China EE Opportunity

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					                                  ClimBus vuosiseminaari 2007
                        “Creating Business, Mitigating Climate Change”
                                     12.6.2007 Tampere-talo

Business Opportunities in Energy Efficiency in China

                                       Tarja Kuokkanen
 Team members:
 Jussi T. Lehmusvaara
 Ilpo Sarikka
 Li Ying
Are There Business Opportunities in Energy Efficiency
Markets in China?
  Do these sound familiar…

          Cost Efficient ?
          Environmentally Friendly ?
          Energy Efficient ?

       When investing in new factories, producing facilities, constructions etc,
     which state, company or business would not pay attention to these factors?

How to Get Into Chinese Markets?
  Simply by…

            Having the Best Product !
            Having the Cheapest Product !
            Having a Good Partner Network !
            Having the Pay-Back Time of Max 2 Years !
                Structure of the Presentation

1. Introduction and Setting the Scene…

2. Overview of the Energy Sector in China
   2.1. Renewable Energies and Energy Efficiency

3. Government Policies & 11th Five-Year Plan

4. Financing Possibilities and CHUEE

5. Opportunities and Building Business in China in Energy Efficiency
1. Introduction and Setting the Scene…

• 1940 Chairman Mao Tse-tung declared in his speech how
  China ”must use natural science to understand, conquer, and
  change nature”.

• And conquer it did…

   • Forests were razed;
   • Factories have dumped untreated waste to rivers so that about
     30% of China’s rivers are so dirty they are not fit for industrial or
     agricultural use;
   • Some 300 million Chinese (roughly the size of the entire US
     population) don’t have access to clean drinking water;
   • The pollution of air and water have resulted to growing number of
     cancer deaths among the population;
       • Cancer has been the most common cause for death in China since
       • An estimated 1.5 million people die to cancer every year;
   • 16 of 20 most polluted cities are in China (WHO);
   • Two-third of China’s largest cities fail to meet WHO Air Pollution
     Minimum Standards;
   • Due to heavy reliance on coal China is largest global emitter of sulfur
     dioxide (SO2);
   • Acid rain affects one-third of China’s geographical area;
   • GHG emissions 2nd largest after US (15% of total).

• Since 2001, China has increased its emissions more than every
  other industrialized country in the world combined.

• Today, China opens an average of one new coal-fired power plant
  per week.

• China uses 15% of world energy but produces 5,5% of the world’s
   • In May 2007 government told local officials to act in “crucial” year for
     meeting energy efficiency targets.

• World Bank estimates pollution costs China 8-12% of its US$ 1.4
  Trillion GDP in direct damage and costs.
While China’s original plan was not to pollute forever,
but just grow economically as fast as possible and
clean up later…

…and, considering the already mentioned 3 main drivers:

     Environmental degradation and its already lethal effects to population;
     Direct damage and costs from pollution to China’s GDP;
     Cost efficiency through energy efficiency.

 China’s prominent interest in Energy Efficiency, Energy Security
  and related matters should not be a big surprise…
2. Overview of the Energy Sector in China

•   Coal: World’s largest coal consumer, more than 30% of the world total
    consumption in 2004 (used about 2 billion ton of coal in 2004);

•   Natural Gas: Rapid consumption growth. Share of natural gas in energy
    consumption very small (3%) but expected to quickly increase to 10% by
    2010, while import dependency could reach 20% by 2010;

•   Oil: World’s second largest oil consumer (app. 315 million tons in 2005),
    oil import dependency could reach 44% in 2005 (about 120 million tons);

•   Electricity: Second largest electricity producer in the world. In 2004,
    installed capacity was 441 GW and by the end of 2005, 530 GW;

   High energy demand growth;
   Energy quickly becomes “bottleneck” of economic growth and
a   affects environment;
   Government considers energy conservation as its top priority.
2.1. Renewable Energies and Energy Efficiency

Key Drivers for Renewable Energies

•   Rising oil prices make renewable energies more attractive;
•   Utilizes domestic resources that can displace imports (ForEx savings);
•   Generates employment and new enterprises;

•   Can help rural areas combat large scale migration to urban areas;
•   Governments, industry, and local populations recognize value;
•   Individuals want to support “green energy”.
•   Represents reduced air emissions and LDC cities often have severe air
•   Helps combat climate change/global warming;
•   Supports sustainability/eco-efficiency at enterprise level.

