungary in 1997 through the Hungary dedicated the energy efficiency programs. Energy Efficiency Co-financing Program (HEECP). Subse- Energy efficiency finance is now an integral part of IFC's quently, these activities were expanded to include similar strategic focus on sustainability and climate change. IFC's programs such as Commercializing Energy Efficiency Fi- goal over the next two years is to achieve a threefold ex- nance (CEEF) in Eastern Europe, and Russia Sustainable pansion of its energy efficiency investments. As IFC is Energy Finance. IFC is planning to further expand such planning to scale up energy efficiency business, it is im- operations to other countries and regions, including the portant to review and assess the experience accumulated Philippines Sustainable Energy Finance (approved in 2008), through past operations. IFC commissioned external re- Indonesia, Vietnam, and so on. views of the first program, the CEEF. Based on the assess- These programs are aimed at addressing market failures ments, IFC decided to mainstream the energy efficiency by promoting commercial financing of energy efficiency finance line of business by giving it "developed" status. projects through local financial institutions such as Some lessons from past operations are summarized in banks and leasing companies. IFC's approach is to address box 1.2. Climate Change and Financing Energy Efficiency | 3 BOX 1.1 RISK-SHARING FACILITY AND FIRST LOSS GUARANTEES An RSF is one of the structured and securitized products that IFC offers. It is a bilateral loss-sharing agreement between IFC and an originator of assets--a bank or a corporation--in which IFC reimburses the originator for a portion of the principal losses incurred in a portfolio of eligible assets. The RSF allows a bank or corporation and IFC to form a partnership with the goal of introducing a new business or expanding an originator's target market. An IFC RSF typically reimburses an originator for a fixed percentage of incurred losses that exceed a predefined threshold (or first loss). The originator and IFC agree prior to signing the RSF on eligibility criteria that specify the assets to be covered under the RSF. All newly originated assets must be added to the facility portfolio during a ramp-up period that generally lasts two to three years, or until the portfolio reaches a predefined maximum volume. The originator monitors the portfolio performance and reports to IFC on a regular basis. Once the losses exceed the first loss threshold, IFC will reimburse the originator in accordance with the agreed risk-sharing formula. Normally, an IFC RSF does not cover the first loss portion of the losses. However, IFC's role in structuring and sharing the credit risk of an asset portfolio may attract third-party sponsors. These sponsors often work together with IFC and potential originators to design RSFs intended to mobilize lending to sectors in which the sponsors are involved. The first loss guarantee by the third-party sponsors effectively covers the part of the losses that the originator should cover by itself. RSF with Originator Covering First Loss Tranche RSF with Third-Party Sharing In First Loss Tranche Portfolio losses Portfolio losses ORIGINATOR IFC ORIGINATOR IFC ORIGINATOR ORIGINATOR THIRD PARTY Sources: IFC structured and securitized products, product description (www.ifc.org/structuredfinance). BOX 1.2 LESSONS FROM PAST OPERATIONS · Pairing of investment and technical assistance has been the key feature of these energy efficiency interventions. IFC found that the guarantee alone did not provide an adequate incentive to make banks offer energy efficiency loans (Obibuaku 2007). The financial package needed to have complementary advisory services, which often enabled the bank to assess the risks associated with the underlying loan products. In some eastern European cases, the assistance for capacity building of marketing agents, such as an energy service company, might have been needed to generate sufficient deal flows for the banks to start lending for energy efficiency investment. · Fit with financial institutions' strategic orientation is an important dimension that IFC needs to consider when designing and marketing its energy efficiency programs. Some banks found that the design of the program fit well with their corporate strategic orientation. For example, one bank wanted to expand SME lending activities and found that the IFC's energy efficiency program, including guarantee (continues on next page) 4 | Energy Efficiency Finance and technical assistance, met its needs. For other banks, the focus of the programs did not have an obvious fit with their strategic orientation. Uptake varied significantly among banks depending on strategic fit. · The introduction of government actions, regulatory reforms, and provision of subsidies to certain activities actively shapes the energy efficiency (and renewable energy) markets and drives banks' behavior. In Hungary, regulatory changes and promotion of energy efficiency in the housing sector created a big push for banks to market to this particular segment. In the Czech Republic, regulatory change and a European Union subsidy on renewable energy was an important boost for investment and helped CEEF increase the renewable section of its portfolio. However, energy efficiency is an area where Russian public institutions are doing very little, and energy policy (including energy subsidy) does not provide strong support or incentives for energy efficiency investment. The Russia Sustainable Energy Finance Project survey on energy efficiency in the Russian Federation revealed that 81 percent of companies believe that current legislation does not promote energy efficiency. · Sustainability depends on banks' changing their culture and strategic orientation. In HECCP/CEEF, there are indications that client banks were taking the energy efficiency projects on their own and requesting lower levels of collateral and lower down payments as they became increasingly familiar with the risk of such projects (Taylor and others 2008, p. 175). In Russia, some participants have started to finance energy efficiency projects using their own funds. However, as programs in Eastern Europe are winding down, and in light of heightened risks in the aftermath of the recent global financial crisis, some participating banks are indicating that they are returning to old practices, which rely heavily on collateral. · The lessons from other programs indicate that energy efficiency finance schemes need financial incentives that match bank needs and technical assistance that targets certain market failures (technical skills, regulatory); and they need the right context (policy and market readiness). Programs may have to adjust their operations in the face of market development. Investment results have been promising (there have been no calls on guarantees so far), and IFC itself should become comfortable taking more risks with this type of investment. At the same time, emphasis needs to be maintained on cost recovery of advisory services, as such programs involve heavy staff and technical inputs (technical reviews, market studies, and administrative costs). Source: IEG. Climate Change and Financing Energy Efficiency | 5 Chapter 2 Photo by Curt Carnemark, courtesy of the World Bank Photo Library. The China Utility-Based Energy Efficiency Finance Program | 7 The China Utility-Based Energy Efficiency Finance Program The China Utility-Based Energy Efficiency Finance Program (CHUEE) was launched in 2006. The program was expected to catalyze energy efficiency investments in China, thus supplementing China's efforts to conserve energy and reduce gas emissions. The program had two components: a guarantee for energy efficiency loans and the provi- sion of technical assistance to market players. Although the program operated with just two banks, these and its demand exceeds 2 billion tons a year, which is nearly banks quickly utilized the loan guarantee facility to build double the demand in the United States (Pew Center on up a large loan portfolio of energy efficiency projects. As Global Climate Change 2007). Coal's carbon content per of June 2009, the program guaranteed loans amounting unit of calorific value is 36 percent and 61 percent higher to 3.5 billion Chinese yuan ($512 million). These loans fi- than oil and natural gas, respectively (National Develop- nanced 99 energy efficiency projects, such as heat and gas ment and Reform Commission 2007, p. 20). recovery power generation and the introduction of an ef- China has been reducing its emission intensity (emission ficient production system. The steel, chemical, and cement per unit of gross domestic product). From 1999 to 2005, industries are the largest beneficiaries of the program. Based China's energy intensity went from 268 to 143 tons of coal on the engineering calculation, these investments reduced equivalent per US dollar, decreasing by an average an- GHG emissions by 14 million CO2 tons per year. This is nual rate of 4.1 percent. However, there are also signifi- more than the target set at the beginning of the program (up cant efficiency gaps in China, primarily because of lack to 13.6 million tons per year). of advanced technologies. According to China's National The program implementation faced some operational issues Climate Change Programme, its energy efficiency is about associated with a complicated internal reporting line, weak 10 percent lower than that of developed countries, and its coordination between investment staff and the program man- per unit energy consumption is about 40 percent higher agement office, and the lack of a monitoring and evaluation than in industrialized industries (National Development system at the program level. and Reform Commission 2007). There are many opportunities to adopt new energy effi- Energy Efficiency Challenges in China ciency technologies in China. For example, utilization of China is now one of the world's largest emitters of GHGs. industrial waste as a fuel for the cement production process In 2007, the country's estimated GHG emission was began very late: in 2003, the industrial waste used as fuel 7.5 gigatons--about 21 percent of the world's emissions in was 0.01 kilograms (kg)/ton cement in China. This is mi- that year (USEIA 2009). China's emission volumes are pro- nuscule compared to 43 kg/ton in Germany and 11 kg/ton jected to rise by another 65­80 percent by 2020. in the United States (IFC 2007). China has been increasing its energy use to support its eco- Chinese government policy supports energy efficiency. nomic growth during the past decades. Since the turn of the The Chinese government has demonstrated a strong com- 21st century, China's energy demand has nearly doubled, mitment to moderating the country's expanding energy from around 40 quadrillion1 British thermal units in 2000 consumption. Since 2006, government policies have been to nearly 75 quadrillion in 2007. China's source of energy increasingly conscious about energy efficiency and pol- also contributed to its GHG emissions; its power generation lution reduction. China's 11th Five-Year Plan for Social is dominated by coal--coal provided 77 percent of China's Economic Development (2006­2010), the country's na- energy in 2007 (the world average was about 30 percent), tional economic planning document, represented a turning 8 | Energy Efficiency Finance point for government support for energy conservation. It coal combustion and reduce the emissions intensity of stipulates that the country's energy consumption per unit industrial production, it can also reduce the effective of gross domestic product nationwide be reduced by 20 price of using coal and thus contribute overall to greater percent during the planned five-year period, or by about absolute coal consumption. The efficiency gain achieved 4.4 percent annually. This was the first time that quantita- from conservation might be cancelled out, if the scale tive targets for energy efficiency were included in a five-year of coal production and its use are expanded, and if the plan; since then, various measures have been introduced to social costs from the scale of coal energy are not closely achieve this goal. The government's policy includes a pro- monitored and regulated to ensure that the expanded use gram to improve energy efficiency in China's 1,000 largest of coal does not offset the gains achieved by energy effi- enterprises (these represent one-third of the country's en- ciency. In this connection, the government's emphasis on ergy consumption) in 2006. The government also plans to the greater use of more sources of renewable energy is a retire inefficient power plants and industrial plants in sec- welcome development. tors such as cement and steel. Detailed progress on govern- ment policy actions is outlined in appendix A. Design of the Program Market-driven action would supplement the policy. Constraints to energy efficiency in China. The government Government policy measures rely on administrative reg- of China made a request to IFC in January 2004 for assis- ulations and subsidies to reach the stated objectives on tance in developing new private sector initiatives in financing consumption. Weak regulatory enforcement (especially renewable energy and/or energy efficiency. After two years at provincial and municipal levels) can undermine such of research, IFC launched the CHUEE program, which was efforts (Bank of Tokyo Mitsubishi UFJ 2007, p. 6). In any approved by the IFC Board in May 2006. The research identi- case, government measures are putting substantial pres- fied market failures and barriers to energy efficiency invest- sure on large industries by providing subsidies and trans- ments in China, which the program would address-- fers from the government budget. However, given the · An information barrier, which limited end users' abil- scale of the challenge to moderate energy consumption ity to gain adequate knowledge on energy efficiency growth, sustainable mechanisms to address market fail- technologies and equipment and to assess the risks to ures--including financing and technical services--would financing such projects. improve the chance of realizing energy efficiency invest- ments based on sustainable market activities. · A lack of awareness and experience among Chinese com- mercial banks about financing energy efficiency projects. Efficiency efforts are part of the solution. Improvement in the efficiency of using energy is only one of several variables · Risk aversion in the Chinese banking sector, which cus- in reducing GHG emissions. Efficiency efforts need to be tomarily makes credit decisions based on fixed asset assessed in the wider context of overall energy and climate collateral. Consequently, energy efficiency players such policy, where issues such as energy pricing and promotion as equipment suppliers and energy service companies of renewable energy industries are major and important (ESCOs) that have a weaker asset base are financially variables. constrained by a lack of credit. Overall, when policy conclusions are drawn in a dynamic The program had three elements: technical assistance to setting, there is a clear need to look at not only the effi- market players, a loan guarantee mechanism, and outreach ciency effects (as is done in this study), but also the and dissemination. The $215.5 million program, including scale effects on the use of coal and fossil fuels. In this a GEF grant of $16.5 million and $3 million in donor con- context, the government of China's pricing regime for tributions (see appendix B for program funding), set the coal and the regulation of its use can have significant target GHG emission reduction directly from the projects impacts. Although the encouragement that the financ- implemented by CHUEE at between 4.1 million tons (high ing subsidies provided through guarantees and technical defaults, low volume scenario) and 8.6 million tons of CO2 assistance may stimulate investments in more efficient (base case volume and defaults).2 The China Utility-Based Energy Efficiency Finance Program | 9 The program provided loan loss guarantees. To give the sheng Banking Corp., Ltd., based in Beijing; and (iii) Indus- banks incentives to lend, CHUEE featured loan guarantees trial Bank (IB), based in Fuzhou in the Fujian Province. IFC for partner banks. Commercial banks were supposed to be was supposed to provide guarantee and technical assistance selected to provide loans for the energy efficiency equip- to the banks, market partners, and end users (customers). ment and projects. Bank lending would be supported by However, Minsheng Banking Corp. decided not to partici- IFC's guarantees. The guarantee facility was designed to pate in the program, and there was a mismatch between IB partially compensate participating banks for losses from and Xinao Gas Holdings Ltd. (see box 2.1). Consequently, this line of business. the initial utility-based business model was abandoned. For example, 75 percent of the first 10 percent loss of the Instead, the program was implemented featuring financial principal loan amount would be guaranteed by IFC/GEF, institution partners that provide loans to end users, shown and the remaining 25 percent of the loss would be covered in figure 2.1. Other partners that provided energy-saving by the participating banks. For the remaining portfolio of services to the end users played a supporting role. energy efficiency lending (90 percent), IFC was to cover The logic model of the program can be subdivided into 40 percent of the losses and the participating banks the re- three categories corresponding to the distinctive stakehold- maining 60 percent. The purpose of the RSF was to provide ers, which contribute to the program's ultimate goal of re- incentives for participating banks to experiment with ener- ducing greenhouse gas emission, as shown in table 2.1. gy efficiency financing, as well as to build their capacity to undertake this kind of business as a standard business line. Banks have financing and information roles in energy efficiency. Banks could not only provide financing for The program also featured technical assistance. Advi- energy efficiency investments, but they could also dissemi- sory services are another important pillar of the program, nate knowledge and information about potential savings as with other IFC energy efficiency programs. They consist from energy efficiency and identify technical partners. mainly of studies supporting energy efficiency activities Project-based financing (which recognizes the key finan- and technical assistance to key players in energy efficiency cial benefit streams of energy cost savings derived from (banks, market partners, and end users). In particular, IFC energy efficiency projects) would be a suitable instrument was supposed to conduct various market studies that were for energy efficiency projects, but because of certain market to be used to sharpen the program's sector targets. Technical failures, such financing does not take place on a significant assistance was to be provided to both the formal CHUEE scale. Major constraints in financing energy efficiency con- partner entities (Xinao Gas, Industrial Bank, and Bank of cerning banks are summarized in table 2.1. Beijing) and to market players in focused "networks." Finance for energy efficiency is exotic in Chinese banks. The technical assistance to banks was supposed to sup- Chinese banks' mainstream lending to private business is plement the guarantee facility. IFC's technical assistance working capital finance backed by the entire corporate to the banks helped them become familiar with energy ef- assets. Loan tenure is typically short (one to two years); ficiency appraisal, deal structuring, and the role of ESCOs payment schedules are often interest only, with a balloon or EMCs, which provide services to help implement energy repayment of principal. Banks assess risk and make credit efficiency projects. The program encourages the project decisions based on the value of a company's fixed asset col- finance approach, or loan repayments based on projected lateral as security. cash flows instead of a project's balance sheet. Energy efficiency lending requires a certain understanding Another important channel of influence was demonstra- of the technology, and Chinese banks are not familiar with tion effects. The program was expected to disseminate in- technology-based lending. This is particularly true for en- formation about energy efficiency technology and services ergy efficiency projects, where the benefits are seen mainly and the benefits of new ways to finance energy efficiency. as avoiding some costs. The financing of energy efficiency This was expected to fill the information gap and catalyze projects based on higher reliance on a project's cash flow energy efficiency investment demand for sustainable en- and on project assets is unconventional, especially if the ergy efficiency market development. project's target is operational cost savings. Furthermore, the The initial utility-based model was abandoned. The pro- transaction costs may be high because of both the highly gram initially identified three partner companies. All three customized nature of project finance packaging and the were existing IFC clients: (i) Xinao Gas Holdings Ltd., a legal documentation associated with any relatively new in- private natural gas distribution company; (ii) China Min- vestment scheme. 10 | Energy Efficiency Finance BOX 2.1 ECONOMICS OF IFC GUARANTEES IN FINANCING ENERGY EFFICIENCY Because of lack of experience among banks and the perception of high risk, energy efficiency loans (financing for future energy savings rather than lending based solely on corporate collaterals) are supplied at a higher interest rate, if they are offered at all. On the demand side, the demand for energy efficiency loans will reflect private benefits only, and private demand will be lower than social demand. IFC's intervention with the guarantee program is rationalized by these imperfections in the credit market. The following model provides an overview of the intended economic effects of the program. The supply curve (Sc) in Figure A represents banks' supply of collateral-based corporate loans. This supply curve meets the private demand curve (D) at quantity (Qc) with price (interest rate) (Rc). Compared to this supply curve of corporate loans, the supply curve of hypothetical energy efficiency loans without or lower collateral would be upper left of Sc (Seeh), corresponding to a higher interest rate (Reeh) that reflects higher risks. As a result, fewer energy efficiency loans may be supplied compared with the social optimum level, which should be somewhere between QSI and QSC. FIGURE A Demand and Supply of Corporate FIGURE B Introduction of Guarantees under the Loans and Energy Efficiency Loans Program Price Social demand Price Social demand (interest rate) Seeh (interest rate) Seeh D D Seeg Reeh Sc Reeh Reeg Sc Rc Rc Qeeh QSi Qc QSc Qeeh QSi Qc QSc Qeeg Quantity Quantity Source: IEG. Introducing a loan guarantee (possibly supported by a subsidy) will lower the interest rate of energy efficiency loans and will increase the supply of energy efficiency finance. As shown in Figure B, the guarantee pushes the supply curve down from Seeh to Seeg, closer to the social optimum quantity. For small and medium-size enterprises (SMEs) without strong collateral to cover the loans, the new guarantee-generated supply curve Seeg creates opportunities to obtain loans with more affordable interest rates. The economic benefits of the guarantee would be sustainable if the intervention fixed the market failure- information asymmetry about the risk of the energy efficiency projects. If banks learn through experience the true risk profile of energy efficiency projects and begin to accept the additional risk in financing energy efficiency as part of their conventional business without IFC guarantees, the supply curve will approach the guarantee-induced supply curve Seeg. However, if the intervention fails to fix the market failure, this temporal shift in supply curve will disappear when the guarantee program ends, and the market will return to its original status. In this case, the program benefits will not be sustained. A commercial guarantee industry has emerged in China, However, these guarantee companies do not currently ad- and banks have grown accustomed to receiving guarantees. dress the needs of the energy efficiency finance market, The China Utility-Based Energy Efficiency Finance Program | 11 FIGURE 2.1 Program Design Technical assistance Technical assistance Bank partners guarantee Banks Loan CHUEE Corporation Loan (Program) agreement Market partners Customers Utilities, ESCOs, energy users vendors, and so forth Equipment engineering Technical assistance services Source: IEG. Note: CHUEE China Utility-Based Energy Efficiency; ESCO = energy service company. which needs three- to seven-year term loans, underwritten be shared between the ESCOs and the client over a pre- more on the basis of borrower/project cash flows, with in- determined period. In mature markets such as the United stallment principal payments and innovative credit struc- States and Europe, investments through ESCOs are sig- tures, for a range of borrowers (MacLean 2008). nificant. One estimate indicates that in the United States these investments reached $1.8­$2.1 billion in 2000, fol- CHUEE combines guarantees and technical assistance lowing a decade of strong growth (Goldman, Hopper, and with the idea that this should allow banks to try new Osborn 2005). One of CHUEE's objectives was to remove types of investment (longer-term loans based on project constraints to the energy efficiency investments, so pro- cash flows, with installment principal payments schedules motion of sustainable ESCO business became a strategic and other credit structures involving energy savings per- priority. formance). The guarantee was expected to provide some comfort to participating financial institutions, as it was in- In China, the ESCO concept was introduced and pro- tended to limit losses from unfamiliar risks. Furthermore, moted by the World Bank Energy Conservation Project. technical assistance to financial institutions was supposed Initiated in 1998, this project supported the establishment to help them build capacity and develop institutional prac- and development of three pilot ESCOs in Beijing munici- tices to handle this new type of business. pality, Liaoning, and Shandong provinces.3 The energy effi- ciency-related business in China has been growing rapidly; by one estimate, the country is projected to spend as much Market partners as 2.1 trillion yuan ($300 billion) over the 2008­12 period Energy efficiency projects often require marketing on products and services to reduce energy use (Cheung partners to act as technical consultants, facilitators, and Kang 2008). Nevertheless, the business faces particular and aggregators. Utility companies, equipment suppli- challenges, especially in accessing finance (see table 2.1). ers, or technical consultants can play these roles, but the Such constraints are typical for SMEs in China (such as ESCOs specialize in performing these functions. ESCOs small size, weak asset base, and limited track records) but are market-based companies providing technical services are also caused by banks' lack of familiarity with the busi- to clients to reduce energy usage; they install new equip- ness and their inability to take risks on such credits. ment or refurbish existing equipment, often on the basis of energy performance contracts (EPCs) between an ESCO For the marketing channels (especially ESCOs), CHUEE and its clients. The contract determines the terms under was supposed to open access to financing to facilitate which the cost savings created by new technologies will ESCOs' response to the growing demands for such 12 | Energy Efficiency Finance TABLE 2.1 Logic Model for Banks, Market Partners, and End Users Constraints for realizing energy efficiency investment Program intervention Expected outcome Expected impact Banks 1. Lack of suitable appraisal meth- · Guarantee to banks · Direct loans to energy Energy efficiency odologies for banks to quickly and · Technical assistance efficiency projects markets that are accurately appraise energy efficiency for capacity building, · Enhanced capacity to funded by private loan applications business development, take energy efficiency business without 2. Risk aversion of Chinese banks relationship brokerage