China, People's Republic of : Shandong Energy Efficiency and Emission Reduction Project

Project Name

Shandong Energy Efficiency and Emission Reduction Project

Project Number

40524-013

Country / Economy

• China, People's Republic of

Project Status

Closed

Project Type / Modality of Assistance

• Loan

Source of Funding / Amount

Loan 2771-PRC: Shandong Energy Efficiency and Emission Reduction Project

Source	Amount
Ordinary capital resources	US$ 100.00 million

Strategic Agendas

• Environmentally sustainable growth
• Inclusive economic growth
• Regional integration

Drivers of Change

• Governance and capacity development
• Knowledge solutions
• Partnerships
• Private sector development

Sector / Subsector

• Energy / Energy efficiency and conservation

• Industry and trade / Industry and trade sector development

Gender

No gender elements

Description

The project proposes to finance the reduction of energy intensity and emissions from energy-intensive industries in Shandong Province through a financial intermediation loan (FIL). The aim of the project is to promote energy efficiency and emission reduction measures in the province's industry sector, develop energy service companies (ESCOs), and enhance institutional capacity to identify and manage energy efficiency and emission reduction projects.

Project Rationale and Linkage to Country/Regional Strategy

The project has a very good fit and direct relevance with the ongoing and targeted energy intensity improvements in the PRC for the next 10 years to meet the 40%45% carbon intensity improvement by 2020 compared with 2005. The project follows and complements a previous successful Asian Development Bank (ADB) loan in a similar energy-intensive Guangdong province. Shandong is the second largest in terms of industrial outputs among all provinces in the PRC. Accordingly, the industry sector is the main energy consumer in Shandong consuming more than three-quarters of total energy in 2009. Moreover, the energy supply in Shandong is heavily dependent on high carbon fossil fuels - coal (77%) and oil (21.2%) - causing large emissions. The province's total energy consumption in 2009 was 324 million tons of standard coal equivalent (tsce)10% of the national total. Shandong's economy, has grown consistently at a rapid rate, expanding at an average rate of 12.49% per annum between (19952009). This economic growth momentum in Shandong is expected to continue in the foreseeable future putting even greater emphasis on accelerating investments in energy efficiency.

In the first 4 years of the Eleventh Five-Year Plan, 20062010, Shandong Province's energy consumption per CNY10,000 GDP declined by 18.9% compared to a target of 22%. In 2009, its energy intensity improved to 1.072 tsce per CNY10,000 of GDP . Despite improving the energy intensity, 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 investment.

The existing industrial energy efficiency financing mechanisms in Shandong have mainly benefited small projects primarily through ESCO involvement. While the ESCO concept has been operative in PRC since 1998 its implementation was rather slow and limited to small-scale industrial energy efficiency improvements, e.g., retrofitting of air-conditioners, lighting, boilers, pumps and motors. A large financing gap exists for medium- and large-sized energy efficiency projects that involve all or part of an industrial manufacturing process for an industry. Three key barriers have impeded investment: (i) lack of familiarity with the latest energy efficient technologies, combined with the enterprises' perception of production interruptions and/or loss of revenues; (ii) difficulties for commercial banks to assess cash-flow benefits and forgo collateral for such investment projects which do not generate additional revenues; and (iii) lack of capacity for evaluation and risk assignments for energy conservation investments by commercial banks. Limited market-based incentive mechanisms to reward investors for reducing emissions through energy efficiency also discourage investors. These market imperfections warrant targeted public interventions.

Several measures have been adopted in designing this project to address these barriers. Accordingly, the FIL modality was chosen to (i) allow multiple rollover of the ADB loan, thus, providing larger investments for energy efficiency over the loan tenor, (ii) build knowledge and capacity of provincial government and selected financial intermediary in evaluation and risk assignments for energy efficiency transactions, (iii) reduce transaction complexities and costs due to familiarity and experience gained by the project management office (PMO) and the financial intermediary from the initial subprojects, and (iv) enhance governance and improve safeguard compliance for energy efficiency investments beyond the first batch of subprojects.

Consistent with the Strategy 2020 goals, the project encourages private sector investments. In the first batch, both selected subprojects are private enterprises. The emphasis on technological innovation featured in the design of the project and selection of the first batch of subprojects is expected to be maintained and further intensified for future subprojects. The project design includes an innovative package of financial incentives and rewards to encourage continued participation and enhance interest from similar industrial enterprises thus, leveraging additional private investments. In addition, to encourage and explore ESCO participation in future subprojects specific recommendations and actions are being finalized under the TA (footnote 1). This, combined with the recent PRC Circular No. 25 of the State Council Development and Reform Commission on ESCO policy, will enhance engaging ESCO companies for the project .

The selected two private enterprisesGolden Yimeng Group (Golden Yimeng) and Dongying Lufang Metallic Materials (Lufang)are both industrial leaders in their respective areas and are proposing state-of-the-art energy efficiency and renewable energy technologies. The Golden Yimeng sub-project includes expanding the biogas capturing system to generate power and supply heat; using biowaste as fuel and to produce organic fertilizers; waste heat recovery and energy conservation from various process units; and using heat from solar parabolic concentrators to supply a 6-megawatt steam turbine to generate electricity. This will be the first such large-scale industrial solar application in the PRC. Lufang is among the top six copper producers in the PRC. Lufang sub-project will support and supplement the development of a zero coal copper ore smelting furnacean innovative technology. This technology will set the new market entry standard for future copper smelters and have a profound impact on energy efficiency and emission reduction efforts.

