A Greener China: A New Approach to Financing Energy Efficiency
For the first time, three key players in China's economy – utilities, suppliers of energy efficiency equipment, and commercial banks – have come together to create a new financing model for promoting energy efficiency. This model offers a market-based solution to China's significant challenges on energy and the environment.
This new approach to energy efficiency is expected to generate $150 million in energy efficiency projects over the next six years, while reducing greenhouse gas emissions by 5 to 10 million tons. It creates a significant new channel to expand the financing of energy efficiency in China.
Today, China is facing, simultaneously, a severe shortage of energy resources and a rapidly growing demand. While the country's government has identified energy efficiency as a priority, investments in this area face critical market barriers. For example, marketing capacities for energy efficiency equipment are underdeveloped in China. Hence suppliers of energy efficiency products and services encounter many challenges to market their equipment and educate their potential customers on the economic benefits of energy efficiency investments. In addition, access to credit is limited in China, especially for small and medium enterprises—and for many of these firms, loans are still a new concept. Commercial banks in China also lack experience in energy efficiency finance and tend to be risk-averse. For all these reasons, the Chinese government has sought IFC's assistance to develop a market-based solution to energy efficiency.
In response, IFC, through its Sustainability Business Innovator program, has designed an innovative market-based energy efficiency financing model, drawing on its experience in other markets as well as its local knowledge of China. This program uses utility companies as market agents and aggregators for the marketing and delivery of energy efficiency projects, while partnering with commercial banks on new practices in risk management. The program is expected to achieve several key outcomes that support sustainable development.
Financing energy efficiency for major environmental benefits. IFC is working with Xinao Gas, as a first utility partner in the program. Xinao Gas will act as a "one-stop shop": it will offer its customers a package that includes advice on reducing energy consumption and pollution, as well as equipment, such as natural gas boilers, to realize these improvements. It will also aggregate a number of transactions for financing purposes. This business model will have a significant environmental impact by reducing greenhouse gas emissions and other pollution.
Improving the capacity of commercial banks. IFC's partner banks, including Minsheng Bank and Industrial Bank,will provide equipment loans to utility customers. These loans will be supported by a risk-sharing facility from IFC. This model will accelerate the engagement of commercial banks in China with utility customers to support energy efficiency. It will also help the banks improve their lending and risk management practices.
Facilitating lending to SMEs. The program offers the kind of equipment financing that small and medium enterprises need to improve the efficiency of their energy use and lower their energy costs. It also gives IFC an opportunity to help commercial banks improve their lending practices for SMEs to acquire all types of equipment.
Serving an IFC client country. This program is expected to help the Chinese government achieve its target, under the 11th five-year plan, to reduce energy usage by 20 percent through energy conservation and efficiency measures.
Among the first steps: on May 17, 2006, IFC, represented by Executive Vice President Lars Thunell, agreed to grant $1 million to Xinao Gas and to provide Industrial Bank with risk sharing coverage of $25 million.