People’s Republic of China: Shandong Energy Efficiency and Emission Reduction Project

Horizontal Tabs

Lessons

Relaxing financial guarantee requirements can optimize the use of the financial intermediation loan (FIL) modality to accelerate investments in energy efficiency.

The $100 million FIL provided by the Asian Development Bank for this project was expected at appraisal to fully revolve two times, supporting an additional eight subprojects under batch 2. However, only one subproject had been approved as of project completion under batch 2. Key reasons for the difficulty in approving new subprojects were (i) the local economic slowdown, resulting in fewer enterprises willing to invest in renewable energy and energy conservation projects; (ii) the saturated renewable energy market in Shandong, given the low subsidies for renewable energy project development; and (iii) the extremely cumbersome and difficult procedures for private enterprises to obtain the local government’s financial guarantee. The cancellation of 1 of 2 original subprojects under batch 1, which led to the reprocessing of other subprojects, also delayed the project’s progress. It is noteworthy that the Shandong Zhongzhuang, the lone batch 2 subproject, overcame the afore-mentioned barriers because (i) it is a state-owned enterprise and the mother company offered a counter-guarantee; (ii) the company deployed engineering procurement construction through a turnkey contract for its renewable energy device installation; and (iii) the renewable energy devices it installed were an integrated solution set up within its manufacturing sites, which meant that the corporation would directly benefit from energy cost savings while delivering emissions reduction. If Shandong’s economic stagnation prolongs and the difficulty of securing financial guarantee remains a formidable challenge, the provincial government and the financial intermediary bank, the China Everbright Bank (CEB), will need to continue their efforts to look for subprojects similar to Shandong Zhongzhuang or private companies which are financially robust with diversified operations. Another option is to relax the requirement for financial guarantee by the local government and allow the CEB to have the full responsibility for assessing and deciding the types of guarantee or collateral needed for approving new subprojects, in which case, the FIL can be fully market-oriented.

Project Cycle Stage:

Preparation

Implementation

Offering an interest rebate on energy savings and emissions reduction can enhance the potential of the FIL modality in leveraging greater investment in energy efficiency and emissions reduction projects.

This project has demonstrated a reliable methodology for calculating the energy savings and emissions reductions from energy efficiency initiatives. The methodology involved establishing an accurate baseline, designing a customized monitoring and verification (M&V) system to verify energy savings from the outset, and engaging a reliable third-party M&V agency to do the assessment and calculation. The calculations provided by the third-party M&V agent can be used as basis for interest rebates to sub-borrowers. To strengthen the incentives and encourage more investment in energy efficiency and emissions reduction, the covenants for future financial intermediation loans should include interest rebates as a mandatory practice with clearly defined milestones so that sub-borrowers can immediately benefit from these actions. A carbon reduction registry system may also be established to enable the sub-borrowers to link with nationwide carbon trading, as they see fit.

Project Cycle Stage:

Preparation

Implementation

Background

During project appraisal in 2010, Shandong was the second largest province in terms of industrial outputs in the People’s Republic of China (PRC). Its energy supply depended heavily on fossil fuels—coal (71%) and oil (26%)—causing high levels of carbon emissions. Its industry sector consumed over three quarters of its total energy in 2009.

To help achieve Shandong’s commitment to improve energy efficiency and conservation over the long-term, the Asian Development Bank (ADB) approved a financial intermediation loan (FIL) of $100 million for the Shandong Energy Efficiency and Emission Reduction Project in August 2011. The project aimed to expand energy efficiency investments in key energy-intensive industries in the province, develop energy service companies (ESCOs), and enhance provincial capacity to identify, finance, and manage similar energy efficiency and emission reduction projects. Its anticipated impact was reduced industrial energy intensity and emissions in Shandong, and expected outcome was expanded energy efficiency investments in energy intensive industries of the province.

The project’s planned outputs were: (i) priority energy efficiency and emission reduction projects implemented in key energy intensive industries; and (ii) capacity developed for government and financial institutions in planning, investment, and management of energy efficiency projects. The China Everbright Bank (CEB), Jinan branch in the province, was designated as the financial intermediary of the ADB loan, envisaged to finance multiple batches of energy efficiency and emission reduction subprojects using the revolving FIL modality.

Two batches of subprojects were financed up to March 2019. Technological innovation was the key element for selecting subprojects for the first and second batches. All four subprojects selected for the first batch were private enterprises. All the batch 1 subprojects were completed as planned, and energy savings were measured and verified by a third-party agent. Successful implementation of the subprojects improved government and financial intermediary capacity in planning, investing in, and managing energy conservation projects in Shandong. The successful experience also encouraged the Shandong Provincial Government (SPG) to further undertake policy reforms to promote energy conservation in industry. A low carbon development plan for 2017–2020 was adopted, and a notice was issued in 2017 for “green industry promotion and replacement of old growth drivers with new ones,” including the creation of local industry funds to support diversified green financing and investments. More market mechanisms to promote new and renewable energy were also identified in the SPG’s 10−year plan for 2018−2028.

The successful batch 1 subprojects enabled the project to achieve its overall emission reduction targets. However, the project’s target to leverage an additional investment double the amount of the ADB loan was only partially achieved. The target number of subprojects for batch was also not achieved: as of project completion, instead of eight, only one subproject had been selected. Delays in identifying new subprojects were mainly attributed to the local economic downturn and capital market vulnerability in 2017 and 2018, which made the process of obtaining financial guarantees more difficult for subprojects under batch 2. Because of the downturn, fewer enterprises were willing to invest in renewable energy and energy conservation projects. Execution delays and cost overruns in the batch 1 subprojects also hampered the turnaround of the revolving FIL fund provided by ADB.

Nevertheless, by reducing coal consumption, the project mitigated its negative impacts on public health and the hazards associated with coal mining and transportation. Improvement in the air and environmental quality due to the reduction has benefited the poor, who are more prone to health risks associated with pollution and coal burning. Jobs created by the project particularly in the manufacture and dissemination of energy-efficient technologies also benefited the poor in Shandong and other regions covered by the participating ESCOs.

Project Information

Project Name:

Shandong Energy Efficiency and Emission Reduction Project

Report Date:

August, 2019

Main Sector:

Country:

Project Number: