During his recent visit to China, Lars Thunell, IFC's Executive Vice President, signed an agreement that will see three key players in China's economy—utilities, suppliers of energy efficiency equipment, and commercial banks—come together for the first time to create a new financing model for promoting energy efficiency.
 This model offers a market-based solution to China's challenges on energy and the environment. It 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. This approach creates a significant new channel to expand the financing of energy efficiency in China.
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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 Innovation program, has designed a new
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 to reduce energy usage by 20 percent over the next five years through energy conservation and efficiency measures.
Among the first steps: on May 17, 2006, IFC, represented by Thunell, agreed to grant $1 million to Xinao Gas (pictured below) and to provide Industrial Bank with risk-sharing coverage of $25 million.
 The grant will help Xinao Gas rapidly develop market capabilities and increase awareness of the benefits of energy efficiency among small companies. The risk-sharing coverage will help Industrial Bank establish a loan portfolio of $58 million in energy efficiency equipment loans to small and midsize energy users in China. Both investments are part of IFC's China Utility-Based Energy Efficiency Finance program. Sources of funding for the program include the Global Environmental Facility and Finland's Ministry of Trade and Industry.
The signing concluded Thunell's eight-day program in China, where he visited Hong Kong, Hangzhou, Chengdu, Xi-an, Beijing, and Shanghai.
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