business as a part of implicit subsidies 3. Banks' lack of knowledge of energy banks' business efficiency technology 4. Cost-saving project finance being considered nonconventional 5. Potential high cost of doing business 6. Strong preference for larger borrow- ers and loans--Energy efficiency finance may be too small to justify its own business Market partners Access to finance is constrained for · Guarantee to banks · Gain access to finance several reasons: that is sponsored by to bank loans 1. Unique financing requirements of EPC market players · Implement more projects · Technical assistance energy efficiency 2. Lack of familiarity with the EMC busi- to broker relationships projects ness model among bank lenders between banks and end users, capacity 3. High level of risk aversion among building to market lenders, especially given the lack of players familiarity 4. Limited track records of many new EMCs 5. Limited balance sheet strength of new EMCs 6. Relatively small size of projects 7. Credit risk associated with many potential project host enterprises End users 1. Weak awareness of energy efficiency · IFC taking ultimate · Higher awareness of potential risks through guaran- energy efficiency op- 2. Weak capacity to identify, structure, tee to banks portunities and implement energy efficiency · Technical assistance · Energy efficiency investments to broker relationship investments 3. Access to finance constrained for with banks and market · Greater access to several reasons: players and to increase finance to energy awareness of energy efficiency projects · Unique financing requirements of efficiency opportuni- EPC projects ties and benefits · Lack of familiarity with the EMC busi- ness model among bank lenders · High level of risk aversion among lenders, especially given the lack of familiarity · No specific consideration of energy efficiency benefits in lending terms and collateral Source: IEG. Note: EMC energy management company; EPC energy performance contract; IFC International Finance Corporation. services. The program seeks to enhance ESCOs' management agement companies, and other players (such as equipment capacity; enhance loan preparation capacity of these compa- suppliers) to increase their familiarity with the subsector. This nies; and strengthen networks among banks, energy man- is expected to lead to better access to financing for ESCOs. The China Utility-Based Energy Efficiency Finance Program | 13 BOX 2.2 WHY THE UTILITY-BASED MODEL FAILED TO MATERIALIZE As the name suggests, at the beginning, the program featured a utility as the central focus of the promotion of energy saving investments. However, this did not materialize. The main reason for that was the strategic mismatch between the utility and the financial institution partners: Different client bases: The gas utility had mostly small (third-tier) clients such as hotels, shopping malls, and restaurants. At the time of appraisal, IFC expected that the program would be implemented through an SME- oriented bank. However, that bank decided not to participate. The banks that did decide to participate found that the utility partner's client base was too small; thus they perceived transaction cost and risks as rather high. There was little overlap between the geographic distributions of the client bases of the participating banks and the utility. The utility partner indicated that a leasing company would have been a more suitable partner than a bank. Misalignment of business interests among utility and financial partners: The utility-based model could have worked if interests among the parties were aligned. For the utility partner, the program supported a number of its core strategic objectives: helping customers acquire gas-using equipment, building gas loads, increasing gas sales, and strengthening staff capacity and customer base. But the gas utility had already surpassed targets for new clients, had received a substantial amount of technical assistance from IFC, and did not have a strong incentive to form a partnership with the CHUEE banks. Furthermore, there was little pressure from the government and the public on gas utilities to improve energy efficiency. The government's focus was on large industrial and energy companies. Finally, the two parties did not agree on banks collecting utility fees in addition to the loan repayments, which was one of the key features of the utility-based finance model. Source: IEG. Through CHUEE, IFC's intervention created an EMC net- for energy efficiency investment. CHUEE intervenes di- work that provides a match-making and brokerage role be- rectly and indirectly through guarantees and advisory ser- tween these companies and banks; if interests and criteria are vices to banks and advisory service/technical assistance met, the guarantee can support bank lending to these compa- targeted at end users to promote energy efficiency technol- nies for energy efficiency projects. IFC has also helped partner ogy and investment schemes (such as clean development banks establish relations with a number of high-profile energy mechanisms) and at indirect marketing channels (utilities, efficiency equipment suppliers by facilitating partnerships be- ESCOs, and suppliers) to enhance their capacity to reach tween equipment suppliers and banks so that banks can better industrial end users. market loans, diversify risks, and replicate deals. Comparing CHUEE with other energy End users efficiency programs China needs to invest heavily in energy efficiency to meet Table 2.2 compares CHUEE with three previous IFC pro- its national goals. To meet the national goals of reducing grams in energy efficiency. Some of CHUEE's differentiating the energy intensity by 20 percent within the five years be- characteristics include loose targeting of the type of energy tween 2005 and 2010, China requires an investment of at users, a relatively small number of partner banks, and a least $170 billion in energy efficiency and renewable ener- separate project management unit with loose reporting gies, according to the National Development and Reform lines to both investment and advisory services manage- Commission. About half of these investments need to be ment structures. in the area of energy efficiency. Reducing petroleum use provides the largest potential gain, followed by coal-fired Implementation of CHUEE industrial boiler retrofitting and energy saving buildings. Guarantees in support of energy efficiency There are many constraints for energy efficiency projects. loans For the end users, constraints for investing in energy efficiency CHUEE had three partner banks for the loan guarantee projects include lack of awareness about potential benefits program. The first bank, Industrial Bank (IB), joined the from such projects, lack of technical expertise to imple- program at the beginning in 2006. The second, Bank of Bei- ment and actualize energy efficiency benefits, and unavail- jing (BOB), joined a year later, and the third bank, Shang- ability of finance. Such impediments depress the demand hai Pudong Development Bank, joined in 2008. However, 14 | Energy Efficiency Finance TABLE 2.2 Summary of IFC's Energy Efficiency Programs (before CHUEE) Russia Sustainable Energy HEECP CEEF Finance Program CHUEE/CEE Czech Republic, Slovakia, Latvia, Countries Hungary Lithuania, and Estonia Russian Federation China Time HEECP I: February 1997­ 2005­08, June 2002, initial November 2005­May 2010, CHUEE I: April 2006, 2001, $5 million (GEF) guarantee of $30 million, in- $20 million loan and $41.4 million IFC, GEF HEECP II: 2001­05, $16 mil- creasing to $75 million over $2 million partial guarantee $16.5 million, Finland lion ($12 million IFC, time. GEF $15 million from GEF approved (not $3 million $4 million GEF) used); later increased to CEE: December 2007, $100 million $167 million IFC, $1 million HEECP III: 2005 (merged with Finland, $3 million Norway CEEF) Financial HEECP I: Partial risk Partial risk guarantees to Loan (guarantee not used) Guarantee: Guarantee (loss instruments guarantees to financial fiscal intermediary Technical assistance: sharing facility) to Banks intermediaries providing Technical assistance: Advi- Advisory services to fiscal in- Technical assistance: credits in the form of sory services to fiscal inter- termediaries (since 2007 no Engineering and marketing commercial loans or mediaries, energy efficiency requirement to be IFC invest- technical assistance to utili- financial leases. companies, including ESCOs ment client) and improve the ties and ESCOs Technical assistance and energy end users capacity of the local energy Credit underwriting provided to fiscal interme- service companies technical assistance to banks diaries (marketing, capacity development) and project developers. HEECP II: Expanding on HEECP I Sector HEECP I: Heating systems Target areas: lighting, Process technology, CHUEE: Utility (gas, (targeted and (gas boiler). motors, space condition- energy generating equip- electricity and heat) realized) HEECP II: Targeted the ing (heating and cooling), ment and energy savings CEE: Energy efficiency and residential, commercial, automated control in the buildings, renew- renewable energy, but no industrial, and institutional systems, as well as able energy sources and sector specified sectors, including lighting, cogeneration systems that manufacturing of the energy motors, space conditioning produce electricity from efficiency equipment (heating and cooling), and waste heat generated for automated control systems, industrial uses. Realized proj- congeneration systems that ects mostly on wind systems produce electricity from (biomass), heating waste heat generated for industrial uses): most projects related to street lighting, block house windows, and lighting. End-user profile Variety of clients targeted Wind farms and hydropower 26 subprojects financed as of CHUEE: There are but mostly ESCOs, leasing stations end 2007, including bakery, 41 CHUEE subprojects companies, and SMEs. Block typology, plastic factory (38 IB and 3 BOB). Most house, SME facility, and (midterm review) end users industrial. renewable energy CEE: SMEs and industrial corporate (target). Program components Investment: Partial Investment: The guarantee Investment: Credit lines for CHUEE: Investment- guarantee program to address the energy efficiency equipment loan mechanism Technical assistance: Sup- credit risk barriers to energy investment and partial credit technical assistance porting end users, ESCOs, efficiency finance guarantees CEE: Investment: RSF and and fiscal intermediaries Technical assistance: Techni- Technical assistance: Techni- technical assistance cal assistance program to cal assistance to help to start address high transaction investment in the energy costs and marketing barriers efficiency segment to energy efficiency project development (continues on next page) The China Utility-Based Energy Efficiency Finance Program | 15 TABLE 2.2 (continued) Russia Sustainable Energy HEECP CEEF Finance Program CHUEE/CEE Banks Raiffeisen Leasing Ceska Sporitelna (Czech Rep.) CIB (Center Invest Bank) · IB The National Savings Bank Dexia (Slovakia) NBD · BOB The Hungarian Foreign Trade Hansabanka (Latvia) Ursa Bank · Shanghai Pudong Bank SEB-Unibanka (Latvia) MDM Bank Development Bank (SPDB)- (HEECP 2 PAD) Bank Austria Hansabankas (Lithuania) CEE Creditanstalt SEB Vilniaus Bankas Hungary/Hypovereinsbank (Lithuania) Hungary Hansapank (Estonia) Budapest Bank Axon Leasing Innotrade Leasing Kereskedelmi es Hitelbank ABN Amro (Magyar) Bank Regulatory Strong Mixed Weak Strong framework ESCO readiness Yes Mixed Not relevant Mixed Streamlined No Yes Not applicable Yes decision making (credit approval system) Managed by IFC Yes (but no other Yes (but no other Joint (CGF-PEP ECA) No (project management Investment operations) operations) office) Department (implemented) Local office Newly established project Newly established project Within existing PEP ECA Project management office management office management office within local office, separate Fast utilization No No No Yes Source: IEG, based on IFC data. Note: BOB Bank of Beijing; CGF Global Financial Markets Department (IFC); CEE China Energy Efficiency Finance Program; CEEF Commercializing Energy Efficiency Finance Program; CHUEE China Utility-Based Energy Efficiency Program; ECA Eastern and Central Europe; ESCO energy service company; GEF Global Environment Facility; HEECP Hungary Energy Efficiency Cofinancing Program; IB Industrial Bank; IFC = International Finance Corporation; PAD = Project Assessment Document; PEP Private Enterprise Program; RSF = risk-sharing facility; SME small and medium-size enterprises; SPDB Shanghai Pudong Development Bank. because of delays in obtaining approval from the Chinese gram's effectiveness.6 See table 2.3 for the banks' utiliza- government's State Administration of Foreign Exchange,4 tion of the guarantee. the guarantee program became effective only recently (on October 26, 2009). Advisory services The program conducted studies, training, and marketing The first banking partner, IB, rapidly built up its port- support to various energy efficiency players. The market- folio of energy efficiency project lending. The first IB ing studies helped to fine-tune the target areas of interven- loan guaranteed by CHUEE was approved in January tion--this was important, as the program's target sectors 2007. Within less than a year, IB fully utilized the guar- shifted when the utility-based approach was abandoned.7 antee facility of 460 million yuan, or about $60 million, Moreover, consultants hired by the program provided a financing 50 loans to 35 companies. Consequently, IFC project-by-project review of the energy efficiency projects modified the program in December 2007 to enhance the for the banks that used the RSF. Thus far, the program has guarantee program by reallocating GEF resources from done a technical review of all the projects in the program; it technical assistance to additional guarantees and putting also made 31 site visits for energy efficiency marketing and additional IFC resources (referred to as the second guar- technical support, 3 industrial and regional energy efficiency antee facility or CHUEE II5). Although this expansion of opportunities studies, and 4 project case studies. the guarantee facilities was not technically effective be- cause of the delay in government approval, IB continued Other than banks, CHUEE emphasizes three distinct its lending in energy efficiency in anticipation of the pro- marketing partners. The program established six networks 16 | Energy Efficiency Finance TABLE 2.3 Utilization of the Guarantee by Banks under CHUEE (as of June 30, 2009) IB IB (first guarantee facility) (second guarantee facility) BOB Total Effective date December 26, 2006 January 1, 2009 November 29, 2007 Number of loans 50 40 8 98 Number of client 35 38 5 78 company Total project ¥1,917million ¥4,460 million ¥161 million ¥6,538 million ($262 million) ($651 million) ($23 million) $936 million Total loan amount ¥893 million ¥2.5 billion ¥117 million ¥3.5 billion ($130 million) ($365 million) ($17 million) ($512 million) Covered by guaran- ¥597 million ($87 million) ¥656 million ¥93 million ¥1,346 million tee (original principal (this includes repaid loans) ($96 million) ($13 million) ($197 million) amount ) Maximum reference ¥460 million ¥1,313 million ¥300 million ¥ 760 million portfolio balance (Target ¥1,500 million ) (first facility) ¥ 2.5 billion ($333 million) (second facility) Source: IEG. Note: BOB = Bank of Beijing; IB = Industrial Bank. to promote energy efficiency activities and access to fi- nance for such projects (table 2.4). Network activities in- TABLE 2.4 Summary of CHUEE Network Participants volve capacity building and networking/brokering among Number energy efficiency players. Capacity-building activities include training and advice to project developers so they Banks and other financial institutions 47 can be credible partners for financial institutions. The pro- Utilities 14 companies gram has conducted the following: EMCs 135 companies Energy efficiency equipment suppliers 76 companies · A seminar on obtaining bank loans: How to Prepare a End users 72 companies Loan Application Source: IEG, based on CHUEE files and database. · Training on business and management--direct help to Note: As of March 31, 2009. access finance by brokering EMCs to banks or other financing windows (clean development mechanisms, carbon trade) · Annual meetings and various fairs, which provided CHUEE's End Users briefings on new foreign technology. Overall, the steel industry has been the largest beneficiary Specifically for marketing partners, the program provided (37 percent) in terms of the total loan amount supported eight training sessions on marketing, building staff capacities, by the guarantee facility. This is followed by chemicals and assisting customers in preparing energy efficiency proj- (20 percent), cement (18 percent), and coking (the removal ects for financing and marketing their equipment in partner- of volatile materials from coal by distillation; 4 percent). ship with banks. This includes two training sessions to Xinao Other industries served include power, food, and glass. Gas, so its staff could prepare for new ESCO business. The share of municipal and hospital construction energy Direct funding from loans supported by the efficiency projects has been small. The original expecta- program's guarantees tion was that CHUEE's guarantee portfolio would have a The loans given to energy efficiency projects by both IB large number of smaller loans that would provide good sec- and BOB, using the guarantee facility, amount to nearly toral diversification. However, because of the dominance of 3.5 billion yuan (figure 2.2). This growth occurred much fast- larger loans, there is a significant sectoral concentration, as er than the original target: the cumulative investment volume well as large exposures to a handful of big companies with target had already been achieved in 2009 (figures 2.3 and 2.4). multiple loans. The China Utility-Based Energy Efficiency Finance Program | 17 FIGURE 2.2 Cumulative Disbursement Amount of Loans Supported by CHUEE Guarantees (million yuan) 4,000 3,500 3,000 Yuan (million) 2,500 2,000 1,500 1,000 500 0 07 07 7 07 07 08 08 08 8 08 08 09 09 l0 l0 ar ay p ov n ar ay p ov n ar Ju Ju Se Ja Se Ja M M M M M N N Date Source: IEG, based on CHUEE files and database. Nearly half of the investments were for power generation, of $19 million. Loans to EMCs are usually backed by per- often associated with heat and gas recovery. About 20 per- sonal guarantees, and then by equipment mortgages. Loans cent involved investing in process improvement. There from BOB were predominantly associated with EMCs (7 of were few air conditioning, building-related activities or re- 9), whereas 7 of 50 (14 percent) IB loans were EMC related newable energy projects. (table 2.6). About a quarter of the loans under CHUEE were ESCO No loan losses were expected at this point. Despite the related. The average size of EMC projects was $3 million, current global financial crisis, loans guaranteed by the pro- which was financed with an average loan of $1.8 million. gram are performing well. At the start of CHUEE, default This is far smaller than the loans without EMCs, which rates were assumed at 4 percent (base case), which was sub- were $9 million on average for projects with an average size sequently revised to target nonperforming loans--not more FIGURE 2.3 Cumulative Loans under Guarantees FIGURE 2.4 Cumulative Investment Supported against the Original Target by Guarantees against the Original Target 1,000 700 600 800 500 $ millions $ millions 600 400 300 400 200 200 100 -- -- 2007 2008 2009 2010 2007 2008 2009 2010 Year Year Investment target Investment actual Loan target Loan actual Sources: Targets are taken from CHUEE presentation as of May 26, Sources: Targets are taken from CHUEE presentation as of May 26, 2008; actual figures from IFC files as of March 2009. 2008; actual figures from IFC files as of March 2009. Note: Effective guarantee only (that is, not covering CHUEE II). Note: Effective guarantee only (that is, not covering CHUEE II). 18 | Energy Efficiency Finance FIGURE 2.5 Sector Distribution of Guaranteed TABLE 2.5 Type of Activities under CHUEE Loans, by Amount Activities Total (%) Power generation 46 Heat recovery 31 Others 21% Efficient production 21 Coking Steel Gas recovery 18 4% 37% Biogas 5 Air conditioning 5 Cement 18% Hazardous waste 2 Chemicals 20% Renewable energy (solar, hydropower) 2 Source: IEG, based on CHUEE database. Source: IEG, based on CHUEE program database. Note: Some projects have multiple activities. than 2.5 percent of the guarantee portfolio. So far, there are Although some projects are still under implementation, the no defaults in the portfolio; and based on the current as- client survey showed that no client had below-expectation sessment of IB and BOB, no defaults are expected in the returns on investment on CHUEE-supported energy effi- near future--although some companies that have received ciency investments, in terms of cash savings from energy use. loans are having financing difficulties, this is not expected About a quarter stated that the results exceeded expectations, to impact the repayment of their loans. However, high con- and 65 percent said the results met their expectations. centrations in certain industries (steel, chemicals, and ce- The program has reduced GHG emissions as targeted. ment) would make the program's loan exposure vulnerable This conclusion is based on aggregating the engineering if there were an economic slowdown in China. calculation for each project and on answers given by the companies that implemented the projects. Projects sup- Energy Efficiency Performance of Projects ported by the guarantee will generate total annual GHG Supported by the Guarantees emission reductions of 14 million CO2 tons, which is higher than the high end of the target, 13.6 million. This is less The ultimate goal of the program was to reduce GHG than half of the annual emission from China's biggest emis- emissions. The program set a target for GHG emission sion-contributing coal fuel power plant8 and about equal reduction from implemented energy efficiency projects at to the annual CO2 emissions of a small country such as the time of original approval: between 4.1 million tons of Lithuania. CO2 (high defaults, low volume scenario) and 8.6 million tons (base case volume and defaults). The second guarantee Forty percent of GHG reductions are from 14 projects facility's target was a reduction of 5 million tons of CO2 per in the chemical industries, followed by 23 projects in year directly from projects supported by the RSF (between steel (22 percent), one clean development mechanism 2011 and 2015). Therefore, total target emission reduction project (15 percent), and 23 cement projects (7 per- from the program was 9.1 million­13.6 million tons of CO2 cent) (see table 2.8). Energy efficiency projects in the per annum. chemical industries include some waste heat recovery for TABLE 2.6 Summary of Loans Related to EMCs IB BOB Total By number of loans 7/50 (14%) 7/8 (88%) 14/58 (24%) By total Project $18.5 million (7% of total) Project $21 million (91% of total) Project $39.5 million (14% of total) Loan $9 million (7% of total) Loan $12 million (71% of total) Loan $21 million (14% of total) Average $3 million project, loan $1.8 million $3 million project $1.8million loan $3 million project $1.8 million loan (non-EMC average) $19 million project $9 million loan Source: IEG, based on CHUEE data. Note: Only for the first guarantee facility (59 loans). BOB = Bank of Beijing; EMC = energy management company; IB = Industrial Bank. The China Utility-Based Energy Efficiency Finance Program | 19 TABLE 2.7 GHG Emission Reduction Targets and Estimates of Results found that there was no demand for guarantees among the targeted CO2 tons per year banks and restructured the package First guarantee Second guarantee facility facility Total to provide liquidity (a credit line) as well as technical assistance. In GHG emission reductions target 4.1 million­ 5 million 9.1 million­ at approval 8.9 million 13.6 million other markets in Eastern Europe, Estimated by engineering 3.5 million 10.7 million 14 million where there was substantial inter- calculation est in renewable energy rather than Number of projects 58 40 98 energy efficiency, the guarantee Source: IEG, based on CHUEE database. instrument was not suitable, as the banks were looking for sponsors' equity rather than guarantees. Uti- lization tended to be slower than steam generation as well as power savings from ferment- anticipated. It took seven years for HEECP to see sig- ing tank agitator improvements, biogas production from nificant usage of IFC guarantees (figure 2.6). The Russia acid waste water treatment for power generation, process Sustainable Energy Finance program took more than two optimization, and nitrous oxide emission control. Most years to reach half of the planned loan commitment vol- of the energy efficiency projects in steel industries are ume (figure 2.7). blast furnace gas power generation. The clean develop- In China, despite the rapid growth in energy efficiency ment mechanism project involves coal mine methane finance, not all actors and initiatives are experiencing development. a surge of demand. The World Bank/GEF Energy Con- It is important to point out that other than CHUEE, servation Project (ECP) II, which has a guarantee scheme none of IFC's past energy efficiency programs met their targeted to loans to ESCOs, has not been utilized much original target volumes of emissions reduction. This is (figure 2.8). The scope of the ECP II covers only EMCs or partly because of the uneven uptake of programs by market ESCOs that are implementing EPC projects. Regarding the participants, as well as shifts in emphasis on intervention low utilization of guarantees, relatively mature ESCOs are targets (for example, from industries to residential) during often able to arrange financing from partners or financial the implementation. institutions without needing to pay for the program's loan guarantees: many ESCOs obtained their first commercial Only a handful of banks in previous IFC energy effi- loan financing through the China National Investment & ciency programs extensively used the guarantee facili- Guarantee Co. program, and then, as they matured, utilized ties. Some banks had a few initial deals and established the guarantee program more selectively while obtaining enough confidence to conduct the business themselves much of the required finance through other channels (Tay- and stopped using the guarantee facility. In Russia, IFC lor and others 2008, p. 167). TABLE 2.8 GHG Emission Reduction by Industry First guarantee facility Second guarantee facility Total Emission No. of Emission No. of Emission No. of Industry type reduction Percent projects reduction Percent projects reduction Percent projects Chemical 312,812 9 6 5,389,788 51 8 5,702,600 40 14 Steel 1,386,499 40 16 1,743,000 16 7 3,129,469 22 23 Clean development None 1,650,000 15 1 1,650,000 15 1 mechanism Cement 464,469 13 14 495,260 5 9 959,729 7 23 Others 1,338,978 38 22 1,374,643 13 15 2,713,621 19 37 Total 3,502,758 NA 58 10,652,691 NA 40 14,155,449 NA 98 Source: IEG, based on CHUEE database. Note: NA not applicable. 