Guodian Technology Environment Co Ltd (GTEC) recently signed a contract with Jiangxi Xinyu Power Plant for what is likely the largest energy performance contract (EPC) project in China.

According to the five-year contract, GTEC will invest about 100 million yuan on alterations to Xinyu Power Plant's two 200,000 kw power generating units, adding energy saving equipment to cut energy consumption and emissions.

The project is estimated to help Xinyu Power Plant save 70,000 tons of coal and 400 tons of fuel, and cut emissions of more than 170,000 tons of CO2 and 1,200 tons of SO2 annually. Meanwhile, GTEC is expected to make a profit of over 200 million yuan by sharing benefits from the energy saved.

In line with the country's demand for energy savings and emissions reduction, EPC projects provide market-oriented energy-efficiency services that leads to a win-win situation for both energy consumption enterprises and energy management corporations (EMCos).

China aims to cut energy consumption per unit of GDP by 20 percent in the 11th Five-Year Plan (2006-10) period. In April 2006, China launched an energy-saving campaign among 998 enterprises in nine high-energy-consuming industries, such as electric power, steel and iron and cement industries, aiming to save a total of 100 million tons of standard coal from 2006 to 2010.

Shen Longhai, director of the Energy Management Companies Association (EMCA), said a total of 14.6 billion yuan was invested in energy efficiency projects throughout the country in 2007, of which 6.55 billion yuan was on EPC projects.

The EPC mechanism, in which an EMCo provides energy-saving and financial services to an energy consumer, emerged in developed countries in the 1970s. With both technical expertise and financial backing, EMCos bear the risk by investing its own or borrowed funds. It recuperates its investment over a period of time through shared savings with client.

In collaboration with the World Bank (WB) and the Global Environment Facility (GEF), the Chinese government introduced EPC in 1998. By the end of 2007, EMCA members increased from 59 to 308 companies in 2004, according to Shen.

Financing barriers

But not all enterprises prosper despite the favorable environment for energy efficiency services. A majority of EMCos in China met barriers financing their projects, since banks are reluctant to lend to them.

Experts say this is largely due to a lack of mutual understanding between banks and EMCos. Without a thorough understanding of energy-saving technologies behind EPC projects, banks tend to believe that the investments can't be repaid. Meanwhile, there is no generally accepted system of measuring and verifying the savings for banks at present, making it more difficult to assess EPC projects.

Another reason is that banks usually provide asset-based loans. But many EMCos, especially small ones, do not have many capital assets, except for energy-saving equipment, which would be difficult for a bank to re-possess, and would have little re-sale value if the customer were to fail to repay the loan.

As EPC is still a burgeoning business in China, most EMCos have limited credit histories, another factor for banks to consider the loans risky.

Raising the money

Besides lending from banks, EMCos in China try to raise funds through many avenues, including project financing, equity financing and financial leases. Some banks and financial institutions have also started to show their interest in EPC projects.

The WB/GEF and the Chinese government launched a guarantee program for EMCos to boost EPC businesses in China. At the end of 2007, the China National Investment Guaranty Co Ltd provided a 346 million yuan guaranty for 110 EPC projects of 25 EMCos, with a total investment of 587 million yuan and guaranty of 385 million yuan, according to Shen.

Last September, China Minsheng Banking Corp, Bank of Shanghai and Industrial and Commercial Bank of China jointly provided a loan of 100 million yuan for 100 EPC projects in Shanghai, 27 of which have been carried out.

There are also business leaders who have taken their own path. Shandong Rongshihua Leasing Co Ltd (formerly called Shandong EMCo), one of the first three EMCo pilot projects in China, is exploring the possibility of financial leases.

"With a license to do financial leases, the company's capital can be magnified ten times. That is to say, if we are registered with 10 million yuan, the scale of the company can reach 1 billion yuan," says Sun Hong, chairwoman of the board of Rongshihua Leasing. "That's how we solve the financing problem, which is critical for an EMCo.

"The financial lease market is more canonical as it is written into law. But there aren't national regulations for EPC projects at the moment. In this way, it is less risky doing financial lease," Wang Zengtao, a legal professional from Rongshihua Leasing, tells China Business Weekly.

(China Daily 03/24/2008 page5)