 Demand for access to clean modern energy from renewable
  sources is rising in general in developing world.
3. Government Policies & 11th Five-Year Plan

How to Develop a Resource-Saving Society in China?

Industries: Focus on high intensive industry sectors and 1,000 enterprises

Transportation: Phase out old vehicles, enhance fuel standards, promote
clean-fuel and launch pilot programmes of ethanol fuel

Buildings: Enforce new energy-saving design standards and improve
energy efficiency in existing buildings

Commercial: Expand energy conservation certification, enhance
mandatory label management and implement “Green Lighting” Project

Government: Take the lead in energy conservation, purchase energy and
water-saving products and highlight resource conservation in decision-
11th Five-Year Plan:
Ten Initiatives to Improve the Energy Efficiency

1. Amendment of the Energy Conservation Law
2. Implementing the Medium and Long-term Plan of Energy
3. Implementing Ten Key Projects for Energy Conservation (see next
4. Top-1000 Enterprise Energy Conservation Action Plan
5. Creation of GDP/Energy Consumption Level Reporting and
    Releasing System
6. Energy Efficiency Labeling Management Directive
7. Encouraging the Development of Energy Saving and Environmental
    Friendly Small Engine Vehicles
8. Amendment of the “Program on Energy Saving Technology Policies
    in China”
9. Program on the Strengthening of Resource Conservation in
    Governmental Agencies
10. Formulating Energy Efficiency Standard for the Products in Major
    Energy Consuming Sectors
Implementing Ten Key Projects for Energy Conservation

    •   Coal-burning Boiler (Kiln) Improvement Project
    •   Regional (Heat & Power) Cogeneration Project
    •   Residual Heat & Pressure Utilization Project
    •   Oil Conservation & Replacement Project
    •   Power Generators Energy Conservation Project
    •   Energy System Optimization Project
    •   Building Energy Conservation Project (See next slide)
    •   Green Lights Project
    •   Government Organization Energy Conservation Project
    •   Energy Conservation Monitoring & Technical Service System
    •   Construction Project
11th Five-Year Plan for Energy Development
(Released by NDRC on 10th of April, 2007)

•   Sets out the goal of keeping primary energy consumption at 2.7 billion tons
    and its annual growth rate at 4% by 2010.

•   Proportions of different energy sources in total primary energy consumption by
    •   Coal 66.1 %
    •   Oil 20.5 %
    •   Hydropower 6.8 %
    •   Natural gas 5.3 %
    •   Nuclear power 0.9 %
    •   Other renewable energies 0.4 %
Business in Energy Efficiency

Government Regulated Business          Private Business

• Price control is very difficult to   • Coastal areas/inland;
  dismantle;                           • Cost calculations: maybe
• Coastal areas/inland;                  cheaper to move a factory
• Rules, regulations and notices;        to inland than to comply;
• Targets by Provinces;                • Partners and contacts;
• Government is the key due to its     • Business opportunity to
  control of raw materials and also      Chinese companies as
  electricity pricing;                   well.
• Government hopes to make EE
  part of new economy.
4. Financing Possibilities and CHUEE
    (China Utility-Based Energy Efficiency Finance Program)

Background of CHUEE
•    January 2004: MOF of China request from International Finance
     Corporation (IFC) for a private sector financing program for EE;

•    March 2006: MTI of Finland approves Technical Assistance to IFC for
     CHUEE project together with GEF and other donors;

•    October 2006: SAFE approves IFC loss sharing arrangement with
     partnering bank – Industrial Bank;

•    January 2007: First loan signed;

•    Purpose of the program is to
       Improve EE financing alternatives in China
       Reduce CO2 emissions.
IFCs 1st & 2nd Loss Risk Sharing Facility

US$ 45 million in risk sharing leverages; US$ 100-115 million in
equipment financing for portfolio of app. 400 projects.

