56416 ACCELERATING ENERGY CONSERVATION IN CHINA'S PROVINCES ACCELERATING ENERGY CONSERVATION IN CHINA'S PROVINCES Robert P. Taylor Gailius J. Draugelis Yabei Zhang Alberto U. Ang Co June 2010 The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The views expressed in this publication are those of the authors and not necessarily those of the Australian Agency for International Development (AusAID). CONTENTS ACKNOWLEDGMENTS ............................................................................................................................... I CURRENCY EQUIVALENTS ........................................................................................................................ II ACRONYMS AND ABBREVIATIONS ........................................................................................................... II EXECUTIVE SUMMARY ............................................................................................................................. V A. MAJOR ACHIEVEMENTS TO DATE ................................................................................................................... VI The Role of China's Provinces ................................................................................................................ vi Key Enterprise Energy-Saving Programs .............................................................................................. vii Industrial Structural Adjustment Efforts ............................................................................................. viii Building and Heating System Energy Efficiency .................................................................................... ix Developing the Energy Efficiency Service Industry ................................................................................ ix Fiscal Incentive Programs and Pricing ................................................................................................... ix B. MEETING THE CHALLENGES FACED BY CHINA'S PROVINCES IN THE FUTURE ............................................................. X Improving the Balance between Administrative and Market-Based Tools ........................................... xi Strengthening Quality in Administrative Program Implementation ..................................................... xi Requirements for Expanding the Role of the Market in Delivering Energy Efficiency .......................... xii Improving Key Enterprise Energy Savings Responsibility Systems ...................................................... xiii Market-Based Approaches for Use of Public Energy Efficiency Funds ................................................ xvi C. RECOMMENDATIONS FOR THE MEDIUM TERM .............................................................................................. XVII Improving Quality in Provincial Program Implementation ................................................................ xvii Increasing Use of Market-Based Tools .............................................................................................. xviii CHAPTER 1: INTRODUCTION ........................................................................................................... 1 CHAPTER 2: AN OVERVIEW OF CHINA'S 2006­10 ENERGY CONSERVATION PROGRAM .. 4 A. CHINA'S 2006­10 ENERGY CONSERVATION AND EMISSIONS CONTROL TARGETS ................................................... 4 B. CHINA'S 2011­20 CARBON EMISSIONS INTENSITY REDUCTION TARGETS .............................................................. 5 C. OVERVIEW OF CHINA'S MAIN CURRENT ENERGY CONSERVATION PROGRAMS ........................................................ 5 D. ORGANIZING IMPLEMENTATION OF THE PROGRAM ........................................................................................... 8 E. THE ROLE OF THE PROVINCES ...................................................................................................................... 11 F. OVERVIEW OF 2006­08 QUANTITATIVE RESULTS ........................................................................................... 11 CHAPTER 3: THE CURRENT ENERGY CONSERVATION PROGRAMS OF CHINA'S PROVINCES ........................................................................................................................................ 15 A. ESTABLISHING RESPONSIBILITIES AND ORGANIZING IMPLEMENTATION ................................................................ 15 Institutional Organization ................................................................................................................... 15 Energy Savings Responsibility Targets ................................................................................................ 16 An Example from Shandong Province ................................................................................................. 16 Monitoring and Reporting on Target Achievement ............................................................................ 17 Some Issues ......................................................................................................................................... 18 B. KEY ENERGY-CONSUMING INDUSTRIAL ENTERPRISE PROGRAMS ........................................................................ 19 China's 1000 Enterprise Program ........................................................................................................ 19 Additional Provincial and Local Government Key Enterprise Programs .............................................. 20 Energy Savings Responsibility Contracts ............................................................................................. 21 Government Monitoring and Supervision Systems ............................................................................. 22 Some Issues and Challenges ................................................................................................................ 26 C. PROGRAMS TO REDUCE ENERGY INTENSITY THROUGH STRUCTURAL ADJUSTMENT ................................................. 27 Elimination of Backward Industrial Capacity ...................................................................................... 28 Energy Efficiency Assessments for New Capacity................................................................................ 32 Developing High- and New-Technology Industries and the Service Sector ......................................... 33 A Key Forward-Looking Issue .............................................................................................................. 35 D. IMPROVING ENERGY EFFICIENCY IN BUILDINGS ............................................................................................... 35 New Residential and Commercial Buildings ........................................................................................ 36 Heat System Reform ........................................................................................................................... 37 Building Renovation ............................................................................................................................ 38 Increasing the Role of Provincial Governments in Fostering Innovation ............................................. 40 E. DEVELOPING THE ENERGY EFFICIENCY SERVICE INDUSTRY ................................................................................. 40 F. ENERGY EFFICIENCY FISCAL INCENTIVE PROGRAMS .......................................................................................... 42 Government Energy Efficiency Investment Subsidies and Awards ...................................................... 42 Energy Pricing Policies......................................................................................................................... 44 Tax Policies .......................................................................................................................................... 46 CHAPTER 4: ISSUES AND CHALLENGES FOR THE NEXT FIVE YEARS ................................ 48 A. NEEDS FOR BOTH ADMINISTRATIVE AND MARKET-BASED ENERGY EFFICIENCY PROMOTION SYSTEMS ...................... 48 Relative Roles and Integration of Administrative Measures and Market-Based Systems .................. 49 B. STRENGTHENING IMPLEMENTATION INFRASTRUCTURE TO IMPROVE ADMINISTRATIVE ENERGY EFFICIENCY PROMOTION SYSTEMS ..................................................................................................................................................... 51 C. REQUIREMENTS AND SUPPORT FOR EXPANDING THE ROLE OF THE MARKET IN DELIVERING ENERGY EFFICIENCY ......... 54 Developing the Energy Efficiency Service Industry .............................................................................. 55 Developing Energy Efficiency Lending in the Banking Sector .............................................................. 58 Energy Pricing and Fiscal Incentives for Energy Efficiency .................................................................. 60 Commodification of Energy Savings .................................................................................................... 62 D. FURTHER IMPROVING ENERGY EFFICIENCY IN KEY ENERGY-CONSUMING ENTERPRISES .......................................... 63 Supporting Competence in Enterprise Energy Managers.................................................................... 64 The Importance of Standardized Enterprise Energy Management Systems ....................................... 66 Improving Enterprise Energy Savings Targeting in Responsibility Contracts ...................................... 72 Is Trade in Energy Conservation Certificates an Option for China? ..................................................... 76 E. MARKET-BASED APPROACHES FOR USE OF PUBLIC ENERGY EFFICIENCY FUNDS ..................................................... 78 The Importance of Monitoring and Verification ................................................................................. 79 The Concept of Energy Efficiency Utilities and other Performance-Based Programs.......................... 80 Improving the Leverage of Public Funds ............................................................................................. 84 Achieving Greater Sustainability in Public Financing .......................................................................... 86 CHAPTER 5: RECOMMENDATIONS .............................................................................................. 88 A. SOME SUGGESTED DIRECTIONS FOR THE MEDIUM TERM .................................................................................. 88 Improving Quality in Provincial Program Implementation ................................................................. 88 Increasing Use of Market-Based Tools ................................................................................................ 91 B. SUGGESTIONS FOR FOLLOW-UP OVER THE SHORTER TERM ................................................................................ 92 Economic Policy Studies ...................................................................................................................... 93 Program Design Advice and Technical Assistance .............................................................................. 93 Training Programs............................................................................................................................... 95 Cross-Exchange Activities .................................................................................................................... 96 ANNEX 1: SAMPLE TEMPLATE FOR EVALUATING PROGRESS ON KEY ENERGY-CONSUMING ENTERPRISE RESPONSIBILITY CONTRACTS ................................................................................................................. 97 SELECT BIBLIOGRAPHY ......................................................................................................................... 100 BOXES Box 3.1: New Energy Efficiency Benchmarking Activities ............................................................................. 24 Box 3.2: Shanxi's Special Compensation Fund for Eliminating Backward Capacity ...................................... 30 Box 4.1: The Climate Change Levy and Climate Change Agreements of the United Kingdom ..................... 61 Box 4.2: Japan's Enterprise Energy Manager System ................................................................................... 65 Box 4.3: Introduction to Enterprise Energy Management Systems ............................................................. 67 Box 4.4: EMSs and Energy Agreements Progamme in Ireland ..................................................................... 70 Box 4.5: Benchmarking Energy Use by Process in China's Cement Industry ................................................ 75 Box 4.6: Introduction to Energy Savings White Certificates ......................................................................... 77 Box 4.7: Vermont's Energy Efficiency Utility ................................................................................................ 81 Box 4.8: China National Investment and Guarantee Company's ESCO Loan Guarantee Program............... 85 FIGURES Figure 2.1: China's Multilevel Government Structure .................................................................................... 9 Figure 3.1: Organizational Structure for Assessing and Supervising Energy Savings Targets ....................... 17 TABLES Table 2.1: Initial Reports of Provincial Energy Intensity Reduction Progress, 2006­08 ............................... 10 Table 3.1: Decomposed Yearly Energy Saving Targets in Shandong Province ............................................. 16 Table 3.2: Prefectural FYP Energy Saving Targets in Shandong Province ..................................................... 17 th Table 3.3: Sector-Specific Targets for Eliminating Backward Capacity in the 11 FYP ................................. 28 Table 3.4: Net Impacts of the Cement Sector Restructuring Policy in Shandong Province .......................... 32 Table 3.5: Energy Consumption and Energy Intensity by Sector in Beijing, 2007 ........................................ 34 Table 3.6: Shandong Energy Efficiency Special Fund, 2007 and 2008 .......................................................... 44 Table 3.7: Differential Electricity Pricing Standards for Selected High Energy-Consumption Industries ..... 45 Acknowledgments This study was supported by a generous grant from the Australian Government`s Agency for International Development (AusAID) and by World Bank resources. This report was prepared by a World Bank study team, including Gailius Draugelis (Task Team Leader for the study), Robert P. Taylor (Senior Consultant and Primary Author), Yabei Zhang (Economist), and Alberto U. Ang Co (Senior Energy Efficiency Specialist). Processing and formatting expertise were provided by Cristina Hernandez, and technical translation of the Chinese version was done by the Center for Industrial Energy Efficiency. The study drew in part from two major background studies commissioned on energy conservation policies and programs in Shanxi and Shandong, respectively, were prepared by the Shanxi Academy of Social Sciences (SASS), Institute of Energy Economics of the Shanxi Academy of Social Sciences, and the Dezhou Energy Utilization Monitoring Center of Shandong Province. The study also drew upon two previous studies completed through the World Bank`s Energy Sector Management Assistance Program (ESMAP) that were carried out by the National Development and Reform Commission`s (NDRC`s) Energy Conservation Information Dissemination Center (NECIDC) in 2009 on provincial energy conservation management in China. In addition to these valuable inputs, the study team is particularly grateful to the provincial and local government officials and experts, especially in Jiangxi, Shanxi, and Shandong Provinces, who provided hands-on and practical knowledge and explanations to the study team in various interviews. The study team greatly appreciates the comments and guidance provided to the study team during two workshops, in November 2009 and April 2010, including comments and guidance from provincial authorities and experts, from experts of the Energy Research Institute of the NDRC, from experts of the Energy Foundation, and from many other interested parties. The study team is also indebted to many World Bank staff and colleagues, particularly to Lynn Price, Staff Scientist of the Lawrence Berkeley National Laboratory (United States); Feng Liu, Senior Energy Specialist at the World Bank; and Chandra Govindarajalu, Senior Energy Specialist at the World Bank for their thoughtful guidance as peer reviewers of this report. i Currency Equivalents (Exchange Rate Effective May 1, 2010) Currency Unit = Renminbi RMB 1.00 = US$0.125 US$1.00 = RMB 6.8 Fen = RMB 0.01 Cent = US$0.01 FISCAL YEAR January 1 ­ December 31 Acronyms and Abbreviations AusAID Australian Agency for International Development BAU Business as usual BECEPC Beijing Energy Conservation and Environment Protection Center BEMS Building energy management system BRT Bus rapid transit C Carbon CCA Climate change agreement CEN European Committee for Standardization CFL Compact fluorescent lamp COD Chemical oxygen demand DEUMC Dezhou Energy Utilization Monitoring Center DRC Development and Reform Commission ECCJ Energy Conservation Center, Japan EEU Energy efficiency utility EMS Energy management system ESCO Energy service company ESMAP Energy Sector Management Assistance Program FYP Five-year plan GDP Gross domestic product GEF Global Environment Facility GHG Greenhouse gas GW Gigawatt IBRD International Bank for Reconstruction and Development IFC International Finance Corporation I&G China National Investment and Guarantee Company kloe Kiloliter of oil equivalent kVA Kilovolt ampere kWh Kilowatt-hour LBNL Lawrence Berkeley National Laboratory LIEN Large Industry Energy Network ii m Meter M&V Measurement and verification MEPS Minimum energy efficiency standards MOC Ministry of Construction MOHURD Ministry of Housing and Urban-Rural Development Mt Million tons MW Megawatt NASEO National Association of State Energy Officials NDRC National Development and Reform Commission NECIDC National Energy Conservation Information Dissemination Center NBS National Bureau of Statistics OECD Organisation for Economic Co-operation and Development p Pence (U.K.) p.a. Per annum PDCA Plan-do-check-act R&D Research and development RBEED Residential Building Energy Efficient Design Standards RMB Renmimbi, Chinese currency SEI Sustainable Energy Ireland SEU Sustainable Energy Utility (Delaware) tce Ton of coal equivalent (1 tce is equal to 7 million kilocalories) TWh Terrawatt-hour VSK Vertical shaft kiln WTO World Trade Organization iii Executive Summary 1. China`s comprehensive 2006­10 energy conservation drive has succeeded in both delivering strong results to date and laying policy and program foundations for delivering more energy savings well into the future. China`s provincial governments have been at the core of program implementation. Working with the central government, they have put new systems in operation to allocate and supervise mandatory energy conservation targets for key energy-using industries and to provide technical and financial support to help these industries achieve their targets. They have implemented large new programs to eliminate particularly wasteful industrial plant and to assess the energy efficiency characteristics of proposed new large projects. They have helped strengthen enforcement of national energy efficiency codes and standards. Provinces have set up new public energy efficiency funds and implemented energy pricing policy adjustments. Many also have undertaken programs to further development of local energy-efficiency service enterprises. 2. The policies, program concepts, and implementation platforms created over the last four years will serve China well to achieve further energy conservation results during the next five-year planning cycle, and to help achieve China`s target to reduce the carbon intensity of its economy by 40­45 percent by 2020. However, much work remains to be done, to improve, adjust, and strengthen the programs further, and to continue to interject new and creative solutions. Current program coverage already is extensive; greater efforts now need to turn to improving the quality of implementation. Use of energy pricing tools can be expanded, and market forces can be further tapped into for delivery of energy savings. The increased attention to energy efficiency by key enterprises mandated under the new target system and the Energy Conservation Law needs to be nurtured through a wide range of initiatives to yield continual benefits to both enterprises and society at large. Efforts need to be made to expand energy savings results from use of public funds further, such as through trying out additional approaches and increasing the leveraging of other financing sources. 3. This report seeks to provide provincial agencies and groups in China, and those that support them, with some outside perspectives and ideas on further development of provincial-level energy conservation programs over the next several years. The report also describes the provincial energy conservation programs developed during the last four years in some detail, since these programs are generally not well known outside of China. Primary focus is given to programs in the industrial sector. The industrial sector accounts for about three-quarters of China`s energy consumption and is a priority for provincial governments Only several of the many important topics worthy of analysis could be considered in this first study; additional worthy topics may be analyzed in the future. v A. Major Achievements to Date 4. China`s leadership set an ambitious target in late 2005 to reduce China`s energy use per unit gross domestic product (GDP) by 20 percent during 2006­10. The target is ambitious because it requires a sharp reversal in the trend of increasing GDP energy intensity witnessed during the five years of industry-led growth before that. To achieve the goal, targets where subdivided and assigned both to provinces and lower administration levels and to administrators of key national programs, with clear accountabilities for delivery. Quantitative results were disappointing the first year. However, China`s leadership insisted that delivery against the goal was essential. The program began to roll out with a level of attention among all groups at all levels on how to achieve energy conservation results that have never been witnessed in China before or perhaps anywhere. The drive has yielded a wealth of new ideas, development of a host of new major programs, promulgation of many new and relatively advanced regulations, and a massive organization effort with great human and financial investment. 5. The latest comprehensive statistics show achievement of a reduction in China`s energy intensity per unit GDP of 12.45 percent over the 2006­08 period. 1 Early indications also suggest that with strong industrial growth in the first years and a growing heavy industry recovery in 2009 from the effects of the financial crisis, the contribution of economic value added changes to the energy intensity reductions has been far less than seen during the 1980s and 1990s. Hence, gains in physical energy efficiency appear to have made a truly impressive contribution during this five-year plan (FYP) so far. 6. The achievement of solid energy savings to date is of course important, but perhaps an even more important result of the national energy conservation program so far has been the institutional gains. The new legal and regulatory foundations put in place, design and implementation experience in a large number of new major programs, capacity building at all levels, and generation of innovative new approaches all can serve China very well in the future. The Role of China's Provinces 7. The governments of 30 Chinese provinces (including autonomous regions and four provincial-level municipalities) have played core roles in the achievement of energy conservation results so far and are expected to continue to do so. National-level government institutions promulgate new national regulations and policies (such as industrial restructuring policies and new taxation regulations), set national targets, establish new national standards and codes (such as national minimum energy efficiency equipment standards and building codes), design and oversee implementation of a series of national-level programs (such as the Top-1000 Energy-Consuming Enterprises Program2 or the new programs for energy conservation renovation in existing buildings), and allocate resources from the central government budget. Provincial-level government 1 In December 2009, China`s National Statistical Bureau announced completion of the reconciliation of past series of energy consumption, GDP, and energy intensity statistics with the results of the massive 2008 National Economic Census. Previously reported energy consumption and GDP statistics are being revised accordingly. 2 Hereinafter referred to as 1000 Enterprise Program. vi institutions must organize much of the implementation on the ground. They also often add specific local policies and policy interpretations, issue local standards and regulations, set local targets, develop and implement additional complementary programs, and allocated additional budget resources. 8. The central government and provincial governments agreed on individual provincial energy savings targets for 2006­10 at the outset of the 11th FYP. Provincial leaders are being held strictly accountable for achievement. Provincial governments have organized comprehensive efforts to achieve their targets, overseen by provincial leadership, usually in a Leading Group chaired by the governor. Provinces also have allocated and are carefully supervising targets for the prefectural governments below them. Most but not all provinces are on track so far to achieve their targets. Their energy conservation programs have many common threads, stemming from the overall national guidance, but implementation methods, priorities, strengths and weaknesses vary substantially and provinces have experimented with different types of program concepts. New provincial government policies, regulations, directives, and organizing efforts focus particularly on the details of program implementation. Provincial agencies play an especially critical role in the implementation of industrial energy conservation programs. Most building energy efficiency and urban transportation initiatives are under the purview of city governments, but provincial governments also play important coordinating roles in these sectors. Key Enterprise Energy-Saving Programs 9. One of the most important new program areas successfully established involves mandatory energy savings targeting and a series of associated supportive initiatives for China`s key energy-consuming enterprises. China`s Energy Conservation Law, revised in 2007, defines key energy-consuming enterprises as any of the more than 15,000 enterprises operating in China that consume more than 10,000 tce per year. 3 The vast majority are industrial enterprises. 10. Enterprise energy savings responsibility contracts. The national 1000 Enterprise Program, launched in 2006, established a new system for government-enterprise agreement on specific enterprise energy savings targets, and monitoring and supervision of compliance. The central government designated the top 1,008 energy-consuming enterprises in the country for participation. Together they account for about one-third of China`s total energy use. Agreements on various enterprise energy conservation measures and energy savings targets for the FYP are established in energy savings responsibility contracts. National agencies have set the objectives, targets, scope, and implementation guidelines. Provincial governments are in charge of most of the details of implementation. Progress in each enterprise is evaluated annually. Initial estimates show that the program is well on track to meet and perhaps surpass its aggregate goal of saving some 100 million tce over the five-year period. 11. Provinces and prefectures also have signed energy savings responsibility contracts with thousands of additional key energy-using enterprises, especially during 2007­08. In 3 The law also allows relevant agencies to designate enterprises consuming between 5,000 and 10,000 tce per year as key energy-consuming enterprises if they wish. vii Shandong Province, for example, key energy-consuming enterprises entering into energy savings responsibility contracts at various levels of government now account for about 70 percent of the province`s total energy consumption. 12. Additional and Associated Measures. While the enterprise targeting system focuses attention on achieving quantified results, the enterprise energy savings responsibility system also provides a platform for regular and sustained public sector and enterprise interaction on a host of energy conservation initiatives. Some particularly important areas now being developed include (a) training of enterprise energy managers and organization of related technical assistance; (b) rollout of new standardized enterprise energy management systems (EMSs); (c) development of comparative unit energy use benchmarking to assist enterprises in assessing savings potential; (d) supervision and support for compliance with minimum energy efficiency performance standards and other key regulations; and (e) identification, packaging, and arranging of some types of financing support for energy efficiency investment projects. 13. Monitoring and supervision. Provincial and prefectural governments have the main responsibility for monitoring and supervising the key enterprise energy savings programs (although the central government also oversees the 1000 Enterprise Program). As of mid-2008, 19 provinces had established provincial-level supervision units to undertake this function, with authority broadly established by the Energy Conservation Law. A key task for the near-term future is the development and operation of new enterprise energy use data collection and reporting systems. If they wish to apply pressure for compliance with agreements, provincial and local governments have discretionary use of broad permitting and regulatory powers relating to enterprise operation and new project approvals. Industrial Structural Adjustment Efforts 14. In recent years, China has tried to increase emphasis on sectoral adjustment in its overall industrial policy, aiming to encourage development more characterized by low input, low consumption, lower emissions, and high efficiency. One aspect of current policy is to encourage more robust development of high- and new-technology industries and the service sector. Another aspect is to subject new energy-intensive industrial project proposals to greater scrutiny. A final aspect is to eliminate particularly wasteful and subscale industrial capacity. 15. Energy efficiency assessments for new capacity. China`s National Development and Reform Commission (NDRC) now requires approval of energy conservation assessments as part of new energy-intensive project proposals under its purview. Many provinces have followed with similar requirements, putting new systems in place as part of the project-permitting process. Project reviews aim both to question more rigorously the benefits and costs of large new energy-intensive capacity expansion and to evaluate the energy efficiency of technologies being proposed. 16. Elimination of backward industrial capacity. One of the largest programs of China`s current energy conservation drive is the national effort to close down old, small- scale, and particularly inefficient energy-intensive industrial capacity. The program focuses mainly on the thermal power, iron and steel, cement, electrolytic aluminum, viii ferroalloy, coke, and calcium carbide industries, and is implemented by provincial and local governments. The main measures include (a) policies to replace the small with the large by linking investment approval for new larger-scale projects to progress achieved in the same locality in eliminating backward capacity; (b) imposition of additional price surcharges on electricity consumed by backward plant, (c) allocation of special funds to compensate for financial loss and unemployment impacts, and to provide awards for early success; and (d) other administrative measures. Although difficult, subsector reports indicate that the program is having a large impact so far. In Shanxi Province, for example, successful closure of particularly wasteful capacity is estimated to have accounted for about 60 percent of the total energy savings in the province`s large industrial sector during 2006­08. Building and Heating System Energy Efficiency 17. Some of the major achievements of the national energy conservation drive in the building sector include (a) a sharp increase in the compliance of new residential building designs with the energy efficiency building code, (b) the launch of new programs for energy conservation retrofitting of existing buildings, and (c) issuance of new regulations and program start-up for improving the energy efficiency of government facilities. Progress also has been made in northern China on the urban heat system reforms necessary to achieve the most meaningful energy savings in centrally heated buildings. However, the difficult but critical reform step to implement consumption-based heat billing in northern China still largely remains a challenge for the future. Provincial governments are well placed to more aggressively coordinate and promote implementation by city administrations. Developing the Energy Efficiency Service Industry 18. Many provinces have taken measures to further foster development of local energy efficiency service entities to undertake critical functions needed for the energy efficiency market to work. Some of these functions include energy auditing and testing, consulting, energy efficiency technology dissemination, energy efficiency project design and appraisal, project construction management and maintenance, training, detailed energy use monitoring tasks, and assistance in arranging project financing. Many energy efficiency service entities also have become engaged in energy performance contracting business. Nationwide, energy efficiency investments using energy performance contracting totaled about US$1.5 billion in 2008--rivaled internationally only by the United States. This business is expected to grow further. Fiscal Incentive Programs and Pricing 19. Energy conservation special funds. The central government, most provinces and some prefectures have established energy conservation and emissions reduction special funds with annual allocations from the government budget. While the main uses of the funds vary some by fund, the most common uses for energy efficiency include provision of subsidies for energy efficiency investment projects payable upon project commissioning, for research and development, for technology demonstration, for information dissemination and for various types of energy conservation awards. The ix central government`s fund allocations for all aspects of energy efficiency and emissions reduction totaled about RMB 105 billion during 2007­09, of which allocations for energy efficiency were only one part. 20. Energy pricing. Generally speaking, average prices for the main energy types in China reflect the financial costs of supply. However, most prices do not reflect the additional, externality costs implicitly assigned by leaders and society concerned with resource savings involving, for example, long-term supply security issues or environmental concerns. Broad pricing policy is under the purview of the central government, but provinces do have some leeway to make certain kinds of adjustments, and some prices, such as for heating, are set by municipal authorities within national guidelines. Shanxi Province has instituted a resource tax on coal production, which is a major source of financing for its energy efficiency special fund and for compensation for eliminated backward industrial capacity. Some provinces also have added small across- the-board electricity surcharges, and utilize revenues received for electricity load management and energy saving programs. Finally, provinces have followed central government guidance and implemented large electricity price increases for wasteful industrial capacity slated for closure. 21. Tax incentives. Although some readjustments were made with arrival of the global financial crises, tax rebates for many energy-intensive product exports were reduced at the outset of the 2006­10 energy-saving program. Favorable taxation policies also have been instituted to encourage the purchase of highly energy-efficient equipment and to attract high- and new-technology industries. B. Meeting the Challenges Faced by China's Provinces in the Future 22. Sustained, strong efforts to improve energy efficiency will certainly continue to be a central part of China`s efforts to build a resource-saving society for the foreseeable future. China`s provincial agencies will need to play an even greater role than in the past. As the final year of the 11th FYP begins, it is a time to objectively reflect on achievements made, program shortcomings and weaknesses, and how further improvements can be introduced during the next five-year planning cycle. The study team`s review is presented in Chapter 4 of this report. Two core categories of needs emerged from the study team`s review, which are recommended for priority attention by provincial governments: (a) needs to improve quality in provincial program implementation, and (b) needs to increase the use of market-based tools in delivery of the energy conservation program overall. 