20 | Energy Efficiency Finance FIGURE 2.6 Use of HEECP Guarantee Facilities FIGURE 2.7 RSEF Commitment Amount 60,000 Russia Energy Efficiency Finance 50,000 100 $ thousands 40,000 80 $ millions 30,000 60 20,000 40 10,000 20 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Ja 05 M 06 M r 06 Ju 06 Se 06 N 06 Ja 06 M 07 M r 07 Ju 07 Se 07 N 07 Ja 07 M 08 M r 08 Ju 08 Se 08 N 08 Ja 08 M 09 M r 09 09 Year ov n ay l p ov n ay l p ov n ay l p ov n ay a a a a N EE investment triggered Loans with IFC guarantees IFC guarantees committed Sources: Taylor and others 2008. Source: IEG, based on IFC data. Note: HEECP Hungary Energy Efficiency Cofinancing Program. Note: RSEF Russia Sustainable Energy Finance Project. Management and Organizational Aspects IB requested more reviews by the program team, and the CHUEE has been operated by the designated project legal agreement was not clear about the arrangement. team within the IFC's Beijing office and has been coman- Moreover, the partner bank did not strictly adhere to aged by the regional financial markets and environment de- exposure limits. The maximum loan limit amounts were partments. Managerial controls and oversight were weak, specified in the agreement as a loan limit, but not per ob- and the RSF was mainly handled by the program team, with ligator. This contributed to significant exposure to one of little involvement of investment officers from the financial the borrowing companies against the original intention of market department. IFC's advisory services team only a diversified portfolio. played a minor role in the program design. There was no credit department involvement in any review This lack of oversight and accountability framework con- or interpretation of the conditions. Furthermore, IFC's con- tributed to some irregular processing in project approval ventional credit and project monitoring systems barely cap- and service provisioning. For example, IFC was supposed tured the program-related exposures. The guarantee was to conduct a technical review of only the first five projects not properly accounted as IFC's exposure until June 2009, and then hand over the responsibility for technical review when it back-filled the commitment records. This situation to the client banks. This handover did not take place, as left IFC exposed to various operational risks. FIGURE 2.8 World Bank ECP II Loans from ESCO Loan Guarantee Component, Actual (million yuan) 140 120 Yuan (millions) 100 80 60 40 20 0 2004 2005 2006 2007 2008 Year Sources: National Development and Reform Commission, World Bank, Global Environment Facility China Energy Conservation Project (April 2009). Note: ECP II Energy Conservation Project II; ESCO energy service company. The China Utility-Based Energy Efficiency Finance Program | 21 Furthermore, the monitoring and evaluation framework the same time, an investment portfolio officer also started of the program has been inconsistent. Records were filed to fix the records. Thus, for most of the period the program under multiple projects. The corporate project database has been operating without an overall monitoring and eval- records three separate entries for the program investments uation system. (the guarantee facility), and there are separate entries for advisory service operations. These are not related to the Summary various portfolio supervision information filed for each The program, originally designed as a utility-based equip- partner bank, as records and performance indicators for ment financing operation, experienced significant design conventional, non-CHUEE investment projects are tracked changes. Although it operated with just two banks for three separately. In each entry system, there are different moni- years and had substantial delays in establishing the second torable indicators, and not all are necessarily consistently guarantee facility, the banks quickly utilized the loan guar- tracked. Moreover, staff turnover in the program project antee facility to build up a large loan portfolio of energy ef- management unit and among the Beijing-based investment ficiency projects. The program achieved its loan financing officers has meant that each new officer started inputting target as well as the gas emission reduction targets set at the data in a manner inconsistent with the past entries. Only beginning of the program. Nevertheless, it is important to in late 2008 did the IFC advisory services results measure- review the program's achievement in comparison with the ment team start revising the logical project framework. At hypothetical "without the program" situation. 22 | Energy Efficiency Finance Chapter CHUEE's Impacts | 3 23 Photo by Curt Carnemark, courtesy of the World Bank Photo Library. CHUEE's Impacts The overarching question for this evaluation is whether CHUEE has made a difference in catalyzing energy efficiency finance for GHG emission reductions. The assessment of impact is based on comparisons of energy efficiency activities and access to financing between groups that accessed the program and control groups, at three distinctive levels: banks, market players, and end users. Recently, the energy efficiency market in China experi- implementing projects with bank financing to reduce GHG enced significant growth, and the investment supported by emissions. It is important to stress that the review is partial the program's guarantees might have been realized even in and static, as it focuses on emission reduction of supported the absence of the program. Nevertheless, counting only emitters, but not on some of the dynamic effects that the for a small portion of end users that would not have im- program can bring in. For example, as mentioned earlier, plemented their projects without the program, the rate of the efficiency gains by energy users could be offset by the return (emission reduction and energy savings compared scale of coal use, leading to greater absolute coal consump- with project and program costs) is estimated at 38 percent. tion. Therefore, this analysis does not capture the complete social costs from the scale of coal energy being possibly The program established an institutional set-up for energy expanded by the subsidies, such as those embedded in the efficiency lending in the participant banks. It also improved guarantees and technical assistance. For a complete assess- access to financing for energy efficiency projects and for ment of the program, it is important to look at not only the the key market players--ESCOs--through technical assis- efficiency effects but also at the scale effects, when policy tance for capacity building and by brokering new relation- conclusions are drawn in a dynamic setting. ships with banks. To enhance its impact, CHUEE needs to enhance the sus- Evaluation methodology tainability of the project benefits, as participant banks still In this evaluation, with a view to highlight whether the rely heavily on the program's technical assessment. Simi- program made a difference, the Independent Evaluation larly, there is no assurance that the banks will continuously Group (IEG) selected comparison groups that closely lend without substantial corporate collateral in the absence resemble "without" scenarios of the intervention in en- of CHUEE guarantees. The program's beneficiaries have ergy finance. This was supplemented by a before-and-after been mainly large companies, contrary to the original em- comparison of the participating banks and their borrow- phasis on small and medium companies as the target. Mov- ers for energy efficiency projects. This evaluation employs ing down market to small companies is needed, as they face both quantitative and qualitative data collection and analy- challenges in access to financing. Finally, there are many sis methods. Quantitative data, such as bank energy effi- potential energy saving opportunities that the Chinese ciency lending activities, energy management companies' banks do not yet adequately address, such as energy saving access to financing, and end users' energy efficiency invest- buildings. ments, are gathered by structured surveys covering a repre- sentative sample of the population. Evaluative Questions Table 3.1 shows the specific comparison groups, with the approach taken for each group at the different levels and This evaluation focuses on the difference made by the the methodology for data gathering. IFC intervention to energy efficiency investments in China. Although the ultimate impact is on actual GHG Limitation of methodology emission reduction, the evaluation looks at effects along This evaluation faced some limitations in applying the the chain of interventions, focusing on three levels: (i) the strongest method in assessing the impacts. Strong con- level of financial institutions that adopt and sustain energy clusions about the assessment of the impact, or differences efficiency financing on a commercial basis; (ii) the level of made on final outcomes, can be derived from strict com- market players, such as providers of energy efficiency equip- parisons between what actually happened and what would ment and services; and (iii) the level of enterprises that are have happened in the absence of intervention (the coun- 24 | Energy Efficiency Finance terfactual). This evaluation attempts to select comparison gies such as random assignment of treatment. The program groups that are like the treatment groups in every way, ex- contains two types of selectivity: one is selection from IFC, cept that they were not subject to the intervention. However, and the other is self-selection. In identifying banking part- several practical limitations inhibit strict identification of ners, IFC initially selected possible candidates based on counterfactuals: lack of baseline data, selection bias, and certain criteria, such as their match with the utility com- contaminations. pany or IFC client relationship, as well as credit on risk criteria. CHUEE also made conscious and unconscious Lack of baseline data selections in marketing its service to EMCs. The end us- There were no relevant baseline data collected at the ers were selected by the banking partners based on, among beginning of the program. There were no industrywide other things, credit assessment and likelihood of success in statistics on energy efficiency finance in China or on the implementing projects. activities by the end users. Some industry reviews were car- ried out at the program appraisal stage; however, because Self-selection is another source of bias in assessing this of the changes in program design, these became irrelevant, program. Banks should be willing to participate, and they as these industries were no longer the main target of the are increasingly asked to contribute fees for the program's intervention. services. The EMCs that are joining the program's net- Selection bias work may have higher aspirations regarding their business Selection was an important feature of the program. growth than those that did not bother to apply in the first CHUEE did not operate in the basis of random allocation place. End users taking loans self selected to implement the of resources. Participant banks, EMCs, and end users were energy efficiency projects. As IFC approaches rely on mar- chosen by some screening and market tests. Therefore, this kets, clients' ability and willingness to pay is also a source of evaluation cannot rely on impact evaluation methodolo- self-selection bias. TABLE 3.1 Summary of Three Levels of Impact Evaluation Levels Treatment groups Comparison groups Data sources and methodology Financial institutions Program participant banks (IB, Nonparticipant banks with IFC portfolio records BOB) similar characteristics to Past IEG project evaluations participant banks (XPSR records, environment IB comparator: Joint stock bank and social field reviews for both with nationwide operations, participant banks and non- with similar asset size and client participant banks) base at the end of 2006--5 of 32 Literature reviews banks surveyed World Bank records BOB comparator: City com- Interviews mercial banks in major Chinese cities, with similar asset size Survey on energy efficiency and client base--3 of 32 banks finance among Chinese banks surveyed Subprojects: EMCs supported by the EMCs not supported by the World Bank project records Marketing channels focusing program--41 members of the program--59 non-CHUEE Interviews on EMCs CHUEE network members randomly selected Survey of EMCs, in collaboration from a population of with the national industry 179 members of the National association Association Subprojects: Cement companies that ob- Comparable companies that Interviews Industries focusing on cement tained loans from participant have not received loans from Survey of program's end users industry banks. participant banks--with NSP Survey of cement companies in Guaranteed loan targeted to cement production lines with collaboration with China companies with NSP cement production capacity of 2,500 Cement Association production line with production tons per day or more-- capacity of 2,500 tons per day or 38 companies randomly select- more--15 clients ed in three Chinese provinces Source: IEG. Note: BOB Bank of Beijing; CHUEE China Utility-Based Energy Efficiency Program; EMC energy management company; IB Industrial Bank; IEG = Independent Evaluation Group; IFC = International Finance Corporation; NSP new suspension precalcination; XPSR Expanded Project Supervision Report. CHUEE's Impacts | 25 Contamination requirements for strict impact evaluation based on quasi- Contamination can come from the intervention it- experimental design, but the evaluation made best efforts self, as a result of spillover effects, and from other to match the two groups and used supplemental informa- interventions similar to CHUEE. One of the objec- tion to derive the findings. tives of the program is to demonstrate its achievement, so that the spillover effects are part of the design. Moreover, Methodology and data for banks as indicated in appendix H, there are sizable outside IFC selected participant banks to match its strategic ob- interventions in climate change in China, and some of jectives. The original program design was centered around them are very similar to the program. The contamination the utility company, so IFC tried to find matching banks. IFC effects reduce the comparability of comparison groups as a also focused on existing banking clients. However, the pro- nontreatment scenario. gram and banks' interests had to be aligned, and one bank (Minsheng) decided not to participate because of changes Dealing with these limitations in its corporate strategy. Later, IFC approached BOB, and The evaluation tried to minimize the problems. The BOB was selected because of its high use of China National surveys collected data on interventions in the comparison Investment & Guarantee Co. guarantees of loans to EMCs. groups to identify sources and intensity of contamination. Furthermore, in the case of EMCs, the comparisons were The two participant banks, IB and BOB, had different done within those EMCs affected by the large-scale World characteristics in geographic coverage, client base, and Bank program, which started earlier than CHUEE. A small size (see appendix D for a summary). IB is a medium-size number of banks makes it impossible to use statistical ap- joint stock commercial bank with nationwide operations. proaches to estimate impacts at the level of the banks. At- Its main business is corporate banking, particularly indus- tempts were made to control selection bias by trying to trial clients. BOB is a smaller, city-level joint stock com- match observables between the treatment and comparison mercial bank established through the consolidation of the group as much as possible. In particular, propensity score 90 urban credit cooperatives in the Beijing municipality. matching methods (by estimating a statistical model of the BOB is expanding beyond Beijing, but its main client base probability of participating using a regression mode with is in the Beijing capital area. Its main clients are local cor- participation as the zero-one dependent variables, and a porations, supplemented by retail companies. set of observable characteristics, which must be unaffected Eight banks altogether were identified as comparators by the intervention, as the explanatory variables) are used for the participant banks, selected from 32 surveyed where applicable. For EMCs and cement companies, a banks by taking into account such factors as ownership/ lack of baseline data made the model less robust. Because governance structure, geographical coverage, bank type, of the data limitation, this evaluation may not meet many size as measured by total assets, and target market/client base. In general, IB is compared against the other major, national joint stock commercial banks with a client base of industrial firms. BOB is compared against other city com- mercial banks in major urban centers. No baseline data for Photo by Curt Carnemark, courtesy of the World Bank Photo Library. the banks were collected at the beginning of the program (2006), but the survey of banks helped gather historical performance records of both treatment and comparison group banks. The impacts of the program on banks are mainly re- flected in three dimensions: growth and quality of the energy efficiency loan portfolio; improved capacity of participating banks to finance energy efficiency projects commercially, as manifested by the transfer of know-how on innovative financing methods; and the demonstra- tion effects of the program on nonparticipating banks. The first two dimensions are examined by comparing the behavioral and performance changes in IB and BOB with corresponding changes in China's banking industry as a whole and with the comparison banks. The third dimen- sion is examined through analysis of comparison banks and the banking industry as a whole. 26 | Energy Efficiency Finance Data are gathered by review of project files; interviews with with technical assistance, if any. The response rate was program team members, IFC investment management and 86 percent. An important consideration is the effect of staff, and clients banks; investment project data for IFC in- other interventions, especially by the World Bank's Second vestee client banks in China that are not in the program; Energy Conservation Program (ECP II), which has been interviews with the China Banking Regulatory Commis- providing technical assistance and a loan guarantee program sion (CBRC) and other financial market actors in China; via the China National Investment & Guarantee Co., Ltd., the and interviews with non-IFC client banks in China. A key implementation agency. The data from the World Bank help source of information is the survey of financial institutions isolate the effects of this and other similar programs. conducted in collaboration with CBRC (see table 3.1; see also appendixes C­F) for the purpose of this evaluation. Methodology and data for end users: Cement The survey covered 32 banks, which collectively represent Because of changes in program design, the baseline stud- about 80 percent of China's banking sector assets. ies conducted before the actual implementation of the program were not relevant for this evaluation. The baseline Methodology and data for EMCs market studies were done for gas utility customers, which are The evaluation focuses on EMCs' access to financing. Be- different from the bulk of current end users such as steel, cause no baseline data were collected by the program, the cement, chemicals, and coking companies. This evaluation impact evaluation methodology is restricted to postimple- focuses on the cement industry. This industry has been one mentation project and comparison groups. of the most inefficient in China in terms of their energy use. CHUEE established an EMC network, and members According to the Beijing Energy Efficiency Center, China's were accepted following a simple application process. As cement industry produces 40 percent of the world's cement of March 2009, the network had 135 members. output and uses nearly 40 percent more energy per ton than comparable facilities in industrialized countries.1 Membership in the network is obtained after application and a simple screening by CHUEE. Originally, the pro- Cement is one of the priority sectors targeted by the govern- gram team considered establishing a list of "qualified" ment for energy efficiency measures. Since 2006, the govern- companies but found it risky to imply any assurance from ment has treated the cement industry as a "high-pollution, the program. Therefore, the program decided to subject high energy consumption" sector. The government policy applicants to "reputation checks," based on information emphasizes three areas: (i) closing down or phasing out provided by the applicants. The application consists of ba- small, inefficient, and polluting facilities; (ii) supporting sic information about the company, such as name, type of consolidation of the sector through ergers and acquisitions; business, type of products, previous achievements (past and (iii) regulatory and financial support for large cement projects), and financial figures (such as capital, total and companies' investment in energy efficiency projects, espe- net assets, and annual sales). The program conducts a cially projects that address waste heat recovery for power quick investigation, looking for reputational risks. Only a generation, one of the government's top priority energy small number of applicants have been rejected so far. The efficiency technologies. process is similar to the one used by the Energy Manage- The cement sector had a detailed marketing study at ment Company Association (EMCA)--the Chinese na- the beginning of the program (IFC 2007), which can be tional association of EMCs. treated as baseline information. The market study identi- The comparison group comprised EMCs from the EMCA fied the specific target for intervention: energy efficiency membership. The 135 companies in the network contain projects involved with recovery of waste heat from a new foreign-based ESCOs or Hong Kong, China-based opera- suspension precalcination (NSP) cement production line. tions in mainland China. IEG paid particular attention to The study also specified companies with production ca- the companies based in China that are not part of larger pacity of 2,500 ton per day or more per production line as industrial groups or that do not benefit from other forms prime targets for intervention. Target capacity is the equiv- of external support that could affect their access to finance. alent of at least 900,000 tons per year. In contrast, the aver- age of the total cement production capacities for all cement To establish a comparison group, IEG reviewed current companies in China is about 400 tons a year. EMCA member companies. Of EMCA's 220 core members, 41 also belong to the CHUEE network. The IEG evaluation This industry is the third largest recipient of CHUEE's team then randomly sampled the remaining 179 compa- guaranteed loans. A total of 18 cement companies nies to select 59 as a comparison group. They conducted have benefitted from loans guaranteed by the program. a survey with 100 companies (the 41 network members Twenty-four projects with an aggregate cost of $184.8 mil- and the 59 nonnetwork members), asking for company lion were financed with $88 million in loans. These com- profiles, access to finance, and descriptions of experiences panies are relatively large. Eight of the 12 national large CHUEE's Impacts | 27 TABLE 3.2 Amounts of IB Loans Made to Energy period the average growth rate of energy efficiency loans Efficiency Projects (billion yuan) by the six comparator banks was 139.9 percent (table 3.2). 2007 2008 Growth rate (%) Similarly, IB achieved stronger growth in expanding loans to new clients than comparator banks did. From 2007 to IB 0.64 2.45 284.6 2008, the number of IB client companies under the pro- Comparison banks' 2.54 5.22 139.9 average gram soared; IB added 43 companies, a 172 percent in- Source: IEG/CBRC survey on energy efficiency finance in China. crease over 2007. Note: These two years are selected because they are the only ones In contrast, comparator banks on average saw an increase in which a relatively large number of banks each had data, to ensure data comparability. of merely one client company, or a 4 percent increase over 2007 (table 3.3). It is also noteworthy that in just two years, IB's client base for energy efficiency loans, starting from zero, became the largest among all comparator banks. TABLE 3.3 Number of Client Companies for IB Indeed, IB now has clients for its energy efficiency loans Energy Efficiency Loans across 14 of the country's 32 provinces, encompassing Growth Growth all major regions of the country. Regarding the composi- 2007 2008 in 2008 rate (%) tion of IB's energy efficiency finance, the main differences IB 25 46 21 84 with comparator banks are the higher shares of new cli- Comparison banks' 35 40 5 14 ents and smaller companies. Both features can be linked average with CHUEE's interventions--guarantees and technical Source: IEG/CBRC survey on energy efficiency finance in China. assistance--which were designed to alleviate the risks as- Note: These two years are selected because they are the only ones sociated with new and smaller clients. in which a relatively large number of banks each had data, to ensure data comparability. The growth rate of IB's energy efficiency finance compares well with industry norms when taking into account initial conditions such as level of commit- cement companies or their affiliates have projects with the ment to energy efficiency and preprogram levels of program, and of the top 50 cement companies in China, the energy efficiency finance. IB has grown faster than program serves 18. CHUEE's lending in the cement sector comparator banks that have a similar level of commit- has been following the target identified by the sector study: ment to financing energy efficiency, as evidenced by the projects recover waste heat from an NSP cement pro- participation in other energy efficiency programs prior duction line with the production capacity of 2,500 ton per to CHUEE. The bank has grown its energy efficiency day or more per production line. finance practice from a lower initial level than com- parators. All energy efficiency programs supported by The comparison group was randomly selected from ce- the public sector are predicated on the assumption that ment companies that meet the program's target criteria initial growth is difficult and slow--hence, their focus on technology and production capacity, including com- on jump-starting the line of business. The market for panies located in provinces in which lending from the pro- energy efficiency finance in China has grown rapidly gram was not active. The data gathering was done through but is still in an early stage of development (Taylor and interviews of selected firms, as well as through a wider sur- others 2008). vey of firms identified as comparators for the companies that received loans supported by the program. IEG collabo- BOB has been a significant player in energy efficien- rated with the China Cement Association to conduct the cy among its peers but has not grown in the program survey. yet. It is important to note that, unlike IB, which has no energy efficiency activities outside the program, BOB is the largest user of the guarantee program for loans to Comparisons between Program Beneficiaries energy management companies under the World Bank's and Nonbeneficiaries ECP II. Since the program's start in 2004, BOB has given The program allowed IB to grow faster than the compar- 81 loans, totaling about 320 million yuan. This is 64 per- ator banks, but other banks provided more loans on aver- cent of total loan guarantees provided under the ECP II age. Although starting from a relatively low level, loans that program and bigger than the IFC program (117 million IB made to energy efficiency projects saw a 284.6 percent yuan so far). BOB experienced lower growth in energy growth from 2007 to 2008. In comparison, during the same efficiency loans than its comparator banks (table 3.4). 28 | Energy Efficiency Finance TABLE 3.4 Amounts of BOB Loans Made FIGURE 3.1 Total Energy Efficiency Loans to Energy Efficiency Projects (billion yuan) (billion yuan) 100 Growth Growth 90 2007 2008 in 2008 rate (%) 80 Yuan (billions) 70 BOB 2.1 2.5 0.4 19 60 Comparison 1.9 2.5 0.6 30 50 banks' average 40 30 Source: IEG/CBRC survey on energy efficiency finance in China. 