|Project Rationale and Linkage to Country/Regional Strategy
The PRC has experienced a rapid increase in energy consumption in tandem with sustained economic growth, especially since 2000. By the end of 2010, the primary energy demand in the PRC increased to more than 3,050 million tons of standard coal equivalent (mtce), compared with 1,390 mtce in 2000. The PRC relies heavily on carbon-intensive coal, which provided about 70% of its primary energy in 2010. The Government of the PRC has recognized the challenges posed by the rapid rise in energy consumption and associated emissions. It has committed to achieve 40% 45% carbon intensity reduction by 2020 compared with 2005, primarily by targeting energy intensity reductions. During the Eleventh Five-Year Plan, 2006 2010, the energy intensity was reduced by 19.06% compared with a target of 20%. The Twelfth Five-Year Plan, 2011 2015, has set a target of a further 16% energy intensity reduction.
More than three fourths of the PRC's electricity and about half of its primary energy are consumed by the industrial sector. The 1,000 Key Enterprises Program was launched during the Eleventh plan to target the 1,000 most energy-intensive enterprises, which consumed about two-thirds of the total industrial energy consumption. During the Twelfth plan, the ongoing program will be extended to cover all industrial enterprises with annual energy consumption of 10,000 tons of coal equivalent (tce) and higher. It will involve some 16,000 enterprises in the country, primarily among nine energy-intensive industries, including iron and steel, nonferrous metal, coal, power generation, petrochemicals, chemicals, building materials, textile, and pulp and paper.
Hebei Province ranks second in energy consumption among all the provinces, with a total energy consumption of 267 mtce in 2010, or 8.7% of the national consumption. During the Eleventh plan, Hebei's energy intensity reduced by 20.11% to 1.58 tce, which is still much higher than the national average of 1.034 tce. This is mainly due to the presence of many energy-intensive industries, such as iron and steel, electricity and heat production, cement, and petroleum and petrochemical. Most of these industrial plants operate at much lower energy efficiency levels than international best practice as a result of underinvestment in energy efficiency. Hebei has set a target of a further 17% energy intensity reduction during the Twelfth plan, which will be challenging unless targeted investments are significantly scaled up in these energy-intensive industrial plants.
The key barriers for energy efficiency investments are (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, thereby limiting debt financing. 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 turnover of the Asian Development Bank (ADB) loan, thus providing larger investments for energy efficiency over the loan tenor; (ii) build the knowledge and capacity of the provincial government and selected financial intermediary in evaluation and risk assignments for energy efficiency transactions; (iii) reduce transaction complexities and costs owing 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.
The ESCOs have been developing slowly since 2000 in Hebei Province. Most of the existing ESCOs in Hebei Province have limited registered capital, assets, and employees. The ESCOs are unable to obtain commercial debt financing because of the banks' perception of risks and the lack of meaningful collateral, which limits their involvement to only small-scale energy efficiency projects with limited investment and short paybacks. The proposed project addresses this barrier by including an ESCO in the project design.
The project design also includes the participation of a joint stock commercial bank (Huaxia Bank) as a financial intermediary to address key capacity and related issues (para. 6), which will catalyze more commercial bank financing in next batches of energy efficiency investments in the industrial sector. This FIL approach is similar to previous ADB loans for energy-intensive provinces of Guangdong and Shandong. The financial intermediary has been selected pursuant to a transparent and competitive process, and the onlending terms have been proposed in a manner consistent with the prevailing commercial banking practices to avoid market distortions. Prior experience in financing energy efficiency projects and participation in other international financial institution funded projects was one of the key criteria in selecting the financial intermediary.
The lessons learned from previous ADB's energy efficiency projects in PRC have been taken into account, especially with respect to the selection of a commercial bank as financial intermediary through a competitive process and its capacity development which can support additional efforts to mobilize commercial bank financing to the energy efficiency sector. The possibility of establishing a credit guarantee facility using the cash accumulated caused by the interest difference between the ADB lending rate and subloan interest rates will also be explored during project implementation. A complementary grant to be financed by the Global Environment Facility is under preparation to address the broader capacity issues in the commercial banking sector for energy efficiency financing (footnote 2). The scope of the grant-financed activities include (i) energy efficiency and emission reduction technology identification, dissemination, and design of market-based policy incentives; (ii) capacity building of commercial banks in Hebei Province on energy efficiency project appraisal, including pilot testing of the credit guarantee facility for ESCO implemented projects; and (iii) capacity building of ESCO industry, and monitoring and verification agents in Hebei Province.
The project is closely aligned with Strategy 2020, which identifies moving developing member countries onto a low-carbon growth path by improving energy efficiency as one of the key means of achieving environmentally sustainable growth. The country partnership strategy, 2008 2010 and country operations business plan, 2011 2013, identifies environmental sustainability as one of the three pillars of ADB assistance to the PRC. Consistent with the Strategy 2020 goals, the project encourages private sector investments. In the first batch, seven of the eight selected subprojects are private enterprises. The emphasis on selecting innovative technologies, in the selection of the first batch of subprojects, is expected to be maintained and intensified for future subprojects. The project design includes measures (para. 20) for leveraging additional private investments.