23. The pages below (and Chapter 4) first discuss the blending of administrative and market-based tools. Next discussed are some core elements of the agenda to improve the quality of administrative program implementation. An overview of requirements that need to be met to increase the role of market forces follows. Two critical special topics are then analyzed, considering both implementation quality issues and integration of market-based approaches, including the agenda to improve key enterprise energy savings responsibility systems and possible use of market-based approaches to help increase results in the use of public energy efficiency funds. A final section summarizes the report`s recommendations on how to improve quality in program implementation and how to increase the use of market-based tools. x Improving the Balance between Administrative and Market-Based Tools 24. China needs both administrative and market-based measures to achieve the best long-term energy efficiency results. In this respect, China is not unique. Other countries that have implemented successful energy efficiency programs also have employed mixes of both tools. In China, however, government guidance and leadership are especially important. Administrative measures, such as mandatory targeting and regulations, codes, and standards aimed at achieving minimum performance requirements, have certainly played key roles in the energy efficiency gains achieved in the 11th FYP so far. Yet, as described further in the main text, they also pose difficulties in bringing out the full potential for savings, and they can create economic distortions. Reliance on market forces has major economic efficiency advantages, but also poses various practical difficulties trying to capture the full potential for energy efficiency gains. A blend of the two sets of tools is needed. In this blend, a greater emphasis on market-based tools than is used today is recommended to provide better balance and to foster greater synergy between the two. Areas worthy of increased emphasis include greater use of energy pricing and fiscal incentive tools, increased support for the development of the energy efficiency service industry, and increased collaboration with financial sector institutions to foster market- based investment. In addition, good potential exists for increased reliance upon market- based programs as implementation mechanisms for public sector programs, as is effectively employed by many countries abroad. Strengthening Quality in Administrative Program Implementation 25. Capacity building needs. During the 11th FYP, China`s provinces put comprehensive and extensive administrative programs in place to help achieve energy savings targets. Now the challenge is to reinforce the institutional systems required to make these programs work as effectively as possible over the long term. Two areas are particular priorities: (a) improved, even-handed, and consistent enforcement of the many existing important regulations, codes, and standards; and (b) further improvements in the evolving key enterprise energy savings responsibility system and steady implementation of the initiatives surrounding it. Success will require a truly massive and continuing capacity building effort at provincial, prefectural, and even county levels of administration, as well as within tens of thousands of enterprises and all types of energy efficiency service institutions. Government monitoring and supervision units need to play central roles to ensure that the increased number of government oversight requirements is handled effectively. Current staffing numbers and qualification levels, especially in units below provincial level, are greatly inadequate if balanced approaches with enterprises are to be maintained with knowledgeable and helpful advice. It is important for government unit staff to have basic technical knowledge and understanding of current programs and regulations, but it also is important, especially for the future, for them to have good understanding of business economics and possible innovative approaches. 26. Development of enterprise energy-use data reporting systems. Development and rollout of key enterprise energy-use data collection, reporting, validation, and analysis systems is a major and important task for the coming years. Access to internally consistent, comparable, accurate, and timely data is essential if government units are to play a productive role in monitoring and supervision and to devise policies and programs xi that can best meet the actual needs of enterprises. Careful design of the new data collection systems at the outset is critical. Standard approaches to the complexities of enterprise energy and output accounting is needed, so that data can be usefully compared. Continuing national-level guidance on accounting and measurement protocols would be of great assistance. Upfront emphasis is needed on maintaining data quality control and determining exactly how government will validate data entered by enterprises. Additional issues for attention include data security measures, clear definition of institutional responsibilities, and development of phased plans for piloting prior to scaling up. 27. Integrating market-based concepts with administrative programs. A number of other countries have been successful integrating market-based concepts with regulatory or targeting programs. Some of these concepts may adapt well into the Chinese system. Following are three examples, which are also discussed further below and in the main text: Linkages with standardized enterprise energy management systems. Rigorous and sustained adoption of standardized EMSs by enterprises provides a systematic way for enterprises to identify and implement energy savings measures of greatest benefit to them. However, adoption should also systematically cover the main areas of government regulatory and targeting interest, thereby allowing more indirect and efficient government regulation that focuses on the sufficiency of EMS adoption. In addition, proper adoption of EMSs provides pipelines of energy efficiency investment projects suitable for adoption through the market. Competitive energy savings procurement. Governments in many other countries, and especially local governments, often use competitive market principles in program implementation using public energy efficiency funds, as they try to attain the maximum energy savings with the minimum expenditure. Trade in certified energy savings. To try to improve economic efficiency and fairness, many countries that impose energy savings obligations on enterprises allow enterprises to meet those obligations through either their own efforts or through purchase of certified energy savings from other parties. Requirements for Expanding the Role of the Market in Delivering Energy Efficiency 28. Having bolstered enterprise interest in energy efficiency investment through administrative measures, provincial governments need to do more to ensure that local enterprises can actually undertake the investments requested of them. While the government provides some concessional finance as a carrot to encourage investment, by far the largest portion of financing for investment projects must come through the market. Many enterprises continue to face serious difficulty in packaging projects in ways that can be accepted by financiers and in securing finance. As a result, many financially attractive potential projects remain unimplemented. Except for a limited number of cases where enterprises possess all the financing and expertise required themselves, three key actors are required to deliver energy efficiency project investment through the market: the enterprise, energy efficiency technical and project expert groups, and financiers such as banks. Experience in China and elsewhere has shown that rapid development of the energy efficiency service industry and engagement of financial institutions in the energy xii efficiency business will not just automatically happen by itself. Steady support and targeted assistance are required. 29. Developing the energy efficiency service industry. While independent institutes and companies involved in the details of identifying, appraising, and implementing energy efficiency projects form a vibrant industry in some parts of China, this industry remains very underdeveloped in others, creating a blockage to rapid progress. Improving the capacity of local companies in technical energy efficiency work, such as auditing, technology assessment, project design, procurement, and commissioning, is important. Also important, however, is development of associated business expertise for packaging projects so that enterprises and financiers can accept them, and for helping to bring projects to financial closure. Provincial governments can help with (a) formal policy support and legitimization of the industry, including the energy performance contracting business, (b) use of government contracts and contracting procedures to help bolster the industry, (c) fostering training and information exchange, and (d) support for development of local energy efficiency service industry associations where appropriate. 30. Developing energy efficiency lending in the banking sector. Most local banks are unfamiliar with the technology and business of energy efficiency. Financing of projects where the benefits streams are in projected operating cost savings are not conventional for most banks, which are more used to projects that create new production assets. Worries about potentially high transaction costs are common. A wealth of experience in China and elsewhere shows that banks and the energy efficiency community do not naturally interact, and efforts to help them mutually understand and benefit from each other are needed to help move energy efficiency investments. Provincial governments can help by (a) convening regular forums on energy efficiency project financing, (b) helping to arrange technical assistance on how to develop energy efficiency lending businesses, (c) cost-sharing of preparation and/or appraisal costs for certain energy efficiency projects and, possibly, (d) facilitating the use of government energy efficiency investment awards as a form of loan security. 31. Expanding the use of energy pricing tools. Additions of different types of surcharges to consumer energy prices can provide an economically efficient signal to consumers as to the true costs of their energy consumption to the nation. Revenue obtained can often be returned to consumers through public financial support for energy efficiency measures, minimizing or even completely negating the impact of higher prices on the energy bills of consumers. Provincial governments should review the areas where they have permission to adjust energy prices or add specific energy surcharges, and undertake such adjustments where they can further improve market incentives without unduly compromising vulnerable groups. Improving Key Enterprise Energy Savings Responsibility Systems 32. More than 15,000 enterprises with energy consumption of more than 10,000 tce per year are designated as key energy-using enterprises under the Energy Conservation Law, with requirements for data submission and government supervision of their staffing, plans, and progress in energy savings. A further 12,000 may be designated at the discretion of government agencies. These enterprises account for the lion`s share of China`s total energy consumption. How can the platforms already put in place to guide xiii and encourage greater energy efficiency in these enterprises be further improved during the next FYP so that steady, continuing energy savings can be achieved year after year? 33. Use of mandatory enterprise energy savings targeting in China has proved its merits for focusing attention on achieving energy efficiency results. However, during the 11th FYP, derivation of quantitative targets was fairly rough. Attention within the Chinese energy efficiency community is now quite rightly turning to the question of how to customize targets to actual enterprise energy savings potential during the 12th FYP better. One prospectively useful approach, aspects of which are currently being used in both Europe and Japan, is to follow a sector approach. This involves assessment of unit energy consumption variations, technology development and penetration patterns, and energy savings potential in specific energy-intensive industrial subsectors. The assessment is followed by agreement on overall subsector and enterprise energy savings targets. 34. Ultimately, however, the key for realizing energy savings in line with cost- effective potential lies with the efforts of enterprises themselves. Increased emphasis needs to be placed on assisting enterprises to plan, manage, and implement energy efficiency measures as part of their own internal systems, with the government playing a more indirect, but important, role monitoring the process, recording agreed enterprise- specific targets, and supervising results. 35. Supporting competence in enterprise energy managers. Japan`s system for government supervision of the energy conservation work of key enterprises, implemented over three decades, puts strong emphasis on ensuring that enterprises have the competence to manage energy efficiently. With requirements for designation of key enterprise energy managers in China`s Energy Conservation Law that are similar to those in Japan, China now aims to implement the very necessary major training programs for enterprise energy managers. Success in this effort will be critical for the work of China`s provinces to improve enterprise energy savings responsibility systems. The study team recommends that the central government seriously consider development and implementation of one standardized national examination and licensing system for the required energy managers, and phase-in of requirements that all energy managers be suitably licensed accordingly. 36. Adoption of standardized energy management systems. EMSs are a set of detailed procedures and practices that enterprises can use to set specific energy efficiency targets and goals cutting across the whole enterprise, to make detailed operational adjustment programs and investment plans accordingly, assess and quantitatively report on results achieved, and make further adjustments for continuing future work. By their nature, EMSs are dynamic processes and are highly customized to the individual circumstances of enterprises. Application focuses on achieving steady progress over the short, medium, and long term. Proper application can bring many advantages, including reduction of enterprise energy costs, a solid basis for energy savings targeting, a systematic means to assess compliance with regulations, and an excellent method for identifying attractive investment projects. 37. Shandong Province piloted application of its own EMS standard in eight enterprises beginning in 2008. After completing an evaluation of results in 2009, the province is now moving to further dissemination. China`s central government issued a xiv national EMS standard in 2009, and is now strategizing implementation. An international voluntary EMS standard--the ISO 150001--is under fast-track preparation, with Chinese authorities and experts as active participants. 38. To be effective, EMSs must be rigorously adopted, with senior enterprise management involvement. Proper adoption is likely to require several years for most enterprises, and steady attention thereafter as well. The study team recommends that provinces initiate deliberate efforts to help enterprises to adopt EMSs, and that the central government provide strong support, using the new national EMS standard. The study team also recommends that China consider adoption of formal government supervision and review mechanisms to ensure that enterprises that claim adoption of EMSs meet standardized adoption criteria. A two-stage supervision and review process is recommended, with the second stage proceeding one to two years after initial adoption, and requiring demonstration of satisfactory operation of the EMSs with concrete results. To help encourage adoption, government supervisors could use various incentive measures, such as shifting to more indirect supervision, providing priority consideration for energy investment project support, and provision of awards to enterprises with certified EMS adoption. 39. Commodification of energy savings. The institution of consistent methodologies for determining actual energy savings from enterprise energy efficiency investments and completed action plans, backed up with suitable data, should be made a priority. Energy savings calculations need to be reliably comparable across enterprises and projects. Consistent calculations are needed to assess enterprise target compliance properly, to assess the contribution of various projects to target achievement, and to assess the results of public energy efficiency fund expenditures. Consistent calculations also are very useful commercially to facilitate financing by improving the definition of investment project benefits. As discussed in the main text, calculations pose challenges, since energy savings cannot be directly measured: Savings represent the absence of energy use. Energy savings must be calculated by comparing energy use with a conservation measure against what energy use would have been without it. While simplified approaches can be adopted, a host of methodological, data reporting, and accounting stance or boundary issues need to be addressed. 40. Derivation of comparable and credible calculations of energy savings naturally leads to the commodification of energy savings--an increasing trend globally that surely also can play an increasing role in China`s future energy conservation efforts. In reality, concepts of energy savings commodification are already being employed in China`s energy performance contracting business and the carbon credit trade. 41. One aspect of energy savings commodification for which the study team recommends launching experimental pilots is trade in certified energy savings between enterprises with energy savings obligations. Internationally, most countries that have instituted energy savings obligations on enterprises also have instituted schemes to allow trade in certified energy savings between enterprises. This can increase the fairness and economic efficiency of the targeting system. Experimental pilots with predefined limited scope could be tried to assess the practical potential and implementation possibilities under Chinese conditions. Provinces may be an ideal level for experimentation, perhaps xv involving a small group of enterprises in a similar line of business and for technical measures where definition of energy savings is relatively straightforward. Market-Based Approaches for Use of Public Energy Efficiency Funds 42. The energy efficiency special funds created by provinces during the 11th FYP are indispensable policy and program support mechanisms. Two important questions looking forward are how to obtain the greatest energy efficiency results from these funds and how to put fund financing on sustainable, multiyear footings. 43. The importance of monitoring and verification. When considering how to get the best results, policymakers and fund administrators might best ask, How can we buy the most energy savings with the limited public funds we have? In order to obtain the best arrangement purchasing something, however, it is essential to be clear what one is purchasing. In this case, it is critical to know how much energy savings has been delivered per RMB of special fund expenditure in different past and current programs, to estimate how much energy savings may be delivered per RMB from program alternatives in the future, and to monitor how these estimates play out in practice to allow adjustments. The study team recommends that provincial governments complete careful and scientific assessments of the actual energy savings achieved through various fund uses to date, followed by realization of program adjustments for the future to increase verifiable energy savings from available funds. 44. Energy efficiency utilities and other performance-based programs. An increasingly popular approach among governments abroad is to engage a third-party entity to deliver energy savings in the most cost-effective way possible under a performance contract with the government. One of a variety of approaches that may be of interest to provincial government is the creation of new energy efficiency utilities (EEUs), adopted by several state governments in the United States. These are new institutions unrelated to electric power or other energy supply utilities, whose sole purpose is to realize energy savings requested by governments as effectively and cheaply as possible. EEUs prepare programs for investment project promotion, targeted subsidies, awareness-building activities, community organizing, and technical assistance, with an overriding objective of maximizing energy savings per unit expenditure. Legal entities operating the EEUs are issued performance contracts, typically following competitive procurement procedures. The performance contracts tie compensation to energy savings levels validated by the state government. EEUs may be revenue earning or not. 45. Increasing leverage. Another set of options for maximizing energy savings results is to establish partnerships with other financing institutions or sources to increase the leverage of public energy efficiency funds in fostering investment. Operation of loan guarantee facilities and development of new energy efficiency investment funds are two among a variety of possibilities. 46. Achieving greater sustainability. Achievement of the best results from public energy efficiency funds requires sustained effort over a number of years, which in turn requires predictable and steady financial support. This usually requires earmarking of some types of specific public revenues to energy efficiency funds. A common option internationally, which also has been adopted by some provinces and can be further xvi considered by others, is the allocation of a portion of certain energy production or use surcharges. C. Recommendations for the Medium Term 47. Recommendations for provincial governments to consider in preparation for the next five-year planning cycle are outlined below. They draw on the discussion above and are described in greater detail in Chapter 5. Chapter 5 also provides a list of specific activities that could be undertaken during the next one to two years with possible international cooperation. Improving Quality in Provincial Program Implementation 48. China`s provinces have made extraordinary efforts during 2006­09 to put a wide range of comprehensive new energy conservation programs in place. Yet, the tasks required are very large scale, and intensive effort will be needed during the 12 th FYP to strengthen the foundations for program execution if excellent results are to be assured. Five broad areas worthy of provincial government attention include the following: Strengthening local human infrastructure for energy conservation program delivery. Staffing levels and skills must be upgraded at all levels, both within and outside of government. Development of improved enterprise energy use data reporting systems. Systems need to be carefully planned and systematically rolled out. Supporting innovation at local levels. In the northern provinces, local experimentation and piloting are especially needed to implement consumption- based heat billing and energy efficiency renovation of existing buildings, as well as other areas. Review of options for further expanding energy savings results from provincial energy conservation special funds. Scientific assessments of energy savings achieved from current fund use need to be followed up with development of future strategies. Consideration of how to develop multiple-year, sustainable financing sources for provincial energy conservation special funds. 49. Further improvements in key energy-consuming enterprise energy savings agreements and associated initiatives could provide among the largest energy savings results during the 12th FYP. Three important areas for focus include the following: Increasing customization in enterprise energy savings targeting. Completion of industrial subsector energy savings assessments may be one useful tool for this. Supporting competence in enterprise energy managers. A standardized national examination and licensing system for designated energy managers is recommended. Fostering the adoption of rigorous and standardized (EMSs) in key enterprises. Effective and high-quality implementation of standardized EMSs may be a crucial foundation for long-term, sustainable energy efficiency gains. xvii Increasing Use of Market-Based Tools 50. Four areas where provincial governments can help energy efficiency investment markets to work better include the following: Expanded use of energy pricing tools. In addition to increasing incentives to reduce energy costs, revenue from surcharges can be explicitly returned to energy-using taxpayers as concessional financing for energy efficiency measures. Fostering development of local energy efficiency service industries. Local institutes, centers, and energy efficiency companies play critical technical and project packaging roles and need more support. Encouraging the expansion of energy efficiency lending by local financial institutions. Energy efficiency project lending rarely falls into standard loan categories for local banks and usually requires special efforts. Moving to commodification of energy savings. Measures to ensure consistent and credible calculation of energy savings from projects is a first step to making energy savings a tradable commodity. 51. Market-based approaches can be used as mechanisms to improve efficiency and the results of various public sector energy efficiency programs. Two examples worthy of consideration by provincial governments include the following: Piloting trade in energy savings certificates. Fairness and economic efficiency in the enterprise targeting system could be improved by allowing trade in certified energy savings, beginning with local experiments. Developing possible new programs to expand results from provincial government energy conservation funds. Two options include establishing provincial EEUs and partnering with other financial institutions to increase fund leverage. xviii CHAPTER 1: Introduction CHAPTER 1: Introduction 1.1. China is implementing an unprecedented effort to improve energy efficiency of its economy. The 11th FYP (2006­10) includes a firm target to reduce the energy intensity of the country`s GDP by 20 percent. China has launched a set of energy conservation policies, regulations, and programs that cover all aspects of the economy. Provincial governments play a critical role in implementation of the country`s energy conservation drive.4 This is the government level that interfaces directly with most large consumers, consolidates resources for specific activities, and organizes implementation on the ground. 1.2. This study provides an overview of how China`s provincial energy efficiency programs are designed and implemented and their progress to date, along with a review of major issues and challenges, and suggestions on how they may be improved as the programs are further implemented. 1.3. The study is part of a multiyear program launched by the World Bank in partnership with Chinese agencies and other international partners to support continuing and increasing energy efficiency gains through provincial government programs, including both investment financing and technical assistance. In addition to this study, this program includes (a) a completed ESMAP 5 overview survey and selected case studies of China provincial energy efficiency programs (2009); (b) a proposed 2010 Global Environment Facility (GEF) Project Provincial Energy Efficiency Scale-Up Project to support new innovations and capacity building in Shanxi, Shandong, and Jiangxi; (c) a proposed IBRD Shandong Province Energy Efficiency Project, under active preparation, and (d) a proposed IBRD Shanxi Province Energy Efficiency Project, also under active preparation. 1.4. Central government policies and program direction, as well as the traditions of Chinese government program implementation, provide a measure of uniformity in the basic content of provincial government energy efficiency programs. However, great variation exists in emphasis and the specifics of implementation, based on local policies and differences in historic trends, economic development and its composition, resource availability, and management capacity. This study therefore included a review of many of the relevant central government policy initiatives and program guidelines, as well as many provincial-level program examples. In its review of program specifics, however, special emphasis has been given to the three provinces currently included in the World Bank`s provincial energy efficiency GEF and loan financing program--Shandong Province, Shanxi Province, and Jiangxi Province. These three provinces also exhibit great differences between each other. 4 The word province in this report is used to refer to all of the provinces, municipalities, and autonomous regions that report directly to the central government`s State Council. 5 The multidonor Energy Sector Management Assistance Program managed by the World Bank. 1 Accelerating Energy Conservation in China`s Provinces 1.5. Shandong Province, located along the eastern seaboard, ranked second among China`s provinces in population with 94 million people in 2008, second in GDP with RMB 3.1 trillion (US$387.5 billion equivalent), and first in energy consumption with 342 million tce. The industry sector accounted for 57 percent of Shandong`s GDP and 80 percent of energy consumption in 2008. Coal accounted for about 80 percent of energy use, which is high even by Chinese standards. Shandong is one of four provinces with an FYP to reduce energy intensity of GDP at a rate higher than the national average--22 percent. The province also has aggressive mandatory FYP targets for sulfur dioxide control. Shandong`s energy conservation program is known for its relative strength in organization and provincial government policy development. 1.6. Shanxi Province in north China is the largest coal production area in China; it produced 656 Mt of raw coal in 2008. Relying upon its abundant coal resources for much of its development, Shanxi has one of the most energy-intensive economies in China. Energy consumption per RMB 10,000 of GDP was 2.55 tce in 2008--an energy intensity more than triple that of Shanghai and Jiangsu in the east and Guangdong in the south. Much of the industrial sector is focused on processing raw coal into higher-value, energy- intensive products. Energy use per unit of industrial output value is therefore more than five times that of Shanghai or Guangdong. Coal accounts for more than 90 percent of commercial energy consumption, against a national average of 69 percent in 2005. Energy-intensive industries account for 82 percent of total provincial energy consumption (including energy transformation for heat and power production). Industrial energy efficiency in these industries is relatively low. For example, the energy consumption per unit of steel produced is 41 percent higher than the national average. For all of these reasons, Shanxi has the most carbon-intensive economy in China. Recognizing the energy-intensive nature of its economy and the great potential to improve energy efficiency, Shanxi set a target for itself to reduce its energy intensity by 25 percent during the FYP, although it is committed by the central government to a target of only 22 percent. 1.7. Jiangxi Province is a landlocked province located in south-central China. GDP per capita in 2008 was RMB 12,504 (US$1,824), ranking 22nd among the 31 provinces. Energy consumption per unit GDP was 0.93 tce in 2008, somewhat below the national average. In contrast with Shanxi, energy resources in Jiangxi are scarce and 57 percent of energy supply is imported from other provinces. Unlike coastal provinces, Jiangxi is just now in the process of rapid industrialization and urbanization. The share of the industrial sector in GDP rose from 36 percent in 2005 to 43 percent in 2008. Industry sector dominates energy consumption, accounting for 75 percent of total energy consumption in 2008, among which 57 percent from the most energy-intensive industries iron and steel, thermal power, and cement industries. Jiangxi has set a target of reducing energy intensity by 20 percent during the 11th FYP. It has a special challenge to achieve this target during a time of increasing industrialization. 1.8. The key concerns in Shandong, Shanxi, and Jiangxi--as in other provinces--are the timely but effective design and implementation of huge, largely new, comprehensive energy conservation programs. Successful achievements of targets for the 11th FYP and those expected for the 12th FYP will not be easy, especially given shortages of both human and financial resources. In addition, authorities are also concerned about 2 CHAPTER 1: Introduction constructing systems and mechanisms that can provide continued results far into the future, since it is clear that pressures from the need for energy conservation will continue indefinitely. This study tries to shed light on how the current programs work and how they might be improved to meet the challenge. 1.9. This study was completed by a small team of Bank staff and consultants, drawing on the ESMAP survey of provincial energy efficiency programs and preparation of case studies, consultant studies on the energy efficiency programs of Shandong and Shanxi Provinces, and information and discussions during field visits in March/April and October/November 2009. 6 The Australian Agency for International Development (AusAID) provided support and financing for the consulting studies and a portion of the study team`s work. 1.10. Chapter 2 provides a brief overview of China`s overall 2006­10 Energy Conservation and Emissions Reduction Program and how provincial programs fit into the overall effort. Chapter 3 describes the main energy conservation programs being undertaken in China`s provinces, how they are organized and implemented, and some of the issues that have arisen. While international experts will recognize themes and approaches that have characteristics similar to many of those developed elsewhere, these programs were developed domestically, and they have many unique features. The programs are also massive in scale. Chapter 4 discusses issues perceived by the study team and challenges for the future--especially for the next FYP cycle--and provides some suggestions from the team. Chapter 5 provides a summary of the team`s conclusions and recommendations. 6 The ESMAP study includes two reports completed by the NDRC`s Energy Conservation Information Dissemination Center (NECIDC), Survey Report of Energy Conservation Activities of Local Government in China (NECIDC 2009b), and Case Studies of Provincial Energy Conservation Management in China (NECIDC 2009a). The two consultant reports include Background Report of Energy Efficiency Management in Shandong Province by the Dezhou Energy Utilization Monitoring Center (DEUMC 2009) and Study on Implementation Capacity of Energy Conservation Planning in Shanxi Province by the Institute of Energy Economics, Shanxi Academy of Social Sciences (SASS 2009). 3 Accelerating Energy Conservation in China`s Provinces CHAPTER 2: An Overview of China's 2006­10 Energy Conservation Program 2.1. China`s leadership has made conservation of natural resources a basic national policy and called for China to focus on building a resource-saving society because sustained and strong economic growth in China over the long term is only possible if natural resources are used more efficiently. Because of China`s size, the extent of its success in using natural resources more efficiently is also critical for sustainable development globally. 2.2. The more efficient use of energy resources is one of the most important elements of China`s resource conservation goals. Although a quadrupling of China`s GDP between 1980 and 2000 was achieved with only a little more than doubling in energy consumption, this trend shifted during the big industrial boom at the turn to this century. As industrial output grew at a torrid pace during 2001­05, with steel production alone rising from 129 Mt in 2000 to 352 Mt in 2005,7 energy consumption rose just about as fast as GDP, reaching 2.2 billion tce in 2005. This placed China as the world`s second largest energy consumer. With coal accounting for almost 70 percent of energy consumption, China has also become the largest emitter of carbon dioxide, which is the biggest greenhouse gas (GHG) contributor to climate change. Looking at the long term, China`s leadership has concluded that the tremendous energy consumption required for continuation of this type of economic growth model was flatly unsustainable on many grounds. With strong aspirations to further increase incomes and improve livelihoods for its people, more goods and services must be obtained using less energy. Less energy- intensive sources of growth need to be cultivated, and energy waste in all manner of production and consumption processes needs to be eliminated where possible. Even so, development of a sustainable energy supply to support the overall growth in energy use needed to raise incomes substantially above their current level of about one-fourth of the OECD average still remains a daunting task, given China`s great population. A. China's 2006­10 Energy Conservation and Emissions Control Targets 2.3. China`s leadership has now put energy conservation at the center of its energy policy. A vision for the future was presented in the Medium- and Long-Term Energy Conservation Plan issued by the NDRC in 2004. A firm target to reduce China`s national energy intensity by 20 percent was then highlighted in the country`s 11th Five-Year Social and Economic Development Plan (FYP 2006­10), requiring an average annual reduction of energy intensity of 4.4 percent. The energy conservation target , together with targets for the reduction of sulfur dioxide air pollution and chemical oxygen demand (COD) levels in surface water, form China`s aggressive FYP program for Energy Conservation and Emissions Reduction (jieneng jianpai). 