20 10 0 2004 2005 2006 2007 2008 It provided a total of 2.5 billion yuan loans in 2008, Year State owned and policy Joint stock, CCB and others which is the same as the comparator banks' average (although there are some issues on the strict compara- Source: IEG/CBRC survey on energy efficiency finance in China. bility of data). The CHUEE loans are therefore only a fraction of BOB's them claimed that they started this type of lending more energy efficiency lending (table 3.5). This indicates that than five years before (appendix D). However, it is impor- it is difficult to attribute BOB's overall performance to the tant to note that there is a potential source of bias: these IFC program, except in the areas that are unique to the pro- energy efficiency projects that claimed to have support gram's approach. from nontreatment banks include some more general- The participating banks are not unique in terms of pro- purpose, large capacity expansion investments.2 More- viding energy efficiency loans: there was significant over, the data on energy efficiency lending are from 2007, growth in China's energy efficiency finance outside of when China's banking regulator was instructed to gather the program. China's energy efficiency finance market such information. The earlier data have underreported leaped in 2007. As indicated in figure 3.1, as of 2008, total energy efficiency lending. energy efficiency loans accounted for about 90 billion yuan Chinese energy management companies are also rap- ($13 billion). This is almost a fourfold growth from 2006 idly growing, especially since 2007. The number of these (figure 3.2). companies grew exponentially in the last five years, and the The key driver of the expansion of energy efficiency lend- membership in the national association reached 317, com- ing was the public sector banks. Their lending in energy ef- pared to just 59 in 2003 (figure 3.3). The total investments ficiency projects more than doubled, and their client bases in projects with energy performance contracts in China almost quintupled over the period. Public sector banks grew more than threefold in 2007, and in 2008 the total was were responsible for more than half of energy efficiency at least $1.46 billion (figure 3.4), yielding about 66 million loans by volume, serving more than two-thirds of energy tons of energy savings over the lifetime of the projects and efficiency clients. a reduction of about 47 million tons of CO2 emissions. In- tensified implementation of the 11th Five-Year Plan target Some comparable banks have been active in energy effi- helped this sharp increase of EMCs in China. ciency activities, and participants' scale of operation does not stand out. As shown in the table 3.6, for both IB and BOB, comparable banks with energy efficiency operations, TABLE 3.5 Number of Client Companies on average, had bigger weights of energy efficiency finance for BOB Energy Efficiency Loans within their new lending. Growth Growth 2007 2008 in 2008 rate (%) The loans guaranteed by the program were small com- BOB 33 38 5 15 pared with total energy efficiency loans in China. The Comparison 55 66 11 20 program's 3.5 billion yuan in loans supported by the guar- banks average antee were about 2 percent of the total energy efficiency Source: IEG/CBRC survey on energy efficiency finance in China. loans by yuan. Outside the participating banks, most of Note: These two years are selected because they are the only ones the 24 nontreatment banks that answered the survey said in which a relatively large number of banks each had data, to ensure they had started lending to projects whose primary objec- data comparability. tives were to achieve energy efficiency savings. Many of CHUEE's Impacts | 29 FIGURE 3.2 Number of Companies that Have FIGURE 3.3 Number of EMCA Members in China Received Energy Efficiency Loans 2,500 350 Number of client companies 300 2,000 Number of EMCs 250 1,500 200 1,000 150 500 100 50 0 2004 2005 2006 2007 2008 0 Year 2003 2004 2005 2006 2007 2008 State owned and policy Joint stock, CCB and others Year Source: IEG/CBRC survey on energy efficiency finance in China. Sources: China Energy Management Company Association, National Development and Reform Commission, and World Bank. Note: EMC = energy management company; EMCA energy man- agement company association. TABLE 3.6 Share of New Energy Efficiency Loans within Total New Loans among Banks with Energy Efficiency Lending (percent) 2005 2006 2007 2008 FIGURE 3.4 Total EPC Investment IB 0 0 1 2 1,600 Comparison 2 6 4 5 1,400 banks' average (8) 1,200 BOB 0 0 2 2 1,000 $ millions Comparison 3 9 5 4 banks' average (3) 800 Source: IEG/CBRC survey on energy efficiency finance in China. 600 400 200 End energy users have developed an interest in en- ergy efficiency investments, and many energy 0 efficiency projects are being implemented outside 2004 2005 2006 2007 2008 Year the program. Among the companies that have received Sources: China Energy Management Company Association, National loans guaranteed by CHUEE, more than half (59 percent) Development and Reform Commission, and World Bank. responded that they have implemented or were consider- Note: EPC energy performance contract. ing energy efficiency projects other than those financed by the program. Nearly a quarter of users indicated that they would implement the same project even if they did not re- most of them have enough technical capability to imple- ceive the loans guaranteed by the program (table 3.7). The ment them, or can obtain adequate help from parties such majority of them would have had projects with limited as industry associations and government agencies. Some scope or longer implementation times. However, 9 percent companies responded that the waste heat recovery tech- of end users did not invest in an energy efficiency project nology was mature and there was enough information if they did not receive a loan supported by the program. available, including examples from other countries. More- These companies were relatively smaller in asset size, and over, as suggested by the high incidence of self-financing their project sizes were also relatively small compared with projects, these companies are willing to spend money for the majority of the end users. these projects. There is a considerable uptake on energy efficiency in- Other than waste heat recovery, which all companies had vestments within the cement industry. All companies been involved in, 68 percent were investing in energy con- surveyed indicated that they had either invested or were servation refit of a motor-driven system, 42 percent were planning to invest in a waste heat recovery system on at investing in the application of high-efficiency grinding least one production line. The cement companies are fully equipment and technologies, and 10 percent were renovat- aware of the benefits of energy efficiency projects, and ing old NSP production lines. These projects were financed 30 | Energy Efficiency Finance TABLE 3.7 Most Companies Would Invest in TABLE 3.8 Implementation Status of Waste Heat Energy Efficiency Irrespective Recovery Projects of CHUEE Loans Cement companies If you have not received a loan supported by the program, would Cement companies that have not you still undertake the energy efficiency project? that received loans received loans guaranteed by the guaranteed by the All companies Cement companies Status program (%) program (%) (n 34) (%) (n 11) (%) Investing in waste 100 100 Yes, for identical 24 9 heat recovery scope as the loan projects supported by the program Completed 93 63 Yes, but limited 68 81 Under 7 16 scope and/or longer implementation time Preparation/ 0 21 No 9 9 planning Source: IEG survey of CHUEE end users. Sources: IEG survey of CHUEE end users (second column) and IEG surveys of Chinese cement companies (final column). Note: Cement companies' response (n 11) is from survey sent to all 16 cement companies (15 returned). Of those, 11 companies responded to this question. TABLE 3.9 Small Companies' Projects and Loans by the company's own resources, bank loans, and--some- Company size by total assets among cement Company- Company- times--government subsidies. About 30 percent of waste companies not receiv- completed waste obtained loans for heat recovery projects were fully funded by companies' ing loans guaranteed heat recovery energy efficiency internal resources (see table 3.8), and 55 percent of proj- by the program projects (%) projects (%) ects involved loan financing. Only 7 percent of projects Small 45 36 obtained some government subsidies. With regard to bank Medium 58 50 loans, 63 percent of the companies applied for a loan, and Large 86 64 83 percent of them were successful. Thus, about 50 percent Average 63 53 of the companies actually obtained loans for energy effi- Source: IEG surveys of Chinese cement companies. ciency projects. Small cement companies outside the program had lower implementation of energy efficiency projects and less ac- conservation. One of the measures included direct loans cess to financing for the projects. Although many compa- from state-owned banks to large state-owned enterprises nies outside of the program have been investing in energy for energy efficiency investments. Furthermore, the gov- efficiency projects, most of the realized investments were ernment banned loans to steel and cement industries unless from relatively larger companies. Nearly all large cement the loans were for energy efficiency or pollution reduction. companies (86 percent) have already completed the waste It also introduced a measure to retire old and inefficient heat recovery projects, but less than half of small compa- plants in many heavy industries. Because of these actions, nies had completed such investments (table 3.9). Such gaps lending to energy efficiency projects by public sector banks among small companies are also evident in access to bank soared in 2007, particularly the policy banks. loans. A majority of the large companies obtained loans for Private sector banks followed the trend. Awareness among energy efficiency projects, whereas only about one-third of the Chinese financial sector regarding renewable energy and small companies obtained loans for their projects. energy efficiency projects increased substantially after the publication of the 11th Five-Year Plan (China, Government Government Policy and Energy Efficiency of, 2006). Significant government interventions created an Investments environment where many market actors found opportuni- The government has been active in promoting energy ties and incentives to invest in energy efficiency projects. efficiency in China. The Chinese government now recog- According to the IEG survey of Chinese banks, the top two nizes its energy use as a risk to the country's sustained eco- drivers for banks to engage in energy efficiency lending nomic growth, and it has committed to conserve its energy were government policies and market opportunities. About and gas emissions, especially through the enactment of the 95 percent of banks that had started energy efficiency lend- 11th Five-Year Plan and Renewable Energy Law. This was ing (21 of 22) cited that enhanced government policies accompanied by a large-scale public campaign on energy were an important reason they decided to make energy CHUEE's Impacts | 31 TABLE 3.10 Factors Influencing Decisions on their decision to implement energy efficiency projects (ta- Energy Efficiency Investment (part I) ble 3.10). There are no significant differences between the Why have you decided to invest in an energy efficiency project? companies reached by the program and those that were not. (Check all applicable answers) Cement companies that did not receive Unique Contributions of the Program Cement loans guaranteed by Although the program is a small and relatively new ac- companies that the program but received loans actually implemented tor, it has already left several unique marks in China's guaranteed by energy efficiency energy efficiency field: (i) establishing an institutional the program (%) projects (%) set-up for energy efficiency lending in participating banks; Government 87 80 (ii) introducing new lending products to Chinese banks regulation on that are different from conventional lending based on cor- emission reduction porate assets; and (iii) facilitating access to financing for Price of energy 80 77 too high key market players--ESCOs--through technical assistance Energy cost savings 100 100 for building their capacity and by brokering relationships with banks. Competitive pressure 87 93 to reduce cost Institutional set-up for energy efficiency Source: IEG survey of Chinese cement companies. lending The program helped the partner banks set up institu- tional arrangements for energy efficiency lending. There is a strong commitment to financing energy efficiency in efficiency loans, and 91 percent of the banks (20 of 22) both banks, and they market themselves as "green banks," said market opportunities for energy efficiency lending partly based on their experiences with the program. IB were an important reason. Financial incentives provided by established a dedicated department for energy efficiency the government were third in the ranking of reasons, cited lending in 2008 and prepared special procedures and as an important factor by about 59 percent of the banks. guidelines for processing such loans. BOB has not yet cre- Support from international organizations was rated as im- ated a dedicated unit, but it has dedicated staff for energy portant by 32 percent of the banks and ranks fourth. efficiency operations and has prepared guidelines and pro- The cement industry has been one of the key sectors in cedures for energy efficiency lending. IB stated in its 2008 which the government has addressed energy efficiency annual report that it would use its own resources to make measures. In early 2006, the government set a goal of re- 10 billion yuan in new loans on energy conservation and ducing energy consumption per ton of cement output by effluent reduction in the next three years, starting in 2009.3 25 percent and increasing the share of NSP production lines Furthermore, IB is one of the first Chinese banks to adhere with waste heat recovery to 40 percent by 2010. This goal to various international sustainability finance standards; it has been integrated into the annual "must-meet" target on is the first Chinese bank to adopt the Equator Principle.4 environmental protection performance of local government Such institutional capacity is rare among nonpartici- officials and executives of key large companies. The gov- pating banks. Only one comparator bank had a dedicated ernment also set financial incentives by providing subsidies department for energy efficiency lending. Another had no to any project conserving the equivalent of the energy of dedicated unit but dedicated professionals working on en- 10,000+ standard grade coals, which is equivalent to about ergy efficiency lending, because of its direct cooperation 15­20 percent of a project's capital cost. Similar incentive with international aid agencies (table 3.11). However, the funds were established or were being formed at the provincial latter bank has not yet provided stand-alone energy effi- and city levels, with subsidies accounting for 10­30 percent ciency loans. of project costs. Also, a state bond of 5.4 billion yuan was issued; its proceeds were used to provide loans to energy Some state-owned banks have dedicated professionals or efficiency projects at subsidized interest rates. both dedicated professionals and special guidelines for en- ergy efficiency lending, but they do not provide stand-alone These intensive government actions uniformly influ- energy efficiency loans, let alone project finance-based en- enced the cement industry to invest in energy efficiency. ergy efficiency loans, according to the survey answers. In More than 80 percent of the cement companies that had in- terms of spreading energy efficiency activities outside bank vested in energy efficiency projects responded that the im- headquarters and delegating authority to branches, IB has portance of competitive pressure, government regulations, been ahead of its comparison banks. It is providing energy and energy costs and savings are the important factors in efficiency loans in both headquarters and branches. In con- 32 | Energy Efficiency Finance trast, all but one comparator bank process energy efficiency TABLE 3.11 Institutional Set-Up of Energy loans in headquarters only. Efficiency Lending Loan products more suitable for energy Special efficiency investment procedures or guidelines for Chinese bank lending is mainly based on collateral as- No dedicated processing sets. The Chinese banking practice of making credit deci- unit but energy sions based on collateral assets of the company or project Dedicated dedicated efficiency unit professionals loans sponsor is one of the biggest constraints to finance for IB Yes NA No many companies, especially SMEs.5 A World Bank report a revealed that in China, about 69 percent of small compa- IB comparables 1/6 1/6 1/6 nies that had been rejected for a loan stated it was because BOB No Yes Yes they lacked acceptable collateral, and nearly a quarter of BOB comparables No No No SMEs did not apply for a loan because of the strict require- Policy and state 2/7b 2/7c 2/7b ments on collateral (World Bank 2008b). banks Other commercial 0/10 4/10d 2/10d banks The program's unique contribution is in the promo- Source: IEG/CBRC survey on energy efficiency finance in China. tion of lending that relies more on project cash flow and Note: Denominator indicates total number of banks. NA not project assets than on corporate assets. As one of its core applicable. interventions, the program helped participating banks as- a. The corresponding banks had direct cooperation with a bilateral sess credit risks and underwrite loans for energy efficiency and an international agency on energy efficiency financing. projects more on the basis of cash flow (energy cost sav- b. Same two policy banks. ings) and project assets (equipment) than the conventional c. One of the two banks is a policy bank that said in the survey it lending, based on the assets or creditworthiness of the didn't provide stand-alone energy efficiency loans. project sponsors.6 The program's guarantee and technical d. One bank with both dedicated professionals and special proce- assistance in such areas as engineering due diligence, risk dures for energy efficiency lending said in the survey it did not lend to projects, but to companies. assessment, loan structuring, and market research were to promote lending practices such as-- · Charging risk-weighted interest rates to cover additional risks pledges of account receivables. Only 4 of the 50 loans made by IB and one of the 9 loans by BOB under the first guarantee · Providing additional bank loss reserves facility involved partial use of fixed assets collateral; the loans · Establishing debt service reserves for individual loans were supplemented by additional personal guarantees and · Establishing more decentralized loan approval author- corporate guarantees. As many as 32 of the 50 IB loans and ity to enable branch offices to make expedient credit 4 of the BOB loans were based on mortgages on equipment decisions or apply innovative practices tailored to local being used in the project being financed. conditions The value of the mortgaged equipment is often significantly · Conducting engineering due diligence and technology lower than that of traditional corporate fixed assets collateral. assessment For example, the value of mortgaged equipment under loans · Introducing mortgages on project equipment as secu- by BOB has been as low as 56 percent and no more than 100 rity for loans7 percent of the loan amount. This is because BOB considers the coverage under the guarantee (40 percent) as alternative · Offering three- to five-year loan tenures to match proj- collateral and requires that its clients cover the balance. ect cash flows and amortize loan repayment in order to reduce repayment risk as well as loan interest cost.8 Project finance energy efficiency lending is scarce among banks that are not in the program. Except for some Participant banks adopted new lending practices loans made to EMCs based on World Bank­supported with lower collateral requirement. The two participat- guarantees and pledges of stable account receivables,9 all but ing banks, for example, stated that they had not had this one bank said explicitly that it had no project finance-based project finance-based lending practice before and had energy efficiency loans, though it provided financing to adopted it with help from CHUEE. Before CHUEE, a de- energy efficiency indirectly through a corporate financing partment in BOB made loans to ESCOs based on World approach. In particular, banks found project finance-based Bank­supported guarantees, but those loans were not lending difficult to handle because of the technical com- project finance based, though some of them were based on plexities. One bank had some standalone energy efficiency CHUEE's Impacts | 33 TABLE 3.12 Factors Influencing Decisions on CHUEE loans to four other similar SMEs in the city dur- Energy Efficiency Investment (part II) ing a period of just several months (Shenzhen Commerce Why have you decided to invest in an energy efficiency project? Daily 2007). (Check all applicable answers) Regression analysis also indicated that availability of Cement companies that did not receive credit was a significant factor for cement companies that loans guaranteed received loans guaranteed by CHUEE. More than half of ce- by the program but ment companies that received loans guaranteed by CHUEE Cement companies actually indicated that the availability of credit was important. This that received loans implemented guaranteed by the energy efficiency was the case for only 17 percent of the companies not as- program (%) projects (%) sisted by the program. At 5 percent statistical significance, Assurance (guaran- 47 27 availability of credit was a significant factor for program tee) that the energy recipient cement companies in making a decision to invest efficiency will be realized (table 3.12).10 In contrast, there is no statistically signifi- cant difference between beneficiaries and nonbeneficiaries Availability 53 17 of credita in terms of size, age, and financial indicators, such as debt Availability of gov- 60 43 to assets ratios. ernment subsidies The loans guaranteed by CHUEE have longer ma- Age of the equip- 13 7 ment that had to turities. About 66 percent of the loans guaranteed by be replaced CHUEE mature in three or more years, with a maximum Source: IEG surveys of Chinese cement companies. of five years and a minimum of one. Overall average ma- a. Statistically significant difference between the two groups. turity is 3.7 years. This is in line with the energy efficien- cy projects' payoff periods, which range from two to four years. Larger loans tend to have longer maturity, partly reflecting the investment payoff periods (table 3.13). All loans, but it indicated that the results were less than suc- loans are amortizing loans and not bullet repayments at cessful and did not see significant potential for increasing the end, which is more common with Chinese commer- its energy efficiency lending. cial banks. This move away from corporate fixed asset collateral re- Access to technical assistance, including from the pro- quirements improved access to financing by companies gram, is linked to loans with longer maturity. Half of the with a weak capacity to provide collateral. For example, energy management companies received loans (from any two client cement companies visited by IEG, one in Jiangsu banks) with a tenure of less than a year. For those with ac- and another in Fujian, said that they would have to post- cess to loans, technical assistance (irrespective of sources) pone their investments in waste heat recovery (a very ef- lengthened the term of the loan beyond that. In particular, fective energy efficiency investment) without the program technical assistance from CHUEE or EMCA is associated loans because they used up their collateral capacity and with longer loan tenure. Eighty percent of the energy man- thus could not get loans from other sources. Another client agement companies that did not receive technical assistance cement company in Tianjin said that without the IB loan, it received short-term loans (less than a year), compared with would have to resort to short-term loans. However, short- 53 percent of technical assistance recipients (longer-term term loans are generally not a good choice for energy ef- loans with maturity of a year or more). About 80 percent of ficiency projects, which typically have a payback period of the program's technical assistance recipients and 72 percent more than three years. of EMCA technical assistance recipients had longer-term loans. An SME located in Shenzhen City of Guangdong Prov- ince, which borrowed 10 million yuan from IB under the Role of guarantees program in 2007, said that it had wanted to carry out the The guarantee was actually an appropriate instrument same energy efficiency project about five years before but in the context of the Chinese banking industry. The Chi- couldn't get a loan because it had a limited capacity to pro- nese banking sector has abundant liquidity, and sources of vide collateral. The loan allowed the SME to achieve a cost funding are hardly any incentive for new types of lending savings of 5 million yuan a year from reduced consump- activities such as energy efficiency. In contrast, guarantees tion of oil, electricity, and water. In total, IB provided by third parties are widely used among banks and are usu- 34 | Energy Efficiency Finance ally considered one of the risk mitigants in the credit review TABLE 3.13 Average Maturity of the Loan with process. In fact, guarantees were counted as a substitute for CHUEE Guarantee, by Loan Size the borrower's collateral requirements. Loan size Average maturity of the loan (years) Guarantees helped promote the energy efficiency line of Small 2.37 business within the banks. Both IB and BOB had strong Medium 2.76 top management commitment toward sustainable green Large 4.03 businesses. However, such commitment does not always Very large 4.06 guarantee operational performance. As each loan officer Source: IEG, based on CHUEE data. and operating branch faces volume and profit targets, there Note: Loan size categories were based on the appraisal report is a strong disincentive to trying new, untested operations. (World Bank 2006b; actual figures are from CHUEE project files). In fact, interviews with banks revealed that bank staff also Small: 0.5­2 million yuan (average :1.43 million yuan $0.2 million); medium: 2.1­9.0 million yuan (average: 5.35 million yuan encounter internal resistance to new business. The guarantee $0.8 million); large: 9.1­19 million yuan (average: 14.5 million enabled banks to build up the portfolio very quickly, which yuan $2.1 million); very large: 19.1 million­40 million yuan (aver- age: 27.49 million yuan $4 million). made the energy efficiency lending team more visible. Their large volume and no-default performance helped the busi- ness be recognized as an important part of normal banking operations. Nevertheless, both banks indicated that there was a strong need to promote the business within the bank, with more training to loan officers and credit/decision in doing energy efficiency lending using this type of frame- makers. work (appendix D). In contrast, BOB-comparable banks knew the program as CHUEE's demonstration effects well but not in depth, and their interests in the program's on other banks energy efficiency lending methods were not as strong. All The program experience is fairly well known among banks except one were interested in the program's guaran- China's financial institutions. A total of 70 percent of sur- tee or considered it important. All IB comparator banks un- veyed banks said they were aware of IFC's support to IB and equivocally expressed willingness to accept the program's BOB. And 100 percent of IB and BOB's comparison banks fee-based technical assistance, whereas BOB comparators knew the program. This was because IFC held several pro- were lukewarm. Two IB comparator banks also had a soon- motions of the program, including a national workshop or- to-be implemented plan on establishing a dedicated energy ganized by the CBRC to promote IB's experience and the efficiency lending unit, and a third one had an International innovative lending methods under the program, with all Bank for Reconstruction and Development project under major banks participating. implementation. Another major indicator of the demonstration effects is The World Bank is about to implement the new program that three additional banks expressed interest in joining the (ECP III), which features a partial loss guarantee to energy program, and the fact of Shanghai Pudong Development efficiency lending by commercial banks. The Asian Devel- Bank's continued commitment to the second guarantee fa- opment Bank is also preparing similar guarantee programs cility even after suspension of the legal agreement for the (see appendix H for major energy efficiency and emission program. However, demonstration is not a major factor for reduction programs). other banks to engage in the energy efficiency business; the survey answers did not put a heavy weight on observation Access to financing for EMCs of other banks engaging in the energy efficiency business.11 CHUEE improved