China Utility-Based Energy Efficiency Finance Program

Developing Financing Model for Energy Efficient Practices in the PRC

Date posted: 
Nov 18 2008

The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.

Responsible Party: 
Regulated Community
I. Objectives or Impact: 

Pressures from population growth create a heavy demand for energy resources. In China, economic growth puts a heavy toll on energy resources. Since 2001, energy consumption was seen to increase much faster than GDP. The increase in the country’s living standards created a demand for products. Also, the flourishing of the heavy industry in China is quite rapid due to its growing position in the world market as a competitive player in the sector. Interestingly, the demand pressures might naturally prompt producers to churn out large volume of products at the expense of efficiency, especially in energy use. The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector.

II. Description of the Good Practice (Outputs): 

Past experiences show that investments and efforts to promote energy efficiency, both in the household and firm levels, can be profitable. For example, conversion to less carbon-intensive energy sources is doable, and in fact can be a source of income. However, a major barrier to actual implementation is the scarcity in financing. It is typical that local banks have a skeptical view on the profitability of environment projects per se. Also, the guidelines of banks are often not aligned with the peculiarities of environment and renewable energy projects (e.g. long gestation periods, issues on track records of borrowers). Also, banks are most often not equipped to evaluate these projects. The International Finance Corporation (IFC) of the World Bank leverages its experience with renewable projects in promoting energy efficiency via the development of novel financial models and schemes. The CHUEE program is co-funded by the IFC, the Global Environment Facility, and the Finnish and Norwegian governments. The program offers a risk-sharing facility for partner banks and tailored advisory services that aim to develop the partner banks’ capacity to appraise projects, and at the same time develop its approval process and credit-underwriting procedures.

III. Outcomes or Results: 

Recently, the IFC signed a memorandum of understanding with the China Export-Import Bank to provide capacity building on the bank’s environmental and social risk management policy and practices for overseas investment. Since 2007, more than 1,400 product managers, credit officers, and loan officers from 100 business outlets in the country received energy efficiency financing training from the IFC. The participating banks included the Industrial Bank, the Bank of Bejing, and Shanghai Pudong Development Bank. Industrial Bank is the initial bank partner in the program. The linkage between IFC and the Industrial Bank started in 2004, with the IFC’s initial investment of US$ 52 million on the bank. The first-phase of the risk-sharing arrangement in 2006 made possible the creation of a facility that has been used to leverage a portfolio of US$ 65.7 million of energy efficiency equipment and project loans for small and medium-scale projects. Projects typically pursued were industrial boiler retrofitting, wasted heat recovery, co- and tri-generation projects for district heating, power saving, and optimization of industrial energy use. The initial efforts of the IFC and Industrial Bank attracted two prominent international co-investors, namely the Hang Seng Bank of Hong Kong and Singapore’s GIC Special Investments. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.

A. Policy Framework: 

One of the crucial steps for endeavors like this is how to fully incorporate a lending program for environment projects within the bank. Given the financial viability of environment projects, resistance from the top management of formal institutions is present. In the case of the CHUEE program, a memorandum of understanding was undertaken between IFC and the partner bank. A careful and explicit risk-sharing arrangement needs to be laid out due to perceived technical and financial risks of energy conservation investments and lending among industrial enterprises and banks.

On the side of the government, policy and regulatory interventions are required complements to encourage industrial enterprises to invest on energy efficient practices. This is pressing given a presence of the large size and share of energy-intensive industries in the economy. Strong regulatory policies, especially command-and-control schemes, and monitoring activities, might be required especially if inefficient practices are already widespread.

B. Budgetary and Financial Requirements: 

(see materials and resources; further information)

C. Human Resources: 

Initially, reliance for technical support for evaluation from outside expertise might be heavy. In China, support was given for staffing development, capacity building, and training. Trainings were also provided to instill due-diligence on skills related with project development and appraisal of energy efficient projects.

D. Material Resources: 

Aside from the financing requirements and support for partner banks, resources might also be required for energy conservation investment promotion, particularly via project demonstrations. Testing of business models and institutional arrangements will require resources for pre-investment activities like feasibility studies and the development of new financing mechanisms.

E. Institutional Support: 

For programs that aim to introduce novel practices, support from the banking sector might be required. For China, the IFC supported a series of national workshops to present successful case studies of subprojects.

F. Planning, Scheduling or Sequencing of Activities: 

The gestation period of programs that aim to promote sound practices on energy conservation is long, especially given perceptions on the nature of environmental investments. For China, the memorandum of understanding occurred in 2004. The initial years might just be devoted towards analyzing the capabilities of the banking sector with regard to business development. The development of strategies, financing models, and appropriate sectoral arrangements and practices, might occur after two years. Scaling-up of the lending activities might happen during the later years of the program.

V. Further Information: 
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