7 China Statistical Yearbook 2004 (2005) and China Statistical Yearbook 2006 (2007). 4 CHAPTER 2: An Overview of China`s 2006­10 Energy Conservation Program 2.4. China`s leaders and many key government directives have continually emphasized the importance of achieving the target to reduce energy intensity by 20 percent. The target is a real challenge to achieve during the continuing era of industry-led growth, with strong concentration on heavy industry. Essentially, the trend of increasing energy intensity driven by industrial growth must be seriously shaken through application of a wide variety of direct and indirect policy, regulatory, and investment measures. 2.5. Energy intensity is defined as commercial energy consumption divided by GDP, and can be measured nationally or for any region or subset of the economy. Calculation is strictly defined and controlled by the National Bureau of Statistics (NBS) under explicit orders from the State Council, with numerous additional progress assessments and evaluations undertaken by NDRC and others. It is important to note that the focus of the target on reduction of energy consumption per unit GDP means that both changes in the structure of economic output and changes in energy use per unit of physical output or service matter for achieving the target. B. China's 2011­20 Carbon Emissions Intensity Reduction Targets 2.6. China`s large-scale and comprehensive energy conservation programs are virtually certain to continue. Achieving further improvements in energy efficiency will be critical for attainment of the country`s announced goal to reduce carbon emissions per unit GDP from the 2005 level by 40­45 percent by 2020. Specific carbon intensity and/or energy efficiency targets for the 2011­15 12th FYP are expected to be issued around the end of 2010. C. Overview of China's Main Current Energy Conservation Programs 2.7. China has successfully launched a comprehensive set of programs to meet the energy conservation challenge, covering all major sectors from many angles. The legal foundation for their implementation was also bolstered through the promulgation of a revised Energy Conservation Law in October 2007. The rollout of these programs has brought successful results so far: The increase in China`s energy intensity witness during the early part of this decade has been reversed with a reduction in energy use per unit GDP of 12.45 percent during 2006­08. Even more important than this remarkable achievement, however, is how these programs have laid foundations for achieving further steady increases in energy efficiency for years into the future. Sector programs are briefly outlined below, and a section on organization for implementation directly follows. Sector programs directly implemented by provinces, especially relating to industry, are discussed in far greater detail in Chapter 3. 2.8. Industrial sector programs. Including building and transport energy use by industrial enterprises, China`s industry accounted for 77 percent of China`s commercial energy consumption in 2005. 8 Therefore, the industrial sector has received priority attention in the government`s energy conservation drive. The government is 8 This figure includes energy used or lost in the production or transformation of energy (for example, coal mining, petroleum production, power generation, and transmission and distribution), as well as final energy consumption in industry. Data on energy consumption in this section are from China`s 2005 energy balance in the 2005/2006 China Energy Yearbook (2007), which uses the thermal heat value of electricity. 5 Accelerating Energy Conservation in China`s Provinces implementing a series of new policies, regulations and procedures, monitoring and supervision mechanisms, and investment control and guidance efforts to foster both (a) a restructuring of industry away from excessive concentration on production of energy- intensive commodities with relatively low value added, from further use of wasteful and backward energy-using technologies, and from further operation of plant that does not adequately capture economies of scale; and (b) increasing energy efficiency investment and improving energy management in key energy-using enterprises, which holds enterprises accountable for attaining results. 2.9. Key initiatives on the industrial restructuring front, as defined in China, include the following: Imposition of new taxes on the export of energy-intensive commodities. Policies to strengthen subsector planning and to tighten control of development of new energy-intensive industrial projects through the project approval process. A major drive to target and eliminate production capacity for energy-intensive commodities, the production of which uses wasteful, backward, and subscale technology. New requirements to more stringently assess energy efficiency aspects of new industrial projects during the approval process. This includes more favorable consideration of new large projects that are linked to the removal of small-scale capacity in the same subsector in the surrounding local area. Policies to support development of new high-technology industries and the service sector. 2.10. Major programs with key energy-consuming enterprises include the following: Development and monitoring of new multiyear mandatory energy efficiency improvement agreements (responsibility contracts) with key enterprises. New data collection and analysis initiatives, development and use of benchmarking comparisons of unit energy consumption levels between enterprises, and issuance and supervision of minimum energy efficiency performance standards for key industrial equipment and processes. Promotion of comprehensive, multiyear enterprise EMSs. Expanded programs to disseminate information on new technologies. Provision of concessional finance to help partially defray the costs of expanded energy efficiency investment. 2.11. Building, heating system, and household appliance programs. Buildings represent an increasingly important component of China`s total energy consumption. Official statistics show that the residential, commercial, and public sector accounted for about 13 percent of energy consumption in 2005. 9 However, this measure does not include many commercial and residential buildings that belong to units that are 9 The residential, commercial, and public sectors are very broadly defined to include all household energy use, commercial sector use, and public entity energy use, as well as consumption by the construction industry and consumption defined as other in China`s official 2005 energy balance statistics. The share of this large sector grouping in total final energy consumption in 2005 (excluding the energy industry, conversion and losses) was 18 percent. 6 CHAPTER 2: An Overview of China`s 2006­10 Energy Conservation Program categorized under the industrial, agricultural, construction, or other sectors of the economy (Fridley, Aden, and Zhou 2007). Some research estimates that the buildings sector actually accounted for some 23 percent of total energy use (Liang and others 2007). Seemingly consistent with this research estimate, Qinghua University experts estimate that urban residential and commercial building energy use amounted to 325 million tce in 2004, or about 16 percent of total energy use (Tsinghua University 2008). Almost 40 percent of this was used for space heating, as a result of high heating demand in northern China, Centralized urban heating, of which some 95 percent is coal-based, accounted for about 7 percent of China`s energy use. 2.12. China`s main efforts to conserve energy in the building sector during the 11th FYP include the following: Improving energy efficiency in new buildings, especially through more strict enforcement of national building energy efficiency codes. The launching of a new major program to foster energy efficiency retrofitting in existing buildings. Further promotion of reforms and renovations in the urban heating supply, metering, billing, and pricing systems to improve incentives for saving energy. The launching of new policies and programs to improve energy efficiency in public buildings. Further promotion and tightening of minimum energy efficiency standards (MEPS) and energy efficiency labeling for key energy-using household appliances. 2.13. Transportation sector programs. Although transportation, storage, post services, and telecommunications accounted for only about 7 percent of total energy use in 2005, energy use in transportation is expected to grow sharply in the years ahead as more people move to cities and motorization rates increase. The growth of the private vehicle fleet in most medium and large Chinese cities is far above the level of GDP growth, and in some cases above 20 percent per year. Yet China`s vehicle ownership levels are still far below those of most middle or upper-income countries. 2.14. The 11th FYP period has included strong investment in key areas that have substantial energy efficiency impacts, but that are being pursued for wider efficiency purposes, such as the expanded development of railroads, urban subways, and urban bus rapid transit (BRT) systems. In a more specific measure, China has set passenger vehicle fuel economy standards such that Chinese passenger vehicles must attain an average fuel efficiency of 36 miles per gallon by 2008, which is tighter than that of many developed countries. China is in the process of setting fuel economy standards for trucks and agricultural vehicles as well. 2.15. Incentives and market-based initiatives. China`s central government has allocated more than RMB 105 billion (US$15 billion) of state budget funds to support the Energy Conservation and Emissions Reduction program during 2007­09. Provincial and local governments are allocating additional funds. The energy efficiency portion of these funds is primarily for technology research and development (R&D), technology demonstration, helping to support enterprise investment, program operational support, and information dissemination. Subsidies are provided for certain qualifying energy 7 Accelerating Energy Conservation in China`s Provinces efficiency investment, payable against demonstration of energy-saving results. Financial support is also provided through state bond funds and special project activities. Tax exemptions or reductions are available for purchases of qualified high-efficiency equipment. 2.16. The government, together with several international donor agencies, has supported the development of new commercial energy-efficiency loan financing windows in a number of China`s leading banks, to help provide core financing for the many financially viable energy efficiency projects that remain to be implemented. 2.17. The country`s push for greater energy conservation has driven demands for service from independent institutes and companies for a wide variety of energy auditing, evaluation, project design and preparation, and training tasks. Demand still remains far greater than the capacity available, but capacity is growing. The subset of this industry of commercial intermediary companies involved in delivery of project implementation and financing is also growing, including energy service companies (ESCOs) engaged in energy performance contracting. China`s ESCO industry now ranks as one of the largest in the world, with energy performance contracting investment reaching about US$1.5 billion in 2008 and growing fast. D. Organizing Implementation of the Program 2.18. China`s energy conservation programs are organized and implemented through China`s comprehensive, top-to-bottom government administration. The capacity of this system for organizing implementation of major programs is one of the country`s greatest strengths. 2.19. All of China`s provincial governments (including province-ranked municipalities and autonomous regions) report directly to China`s State Council, the government`s highest executive body (see Figure 2.1). Central government ministries, commissions, and bureaus also report to the State Council. Ministers and provincial governors are of equal rank. Within provincial governments, then, the basic setup is repeated: Prefecture directors report to the provincial governor, as do provincial-level departments, commissions, and bureaus. The setup is further repeated yet one further level, whereby directors of China`s more than 4,000 counties report to prefecture directors, as do prefecture-level departments, commissions, and bureaus. 8 CHAPTER 2: An Overview of China`s 2006­10 Energy Conservation Program Figure 2.1: China's Multilevel Government Structure Central Government The State Council National Ministry of Ministry of Ministry of Housing Development and Industry and Finance and Urban-Rural Reform Commission Information Development Provincial Government Governor`s Office Development and Economic/Industry Finance Bureau Construction Reform Commission and Information (FB) Commission (CC) (DRC) Commission (IIC) Prefecture Government Prefecture Director`s Office DRC IIC FB CC County Government County Director`s Office DRC IIC FB CC Notes: 1. Only four of China`s many central agencies reporting to the State Council are depicted for illustrative purposes. 2. Solid lines depict direct reporting relationships. Dotted lines depict additional strong operational linkages within the same professional streams (xitong or work systems). 3. At provincial and local government levels, commissions covering the work scope of the Ministry of Industry and Information may assume many responsibilities of the original economic and trade commissions, and the names and reporting relationships of these commissions vary. Source: World Bank staff. 2.20. Furthermore, ministries, commissions, bureaus, and departments operating in the same work system (for example, the Ministry of Finance (MOF) and provincial, prefecture, and county finance bureaus) have a strong hierarchical operational relationship on the professional matters of their work. This greatly facilitates program implementation throughout the country within a given work system. 2.21. In 2007, the State Council established the National Energy Conservation and Emissions Reduction Leading Group, chaired by the Prime Minister and comprised of the ministry-level leaders of the key relevant agencies. Provinces have also established similar leading groups chaired by the governors. This facilitates timely and coordinated policy development and decision making for program implementation. 2.22. The State Council has assigned responsibility, accountabilities, and evaluation criteria and procedures for achieving specific quantified energy intensity reduction targets 9 Accelerating Energy Conservation in China`s Provinces to all provinces (see Table 2.1). China`s leadership has made it clear that provincial government leaders would be held directly accountable for results. Program development and implementation responsibilities and accountabilities also have been assigned to specific agencies for all of the specific programs mentioned above. Provincial governments have followed, assigning fixed targets and responsibilities to prefectures and departments within their provinces. Table 2.1: Initial Reports of Provincial Energy Intensity Reduction Progress, 2006­08 Energy 2006­08 intensity cumulative (tce/Y % energy % energy % energy energy 10,000 intensity intensity intensity intensity Target GDP) reduction reduction reduction reduction Province (%) 2005 in 2006 in 2007 in 2008 (%) National 20 1.23 -1.8 -4.1 -4.6 -10.1 Ningxia 20 4.14 -1.0 -3.5 -6.8 -11.0 Guizhou 20 3.25 -1.9 -4.0 -6.1 -11.5 Qinghai 17 3.07 1.7 -1.9 -4.2 -4.4 Shanxi 22 2.95 -2.1 -4.5 -7.4 -13.4 Inner Mongolia 22 2.48 -2.7 -4.5 -6.3 -12.9 Gansu 20 2.26 -2.7 -4.1 -4.6 -10.9 Xinjiang 20 2.11 -0.9 -3.1 -3.2 -7.0 Hebei 20 1.96 -3.3 -2.7 -6.3 -11.9 Liaoning 20 1.83 -3.0 -4.0 -5.1 -11.6 Yunnan 17 1.73 -1.3 -3.9 -4.8 -9.7 Jiling 22 1.65 -3.6 -4.5 -5.0 -12.5 Sichuan 20 1.53 -2.1 -4.4 -3.6 -9.7 Hubei 20 1.51 -3.2 -4.0 -6.3 -13.0 Shaanxi 20 1.48 -3.6 -4.6 -5.9 -13.4 Heilongjiang 20 1.46 -3.3 -4.1 -4.7 -11.6 Chongqing 20 1.42 -3.5 -2.8 -5.0 -10.8 Hunan 20 1.4 -3.4 -2.9 -6.7 -12.5 Henan 20 1.38 -2.9 -4.1 -5.1 -11.7 Shandong 22 1.28 -3.8 -4.5 -6.4 -14.1 Guangxi 15 1.22 -2.4 -3.3 -4.0 -9.3 Anhui 20 1.21 -3.2 -3.8 -4.5 -11.2 Tianjin 20 1.11 -3.7 -5.0 -6.8 -14.7 Jiangxi 20 1.06 -3.5 -4.0 -5.5 -12.5 Fujian 16 0.94 -3.5 -3.5 -3.7 -10.3 Hainan 12 0.92 -1.6 -0.8 -2.6 -4.9 Jiangsu 20 0.92 -3.2 -4.3 -5.9 -12.7 Zhejiang 20 0.9 -4.0 -4.2 -5.6 -13.1 Shanghai 20 0.88 -0.8 -4.6 -3.8 -9.0 Beijing 20 0.80 -5.0 -6.1 -7.3 -17.3 Guangdong 16 0.79 -2.4 -3.1 -4.3 -9.5 Source: NBS, NDRC, and ONELG (2006, 2007); NBS, NDRC, and NEB (2008, 2009). GDP estimates are in constant 2005 prices. Official revisions of these figures are expected in due course, incorporating results of the second economic census. 10 CHAPTER 2: An Overview of China`s 2006­10 Energy Conservation Program E. The Role of the Provinces 2.23. China`s central government assigns responsibilities and establishes the broad policies, national programs, implementation guidelines, and key regulations and procedures for China`s energy conservation effort. The central government also reviews and appraises the results achieved on the responsibilities it has assigned. Aside from efforts that clearly must be made at the national level (such as promulgation of national standards), implementation must be undertaken at provincial and local levels. Because of the great variation that exists across China, considerable flexibility also must be maintained to allow programs to match local conditions and priorities. 2.24. Provincial governments have promulgated new laws and decrees to deepen foundations for implementation. They have organized new institutional arrangements to focus the related agencies on the task of achieving energy savings. Provincial programs generally mirror the national programmatic themes, but priorities, specific implementation arrangements, and provision of financial and human resources vary substantially between provinces. Many provinces have developed novel approaches of their own. Program strengths and weaknesses vary dramatically across China`s 30 provinces. 2.25. In program implementation, provincial governments have particularly strong responsibilities for overall energy conservation program development and oversight in the province and consolidation of relevant financing. Among the sector programs, the role of provincial governments is especially strong in industry, where provincial governments interface directly with the big industries in the national 1000 Enterprise Program, and carry responsibility for organizing further efforts through the prefectures and counties. In the building energy efficiency and urban transportation, provincial authorities play a critical coordinating role, but responsibilities for the specifics of implementation (for example, energy efficiency code enforcement, heat system development and reform, or mass transit planning) fall to city governments. F. Overview of 2006­08 Quantitative Results 2.26. China`s GDP and energy consumption statistics are compiled each year by the NBS and its provincial and local affiliates, using standard methodologies similar in many ways to those in other countries. These statistics are first compiled and reported to the center by provincial statistics bureaus. The NBS then completes spot-checking surveys and quality control measures, and compiles the national statistics. For the current Energy Conservation and Emissions Reduction Program, the NDRC and its provincial and local affiliates also complete a series of evaluations and progress appraisals every spring, which are reported to the State Council. 2.27. In addition, China has begun to undertake very large National Economic Census Surveys. These surveys numerate the basic status and statistics of every enterprise in the country engaged in economic activity.10 A key goal is to capture a better understanding of all types of enterprises, including less formal enterprises whose nature and scope tends to shift frequently. The first economic census was completed for 2004. The second 10 The 2008 Economic Census enlisted more than 30 million enumerators and listed almost 45 million economic entities outside of agriculture, including licensed individual households. See NBS 2009. 11 Accelerating Energy Conservation in China`s Provinces economic census was completed for 2008. The second census included accounting of enterprise energy consumption for the first time. 2.28. As was the case following the 2004 economic census, economic statistics compiled through the standard annual statistical surveys and economic statistics gathered through the snapshot, blanket approach of the 2008 census need to be reconciled. Each method has its advantages and disadvantages. Concerning energy consumption statistics, the availability of two lenses for view may allow energy consumption statistics in China to be put on the strongest footing to date. For example, it may be possible to clarify better some longstanding issues in energy statistics, such as the production and use of energy (especially coal) by informal or unlicensed entities. 2.29. In December 2009, the NBS announced reconciled national GDP and energy consumption statistics, revising previous initial estimates both upwards. GDP is reported at RMB 31.4 trillion in current prices, and energy consumption at 2.91 billion tce. Reduction in energy intensity during 2006­08 is reported at 12.45 percent, compared to earlier estimates of 10.1 percent. The energy intensity reduction in 2008 alone is reported at 5.2 percent, compared to the 4.59 percent reported earlier. Publication of more detailed statistics for 2008 and revisions for previous years, including provincial-level statistics, is expected in due course. Table 2.1 provides the initial estimates for energy intensity reductions during 2006­08 by province for reference only (this should be revised when the statistics are made available).11 2.30. Progress in reducing energy intensity started out slow in 2006. Much of the first year involved necessary initial organizing of new programs. The initial results from 2006 reported as a reduction in energy intensity of only 1.33 percent were met with an even stronger push from China`s leaders and a further scaling-up of the program. The effort has gathered great momentum since then. The year 2007 was a very active one, the benefits of which came to the fore during both 2007­08. Initial reports show solid continued progress during the first half of 2009. 2.31. Early analysis is beginning as an attempt to disaggregate the contribution of various factors and programs to the energy intensity reductions achieved so far. 12 While some basic conclusions are beginning to emerge, definitive conclusions are likely to be years away, since much of the analysis needed is highly complex and data intensive. A key issue is the relative roles of changes in the structure of economic value added (aggregated to become GDP), and changes in physical energy intensity per unit product or service. Big factors affecting the role of structural change include deceleration of energy-intensity industrial output stemming from the global financial crisis, followed by accelerations resulting from the government`s 27-month economic stimulus program that began in November 2008. The results of this slowdown and speedup on macro energy intensity trends have yet to fully play out. As of the end of 2009, however, indications were that the contribution of changes in the structure of economic value added to energy intensity would likely be far less during this FYP than they were during 1980­2000, and 11 It should also be noted that initially reported, previous series of GDP, energy consumption, and energy intensity reduction exhibited several internal inconsistencies. 12 For example, the Lawrence Berkeley National Laboratory of the United States was completing a useful initial analysis at the end of 2009. 12 CHAPTER 2: An Overview of China`s 2006­10 Energy Conservation Program could conceivably be close to zero or even negative. This means that physical energy efficiency gains would have had to play a much greater role in the success achieved so far. Programs that appear to have made especially strong contributions to physical energy efficiency gains so far include the 1000 Enterprise Program and its provincial-level associated programs (Chapter 3, paras. 3.14­3.42), and the program to eliminate wasteful backward industrial production capacity (Chapter 3, paras. 3.49­3.57). 2.32. Aside from the strong quantitative results achieved so far, the biggest achievement made during 2006­09 has been the large and successful investment at all levels in new programs and institutions to foster energy efficiency over the long term. The attention given to the agenda at all levels, and the planning, organizing, capacity building, and implementation of so many new but large initiatives will have positive impacts for many years. The next chapter outlines the main elements of the work, innovations, and achievements of provinces on these programs so far. Chapter 4 then provides ideas and suggestions on how provincial programs can be even further strengthened to provide further results during the next FYP and beyond. 13 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces CHAPTER 3: The Current Energy Conservation Programs of China's Provinces 3.1. This chapter describes the main energy conservation programs being implemented by provincial governments. Special focus is given to the industrial sector, which is the largest energy-consuming sector and the one in which provincial governments are most involved. Included are descriptions of (a) how implementation is organized; (b) the new government­key enterprise agreements on energy savings targets and associated activities; (c) initiatives of structural adjustment including elimination of backward plant, development of new energy efficiency assessments for new proposed projects, and promotion of high- and new-technology industries and the service sector; (d) efforts to encourage greater energy efficiency in buildings; (e) efforts to develop the energy efficiency service industry; and (f) fiscal incentives programs. A. Establishing Responsibilities and Organizing Implementation 3.2. The energy intensity reduction targets presented in Table 2.1 were agreed between the central and provincial governments through negotiations considering the economic and resource conditions of each province and rough assessments of their potential for achieving energy savings. The allocation principals were that the central government would seek to confirm targets that provincial governments volunteered above 20 percent, and for provinces recommending targets below 20 percent, decisions would be based on consideration of both needs for the country to meet the overall national target and provincial development conditions, economic structure, current energy consumption, and energy balances. The State Council officially announced the provincial energy savings targets in 2006. Four provinces have targets of 22 percent, six provinces have targets below 20 percent, and the rest have targets of 20 percent. Institutional Organization 3.3. All provinces have taken a series of measures to organize work to meet their targets. Provincial governments have issued key directives to launch their energy conservation and emissions reduction programs, followed by typically dozens of more specific regulations and guidelines. 3.4. Provinces have set up leadership groups to oversee the work, led by the governor or executive vice governor and composed of key members from various provincial-level departments. Leadership group core responsibilities include assignment of responsibilities for tasks designated from the central government; arrangement, guidance, and supervision of provincial energy conservation and emissions reduction programs; discussion and approval of the annual work program; and coordination to solve major problems as they arise. 3.5. Responsibilities for day-to-day oversight of implementing provincial energy conservation work programs have been assigned to the regular government units 15 Accelerating Energy Conservation in China`s Provinces responsible for energy conservation, which may be in economic and trade commissions (or, more recently, the Industry and Information Commission) or development and reform commissions. In Shandong, Yunnan, and Guizhou Provinces, special new provincial energy conservation offices have been set up that now manage this work. In addition, provinces operate energy conservation supervision troops or centers that undertake much of the detailed monitoring and supervision work in the industrial sector. Special energy conservation funds and fiscal policy initiatives are managed by the finance bureaus. Construction commissions oversee implementation of the building energy efficiency and heat reform agenda (where applicable). Statistical Bureaus are responsible for the systematic collection and compiling of the basic energy consumption and GDP statistics that form the basis for geographic energy intensity calculations. Energy Savings Responsibility Targets 3.6. Provinces have assigned energy intensity targets for the FYP to lower levels of government, together with annual progress targets, defined in terms of energy consumption per unit GDP, as for the national target. In addition, provinces are responsible for signing energy savings target responsibility contracts with key energy- consuming enterprises covered under the national 1000 Enterprise Program. This system proceeds further through prefectural and county governments--prefecture governments assign targets to county governments and are responsible for signing responsibility contracts with key energy-consuming enterprises covered under provincial key enterprise programs. The system is depicted in Figure 3.1. An Example from Shandong Province 3.7. Shandong Province has the largest energy consumption of any province and features a high concentration of energy-intensive industries. Provincial authorities realized that improving energy efficiency was a must to sustain economic development. After analyzing various economic and social factors and its energy saving potential, Shandong set an 11th FYP target to reduce energy intensity by 22 percent. 3.8. Annual progress targets were set at accelerating rates, as shown in Table 3.1, with the realization that it would take time for the effects of energy conservation programs to show results. Table 3.1: Decomposed Yearly Energy Saving Targets in Shandong Province Year 2006 2007 2008 2009 2010 Energy Intensity Reduction Rate (%) 4.5 4.5 4.8 5 5.5 Source: DEUMC 2009. 3.9. Provincial and prefectural authorities also agreed on energy savings targets for the province`s 17 prefectures, with higher targets, in Shandong`s case, for more energy- intensive prefectures, and lower targets for less energy-intensive prefectures. The targets are shown in Table 3.2. 16 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces Figure 3.1: Organizational Structure for Assessing and Supervising Energy Savings Targets Central Government Provincial Leadership Group on Energy Savings and Emissions Reduction Provincial Statistics Provincial Energy Conservation Bureau Office/Relevant Unit Provincial Energy Monitoring and Supervision Troop Prefectural Government National Key Enterprises Provincial Key Enterprises County Government Prefecture Key Enterprises Instruction, Supervision, Inspection Planning, Guidance, Review Source: World Bank staff. Table 3.2: Prefectural FYP Energy Saving Targets in Shandong Province Energy intensity Classification standard Prefectures reduction rate (%) Energy intensity below provincial mean Qingdao, Yantai, Jinan, Heze, 22 level Weihai, Dongying, Binzhou Energy intensity above provincial mean Jining, Zibo, Dezhou, Linyi, 23 level, but lower than 3 tce per Zaozhuang, Taian, Weifang, RMB 10,000 of GDP Liaocheng, Rizhao Energy intensity above provincial mean Laiwu 25 level and higher than 3 tce per RMB 10,000 of GDP Source: DEUMC 2009. Monitoring and Reporting on Target Achievement 3.10. China`s central government issued regulations for implementing the monitoring and evaluation of Energy Conservation and Emissions Reduction Program targets in 2007, which set the pattern for oversight throughout the government hierarchy. Energy intensity indexes and data quality are monitored and supervised by statistical bureaus at the next higher government level. Monitoring and supervision responsibilities follow the schematic shown in Figure 3.1. Each March, provincial governments base their annual energy savings targets on the overall energy savings target, and the next March, they 17 Accelerating Energy Conservation in China`s Provinces report to the central government on the progress of their energy conservation work and the status of target achievement. In addition to self-evaluation, an evaluation and supervision group from the central government will conduct comprehensive evaluation through onsite assessment and sample investigation. Procedures within provinces with lower levels of government are similar. 3.11. A scoring system is established for assessing the performance of both government levels and key energy-consuming enterprises. A total of 100 points are allocated against a number of different objectives. A maximum of 40 points relate to whether the annual energy savings target is achieved. The remaining 60 points relate to 8 qualitative measures of efforts to enhance the management of energy conservation and implement energy conservation projects. The evaluation has four grades: highly satisfactory (above 95), fully satisfactory (80­94), generally satisfactory (60­80), and failed (lower than 60). Those who did not achieve the annual energy savings target are automatically evaluated as failed. 3.12. Individual senior local government officials and the leaders of the major state- owned enterprises are assessed on their performance based on the evaluation results. For those who are evaluated as failed, the leaders cannot be given any type of awards, and the central government may suspend approval of any energy-intensive projects requiring central government approval in the province.13 Those who are rated highly satisfactory receive awards. Some Issues 3.13. The targeting system does give rise to serious contradictions in some cases because the energy intensity targets are defined against administrative boundaries and generally need to be firm across time to be supervised practically, but economic comparative advantage and the dynamics of economic development are not. This is especially true at increasingly disaggregate levels. An example would be the implications for target compliance, and subsequent ensuing arguments, caused by attempting to move an energy-intensive plant across administrative boundaries, or even shifting production scheduling between plants in different administrative localities. Thus, this targeting system can increase difficulties in integrated planning that cut across administrative boundaries. 13 Called yi piao fou jue in Chinese, the policy stipulates that if the energy-saving target is not achieved, no awards of any kind can be provided no matter how well the supervised entity is doing in other aspects. 18 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces B. Key Energy-Consuming Industrial Enterprise Programs 3.14. China is implementing a series of new programs to encourage energy efficiency improvements in key energy-consuming industrial enterprises. The programs are configured around a new system of energy savings responsibility contracts between the government and large or medium-size enterprises. The effort involves establishment of enterprise-specific energy savings targets, development of improved enterprise EMSs, development and government review of enterprise-specific energy efficiency improvement plans, government energy savings target monitoring and supervision, and assessment of various types of penalties and awards for compliance. The specific government-enterprise relationship platform developed also draws on or supports a variety of related initiatives. Examples include enterprise energy efficiency level benchmarking programs, application of an increasing number of specific industrial process or equipment energy use standards, enforcement of regulations calling for elimination of particularly wasteful energy use technologies, application of higher electricity prices for enterprises that are not in compliance with energy efficiency regulations, and the application and award of certain government energy efficiency investment subsidies. 3.15. The logic for focusing on the country`s key energy-consuming industrial enterprises is clear--they account for a huge share of China`s energy use. The 1,008 key enterprises designated by the central government account for about one-third of China`s total energy use. Adding in key enterprises designated by provincial and local governments, coverage exceeds half of energy use in many provinces. In Shandong Province, for example, key energy-consuming enterprises entering into responsibility contracts at various levels of government account for about 70 percent of total energy consumption in the province. 3.16. China`s overall key energy-consuming enterprise energy savings program is shaped by the central government`s 1000 Enterprise Program, the requirements of the country`s Energy Conservation Law (especially the revised law, which became effective in April 2008), and the desire of provincial and local governments to meet their overall 11th FYP energy savings targets, for which progress in key enterprises is a key factor. China's 1000 Enterprise Program 3.17. China`s national 1000 Enterprise Program was launched in April 2006 through a directive of five central government agencies. 14 The program aims to make a major contribution to the country`s five-year energy intensity reduction target by delivering some 100 million tce of the 600­700 million tce of total savings most likely needed to achieve the national 20 percent target. The program targets the largest 1,000 energy consuming industrial enterprises in the country, dispersed throughout the provinces. In the end, the enterprise name list included 1,008 enterprises, in the iron and steel, petroleum and petrochemical, chemical, electric power generation, nonferrous metals, 14 The directive provides for an implementation plan for the program to provincial-level governments. It was issued in April 2006 by the National Development and Reform Commission (NDRC); National Energy Agency; State Statistical Bureau; State General Administration for Quality Supervision, Inspection and Quarantine; and the State Council`s State Asset Management Commission. The NDRC`s Environment and Resource Savings Department was designated as the contact entity. 19 Accelerating Energy Conservation in China`s Provinces coal production, construction material, textile, and pulp and paper industries. Hebei Province has the largest number of enterprises designated for the national program (112), followed by Shandong (103), Shanxi (revised to 86), Henan (82), Jiangsu (68), and Liaoning (52) (Price, Wang, and Jiang 2008). 3.18. The program requires participating enterprises to do the following: Establish dedicated internal energy management posts, responsibilities, and implementation systems. Adopt comprehensive energy use metering systems and provide timely energy use data reports. Undertake factory energy audits and develop energy efficiency improvement plans. Increase energy efficiency investments and undertake renovations to use more energy-efficient technology. Develop internal award and fine systems to increase incentives for saving energy in operations. Strengthen internal information dissemination and training on energy efficiency. 3.19. The central government determines the program objectives and targets, scope, implementation guidelines, and the participating enterprise list, and it undertakes inspection and evaluation of results. Provincial governments are responsible for implementation, first-line dialogue with the enterprises, detailed appraisal of results, and compilation of reporting to the central government. These responsibilities are part of their overall responsibilities for achieving FYP energy savings targets. Provincial governments have issued directives on how the program will be undertaken in their provinces, and have signed the energy savings responsibility contracts with the enterprises. Additional Provincial and Local Government Key Enterprise Programs 3.20. Provincial and local governments have added additional key energy-consuming enterprises for targeting and development of specific energy savings responsibility contracts, at their own discretion, with objectives, substantive content, and implementation mechanisms patterned after the national 1000 Enterprise Program. They have determined that this can make an important contribution to their overall effort to meet their FYP energy intensity reduction obligations. After 2007, provincial and local governments also have initiated additional efforts to comply with provisions in the revised Energy Conservation Law. As shown in Figure 3.1, direct implementation of provincially designated key enterprise programs is allocated to the next level of government--prefectures--and additional prefecture-designated key enterprise programs (if undertaken) are implemented by county governments. Provincial governments tend to manage and guide the overall effort, including national enterprise program elements, as an integrated package, based on formal documentation established by the provinces. 3.21. In Shanxi Province, for example, the largest energy-consuming enterprises in the province (for example, with annual consumption over 140,000 tce/year) are targeted under the province`s Double 100 Program established in July 2006. This program encompasses 86 key enterprises covered under the national 1000 Enterprise Program and 114 provincially designated key enterprises. In 2008, the key enterprise program was 20 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces expanded to cover some 800 additional enterprises, for a total of 996, each with annual energy consumption in excess of 10,000 tce/year.15 3.22. In Shandong, the provincial government launched its integrated key enterprise program in July 2006 to cover about 1,000 enterprises, including 103 enterprises under the national 1000 Enterprise Program, and some 900 provincially designated enterprises. Subsequently, about 1,000 additional enterprises were added in programs initiated by prefecture governments. 3.23. Jiangxi Province`s program laid out in 2007 covers 100 key enterprises, including 19 under the national 1000 Enterprise Program 16 and 81 designated by the provincial government. In some cases, prefecture governments have also added their own key enterprises. In the case of Nanchang Prefecture (Municipality), for example, energy savings responsibility contracts had been signed by early 2009 with 3 national-level key enterprises, 16 provincial level key enterprises, and 101 prefecture-level key enterprises consuming more than 3,000 tce per year. In 2009, the provincial government also had issued a list of 223 key energy-consuming enterprises in the province for which registration of energy management responsibilities was being required. Of these, about 132 consumed 10,000 tce/year or more. Energy Savings Responsibility Contracts 3.24. Energy savings target responsibility contracts between the government and key energy-consuming enterprises provide a formal underpinning for the relationship between the supervising government and the specific enterprises on the attainment of energy efficiency improvements during the FYP. Contracts developed for the 1000 Enterprise Program have provided the model, but contracts for key enterprises designated by provincial and local governments often have variations. The contracts typically reiterate the requirements that key enterprises need to meet based on program regulations (for example, in the case of the 1000 Enterprise Program, the main requirements listed in para. 3.18 above), provide a fixed energy savings target to be achieved over the FYP (and also annual progress targets in many cases), and reiterate the government`s supervision and appraisal processes. Energy savings targets are typically assessed using an agreed reduction in 2005 unit energy consumption levels to be achieved by 2010. Unit energy consumption may be calculated in physical units, if possible (for example, there is substantial homogeneity in products within the enterprise), but often it is calculated in terms of energy use per unit output value. Contract fixed targets are often expressed in 15 Article 20 of the 2007 Energy Conservation Law defines a key energy-consuming enterprise as an entity consuming 10,000 tce or more per year, or entities consuming more than 5,000 tce per year, but less than 10,000 tce per year, that are specifically designated as key enterprises by relevant departments of the central or provincial governments. Articles 20­23 and 28­29 outline broad requirements. These included requirements for all energy-using entities to strengthen energy management, implement energy efficiency measures, undertake internal education on energy conservation, and provide internal incentives for energy savings. Key energy-consuming enterprises also must submit reports on all of these aspects to relevant government authorities and be subject to the supervision of those authorities, which may involve testing and measurement. Key energy-consuming enterprises must also meet specific requirements on establishment of internal energy management positions. 16 By 2008, only 18 enterprises in Jiangxi were participating in the 1000 Enterprise Program. 21 Accelerating Energy Conservation in China`s Provinces terms of total energy savings in tons of coal equivalent, requiring introduction of assumptions concerning output growth over the FYP, but in some cases targets are only expressed in terms of unit energy consumption reduction. In some cases, a list of specific planned energy efficiency renovation projects is attached. 3.25. Quantitative targets set for individual enterprises at the outset of the programs aimed to take some enterprise-specific characteristics into account, but it was not possible, given the scale and timing of only a few months, to develop truly customized target arrangements for so many enterprises. Perhaps most important was to establish the system, the formal relationships and dialogue, the methodologies and the appraisal techniques, and to signal very serious requirements for obtaining measurable results. However, refinement of the system for the future is now an important challenge. 3.26. Annex 1 provides the blank template that supervision experts in one province were using in 2009 to appraise 2008 results for each key energy-consuming enterprise. Evaluation against the quantitative targets accounts for 40 of the 100 scoring points total. Progress on different kinds of energy conservation activities accounts for 60 points. These include progress in developing internal energy efficiency management systems, in delivery of energy efficiency technical improvements and investment, in compliance with energy efficiency-related regulations, especially elimination of backward equipment and adherence to standards, and in advancement of auditing, measurement, and collection and analysis of statistics. 3.27. Penalties and awards are also established to encourage enterprises to meet their energy savings targets. Those enterprises that are evaluated as highly satisfactory or fully satisfactory will be commended and awarded by both provincial and central governments. For those enterprises that are evaluated as failed, a notice of criticism will be circulated, approval of any energy-intensive projects or additional industrial land use may well be suspended, and no favorable exemption policies will be applied. In addition, if a state- owned enterprise is evaluated as failed, its leader cannot be given any type of awards, no matter how well the enterprise is doing in other aspects. Government Monitoring and Supervision Systems 3.28. The new key energy-consuming enterprise programs bring huge new supervision obligations to provincial and local governments. Whereas national-level legal underpinnings, key regulations, guidance, and review are provided by Beijing, provinces must deliver the execution of the government`s role in the new relationship between government and key enterprises. As of mid-2008, 19 provinces had put in place provincial-level energy conservation supervision units as the key entities to undertake this function. Quite a few provincial governments had also fostered similar development of prefecture-level energy conservation supervision centers, aiming to create the backbone of integrated new government energy conservation supervision networks for the future. 3.29. Shanghai established the first provincial- (municipality-) level energy conservation supervision center during the late 1990s, aspects of which have served as a model for others. Shanghai`s center was spun off from the energy conservation technical service center that had existed for many years under the Provincial Economic and Trade 22 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces Commission. A series of new provincial-level regulations provided the foundation for its operation. The center established a name for itself with a successful effort to test and publicize the varying levels of coal supply quality for fuel companies operating in the municipality. The center then began to supervise the adherence of industries to energy efficiency regulations, followed with entry into supervision of energy use in buildings, including programs to monitor the energy efficiency characteristics of new building designs and an innovative effort for supermarkets and shopping malls. The center has aimed not only to monitor and supervise enterprises, but also provide assistance to them, since the center goal is to act not only as energy efficiency police, but also energy conservation teachers, doctors and coaches. It has undertaken some enterprise energy auditing tasks under government contracts. It also has implemented a dynamic energy statistics reporting system, for which it aims not only to monitor the timely input of statistics by enterprises, but also to analyze the factors underlying changes in energy use patterns and propose remedies for evolving problems (NECIDC 2009a). 3.30. The many new supervision units being formed in other provinces beginning in 2006/2007 are born from the pressing needs to monitor and supervise key enterprise programs, to organize large new training programs, and to implement the revised Energy Conservation Law. They are typically built upon the foundations of previous energy conservation technical centers, but also draw staff from various other government departments, especially those involving enterprise oversight or economic operational management. Some of the new units are designated as Energy Conservation Monitoring and Supervision Troops, emphasizing their responsibilities for ensuring compliance with the law. Staffing requirements are large, given the breadth and depth of the tasks assigned to the new units. In Shanxi Province, for example, the provincial level troops have been allocated 30 formal civil servant positions. Prefecture-level troops then have additional formal staffing allocations (for example, totaling 40 civil servant positions in the case of Taiyuan Prefecture, Shanxi Province). 3.31. The typical main responsibilities of the supervision centers or troops (or other relevant government departments tasked with supervising enterprise energy conservation programs) include the following: Oversight of the energy savings target responsibility contract system on behalf of the signatory government level, including appraisal of annual results. This involves, among other things, organization of large appraisal efforts in the spring of every year. Development and management of new enterprise energy consumption data reporting, compilation, and analysis systems. These are more detailed and require more frequent reporting than standard NBS energy-use data reports. Development and execution of major training programs, especially for enterprise energy management staff and new government supervision system staff, but also for independent energy auditing and other new energy efficiency professionals. This includes development of training materials, as well as course delivery. Provision of assistance arranging and organizing energy audits for enterprises, especially those who are obligated to have them undertaken. 23 Accelerating Energy Conservation in China`s Provinces Identification of continued operational use of illegal or substandard energy wasting equipment or processes (especially those earmarked for elimination), and initiation of appropriate counteractions. 3.32. A variety of related programs feed into the government­key energy-consuming enterprise relationship at the core of the work of the supervision centers and troops, which mutually complement each other and the execution of energy savings responsibility contracts. Several important ones include improved energy consumption reporting and analysis systems, unit energy consumption benchmarking, and minimum energy efficiency standards. 3.33. Improved energy consumption reporting and analysis systems. The Energy Conservation Law requires regular energy use reporting by all key energy-using enterprises. Provinces are looking to introduce new systems, often hoping to develop dynamic reporting systems that can provide detailed statistical reports seasonally or even every month. As in the case of Shanghai, such systems may provide a solid foundation for dialogue on results, opportunities and problems. Investment cost can be high, however, especially in terms of human investment, to develop definitions, protocols, and systems that are useful, reliable, and practical (see Chapter 4, para. 4.24). 3.34. Unit energy consumption benchmarking. Comparison of energy use levels per unit of output between different factories in different parts of China and internationally provides a useful tool for developing enterprise energy efficiency improvement plans and targets. Encouraged and supported by central government directives, provinces are beginning to implement more systematic benchmarking programs to support their key energy-consuming enterprise efforts. See Box 3.1 for an example, as well as paras. 4.71­ 4.73. 3.35. Minimum energy efficiency standards. The law also calls for adherence to officially established ceiling levels for unit energy consumption in the production of energy-intensive products. The central government is issuing a growing number of such standards for key industrial equipment and processes. Compliance with these standards, as well as additional local ones, is an important aspect of local energy efficiency targeting and supervision. Box 3.1: New Energy Efficiency Benchmarking Activities In February 2009, in line with national policies, Shandong Province issued an implementation plan for new activities in the benchmarking of energy efficiency levels in key energy-using enterprises. These enterprises, each with energy consumption in excess of 10,000 tce per year, account for about 60 percent of total energy consumption in the province. The main principles to be adhered to in the development and implementation of the energy efficiency benchmarking system include the following: The main purpose for the benchmarking system is to be useful to the enterprises in their assessments of themselves. To be useful, benchmarking will need to address issues that are highly technical in nature, complex, and central to the 24 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces large differences in energy consumption patterns between enterprises. The government and energy efficiency service enterprises will help guide the effort, but enterprises need to play the main role. In establishing yardsticks and benchmarking tools, and in organizing activities, focus should be on the most advanced levels and progress towards them. Focus should be directed to key areas--key enterprises, key processes, key equipment, and key products. Focus should be on the actual situation and achievement of practical results. The activity plan established for the coming months included the following: Establishment of energy utilization benchmarks will be undertaken in pilot enterprises, taking into account opinions of subsector industry associations, and utilizing previous piloting work, audit reports, and information on similar industries domestically and abroad. Yardstick enterprises will be set. A manual will be prepared to guide key enterprises on how to undertake benchmarking activities. Benchmarking activities will be further rolled out among key enterprises, based on the experience in the piloting and using the guidance manual. Experience will be evaluated and case study analysis completed, to guide further all-province benchmarking activities. It is recognized that intermediate energy efficiency service enterprises will need to undertake much of the work involved. The importance of maintaining confidentiality of data is also firmly emphasized--data is not allowed to be provided to broader society or other consultants, or to be published. Electronic security measures must be maintained. 3.36. Enterprise energy management systems. Enterprise EMSs are a comprehensive set of tools and procedures that enterprises can use themselves to continually assess their own energy use characteristics, identify opportunities for energy cost savings, plan out and implement attractive opportunities, and evaluate results. Systems being developed in China generally follow the plan-do-check-act guiding methodology also used abroad. Effective adoption of EMSs can cover the energy efficiency activities section of enterprise responsibility contract obligations (see Annex 1), help meet quantitative targets in a planned and systematic way, and provide an excellent means for continual identification of priority enterprise-specific energy efficiency investment projects. Shandong Province has developed a trial comprehensive EMS and launched its piloting in eight key enterprises. The central government has also developed a trial EMS and initiated its piloting among interested parties (see also Chapter 4, paras. 4.55­4.65). 3.37. Investment subsidies. Different government levels have a variety of concessional financing programs that enterprises can tap into for energy efficiency investments. Assistance in arranging concessional finance is one of the key supportive measures that supervising authorities can bring to the table as part of their new relationship on energy efficiency with key energy-consuming enterprises. For the central government`s large 25 Accelerating Energy Conservation in China`s Provinces Y 200­250 award program per tce of qualified savings from agreed energy efficiency projects, local supervising authorities also play an important role in monitoring and evaluating to verify whether the planned savings have been achieved (see also paras. 3.90­3.92). Some Issues and Challenges 3.38. The new key energy-consuming enterprise programs have been a major, cross- country, and particularly worthwhile part of China`s energy efficiency drive. They have undoubtedly made a major contribution to the energy intensity reductions achieved so far. Probably even more important, the specific and formal government­key enterprise relationships and the many associated, integrated program aspects that have been developed provide a very important foundation for attaining continuing large energy savings over the longer term. 3.39. One issue is that the infrastructure requirements needed for effective implementation of these programs--in terms of people, expertise, data collection and monitoring systems, operating protocols, and training--are truly massive. China has made very impressive investments of human resources, time, and money to build the infrastructure now in place. However, reaching as many enterprises as many people hope, and with an appropriate level of sophistication, will require further very large investments over quite a few more years. Continued strong and steady government support at all levels will be essential to see the completion of the necessary human infrastructure through, and avoid a sputtering out of the effort. 3.40. Another issue is that the enterprise energy savings quantitative targets set out during these program-initiating years have often been too coarse. There was no time or resources to ensure that targets conformed well with realities in the specific enterprises, especially outside of the 1000 Enterprise Program. Resulting targets may often align poorly with real energy savings potential, be unfair, or encourage behavior by enterprises that is not in the country`s economic interest (such as some types of product restructuring running far against enterprise comparative advantage). Target enforcement also may be too rigid and overlook needs for dynamic interaction to meet changing circumstances and new opportunities. Clearly the benefits of the programs, as implemented during these initial years, outweigh the costs posed by their imperfections. Moving forward, however, the issue of overly simplistic and coarse targeting needs to be addressed. How can greater flexibility, fairness, and customization to on-the-ground realities be introduced without compromising needs for steady pressure or allowing flexibility to become a loophole for lax behavior and evasion of important responsibilities? 3.41. A third set of issues concerns needs to strengthen enterprise incentives to not only meet targets, but also perhaps surpass them and, relatedly, to allow a much stronger, mutually reinforcing interplay between the government`s administrative key enterprise program and market forces. Most good energy efficiency projects in industry today are financially quite profitable. However, a number of primarily institutional barriers continue to constrain uptake. These barriers can be overcome through steady efforts to engage commercial banking institutions and the variety of independent energy efficiency service providers that increasingly operate in the Chinese market. How can the key energy-consuming enterprise programs operate in greater synergy with the market-based players and programs? 26 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces 3.42. Some thoughts on how these issues might be addressed are discussed in Chapter 4. C. Programs to Reduce Energy Intensity through Structural Adjustment 3.43. Economic structure has a very major effect on the energy intensity of an economy. This includes the relative contributions of various economic sectors to GDP as well as the structure of value added within those sectors. The industrial sector is more energy intensive than the service sector, for example, and within the industrial sector, heavy industry is more energy intensive than light manufacturing. 3.44. In recent years, China has tried to increase emphasis on sectoral adjustment as part of its overall industrial policy, aiming to encourage development that is characterized more by low input, low consumption, lower emissions, and high efficiency. Policies aim to accelerate the optimization and upgrading of China`s industrial structure, to develop high- and new-technology industries and the service sector, to limit development of industries that consume large amounts of energy, water, and other raw materials, and to eliminate industries with backward production methods.17 3.45. The State Council`s Decision on Implementing the Interim Regulation on Promoting the Adjustment of Industrial Structure (December 2005) sets out the objectives, principles, direction, and priorities of the current national effort to adjust industrial structure. A supplemental Guiding Catalogue for the Adjustment of Industrial Structure issued by the NDRC (2007) covers more than 20 industrial sectors, categorizing industries into three types: those to be encouraged, those to be restricted, and those to be eliminated. In total, there are 539 subindustries or types of projects in the encouraged category, 190 in the restricted category, and 399 in the to-be-eliminated, or banned, category. 3.46. The Interim Regulation specifies policy measures on how to encourage, restrict, and eliminate the categorized industries. For investment projects in the encouraged category that are subject to government examination and approval, preferential taxation policies are applied and financial institutions are encouraged to provide credit support. 3.47. For investment projects with scales and technologies in the restricted development category, departments in charge of providing investment approval are instructed not to approve these projects. Financial institutions are discouraged from granting loans, and authorities in charge of land management, urban planning, environmental protection, quality inspection, firefighting, customs, and enterprise operations should not complete relevant procedures for these projects. Enterprises currently operating production capacity that falls into the restricted category are allowed to continue if they adopt upgrading measures within a specified period. Financial institutions are not blocked from providing continued support. 17 Internationally, most energy economists define energy savings through structural adjustment as energy savings per unit economic output value (for example, GDP) achieved solely through changes in the structure of economic output value (for example, the structure of GDP and its many subcomponents). This is analogous to the Chinese concept of structural energy savings. In this section, however, the discussion of programs to reduce energy intensity through structural adjustment is broader--including adjustments in the scale and basic technical processes of industrial plant, as well as in sources of industrial value added. This follows the general Chinese definitions of Sectoral Policy (chanye zhengci). 27 Accelerating Energy Conservation in China`s Provinces 3.48. For investment projects with scales and technologies currently in the to-be- eliminated category, financial institutions should stop providing credit support and try to recover loans that have already been made. Local governments should take measures to ensure that the relevant production capacity is eliminated within a set period. During that period, electricity prices can be raised for enterprises operating the banned technology. For those enterprises that fail to eliminate obsolete production processes and technologies, equipment, or products in due time, local governments should order them to stop production or close them in line with state laws and regulations. Elimination of Backward Industrial Capacity 3.49. One of the largest programs in China`s current energy conservation drive is the national program to close down old, small-scale, and particularly inefficient industrial production capacity. The program focuses mainly on the thermal power, iron and steel, cement, electrolytic aluminum, ferroalloy, coke, and calcium carbide industries. The central government has set specific national targets (see Table 3.3) and allocated targets to provinces. For example, the Cement Industry Structure Adjustment Policy (NDRC 2006) sets a target to phase out a total of 250 Mt of inefficient cement production capacity during 2006­10. The central government also established a special award fund in 2007 to help provinces implement the policy. Table 3.3: Sector-Specific Targets for Eliminating Backward Capacity in the 11th FYP Industry Specification Unit 11th FYP target 2007 target Power Small-scale, coal-fired power plants GW 50 10 3 Iron Blast furnaces under 300 m Mt 100 30 Small LD-convertors or electric arc furnaces Steel Mt 55 35 with annual production lower than 0.2 Mt Electrolytic Small prebaked-anode type cells Mt 0.65 0.1 aluminum Ferroalloy Submerged arc furnaces under 6,300 kVA Mt 4 1.2 Carbide Calcium carbide furnaces under 6,300 kVA Mt 2 0.5 Coke Small coke ovens with chamber heights Mt 80 10 lower than 4.3 m Cement Vertical shaft kilns (VSKs) Mt 250 50 Source: NDRC 2007. 3.50. The main implementation measures. The main measures undertaken by provinces to implement the policy to eliminate backward production capacity include (a) policies to replace the small with the large (shang da ya xiao), which link investment approval for new, larger-scale capacity development to progress achieved in the same locality in eliminating backward capacity; (b) differential electricity pricing that imposes additional charges on electricity consumed by backward plants; (c) establishment of special funds to provide compensation for financial loss and unemployment impacts; (d) earlier elimination more reward incentive mechanisms that link compensation with the 28 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces speed of progress in eliminating backward capacity; and (e) other administrative measures, such as revoking production permits or instructing banks not to approve credit support. 3.51. Sector-specific measures have also been adopted. In the power sector, for example, the government has taken steps to encourage priority dispatch of renewable (including hydropower), nuclear, high-efficiency, and clean coal power plants. For coal- fired thermal plants, plans call for the order of dispatch to take energy consumption and pollution levels into account. Trials started in 2008 in five selected provinces: Henan, Jiangsu, Guangdong, Sichuan, and Guizhou. Furthermore, the government has lowered the on-grid purchase price for power from plants with capacities of less than 50 MW and some plants in the 100­200 MW size range. According to a recent study commissioned by the World Bank using Fujian and Shandong as examples, provinces can save about 3 percent of coal consumption in power generation by taking energy use and pollution economic costs into account when optimizing power generation dispatch merit order. For Shandong Province, simulations estimated annual saving of 2 million tce. The calculated savings correspond to generation currently dispatched by the provincial grid company. The potential savings could be greater if generation units currently dispatched by local distribution companies were also more efficiently dispatched. 3.52. Example of Shanxi Province. Provincial efforts to eliminate backward capacity play an especially important part of Shanxi Province`s energy conservation program. With abundant supplies of coal a key comparative advantage, many localities have reasonably aimed to convert this resource into energy-intensive commodities. However, a large share of the capacity built with limited investment funds over the years is under- scale and uses substandard technology. Although there are difficult locational issues to solve, the province aims to upgrade its energy-intensive industry with development of large-scale modern plant to replace the substandard plant where possible. 3.53. To eliminate the most inefficient, small-scale plants, Shanxi adopted a six stop policy (stop water supply, stop electricity supply, stop gas supply, stop transport support, stop credit support, and stop validity of production permits). The province also developed a particularly large special compensation fund to compensate enterprises and localities losing production capacity. The fund has totaled about RMB 1 billion as of 2008, with RMB 406 million from central government sources and RMB 593 million from provincial taxes levied on coal production and electric power construction and from the provincial treasury (see Box 3.2). Fund operation includes an earlier elimination more reward incentive mechanism to accelerate progress. 29 Accelerating Energy Conservation in China`s Provinces Box 3.2: Shanxi's Special Compensation Fund for Eliminating Backward Capacity Financing Sources Financing comes from the central government allocation, the province`s Coal Sustainable Development Fund, its Electricity Construction Fund, and the provincial government fiscal budget. Major Usage The main uses of the fund include the following: 1. Compensation to enterprises that need to close down and demolish their backward production equipment. If an enterprise is eligible for this compensation, the enterprise needs to demolish the equipment and clean up the site; if an enterprise does not demolish the backward capacity according to the schedule, the fund will be used for mandatory demolition of the equipment. 2. Mandatory demolition of targeted equipment in those cases where enterprises do not meet the deadline. 3. Site clearance and restoration. Principles Early elimination of backward capacity is especially encouraged. If the targeted production line is closed one year earlier than required, the enterprise receives 10 percent extra compensation; if it is closed two years earlier than required, the enterprise receives 20 percent extra compensation. If the targeted production line is not closed by the required schedule date, the government will provide no compensation and will ensure demolition itself. The compensation period began in 2006. The government provides no compensation in the following cases: (a) the enterprise does not demolish the backward equipment, but instead uses it for other purposes; (b) the enterprise does not demolish the backward capacity within the predetermined schedule; (c) the closed capacity will be replaced with new, larger-scale capacity; (d) assets were built illegally or did not comply with regulations; or (e) asset construction was completed without proper environmental assessment. Examples of Compensation Iron and steel industry: Asset life Blast furnaces Steel converters <100 m3 100­200 m3 200­300 m3 <15 tons <20 tons >5 years 0 RMB 1.8 m RMB 3.0 m 0 RMB 0.5 m <5 years 0 RMB 2.8 m RMB 3.5 m 0 RMB 1.0 m Thermal power: No provincial compensation is provided for capacity targeted for closure in the national power generation corporate groups; compensation of RMB 0.2 million/MW is provided for other small thermal power plants targeted for closure. 3.54. The elimination of particularly wasteful production capacity is estimated to account for about 60 percent of the total energy savings from the industrial sector in Shanxi Province during 2006­08. During 2006­07, Shanxi Province eliminated 908 pieces of backward equipment in more than 600 enterprises, exceeding the target set by the central government. By the first half of 2008, Shanxi Province had eliminated 30 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces backward iron production capacity by 24.22 Mt, coke-making capacity by 16.55 Mt, small coal-fired power generating capacity by 1.15 GW, cement-making capacity by 8.8 Mt, calcium carbide production capacity by 0.71 Mt, and ferroalloy production capacity by 0.22 Mt (SASS 2009). 3.55. Example of the cement industry in Shandong Province. Shandong Province is the leading cement-producing province in China. It established an aggressive target to phase out 563 vertical shaft kilns (VSKs) with total production capacity of 47 Mt per year during the 11th FYP. An Obsolete Cement Capacity Phaseout Task Force was established in 2007 to organize the program. Shandong Provincial Economic and Trade Commission has overall responsibility for the program and prefecture governments are responsible for local implementation. Specific measures include (a) refusal of production permit renewals for enterprises and production lines targeted for closure; (b) strengthening of environmental inspections on VSK plants and imposition of fines on those who do not meet pollution emission standards; (c) imposition of higher, discriminatory electricity charges on targeted VSK production facilities; (d) prohibition of transport of cement products from VSK plants through public highways, airports, ports, and bridges; (e) imposition of bans on receipt of new loans to VSK enterprises that have been ordered to close down; and (f) provision of proof of vertical kiln dismantling by VSK enterprises that plan to convert to operation of grinding facilities before application for project approval. In parallel, a set of policy measures was also put in place to encourage investment in energy-efficient new suspension preheater rotary kilns with precalciner (NSP). These policies encourage large enterprises to merge with small enterprises operating VSK plants, and encourage investment and construction of new NSP facilities on existing VSK sites, with expedited approvals where enterprises can demonstrate replacement of equivalent or greater closed VSK capacity (Li, Voravate, and Wang 2009). During 2006­08, a total of 39.6 Mt per year of backward VSK production capacity was shut down in Shandong Province, exceeding targets set by the central government (DEUMC 2009). The annual energy savings are estimated at about 30 percent of the total energy consumption of the provincial cement sector. 3.56. Impacts. The policy of eliminating backward capacity has significantly contributed to energy intensity reduction. However, it can also bring some economic, fiscal, financial, and social challenges to provinces and local governments, especially in the near term. The program of developing large-scale new capacity to replace eliminated backward capacity can mitigate some of the problems. However, as new plant needs significantly fewer employees and employment sites are more centralized, there are often still major employment impacts. According to a recent study on the impact of cement industry restructuring policy in Shandong Province, the policy results in relatively small economic and fiscal impacts (-0.2 percent of GDP), but has significant impact on job losses--98 percent of workers being laid off would not find a job in the cement industry within the province (see Table 3.4). Many of these workers are relatively older and have low levels of education level and hence have difficulties regaining employment. 31 Accelerating Energy Conservation in China`s Provinces Table 3.4: Net Impacts of the Cement Sector Restructuring Policy in Shandong Province Types of impacts VSK phaseout NSP expansion Net impacts Total capacity change between 2006 and 2010 (Mt of cement) -53 30 -23 Economic impacts Value of production (million RMB per year) -18,171 12,978 -5,194 - % of GDP -0.7 0.5 -0.2 Social impacts Job losses (# of jobs) -56,300 1,600 -55,020 Fiscal impacts Financial compensation for VSK closure (million RMB) -141 -141 Total tax revenue (Million RMB per year) -999 714 -286 Energy impacts Coal (Mt/year) -7.8 3.0 -4.9 Electricity (TWh/year) -7.3 4.3 -3.0 Source: Li, Voravate, and Wang 2009. 3.57. Addressing post-elimination issues. A key to achieving sustained good results in the restructuring of backwards enterprises is the establishment of exit mechanisms to address post-elimination issues, such as reemployment of current employees, benefit rearrangements for retirees of eliminated plants, and financial compensation to enterprises (for example, owners and investors). Many provinces have established special compensation funds for this, in addition to the special award fund of the central government. Some areas encourage local authorities to recover and reuse the land of eliminated units, aiming to increase its value. Additional value can then be used as a funding source for compensation. Some provinces also establish favorable policies to help closed enterprises switch to other businesses or encourage laid-off employees to start their own small businesses. Laid-off employees from closed plants are normally given priority for employment at newly added facilities in the same industry. Some local governments have arranged measures to alleviate the hardship brought to workers who lose jobs. The Zibo Prefectural Government in Shandong Province, for example, provides subsidies of at least RMB 5,000 from the local treasury for each worker. Other financing includes RMB 5,000 per person set aside by the enterprises, and a subsidy of RMB 13,000 per person from the health insurance system (Li, Voravate, and Wang 2009). Energy Efficiency Assessments for New Capacity 3.58. A key aspect of the government`s structural adjustment policy is the use of approval powers for new projects. This includes both reviews of new project proposals to 32 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces ensure that they are in line with structural adjustment priorities, and new measures to specifically review and evaluate the energy efficiency characteristics of projects submitted for approval. In 2006, the NDRC issued the Notice on Strengthening Energy Conservation Assessment and Examination for Fixed Assets Investment Projects, which requires all project proposals sent to NDRC for approval to include a section on energy conservation assessment. Provincial and local governments are also following this lead to require energy conservation assessments in energy-intensive project proposals under their purview, and to include evaluation of energy efficiency aspects in appraisal and approval procedures. 3.59. Beijing Municipality has been among the leaders in this area, formulating a Fixed Assets Investment Appraisal and Examination Method in 2007 with specific energy conservation assessment elements. It also established a specialized energy efficiency appraisal agency, regulated the contents and standards of energy conservation assessments, and formulated appraisal procedures. Beijing`s Development and Reform Commission (Beijing`s DRC) will not register and approve new projects unless the required energy conservation assessments are included and approved. Beijing requires all new public buildings with construction areas above 20,000 square meters, all residential buildings with construction areas above 200,000 square meters, and projects with annual energy consumption above 2,000 tce to have energy conservation assessments and examinations, and all other projects are required to be registered for energy conservation management. The municipality`s procedures require supervision through the project cycle--from initial project approval, through planning, construction, and registration of completion. Supervision is managed by Beijing`s DRC, other planning departments, and the Municipal Construction Department. More detailed documents were issued to guide implementation, in addition to the Fixed Assets Investment Appraisal and Examination Method, the Energy Conservation Third Party Management Method, and a Guide for Energy Conservation Assessment and Examination. An institutional platform for the detailed work was set up, including the Beijing Energy Conservation and Environment Protection Center (BECEPC) and 18 third-party energy assessment agencies. BECEPC is responsible for daily management, examination, and evaluation of assessment quality. As a result, by the end of 2008, Beijing had conducted energy conservation assessments and examinations for 151 projects, with estimated energy savings of 129,000 tce of energy or 13.1 percent compared to estimated preassessment energy consumption. 3.60. Similar to many provinces, Shandong Province also issued a Notice on Implementing Energy Conservation Assessment and Examination for Fixed Assets Investment Projects and a Notice on Further Restricting Fixed Assets Investment Project in High Energy Intensity Industries. Approval authority for 12 energy-intensive industries (for example, iron and steel, aluminum, and coke) was also raised to the provincial level except for those that are required to be submitted for central government approval. In addition, all 17 cities in Shandong Province issued and implemented energy conservation assessment and examination methods. Developing High- and New-Technology Industries and the Service Sector 3.61. Encouraging development of high- and new-technology industries and the service sector is another important aspect of the structural adjustment policy. The MOF and State 33 Accelerating Energy Conservation in China`s Provinces Administration of Taxation issued favorable income tax policies in 2006 to encourage investment in relevant R&D and new start-ups. For example, those high- and new- technology industries established in the national high- and new-technology industry development zones are exempted from paying income tax for two years after they are profitable. Investment in R&D and training is tax deductible, and equipment used for R&D can use accelerated depreciation. The State Council issued an Opinion on Promoting Service Industries in 2007 calling for further efforts to accelerate the development of service industries. The target for the 11th FYP is to up the proportion of GDP from the service industry by 5 percent in 2010 compared to 2005. 3.62. Provincial governments also have issued various favorable policies to promote high- and new-technology industries and the service sector based on their own conditions. Liaoning Province, a traditional heavy industrial base in the Northeast, now has put special priority on the development of low energy use, advanced equipment manufacturing, and agricultural processing industries. Net output from such equipment manufacturing increased by 32 percent in 2007, well above the overall industrial growth rate of 21 percent. Hubei Province has focused on financial, technical, and human resources in the development of electronic information, biomedical, and new materials industries. The GDP from these high-technology industries increased by 26.3 percent in 2007 (NECIDC 2009b). 3.63. Beijing Municipality adopted a policy of one strict and one loose (yi song yi jin) to adjust economic structure. One strict means that for those highly energy-intensive and highly polluting industries, the government would restrict their development or require closure, while one loose means that the government would encourage development of high- and new-technology industries and service industries. Under the one loose policy, Beijing formulated Opinions on Further Promoting Service Industries, seeking to drive the service sector toward high-end development. In 2007, Beijing GDP increased by 12.3 percent, and the service industry contributed about 71 percent of the growth. Since energy intensity from the service industry is only half of the overall average economic energy intensity, and the energy intensity of the high- and new- technology industries in Beijing`s economic and technology development zone is only one-fifth of the overall energy intensity, the structural change has substantially contributed energy intensity reduction in Beijing. Table 3.5 shows energy consumption and energy intensity change by sector in 2007 (NECIDC 2009b). Table 3.5: Energy Consumption and Energy Intensity by Sector in Beijing, 2007 Energy consumption Energy intensity Change Change compared to compared to Industry type 1,000 tce 2006 (%) Proportion% tce/RMB 10,000 GDP 2006 (%) Total 6,285.04 6.45 100.0 0.714 -6.04 Primary industry 96.44 4.49 1.5 1.058 2.27 Secondary industry 2,793.83 0.75 44.5 1.107 -10.61 Tertiary industry 2,389.51 12.22 38.0 0.387 -1.38 Source: NECIDC 2009b. 34 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces A Key Forward-Looking Issue 3.64. For the 12th FYP (and the 13th), a key issue is to define the expectations for reductions in energy intensity resulting purely from changes in the structure of value added in the economy, for example, structural energy savings, and then how specifically these expectations may be achieved. Early indications for the first four years of the 11th FYP are that the structural energy savings achieved have been less than originally hoped, and perhaps even negative. Achievement of structural energy savings is the result of broad macroeconomic trends, which are influenced by global supply and demand trends, domestic economic growth patterns, and a wide range of macroeconomic policies. It is beyond the scope of this study to analyze the best potential policy tools to use to achieve greater structural energy savings without unduly compromising economic efficiency and development. Looking forward, however, provincial government will need to consider these issues carefully. Broadly speaking, the basket of tools that can be considered include (a) energy pricing policy, which can impact the cost of products that embody large amounts of energy as well as direct energy costs; (b) fiscal incentives and taxes; and (c) increased government regulation of new projects, through strict application of the government`s sector policies (chanye zhengci). D. Improving Energy Efficiency in Buildings 3.65. The main focus of work to improve the energy efficiency in buildings during the 11th FYP at provincial levels includes coordination and support for efforts to design and construct more energy-efficient new residential and commercial buildings, to promote energy efficiency retrofits for existing buildings and, in northern provinces, to promote key reforms in the heat supply and billing system. The Ministry of Housing and Urban- Rural Development (MOHURD, formerly the Ministry of Construction, or MOC) and its provincial- and municipal-level affiliated construction commissions have primary responsibility for these agendas within the government. Within MOHURD and the construction commissions, the science and technology departments are responsible for building envelopes, and the building energy efficiency and urban development departments are responsible for government oversight of the heating industry. Municipal governments are responsible for program implementation, code enforcement, and setting heat prices. MOHURD and provincial governments provide policy guidance, coordination, and support. 3.66. As the FYP has progressed, increasing attention also is being devoted to new initiatives to improve energy efficiency in government-owned public buildings. The State Council issued a national Regulation on Energy Conservation by Public Institutions in August 2008, which establishes responsibilities, accountabilities, and targeting and monitoring requirements for increasing energy efficiency in government facilities for the first time. While initial implementation focuses on central government facilities, this and other initiatives have set the stage for expanded efforts at provincial levels as well. 3.67. Since provincial government roles for residential and commercial building energy efficiency are primarily guidance and coordination roles, current activities are outlined only briefly below. Discussion of some areas where provincial governments might increase attention is included. Far more detail can be found in a series of specific World 35 Accelerating Energy Conservation in China`s Provinces Bank study reports completed during 2001­09 and analysis and reports associated with the World Bank/GEF Heat Reform and Building Energy Efficiency Project.18 New Residential and Commercial Buildings 3.68. Because the rate of new building construction is so high in China, building energy efficiency levels a decade from now will be heavily determined by the energy efficiency characteristics of buildings being constructed now. To make an impact on the efficiency levels of new buildings entering the building stock, China has promulgated a series of building energy efficiency codes. The Residential Building Energy-Efficient Design Standards, effective in 1996 (RBEED-95), specifically targets new residential buildings with centralized heat supply. Other codes include an adjusted standard for Hot Summer and Cold Winter Regions (2001, updated 2003), and a Public Building Energy Conservation Design (2005). The goal of these standards is to reduce the space heating energy consumption by 50 percent compared to 1986 levels, primarily by improving the thermal integrity of the building envelope. In addition, some municipalities have issued more stringent building energy efficiency codes, such as Tianjin Municipality, calling for reduction in consumption by 65 percent compared to 1986 levels. 3.69. Improved compliance of new building designs with the energy efficiency code has been a major achievement in recent years. Compliance was reported at only 30 percent in 2003, but has since risen to a reported 98 percent in 2008 (Cai and others 2010). This effort has required strong organization and focus throughout the government system. 3.70. Improvements are still needed in the system to ensure compliance with the building energy efficiency code, however. The frequency of actual inspection of buildings to ensure that energy efficiency measures are actually adopted as specified in designs varies substantially. In quite a few localities, no site inspections of energy efficiency aspects are undertaken at all. Primary focus in code compliance supervision is on two milestones--the design approval stage and the building, commissioning, and acceptance stage. In addition, spot review of the technical offer by the construction company to the developer could at least help ensure that the developer complies with the technical specifications and construction drawings approved at the design stage. Greater attention during construction might help solve problems more cost effectively and efficiently compared to trying to find solutions at the commissioning stage. Training programs on energy efficiency code compliance by quality inspection stations could be provided to construction workers and construction supervisors. A good practice adopted in some localities is to adopt checklists as part of acceptance procedures, which are completed during key stages of the construction cycle. 3.71. In addition to compliance with current building energy efficiency codes, which focus on reducing heat losses through building envelopes, energy efficiency gains can be achieved through broader planning and design measures. Substantial energy efficiency gains can be achieved at very low or zero cost by considering potential solar gains and heat loss reduction in building orientation, from optimal building shape coefficients and 18 See World Bank (2000); Ping and others (2002); World Bank (2005); ESMAP (2006); and Liu and others (2006). 36 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces from shading between buildings when developing housing block master plans. Realization of these potential gains, however, would require specific attention by developers and municipal authorities before control site plans (konggui) are approved. 3.72. A new initiative launched by MOHURD is the development of building energy efficiency labels. Under such schemes, potential real estate buyers can consider and compare the energy efficiency characteristics of buildings, and developers may well have greater incentives to pay closer attention to energy efficiency. Under MOHURD`s pilot system, developers pay for participation, including a fee for prelabel design review based on final construction drawings, and some RMB 30,000­100,000 for monitoring and verification (M&V), depending on the size of the building. Labels rate energy efficiency performance (including use of renewable energy) with from one to five stars, calculated from the existing building energy efficiency standards. There are two stages of labeling: (a) a prelabeling after the commissioning stage based on actual (revised) construction drawings submitted for file to the relevant municipal authorities and (b) final labeling following testing and appraisal by certified laboratories (for example, the China Academy of Building Research), implemented within one to five years after building commissioning. MOHURD also has a green building standard with its own star rating system. This takes into account other sustainable building practices similar to those of internationally recognized sustainable building initiatives, such as LEED. This is also a good initiative. However, the two standards appear to be overlap in some respects, and some type of unification may be worth considering. Heat System Reform 3.73. Achievement of major energy efficiency gains in residential buildings in northern China requires completion of difficult reforms in the current heat supply, pricing, and billing system. Under the prevailing system, most consumers cannot adjust heat supply from their home radiators at all. District heading also is priced according to floor area, and actual consumption (which cannot be adjusted anyway) does not figure into district heating bills. 3.74. Essentially the necessary reform needs to address a series of intertwined issues to enable the commodification of heat. First, responsibilities for payment of district heating bills needs to fully shift from employers to consumers (which, in turn, requires issuance of new wage supplements or new subsidy mechanism for unemployed or disadvantaged persons). Second, consumers need to be able to control their heat use levels, which requires different heat piping and radiator system configurations in buildings and major technical changes in the heating network and its operational management. Third, heat consumption at the apartment or at least the building level must be measured (which is an imperfect science compared to electricity or water). Fourth, heat pricing systems need to be reformed to include pricing based on consumption instead of only heated floor area. Fifth and finally, billing systems need to be implemented that bill customers based on the new pricing methodologies and metered consumption of their actual heat use. 3.75. A comprehensive vision for implementation of this heating system reform was jointly issued in July 2003 by eight central government ministries and commissions in a Guideline for Pilot Projects of Urban Heating Reform, with plans for implementing 37 Accelerating Energy Conservation in China`s Provinces pilot actions during 2004­06. Following two years of pilot efforts, the eight ministries issued Instructions to Further Push Forward Urban Heat Reform, with State Council approval. In June of 2006, the MOC established a new Heat Reform Promotion Office, which was followed with instructions at the National Heat Reform Working Conference in August 2006 for localities to set up specific offices to lead implementation of municipal heat reform efforts, beginning with the development of specific action plans. 3.76. Significant progress has been made in this very challenging reform agenda. However, while progress has been clear in some areas, it has been less than expected in others. Consumer responsibility for bill payment is now widely accepted, although the bills of some government workers are still paid for by their employers. Regulations mandating horizontal apartment heating system configurations conducive to consumer control and apartment-level metering in all new buildings have now been accepted by the housing development industry. Experience has been gained in the consolidation of small boilers into larger centralized heating systems. Experience has also been gained with a variety of models for retrofitting heating system configurations in older buildings. Experience in the application of various metering technologies has also been widespread, and the central government has issued guidelines for heat metering. The foundation for price reform has been fully laid with the issuance of Temporary Guidelines for Two-Part Heat Tariffs by NDRC and MOHURD in 2007, which endorses methodologies for introduction of a large consumption-based block into the heat tariff for the first time in China, and encourages local implementation. However, implementation of consumption- based billing on the ground--which requires that all the key reform elements be in place, working together--has been far slower than originally hoped. The cities of Tianjin and Chengde have gained several years of experience in consumption-based billing, and some others are starting, but still, only about 46 million m2 of apartment buildings are billed according to the meter, accounting for only 1.2 percent of the total reported building stock of 3.9 billion m2 in 2008.19 The largest benefits of the reform, and certainly its key energy efficiency gains, can only be achieved with the implementation of the key consumption-based billing step, and that has remained a challenge. Building Renovation 3.77. MOHURD`s plans for the 11th FYP include a target to complete building energy efficiency retrofitting of at least 150 million m2 of existing building area in 15 northern provinces. Each province was allocated a share of this target. Technical guidelines for building renovation have been issued at the municipal level. The central government established a formula-driven subsidy, taking account of varying climactic conditions, levels of reconstruction, estimated energy conservation and implementation progress.20 19 MOHURD 2009. 20 The formula is B=b x [ (0.6 x R1+0.3 x R2+0.1 x R3) x 70% +R x Ec x 30%] x Pc where B is the final subsidy, b is the benchmark subsidy based on climate (severe cold zone: RMB 55/m2; cold zone Y 45/m2); R1 is reconstructed area of enclosed structure; R2 is the reconstructed area of the indoor heating system; R3 is the reconstructed area for temperature control; R is the total reconstructed area; Ec is an energy efficiency coefficient ranging from 0.8, 1 and 1.2 for 15­20%, 20­30%, and > 30 or >40% energy efficiency, depending on whether it is measured from the heat source or the substation, and Pc is a progress coefficient, that is, reconstruction completed before 2010 = 1.2, finished on 2010 = 1, and after 2010 = 0.8 (Cai and others 2009). 38 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces Central government support has been about RMB 45­55/m2, depending on the location. Although useful experiences have been gained, the scope and pace of the program have been less and slower than originally hoped. 3.78. The program for energy efficiency renovations in existing centrally heated buildings is a particularly difficult one, and an area where administrative measures have only limited usefulness. The key issues are less technical and more institutional: homeowners must be actively and enthusiastically involved, requiring both incentives and effective local organization. It is likely to be difficult to achieve the government`s target as originally envisaged. Issues of incentives and organization are briefly discussed below. 3.79. Incentive issues. Without implementation of consumption-based heat billing, homeowners gain no financial benefit from energy efficiency retrofits. (In cases where apartments are currently too cold, however, they may gain comfort benefits.) However, some municipal authorities require that retrofitting be undertaken before consumption- based billing can proceed, arguing that it is unfair at this stage to saddle residents of older, particularly leaky apartments with higher heat bills. This impasse tends to slow down progress on both programs. Government subsidies may in principle provide a measure of financial incentives to help bridge this problem, but if they are the only form of financial incentive to homeowners, the levels of subsidy needed to foster the levels of organization and enthusiasm required for real success are likely to be exorbitant. Implementation of consumption-based billing and retrofitting might best be closely linked and completed as a package within a reasonable time frame. However, this places even greater requirements on the effectiveness of local organization. 3.80. Organizational issues. Successful efforts in energy efficiency building renovation in other countries--including Eastern European countries with Soviet-era heating systems--typically are built with the heavy involvement of local homeowners, building management, or other grassroots organizations. Involvement of such organizations can be critical for achieving the needed homeowner support. Effective results often require a degree of customization to the actual technical and institutional situation in different building blocks. Even if buildings are of similar vintage, structural differences and substantial variations in heat demand and other conditions often exist, as well as different perceptions and desires among homeowners. It is not advisable to apply uniform criteria across a municipality, including uniform measures, estimated savings, and subsidy amounts, without flexibility to allow greater customization to the actual conditions in different building blocks. A common implementation approach in other countries is for energy efficiency service companies to work with homeowners, usually through appropriate local organizations, to develop customized packages from a menu of options supported by overall city programs. These companies have energy auditing skills and experience packaging investments with reasonable payback periods. Because energy efficiency services are their business, these companies also have specialized experience communicating the benefits of their technical proposals to homeowners and building managers who may not have technical backgrounds. 3.81. Additional organizational challenges arise in buildings that retain traditional vertical heat piping systems. Unless radical renovations are undertaken to convert to horizontal piping, which have proved highly unpopular with many residents, the key heat 39 Accelerating Energy Conservation in China`s Provinces meter for heat supply company consumption-based billing purposes should be at the building level. Allocation of individual apartment shares, using any of a variety of methods, may then also fall to building management companies or similar organizations. Increasing the Role of Provincial Governments in Fostering Innovation 3.82. Many aspects of the building energy efficiency agenda, and especially the implementation of consumption-based heat billing and existing housing renovation programs, are at a stage where a variety of creative technical and institutional solution packages need to be developed at local levels. Northern provincial governments are in an excellent position to promote such innovation by (a) providing intense support for the development of specific experimental and pilot projects at municipal or submunicipal levels; (b) carefully reviewing experiences from other provinces or even abroad, and introducing relevant cases to local authorities; (c) intensely propagating successful pilot cases in the province to others, to achieve scale-up; and (d) collecting and sharing information on successful experiences with heat reform in different cities within a province and on costs and performance of heating companies. Some specific ideas of the study team include the following: Provision of concentrated provincial government support for the implementation of consumption-based heat billing in several municipalities as soon as possible, to garner experience for further scale-up. Support for municipal-level piloting of measures to more systematically check energy efficiency building code compliance after initial design approval and up to final building acceptance. Adoption of high thermal performance standards, use of certified materials, and rigorous ex post energy efficiency evaluation and rating for at least a selected number of new provincial government buildings to set highly visible examples for the building industry. Provision of intense support for the pilot development of creative local projects combining energy efficiency building renovation and consumption-based billing reform. The government could organize a competition for generous government subsidy support for housing community project proposals that combine implementation of both programs. Promotion of adoption of modern building energy management systems (BEMSs) in commercial buildings. Usually these systems cover all forms of energy use and involve participation of energy efficiency service companies. Promotion of exchanges of experience with heat system reform. 3.83. Another important role of provincial governments is to help ensure that high- quality equipment is used in key applications. An important example is heat meters. To ensure that the highest quality meters are available in province at reasonable cost may require not only attention to enforcement of quality standards, but also initial subsidies to allow initial penetration of the best quality meters into local markets. E. Developing the Energy Efficiency Service Industry 3.84. Many provinces are making efforts to further develop local energy efficiency service industries, with increasing central government support. This service industry 40 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces includes independent companies and institutes that undertake any of a wide variety of important tasks, including energy auditing and testing, consulting, energy efficiency technology dissemination, energy efficiency project design and appraisal, energy efficiency project construction management, energy efficiency project maintenance, energy efficiency project and energy management training, detailed M&V of energy savings results, and/or assistance in arranging energy efficiency project financing. At times, this industry is also called energy efficiency intermediary organizations or third parties. Development of a vibrant energy efficiency service industry is absolutely essential for achieving sustainable and progressive energy savings results over the medium and long term, especially through market interaction. 3.85. An immediate, pressing task for the energy efficiency service industry in all provinces has been completion of energy audits for the 1000 Enterprise Program and various additional provincial and local government key enterprise programs. Provincial government agencies have struggled to cover the work program by enlisting help from all sources and undertaking major energy audit training programs to expand auditing capacity. Many provinces have developed registries of relevant expert groups and begun formal organizing efforts. In Yunnan Province, for example, provincial authorities undertook a program of identifying, screening, training, and appraising energy service entities operating in the province, which culminated in the announcement of 40 entities deemed qualified to carry out energy audits for the province`s double 100 key enterprise program, which includes financial subsidies to key enterprises for completing required energy audits (NECIDC 2009b). 3.86. Technically sound energy auditing is very important. However, there are also increasingly pressing needs for energy efficiency service providers to move further along the service spectrum toward (a) identification of priority lists of the most attractive energy efficiency projects, (b) completion of project feasibility studies, (c) packaging of the investment projects into bundles for both enterprises and financiers, (d) assistance in closing financing, and (e) assistance in project implementation. Many different types of service business models are possible and appropriate for Chinese conditions. One specific model is energy performance contracting. This business has grown very fast in China during 2004­08, with total energy performance contracting by Chinese ESCOs reaching about US$1.5 billion in 2008.21 Industrial customers accounted for just under half the total number energy performance contracting projects in China in 2007, but industrial projects accounted for about three quarters of total contracted investment. However, while ESCOs operate across China, reaching virtually every province to some extent, operations are still primarily concentrated in about half of China`s provinces. 3.87. Some provinces have assessed the importance of local energy efficiency service industries and launched concrete actions to support its development. Others have not come as far along. In the case of Shandong, a Provincial government circular was issued in 2008 specifically recognizing the importance of developing the energy efficiency service industry, underlying its important intermediary position outside of both the 21 The World Bank and GEF played a major role as partners in the development of China`s energy performance contracting industry, beginning from 1997. More information can be obtained from the NDRC`s WB/GEF Energy Conservation Project Management Office and the EMCo Association of China (www.emca.cn). 41 Accelerating Energy Conservation in China`s Provinces government and enterprises, emphasizing its importance for market-based initiatives, and setting goals for the development of a core of highly competent service companies by the end of 2010. So far, a total of 66 energy audit companies and clean production consulting firms operate in Shandong (DEUMC 2009). 