CASE STUDY

Closing the Industrial Energy Efficiency Financing Gap

Reduced greenhouse gas emissions in Lufang’s copper smelting plant in Dongying City, Shandong. Photo source: Lufang subproject.
Reduced greenhouse gas emissions in Lufang’s copper smelting plant in Dongying City, Shandong. Photo source: Lufang subproject.

Accessible funds for the industry sector accelerated investments in energy efficiency and enhanced institutional capacities.

Overview

A project supported by the Asian Development Bank (ADB) highlighted the impact of supporting the industry sector to invest in technology innovations that lead to reduced energy costs and enhanced market competitiveness.

This project showcased how a financial intermediation loan modality can accelerate private sector investments required for improving energy efficiency through enhanced provincial capacity in financing and managing energy conservation projects.


Project information


Project snapshot

  • 18 Aug 2011: Approval Date
  • 19 Sep 2017: Closing Date
  • US$ 100 million:Amount of Loan

Context

The industry sector is the main energy consumer in Shandong, a province in the People’s Republic of China (PRC). In 2009, it consumed more than three-quarters of the province’s total energy supply. Moreover, the energy supply in Shandong is heavily dependent on high carbon fossil fuels – coal (77%) and oil (21.2%) – causing high level of emissions. The province’s total energy consumption in 2009 was 324 million tons of standard coal equivalent or 10% of the national total. Its economy has grown consistently at a rapid rate, expanding at an average of 12.49% per annum from 1995 to 2009.

Shandong province is committed to reduce energy emissions in the long term. Despite some achievements, the underinvestment in energy efficiency and the existence of many energy-intensive industries in the province provide significant opportunities for further energy intensity reductions through targeted investments.

Development Challenge

Existing industrial energy efficiency financing mechanisms in Shandong were designed mostly for large projects. A large financing gap existed for small and medium-sized energy efficiency efforts that involve all or part of an industrial manufacturing process because of the following:

  • lack of familiarity with the latest energy efficient technologies, combined with the enterprises’ perception of production interruptions and/or loss of revenues;
  • difficulties for commercial banks to assess cash flow benefits and forgo collateral for such investment projects which do not generate additional revenues; and
  • lack of capacity for evaluation and risk assignments for energy conservation investments by commercial banks.

Solution

Through the Shandong Energy Efficiency and Emission Reduction Project, ADB approved in 2011 a financial intermediation loan of US$ 100 million to finance the reduction of energy intensity and emissions from energy-intensive industries in Shandong. The project aimed to:

  • expand investment in energy efficiency and emission reduction measures in the province’s industry sector,
  • develop energy service companies, and
  • enhance institutional capacity to identify and manage energy efficiency and emission reduction projects.  

The China Everbright Bank, particularly the Jinan branch in Shandong, was selected as the financial intermediary in rolling over the fund because of its sound track record. It is a major onlender of loans from foreign governments and international financial institutions. It is also familiar with the policies and procedures of Shandong Provincial Finance Department.

Financial intermediation loan was chosen as the modality to:

  • build the knowledge and capacity of the provincial government to evaluate and assess risks for energy efficiency project investments;
  • reduce investment transaction complexities;
  • enable rollover of the ADB loan to support multiple batches of subprojects and leverage additional domestic investments; and
  • enhance governance and safeguard compliance for energy efficiency projects.

Subprojects

The Lufang subproject developed oxygen bottom-blown smelting (OBBS) technology with flue gas recovery and residual-heat utilization. The flue gas recovery component utilizes the most advanced vanadium catalyst and rhodium catalyst so that its sulfur dioxide conversion rate can reach 99.85%. At the same time, the sulfur dioxide emission concentration can be less than 20mg/m3. The residual-heat utilization component utilized waste heat for power generation. Because of the successful implementation of the new OBBS technology, other metal and iron smelting enterprises in Shandong have also started to apply these technologies through Lufang.

The Hider subproject replaced coal-fired boilers with advanced heat exchangers and customized pumps. Their technology can use wastewater heat from a combined heat and power plant to warm up aquaculture ponds to up to 12 centigrade. Hider covered 45 clients for energy efficiency renovations.

During the project implementation, Hider also developed other energy conservation and emission reduction technologies like frequency motor application technology in oil fields, enhanced natural gas energy conservation technology, and waste heat power generation technology.