access to financing among the EMCs. Government policy and recognition of business opportuni- The evaluation created matched samples between program ties are more important.12 network participants and nonparticipants based on a pro- Many banks were interested in energy efficiency lend- pensity scoring method in order to minimize the selection ing, but commitments vary among them. There were sig- bias (see appendix E for detail). Based on this data, more nificant differences among the levels of interest of different than half (52 percent) of the EMC network members ap- types of banks and among their attitudes toward different plied for a loan, compared with only one-third of nonmem- program instruments, such as loan guarantees and tech- bers. Moreover, members were more successful in getting nical assistance. The survey shows that all IB comparison loans; 91 percent of applicants obtained a loan, compared banks knew the program well and were clearly interested with just half of nonmembers. Overall, nearly half of CHUEE's Impacts | 35 TABLE 3.14 Access to Financing among EMCs riods (table 3.16). Those EMCs that obtained financing had a higher growth rate than average. The CHUEE network Program's Not member network of the members had a much higher growth rate than average, far members program (%) Overall (%) higher than the comparison group. (%) (n 21) (n 29) (n 50) Applied to loan 52 31 40 Quantifying Overall Impacts Of which, 91 56 75 obtained a loan and the Program's Efficiency Overall access to 48 17 30 The overall impact of the program consists of the GHG re- finance duction and the net private benefits generated by projects Source: IEG/EMCA survey data. that would not have happened without the program, plus Note: Matched sample based on propensity scoring method. nonquantifiable benefits related to demonstration and EMC energy management company. spillover effects. The latter appear to be emerging--accord- ing to survey results the program is well known in China, and there is interest among banks to learn from its approaches members received a loan, compared with just 17 percent of to the end users--but are hard to estimate. The quantifi- nonmembers (table 3.14). able impacts are conservatively estimated at $384 million for 10 years since program's inception, based on the 9 per- Being a network member will increase the chance of cent of the projects' gross dollar value of annual emission receiving loans. A test of probability of access to finance reductions (by emission trade market price) and energy was conducted, with EMC characteristics as independent savings (by international coal price). It is likely that they are variables (asset size, number of employees, years of es- underestimated--more than 68 percent of borrowers indi- tablishment); other variables included receiving techni- cated that without the program they would still have imple- cal assistance from any source, experience in arranging or mented their energy efficiency projects but on a smaller marketing loans, and being part of an IFC network.13 The scale or over a longer time frame (table 3.7). The critical results showed that the whole model is statistically signifi- factors that affect the magnitude of the benefits are the pro- cant (likelihood ratio Chi square 25.17 [p 0.0]), as shown gram's additionality at the bank level, banks' additionality in table 3.15. for end users, the size of average CO2 emission reduction Two variables are significant in explaining the probability per project, and the prices of CO2 and coal (for the energy of receiving finance at 5 percent: belonging to the network saving calculations). and receiving technical assistance. The results show that The costs expended to derive the benefits consist of network membership and receiving technical assistance (i) project investments costs; (ii) the costs of running the both influence EMCs' access to financing. Arranging or program, including the costs of the technical assistance that marketing loans to clients is not related to the EMCs' ac- was provided, minus payments made to IFC in the form cess to financing. A probit analysis also indicates a rela- of guarantee and other fees; and (iii) the subsidy embed- tionship between the asset size of the companies and their ded in the first loss cover by GEF, which underpinned the possibility of getting a loan, as the larger the asset size guarantee facility. Of these costs, only the valuation of the of the company, the more likely it was to get a loan. The first loss cover presents methodological difficulties. Given chance of getting a loan was enhanced by 31 percent with the lack of actuarial data, and in the absence of a market network membership and by 27 percent with receipt of in similar guarantee or insurance products, these estimates technical assistance. It is also important to indicate that are based on the expected default rate at the inception of members that were successful in getting bank loans have the program. This represents an estimate of the willing- a relatively smaller asset size than nonmember companies ness to pay for the protection given by GEF. The base case (average assets 130 million yuan for treatment, 160 mil- default rate was expected to be 4 percent and the GEF lion yuan for comparison). grants were used to cover these potential losses. This GEF The members on average grew faster than nonmembers. first loss cover catalyzed the IFC guarantees and supported Based on the matched samples by propensity scores, the av- the energy efficiency lending by partner banks. The pro- erage asset (measured by average assets) treatment group gram would collect about $1.3 million in guarantee fees grew by 20 percent and 25 percent in 2007 and 2008, re- under the existing agreements. The costs of running the spectively. This can be compared with the comparison program so far were $4.6 million, including $3 million in group, which grew 16 percent and 7 percent in the same pe- technical assistance. 36 | Energy Efficiency Finance TABLE 3.15 Probit Analysis on Access to Finance among EMCs Coefficient Z score Year company established 0.0463877 0.65 (0.513) Company's assets (in yuan) 0.0002626 1.57 (0.11) Number of employees ­0.0045136 0.55 (0.585) a Receiving technical assistance 1.001503 2.01 (0.045) Participating CHUEE networkb 0.9355355 1.94 (0.053) Arranging or marketing loans to clients ­0.1424357 ­0.27 (0.790) Probabilities in gaining access to financing Yes (If yes in parameters, prob- No (If no in parameters, ability of gaining access to probability of gaining access to financing) (%) financing) (%) Differences (%) Receiving technical assistance 36 9 27 Participating CHUEE network 40 9 31 Source: IEG/EMCA survey data. Note: Samples based on propensity score matching (n 50). EMC energy management company. a. Statistical significance 5%. b. Statistical significance 10%. The real rate of return of the program so far is estimated TABLE 3.16 Average Asset Growth Rate (%) at 38 percent. This is based on an assumption that 9 per- 2006­07 2007­08 cent of projects gain additional impact from the program. Program's 20 25 The cost benefit analysis takes 9 percent of total benefits network EMCs Matching samples, (n 21) in energy savings and emission reductions, correspond- with program and ing project costs as well as entire program cost, including without program Nonnetwork 16 7 companies costs of technical assistance. This is a high rate given the (n 29) seemingly modest rate of additionality at the level of the EMCs with loans 17 18 end users. (n 36) All samples, sepa- The result is indicative of the win-win nature of energy ef- rated by access to Companies 12 10 bank financing without loans ficiency investments, which can generate both significant (n 62) social and private benefits. Even small additionality can All (n 98) 14 13 be sufficient to justify the subsidies involved. The upper- Source: IEG/EMCA survey data. bound rate of return of the program gained by taking Note: EMC energy management company. 76 percent of the program's outcomes (that is, excluding the clear cases of projects that would take place without the program) is 45 percent. Social benefits exceed benefits to private organizations by a omit various operating costs and maintenance capital ex- wide margin: the private benefits in the form of energy sav- penditures. Actual private financial return would be lower ings from this program are 20 percent, based on total proj- than the 20 percent private return from energy savings. ect costs and energy savings measured by the international price of coal (but not reflecting emission reductions). How- The return is especially sensitive to assumptions about ever, this private benefit is extremely sensitive to the energy the prices of coal and carbon emissions. The quoted price price. This private return can be compared to other energy of carbon in the emission trading market is also volatile. savings estimates. An average internal rate of return of en- For example, the price of emission traded in the European ergy efficiency project is an estimated 17 percent (Farrell futures market fluctuated between 26.29 and 8.2 euro per and Remes 2009). This evaluation's estimates do not take CO2 ton in just 7 months (proxies were used in the cal- into consideration the actual cash-flow benefits, and they culation, as the domestic emission market is not yet fully CHUEE's Impacts | 37 developed in China). Moreover, the model assumed GEF Sustainability of the banks' energy efficiency grants supported guarantees as expensed--the no-defaults operations under the guarantee program would reduce the ex post cost There are some areas of concern regarding the sustainabil- of running the program and thus reduce costs and improve ity of energy efficiency lending activities after completion rates of return. of the program. First, the capacity to appraise technical aspects of energy efficiency has not yet been fully devel- Issues and Challenges oped in partner banks. The partner banks expressed that they still need the program's support to continue and ex- The program is narrowly based on one dominant bank. pand their operations, particularly in the technical review Ninety-eight percent of the loans covered by the program's of project proposals, which is undertaken by consultants. guarantee were from IB (figure 3.5). The size of the loan as This was the most valued part of the technical assistance well was influenced by the fact that IB's client base is larger from the program, but it was unintentional and against the industrial companies. In stark contrast with IB, BOB was spirit of the capacity building efforts of the program. slow in growing its energy efficiency loan portfolio under the program. As of August 2009, BOB had provided nine IFC was supposed to conduct technical reviews of the first loans to six companies, with a total loan amount of 117 mil- five projects and intended to hand over the responsibility lion yuan, financing about 3 billion yuan projects (against to the client bank. But this did not take place, as IB re- the target of 200 million by November 2009). quested continuous reviews by the program team, and the legal agreement was not clear about the arrangement. Sub- BOB's low utilization of the program was due to a limited sequently, the program performed technical reviews of all client base and few branches outside Beijing, where most projects in the program until August 2009, when the bank of its potential energy efficiency loan clients were located. strengthened its internal technical capacity by establishing BOB targeted industrial companies as end users, espe- a Sustainable Finance Center specialized in managing en- cially in the high-pollution, high energy consumption ergy efficiency business and started reviewing some of the industries such as cement, steel, coking, and chemical. projects independently. This turned out to be difficult. Most of the potential client companies had relocated out of Beijing and its neighbor- Moreover, the guarantee facility temporally relieves collateral ing areas over the years before the Beijing Olympics. As a requirements, as banks only requested collateral for 60 per- result, BOB used EMCs/ESCOs as borrowers, which BOB cent of the loan, with the remaining 40 percent to be covered saw as potentially a good channel to reach industrial end by the RSF. There is no assurance that the practice of hav- users. Recently, BOB announced its alliance with Carrier ing collateral requirements of less than 100 percent of loan Asia (a subsidiary of the world's largest provider of heat- amounts would continue after the expiration of the guarantee. ing, air conditioning, and refrigeration solutions) to pro- The second guarantee facility (CHUEE II), which reduced mote energy efficiency equipment marketing and finance the first loss coverage by the program from 75 percent of (IFC 2009). the first 10 percent losses to 50 percent of first 5 percent of losses, actually increased IFC's guarantee of the over- all portfolio to 50 percent (compared with 40 percent in FIGURE 3.5 Distribution of Projects Supported the first guarantee facility). There is no plausible design by Guarantees, by Project Amount for how the banks will take project finance types of loan BOB products, with increased reliance on cash flow from proj- 2% IB (first ect assets, rather than relying primarily on collateral assets. guarantee facility) Experience from earlier IFC energy efficiency programs in 28% Eastern Europe suggests that banks tend to revert to old practices after withdrawing the guarantees. SME outreach IB (second guarantee The program loans were larger than originally planned. facility) The original program appraisal emphasized that the pro- 70% gram's end users would be primarily SMEs (this was because Source: IEG, based on CHUEE data. the original utility-based model was based on Xinao's clients, Note: BOB Bank of Beijing; IB Industrial Bank. which were mostly SMEs).14 However, the actual portfolio is dominated by large loans. The guaranteed loan portfolio had 38 | Energy Efficiency Finance many fewer loans (although it achieved the total investment that the most significant emission reduction should come target), with small loans representing less than 10 percent of from industrial boiler retrofitting, followed by energy sav- those. Furthermore, there were multiple loans (each used the ings in building (table 3.17). Both banks in general and the maximum allowed loan and guarantee coverage) to some CHUEE banks so far have not lent significantly in those large companies. The second guarantee facility portfolio is areas identified as high potential. Moreover, these are the even more weighted toward large loans so far; nearly three- areas where there are a lot of small and dispersed users and quarters of the loans are very large (19.1 million yuan or access to finance and technical services is more challenging more), and the average loan size is about $9 million, which is than for the large enterprise energy users. much higher than the appraisal target of average loan size of 10­15 million yuan ($1.3­2 million) (figure 3.6). Summary of CHUEE's Impact The survey of the EMCs highlighted the ongoing chal- CHUEE is a small actor, or even a niche player, in the con- lenges for the SMEs, including many energy management text of China's energy efficiency and emission reduction companies, face in obtaining loans. fields. The program's rapid growth in lending and achieve- ment of the emission reduction target are relatively minor Missed energy efficiency potentials when compared with the overall market development. The CHUEE investments are similar to what other Chinese banks very strong government orientation toward energy ef- are doing in energy efficiency lending. Figure 3.7 indicates ficiency and emission reduction has been the key driver the sector focus of energy efficiency lending among Chinese of the market development. Many client companies that banks. The most commonly cited clients by banks are indus- participated in the program would have been invested in trial enterprises--21 banks had made energy efficiency loans energy efficiency, even without the program. However, to these enterprises. Second in the ranking are utilities-- even with the modest additionality, the program's return 13 banks had made loans to this sector. EMCs and public in energy savings and emission reduction was estimated organizations rank third and fourth, respectively. Last are at about 43 percent. Also, the program provided many housing entities; only one bank had made energy efficiency unique contributions to the energy efficiency market. loans to the housing sector. Building banks' institutional capacities, promoting new However, the most important areas for emission reduc- lending practices, and improving access to financing for tions are not well addressed by any of these players. The some underserved groups are the additional contributions China National Development Reform Commission showed of the program. FIGURE 3.6 Distribution of RSF-Supported Loans by Number of Projects (percent of total) 70 60 50 Percent 40 30 20 10 00 Small Medium Large Very large Size At appraisal distribution Actual (CHUEE total) Source: IEG, based on CHUEE data. Note: Loan size categories were based on the appraisal report (World Bank 2006b; actual figures are from CHUEE project files). Small: 0.5­2 million yuan (average: 1.43 million yuan $0.2 million); medium: 2.1­9.0 million yuan, (average: 5.35 million yuan $0.8 million); large: 9.1­19 million yuan (average: 14.5 million yuan $2.1 million); very large: 19.1 million­40 million yuan (average: 27.49 million yuan $4 million). CHUEE's Impacts | 39 FIGURE 3.7 A Ranking of Sectors by Number of Energy Efficiency Projects (n 26) 26 24 22 20 Number of projects 18 16 14 12 10 21 8 6 13 4 5 6 2 0 1 Housing Public ESCOs Utilities Industrial entities organizations enterprises Sector Source: IEG/CBRC survey. Note: Some banks are operating in multiple sectors. ESCO = energy service company. TABLE 3.17 China's Energy Efficiency/Renewable Energy Potential Estimated total investment Annual emission reduction 10-year emission reduction Industries ($ millions) (millions of tons of CO2) (millions of tons of CO2) Coal-fired industrial boiler (kiln) retrofitting 18,182 168 1,680 District heating and cogeneration 9,091 84 840 Waste heat and pressure recovery 2,597 24 240 Energy saving buildings 12,987 120 1,200 Petroleum saving and substitution 19,481 103 1,030 Motor and drive upgrading 6,494 18 180 Green-lighting 9,416 26 260 Energy saving in public facilities 2,597 24 240 Energy efficiency total 80,845 567 5,670 Renewable energy investment 90,000 410 4,100 Total 170,845 977 9,770 Source: China National Development Reform Commission data. 40 | Energy Efficiency Finance Chapter Climate Change and Financing Energy Efficiency | 4 41 Photo by Curt Carnemark, courtesy of the World Bank Photo Library Lessons and Recommendations The program operates in a dynamic market, which government actions have significantly pushed toward energy efficiency objectives. CHUEE benefitted from the very strong government orientation toward energy efficiency and emission reductions, which generated strong demand for energy efficiency project finance. Also, previous interventions by other parties, especially by the World Bank on EMCs, helped create an "energy efficiency finance-ready" situation. CHUEE is a small actor or even a niche player in the context geted new types of clients and faced difficulty in growing its of China's energy efficiency and emission reduction fields. energy efficiency loan portfolio. Despite that, and although it has a relatively short track Flexibility is needed in the program design to respond to record, it has left a mark in the energy efficiency market in unexpected challenges and opportunities. The program China. Its main contribution has been the access to finance experienced a complete modification of its business model for energy efficiency projects by Chinese companies, which and responded with additional resources when confronted face relative constraints in conventional bank lending be- with larger-than-expected market demand for investment. cause of the high collateral asset requirement. The program This indicates that programs require some flexibility to re- also facilitated access to finance for key market players-- spond to new developments in the market or to changes in EMCs--through its technical assistance for capacity build- regulatory regimes. ing and relationship brokerage. Government policies and market readiness are impor- The main outstanding issue is the sustainability of the tant factors in determining program design. In China, program benefits, such as the promotion of project finance- the timing for the program was right, as the government type of lending, in the absence of IFC or third-party guaran- was putting significant emphasis on promoting energy effi- tees. Furthermore, moving down market to SMEs or other ciency activities. It had already put various policy measures marketing partners (such as utilities) is needed, as there are in place for energy efficiency. Also, the World Bank initia- still significant constraints in access to finance among these tives for the energy management companies paved the way parties. This may involve working with different partners for further assistance by IFC and others. CHUEE built on and trying new models as the market evolves. these market conditions. Lessons from CHUEE The combination of private and public benefits in energy efficiency projects suggests the need for a more discrimi- Careful selection of private sector partners is needed to nate and dynamic approach to subsidies in the sector. As meet strategic program objectives. The program experi- the sector matures and certain types of energy efficiency enced different outcomes between the two banks--IB and projects become well established, subsidies need to shift to BOB--in terms of portfolio growth and ability to use the less mature areas with high growth potential and significant guarantee. Earlier IFC energy efficiency programs in other social benefits. Indiscriminate use of subsidies impedes the countries also experienced varied usage of financial fa- commercialization of energy efficiency finance. cilities. Obviously, a guarantee by itself is not an adequate incentive to increase energy efficiency lending, and the In emerging markets, caution is needed in applying a program needs to find the right balance between banks' utility-based energy efficiency finance model. Utilities strategic objectives and the program's objectives. IB, for ex- may not have incentives for reducing energy consumption ample, combined the marketing of energy efficiency loans or expanding their market through energy switching when with a strategy of retaining customers. Thus, it made energy there are enough potential customers. It is important to efficiency loans largely to existing clients, whereas BOB tar- assess incentives, policy environments, and the degree of 42 | Energy Efficiency Finance match between a utility's clients and partner banks' market Photo by Curt Carnemark, courtesy of the World Bank Photo Library. strategies. An exit plan is critical. Many of the efforts to promote fi- nancing of energy efficiency focus more on generating in- vestments than on the sustainability of maintaining energy efficiency investments after the completion of the program. Moreover, there is little practical information on how to terminate a program or how to shift its focus when com- mercial energy efficiency operations are emerging and start to compete with the program. One of the factors behind the quick build-up of IB's energy efficiency loan portfolio was the technical reviews by the program, instead of doing it by itself or by developing key service relations with local firms. However, the overreliance on the program undermines its sustainability by reducing incentives to build internal ca- pacity for such reviews. followed by energy savings in building. Banks so far Recommendations have not provided financing in the areas identified as high potential. Moreover, in these areas there are a lot Based on the findings, IEG recommends that IFC do the of small and dispersed users, and access to finance and following: technical services is more challenging than for the large 1. Increase additionality at the level of banks and end enterprise energy users. Thus, additionality is also high users. CHUEE has supported substantial emission in these areas of high energy saving potential. reductions mainly through projects carried out by 3. Reorient subsidies to areas with market failure and larger companies, but not all can be counted as impact. increase IFC's involvement in first loss guarantee. The program needs to orient activity to the areas with CHUEE has reduced the first loss cover under the potential for the largest additionality. Program activities GEF grants, but IFC continues to rely on GEF to should be more strategically focused on areas where provide first loss guarantees. Furthermore, there is IFC could have a unique role, such as working with no assurance that the banks will continue to lend SMEs, residential housing, or commercial buildings. without substantial collateral in the absence of This requires that IFC consider and design new CHUEE guarantees. Efforts are also being made to approaches and work with different types of partners, charge for technical assistance. These measures need not just extend the existing types of program activities. to be pursued with existing and new partners, as 2. Enhance the CO2 emission reduction impact of projects they can both provide a market test of additionality financed through the program by moving into areas and enhance sustainability. The program should that are identified as having high potential, but that prepare an exit plan to ensure the sustainability of its are not currently addressed by market participants. energy efficiency lending activities. It should design Despite the explosive growth of energy efficiency finance a workable plan to hand off technical appraisal in China, market participants do not adequately address functions to client banks and encourage risk taking. the most important areas for emission reductions. The These efforts need to be supplemented by policy China National Development Reform Commission work of the World Bank Group to promote market- showed that the most significant emission reduction based practices in energy efficiency finance and more should come from industrial boiler retrofitting, discriminate use of subsidies at the sectoral level. Lessons and Recommendations | 43 APPENDIX A Chinese Government Policy to Support Energy Efficiency The Chinese government's efforts to curb the country's ex- To implement the policy, various government agencies in- panding energy appetite have been evolving over the years. troduced additional measures: Early policies on energy conservation can be traced back to the mid-1980s. In 1985, the government issued several · In August 2007, the Ministry of Finance, together with preferential fiscal, tax, and financial policies for enterprise the National Development and Reform Commission, activities on energy conservation. These favorable policies, introduced a subsidy for projects that conserve at least however, were subsequently abolished in 1994 as the coun- 10,000 standard grade coal equivalents of energy. Simi- try embarked on a massive transition to a market economy. lar incentives were introduced by provincial and mu- In 1998, the country did pass the Energy Conservation nicipal governments. At the end of 2007, the ministry Law, but there were no substantial incentives or enforce- also established the Clean Development Mechanism ment measures for energy conservation in the law.1 Fund in local currency. It intends to raise awareness about energy saving and to finance relevant invest- Since 2006, the government has been increasingly con- ments (World Bank 2008a).4 scious of energy efficiency and pollution reduction. China's 11th Five-Year Plan for Social Economic Development · In November 2007, the China Banking Regulatory Com- (2006­10) represented a turning point in terms of govern- mission issued a policy that requires banks and other ment support for energy conservation: it stipulates that the financial institutions to establish a link between their new country's energy consumption per unit of gross domestic credits and borrowers' performance against the energy product nationwide be reduced by 20 percent during the conservation targets agreed with the government. Be- planned five-year period, or about 4.4 percent annually. cause of this policy, bank lending to the "high pollu- This is the first time that quantitative targets for energy ef- tion, high energy consumption" sectors was practically ficiency have ever been included in a five-year plan. Sub- banned, except for financing investments that promote sequently, various measures were introduced to achieve energy efficiency and pollution reduction. this goal. These include various directives and regulations toward the most polluting industries, as well as various sub- As a result of these initiatives, by the end of 2007 China had sidies to provide incentives to conserve energy. established various institutions within the government that share energy conservation responsibilities. The major out- To implement the plan, the government issued a number of standing policy issues were inadequate tax and energy price important supplementary polices in 2006 and 2007: 2 regimes that rewards efficient use of energy (World Bank · In March 2006, the State Council issued a "Notice on 2008c). Nevertheless, the International Finance Corpora- Accelerating the Push for Structural Adjustment in In- tion (IFC) program was started within the context of strong dustries with Surplus Capacities." This encourages large government policy and support toward energy efficiency companies to acquire smaller ones that have excess ca- and emission reductions. pacities to consolidate polluting industries and keep Many of these policies and regulations were later integrated small producers from using backward technologies. 