3.88. Development of the local energy efficiency service industries will definitely need more attention and support in the coming years. The role of this industry is additional to, but supportive of, the government`s key energy-consuming enterprise supervision and monitoring network. Given the shortage of qualified energy efficiency expert manpower experienced during at least the first three years of the FYP, the service industry has at times suffered from the pull for staffing into the government`s supervision system. Both systems need to be built up. In the service industry, then, there is also a strategic need for an injection of financial and business expertise, in addition to technical know-how. A key issue looking forward is how to further develop the government`s continuing key energy- consuming enterprise effort in such ways as to also foster the long-term development of the local energy efficiency service industry (see Chapter 4, paras. 4.27­4.32). F. Energy Efficiency Fiscal Incentive Programs 3.89. Government fiscal and incentive policies can have a major influence on energy efficiency investment behavior. Major fiscal instruments include subsidies and awards, pricing policy, and taxation policy. The most common fiscal instruments used by provinces are summarized below. Government Energy Efficiency Investment Subsidies and Awards 3.90. Allocation of central government funds through the provinces. The central government established a special fund for the energy conservation and pollution abatement program in 2007, with an allocated budget for that year of RMB 23.5 billion (about US$3.4 billion). The fund is managed by the MOF. RMB 9 billion of the total was allocated in 2007 for energy conservation, including funding for energy conservation research and development, technology demonstration, and encouragement for key energy conservation project investment. In 2008, annual financing for the special fund was substantially increased to a total of RMB 42.3 billion. The budget for 2009 was further increased to RMB 49.5 billion (US$7.3 billion), a 17 percent increase over 2008. The government`s economic stimulus policies responding to the global financial crisis of 2008­09 provide part of the context for the recent increases. 3.91. A major use of the energy efficiency portion of the central government`s energy efficiency and pollution abatement special fund is to encourage investment in major energy efficiency projects. Areas included represent 5 of the 10 key energy conservation project lines listed in the 11th FYP: coal-fired industrial boiler rehabilitation, residual heat and pressure utilization, petroleum saving and interfuel substitution, motor system energy savings, and energy system optimization. Project awards are directly linked to the energy savings achieved in the approved specific project. Project hosting enterprises in East China receive RMB 200 (US$29) per ton of coal equivalent of annual energy savings capacity generated by eligible projects, while enterprises in the less affluent Midwest and West receive RMB 250 (US$36) per tce of savings capacity. This amounts to about 10­ 20 percent of the investment cost of a typical energy efficiency project. Enterprises 42 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces submit their applications to provincial governments. If approved, applications are forwarded to the central government for final evaluation and approval. In a substantial policy change from previous programs that provided investment subsidies, this program provides rewards disbursed only to enterprises with energy metering and measuring systems that can document proven savings of at least 10,000 tce from their previously approved energy saving technical transformation projects. 3.92. An additional program provides more traditional investment subsidies of 12 percent of investment costs for eligible projects. However, enterprises cannot avail themselves of funding from both programs for the same project. 3.93. Provincial and local government special funds. Most but not all provincial governments have also established their own special energy efficiency or energy efficiency and pollution control funds, managed by their provincial finance bureaus. Special funds allocated for energy conservation are used mainly to support energy efficiency technology research and development (a) to demonstrate and promote new energy efficiency technology and products, (b) to support implementation of key energy conservation projects, (c) to disseminate information, and (d) to award groups and individuals who made outstanding achievements in energy conservation. Some provinces have followed the approach of the central government to link investment support payments to actual energy savings in the form of awards, but targeted at local key energy conservation projects with energy savings of less than 10,000 tce, which therefore are not eligible for central government awards. Some provinces use the funds to support energy conservation projects in certain key local enterprises, while others use them for building the capacity of local energy conservation units or undertaking energy efficiency projects in the government sector. 3.94. Shanxi Province established its provincial special energy efficiency fund in 2000, well before the current national energy conservation drive. In 2007 a total of RMB 728 million (US$107 million) in investment support was disbursed for 180 major energy efficiency projects, including RMB 520 million from the provincial budget, RMB 200 million from the central government, and RMB 8 million from a new wall materials fund. Funds also supported 200 building energy efficiency projects. A number of prefectures also provided counterpart special energy efficiency funds. Jincheng Prefecture, for example, arranged an energy efficiency special fund with government budget financing of RMB 20 million in 2007 (SASS 2009). 3.95. In 2007 Shandong Province spent RMB 261 million (US$37.3 million) from its energy efficiency special fund on various programs, including RMB 130 million to support three of the province`s special Energy Conservation 100 projects, RMB 47.4 million to support major energy efficiency technology research and development tasks, and RMB 30.6 million to reward early elimination of backward industrial capacity (DEUMC 2009). Although the provincial government significantly increased its budget allocation for the special fund in 2008, actual spending decreased to RMB 189 million because there was less funding carried forward from the previous year and less additional allocation made during the year. Fund use also changed. The funding for the research and development was substantially increased to RMB 109 million, accounting for 58 percent of special fund disbursements in 2008 (see Table 3.6). 43 Accelerating Energy Conservation in China`s Provinces 3.96. Similar to the annual central government`s special fund, the energy efficiency special funds of the provinces are financed primarily from annual provincial budget allocations. Thus, they are subject to frequent fluctuations and funding uncertainty, depending upon the status of the overall provincial budget and changes in annual priorities. As in other countries, this raises concerns on energy efficiency funding stability and sustainability, which are further discussed in Chapter 4, together with suggestions on how to increase energy savings results from application of these funds. Table 3.6: Shandong Energy Efficiency Special Fund, 2007 and 2008 2007 2008 Budget financing for energy efficiency programs (million RMB) (million RMB) Committed 300 188.8 Carried forward from the previous year 150 38.8 Current year budget 50 140 Percentage of current year EE budget of provincial financial 0.23% 0.59% revenue Additional allocations 100 10 Actual Spending 261.2 188.8 Support for three Energy Conservation 100 Projects 130.0 Financial subsidy for solar thermal collection systems 27.0 20.2 Support for the research and development of major energy 47.4 109.0 saving technology Rewards for eliminating cement shaft kiln production lines 30.6 Rewards for eliminating cement shaft kiln production lines and 39.6 coking productivity Rewards for supporting energy saving and enhancing public 26.2 16.6 EE management capacity Recycling used electrical appliances and electronic products 3.2 Source: DEUMC 2009. 3.97. Organization and individual rewards. Some provinces use small portions of their energy efficiency special funds for special annual awards to local government units, organizations, enterprises, and individuals who have made outstanding energy conservation achievements. For example, Shandong Province implemented an Energy Conservation Rewarding Method in 2007. The system includes outstanding awards of RMB 1 million and excellence awards of RMB 50,000 for selected organizations, enterprises, and projects. The selection criteria are directly linked to energy savings. For example, outstanding awards for enterprises require that energy consumption per unit of product should be at the national leading level for at least two years, and the annual energy savings should be above 40,000 tce. In 2007, Shandong Province awarded five outstanding energy efficiency awards to enterprises and five outstanding awards for energy efficiency projects (for example, demonstration of high-efficiency solar energy concentrating thermal technology). Energy Pricing Policies 3.98. While provincial governments have been allowed at times to make certain types of adjustments, basic electricity and petroleum product price schedules are set by the central government. For coal, prices for some key consumer categories are subject to 44 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces some central government control, but many are determined fully by the market. Prices for heat and locally produced city gas are determined by municipalities. 3.99. One new policy, launched by the central government in 2004, was to allow localities to establish differential electricity prices for certain industrial customers, according to their classification under the government`s structural adjustment policy. As a specific policy to encourage structural adjustment in the interests of the energy conservation drive, it is outlined below. 3.100. The Differential Electricity Pricing Policy. This policy was initiated with guidelines issued by NDRC in 2004. It allows different electricity prices to be set for individual enterprises according to their energy intensity level in six energy-intensive industries: electrolytic aluminum, ferroalloy, calcium carbide, caustic soda, cement, and steel. In 2006, the yellow phosphorus and lead zinc industries were added to the list to make eight industries. As described in paras. 3.45­3.48, the government`s industrial restructuring policy classifies enterprises into four categories: encouraged, permitted, restricted, and to be eliminated. The new differential electricity pricing policy calls for addition of surcharges of 5 fen/kWh (US$0.007/kWh) for enterprises classified as restricted and 20 fen/kWh (US$.0.029/kWh) for enterprises classified for elimination. This corresponds to increases of about 10 percent and 30 percent in the average price of electricity for these customers, respectively (Price, Wang, and Jiang 2008). Table 3.7 presents the schedule set out by NDRC for implementing these surcharges over time. Thirty provinces began implementing this policy in 2004, covering approximately 8,000 enterprises. Table 3.7: Differential Electricity Pricing Standards for Selected High Energy-Consumption Industries (RMB/KWh) September October 1, January 1, January 1, Industry 2006 2006 2007 2008 Electrolytic aluminum, Eliminated 0.05 0.1 0.15 0.2 ferroalloy, steel, calcium carbide, caustic soda, cement, yellow Restricted 0.02 0.03 0.04 0.05 phosphorus, and lead zinc Source: NDRC 2006. 3.101. The policy was adjusted in 2007 to allow local provincial authorities to retain revenue collected through the differential electricity pricing system, and use this revenue to support local structural adjustment and energy conservation programs. This change increased incentives for provincial authorities to implement the policy. In addition, all previous national and local favorable electricity pricing policies on high energy- consuming industries were abolished--a key measure for certain industrial subsectors, such as ammonia fertilizer production. 3.102. To cite a specific implementation example, Yunnan Province started to implement differential electricity pricing policy in 2004 and extended the policy to additional energy-intensive industries in 2006. Policy extension to the yellow phosphorous industry 45 Accelerating Energy Conservation in China`s Provinces was particularly important, since Yunnan Province accounts for about 50 percent of national production. The impact of differential electricity pricing policy can be very significant for enterprises. According to estimates from Yunnan Malong Industrial Group, which produces yellow phosphorus, an electricity price increase of 5 fen/kWh for equipment on the to be eliminated list and 2 fen/kWh on the restricted equipment list in 2006 amounted to an annual production cost increase of RMB 10 million, if annual production and equipment use remained the same. This was equivalent to 45 percent of the enterprise`s profit in 2005.22 Revenues from the differential electricity pricing policy became an important funding source for Yunnan`s energy efficiency special fund, with funds being used for a variety of energy efficiency programs. Tax Policies 3.103. Tax policies can provide strong incentives for energy efficiency investment and behaviors through either increasing the costs associated with energy use or by reducing the costs associated with energy efficiency investment. China has taken various tax policies to adjust industrial structure, promote energy efficiency investment, and encourage energy efficiency behavior. 3.104. Tax policies to adjust industrial structure. Introduced in 1985, the tax rebates for exporters have made Chinese products more competitive on the international market, especially after China joined the WTO in 2001. However, the provision of tax rebates for exports of energy-intensive products accelerated the growth of heavy industries and worked against the government policies to conserve energy and shift toward high value added and low resource-consuming industrial structure. Therefore, in September 2006, the MOF reduced tax rebates on exports of high energy-consuming, resource-intensive, and environmentally harmful products. The rebate was reduced from 11 percent to 8 percent for steel, from 13 percent to 8 percent for cement, from 13 percent to 11 percent for glass, and from 13 percent to 5 percent, 8 percent, or 11 percent for some nonferrous metal products. In April 2007, the government announced further canceled or reduced tax rebates on exports of most steel products. Further on in 2007, export rebates on 553 energy-intensive and highly polluting products were eliminated (Price, Wang, and Jiang 2010). 3.105. Provincial governments use various tax policies under their purview to attract high- and new-technology industries and to encourage investment in energy efficiency. Tools include income tax reductions or exemptions, certain tax rebates, and allowing accelerated depreciation for specified investments or purchases. For example, Shandong Province has allowed accelerated depreciation for equipment that is central for the manufacturing of energy saving, water saving, and other resource-saving products encouraged by the government. For those energy-conserving and water-conserving enterprises that have difficulties in paying taxes, Shandong Province also allows reductions or exemptions in city or town land use taxes or real estate taxes in certain cases for energy or water-saving enterprises. 22 Source: Yuannan High Energy-Consuming Industries Will Pay More Electricity Bill, 5 Fen per kWh for To-Be-Eliminated Industries. Power Product website (Chinese) http://www.powerproduct.com/news/1795.html. 46 CHAPTER 3: The Current Energy Conservation Programs of China`s Provinces 3.106. Tax policies to conserve coal. Imposing resource taxes on coal can be an important instrument to encourage coal conservation. Since 2004, the central government has allowed increases in resource taxes on coal in most provinces. Some provinces also have established additional charges on coal to reflect environmental and social impacts. With central government approval, Shanxi Province established a Coal Sustainable Development Fund in 2007 using additional fees charged on all coal produced in the province. The surcharge ranges from RMB 5­15/ton for steam coal, RMB 10­20/ton for anthracite, and RMB 15­20/ton for coking coal. In 2008, revenue from the surcharge amounted to RMB 14.6 billion.23 This provides an important funding source for energy efficiency and environment protection investments. 3.107. Tax policies to encourage energy efficient purchasing behavior. China adjusted automobile sales tax rates in 2008 to increase the tax rate for large-displacement cars and to lower the tax rate for small-displacement cars. Additional taxes are expected to be levied on a variety of energy-intensive products. 23 Source: Shanxi Has Collected Y 1.46 billion from Coal Sustainable Development Fund This Year. State-Owned Assets Supervision and Administration Commission of the State Council website (Chinese). http://www.sasac.gov.cn/n1180/n1271/n1301/n4149886/5722050.html. 47 Accelerating Energy Conservation in China`s Provinces CHAPTER 4: Issues and Challenges for the Next Five Years 4.1. The previous chapter described the main current energy conservation programs of provincial governments. This chapter highlights some of the issues and challenges for the future as China moves to strengthen these programs further. Most of the main programs operated by provincial governments are included and discussed generally. Because of the major variations that exist between China`s provinces, however, different provinces have different needs and priorities. Future analysis would do well to categorize China`s provinces into different groups and analyze the priorities for program development and strengthening in each. 4.2. The first section in this chapter describes China`s need to use both administrative and market-based systems to achieve the best energy efficiency results. The next section then briefly discusses needs and means to strengthen the human infrastructure needed for further improvements in the administrative system over the next few years. The next section discusses requirements for expanding the role of the market in delivering energy efficiency investment. The final two sections deal with two key topics that are central to provincial government energy efficiency programs: further improving results in energy conservation in key enterprises and increasing efficiency and results in the use of public energy efficiency funds. Relevant international experience is heavily drawn on. While other topics also warrant special discussion and analysis, these may best be further explored in future study efforts. 4.3. The final chapter of the report lists the study team`s recommendations, most of which are drawn from the discussion in this chapter. A. Needs for Both Administrative and Market-Based Energy Efficiency Promotion Systems 4.4. China`s current provincial energy efficiency programs rely heavily on administrative systems, which have played a critical role in the success achieved so far. Government guidance and leadership are especially important and necessary in China. The higher-to-lower government-level energy savings target responsibility contracts of the 11th FYP have provided much of the impetus for organizing major new comprehensive energy efficiency efforts at local levels. These include efforts to reduce energy intensity through economic restructuring, as well as through energy efficiency projects. The government-enterprise energy savings target responsibility contract system, along with related reporting, supervision, benchmarking, and EMS promotion efforts, provide a foundation for new government-enterprise relationships on energy efficiency issues, supported by the Energy Efficiency Law. Mandated energy savings targets encourage enterprises to act and demonstrate results. The system also provides a vehicle for sustained dialogue and mutual support between the public sector and enterprises. Finally, China`s increasingly sophisticated system of regulatory tools is clearly playing a key role, including China`s energy efficiency standards and codes and government use of various approval authorities for new investment to support energy efficiency policies. 48 CHAPTER 4: Issues and Challenges for the Next Five Years Although most countries also use such regulatory tools in various degrees, China is breaking new ground with increasing minimum energy performance standards in industry, use of powers to increase electricity prices or even revoke operating licenses for industrial plant using wasteful technology, and increasing the incorporation of energy efficiency assessments as part of new industrial project review and approval procedures. Relative Roles and Integration of Administrative Measures and Market-Based Systems 4.5. China`s main administrative measures to promote energy efficiency--mandatory targeting, regulations, codes, and standards aimed at establishing minimum performance requirements--certainly have a key role to play if China is to meet continuing ambitious energy conservation goals. However, these measures also have their drawbacks and limitations as to what they can achieve, which should be recognized. Many current regulations, for example, are aimed at eliminating the most wasteful technologies and practices. This can lead to important achievements, but most of these types of regulations themselves are not likely to effectively encourage adoption of the most efficient, new, and more innovative solutions. Mandatory energy savings targeting has played a key role in China`s energy savings achievements so far during the 11th FYP, although there are also inherent contradictions in the approach, which may become yet more apparently in the future, for example, standardizing versus customizing targets, administrative discretion, and creation of economic distortions. 4.6. Standardizing versus customizing targets. It is administratively simplest to establish fairly standard targets (for example, a common percentage savings reduction across a large group of enterprises). However, potential for economically rational energy savings varies dramatically across areas and especially enterprises. A one size fits all approach will likely be very unfair and overly burdensome to some, and leave large amounts of potential savings untouched in other cases.24 Developing individual targets customized to the actual circumstances of areas or enterprises could, in principle, achieve better results. However, this requires far more intensive focus on details and is administratively very difficult. Achievement of the best balance between these two extremes is a major challenge. 4.7. Administrative discretion. Allowing local authorities to exercise increased discretion in the establishment of targets may allow greater sensitivity to the realities of different circumstances, but may also lead to increasing unfairness, subjectivity, and arbitrariness. Proper use of greater discretion also requires greater technical support. Greater customization of targets will tend to require greater discretion, even if methodologies are rigorously defined. Increased standardization of targets, on the other hand, may lead to de facto greater discretion in the degree of rigor in target monitoring and enforcement. 4.8. Creation of economic distortions. A range of potential distortions can arise from implementation of the targeting system, which can be complex to adjust for. Geographic 24 To avoid too many cases where the standardized target is unfair or basically impossible to meet, the natural tendency is to set targets at levels that almost everyone can meet. This, then, by definition, causes the target level to encourage only mediocre results for most of the remaining group. 49 Accelerating Energy Conservation in China`s Provinces targets raise serious issues concerning industrial location. For example, are local governments to be penalized for developing state-of-the-art large-scale thermal power plants or coal washing facilities for the benefit of the nation? Energy use per unit output value targets for enterprises can force changes in output product mix that greatly counter enterprise comparative advantage. Application of generalized energy consumption per physical unit output targets may force some enterprises to undertake high-cost, uneconomic investments, while allowing other enterprises to continue dilatory attitudes to energy efficiency efforts and still get by. 4.9. Reliance on market forces alone to foster and implement energy-saving investment and behavior avoids these headaches and has many economic efficiency advantages. However, pure reliance on market forces alone also has its own, different shortcomings. Markets are unparalleled in their ability to efficiently and dynamically allocate resources, provided that pricing and other signals properly reflect societal costs and benefits. The advantages and potential effectiveness of the powerful and dynamic invisible hand of market forces in promoting increased efficiency is well known in China. However, putting optimal signals in place to promote investment and behavior through the market in key areas of national interest, such as energy efficiency, is not a simple matter. 4.10. Energy prices are the key market signals for encouraging more efficient use of energy. In China, energy pricing policy is basically geared to cover the financial costs of energy supply. Given the power of the energy pricing tool, China can and should do more to increase pricing levels to provide market signals that are better aligned with the country`s goals and policies to create a less energy- and resource-intensive society. In other words, the environmental, indirect, and supply security externality costs recognized clearly in China`s policies to promote resource savings could be reflected better in energy prices. The pros, cons, and practical issues relating to increasing the use of the energy pricing tool, however, are broad national issues, which are discussed and debated in forums other than this report. (See also paras. 4.39­4.43 below.) 4.11. Even if energy pricing is aggressive, persistent barriers to effective market pickup of profitable energy efficiency investments still exist. Many energy efficiency projects in China would be highly profitable at current prices, yet they remain unimplemented. Additional barriers include lack of information, prejudice against operating cost­saving investment in favor of investments that increase revenue (for many reasons), initial high transaction cost barriers, and others. Serious market failures exist in some sectors, such as aspects of the building energy efficiency sector which, experience has shown, require regulation in addition to the use of market forces. As business people in the energy efficiency project business know well, energy efficiency investment projects often have wonderfully high internal financial rates of return, but interest in implementation still often lags for other reasons.25 4.12. Suffice it to say that no country in the world with an active and successful energy conservation program has relied solely on pricing and laissez-faire market forces. In Europe, for example, many countries have adopted aggressive energy pricing policies that have brought good results, but they also work together with companion regulations 25 For further discussion, see Taylor and others 2008. 50 CHAPTER 4: Issues and Challenges for the Next Five Years and administrative measures. However, in the energy efficiency programs of most European and North American countries, there is a key difference from that of China: while incentives include a mix of pricing and regulatory incentives, strong efforts are made to bring market forces more heavily to play for delivery of energy efficiency investment and results. Great efforts are made in program design and implementation methods to try to capture the dynamism, economic efficiency, competitive drive, and sustainability advantages of market forces as much as possible. 4.13. In China`s case, it is clear that administrative and regulatory measures have a key role to play to increase incentives for energy efficiency, together with, in the opinion of the study team, more aggressive energy pricing policy. The best balance and mix of regulatory and pricing tools to provide incentives for energy efficiency is an area of great debate internationally and can be debated more extensively in China. Certainly, however, given China`s current market economy, more needs to be done to utilize market forces better in the delivery of energy efficiency investment and behavior response. This is a key to achieving lasting, sustainable results in an efficient way. This does not just happen automatically. Greater attention is needed, especially at provincial levels, to facilitate the effective functioning of the market in the energy efficiency sector, and to integrate market-based approaches into programs where possible. Section C below (paras. 4.25­ 4.47) deals with this topic. 4.14. In efforts to improve the use of both administrative and market-based approaches, and especially to blend these approaches, China`s provinces will need to experiment and test out a variety of different program concepts and mechanisms. Some areas require degrees of standardization across provinces--for example in data collection protocols. However, other areas require innovation and creativity, which can often best be undertaken at provincial and local levels. Provinces can then learn from each other`s experiences. B. Strengthening Implementation Infrastructure to Improve Administrative Energy Efficiency Promotion Systems 4.15. During the first four years of the 11th FYP, a wide range of regulations, codes, standards, and basic enterprise energy conservation targeting was put in place. This administrative system is very extensive in its reach. To achieve further results during the next FYP, perhaps the best focus for further administrative system construction is on implementation with quality. Achievement of the necessary quality results will require a truly massive investment in human infrastructure, spanning years and covering all levels. This investment requirement falls especially on provincial governments, given their core role in program implementation. 4.16. One key aspect of implementation with quality is evenhanded and consistent enforcement of the most important longstanding and new codes, standards, and regulations. Each set of codes, standards, and regulations has its own requirements to put in place or fine-tune detailed procedures for implementation to actually produce good results. Each set also has its organization and capacity requirements for staff and experts. Quality implementation of China`s new requirements for energy efficiency assessments of major new projects (Chapter 3, paras. 3.58­3.60) requires a combination of detailed procedures that are consistently followed and the application of suitable expertise. One 51 Accelerating Energy Conservation in China`s Provinces way to assess whether or not the procedures and expert reviews are successful is to evaluate the extent to which new project proposals are substantially revised as a result. Enforcement of the energy efficiency code for new buildings at the municipal level has improved steadily since 2001­02, but gaps remain between what is actually constructed and what is required. Inspection procedures, as well as understanding and experience concerning energy efficiency issues within inspection units, need to be bolstered. Much of the work for enforcement of China`s many new MEPS for industrial equipment still lies ahead, as an integral part of the evolving new government-enterprise energy efficiency responsibility system. Many enterprises are not yet even aware of some of the new MEPS. 4.17. Another key aspect of administrative system implementation with quality is improvement of the overall energy conservation targeting system for key energy- consuming enterprises. This topic is specifically addressed in Section D (paras. 4.48­4.79 below. Two suggested interrelated themes for the next FYP include stronger efforts to assist enterprises to plan, manage, and implement energy efficiency measures themselves (with the government playing an increasingly indirect supervision role), and increasing customization of enterprise energy savings targets. Both of these carry further major human infrastructure development requirements. The capacity of staff in more than 15,000 enterprises to deal properly with energy management issues needs to be greatly strengthened, as along with the ability of the energy efficiency service industry to provide quality audits and other technical services. Government staff and experts in units close to the government need to be sufficient in number and well versed and experienced in enterprise energy efficiency issues, or else the evolving new system will not be able to function properly. Finally, major critical investments need to be made in new systems of energy use measurement in enterprises, consistent and standardized data collection and reporting systems and protocols, data analysis, and data validation. Without this investment, enterprise targeting cannot be completed in a scientific way, priorities for improving energy management cannot be properly assessed, and progress cannot be properly monitored and evaluated. 4.18. Perhaps three of the greatest priorities for strengthening human infrastructure for administrative system implementation include (a) needs to strengthen human capacity (staffing and improving staff qualifications); (b) needs for information exchange, especially on new technology and for cross-fertilization of program ideas and experience; and (c) needs for development and rollout of new and improved enterprise energy-use data collection, reporting, monitoring, validation, and analysis systems. 4.19. Training for staff development. Given the great gap between needs for and availability of qualified staff in the energy efficiency field in China`s provinces (and internationally), the main solution for increasing energy efficiency-related staff in government, service entities, and enterprises lies in a wide variety of training efforts. China`s provinces have made major efforts in practical training during the 11th FYP, with major accomplishments. These efforts need to continue and be further expanded because the task is so immense. In Shandong, Shanxi, and Jiangxi Provinces, insufficient qualified staffing in prefecture government energy conservation supervision units and below remains a serious issue that needs to be solved for the administrative system to be able to function. This is doubtlessly true in other provinces as well. Many new energy efficiency 52 CHAPTER 4: Issues and Challenges for the Next Five Years technical service entities are just emerging, with uneven technical skill and knowledge, and an uneven understanding of approaches and business models successfully introduced in other parts of China. If the new enterprise energy savings responsibility systems are to work well, ensuring that suitably competent enterprise energy managers are in place will be essential (paras. 4.51­4.54). 4.20. National institutions can provide important guidance, expertise and, in some cases, systems for quality control. However, much of the design and delivery of training programs needs to be done at provincial levels. One important focus for continuing effort is on short-term workshops and training courses to meet specific needs, such as imparting understanding of new regulations and programs, or introduction of new technical approaches or emerging technologies. Long-term efforts, however, are also important to develop the staff of the future, such as development of partnerships with academic institutions for education in energy efficiency as a specialty and new curriculum development. Institutions abroad that have had many years of experience in energy efficiency technical training, such as the Energy Conservation Center of Japan and its regional offices, may be a good source of models and ideas for provinces. 4.21. Information exchange. Two areas of provincial government investment that can consistently provide results include organization and participation in (a) exchange of practical experience, lessons learned, and new program design and execution ideas with other provinces; and (b) facilitation of technology exchange opportunities for enterprises and service entities. 4.22. Although ideas from abroad can also be useful, the greatest wealth of relevant experience and ideas on provincial-level program development lies in other provinces in China. In the United States, as in China, a key source of expertise, experience, and ideas for the 50 state governments in their operation of energy conservation programs is other states. In 1986, the 50 states organized their own National Association of State Energy Officials (NASEO) as a permanent organization to help foster state-to-state exchange. The goals of NASEO include helping to foster the improvement of the effectiveness and quality of state energy programs and policies, providing policy inputs and analyses, sharing successes among states, and acting as a repository of state program information. NASEO regularly compiles best-practice case studies and an annual description of the State Energy Programs of each state. It also convenes a variety of conferences and workshops of member interest.26 4.23. Opportunities to learn more about emerging technologies are typically welcomed especially by local enterprises and energy efficiency service entities. Provincial governments can best continue to use their convening power to organize relevant events and help local entities participate in regional or national events. 