ESCO Industry in China: Status and Way Forward

Xiaoyu Shi June 2011, Manila

World Resources Institute

A global environmental think tank that goes beyond research to put ideas into action Sustainability and development Non profit organization http://www.wri.org/ Established in 1982 Headquarter in DC with Beijing Office Over 200 staff

China ESCO Industry: Three Stages of Development

EMCA established; ESCOs loan guarantee program launched
1998 2004 2010

Agreed to introduce EPC

1996

Energy intensity and carbon reduction targets

2015

3 pilot EMCs

taxation and incentive policies for ESCOs

China ESCO Industry: Three Stages of Development

New Era of ESCOs - 12th 5 YP?

Continue to be growing at a fast pace
To save energy to Vigorously promote energy conservation 7+ strategic emerging industries

Attention shifted to ESCOs and EPCs

EE improvement in SMEs and Buildings Greater leverage with private funding and wider options

New ESCO taxation policy and accounting rules Cash rewards to eligible ESCOs and EPCs

SWOT Analysis
STRENGTHS
Strong expertise in certain technologies Ability to provide full-house services and flexibility to deliver customized services Business experience gained in past 15 years Fast-growing industry with increasing popularity

OPPORTUNITIES
Conducive policy environment Huge energy efficiency potential Growing funding sources (e.g, commercial banks such as Industrial Bank Co., Ltd and other financial institutions) Low-hanging fruits already grabbed Underdeveloped market in public sector

WEAKNESSES
Most ESCOs are small and lack of competitive advantage Lack of capital Low credibility Limited technological types Insufficient management skills Incomplete regulatory framework

THREATS
Insufficient access to commercial financing Narrow coverage of government incentive programs Energy user entities implement EE in house vs. outsourcing International ESCOs have stronger technical, financial, and managerial expertise

Characteristics of ESCO Industry in China

Nascent Industry
Many ESCOs are: limited assets & capital newly established have limited track record and low market recognition The industry has mixed track record and image Regulatory framework is not complete

Structural Conflict
Most ESCOs in China are technologically focused and strong But lack the full range of skills and strengths business and finance Misaligned with the need for providing comprehensive solutions

Technological Scope Constraint

Single technology (or limited) Have proprietary relationship with the technologies Requires customers to contract with multiple ESCOs (transaction costs) Reduce the size of each transaction

China Energy Efficiency Aggregation RFI Response

Many small and EPC not core

<=50 100%

10-50 50%

>50 0% <10 50%

EPC Revenue (million RMB yuan)

China Energy Efficiency Aggregation RFI Insights from RFI Response

Difference in EPC experience and limited track record

China Energy Efficiency Aggregation RFI Insights from RFI Response

Limited technological scope

China Energy Efficiency Aggregation Project

Background:
Wide supports on energy audits 1/3 of identified EE projects not implemented Government in search for new business model

Objectives:
10 Miles 16 Km

Projects clustered in SW Shanghai

Adopt a comprehensive approach to demonstrate the need, approach, process, and benefits of aggregating small and medium sized projects in China.

Activities:
Convening Hosts, ESCOs, financiers Organizing workshop to explain EPC and the project Developing tools to overcome barriers Pre-screen Financing Checklist EE Financing/Investment Decision-Making Supporting Tool Request For Information and Proposal (RFI/P) template

Growth opportunity new development of financial sector

Private equity funds / Venture capital enter into EE market
Project financing ESCOs China, India, and others

Commercial Banks
Minsheng 1:5

Way Forward what is it?

Aggregation Enabling environment / Eco-system
Regulation to encourage investment in ESCOs and financing ESCO projects
NPL financial sector Quota similar to that to power generators Accreditation Rating

New Players
Financial services providers Third party project evaluators Government qualified or accredited institutions?

ACKOWLEDGEMENT