The China Everbright Bank (CEB), Jinan branch, was selected as the FI through a competitive bidding process conducted in May 2010. The involvement of CEB, a commercial bank, in rolling over the fund will bring in sound banking expertise and governance in energy efficiency lending. It will also strengthen cooperation between the government agency (the PMO) and the domestic financial institution, which may encourage them to work together beyond the project and expand investments in this high priority area for the government.

To ensure that high standards with regard to due diligence and assessment are followed beyond the first batch of subprojects, ADB, the Government of the PRC, Shandong provincial government (SPG), and CEB have agreed on a set of technical, financial, economic, social, and safeguards criteria for selecting subborrowers and subprojects. This will assist the PMO and CEB in managing risks in future subprojects.

Impact

Reduced industrial energy intensity and emissions in Shandong Province

Project Outcome

Description of Outcome

Expanded energy efficiency investments in energy-intensive industries of Shandong Province

Progress Toward Outcome

On track and achieved the performance indicator of achieving energy savings of at least 157,000 tsce/yr by 2017.

Implementation Progress

Description of Project Outputs

Priority energy efficiency and emission reduction projects implemented in selected energy-intensive industries

Capacity developed for government and financial institutions in planning, investments and management of energy efficiency projects

Status of Implementation Progress (Outputs, Activities, and Issues)

All subprojects completed by the closing date of 19 Septmeber 2017. Project closed.

Geographical Location

Dongying Shi, Linshu Xian, Shandong Sheng

Safeguard Categories

Environment

FI

Involuntary Resettlement

FI

Indigenous Peoples

FI

Summary of Environmental and Social Aspects

Environmental Aspects

The first batch of this FIL project includes three subprojects (Lufang, Hider, Jintai and Lvxi subprojects) which have been individually assessed and categorized as B' and C for environment, respectively. Environment and Social Management System (ESMS) approved by ADB has been endorsed and adopted by PMO. The PMO has already appointed an environment and social safeguard manager on 30 September 2012. Project performance and management system (PPMS) reporting and the semi-progresss reports were submitted up to June 2014. The ESMS implementation report were received and is on track.

Involuntary Resettlement

All works will be done within the existing premises and does not require any land acquisition. There are no resettlement issues for the two subprojects in the first batch since potential subprojects involving land aquisition and resettlement have been and will be eliminated through the selection criteria for the project.

Indigenous Peoples

The project will not have any adverse impact on any ethnic minority group, which is stipulated in the subproject selection criteria.

Stakeholder Communication, Participation, and Consultation

During Project Design

The National Development and Reform Commission, Ministry of Finance, Ministry of Industries and Information Technologies, and Ministry of Environmental Protection have been consulted to ensure the project is aligned with the government's development strategies and priorities.

The Shandong provincial government will be the executing agency for the project. Shandong Provincial Development and Reform Commission, Shandong Provincial Finance Department, Shandong Economic and Information Technology Commission, and Shandong Provincial Department of Environmental Protection are the partners for the project, and have been participating in all steps for the project design and subproject selection. They are also the main constituent entities of the project management office. Shandong Provincial Energy Conservation and Monitoring Center has been active in providing support for the preparation of the subprojects.

Experts from industrial associations and research institutions have been invited to workshops or engaged as advisors for the project. Interviews and site visits were conducted with more than 20 large energy consuming enterprises, energy service companies, and high-efficiency equipment manufacturers.

Consultations were conducted to gauge support for the project from local communities, which will be direct beneficiary groups.

During Project Implementation

Business Opportunities

Consulting Services

Based on the readiness of the initial subprojects, in the first batch of the FIL loan, there is no need for implementation consultants. The safeguard reporting requirements of the initial subprojects have been accomplished as part of the project preparatory technical assistance (PPTA) Part A work with the exception of annual ESMS implementation report. The nature of work, as reflected in the subproject categories, is not expected to induce any adverse environmental impacts during the construction period for Golden Yimeng and Lufang subprojects. Thus, the monitoring records furnished by the subproject companies as part of their domestic environmental license conditions and environmental impact assessment requirements will suffice the annual ESMS implementation report which would be forwarded by the PMO to ADB during the 2 years of construction period. The implementation of ESMS may require specific technical expertise for the next batch of subprojects for which SPG has given assurance to engage appropriate consultants utilizing the funds in Shandong Energy Efficiency and Emission Reduction Account.

Procurement

Procurement will be done in accordance with ADB's Procurement Guidelines (2010, as amended from time to time). Subborrowers will be required to follow the relevant procurement rules in ADB's Procurement Guidelines for financial intermediaries, and adopt appropriate procedures including (i) payment of reasonable prices, and (ii) fair canvassing when selecting suppliers. Procurement must be from ADB member countries. Subborrowers will be encouraged to procure goods through competitive bidding or shopping when such procedures are most appropriate in the interest of economy and efficiency. A procurement manual indicating the detailed procurement procedure that will be used under the overall project implementation will be prepared by the PMO and submitted to ADB for review and approval prior to undertaking any procurement activities including advance contracting and retroactive financing. In case of noncompliance, CEB will exercise the right to recall the subloan.

A procurement capacity assessment was performed on SPG and subborrower companies. The draft procurement packages will be finalized after the detail design.

Contact

Responsible ADB Officer

Lu, Lanlan

Responsible ADB Department

East Asia Department

Responsible ADB Division

PRC Resident Mission (PRCM)

Executing Agencies

Shandong Provincial Government

Timetable

Concept Clearance

08 Jul 2010

Fact Finding

-

MRM

30 Sep 2010

Approval

18 Aug 2011

Last Review Mission

-

PDS Creation Date

13 Jul 2010

Last PDS Update

19 Jan 2018

Funding

Loan 2771-PRC