4.24. Data collection, reporting, monitoring, validation, and analysis systems. China`s Energy Conservation Law requires that all key energy-consuming enterprises report their energy use to the government. Reliable enterprise energy use data is essential for the monitoring and evaluation of progress in improving energy efficiency, and the enterprise 26 Energy conservation is also one of the largest areas of concern for state energy offices in the United States. See www.naseo.org. 53 Accelerating Energy Conservation in China`s Provinces energy savings responsibility system cannot function without proper data collection and reporting systems in place. Currently, China`s provinces are beginning to develop systems for efficient reporting of energy consumption, preferably online, as a critical monitoring and supervision tool for the future. As these efforts gain momentum, the study team has the following suggestions: Quality control of data being collected should be emphasized as a priority. Data collection efforts often request too much without sufficient attention to exactly how quality can be maintained in data generation, resulting in large amounts of almost useless data in the end. The system hardware and design of reporting protocols is the easier part of the effort; more attention needs to be focused on just what is being reported. Energy and output accounting conventions need to be standardized, or else data between enterprises may not be comparable (see paras. 4.68­4.70). Standard measurement protocols need to be developed, tested, and disseminated--defining what is to be measured, what is to be backed up with purchasing invoice documentation, and what is to be estimated, as well as how. National guidance would be helpful. In most countries, very strict measures must be adopted to ensure confidentiality of such proprietary operational data provided by enterprises. Inadequate safeguards for data security, resulting in security breaches, may undermine the effort. Plans and procedures for government validation of data entered by enterprises should be established at the beginning. It is important to make it clear that government units will be investigating the accuracy of data entries. Validation should include site investigations of enterprises selected through scientifically based random sampling. Timely implementation of validation procedures will uncover problems early and demonstrate the seriousness of government units. Institutional responsibilities need to be clearly defined. Duplication of collection efforts should be avoided, and it should be very clear which government units are responsible for collection of which types of data. Pilot testing of data accounting protocols, measurement protocols, collection and data entry, validation, and analysis should be conducted on a limited number of enterprises before hardware and system software are fully developed and rolled out. C. Requirements and Support for Expanding the Role of the Market in Delivering Energy Efficiency 4.25. Except for cases where enterprises have all of the financing and expertise required for them to implement their priority energy efficiency projects by themselves, three key actors are required to deliver energy efficiency project investment through the market: the enterprise, energy efficiency technical and project expert groups, and financiers (for example, banks). Technical and project expertise from the energy efficiency service industry is needed to help identify the best investments through systematic auditing; help assess the best technical options; help design the projects and prepare feasibility studies; help package for and arrange financing; and advise through the stages of procurement, 54 CHAPTER 4: Issues and Challenges for the Next Five Years construction, commissioning, and maintenance where needed. Financing from local financing institutions is needed to help bridge the time gap between payment for upfront costs and the return on investment from savings on energy bills (and other possible cobenefits). 4.26. Unfortunately, the capacity of the energy service industry and the engagement of local banks in the energy efficiency business are woefully inadequate in too many parts of China. Having undertaken extraordinary measures to bolster incentives of enterprises to implement energy savings measures and investment through mandatory targeting and other administrative measures, provincial governments need to do more to ensure that local enterprises can actually undertake the investments requested of them. The following two sections outline some of the requirements that need to be met, along with some ideas on how that might be achieved. Experience in China and elsewhere has shown that rapid development of the energy efficiency service industry and engagement of financial institutions in the energy efficiency business will not just automatically happen by itself.27 Developing the Energy Efficiency Service Industry 4.27. Also called intermediary or third-party organizations, energy efficiency service enterprises undertake the detailed technical, project packaging and closure, implementation management, and monitoring and evaluation work required for energy conservation measures to be developed and implemented. (See Section E of Chapter 3 for an introduction.) All countries implementing serious energy conservation programs need for this industry to be operating well in the local environment. Energy efficiency service enterprises include commercial companies with expertise in auditing, metering, project design, and/or energy efficiency investment; ESCOs undertaking energy performance contracting; centers and institutes with energy efficiency expertise; university departments; project appraisal companies; and general energy sector consulting companies. Energy-efficient equipment vendors who provide diagnostic and/or project design services may also be included, although they can be expected to have views that support their equipment sales. 4.28. Development needs. One key area where energy efficiency services are needed is in technical work. Working for enterprises, this may include completing audits, comparing technical options and selecting the best fits for different cases, completing project designs, assisting in procurement, and overseeing implementation. Working for government units, this may include detailed energy use monitoring and supervision, project review and evaluation, completion of strategic assessments, and other consulting assignments. The development need here is to expand the capacity of energy efficiency service enterprises to be able to meet the high demands of today and tomorrow, in terms of both the size of the industry and, especially, its competence and ability to complete top-quality work. 4.29. There are other critical needs, too, however. The energy efficiency service industry needs to play a critical intermediary role in developing specific investment 27 In addition to the sections below, more discussion and operational case studies of these topics can be found in Taylor and others 2008. 55 Accelerating Energy Conservation in China`s Provinces projects, packaging them so that enterprises and financiers can accept them, and helping to bring the investments to closure. Service enterprises are needed that can help bridge the gap between the technical world and the financial world, to be able to speed up actual project closure and implementation. Sound technical proposals that are put together and reviewed only by enterprises` technical departments is not enough. Projects need to be designed, packaged, and presented from a business perspective, as well as a technical perspective--for example, by including analysis of the potential risks of projected energy savings cash flow benefits not materializing as expected, and how those risks may be mitigated. Project proposals need to address the concerns of enterprises` financial directors and outside financiers, as well as enterprises` technical staff. This requires skills and relationships additional to sound engineering skills--skills and connections in business and finance. Energy efficiency service enterprises with this breadth are seriously in short supply, but are especially needed to make market delivery of energy efficiency investment projects work. 4.30. The other side of the bridge that is needed to close project implementation gaps--the banks--also greatly needs the services of energy efficiency service enterprises if they are to develop energy efficiency lending. Few banks carry expertise in-house to assess energy efficiency projects, and they therefore need trusted contractors who can both ensure that projects are technically sound and who can evaluate project financial performance risks in ways that meet the banks` loan appraisal requirements. 4.31. Although not always the case, and certainly not required, many service enterprises with the proper business skills for full project packaging quite naturally become involved in some forms of energy performance contracting. An abundance of quite profitable energy efficiency projects remain to be developed and implemented in China`s provinces. If service companies satisfactorily complete the complex work of developing profitable projects and bringing them to closure, they naturally have interests in capturing a more significant share of the profits by providing a guarantee of the energy cost savings results of their work, and/or by providing some of the investment capital themselves in exchange for greater returns. Both the performance guarantee and provision of investment capital may also greatly increase the chances of project closure. 4.32. What can provincial governments do to bolster energy efficiency service industry development? Given its importance, especially over the medium term, some governments in other countries make energy efficiency service industry development a specific goal of their energy conservation programs. Some state governments in the United States include the ability of different programs to nurture energy efficiency service enterprises as a specific criterion used to evaluate the pros and cons of alternative program approaches. In designing programs, then, efforts are made to maximize the positive effects on local service industry development. Several areas where provincial governments in China may be able to support the industry and help nurture its more rapid development include the following: Use of government contracting. Provincial and local governments need energy efficiency services for a variety of supervision and review tasks, and new service companies need some steady sources of revenue to maintain business stability. If procurement procedures and contract design take into account goals to develop the service industry, modest adjustments might make a big difference. For 56 CHAPTER 4: Issues and Challenges for the Next Five Years example, explicit attention could be given to minimizing barriers to entry for relatively new companies, to allow them to have a chance to bid on small contracts. In addition, quite a few governments abroad engage in energy performance contracts with ESCOs for delivery of energy efficiency projects in public facilities, such as schools and office buildings. In fact, award of energy performance contracts for public facilities, beginning in the 1970s, was the largest impetus for the establishment of the ESCO industry in North America. Although complexities of government procurement of energy performance contracts need to be solved for this to become a wide practice in China, the potential benefits for both the public sector and energy efficiency service industry growth are large. Partial payments for public service work. Some governments abroad provide subsidies for energy audits or energy efficiency project identification or preparation tasks, mainly to encourage enterprises to have these tasks done, but also to help support the energy efficiency service industry. Some may argue that subsidies should not be provided to help enterprises meet their obligations under the Energy Efficiency Law. However, it may be worthwhile to consider offering partial public payment for service companies to work with enterprises to develop detailed energy efficiency investment project pipelines, as is undertaken in Ireland`s Large Industry Program (see Box 4.4). Full payment could be contingent on financial closure of one or more of the identified projects. Legitimizing the energy efficiency service business. Especially in China, it is helpful for provincial and local governments to publicly confirm the legitimacy and importance of the energy efficiency service industry. This also includes clear confirmation of the legitimacy of the energy performance contracting business model and the government`s support for its further development. In addition, public confirmation or certification of the qualifications of different service companies, perhaps at several levels, can help consumers gain confidence in the basic quality of service and service companies to improve their qualifications and expand their market. However, great care must be taken to make sure evaluations are fair and to allow new start-up companies to be able to build up their experience and not be closed out of the market. Training and information exchange. Provincial and local governments can organize a variety of events to introduce local service enterprises to advanced analytical techniques and business models, and successful experiences elsewhere. It is also worthwhile to consider long-term capacity needs by supporting basic training and course work in related topics in local universities and vocational schools. Energy efficiency service industry associations. Creation of formal provincial- level associations may be an effective way for the industry to share experience, represent its view and interests with key stakeholders, undertake marketing activities in the interest of the industry as a whole, organize training activities, and disseminate information and knowledge. The EMCA--a national association of energy efficiency service companies--has effectively played this role at the national level.28 28 See www.emca.cn. 57 Accelerating Energy Conservation in China`s Provinces Developing Energy Efficiency Lending in the Banking Sector 4.33. Even if projects and enterprises are financially strong, obtaining loans for energy efficiency project from local banks is typically not easy, unless simple balance sheet­ backed working capital financing modalities are used, which may be difficult if medium- tenure loans are required. Financing projects where the benefit streams are in projected operating cost savings are not conventional for most banks, which are more accustomed to projects creating new production assets. Most banks are unfamiliar with energy efficiency technology and the energy efficiency business. They also may be concerned about the high transaction costs of getting seriously involved in the energy efficiency project finance business, especially if projects are relatively small. 4.34. If banks do wish to become seriously involved in energy efficiency financing, special attention to a number of issues is required in order to create an effective business line. Appraising projects focused on cost savings rather than generation of increased production or sales revenue requires attention to the cost savings cash flow projections and how they might relate to loan payment. What factors, such as changes in energy prices, changes in use of the relevant production capacity, or unforeseen maintenance requirements may heavily influence the energy bill savings of the project? How can these types of risks be mitigated? Existing appraisal methods and procedures may require some modification. In addition, banks will need to contract and make alliances with energy efficiency service experts to help them undertake their business efficiently. This is usually best done by establishing long-term relationships. 4.35. One energy efficiency lending business model that may be particularly attractive to some Chinese banks is the offering of energy efficiency loan products to key customers as an additional product to add into the existing lending relationship. Enterprises are under pressure to undertake these investments and may strongly welcome the additional product and service. Cost savings also contribute directly to the corporate bottom line, and hence can serve the bank`s overall relationship interest in helping enterprises maintain financial strength. Periodic joint review and selection of potential energy efficiency projects to include in financing portfolios with key customers (for example, once per year) also works well in the energy efficiency business. For large enterprises, energy efficiency progress is dynamic, with good investment opportunities arising steadily over time. For banks, a gradual approach to developing loan exposure, allowing approvals over time based on experiences gained and repayment results, may also be helpful. 4.36. A few banks may also be interested in aggressive engagement in the energy efficiency business as a way of generating new business with new customers. 4.37. However, experience in many countries across the world shows that banks and the energy efficiency community do not naturally interact, and efforts to help them mutually understand and benefit from each other are needed to help move energy efficiency investments forward. To provide some assistance, the World Bank and International Finance Corporation (IFC) have approved a series of national-level projects with major Chinese banks to help them develop specific energy efficiency loan programs. The World Bank has ongoing projects with Huaxia Bank and China Export and Import Bank and is 58 CHAPTER 4: Issues and Challenges for the Next Five Years discussing a new project with Minsheng Bank. The IFC`s ongoing project work involves Xinye Bank, Shanghai Pudong Development Bank, and the Bank of Beijing in particular. 4.38. How provincial governments can facilitate increased energy efficiency bank lending. Having put great pressure on enterprises to undertake energy efficiency investments, provincial governments should help to work with the commercial financing community to improve the prospects for enterprises to obtain the necessary financing. Some measures provincial governments could undertake include the following: Convening regular forums on energy efficiency project financing. Experience elsewhere has shown that significant progress can be made by creating mechanisms for regular but specific conversation between local banks, relevant government entities, key actors in the energy efficiency service community, and selected enterprises. Important topics for exchange of information include the latest developments in the province on energy conservation, new and emerging opportunities for energy efficiency financing, successful case studies of innovative bank-enterprise cooperation on energy efficiency, and discussion of barriers to increasing energy efficiency lending and how to overcome them. It is important, however, for the banks to play a leading role, and to be represented at senior levels. Technical assistance support to local banks on developing energy efficiency lending businesses. Provincial governments, perhaps with some international donor assistance, can arrange carefully targeted technical assistance to interested banks to help them develop approaches to overcome the various peculiarities of the energy efficiency lending business, and to learn from the experience of other banks. Such assistance, however, should require concrete commitments from the banks and include specific targets for achieving results. Cost-sharing for investment project preparation and/or appraisal. Provincial governments can undertake modest programs to provide cost-sharing assistance to banks for their detailed investigation and/or appraisal of certain types of new loans for energy efficiency. Especially useful would be support for areas where initial transaction costs may be very high because of needs for innovation--for example, for banks just beginning to seriously investigate energy efficiency lending, or for entry into new aspects of the energy efficiency market. One implementation option might be for governments to partially underwrite the costs of energy efficiency service enterprises engaged for such work (which also helps provide support to service industry development). Further explore linkages with government investment award programs. It may be useful for government finance bureaus, local banks, and key enterprises to further explore ways in which implementation of ongoing government investment award programs (see Chapter 3, paras. 3.90­93) might be structured to play an even greater role in catalyzing commercial loan financing for large projects. For example, can financing structures be worked out whereby the lending banks have specified claims to award payments under certain conditions, and in return can partially reduce other loan security requirements, improving prospects of loan closure and project implementation? 59 Accelerating Energy Conservation in China`s Provinces Energy Pricing and Fiscal Incentives for Energy Efficiency 4.39. The level and structure of energy prices have a big impact on energy efficiency investment incentives and behavior. Many issues need to be considered in defining energy pricing policies. From an energy efficiency perspective, however, the basics are not complicated: higher energy prices help spur energy efficiency investment and behavior, while lower energy prices dampen interest in energy efficiency. Copious experience under many conditions and in many countries shows how powerful the pricing tool can be. In addition, maintenance of relatively high prices for key energy commodities, including through possible taxation, is with little doubt the most effective way to generate increased indirect or life-cycle energy efficiency gains.29 4.40. In China, energy pricing policy is primarily under the purview of the central government, especially concerning price levels and structure of electricity and petroleum, but also some aspects of the coal market. Even if they have the legal authority in principal, provincial and local governments often refrain from adding surcharges or taxes to energy without specific policy direction from higher levels, and they may be concerned about competitive disadvantages that might arise from increasing input prices if other localities do not. Detailed discussion of international experience and energy pricing policy debate in China is therefore best left for other reports and studies. 30 However, the mechanisms through which some countries are now implementing new energy taxes do at times intertwine with key aspects of energy efficiency program implementation in ways that might be instructive to provincial governments. This is discussed briefly below. 4.41. Many countries are now introducing and/or increasing different types of energy or carbon emission taxes as tools to spur energy efficiency and clean energy investment. These include surcharges on electricity bills, taxes on petroleum products and other fuel sales, taxes on carbon emissions, and requirements for purchase of carbon emission allowances. In addition to increasing incentives for energy efficiency gains, such programs also often seek to minimize potentially negative economic impacts on energy users by returning revenue to affected consumers in various ways. In some cases, such as the Climate Change Levy of the United Kingdom, a substantial portion of the tax revenues are returned to payers as offsets for their contribution requirements for National Insurance funding (see Box 4.1). The tax still provides incentives for reducing carbon emissions despite the return of funds because, while the tax is based on individual enterprise energy consumption patterns, the return is not. In many cases, a substantial part of tax revenue is used to fund energy efficiency or clean energy development programs, which both provides a sustainable funding source for those programs and gives back to the payers of the tax through special and concessional assistance to save energy and hence reduce the impacts of energy bill increases resulting from the tax. In many U.S. states, revenue from various levies on energy use is earmarked for special programs to help low-income groups save energy and mitigate any additional tax burden on them. 29 Indirect or life-cycle energy savings includes savings of embodied energy in other commodities, through increased efficiency of use of those commodities, in addition to direct energy savings. For a recent discussion of the importance and large potential of life-cycle` energy savings in China, see Weidou and others (2009; in Chinese only). 30 One recent report with greater attention to energy efficiency and energy pricing policies in China, which may be of interest to readers, is World Bank 2008. 60 CHAPTER 4: Issues and Challenges for the Next Five Years Another program implementation option is to provide energy and carbon emissions tax rebates to payers who enter into energy savings agreements with the government and meet their energy savings targets. This is done in Denmark, the Netherlands, and the United Kingdom, and is being considered by other countries as well, as a key measure to provide incentives for enterprises to enter into such agreements and meet the agreed targets. Box 4.1: The Climate Change Levy and Climate Change Agreements of the United Kingdom Initiation. Climate Change Levy is a key element of the United Kingdom`s Climate Change Program. The levy is an energy tax applied to industry, commerce, agriculture, and the public sector. The U.K. Climate Change Program was established in 2000 to meet both the country`s Kyoto Protocol commitment of a 12.5 percent reduction in GHG emissions by 2008­12 relative to 1990 and the country`s domestic goal of a 20 percent CO2 emissions reduction relative to 1990 by 2010. How does it work? The levy applies to most energy users, with the notable exceptions of household energy consumers and the transport sector. Electricity generated from new renewables and approved cogeneration schemes is not taxed. From when it was introduced, the levy was frozen at 0.43p/kWh on electricity, 0.15p/kWh on coal, and 0.15p/kWh on gas. Subsequently, the government announced that the levy would rise annually in line with inflation, starting from April 1, 2007. The revenues from the levy are returned to the taxed sectors through a reduction in the rate of employer`s National Insurance Contributions and used to fund programs that provide financial incentives for adoption of energy efficiency and renewable energy. Linkage with Enterprise Climate Change Agreements. Levies are reduced for energy- intensive users if they sign a climate change agreement (CCA) sponsored by the government. Through participation in the CCAs, energy-intensive industrial sectors established energy efficiency improvement targets, and companies that meet their agreed-upon target are given an 80 percent discount from the Climate Change Levy. There are 44 sector agreements representing about 5,000 companies and 10,000 facilities. The goal of the CCAs is to reduce carbon dioxide emissions by 2.5 MtC (9.2 Mt CO2) by 2010, which is 10 times the estimated savings from the Climate Change Levy without the agreements. Companies that exceed their targets will have excess carbon allowances that they are allowed to trade with companies that do not meet their targets through the U.K. Emissions Trading Scheme. Source: Price, Galitsky, Kramer, and McKane 2008. 4.42. In cases where provincial governments have the authority to levy certain types of energy taxes, they may also wish to consider similar means to return the tax revenue to the taxpayer groups, but in ways that add even greater incentives or support for energy efficiency work. This can both make the taxation more palatable, and further reinforce energy efficiency promotional efforts. 61 Accelerating Energy Conservation in China`s Provinces 4.43. In broad terms, provision of various fiscal incentives for energy efficiency investments, such as allowances for accelerated depreciation or other tax advantages, tax rebates on purchases of high-efficiency equipment, and special treatment concerning customs duties, are an indirect means to alter pricing of investment costs and benefits by reducing the investment cost side. This can also be a powerful tool to promote energy efficiency. It would be especially worthwhile for provinces to objectively consider and weigh their various options over the medium term, evaluating the costs and benefits of different specific measures based on experience gained in China and elsewhere. Commodification of Energy Savings 4.44. Commodification of energy savings is an increasing trend internationally that greatly facilitates use of the market to generate energy savings. Commodification through clear definition of energy savings allows energy savings to be more easily purchased or sold. Energy performance contracting, as practiced by various ESCOs in China, already involves a degree of energy savings commodification: an energy performance contract defines a basic energy savings commodity, which the ESCO generates and sells to its client. Clear, mutually agreed definition of the energy savings commodity helps the ESCO to market its business or obtain financing. Internationally, various governments and public agencies are also putting increased emphasis on the concept of energy savings as a defined commodity in their efforts to ensure the purchase of maximum energy savings with public funds (see paras. 4.82­4.92). Finally, where enterprises are obligated by the government to save energy (or reduce carbon dioxide emissions), the purchase of certified energy savings commodities generated elsewhere is often allowed internationally as one way to meet such obligations. Definition, certification, and sale of energy savings commodities is a growing business internationally, both inside and outside the formal international carbon market, which has great potential for domestic development in China as well (see paras. 4.76­4.79). 4.45. For something to be a commodity, it must be clearly discernible--all parties must be clear as to just what is being bought and sold. This is the biggest challenge for the commodification of energy savings because energy savings cannot be directly measured: savings represent the absence of energy use. Actual energy savings can only be indirectly measured by calculating the difference between energy use achieved with an energy conservation measure compared to what energy use would have been without the energy conservation measure. Two scenarios--one with the energy conservation measure and one without--need to be calculated and then compared. The factors considered in preparing these scenarios, and what is measured and what is estimated, need to be understood and agreed by the participating parties. Calculations can be very rigorous or rough estimations, depending upon how important accuracy is for the given transaction. 4.46. It should be pointed out that improving the energy efficiency of equipment or processes is not the same thing as generating energy savings. Achievement of energy savings also depends on other factors--for example, how much the equipment is used. In industry, patterns of operation of the relevant production line are especially important. For example, if an enterprise replaces a very inefficient boiler with a more efficient new model, but employs the boiler only on a production line that is used only occasionally for certain high-value, special-order products, little actual energy savings may result. In 62 CHAPTER 4: Issues and Challenges for the Next Five Years buildings, weather and occupancy variations are especially important. For this reason, standard M&V protocols, used to provide consistency in calculation of energy savings, include procedures for defining and monitoring the key non­energy-efficiency factors that have a major impact on the achievement of actual energy savings.31 4.47. The degree of rigor necessary in measurement and verification of energy savings to define an acceptable energy savings commodity depends on the requirements of the buyer or market regulator. For commercial transactions, it is only necessary to satisfy the needs of the parties concerned. In some energy performance contracts, it may only be necessary to demonstrate achievement of targeted equipment energy efficiency if the host enterprise is willing to assume risks that other factors may alter actual energy savings from initial rough estimates. In other cases, investors in specific energy conservation projects may require greater attention to all factors that affect the actual energy cost savings cash flow. Public entities interested in evaluating how much energy savings resulted from public fund expenditures may need to balance interest in calculating actual energy savings with practical constraints on the costs and logistics of surveys and detailed analysis (see paras. 4.84­4.86). In certified energy savings or carbon markets, market regulators may require a relatively high level of rigor in measuring and verifying energy savings to ensure that the public interest is indeed properly served. D. Further Improving Energy Efficiency in Key Energy-Consuming Enterprises 4.48. China`s 2007 Energy Conservation Law defines key energy-consuming enterprises as any entities consuming more than 10,000 tce per year, plus any entities with annual consumption of between 5,000 tce and 10,000 that are designated as key energy-consuming entities by the responsible central or provincial government departments. The basic energy conservation requirements of these energy-consuming enterprises are to be determined by the relevant central government departments, but requirements specifically set out in the law include requirements for each enterprise to (a) complete annual reports on their energy utilization situation, including analysis of energy consumption, utilization patterns, completion of energy conservation targets, and implementation of energy efficiency measures; (b) accept the supervision of these reports by relevant government departments, including on-site investigation and ordering of rectification measures where necessary; and (c) set up and fill energy management posts with staff of sufficient experience and technical title, and notify the government of these assignments, since these staff will be responsible for overseeing the energy conservation work of the enterprise. These requirements in the law, blended with the 11th FYP implementation measures described in Chapter 3 (paras. 3.14­3.37), have become key underpinnings for the new government-enterprise relationships and energy savings responsibility agreements that have been launched during the last four years. These relationships and agreements are expected to become an even more important part of China`s energy conservation program in the future. 4.49. More than 15,000 enterprises with annual energy consumption of more than 10,000 tce currently operate in China, while roughly another 12,000 consume 5,000­ 31 For more information, see EVO (2007). 63 Accelerating Energy Conservation in China`s Provinces 10,000 tce per year. While most are industrial enterprises, all sectors are included. These key energy-consuming enterprises account for the lion`s share of China`s total energy consumption. How can the platform already put in place to guide and encourage greater energy efficiency in these enterprises be further strengthened and improved during the 12th FYP so that steady, continuing energy savings can be achieved year after year? 4.50. China`s evolving system for promoting energy efficiency in enterprises will certainly continue to be a unique blend of ideas, practices, and institutional traditions. While they must cater to China`s current market economy, current government-enterprise relationships evolved from over 40 years of operation of a planned economy. Despite China`s differences, however, a variety of experiences from industrial countries with longstanding market economies are instructive. The sections below explore some specific areas where experience elsewhere appears highly relevant. In assessing the current situation and some international experiences, the study team also identified two broad directions for improvement that it feels are especially important for the Chinese enterprise energy efficiency promotion program over the next five years, and that are interwoven in the more specific discussion: Greater emphasis needs to be placed on helping enterprises plan, manage, and implement energy efficiency measures themselves, for their own competitive benefit, with government supervision playing a more indirect role in monitoring the overall process and especially the results. If enterprises are completing energy efficiency plans and reports year after year only to satisfy a regulatory requirement, this will be a sign of deficiency in policy approach and implementation. Further development of government-monitored enterprise energy efficiency targeting and related activities needs to be more closely allied with, and take advantage of, market forces. Supporting Competence in Enterprise Energy Managers 4.51. Provisions in China`s Energy Conservation Law on enterprise reporting and assignment of energy managers are similar to provisions in Japan`s Energy Conservation Law first adopted in 1979 and amended over the years. These systems have worked well in Japan. In discussions with the study team, Japanese experts attributed much of their success to strong emphasis on (a) raising staff qualifications (on the production lines, in management, and in government); (b) standardized methods; and (c) commitment to continuous training down to the production line. 4.52. Licensed Energy Managers represent the key pin in Japan for the energy efficiency business of major energy-consuming enterprises and their related dialogue with government (see Box 4.2). Given the importance of these positions, strong emphasis is placed on ensuring that staff have sufficient seniority and suitable qualifications, as well as sufficient, detailed technical and procedural guidance resources. Energy managers must pass a national examination, or otherwise demonstrate mastery of the examination content, in order to be licensed and appointed. A recent passing rate of 23 percent on the standardized examination indicates that it is relatively rigorous. In addition, there are clear requirements for the number and qualifications of supporting energy management officers, who also play important roles in large enterprises. 