The Jintai subproject replaced the traditional resistance heating method with advanced ultra-frequency magnetic fluid-heating equipment to heat oil in the Shengli Oil Field pipeline. Their technology improved energy efficiency by 30% to 70%.

Because of its successful implementation, other oil fields across the country have replicated Jintai’s technology. Jintai scaled up its technology application to Daqing Oil Field, Changqing Oil Field, and several oil fields in Xinjiang Uygur Autonomous Region. Successful promotion of this technology led to multiplier effects in energy conservation and emission reduction in the oil sector in the People’s Republic of China.

The Lvxi subproject developed advanced energy conservation and renewable energy utilization technologies like solar central air condition systems, air-source heat pumps, distributed PV stations, and absorption and compression cooling systems to enable the complementarity of diversified renewable energy utilization and improve the energy efficiency of public buildings.

From 21,344 tons of coal equivalent per year, the actual energy consumption of Lvxi clients was reduced to 19,511 tons per year – effectively improving client energy efficiency by 91% – after implementing the new technologies. The Lvxi technologies were also tested on a university campus. This became the first micro-emission campus in Shandong and a flagship of micro-emission or near-zero-emission campuses.

Results

The four subprojects achieved total annual energy savings of 263, 417 tons of coal equivalent per year and reduced emission by 647,129 tons of carbon dioxide and 2,943 tons of sulfur dioxide per year as of 2018. The accumulated energy savings were almost 1.6 times the original target.

Improved energy efficiency reduced the negative impacts of coal consumption on public health. The improvement in environmental quality has benefited the poor who are more exposed to health risks such as air pollution and coal burning.

The subprojects successfully adopted new technologies. This encouraged new projects in Shandong and other parts of the PRC to replicate these technologies. The wider application and selling of energy-efficient technologies created jobs in the energy sector thereby promoting overall economic development.

The private sector invested in upgrading their existing equipment and facilities to conserve energy and reduce emissions. All companies involved in implementing the subprojects were key players in different renewable energy and energy efficiency subfields in Shandong. As sub-borrowers, they benefited financially through reduced energy costs and increased sales of their auxiliary services and products, which enhanced their market competitiveness.

As a financial intermediation loan, the project improved the capacity of the government and the China Everbright Bank in planning, investment, and management of energy conservation in Shandong province. The Shandong Provincial Government further strengthened its policies to promote energy conservation in industries. It encourages public-private partnership including diversification of financing and investment channels to promote green financing.  

China Everbright Bank has built its capacity in evaluating and assessing renewable energy and energy efficiency improvement projects. It is now more experienced in coordinating subproject selection, approval, implementation, disbursement, and audit of subloans. The institutional mechanism required for effective subproject processing and implementation in succeeding batch of projects has been established and operational.  

Lessons

Financial intermediation works  

Financial intermediation has made the implementation of energy conservation and efficiency improvement projects possible. To provide for more market-oriented financial intermediation loans, it is recommended that (i) local governments consider relaxing the requirements for financial guarantee, and (ii) for the intermediary to take full responsibility in assessing the types of guarantee or collateral needed as the precondition for approving subprojects.

Incentives for enhancing emission reductions

To provide incentives for sub-borrowers, the intermediary could consider green bonds financing to give interest rebates with clearly defined milestones, so that sub-borrowers who achieved emissions targets can benefit from their action in a timely manner. Likewise, a carbon dioxide reduction registry system for the sub-borrowers could be established to link with nationwide carbon trading in the near future.    

Resources

Asian Development Bank. 2012. 2011 Clean Energy Investments: Project Summaries. Mandaluyong. 

ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People’s Republic of China for the Shandong Energy Efficiency and Emission Reduction Project. Manila.  

Ask the Expert

  • Lanlan Lu
    Senior Project Officer (Energy), East Asia Department, Asian Development Bank

    Lanlan Lu is primarily responsible for managing and implementing energy efficiency and renewable energy utilization projects at ADB People's Republic of China Resident Mission. She holds a PhD in Management Science and Engineering from Nuclear Research Department of Tsinghua University. She is also a licensed Private Equity practitioner certified by China Security Regulatory Commission.

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   Last updated: August 2019



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The views expressed on this website are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.




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