http://www.proactiveinvestors.com.hk/columns/1521-on-trying-to-make-china-energy-efficient.html
On trying to make China energy efficient2009-09-03 by Tristan Edmondson
One of the most exciting approaches I've come across to tackle China's low levels of energy efficiency is a financing model called energy performance contracting.
Under an energy performance contract, Energy Service Companies (ESCOs) install energy saving technologies and methodologies and then use the cost savings to repay the capital investment. By doing so ESCO customers do not have to pay up-front to reduce their energy bills.
In the US it has already played a major factor in reducing the amount of energy needed to produce one unit of GDP.
It seems simple at first glance, especially in a country with one of the worst ratios of energy use to GDP in the world (2.5 times the world average). But there are many hurdles to overcome in carrying out an ESCO project in China.
I have recently been working alongside Dr. Stephane Grand, managing partner at SJ Grand, a financial advisory firm. He has been doing business in China for over 15 years and wrote his PhD dissertation on Chinese contract law. "Every ESCO project is a real test of whether China's legal structures can stand up to such complex contracting," he tells me.
According to China's Energy Management Association, set up by the World Bank to promote the interests of the industry, there are now over 250 ESCO companies in China.
Foreign players in on the game include a number of listed companies.
US-based Honeywell International (NYSE:HON) has an active ESCO arm which implemented energy saving solutions at Tsingdao-Asahi's brewery in Shenzhen, ultimately resulting in 17 percent annual energy savings.
China Energy Recovery, Inc. (OTC:CGYV) designs, manufactures and installs waste heat energy recovery systems which provide facilities with greater energy efficiency. In July the company won a US$1.42 million contract to design and manufacture two waste heat recovery systems for Chinese fertiliser company Hubei Yangfeng Group.
Global Innovative Systems Inc. (OTC:GBSY) has a wholly owned subsidiary, Tech Team Development (Zhuhai) Limited ("TTZ"), that has been admitted as a member of EMCA, China's energy management company association.
Despite a few apparent successes, cultural and institutional barriers exist that inhibit the kind of growth the Chinese ESCO industry is capable of.
According to Stephane, the concept of utilising energy efficiency in order to create a ‘savings stream' runs contrary to China's prevailing business culture, one of quick returns based on expansion and finding new markets.
Chinese Banks are often unwilling to lend for energy efficiency projects because the benefits appear non-tangible and therefore risky. The size of typical ESCO loans is often too small for Chinese banks to be worthwhile appraising, loan amounts usually range from $1m to $6m, much smaller than the large infrastructure projects and production expansion loans that loan officers typically appraise.
A lack of standardized measures for energy use makes the measurement of energy savings difficult in China, and this, in combination with China's nascent legal apparatus, means that ESCO contracts are much riskier than in other countries.
Development institutions have sought to tackle these problems through loan guarantees, financial and technical assistance to banks and ESCO companies, as well as help to bundle up ESCO projects to reduce loan transaction costs. Their efforts have resulted in a growing ESCO industry in China, but one that is not yet fully independent of this development aid.
Chinese ESCO development is also dependent on domestic ESCO capability; if the appropriate energy efficiency technologies, methodologies and management expertise are not available in China then the huge energy savings potential will not be realised.
Chinese ESCOs are currently typically small operations and are often dependent on one technology, such as energy efficient lighting, rather than a full service of energy saving methodologies.
The future of these companies will depend not just on the extent to which China can develop more sophisticated market institutions, but also whether they are prepared to match the full-service capabilities of their American and European counterparts.
On trying to make China energy efficient2009-09-03 by Tristan Edmondson
One of the most exciting approaches I've come across to tackle China's low levels of energy efficiency is a financing model called energy performance contracting.
Under an energy performance contract, Energy Service Companies (ESCOs) install energy saving technologies and methodologies and then use the cost savings to repay the capital investment. By doing so ESCO customers do not have to pay up-front to reduce their energy bills.
In the US it has already played a major factor in reducing the amount of energy needed to produce one unit of GDP.
It seems simple at first glance, especially in a country with one of the worst ratios of energy use to GDP in the world (2.5 times the world average). But there are many hurdles to overcome in carrying out an ESCO project in China.
I have recently been working alongside Dr. Stephane Grand, managing partner at SJ Grand, a financial advisory firm. He has been doing business in China for over 15 years and wrote his PhD dissertation on Chinese contract law. "Every ESCO project is a real test of whether China's legal structures can stand up to such complex contracting," he tells me.
According to China's Energy Management Association, set up by the World Bank to promote the interests of the industry, there are now over 250 ESCO companies in China.
Foreign players in on the game include a number of listed companies.
US-based Honeywell International (NYSE:HON) has an active ESCO arm which implemented energy saving solutions at Tsingdao-Asahi's brewery in Shenzhen, ultimately resulting in 17 percent annual energy savings.
China Energy Recovery, Inc. (OTC:CGYV) designs, manufactures and installs waste heat energy recovery systems which provide facilities with greater energy efficiency. In July the company won a US$1.42 million contract to design and manufacture two waste heat recovery systems for Chinese fertiliser company Hubei Yangfeng Group.
Global Innovative Systems Inc. (OTC:GBSY) has a wholly owned subsidiary, Tech Team Development (Zhuhai) Limited ("TTZ"), that has been admitted as a member of EMCA, China's energy management company association.
Despite a few apparent successes, cultural and institutional barriers exist that inhibit the kind of growth the Chinese ESCO industry is capable of.
According to Stephane, the concept of utilising energy efficiency in order to create a ‘savings stream' runs contrary to China's prevailing business culture, one of quick returns based on expansion and finding new markets.
Chinese Banks are often unwilling to lend for energy efficiency projects because the benefits appear non-tangible and therefore risky. The size of typical ESCO loans is often too small for Chinese banks to be worthwhile appraising, loan amounts usually range from $1m to $6m, much smaller than the large infrastructure projects and production expansion loans that loan officers typically appraise.
A lack of standardized measures for energy use makes the measurement of energy savings difficult in China, and this, in combination with China's nascent legal apparatus, means that ESCO contracts are much riskier than in other countries.
Development institutions have sought to tackle these problems through loan guarantees, financial and technical assistance to banks and ESCO companies, as well as help to bundle up ESCO projects to reduce loan transaction costs. Their efforts have resulted in a growing ESCO industry in China, but one that is not yet fully independent of this development aid.
Chinese ESCO development is also dependent on domestic ESCO capability; if the appropriate energy efficiency technologies, methodologies and management expertise are not available in China then the huge energy savings potential will not be realised.
Chinese ESCOs are currently typically small operations and are often dependent on one technology, such as energy efficient lighting, rather than a full service of energy saving methodologies.
The future of these companies will depend not just on the extent to which China can develop more sophisticated market institutions, but also whether they are prepared to match the full-service capabilities of their American and European counterparts.
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