3 into China's new Energy Conservation Law, enacted on · In May 2007, the State Council issued the "Compre- April 1, 2008. The law authorizes the development and is- hensive Work Program for Energy Conservation." This suance of energy efficiency standards and requires that all forced each level of the government and state-owned new capital investment projects be subject to an assessment enterprises to set up energy conservation targets. It also of whether they can reach energy efficiency standards is- introduced detailed measures on curbing the expansion sued by the government--the government will not approve of "high energy consumption, high pollution" sectors projects that cannot reach the standards. The law also sup- and closing down companies or production facilities ports use of tax and pricing policies to promote energy con- using obsolete technologies. servation and supports the establishment of energy audit Appendix A: Chinese Government Policy to Support Energy Efficiency | 45 and statistics functions in key government entities and en- sectors or technologies, such as solar energy use in build- ergy consumption companies. ing; new sources of fiscal funds for attracting investment in building energy conservation; replacement of old equip- During 2008 and 2009, the government issued a number ment; utilization of recycled products, use of renewable of policies aiming at strengthening implementation of the energy in public transportation systems, and promotion of existing policies, such as better measurement and monitor- energy conservation concepts nationwide. ing of emission reduction; fiscal policies to support specific 46 | Energy Efficiency Finance APPENDIX B CHUEE Funding Sources CHUEE (original) CHUEE I (revised) CHUEE II/CEE Total Funding source ($ millions) ($ millions) ($ millions) ($ millions) Total 60.6 51.0 180.5 231.5 IFC (guarantee facility, 41.1 40.0 167.0 207.0 own account) GEF (first loss guarantee) 16.5 8.0 8.5 16.5 Finland (technical 3.0 3.0 1.0 4.0 assistance) Norway (technical -- -- 3.0 3.0 assistance) IFC technical assistance -- -- 1.0 1.0 Sources: IEG, based on CHUEE approval documents; CHUEE II/CEE approval documents. Note: CEE China Energy Efficiency Finance Program; CHUEE = China Utility-Based Energy Efficiency Finance Program; GEF Global Environ- ment Facility; IFC International Finance Corporation. Appendix B: CHUEE Funding Sources | 47 APPENDIX C Summary of Surveys Conducted for the Evaluation Survey administrator and Type of survey Survey targets (samples) response rate Population Financial institutions 37 financial institutions: China Banking Regulatory Com- Sample covers 80+ percent of · Four big state-owned banks mission (Statistics Dept.) banking assets and three policy banks Response rate of 91 percent: · 17 joint-stock commercial 29 of 32 banks banks · Other major banks in eight major cities · Five leasing companies EMCs 100 EMCs in China China Energy Management 220 EMCs--members of the (41 IFC CHUEE network members Company Association China EMC Association and 59 randomly selected from Response rate of 86 percent: remaining 179) 86 of 100 EMCs CHUEE client companies: 20 IB client companies, located IB and BOB 62 companies (excluding companies that received loans in five cities (Wuhan, Tianjin, Response rate of 76 percent: cement companies) from CHUEE partner banks with Jinan, Nanjing, and Shenzhen) 19 of 25 companies program guarantees All five BOB client companies Cement companies CHUEE beneficiaries: All cement China Cement Association 16 cement companies (CHUEE beneficiaries and non- companies that received CHUEE Response rate of 94 percent: beneficiaries) loans from IB or BOB 15 of 16 companies Non-CHUEE beneficiaries: China Cement Association 98 eligible cement companies Randomly selected sample of Response rate of 95 percent: The three provinces cover 40 cement companies in Henan, 38 of 40 companies 29 percent of national cement Zhejiang, and Shandong Prov- outputs: Henan 6 percent, inces that have at least one NSP Zhejiang 9 percent, Shandong cement production line with 14 percent. There are no CHUEE production capacity of 2,500 cement projects in Henan tons/day, and not receiving Province. financial assistance from CHUEE. The criteria of NSP production line with capacity of 2,500t/day matches CHUEE client profiles. Source: IEG. Note: BOB Bank of Beijing; CHUEE China Utility-Based Energy Efficiency Finance Program; EMC energy management company; IB Industrial Bank; IFC International Finance Corporation; NSP new suspension precalcination. 48 | Energy Efficiency Finance APPENDIX D Bank Survey The Survey The specific composition of the 29 responding banks is given in table D.1. From May to August 2009, the Independent Evaluation Group­IFC and the Statistics Department of China Bank- Among the banks, the survey response rate was 91 percent ing Regulatory Commission carried out a joint survey of (29 of 32 banks surveyed). By the end of 2007, the total energy efficiency activities in China's financial institutions. assets of these 91 responding banks were 41.1 trillion yuan, The main objective of the survey was to assess the impact about 78 percent of the total assets of China's banking of IFC's China Utility-Based Energy Efficiency Finance sector. (CHUEE) Program on energy efficiency lending portfolios and capacity among financial institutions in China. Summary of Findings The survey targeted 37 financial institutions, including 32 Number of banks giving energy major banks, which account for more than 80 percent of efficiency loans the total assets of China's banking industry, as well as five Most responding banks (22 of 29) said that they had pro- energy efficiency equipment leasing companies. The fol- vided energy efficiency loans to companies. Taking into lowing were among the targeted financial institutions: account the six banks that did not complete the survey, as they do not engage in energy efficiency loans, 76 percent · The four largest state-owned banks and three policy (22 of 29) of sample banks are in the business of energy ef- banks ficiency loans. Among the seven banks that answered that · 17 major joint-stock commercial banks, including In- they do not provide energy efficiency loans, two were ru- dustrial Bank (IB) and Bank of Beijing (BOB) (the ral development or rural commercial banks whose clients treatment banks) are unlikely to be large energy end users, and five are small · Eight other major banks in large cities joint-stock banks that said they either had no capacity to · Five energy efficiency equipment leasing companies. appraise energy efficiency loans or did not provide project- based energy efficiency loans. The selection of financial institutions allows for compari- son between CHUEE treatment banks and similar banks, as well as comparison with the industry average of the fi- nancial sector. TABLE D.1 Composition of Banks Responding to the Survey Bank type Number Survey Responses Policya 3 Twenty-nine of the 37 surveyed financial institutions an- State-owned 4 swered the questionnaire. The respondents are the three b Joint-stock 15 policy banks, the big four state banks, and all the major joint-stock banks, including IB and BOB--the treatment City commercial 4 banks. Three banks and five energy efficiency equipment Rural commercial 3 leasing companies didn't answer the survey. Total 29 All policy and state-owned banks are located in the nation's Source: IEG/CBRC survey on energy efficiency finance in China. capital, Beijing, and 32 percent of joint stock, city commer- a. Policy banks include State Development Bank, which has recently converted to a commercial bank. cial and other banks are in Beijing, 21 percent each in the b. BOB is included here as a joint-stock bank--the bank has second largest city Shanghai and Guangdong province, and converted from a city commercial bank to a joint-stock bank over 5 percent each (one bank) in Fujian, Shandong, Tianjin, the past several years. Zhejiang, and Sichuan Provinces. Appendix D: Bank Survey | 49 TABLE D.2 Period when Banks Started Energy efficiency loans made to standard energy efficiency projects Efficiency Lending such as waste heat recovery and cogeneration was much Period Number of banks smaller. Particularly, the share of energy efficiency loans to the housing sector was among the lowest (figure D.1). Less than 1 year ago 1 Reasons for energy efficiency lending 1­3 years ago 8 business 3­5 years ago 1 The top two drivers for banks to engage in energy efficiency 5­10 years ago 8 lending were government policies and market opportuni- 10+ years ago 3 ties. Ninety-five percent of banks that had started energy No answer 1 efficiency lending (21 of 22) cited that enhanced govern- Total 22 ment policies were an important reason for them to decide Source: IEG/CBRC survey on energy efficiency finance in China. to make energy efficiency loans (table D.4), and 91 percent of the banks (20 of 22) said market opportunities for en- ergy efficiency lending were an important reason. Financial incentives provided by the government were third in the Most banks started energy efficiency lending during two time ranking, cited as an important factor by about 59 percent of periods in the past 10 years--5­10 years ago and 1­3 years the banks, but the percentage is dramatically lower than for ago (table D.2). About 45 percent of banks (10 of 22) started the top two drivers. Support from international organiza- energy efficiency lending during the last five years. This is tions was rated as important by 32 percent of the banks and consistent with the government's dramatically strength- ranks as the fourth most important factor. ened emphasis on energy conservation in the past three Services by energy service companies (ESCOs) and peer years or so. demonstration effects rank the lowest: they were least com- Table D.3 shows that all banks that started energy efficiency monly cited as an important factor by the banks. The same lending 1­3 years ago are commercial banks, and most of is generally true for each of the three types of banks, except them are joint-stock banks (six of eight). In contrast, all that joint-stock banks cited support from international or- the large, state-owned banks entered into energy efficiency ganizations and services by ESCOs much more as an im- lending more than five years ago. portant factor than other banks. Type of projects supported by energy Growth potential for energy efficiency efficiency finance lending business The largest share of energy efficiency loans went to re- Most banks saw significant future growth potential for en- structuring projects that often have a strong focus on ca- ergy efficiency finance (table D.5). Nearly 80 percent (20 pacity expansion, such as thermal power "large replacing of 26) of banks answered that they see significant potential small" projects, general purpose technical renovation, for increasing their financing for energy efficiency projects. and clean energy and waste treatment projects (included However, only six percent (one bank) among joint-stock in the "other" category). In contrast, the share of energy and city commercial and other banks answered that there TABLE D.3 Period when Banks Started Energy Efficiency Lending, by Type of Bank Period Number of banks State owned Joint stock Other commercial banks Total 1­3 years ago 0 6 2 8 3­5 years ago 0 1 0 1 5­10 years 2 5 1 8 10+ years ago 2 1 0 3 Source: IEG/CBRC survey on energy efficiency finance in China. Note: State-owned banks here includes State Development Bank. One state-owned bank did not answer the question. 50 | Energy Efficiency Finance FIGURE D.1 Average Shares of Loans Made to Various Types of Energy Efficiency Projects 18 16.3 16 14 12 11.0 11.5 11.5 Percent 10 8 6 5.4 4.4 4 2 1.0 1.2 0.1 0 rs g w , t n y al e n r do C en e er in tio sm rg io ile th in VA s) l) ad at m ov g la ra O Bo ov w H ce in r ( gr c ne re ac e en n, g, la up ge pl ow tio tin ep s lr ga em o- re l p la gh ca tr C nd a en st ni su (li m sy ch ta pm gs er Te g ea in Th ui lin ild H Eq in oo Bu C Source: IEG/CBRC survey on energy efficiency finance in China. Note: Examples of relatively large energy efficiency projects included in the "other" category are clean energy and waste treatment. are no constraints to reaching this potential. Among those Internal capacity building for energy efficiency that answered that there are some constraints, half consid- activities ered competition too strong, followed by high risks (44 per- In contrast to the tremendously increased energy efficiency cent) and high transaction cost (38 percent). lending volume, only about 18 percent of banks that had started energy efficiency lending (4 of 22) had established In contrast, state-owned banks and policy banks were rela- a dedicated unit to deal with energy efficiency loans, and tively more optimistic, as half of those who answered posi- only 32 percent of the banks (7 of 22) had dedicated pro- tively on growth potential saw no major constraints. The fessionals working exclusively on energy efficiency lending biggest constraints for them were that potential customers (excluding those having a dedicated energy efficiency do not see the need to implement such projects. This sug- lending unit) (table D.6). This means that 50 percent of gests that the private sector banks are more conscious about banks that had started energy efficiency lending had no competition and risks than their state-owned counterparts staff working full time on energy efficiency lending. On and are relatively less concerned about customers' demand the other hand, only 23 percent of the banks (5 of 22) had for energy efficiency projects. TABLE D.4 Main Reasons for Engaging in Energy Efficiency Financing--Share of Banks that Rated Various Reasons as "Important" Energy efficiency Government Saw other banks became an started providing Received ESCOs began engaging in important Management incentives for support from bringing the business of national policy saw a market energy efficiency an international bankable energy efficiency Type of bank priority (%) opportunity (%) (%) organization (%) projects (%) (%) Policy or 83 (5/6) 83 (5/6) 50 (3/6) 17 (1/6) 0 (0/6) 17 (1/6) state-owned Joint stock 100 (13/13) 92 (12/13) 69 (9/13) 46 (6/13) 31 (4/13) 15 (2/13) City or rural 100 (3/3) 100 (3/3) 33 (1/3) 0 (0/3) 0 (0/3) 0 (0/3) commercial Total 95 (21/22) 91 (20/22) 59 (13/22) 32 (7/22) 18 (4/22) 14 (3/22) Source: IEG/CBRC survey on energy efficiency finance in China. Note: Numbers in parentheses indicate how many banks answered this way out of total banks answering. ESCO energy service company. Appendix D: Bank Survey | 51 TABLE D.5 Growth Potential for Energy Efficiency Lending Do you see significant potential for Joint stock, city or rural commercial banks State-owned or policy banks increasing your finance for energy efficiency projects? Yes = 16 (84%)/No = 3 (16%)/No answer = 0 Yes = 4 (100%)/No= 0/No answer = 3 If yes: what are the constraints? Out of 16 Out of 4 No major constraints 1 (6%) 2 (50%) Competition is too high 8 (50%) 1 (25%) Risks are too high 7 (44%) 1 (25%) Transaction costs are too high 6 (38%) 0 (0%) Potential customers do not see the need 4 (25%) 2 (50%) to implement such projects Others 5 (31%) 0 (0%) Source: IEG/CBRC survey on energy efficiency finance in China. developed special guidelines/manuals for processing of assistance, including training on energy efficiency tech- energy efficiency loans (table D.6). nologies, structuring and marketing energy efficiency loans, credit underwriting and risk assessment, portfo- Assistance received for energy efficiency lio management and reporting practices, and marketing lending for banks providing energy research and identification of target sectors. Fourteen of efficiency loans them have received more than one of the above types of About 45 percent of banks (10 of 22) received various types training. There are no significant differences among the of support from different sources (table D.7). The most numbers of banks that have received different types of commonly received support is technical assistance--nine training (figure D.2). of the ten banks received technical assistance. Other types of support were evenly spread among grants, guarantees, and subsidized credit. The top two sources of support were This technical assistance was generally valued by recipient international development agencies and international fi- banks. Only two banks answered that the technical assis- nancial institutions. Each of these two channels provided tance was not an important factor for their energy efficiency support to nine banks. Domestic providers comprised finance business. One bank answered that the technical as- three groups: government, Chinese financial organizations, sistance was important at the beginning, and 13 answered and other Chinese institutions. But overall their activities that technical assistance was important to entering the seemed fairly sporadic. market and continuing. That said, however, they also be- lieve that technical assistance is not essential for sustaining Types of technical assistance received and expanding their energy efficiency financing. Seventy- for all banks one percent of banks that answered the question said they Among all banks giving energy efficiency loans, the can sustain and expand energy efficiency financing without majority (15 of 26) received various types of technical the technical assistance. TABLE D.6 Institutional Setup for Energy Efficiency Lending Special procedures or No dedicated unit but guidelines for processing Bank type Dedicated unit (%) dedicated professionals (%) energy efficiency loans (%) Policy and state owned 33 (2/6) 33 (2/6) 33 (2/6) Joint stock 15 (2/13) 31 (4/13) 23 (3/13) City or rural commercial 0 (0/3) 33 (1/3) 0 (0/3) Total 18 (4/22) 32 (7/22) 23 (5/22) Source: IEG/CBRC survey on energy efficiency finance in China. Note: Numbers in parentheses indicate how many banks answered this way out of total banks answering. ESCO = energy service company. 52 | Energy Efficiency Finance TABLE D.7 Types of Support Banks Received in Provision of Energy Efficiency Financing International International development financial Chinese financial Other Chinese Support Government agencies institutions organizations institutions Total Grants 1 2 3 Guarantees 2 1 3 Technical 1 4 6 1 2 9 assistance Subsidized (low 2 1 2 interest rate) credit lines Total 1 9 9 1 3 10 Source: IEG/CBRC survey on energy efficiency finance in China. Note: Rows and the last column here do not necessarily add up because some banks received support from more than one agency. IFC and CHUEE ing project is much higher. Hence, the average size of a stan- Seventy percent of all 23 responding banks (excluding the dard energy efficiency loan should be much smaller than three CHUEE banks) said they were aware of CHUEE 39 million yuan. The comments made by banks in the survey support to IB, BOB and SPDB on energy efficiency lend- answers suggest that they had included loans to restructur- ing (table D.8). Comparatively speaking, joint-stock banks ing projects as part of their reported energy efficiency loans, have the highest awareness, followed closely by policy and such as thermal power "large replacing small" projects, state-owned banks, with city and rural commercial banks clean energy projects, general purpose technical renovation coming as a distant third. This is consistent with the fact and structure adjustment projects, and so forth. These proj- that CHUEE banks are all joint-stock banks, though BOB is ects have certain energy efficiency effects but are largely for a city commercial bank turned joint-stock bank. the purpose of capacity expansion, and their sizes are much larger than standard energy efficiency projects. Issues in interpreting the data Table D.9 provides three examples of such projects reported A caveat to keep in mind is that not all the loans reported by banks. The size of the loan for each of the projects is well by respondent banks as energy efficiency loans are in fact above the amount typical for a standard energy efficiency standard energy efficiency loans as typically defined in the loan. The first and second projects have a heavy focus on literature (Taylor and others 2008, pp. 39­40), that is, a loan output capacity expansion. They do contribute to emission made to a standard energy efficiency project whose primary reduction in certain locations or plants, but emission might objective is to achieve energy efficiency savings, as opposed have increased in the other locations or plants. Therefore, to say a multipurpose restructuring project with energy ef- the new plant necessarily contributes to emission reduction ficiency as only one of its multiple objectives. The invest- at the aggregate level. No information is available about the ment cost of a standard energy efficiency project is relatively purpose and contents of the third project. But it can be told small, usually no more than 39 million yuan at the 2007 from the large size of the loan that the project is far from price (Taylor and others 2008), whereas that of a restructur- being a standard one. TABLE D.8 Recognition of CHUEE among Banks Selection of Comparable Banks Type of bank Banks that know CHUEE (%) From the 27 nontreatment banks that answered the sur- Policy and state-owned 71 (5/7) vey, 6 comparison banks for IB and 3 for BOB have been Joint stock 75 (9/12) identified (tables D.10 and D.11). They are selected based City and rural commercial 50 (2/4) on similarity of a number of baseline bank characteristics Total 70 (16/23) such as ownership/governance structure and geographical Source: IEG/CBRC survey on energy efficiency finance in China. distribution/coverage of operations that are largely deter- Note: Numbers in parentheses indicate how many banks answered mined by bank type (state-owned, joint-stock, city com- this way out of total banks answering. mercial, and other factors), size as measured by total assets and total outstanding loans, and portfolio/client base. The Appendix D: Bank Survey | 53 FIGURE D.2 Number of Banks and Types of Technical Assistances Received 45 40 10/26 35 9/26 8/26 8/26 30 7/26 Percent 25 20 15 10 5 0 Energy savings Structuring Credit Portfolio Market technologies and marketing underwriting management research to energy efficiency and risk and reporting help identify loans assessment practices target sectors Types of technical assistance Source: IEG/CBRC survey on energy efficiency finance in China. Note: Numbers above bars represent how many banks received that type of assistance out of total number of banks. rationale for considering these factors is that they are very banks to either IB or BOB, based on some of the most obvi- likely correlated with the outcomes of CHUEE support to ously relevant variables, such as bank size and ownership/ banks. The process of identifying the comparison banks governance structure. was straightforward because the dropped banks were either Almost all these comparison banks have had some expe- significantly too small or too much larger than or not the rience in making loans to/via energy management com- same type as IB or BOB. panies (EMCs) guaranteed by China Investment and The participating banks were selected based on a combi- Guarantee Agency with support from the World Bank. In nation of IFC's screening and self-selection of potential addition, two of the comparison banks have had direct co- participant banks themselves. There was no pipeline of operation with aid agencies in energy efficiency financing, candidate participating banks, so the pipeline method is mainly in the form of on-lending loans from aid agencies not used in the identification of the comparison groups. to end loan recipients for energy efficiency investments. The propensity score matching method is not used because One received assistance from a bilateral aid agency in 2005, there was only one treatment bank--that is, either IB or shortly before CHUEE, and the other from both a bilateral BOB--and there were no more than 10 loosely comparable agency and an international organization at the end of the TABLE D.9 Examples of Energy Efficiency Loans Provided by Responding Banks Project type and loan amount Description of projects Capacity expansion / environmental A loan to a steel company for its environmental relocation project. The loan is also sub- relocation (300 million yuan) categorized by the bank as an equipment replacement loan. However, the construction contents of the project were mainly expansion of production capacity of pig iron by 320 thousand tons/year, steel billet by 1,990 thousand tons/year, and steel by 1,080 thousand tons/year. Capacity expansion / "large replaces small" A loan to a power plant phase III expansion via building a 1 x 600 megawatt ultra super- (220 million yuan) critical coal burning power generation unit, also called a "large replaces small" project. Unknown-purpose electric power project The balance amount of a loan to an electric power project. (117 million yuan) Source: IEG/CBRC survey on energy efficiency finance in China. 