                                               2nd Loss
    IFC                 Bank 60%
                                                 90 %

                                Bank            1st Loss
         IFC 75%
                                25%              10 %
Eligibility for CHUEE loans

                                                  Other Conditions:
Industrial, commercial and/or other entities
    who are at least profitable over the last        At least 20% equity;
    two years (unless newly created entities).
                                                     Mortgage-style debt services;

                                                     Debt Service Reserve;
Size of loans:
                                                     Audited Financial Statements;
        Small: 200,000 - 2,000,000
        Medium: 2,000,000 - 4,000,000               No negative credit records;
        Large: 4,000,000 - 40,000,000
        Single CHUEE loan has a upper limit of
           16,000,000 to enter into portfolio        Loans are used to finance eligible
        Banks can lend up to 40,000,000 but
         only 16,000,000 is eligible                  projects/equipment;

                                                     Cost reflect market/credit-
                                                      worthiness of projects/borrowers.
In line with payback years but not to exceed 5
                             International Finance Corporation

                                                                                 Fees     Technical
   Technical                                       Technical                             Assistance &
   Assistance                                      Assistance                             Loan Risk

                               in g
                                             Utilities               U
                           rket                                    Pay tility
                         Ma                                           me
                                                                          n ts
        Suppliers                                                                     Banks
                                                  Energy Sales &          Utility &       EE Project
Equipment                   Fee
                                                     Project                Loan              &
    &            Payments                          Development
Engineering                                                               Payments        Equipment
                                                   Engineering                              Loans
 Services                                            Services

                        Industrial, Commercial and Institutional Customers
 Customer1      Customer 2    Customer3       Customer4         Customer5        Customer6
Other CHUEE Products

• Mid/Long-term Loan to End-Users
    Lien on Project
    Securing settlement accounts for enough transactions
     (for debt service coverage)

• EE Financing to Leasing Companies
    Step-in rights
    Closed-circuit cash management

• Mid/Long-term Loans to Fund New Production Line
  or Expansion for EE Manufacturers
    Lien on Project
Typical Equipment within CHUEE Programme

•   Boilers, for industry & building heating;
•   Air Conditioning & Heating Systems;
•   Cogeneration & Tri-generation;
•   Industrial Process: kiln, smelting, glass furnace;
•   Waste heat recovery;
•   Motors, drives, pumps & related controls;
•   Automation & control systems;
•   Capacitors, frequency invertors.

          Finnish equipment companies offer wide range
                      of relevant equipment
Program Benefits for Finnish Companies

 Direct opportunities for equipment sales
   • Program will create “decision ready” customers
   • Finnish companies can propose & bid on projects

 Marketing partnerships with utilities and banks
   • Program creates new marketing channels; equipment companies
     can access utility and bank customers
   • Marketing programs can be created with utilities & banks

 Equipment financing for customers
   • Banks can provide loans to customers originating from multiple
     channels, supported by the IFC RSF.
Value-added Market Development Services by Finpro
to Participating Finnish Companies
 Customized action plan/services for individual companies:

   •   Market research
   •   Networking services
   •   Partnering services
   •   Marketing
   •   Facilitating financing
   •   Government/research institute contacts
   •   Benefiting of MOU’s signed between MTI of Finland and NDRC/MOE
   •   Dedicated EE resource in Finpro Beijing office

 IFC coordinates actively with Finpro;

 EE project officer Mr. Lee Zhang in Finpro Beijing office, Project
  Manager Tarja Kuokkanen supported by other members of
  Energy Team.
5. Opportunities and Building Business in China in
Energy Efficiency Sector

 How to Build Profitable Business in China ?
    •   Different statistics who’s profitable – if you are profitable you don’t want
        to talk about it…

 How to Build Partner Network in China ?
    •   Takes time and patience to build relationships.
    •   Universities, research institutions etc.

 What Business Areas Have the Most Potential ?
    •  Pulp & Paper, chemical, mining, service related with right
       partners; any production equipment with pay back time of max 2 years
   and and technical/running cost advantage compared to local products.

 How to Operate Profitably ?
    •   Raising cost issue in China.

 Clean Development Mechanism – Any Opportunities ?
    •   Big hype, disappointment, cautiously optimistic.
Latest Developments and Growing Competition in
Chinese Energy Efficiency Markets…
•    President Hu Jintao’s three-day visit to Sweden last Sunday, 10th of
     June 2007:

    “China primarily wanted to learn about Sweden’s environmental
     technology solutions, ranging from energy use to waste management
     and emissions…”

     Andreas Carlgren (Sweden’s Minister for the Environment), upon signing an agreement on
     environmental cooperation under which Sweden and China will exchange information and

 State and businesses for example in Sweden already acting…
     Business Opportunities in Chinese Energy Efficiency Markets
                    Are Here and They Are Now!
 Tel: +358 40 51 30488
 Cell: +63 917 620 9650

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