Introducing Market-based Mechanisms for Energy Conservation in China

China is the largest greenhouse gas emitter in the world, and more than 80 percent of China’s greenhouse gas emissions come from the energy sector. Transforming China’s energy sector towards a low-carbon path is the most important climate change mitigation action in the world. 

To help the government achieve its ambitious energy conservation and emission reduction targets, the World Bank has played a significant role in introducing market-based approaches to improve energy efficiency in China, such as the Energy Service Company (ESCO) concept and energy efficiency financing credit lines.

To disseminate China’s experience in energy efficiency and promote South-South exchange, the World Bank and the National Development and Reform Commission (NDRC) co-hosted a high-level international forum to promote ESCO industry and energy efficiency financing during November 8-9, 2013, under the nearly 20-year partnership between the World Bank, Global Environment Facility (GEF) and NDRC.

More than 500 participants, including government officials, bilateral and multilateral aid agencies, ESCOs, financial institutions and practitioners from China, Brazil, Bulgaria, India, Indonesia, France, the Pacific Islands, Poland, Singapore, South Africa, Thailand, the United Kingdom, the United States and Vietnam gathered in Guangzhou, China to share knowledge and experience on energy efficiency policies, financing mechanisms and ESCO business models.

The Government of China has embarked on one of the most aggressive energy conservation campaigns in the world. From 1980 to 2010, China’s energy intensity per unit of GDP declined by about 70 percent, and the government set a mandatory target to cut energy intensity by 16 percent in the 12^th Five-Year Plan (2011-2015). The target has been allocated to each province and the nation’s top energy-consuming enterprises, and the government has provided generous financial incentives, which led to the boom of Chinese ESCO industry. In addition, the Chinese government has also pledged to reduce carbon intensity per unit of GDP by 40-45 percent from 2005 to 2020, to which energy efficiency will make the single largest contribution.

Over the past two decades, the World Bank has been working with China to help the country move to more market-based approaches for energy conservation under three World Bank/GEF-supported projects: (1) the Energy Conservation Project introduced the Energy Service Company (ESCO) concept to China by establishing the first three ESCOs; (2) as the ESCO industry started to grow, the Energy Conservation II Project provided partial risk guarantees to help ESCOs access to financing and established an ESCO Association. Today, the ESCO industry in China grow to nearly 5,000 companies with nearly $10 billion in energy performance contracts; and (3) the China Energy Efficiency Financing (CHEEF) program is now supporting mainstreaming of energy efficiency lending in the China’s banking sector through dedicated credit lines. CHEEF Phase I has financed more than $800 million investments in energy efficiency to date, leveraging four times the IBRD loans, with substantial emission reductions. It has substantially increased participating banks’ confidence and commitment in financing energy efficiency. 

"The Chinese government’s commitment, ambitious targets, and effective policies for energy conservation are the driver to create market demand for ESCO services and catalyze energy efficiency investments,” said Xiaodong Wang, World Bank’s Senior Energy Specialist and the task team leader of the CHEEF Project, in her presentation of the new book titled “Unlocking Commercial Financing for Clean Energy in East Asia”.

"We are pleased that we have an opportunity to play an instrumental role in introducing market-based approaches to improve energy efficiency in China. The Bank’s interventions in China’s energy sector have been based on long-term sector engagement and aimed at moving from pilots to mainstreaming actions, resulting in transformational impacts. We are committed to deepen the partnership with the Chinese government in the area of energy efficiency and climate change to help the government achieve its emission reduction targets,” said Axel van Trotsenburg, World Bank Vice President for the East Asia and Pacific Region.

"Today’s international forum provides an excellent opportunity not only to disseminate China’s successful experience to the world, but also to introduce international good practices to China,” said Klaus Rohland, World Bank Country Director for China, in his keynote speech.

"An international forum like this cannot be more timely for us to exchange experience and learn from each other.” said Ajay Mathur, Director General of India’s Bureau of Energy Efficiency. He also proposed concrete follow-up actions of further exchanges between China and India in the area of energy conservation.