54 | Energy Efficiency Finance review period (table D.10). These interventions are sub- by CHUEE. This can cause potential bias in estimating the stantially different from CHUEE in that they are not based impact of CHUEE's support to IB, as IB didn't receive as- on a third-party guarantee for loans to energy efficiency sistance from any such interventions. The possible bias is projects and on project finance based lending as CHUEE is. worth keeping in mind. However, it ought not to be large, However, they do provide support for certain training ac- and the direction of the bias is known to be downward. tivities that are similar in some aspects to those supported TABLE D.10 Industrial Bank and Comparable Banks Total assets in Outstanding loans Bank (bank name 2006 (billion by end of 2006 or survey number) yuan) (billion yuan) Portfolio/client base around 2006 Industrial Bank 617.5 324.4 Corporate banking and large enterprises, with corporate loans amount- ing to 77.9 percent of total loans by the end of 2006. Had limited experi- ence in SME lending and energy efficiency equipment financing, but was committed to developing this business. Bank 6 700.5 472.1 Traditionally focused on large enterprises. Loans to the top 10 clients amounted to 43.7 percent of total loans by end of 2006. Started to serve SMEs in 2006. Had a lot of focus on trade finance. Bank 11a 944.6 565.7 Focused on large enterprises and projects. As of 2007, loans to enter- prises in manufacturing, transport and telecommunications, storage, and wholesale and retail accounted for 63.6 percent of gross loans. In recent years it strengthened lending to SMEs. The bank put a lot of emphasis on retail banking as well. Bank 22 706.9 463.2 Focused on large enterprises, but increasingly on SMEs as well. As of 2007, corporate loans accounted for 80.9 percent of gross loans. Port- folio composition: manufacturing 31.2 percent; transport, storage and telecommunication 13.5 percent; power, gas, and water 9.5 percent; and wholesale and retail 9.1 percent. Bank 24b 445.1 259.8 Focused on corporate banking and medium-sized enterprises, with increased emphasis on financing of large enterprises. Corporate loans to top five industries amounted to 64.8 percent of total loans by the end of 2006. Bank 25 596.1 352.3c Focused on large and medium-sized enterprises. Meanwhile, started providing loans to small enterprises. Known for financing businesses through innovation and marketing. Bank 26 689.3 460.9 Core business was corporate banking with retail banking only accounting for around 14 percent of its business activity; as of mid-2007, manufactur- ing 26 percent, wholesale and retail and restaurants 11 percent, real estate 10 percent, and social services 8.5 percent. The bank had a lot of focus on large enterprises but an increasing focus on SMEs as clients. Sources: IEG survey of China financial institutions, IFC database, and banks' annual reports. Note: SME small and medium-size enterprise. a. Received assistance from a bilateral aid agency in 2005. b. Received assistance from both a bilateral agency and an international organization in late 2008. c. By September 2006, based on the bank's Web site. Appendix D: Bank Survey | 55 TABLE D.11 Bank of Beijing and Comparable Banks Total assets in Outstanding loans Bank (bank name 2006 (billion by end of 2006 Bank type and geographic or survey number) yuan) (billion yuan) coverage Portfolio/client base around 2006 Bank of Beijing 272.8 129.6 City commercial bank turned Traditionally large, state-owned joint-stock bank. Traditionally lim- enterprises and large public proj- ited to Beijing Municipality. Now ects owned by Beijing Municipality. expanded to some major economic Started to diversify in recent years. centers in various areas of the country. Main business is corporate banking, supplemented by retail banking, consumer banking. Bank 18 262.9 124.7 City commercial bank turned Large municipal projects as well joint-stock bank. Focus on local as SMEs. enterprises and projects in the mu- nicipality of its headquarters, but started to diversify into other parts of the country in 2006, especially some major economic centers. Bank 20 260.8 182.2 Established branches in major eco- Large enterprises in manufactur- nomic centers around the country, ing, social services, commerce, real especially in the coastal areas. estate, and so forth. In recent years, SMEs have become a target group. Bank 21 374.3 217.0 A joint-stock bank with branches Large enterprises in a variety of in many major economic centers sectors. Launched a SME initiative around the country. around 2006. Sources: IEG survey of China financial institutions, IFC database, and banks' annual reports and Web sites. Note: SME small and medium-size enterprise. 56 | Energy Efficiency Finance APPENDIX E Energy Management Company Survey The Survey members. Overall, nearly half of CHUEE members received a loan, compared with just 13 percent of nonmembers. There were 135 ESCOs/energy management companies (EMCs) on the list of the CHUEE network. The treatment Terms and conditions of the loan sample was restricted to 41 China-based ESCOs/EMCs When EMCs have some access to loans, the size of the loans that were mainly in the business of energy efficiency ser- is relatively small: 60 percent of EMCs are getting loans for vices provision and that were members of the China En- less than 5 million yuan ($0.73 million), with bulk of the ergy Management Company Association (EMCA), be- loans between 1 and 5 million yuan (table E.3). cause of the key role these ESCOs were expected to play Half the EMCs are getting loans with a maturity of less in helping reduce market barriers to energy efficiency in- than a year. For those with access to a loan, technical as- vestment in China related to the lack of channels for ac- sistance (irrespective of sources) lengthens the term of cess to reliable energy efficiency services. The excluded the loan. Technical assistance from CHUEE and EMCA ESCOs were either foreign based or those based in Hong in particular lengthens loan maturity: 80 percent of Kong SAR, China, and had relatively strong financial and the EMCs without technical assistance received only technical capacities, or they were equipment suppliers. The short-term loans (less than a year), and 53 percent of untreated comparison sample consists of 59 ESCOs/EMCs technical assistance recipients had long-term loans (matu- randomly selected from the remaining 179 EMC mem- rity of a year or more). About 80 percent of CHUEE techni- bers of EMCA that were mainly energy efficiency services cal assistance recipients and 72 percent of EMCA technical providers. The total size of the sample was 100, of which assistance recipients had long-term loans. 86 ESCOs/EMCs answered the survey. The survey was car- ried out through EMCA (86 percent response rate). The CHUEE treatment on ESCOs/EMCs focused on pro- TABLE E.1 EMCs Receiving Technical Assistance viding a network of information and knowledge sharing to Have you received technical assistance? enhance possible partnerships and carry out certain train- CHUEE Non-CHUEE ing for network ESCOs/EMCs. The treatment is relatively network (%) network (%) simple and homogeneous and thus allows for appropriate Technical assistance received 61 24 (from any source) use of dummy and mean comparison approaches. Technical assistance not received 39 76 Source: IEG/EMCA survey data. Survey Responses Note: EMC energy management company. Access to technical assistance CHUEE network members are associated with receiving effective technical assistance from various sources includ- ing CHUEE (table E.1). More than half of the network TABLE E.2 Access to Finance among EMCs members (61 percent) received technical assistance from Non-CHUEE any sources (such as CHUEE and EMCA), compared with CHUEE net- network nonmembers (only a quarter received technical assistance). work member member EMCs (%) EMCs (%) Overall (%) Access to finance Applied to loan 62 25 41 Based on the survey, a larger number of CHUEE's EMC net- Of which, 78 50 63 work members applied for a loan than nonmember EMCs. obtained a loan More than half (62 percent) of CHUEE network members Overall access to 49 13 28 applied for a loan, compared with only a quarter of non- finance members (table E.2). Moreover, CHUEE members were Source: IEG/EMCA survey data. more successful in getting loans: 78 percent of applicants Note: EMC energy management company. obtained a loan, compared with just half of non-CHUEE Appendix E: Energy Management Company Survey | 57 TABLE E.3 Size of Loans Obtained by EMCs TABLE E.5 Average Asset Growth Rate Amount EMCs obtained loans (%) 2006­07 (%) 2007­08 (%) Less than 1 million yuan 17 CHUEE network EMCs 19 21 1­5 million yuan 43 Non-CHUEE network EMCs 11 7 5­10 million yuan 9 EMCs with loans 17 18 10­20 million yuan 13 EMCs without loans 12 10 20­40 million yuan 13 All 14 13 More than 40 million yuan 4 Source: IEG/EMCA survey data. Source: IEG/EMCA survey data. Note: EMC energy management company. TABLE E.4 Types of Loan Collaterals and Use guarantees was a concern for 12 percent of EMCs. The sur- of Guarantees for Loans to EMCs vey also revealed that 29 percent of loans include receivables Percent of EMCs from the energy efficiency project as collateral; thus, there is provided loans more room for a project finance type of loan to EMCs. Liens on personal or corporate assets 67 (including parent company guarantees, mortgage in equipment, and so forth) Propensity Score Matching Methods Receivables from the energy efficiency 29 to Minimize Selection Bias project Although the program did not intentionally screen the ap- Loan guarantee from China National 24 Investment and Guarantee Co . plicants for membership into the network, the beneficiaries Other guarantee agency 33 were not a random sample of the population. Therefore, the Others 18 comparison group is also not a random sample of the popu- lation. The comparison group needs to be matched with the Source: IEG/EMCA survey data. treatment group on relevant characteristics. The propensity score matching method is one way to achieve this matching. Propensity score matching identi- Loan collaterals and guarantees fies a group of individuals, households, or firms with the Majority of loans are liens on personal or corporate assets, same observable characteristics as those participating in while about a quarter to one-third include receivables from the project. It does this by estimating a statistical model of energy efficiency projects (table E.4). Guarantees from the probability of participating (propensity to participate) China National Investment and Guarantee Co. and other using a regression model with participation as the zero-one agencies/companies are popular as well. dependent variable and a set of observable characteris- Corporate business performance tics that must be unaffected by the intervention as the ex- CHUEE members on average grow faster than nonmem- planatory variables. The coefficients are used to calculate a bers as measured by growth in average assets (table E.5). propensity score, and participants are matched with non- Those who obtained loans had a higher growth rate than participants based on having similar scores. average; however, the CHUEE network group had a much In this case, the statistical model of participating was based higher growth rate than the average, and far higher than the on the following: comparison group. · Dependent variable: network participation Confirming ongoing challenges to access to financing · Independent variables: asset size before program, year The survey highlighted ongoing challenges for EMCs to of establishment of the company, number of employees, and applications for loans. obtain loans. Twenty-eight percent of the answers indicated that banks are requesting fixed asset collateral, rather than Based on the matching exercise, 50 companies (21 net- cash flow, and that was considered a constraint. Further- work, 29 nonnetwork) were matched, and the same anal- more, 22 percent of EMCs answered that the banks are not ysis was conducted with a reduced amount of data (see aware of energy efficiency projects. Banks' lending attitudes tables 3.14­3.16 in the text). The analysis confirms the con- are still a concern for some, as 16 percent responded that clusion about the association between network participa- banks cannot lend for long-term or small projects. Access to tion and access to financing and asset growth. 58 | Energy Efficiency Finance APPENDIX F Cement Company Survey The Survey on waste heat recovery from NSP cement production lines The survey of energy end users mainly consists of a sample with a cement production capacity of 2,500 tons per day. of untreated cement companies in Henan, Shandong, and The distribution of the untreated sample companies among Zhejiang Provinces and treated ones in a number of prov- the three provinces was determined partially based on con- inces. The cement industry was selected because it is one sideration of matching with the geographic distribution of the key sectors that CHUEE has been providing support of the treatment companies, which are located in either to and it is reasonably easy to identify untreated compari- coastal or central regions. The two regions tend to have son companies in the industry. The three provinces were significantly different characteristics that very likely affect selected because they were among the largest cement pro- the outcome of CHUEE energy efficiency lending in the ducing provinces in China and had comparatively the least cement industry, such as energy price, government incen- exposure to CHUEE intervention and thus were unlikely to tives, ease of access to the electricity grid, environmental have significant contamination effects. For example, there performance measurement and monitoring by the govern- were no CHUEE-supported cement companies in Henan ment, effectiveness of business contract enforcement, and Province, and there were only one and three in Shandong so forth. Hence, the percentage of untreated sample com- and Zhejiang Provinces, respectively (table F.1). The three panies in the central region should be more or less the same provinces were also selected because they are located in the as that of treated sample companies. same region as CHUEE clients: the coastal and central part of China. The survey was carried out from May to August 2009, mainly through the China Cement Association. The sur- The sample of untreated cement companies consists of vey questionnaire is the same for all sample companies, 13 companies in each of Henan and Shandong Provinces treated or untreated. Thirty-eight of 40 untreated cement and 14 in Zhejiang Province. For each of the three prov- companies answered the survey (95 percent response rate). inces, the sample companies were randomly selected for Sixteen treated cement companies were surveyed, and 15 of inclusion in the survey from a population of untreated them answered the questionnaire (95 percent response companies that in turn were identified from China Cement rate). Table F.2 shows that the regional distribution of Association's list of cement companies that had at least one treated cement companies that answered the survey indeed new suspension precalcination (NSP) cement production matches well with that of untreated sample companies. line of 2,500 tons per day at the time of the survey (table F.2). The rationale for using this NSP production line­based cri- Other company characteristics that likely correlate with terion in the sample selection was to ensure basic compara- the outcome of CHUEE energy efficiency lending include bility: CHUEE loans to cement industry focused exclusively the age of the company; the NSP production line; company TABLE F.1 Descriptive Statistics of the Sample for Survey of Untreated Cement Companies Number of cement Number of CHUEE Province's national Number of sample companies meeting clients in the production share in Province's national Province companies the criteria province 2005 (%) output ranking Henan 13 32 0 6 6 Shandong 13 32 1 14 1 Zhejiang 14 34 3 9 2 Sources: IEG, China Cement Association. Appendix F: Cement Company Survey | 59 TABLE F.2 Regional Distribution of Treated vs. Untreated Cement Companies that Answered the Survey CHUEE cement companies Non-CHUEE cement companies Number of Regional Number of Regional Region Province responses distribution Province responses distribution Central provinces Chongqing 1 Henan 12 Hebei 1 Hubei 2 Hunan 1 Subtotal 5 33% 12 32% Coastal provinces Jiangsu 3 Shandong 13 Shandong 1 Zhejiang 13 Tianjin 1 Zhejiang 2 Fujian 3 Subtotal 10 67% 26 68% Total 15 100% 38 100% Sources: IEG, China Cement Association. size, as measured by sales, output, and NSP production In contrast, in general a company with less indebtedness capacity; whether the company is a member of a "group tends to be more creditworthy and have better access to bank company" (conglomerates); and level of indebtedness as loans. The treated and the untreated sample companies reflected by the ratio of outstanding loans to total assets. match reasonably well on these characteristics (table F.3). In general, large companies or those that are a member of a Admittedly, there are certain differences between the group company that have been in the market for a relatively two groups: treated companies are larger in general and long period tend to be more creditworthy and have more relatively more established in the market, but a higher per- access to finance, have a stronger technical and manage- centage of untreated companies are a member of a group ment capacity, enjoy more support from government poli- company. This will result in possible estimation bias, but cies, and are subject to more pressures from the govern- the bias is not expected to be very large. ment on energy efficiency investment. Thus they are more Any possible contamination effect on the untreated sample likely to carry out energy efficiency investment and achieve from the treated companies should not be large. Besides good results. TABLE F.3 Characteristics of the Cement Companies Covered by the Survey Average ratio of total % of companies that Average year Average total NSP outstanding are a member of a when an NSP production capacity Average total Average total loans to total group company or a production line as of end of 2006 sales in 2006 output in 2006 assets in 2006 holding company was first built (tons per day) (million yuan) (million tons) (%) Non-CHUEE 97 2005 2,958 387 168 33 CHUEE 87 2001 6,113 495 231 31 Sources: IEG, China Cement Association. Note: NSP new suspension precalcination. 60 | Energy Efficiency Finance the fact that the untreated cement companies in the sample from 2005 to 2006, shortly before CHUEE's intervention. provinces had relatively less exposure to CHUEE financing, Table F.4 shows that 25 waste heat recovery projects were as discussed above, the CHUEE energy efficiency project put into operation in 2005 and 2006 (6 in 2005 and 19 in finance­based lending model was unique in China and 2006). These projects were implemented by major cement there were no comparable alternatives in the market. In ad- companies in about 12 provinces in the coastal and central dition, waste heat recovery projects were listed as one of part of China, and most of them were based on an NSP the 10 key recommended energy efficiency projects by the production line of 2,500 tons per day or more as CHUEE government in 2006 and hence were well known among ce- cement projects. The electricity generation output of most ment companies, especially among large ones. of these projects was above expectation, though it is based on domestic technology and equipment (IFC 2007). More importantly, many companies in China completed investment in waste heat recovery and achieved success TABLE F.4 Waste Heat Recovery Projects in the Cement Industry in China (February 2007) Scale of Designed Average production installed electricity Year operation Name of enterprise (tons/day)a capacity (kW) generation (kW)b Designing unit started 1 Conch Group Ninguo 4,000 6,480 7,000 TCDRI 1998 Cement Plant 2 Shanghai Wanan 1,200 2,500 2,000 TCDRI 2003 Enterprise Corp. 3 Guangxi Liuzhou 4,000 6,000 5,900 TCDRI 2005 Cement Plant 4 Zhejiang Shenhe 2,500 3,000 2,900 TCDRI 2005 Cement Co., Ltd. 5 Zhejiang Qinglongshan 1,200 2,500 2 3,000 4,900 TCDRI 2005 Cement Co., Ltd. 6 Zhejiang Changxing 2,500 3,000 3,300 TCDRI 2005 Xiaopu Zhongsheng Cement Co., Ltd. 7 Zhejiang Changxing 5,000 6,000 6,800 TCDRI 2005 Meishan Zhongsheng Building Material Co., Ltd. 8 Zhejiang Leomax 2,500 5,000 3,000 6,000 9,600 TCDRI 2005 Cement Co., Ltd. 9 Zhejiang Zhongxinyuan 2,500 3,000 3,200 TCDRI 2005 Cement Co., Ltd. 10 Zhejiang Haolong 1,200 1,500 1,700 TCDRI 2006 Building Material Co., Ltd. 11 Hainan Sanya 5,000 6,000 7,200 TCDRI 2006 Huashengtianya Cement Co., Ltd. 12 Shandong Zibo 5,000 6,000 6,600 TCDRI 2006 Donghua Cement Co., Ltd. 13 Jiangxi Taihe Yuhua 1,200 2,500 2,000 TCDRI 2006 Cement Co., Ltd. (continued on next page) Appendix F: Cement Company Survey | 61 TABLE F.4 Waste Heat Recovery Projects in the Cement Industry in China (February 2007) (continued) Scale of Designed Average production installed electricity Year operation Name of enterprise (tons/day)a capacity (kW) generation (kW)b Designing unit started 14 Sichuan Shuangma 2,500 3,000 3,200 TCDRI 2006 Yibin Electric Power & Energy Co., Ltd. 15 Beijing Cement Plant 2,000 3,000 7,500 7,000 TCDRI 2006 Co., Ltd. 16 Gansu Qilianshan 2 2,200 6,000 6,200 TCDRI 2006 Cement Co., Ltd. 17 Zhejiang Red Lion 2 2,500 5,000 2 7,500 18,000­20,000 TCDRI 2006 Cement Co., Ltd. 18 Hebei Luquan Quzhai 2 2,500 2 4,500 7,800 TCDRI 2006 Cement Co., Ltd. 19 Zhejiang Zhengda 1,200 2,500 2,000 TCDRI 2006 Cement Co., Ltd. 20 Jiangxi Gaoan Red Lion 5,000 9,000 9,600­10,000 TCDRI 2007 Cement Co., Ltd. 21 Weifang Sunnsy 2,500 4,500 Dalian Yishida Energy 2006 Cement Co., Ltd. Engineering Co., Ltd. 22 Changle Sunnsy 2,500 3,300 Dalian Yishida 2007 Cement Co., Ltd. 23 Zhejiang Dushan 2,500 4,500 Dalian Yishida 2006 Group 24 Zhejiang Xingbaolong 1,600 3,000 Dalian Yishida 2006 Co., Ltd. 25 Changzhou Pangu 2,000 3,000 Shanghai Kaineng 2006 Cement Co., Ltd. 26 Taishan Cement Group 2,500 5,000 13,200 Huaxiao Energy 2006 Co., Ltd. 27 Liaoyuan Jingang 2 5,000 2 7,500 CITIC Heavy Machinery Inc. 2006 Cement Group 28 Guangdong Tapai 5,000 7,500 CITIC Heavy Machinery Inc. 2007 Cement Co., Ltd. 29 Conch Group Ninguo 5,000 9,100 Conch Group 2006 Cement Plant 30 Jiande Conch Cement 5,000 9,100 Conch Group 2006 Co., Ltd. 31 Anhui Chizhou Conch 2 5,000 17,000 Conch Group 2006 Cement Co., Ltd. 32 Anhui Tongling Conch 4,000 5,000 16,300 Conch Group 2007 Cement Co., Ltd. 33 Anhui Congyang Conch 2 2,500 5,000 18,300 Conch Group 2007 34 Jiangxi Cement Plant 2,000 3,000 NCDRI & Shanghai Kaineng 2001 Total 150,500 239,780 Source: IFC 2007. Note: kW kilowatt. a. Two entries indicates two production lines with different capacities. b. Blank cells indicate no data available. Survey Responses panies surveyed responded that they have either invested Incidence of waste heat recovery projects or are planning to invest in a waste heat recovery system The survey indicated that there is considerable uptake on on at least one of the company's production lines. In total energy efficiency investments within the industry. All com- there are 42 (some companies have more than one waste 62 | Energy Efficiency Finance TABLE F.5 Source of Technical Expertise in Implementing Energy Efficiency Projects Non-CHUEE cement companies that actually CHUEE cement companies implemented energy efficiency projects Internal technical staff 87% 83% Equipment suppliers 53% 53% Relationship companies (clients, suppliers) 33% 13% EMCs 40% 23% Technical consultants specialized in industry 73% 50% Utility companies (gas, electricity, and so 20% 0% forth) Banks 40% 17% Government agencies 73% 73% Industry association 40% 47% Average types of technical expertise 4.6 3.6 involved in energy efficiency projects Percent of companies with 0­3 types 47 44 of technical assistance involved Percent of companies with 7­9 types 20 4 of technical assistance involved Sources: IEG surveys of Chinese cement companies. heat project) projects among companies not participating industrial associations.1 The role of banks and marketing in the program. channels reflects inputs from CHUEE interventions. Role of marketing actors more critical Significant differences between CHUEE and non-CHUEE for CHUEE cement companies companies exist in the role of EMCs, which is higher for The role of internal staff and equipment suppliers was CHUEE companies. Equipment suppliers are important nearly the same for CHUEE clients and nonclients; the players for both groups. Government support in providing most important differences are a strong reliance on mar- technical advice and awards (financial stimulus) is wide- keting partners among CHUEE clients, such as EMCs spread in the sector. and technical consultants (83 percent and 100 percent The survey results confirm the importance of internal tech- for CHUEE, 23 percent and 50 percent for non-CHUEE, nical capacities in executing energy efficiency projects, respectively). Banks are more relevant as source of techni- and technical help from banks (for CHUEE beneficiaries), cal expertise for CHUEE (50 percent) than non-CHUEE EMCs, suppliers, and the government played supplemen- companies (17 percent; see table F.5). The non-CHUEE tary roles (table F.6). groups got more assistance from government agencies and TABLE F.6 Type of Support Received in Energy Efficiency Projects Support CHUEE companies Non-CHUEE companies Grants 13% government grant 3% government grant Energy saving performance guarantees 20% Suppliers 20% suppliers 7% international donors 3% EMCs Technical assistance 33% EMCs 23% suppliers 13% suppliers 7% suppliers and EMCs Government awards for energy conservation 87% received government awards 70% received government awards Government subsidized (state bond fund subsidized) 27% received subsidized credit 13% received subsidized credit line of credit Sources: IEG surveys of Chinese cement companies. Note: EMC energy management company. Appendix F: Cement Company Survey | 63 APPENDIX G CHUEE Cost Benefit Analysis The calculation covers energy efficiency projects support- Scenarios ed by the program's guarantee and financed by the partner 1. Base case: Based on the program's end user surveys banks (IB and BOB). The portfolio includes projects under (general client and cement), interviews, and reviews of the guarantee facility, and program expenditures and fee project documentation, it is estimated that 9 percent incomes until the end of fiscal 2009. of end users would not have implemented the energy efficiency projects if there were no loans supported by the Benefits program. This 9 percent figure was used to benchmark incremental benefits from the program (9 percent of 1. Greenhouse gas (GHG) emission reductions, measured total project costs and project benefits are used). by an engineering calculation of estimated annual 2. High case: Program's additionality may be higher GHG reductions in CO2 tons. They are monetized by because of its assistance to capacity building in banks the price quoted in the carbon trade market. and because of the introduction of loans with lower 2. Energy savings, measured by an engineering collateral requirements. High case assumes partial calculation of estimated annual energy savings by ton additionality in 76 percent of projects as a direct of coal equivalent. They are monetized by using the contribution from the program. international price of coal. Results Costs In the base case, the rate of return was 38 percent, which is 1. Project costs of each energy efficiency projects higher than the private return (cost of project versus energy 2. Program costs, consisting of savings) of the same projects (20 percent). The gap between a. Costs of technical assistance the two is a proxy of the program's social contributions b. Costs of program's operations through the emission reductions, leveraged by the program c. Costs of guarantees covered by the GEF grants inputs including the subsidy components. The upper limit (covering the first loss portion of the risk-sharing of the program's return takes into account benefits from facility). IFC's expenditures come from the expense 76 percent of projects, as 24 percent of projects were said records of supervision reports, verified with the to be implemented in full even without the program. The program's original budgets and records for the trust upper limit rate of return is as high as 45 percent. funds (technical assistance). Realistically, the program's return would be somewhere between 38 and 45 percent but closer to the 38 percent, Assumptions as benefits in the 76 percent case are only partial--bigger 1. Projects are implemented by 2008. Project benefits last scope or faster implementation. The calculations also sug- until 2016. Exchange rates and carbon and coal prices gest that the social rate of return is not very sensitive to the will be stable until 2016. degree of additionality once a certain threshold is reached, 2. Costs of guarantees are expected losses (4 percent of covering the fixed costs of running the program and the the portfolio) estimated at the time of appraisal. subsidies involved. Appendix G: CHUEE Cost Benefit Analysis | 65 TABLE G.1 Cost Benefit Analysis Worksheet Year 2006 2007 2008 2009 RMB/$ 7.80 7.32 6.85 6.83 Benefits Emission reductions CO2 ton -- -- 1,050,827.53 6,698,565.72 Carbon price $/CO2 ton 19.24 19.24 Emission in $ 20,217,921.60 128,880,404.45 Energy savings Ton of coal equiv. -- -- 345,837.02 1,801,787.27 Price of coal $/ton 65.73 127.10 70.82 Energy savings ($) 36,628,855.40 191,216,537.13 Total benefits 4,267,197,356.85 64,175,248.10 256,484,617.16 9% benefits scenario 384,047,762.12 5,775,772.33 23,083,615.54 76% benefits scenario 3,243,069,991.21 48,773,188.55 194,928,309.04 New guarantees RMB 435,300,000 206,664,166 1,494,308,817 issued $ 59,467,213 30,191,107 218,738,025 Costs Project costs $ 78,689,536.99 781,975,329.16 76,238,780.95 9% benefits scenario 7,082,058.33 70,377,779.62 6,861,490.29 76% benefits scenario 59,804,048.11 594,301,250.16 57,941,473.52 Program costs 457,500.00 4,751,422.47 3,580,378.23 11,122,254.94 Operations costs $ 457,500.00 1,372,733.94 1,372,733.94 1,372,733.94 Technical assistance Trust funds (est.) 1,000,000.00 1,000,000.00 1,000,000.00 Guarantee (est. 4% of portfolio 2,378,688.52 1,207,644.28 8,749,521.00 losses) Total costs 457,500.00 83,440,959.45 785,555,707.38 87,361,035.89 9% benefits scenario 457,500.00 11,833,480.80 73,958,157.85 17,983,745.22 76% benefits scenario 457,500.00 64,555,470.58 597,881,628.38 69,063,728.46 GDP deflator 100.0 102.7 105.0 106.6 Net benefits (real) Total net benefits (457,500.00) (80,279,083.47) (686,349,747.57) 159,533,586.60 9% benefits scenario (457,500.00) (10,549,390.92) (65,927,826.36) 7,609,059.28 9% case rates of 38% return 76% benefits scenario (457,500.00) (61,888,834.89) (522,215,843.68) 118,967,408.29 76% case rates of 45% return Private net benefits -- (76,626,035.77) (703,154,094.89) 48,167,993.49 Private rates of 20% return Source: IEG database. Note: CO2 = carbon dioxide; GDP = gross domestic product; RMB = Chinese yuan; USD = United States' dollar. 66 | Energy Efficiency Finance 2010 2011 2012 2013 2014 2015 2016 6.83 6.83 6.83 6.83 6.83 6.83 6.83 14,155,449.42 14,155,449.42 14,155,449.42 14,155,449.42 14,155,449.42 14,155,449.42 14,155,449.42 19.24 19.24 19.24 19.24 19.24 19.24 19.24 272,350,846.84 272,350,846.84 272,350,846.84 272,350,846.84 272,350,846.84 272,350,846.84 272,350,846.84 3,316,114.07 3,316,114.07 3,316,114.07 3,316,114.07 3,316,114.07 3,316,114.07 3,316,114.07 87.89 87.89 87.89 87.89 87.89 87.89 87.89 351,926,034.31 351,926,034.31 351,926,034.31 351,926,034.31 351,926,034.31 351,926,034.31 351,926,034.31 563,791,070.23 563,791,070.23 563,791,070.23 563,791,070.23 563,791,070.23 563,791,070.23 563,791,070.23 50,741,196.32 50,741,196.32 50,741,196.32 50,741,196.32 50,741,196.32 50,741,196.32 50,741,196.32 428,481,213.37 428,481,213.37 428,481,213.37 428,481,213.37 428,481,213.37 428,481,213.37 428,481,213.37 108.8 110.9 113.2 115.4 117.7 120.1 122.5 518,329,150.15 508,165,833.48 498,201,797.53 488,433,134.83 478,856,014.54 469,466,680.92 460,261,451.89 46,649,623.51 45,734,925.01 44,838,161.78 43,958,982.13 43,097,041.31 42,252,001.28 41,423,530.67 393,930,154.11 386,206,033.44 378,633,366.12 371,209,182.47 363,930,571.05 356,794,677.50 349,798,703.43 267,939,616.79 262,685,898.82 257,535,194.92 252,485,485.21 247,534,789.42 242,681,166.10 237,922,711.87 Appendix G: CHUEE Cost Benefit Analysis | 67 68 | Energy Efficiency Finance APPENDIX H Major Climate Change Projects in China GEF grant Cofinancing Project name Agency ($ millions) total ($ millions) Approval date Description Executing agency Energy Con- UNDP 1.00 0.00 Dec. 5, 1997 The primary objective of the project is to raise the energy efficiency of the rural Ministry of Agriculture servation and industrial sector in China by selecting several key TVEs to carry out demonstra- Pollution Control tion projects involving improved technologies. Four subsectors targeted: brick in Township and making, coking, metal casting, and cement. Village Enterprise Industries Efficient Indus- IBRD 32.81 68.57 Dec. 23, 1996 This project will reduce GHG emissions by adapting high-efficiency foreign Ministry of Machinery trial Boilers technologies to local conditions for small and medium-sized, coal-fired industrial Industry boilers. To assist the dissemination and effective use of efficient technologies, the project will also strengthen China's industrial-boiler engineering, opera- tions, production management, and marketing capabilities and improve boiler technology exchange domestically. As long-term measures for barrier removal, the project will support related technical and policy studies, public awareness/ information dissemination, and strengthened environmental standards for the industrial boiler sector. Energy IBRD 22.70 180.00 Mar. 26, 1998 The project will support the establishment, pilot testing, and commercial dem- State Economic and Conservation onstration of market-oriented EMCs that will promote investments in energy- Trade Commission efficient technology through energy performance contracting. The project will start in three provinces, and after a pilot phase will be expanded to other parts of the country; it may involve more varied applications such as leasing or Chinese- foreign joint ventures. The project will also develop a national energy conserva- tion information dissemination center to gather information and lessons learned on energy efficiency measures and to disseminate information on the technical and financial results of these measures, targeting enterprise managers. Energy Conserva- UNDP 8.00 10.55 Dec. 26, 2000 This project will focus on TVEs, which constitute a significant share of Chinese UNIDO tion and GHG economic production. It seeks to reduce GHG emissions in China from the TVE Emission Reduc- sector by increasing the utilization of energy efficient technologies and products tion in Chinese in the brick, cement, metal casting, and coking sectors. The project removes key Township and Vil- market, regulatory, technological, management, and commercial barriers to lage Enterprises, the production, marketing, and utilization of energy efficient technologies and Phase II products in these industries. Second Beijing IBRD 25.00 437.00 June 20, 2000 The project's objectives are to (i) improve the quality of life for the citizens of Beijing by Beijing Municipal and Environment alleviating the city's acute air and water pollution problems and (ii) significantly reduce District Government, Project China's GHG emissions. It has three components: energy conversion and efficiency; waste- Beijing Comprehen- water treatment; and environment capacity building. GEF assistance is requested to remove sive Investment Co. the barriers to successful implementation of the project's two major energy components. One of these components will convert at least 2,500 small (below 20 tons/hour) space- heating boilers from coal to natural gas (small boilers being the largest cause of ambient air pollution) and, by reducing the cost of gas boilers and creating conversion capacity, will indirectly facilitate at least another 2,500 boiler conversions. The second component will improve the energy efficiency of the city's extensive district heating systems. Barrier Removal UNDP 8.14 18.07 July 6, 2001 The project aims at addressing identified market barriers to widespread use of energy ef- State Economic and for Efficient ficient lighting in China by broadening the China Green Lights start-up efforts. The overall Trade Commission Lighting Prod- objective of this project is to save energy and protect the environment by reducing lighting ucts and Systems energy use in China in 2010 by 10 percent, relative to a constant efficiency scenario. The specific objectives include upgrading of Chinese lighting products; increased consumer awareness of, and comfort with, efficient lighting products; and establishing a vibrant, self- sustaining market in efficient lighting products and services. Demonstration UNDP 5.82 10.12 Nov. 28, 2002 This project will help catalyze the cost-reduction of FCBs for public transit applications in State Economic and of Fuel Cell Bus Chinese cities by supporting significant parallel demonstrations of FCBs and their fueling infra- Trade Commission Commercializa- structures in Beijing and Shanghai. In collaboration with the Chinese government, the municipal tion in China governments of Beijing and Shanghai, and the private sector, the GEF and UNDP will assist the (Phase II-Part I) public transit companies of Beijing and Shanghai to obtain six FCBs each and operate these over a combined total of 1.6 million kilometers. The knowledge and experience gained through this project will enable the technology suppliers to identify cost-reduction opportunities and the host public transit operators to gain valuable experience needed to adopt larger fleets of FCBs in the future. Additionally, some activities will help build capacity relating to FCBs. Finally, a series of activities will also focus on defining a detailed strategy for large-scale FCB implementation in China, which is planned as a follow-on to this initial project. Appendix H: Major Climate Change Projects in China Energy Conserva- IBRD 26.00 255.20 Oct. 24, 2002 Phase II of the project is designed to replicate the experience of phase I, especially to State Economic and tion Project, support the development of new EMCs in China by strengthening an EMC service group, Trade Commission Phase II which is expected to develop into a self-sustaining EMC association and by establishing a guarantee fund to provide partial risk guarantees to local financial institutions that lend to the EMCs. End Use Energy UNDP 17.38 63.00 Mar. 29, 2005 The Chinese government is embarking on a long-term program to support energy efficien- State Development Efficiency Project cy in the industrial and building sectors. This project supports the first phase (three years) and Planning Com- of that program. The project's purpose is to remove barriers to the widespread application mission and practice of energy conservation and energy efficiency in the major energy consuming sectors (buildings and industrial) in China. The project fosters a strategic approach to devel- oping, implementing, and enforcing a comprehensive and effective energy conservation policy and regulatory system consistent with the objectives of the Energy Conservation Law of 1998. The project will play a catalytic role in promoting energy efficiency improvement and market development in China. The Chinese government attaches great importance to the project and intends for it to be the overarching framework for international cooperation on end-use energy efficiency. (continued on next page) | 69 70 GEF grant Cofinancing Project name Agency ($ millions) total ($ millions) Approval date Description Executing agency | Energy Efficiency Finance Heat Reform and IBRD 18.35 81.00 Mar. 17, 2005 The project aims to improve the energy efficiency of new building construction in China Ministry of Construc- Building Energy through a combination of building equipment market transformation and heat supply tion/CEEB Efficiency Project policy approaches. It promotes demand in the housing sector for more efficient building materials and for more effective heat metering and control equipment. It also promotes new policies and institutions for metering, controlling, and managing centralized heat sup- ply systems. The project is part of a broader program for heat reform and building energy efficiency by the World Bank and China. The concept fits within a "efficient product market transformation" strategic priority. China Utility- IBRD/IFC 16.50 130.40 Apr. 24, 2006 This project will organize and provide marketing, development, and financing services to IFC PMO Based Energy commercial, industrial, and municipal sector energy users to implement energy efficiency Efficiency Finance equipment installations ("subprojects"), including those using high efficiency natural gas Program (CHUEE) equipment. Energy Efficiency IBRD 13.50 583.15 May 27, 2008 The development objective of the proposed project is to improve the energy efficiency of National Develop- Financing medium and large industrial enterprises and to reduce their impact of climate change. ment and Reform Commission Thermal Power IBRD 20.05 143.80 Nov. 16, 2007 The objective of the proposed project is to reduce GHG emissions by removing regulatory, N/A Efficiency institutional, and technical barriers to phasing out small inefficient coal-fired units, improv- ing the efficiency of larger units, and introducing new generation dispatch models and trading mechanisms to improve the overall efficiency of the power system. Promoting Clean UNDP 1.00 12.30 May 2, 2008 This project supports the Chinese efforts in greening the 2008 Olympic Games in Beijing Beijing Municipal Electric Buses through the demonstration of electric buses solely powered by Li-ion batteries. Environmental Protec- for the Beijing tion Bureau Olympics Phasing-out UNDP 14.25 70.00 July 28, 2008 Enhanced promotion and implementation of the utilization of ESLs in China through the National Develop- Incandescent transformation of the local lighting products market and the phasing out of incandescent ment and Reform Lamps & Energy lamp production and sale. Commission Saving Lamps Promotion Promoting Energy UNDP 6.36 19.03 Nov. 13, 2008 Reduction of China's future GHG emissions through transformation of the Chinese RAC Ministry of Environ- Efficient Room market to production and sale of more energy-efficient RACs. mental Protection Air Conditioners Project Provincial Energy IBRD 13.64 313.70 Under The overall development objective of this project is to achieve significant reductions in GHG Shanxi Provincial Gov- Efficiency Scale- preparation emissions by establishing s uitable provincial-level policies and institutional and financial ernment, Jiangxi Pro- Up Program mechanisms to scale up the adoption of energy efficiency practices, technologies, and vincial Government, programs. Shandong Provincial Government Energy Efficiency ADB 100 (ADB) Under This program will establish a special financing fund implemented by a provincial govern- Guangdong Provincial Power Plan preparation ment fund manager. It targets large/medium industrial and large commercial and institu- Government Program tional end users and ESCOs for retrofitting of plants and building. Energy Efficiency ADB Program concept Partial credit guarantees with partner banks. Will use technical partners to provide technical The Chinese Govern- Multi-Project approved in services for banks and will mobilize equipment vendor cofinancing. The project focuses on a ment/Joint Venture Financing 2008; some proj- variety of subsectors, including district heating, district cooling, and cogeneration projects. Entities Program ects are under discussion Government of Govern- In 2007 NDRC and the Ministry of Finance created energy efficiency fiscal incentive pro- Government of China China Energy ment of grams, including incentive payment of 200­250 yuan per annual TCE energy savings (15­20 Efficiency Incen- China percent project capital cost). Similar incentive funds set up or being formed at provincial tives and Special and city levels, for example, Jiangsu, Guangdong, Hebei, subsidizing 10­30 percent of Funds project costs. Currently the main focus is large projects. A new national government clean energy fund is being set up with proceeds from clean development mechanism projects. CDM Energy CDM Since 2006, CDM has financed energy efficiency projects in China. One criterion for a clean CDM PMO Efficiency Projects development mechanism project is additionality, implying that the program does not include commercially viable projects. Sources: GEF Web site: http://projectdatabase.thegef.org; ADB Web site: http://www.adb.org/Documents/Periodicals/Clean-Energy/ENERGY EFFICIENCY I-Update-Issue6.pdf; China Daily Web site: http://www.china- daily.com.cn/bizchina/2008-06/20/content_6781657.htm; World Bank Web site: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20981087~pagePK:34370~piPK:34424~theSitePK:4607,00.html; MacLean 2008. Note: ADB Asian Development Bank; CDM clean development mechanism; CEEB Center of Energy Efficiency in Buildings; EMC energy management company; ESCO = energy service company; ESL = energy sector loan; FCB fuel cell bus; GEF Global Environment Facility; GHG greenhouse gas; IBRD International Bank for Reconstruction and Development; IFC International Finance Corporation; N/A = not applicable; NDRC National Development and Reform Commission; PMO Project Management Office; RAC room air conditioner; TCE = ton of coal equivalent; TVE township and village enterprise; UNDP United Nations Development Programme; UNIDO United Nations Industrial Development Organization. Appendix H: Major Climate Change Projects in China | 71 Endnotes Executive Summary 8. The Castle Peak Power Plant in Tuen Mun, China, emits 35,800,000 tons of CO2 per year. This is the China's largest 1. In 2008, total annual CO2 emissions from the consump- emitter of CO2, and the world's third largest (Science Daily tion of energy was 14.4 million metric tons in Lebanon, 2007). 13.5 million in Bolivia, 13.3 million in Sri Lanka, and 13.1 million in Jamaica. Chapter 3 Chapter 2 1. Beijing Energy Efficiency Center data. 2. This to a significant extent reflected the national stan- 1. A quadrillion is one thousand million million or 1015 dards and practices these banks followed. For example, (1,000,000,000,000,000). large thermal power plants built to replace small ones are 2. The appraisal assumed the following scenarios: the vol- counted as energy conservation projects, according to the ume of projects financed ($150 million is the target case government regulation. and $75 million the reduced volume case) and the level of 3. "Over the next three years, IB will provide loans of loan defaults that directly affects expenditures of GEF RSF 10 billion yuan to support the undertaking of energy con- reserves (4 percent is the estimated case and 10 percent, servation and emission reduction in China, and projects reflecting complete expenditure of GEF RSF reserve funds, financed by this program are expected to save 60 mil- is the worst case). The "high defaults and low volume" case lion tons of coal equivalent and reduce 200 million tons is a combination of 10 percent default rate and volume of of CO2 emission. Capitalizing the know-how and experi- $75 million. The base case is $150 million worth of projects ence obtained in CHUEE, the IB innovated upon financial financed with default rates at 4 percent. instruments to successfully offer loans for carbon emission 3. The three pilot EMCs have been successful in terms of the reduction, and developed two product series for buyer and delivery of energy savings and emission reductions; they seller in the carbon trading. The Company also established have also shown that the ESCO model and the EPC mecha- cooperative ties with the major carbon finance institutions nisms can be successfully and profitably implemented in such as the IFC, the Arreon Carbon UK Ltd, the Climate China. By the end of 2006, the three ESCOs implemented Change Capital and the KFW Carbon Fund" (IB 2008). 1,426 projects with total investments of 4.26 billion yuan 4. In December 2006, IB became a signatory on the Carbon (about $550 million). These projects saved 2.8 million tons Disclosure Project (a voluntary mechanism for institutions of coal equivalent energy and reduced CO2 by 1.81 million to disclose information about their carbon emissions). The tons of carbon equivalent (IEG, forthcoming). following year, IB signed up for the United Nations Envi- 4. SAFE has been formulating an overall policy on risk- ronment Programme Finance Initiative. IB became the first sharing and partial guarantee facilities. The IFC requests Chinese bank to adopt the Equator Principles in October for SAFE approval became subject to the new regulations, 2008. In July 2008, the Chinese nongovernmental organiza- and that caused the substantial delays in obtaining the tion sector presented the first-ever Green Banking Innova- approval. tion Award to IB. A Friend of the Earth report describes IB 5. Although the program is no longer based on utility-based as "fast becoming a model of sustainable investing in the financing, IFC continues to refer to it as Utility-Based En- country. IB's relationship with the IFC probably has much ergy Efficiency (CHUEE). to do with its environmental progress" (Matisoff and Chan 6. The legal agreement allows IB to continue its lending, in 2009). IB was a runner up in the Financial Times/IFC Sus- anticipation of the program's effectiveness. tainable Banking Awards in 2007 and 2008. 7. CHUEE conducted six studies covering the market po- 5. SMEs in China were defined as businesses with fewer tential for certain sectors and regions to guide the CHUEE than 2,000 employees, less than $50 million in assets, and team and clients (including network participants) and to less than $37 million in sales (these amounts vary depend- inform their business plan in certain targeted energy effi- ing on sector). ciency markets. 72 | Energy Efficiency Finance 6. The project finance-based lending discussed here is dif- 6 percent. "Energy efficiency became an important national ferent from traditional project finance, especially in that it policy priority." Important: 100 percent. "The government is not based on a nonrecourse loan structure, as traditional started providing incentives for energy efficiency." Impor- project finance models are. When making credit risk deci- tant: 56 percent; fair: 11 percent; not important: 6 percent; sions and underwriting loans, project finance-based lend- NA: 28 percent. ing may to a certain extent still consider the general assets 13. There is near-zero correlation between receiving techni- or creditworthiness of the project sponsors, though it puts cal assistance from any source and program membership. more emphasis on project cash flow and project assets. 14. The original expected project sizes under CHUEE range 7. This practice by itself is probably not entirely new in from 500,000 to 1 million Chinese yuan at the small end to China. IB said in the survey that it followed this practice 16­40 million yuan at the large end. Expected average size before CHUEE, though BOB said that this is an innovation is about 2­4 million yuan, and targets directly supporting brought by CHUEE. more than 1 billion yuan in loans and 350­400 transactions 8. Based on field interviews with end users and banks, such over the six-year life of the program, with 61 percent of mid- to long-term loans with amortization repayments the volume to be small projects with average loan size of alone are actually not entirely lacking in China's financial 1.5 million yuan. This indicates that the intended projects market. However, especially for smaller companies or com- are small and support SMEs purchasing relatively small- panies with perceived high credit risk, such loans are in scale energy efficiency equipment. This target was main- short supply. The amortization schedule tends to be by year tained in CHUEE II, as it set its target for 160­250 transac- rather than by quarter, as is the case under CHUEE. Also tions with average loan size $1.3­2.0 million. see appendix D for further statistics from the survey. 9. These loans are in general not project finance based, be- Appendix A cause (i) the guarantees were typically based on counter 1. www.zhjieneng.net. " (Con- guarantees in the form of fixed asset collateral from loan tract Energy Management Data Collection and Analysis)." recipients, and these collateral requirements are typically as 2. In December 2005, the State Council issued a provisional strict as those of commercial banks; (ii) account receivables regulation on promoting structural adjustment, calling for, are mostly associated with already implemented projects, among other things, developing large corporations and a not with the project being financed; or (iii) in certain cases, "recycle economy" (featuring resource reutilization, energy such as for some clean development mechanism projects, conservation, and so forth) and reducing the share of "high the loan was for refinancing. This was often the case in energy consumption, high pollution" sectors. The regulation which the account receivables of the project had become set up some good goals but lacked specific implementation stable after it had been in operation for some time (IFC measures. 2008). 3. Subsequently, the government issued a number of poli- 10. Regression of factors influencing cement companies' cies to implement the notice. In April and June 2006, for decision to invest in waste water heat recovery projects example, the National Development and Reform Commis- among CHUEE cement companies tested "investment sion, jointly with seven other ministries and bureaus, issued implementation" as the dependent variable, with indepen- implementation policies for the cement and steel indus- dent variables from survey answers ("competitive pressure," tries, entitled "Notice on Several Opinions Regarding Ac- "availability of credit," "availability of government subsi- celerating Structure Adjustment in the Cement Industry" dies," and "GHG reduction as policy"). Only "availability of and "Notice on Controlling Total Quantities, Eliminating credit" was a significant factor, with statistical significance Backward Capacities, and Accelerating Structural Adjust- at 5 percent. ment in the Iron and Steel Industry," respectively. 11. 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Bibliography | 75 IEG Publications Annual Review of Development Effectiveness 2009: Achieving Sustainable Development Addressing the Challenges of Globalization: An Independent Evaluation of the World Bank's Approach to Global Programs Assessing World Bank Support for Trade, 1987­2004: An IEG Evaluation Books, Building, and Learning Outcomes: An Impact Evaluation of World Bank Support to Basic Education in Ghana Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy Climate Change and the World Bank Group--Phase I: An Evaluation of World Bank Win-Win energy Policy Reforms Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative A Decade of Action in Transport: An Evaluation of World Bank Assistance to the Transport Sector, 1995­2005 The Development Potential of Regional Programs: An Evaluation of World Bank Support of Multicountry Operations Development Results in Middle-Income Countries: An Evaluation of World Bank Support Doing Business: An Independent Evaluation--Taking the Measure of the World Bank­IFC Doing Business Indicators Egypt: Positive Results from Knowledge Sharing and Modest Lending--An IEG Country Assistance Evaluation 1999­2007 Engaging with Fragile States: An IEG Review of World Bank Support to Low-Income Countries Under Stress Environmental Sustainability: An Evaluation of World Bank Group Support Evaluation of World Bank Assistance to Pacific Member Countries, 1992­2002 Extractive Industries and Sustainable Development: An Evaluation of World Bank Group Experience Financial Sector Assessment Program: IEG Review of the Joint World Bank and IMF Initiative From Schooling Access to Learning Outcomes: An Unfinished Agenda--An Evaluation of World Bank Support to Primary Education Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters How to Build M&E Systems to Support Better Government IEG Review of World Bank Assistance for Financial Sector Reform An Impact Evaluation of India's Second and Third Andhra Pradesh Irrigation Projects: A Case of Poverty Reduction with Low Economic Returns Improving Effectiveness and Outcomes for the Poor in Health, Nutrition, and Population Improving the Lives of the Poor through Investment in Cities Improving Municipal Management for Cities to Succeed: An IEG Special Study Improving the World Bank's Development Assistance: What Does Evaluation Show: Maintaining Momentum to 2015: An Impact Evaluation of Interventions to Improve Maternal and Child Health and Nutrition Outcomes in Bangladesh New Renewable Energy: A Review of the World Bank's Assistance Pakistan: An Evaluation of the World Bank's Assistance Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance The Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank's Support Through 2003 The Poverty Reduction Strategy Initiative: Findings from 10 Country Case Studies of World Bank and IMF Support Power for Development: A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support Small States: Making the Most of Development Assistance--A Synthesis of World Bank Findings Social Funds: Assessing Effectiveness Sourcebook for Evaluating Global and Regional Partnership Programs Using Knowledge to Improve Development Effectiveness: An Evaluation of World Bank Economic and Sector Work and Technical Assistance, 2000­2006 Using Training to Build Capacity for Development: An Evaluation of the World Bank's Project-Based and WBI Training The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits--An IEG Impact Evaluation World Bank Assistance to Agriculture in Sub-Saharan Africa: An IEG Review World Bank Assistance to the Financial Sector: A Synthesis of IEG Evaluations World Bank Group Guarantee Instruments 1990­2007: An Independent Evaluation The World Bank in Turkey: 1993­2004--An IEG Country Assistance Evaluation World Bank Engagement at the State Level: The Cases of Brazil, India, Nigeria, and Russia All IEG evaluations are available, in whole or in part, in languages other than English. For our multilingual section, please visit http://www.worldbank.org/ieg. ISBN 978-0-8213-8450-3 SKU 18450