64 CHAPTER 4: Issues and Challenges for the Next Five Years Box 4.2: Japan's Enterprise Energy Manager System Japan`s Energy Conservation Law requires that all key energy-consuming enterprises appoint a suitably qualified energy management control officer (energy manager). This requirement and the systems to support it have been under implementation for about 30 years. The energy manager position needs to be filled by a person from the management level of the enterprise, and the energy manager must have a valid license issued by the government`s designated examining body. The requirement applies to all of the roughly 7,800 Type 1 enterprises in Japan, which include the vast majority of the country`s enterprises consuming 3,000 kloe of energy per year (about 4,300 tce p.a.). An additional over 6,800 Type 2 enterprises, consuming over 1,500 kloe (about 2,150 tce) per year are also required to appoint energy management officers, but with somewhat less stringent responsibilities. The law stipulates that the energy manager should supervise and manage the maintenance of the enterprise`s energy-consuming facilities, the improvement and supervision of methods of using energy, and other energy conservation affairs required by the government. The appointment needs to be registered with the government, since the energy manager is the key contact person on all energy conservation matters. The energy manager is responsible for oversight and submission of required energy utilization reports, as well as medium- and long-term energy conservation plans, including assessments of progress on achieving targets. The energy manager is assisted by an energy management planning promoter appointed from among the enterprise staff, as is also now required by the law. Large enterprises are also required to appoint specific numbers of additional energy management officers to assist the energy manager. Energy managers and their assistants in industrial enterprises use the government`s energy use Standards of Judgment as a key guide for their work, as well as the Energy Conservation Handbook of Japan and a wide variety of specific technical guides and resources. These include Japan`s specific energy utilization standards for key equipment and details concerning the types of management manuals that energy managers need to establish and use in their enterprises for efficient operation of many specific types of equipment or processes. All energy managers must obtain a license certifying that they are suitably qualified to be appointed. Japan`s Energy Conservation Law includes specific requirements for the establishment of the designated examination body, which conducts the qualification examinations for energy managers, as well as other investigative assignments for the government. The law also includes requirements for a designated training agency. Since 1983, the Energy Conservation Center, Japan (ECCJ) has been designated to serve these functions. The ECCJ holds a national qualifying examination for energy managers once a year 65 Accelerating Energy Conservation in China`s Provinces that covers four major subjects. About 9,000 people take the examination each year, but only about 2,300 pass (23 percent), which indicates that the examination is quite rigorous. In addition, the ECCJ holds a six-day national energy managers` training course every year. Participants have numbered about 2,700 each year, with about 1,700 persons (65 percent) passing the examination given at the end. The ECCJ also convenes two courses each year for energy management officers, with some 5,000 participants per year. Sources: Japan`s Act on the Rational Use of Energy (Act No. 49, amended in May 2008 from the original Act of 1979); Energy Conservation Center, Japan (ECCJ). 4.53. China should seriously consider development and implementation of one standardized national examination and licensing system for the enterprise energy managers required under China`s Energy Conservation Law. As in Japan, energy managers would be required to hold such a national license in order for their appointment to meet the provision in the law. An associated national examination might best include required basic technical topics and energy use auditing, but also content on (a) establishment of energy performance indicators, baselines, and benchmarks; (b) recording, monitoring, and reviewing of the identified significant energy uses in standardized formats on a regular basis; (c) prioritization of opportunities for improving energy performance; (d) and economic and financial evaluation of energy saving measures. Training could be conducted by a variety of qualified institutions in different regions and provinces. Continuing training course offerings and requirements should also be considered, with possible minimum requirements for license renewals. 4.54. While establishment of a standardized national examination and licensing system would need to be undertaken by central government authorities, it would be especially helpful to provincial government programs. It would help ensure a core competency level among the cadre of key enterprise staff interacting with the government on the host of enterprise energy efficiency programs. Continual training provisions could also be a key vehicle for introducing new initiatives and implementing improvements. The Importance of Standardized Enterprise Energy Management Systems 4.55. Current trends point toward the rising importance of rigorous development of systematic enterprise EMSs 32 within China`s key energy-consuming enterprises. As described in Box 4.3, standardized EMSs are a set of detailed procedures and practices that enterprises can use themselves to set specific energy efficiency targets and goals cutting across the whole enterprise, make detailed operational adjustment and investment plans to achieve them, assess and quantitatively report on results achieved, and make further adjustments for continuing future work. By their nature, EMSs should be dynamic processes that evolve over time and that are highly customized to the individual 32 The term energy management system is used to here to refer to both the hardware and operational procedure aspects of a system to holistically manage enterprise energy use, as is consistent with the concept outlined in China`s national Energy Management System standard. 66 CHAPTER 4: Issues and Challenges for the Next Five Years circumstances of enterprises. The focus of a proper EMS is on steady progress over the short, medium, and long term. Box 4.3: Introduction to Enterprise Energy Management Systems Enterprise energy management systems (EMSs) are a type of management tool with a systematic set of procedures and practices that enterprises can adopt and use themselves to improve their internal management of energy use. The main objectives for using EMSs are to control and reduce enterprise energy costs better, improve energy efficiency, and achieve associated operational efficiency and performance gains. EMSs seek to improve the energy performance of an organization through both identification and implementation of specific projects and through a wide variety of behavioral changes. EMSs can be used by all types of organizations in all sectors, but are especially effective in industrial enterprises. Some of the key requirements for achieving good results from the use of EMSs include (a) leadership and involvement of enterprise senior management; (b) cross-divisional participation in the management team, and the awareness and involvement of all enterprise staff; (c) documentation and careful quantification of emerging results; and (d) institution of EMSs as a permanent management system, with continual operation to achieve continuous further progress. EMSs commonly use the plan-do-check-act, or PDCA approach. The figure below, from China`s newly issued EMS national standard, shows the circular and continuous nature of this approach. After overall enterprise energy policy objectives and priorities are established by senior management, the plan phase involves determination of what aspects of operations matter for energy use, potential measures to improve energy efficiency, setting of goals and targets to achieve them, how to measure progress on these targets, and management requirements, as well as incorporation of these into overall plans. Typically plans include specific projects for energy efficiency improvements, as well as specific policies and procedures to address all aspects of energy purchase and use. The do phase involves implementation of the plan, including arranging the required resources, training, issuance of new procedures, implementation of new operational controls, and investment project implementation. Often an energy manual, best conceived as a living document that evolves over time, is prepared to guide implementation. The check step involves testing, data analysis, evaluation against goals and key indicators, and identification of gaps. The act step involves senior management review of results, good points and shortcomings, and areas for correction or increased emphasis as the process once again moves into further planning to achieve further progress. 67 Accelerating Energy Conservation in China`s Provinces MANAGEMENT ENERGY POLICY PLAN Continuous ACT DO CHECK EMS Operation System Model A core concept of the PDCA-based EMS is its continuous nature. Implementation of EMSs is not an event, but a sustained effort to seek improvement. This is particularly appropriate for medium- and large-scale industry, where identifying and capturing energy efficiency opportunities is a never-ending part of the sustained evolution of enterprise operations and growth. Source: Adapted from National Standard GB/T 23331-2009, Management System for Energy-- Requirements (issued by the General Administration of Quality Supervision, Inspection and Quarantine of the People`s Republic of China, March 11, 2009). 4.56. Developing and implementing EMS standards. In recent years, various countries have issued national energy management standards as a way to ensure clarity about what EMS means in practice and as a specified degree of rigor in its application. These standards typically call for use of the PDCA approach. They typically list requirements for management participation, cross-enterprise approach, preparation of plans and performance targets, documentation, testing, quantification of results, and progress towards improvement. Application of EMSs by enterprises is often left voluntary, but enterprises may stand to gain access to certain government support or tax breaks or to distinguish themselves as responsible corporate citizens by adopting the standard EMS. Outside certification of enterprise compliance with standards, including attainment of energy efficiency results from EMS application, is required in some countries, such as Ireland. 68 CHAPTER 4: Issues and Challenges for the Next Five Years 4.57. In July 2009, the European Committee for Standardization (CEN) issued EN 16001: Energy Management Standards--Requirements with Guidance for Use, providing a common standard for voluntary use across 30 European countries. Subsequently launched in September 2009, this EMS standard is based on the previous experience of many European countries with national EMS standards. In Japan`s case, nomenclature is different, but most of the substance of EMS implementation is already encompassed in systems of energy conservation management in enterprises promoted nationally, and a long tradition of using PDCA-type philosophy in industrial management. In March of 2009, China`s General Administration of Quality Supervision, Inspection and Quarantine issued China`s new national standard for EMS requirements, for voluntary implementation beginning November 1, 2009. In addition, there is active work to prepare a global voluntary EMS standard--the ISO 50001--which will build upon the existing ISO 9001 and 14001 management standards in the energy management arena. Work on ISO 50001 is on a fast track, with 39 countries participating in ISO Project Committee 242 to release a draft international standard by April 2010. China is an active participant in the preparation of ISO 50001. 4.58. China`s new national EMS standard also follows the PDCA approach and incorporates many aspects from the EMS standards previously used by other countries. Particularly strong emphasis is placed on requirements for the involvement of senior management in enterprises. In requirements for planning and implementation aspects, there also is strong emphasis on the need to discern the applicability of all relevant regulations and standards (for example, including existing minimum energy efficiency standards) and to incorporate compliance measures properly into plans. The standard is intended for all key energy-consuming enterprises, and not just industries. 4.59. Shandong Province is at the forefront of developing EMSs at the provincial level. The province prepared its own EMS standard and implementation guidance during 2007­ 08 before the national standard was issued. Eight pilot industrial enterprises undertook efforts to adopt EMSs according to the provincial standard and guidance, beginning in 2008. An evaluation of pilot project progress during May­June 2009 showed success in implementing many basic energy management procedures and achievement of a great deal of practical experience. Areas for further strengthening were also highlighted. The province is now moving to both further improve implementation guidance and to expand the adoption of EMSs by a greater number of industrial enterprises during the 12th FYP. 4.60. Linkages between EMS implementation and energy efficiency project development. To be truly effective, adoption of EMSs must include very rigorous identification and analysis of all specific factors influencing all types of energy use; identification of behavioral, operational and technology adjustments that can favorably influence these factors; prioritization of these adjustments for phased implementation; and action to implement concrete projects to modify operational practices and especially to undertake technology upgrading investments. These efforts must also be continued year after year. Enterprises that adopt EMSs effectively need to prepare lists of specific energy efficiency investment projects for implementation as part of the planning exercise. These lists are then renewed periodically as the EMS continues to operate. Some projects, especially small ones, may be undertaken by enterprises fully by themselves. Others, however, may require assistance from ESCOs and/or local banks. For all three market 69 Accelerating Energy Conservation in China`s Provinces participants--enterprises, energy efficiency service companies, and local financiers--the project identification elements of EMSs could be an excellent and dynamic tool to help launch the development of medium- and large-scale projects and bring them through financial closure. 4.61. Box 4.4 introduces how Ireland has launched programs to use EMSs and undertake government-enterprise energy savings agreements. One aspect of Ireland`s current Energy Agreements Program that may be especially interesting for Chinese provincial governments is the commitment of participating enterprises to host at least three Special Investigations. These investigations are paid for by the government`s energy agency and undertaken by energy efficiency service enterprises, together with the enterprises. They are intertwined with the EMS process. They focus on identification of key projects to introduce new, state-of-the-art, energy efficiency technology or change core energy-intensive processes. This type of program may be quite interesting to enterprises and may yield substantial energy efficiency gains through implementation of key new projects with very modest government financial support. Box 4.4: EMSs and Energy Agreements Progamme in Ireland Facilitated by Ireland`s national energy agency, Sustainable Energy Ireland (SEI), Irish industry has operated a Large Industry Energy Network (LIEN) since the early 1990s. The aim of the network has been to reduce the energy costs of members, as well as to gain related environmental and reputational benefits. Participation is voluntary. To be eligible to participate, companies must be participants in the country`s new Energy Agreements Programme or have annual energy expenditures in excess of 1 million. By the end of 2008, LIEN had about 120 members. Ireland issued one of the first EMS standards in the world--IS 393--in 2005. This standard has been one of the models for Europe`s new EN 16001 EMS standard. The IS 393 EMS standard includes the typical requirements for energy efficiency management, planning, targeting, and reporting also described in Box 4.3. As of September 2009, close to 100 enterprises had adopted the voluntary standardized EMS. These companies account for about four-fifths of industrial energy use in Ireland. The companies have reported an average reduction in energy costs of about 7 percent in the first year of adoption because of the use of the EMS. Correct adaptation of the EMS in each enterprise is certified by an independent entity. In May 2006, SEI launched a new Energy Agreements Programme. Industrial enterprises entering into these Agreements must commit to (a) obtaining certification of proper adaptation of the IS 393 EMS within three years, (b) complete three special investigations. In return, SEI guarantees support through (a) assignment of an enterprise-specific agreements support manager to provide both general and technical advice and support; (b) assistance in overcoming any gaps for certification of EMS standard compliance; (c) support for identifying topics for special investigations; (d) financial support for special investigations; (e) workshops, training networking, and 70 CHAPTER 4: Issues and Challenges for the Next Five Years other special initiatives events; and (f) publicizing the participation of members in the program as leaders in managing energy and reducing emissions. The required Special Investigations are an important feature of the Energy Agreements Programme. These investigations are enterprise-specific and focus on assessment of the viability of new energy efficiency technologies in the enterprise or changes to core processes in energy-intensive areas. SEI provides financial support for the investigations, which are undertaken with assistance from energy efficiency service entities. Host enterprises are not obligated to implement the projects identified, but they are obligated to host the activities and devote management attention to the recommendations. More than 60 major industrial companies signed onto the Energy Agreements Programme in the first 18 months. Source: SEI. 4.62. Recommendations on effective rollout of EMSs in China. If implemented properly, enterprise adoption of standardized EMSs could provide a very good platform for developing increasingly productive government-enterprise relationships on energy conservation in the future. Proper adoption of standardized enterprise EMSs can (a) help enterprises customize their energy conservation actions to provide the greatest overall benefits to themselves; (b) provide an excellent framework for incorporating compliance with key requirements of the Energy Conservation Law into enterprise practice, which can make the job of provincial and local governments to supervise implementation of provisions under the law more efficient and more effective; and (c) provide a steady and systematic mechanism for identification of priority energy efficiency investment projects. Proper application of EMSs, as well as reporting on key aspects of its use and results to the relevant government agencies, should be able to cover basic requirements under the law to report on energy consumption, assign energy management teams within the enterprise, prepare and implement energy efficiency improvement plans, and adhere to the equipment and process standards issued by the state. 4.63. However, standardized EMSs cannot be adopted in a lackluster manner and still be effective. Very rigorous and detailed analysis is required, which then needs to be directly related to follow up action supported by top management. The system needs to be fully internalized in the organization with continued use and improvement. At the current launching phase in China, it is essential for central and provincial governments to provide strong leadership and to set the right tone on high-quality implementation. Otherwise, it is likely that most enterprises will see the standardized EMS as just another in vogue voluntary management standard, with some interesting concepts. They may aim primarily to adopt some new procedures, check a box in reports classifying EMS adoption as completed, and move on to something else. It is important for government to stress quality in adoption of the new EMS, and not to overemphasize the quantity of enterprises supposedly adopting the new systems. As the implementation example of Shandong`s pilots shows, it also is important to emphasize continued improvement in the 71 Accelerating Energy Conservation in China`s Provinces adoption and use in each enterprise. Proper adoption of EMSs to gain its real advantages in energy cost savings is not simple, and cannot be realistically achieved in a few months. Steady effort is needed over a longer period to refine and improve the system. 4.64. The Bank study team recommends that China consider adoption of formal government supervision and review mechanisms to ensure that enterprises that claim adoption of EMSs meet standardized adoption criteria. Without satisfactory evidence of government review and endorsement, enterprises would not be able to report satisfactory adoption of EMSs according to the national standard. The study team further suggests that government supervision and review be undertaken in at least two phases. The first phase would concern initial adoption, including establishment of the basic system in the enterprise. Assessors would also provide recommendations for further strengthening. The second phase, probably one to two years later, would require demonstration of satisfactory operation of the EMS over an extended period, and especially evidence of concrete achievement of initially planned energy savings measures and investments against originally established performance indicators. 4.65. While current practice in China is for compliance with management standards to be voluntary, the government can increase the attractiveness of proper EMS adoption to enterprises, over and above the natural operating cost reduction benefits that enterprises can achieve. For example, there could be a clear understanding reached that the government will in most cases accept enterprise energy savings targets resulting from EMS adoption as the basis for targeting in energy savings responsibility agreements, as opposed to coarser, less customized targeting. Provincial or local government supervision of those agreements and other aspects pertaining to the Energy Conservation Law could also be far more indirect--focusing on the proper use of EMSs--for enterprises with proper EMS adoption. Priority consideration could be given to enterprises operating standardized EMSs for receipt of public awards and subsidies for energy efficiency investment. For enterprises where a national, and especially international, reputation is especially important, the extent and meaning of standardized EMS adoption could also be highlighted. Improving Enterprise Energy Savings Targeting in Responsibility Contracts 4.66. Assignment and supervision of achievement of mandatory quantified energy savings targets in energy savings responsibility contracts between key energy-using enterprises and provincial or local governments (see Chapter 3, paras. 3.24­3.27) are expected to be a key part of China`s energy efficiency effort during the 12 th FYP and most likely thereafter. Government agencies and enterprises are seeking ways to improve the targeting system--especially to allow greater customization to the actual savings potential and circumstances of specific enterprises. 4.67. Increasing customization of targets based on assessment of savings potential in specific enterprises requires ability to compare energy use patterns between enterprises in the same line of business. Such comparative data analysis can help show the magnitude of energy savings that may be achieved by improving management to levels attained at best-practice enterprises and by adopting various specific technical improvements, both small and large. This type of analysis is needed both by enterprises to make reasonable energy conservation plans for themselves, using EMS-type approaches, as well as by 72 CHAPTER 4: Issues and Challenges for the Next Five Years government entities trying to negotiate more customized enterprise energy savings targets. 4.68. Needs for standardization in energy use data measurement, collection, and reporting. For data on enterprise energy use to be useful for aggregation and especially for cross-enterprise comparison, energy and output accounting must be standardized. Standard protocols need to be used that define accounting boundaries, measurement and data collection methods, and reporting frameworks. 4.69. Establishment of consistent accounting boundaries is critical if total and unit energy consumption data are to be compared across enterprises. There are a variety of choices, each with its own advantages and disadvantages. For example, is only direct consumption to be included or should indirect consumption also be considered when calculating unit energy consumption per ton of product? In Europe, the common practice is to include only direct consumption; in Japan, the practice is to add certain indirect consumption (for example, energy use for unfinished products used in production or in thermal generation of electric power used) and to subtract credits when also due. In any event, care must be taken to avoid double-counting. When calculating energy use per ton of product, the definition of the product can be important. In the cement industry, for example, it may be easiest to calculate energy use per ton of clinker, but that may then hide progress on other aspects of increasing energy efficiency, such as increasing the use of slag and other waste products in the blending of cement for shipment. These issues need to be debated, and then decisions made on adoption of a uniform approach, so that data can be properly compared. 4.70. Second, as already described in para. 4.24 above, measurement and data collection protocols, data reporting and validation systems, and data security measures also need to be systematically developed and implemented to ensure basic data quality. Without standard and reliable measurement, collection, and reporting systems, it will be difficult to tell if differences in unit energy consumption data across enterprises are the result of different assumptions and data quality, or the result of real differences in energy use. 4.71. Use of benchmarking tools. Use of unit energy consumption benchmarking can certainly help government agencies to customize energy savings better by targeting the actual circumstances of specific enterprises producing similar energy-intensive commodities. Provincial governments can assess how different enterprises stack up against the most advanced levels in the province, in the country as a whole and internationally as part of the process of defining future enterprise savings targets. The basic practice of unit energy consumption benchmarking is well known in China. However, major tradeoffs exist between increasing the scope and specificity of benchmarking and the practicalities of meeting heavy data requirements. At times, it may be most practical to rely also on assessments of key technology penetration levels and customizing targets according to agreements on adoption of key, fairly standard technological improvements. 4.72. As emphasized in the benchmarking policy promoted in Shandong Province (Chapter 3, paras. 3.34, Box 3.1), benchmarking is also an important tool for enterprises to use themselves to assess their own performance. If objective, technical, and sound 73 Accelerating Energy Conservation in China`s Provinces benchmarking analyses can be made available to enterprises, it will be very use useful for them in undertaking PDCA-type activities. Organizing and supporting the completion of benchmarking analysis, without compromising confidential enterprise-specific data, is a key area where provincial governments can and should help enterprises. High-quality, technically sound analyses are also not easy to complete. Updates are required as technology shifts. 4.73. Box 4.5 introduces a relatively sophisticated benchmarking tool developed by the Lawrence Berkeley National Laboratory in the United States with Chinese counterparts for the cement industry. A key feature is that enterprises can view how their energy use patterns compare with advanced levels using the most advanced technology in each of a series of relevant processes. They can then compile a vision of how their plant might look if it adopted different combinations of improvements in the processes most relevant for them. 74 CHAPTER 4: Issues and Challenges for the Next Five Years Box 4.5: Benchmarking Energy Use by Process in China's Cement Industry Benchmarking is a useful methodology to find out energy-saving potentials and identify what can be done to achieve those potentials. A recent study conducted by Lawrence Berkeley National Laboratory and jointly supported by the World Bank and the Energy Foundation used this method to analyze the cement industry in China. This study compared 16 surveyed cement plants in Shandong Province to both domestic and international best practice in terms of energy efficiency using the Benchmarking and Energy Saving Tool for Cement (BEST-Cement) developed by Lawrence Berkeley National Laboratory in collaboration with the Energy Research Institute, the China Building Materials Academy, and the China Cement Association. The BEST-Cement is a process-based tool that is based on commercially available energy-efficiency technologies used anywhere in the world applicable to the cement industry. It models energy use in main process steps, as shown in the following figure. Preparing Additives (gypsum, fly ash, etc.) prepared additives Quarrying & Preparing Fuels Mining Materials Drying Additives (optional) raw materials fuels dried additives Raw Materials Raw Clinker Making clinker Finish Grinding Preparation meal cement Packaging and Transport This study finds that an average technical potential primary energy savings of 12 percent would be possible if the surveyed plants operated at domestic best-practice levels in terms of energy use per ton of cement produced. Average technical potential primary energy savings of 23 percent would be realized if the plants operated at international best practice levels. The study also identified a number of cost-effective, energy-efficiency technologies and measures that have not been fully adopted in the 16 surveyed cement plants in Shandong Province, including 13 cost-effective, electricity-saving technologies and measures related to improving the efficiency of motors and fans, fuel preparation, and finish grinding, and six cost-effective, fuel-saving technologies and measures, such as expanding the use of blended and limestone Portland cement and using alternative fuels in the cement kiln. Source: Price, Hasanbeigi, Lu, and Wang 2009. 75 Accelerating Energy Conservation in China`s Provinces 4.74. Use of sector approaches. China is also considering increased use of industrial subsector assessment and target approaches as a means to improve industrial enterprise energy savings targeting. This is consistent with international trends, too. In Europe, assessment of unit energy consumption variations, technology development and penetration, and energy savings potential in specific subsectors have provided much of the framework for setting up long-term energy savings agreements, establishing baselines for Europe`s Emissions Trading System (ETS), and defining the needed contributions of different sectors to overall energy savings and GHG emissions reduction targets. In Japan, industrial subsectorwide benchmarking is now beginning to be used as a regulatory tool, backed up by the 2008 amendments to Japan`s energy conservation law. In lieu of the 1 percent per year energy savings targets promoted in these industries in past years, the Japanese government is now setting specific mandatory unit energy consumption targets for the steel, thermal power, and cement industries, based on sectorwide assessments. 4.75. Increased use of industrial subsector assessments at both national and provincial levels certainly can also help achieve better customization of enterprise energy savings targets. Subsector energy efficiency assessments might well include basic analysis of the state of the subsector, analysis of variations in unit energy consumption levels, technology development trends over the short and medium term, up-to-date assessment of relatively backward technologies still employed by some enterprises that should be abandoned, scale issues and plans to further improve economies of scale, and aggregate subsector potential energy savings. Such assessments can then provide a useful framework for assessing technology upgrading goals and targets for individual enterprises, in line with overall subsector challenges and trends. Work on such assessments might best be undertaken in collaboration with China`s industrial associations.33 Is Trade in Energy Conservation Certificates an Option for China? 4.76. In addition to China, other countries also have entered into agreements with enterprises obligating the enterprises to achieve specified energy savings targets. These include agreements between government regulators and electric power utility companies in the United States and some European countries that require the utilities to deliver specific quantities of energy savings from their customers. Also included are agreements between European governments and industrial enterprises. In many of these examples outside of China, however, provisions for trade in certified energy savings are key aspects of these programs. The certified energy savings are generally called white certificates, but also may be called energy savings certificates, energy savings credits, or white tags. In these cases, enterprises have the choice of meeting their obligations themselves fully through their own efforts or purchasing white certificates on the market to make up any differences. In Europe, such a system was first launched by the United Kingdom, and then also adopted in France and Italy. In the United States, it has been tried by several state governments in their regulation of electric power utilities. Box 4.6 provides an introduction. 33 In should be noted, however, that China`s industry associations have a different history, and somewhat different institutional role, compared with industrial associations in Europe, North America. or Japan. 76 CHAPTER 4: Issues and Challenges for the Next Five Years 4.77. If they can be effectively implemented, white certificate trading schemes can offer great advantages in terms of increased fairness and increased economic efficiency. Enterprises that have great difficulties meeting their energy savings obligations have the option of purchasing the required energy savings. Enterprises that have great remaining potential for energy savings even after meeting their obligations have a cash incentive to deliver more savings. Economic efficiency gains are achieved by enabling delivery of energy savings according to comparative advantage. Box 4.6: Introduction to Energy Savings White Certificates The white certificate system works with an obligation scheme. Market actors are obliged to reach a certain amount of energy saving. Target compliance requires submission of a number of certificates commensurate with the energy savings target. Certificates can be created from projects that result in energy savings beyond business as usual. The market actor receives certificates for savings achieved, which can be used for their own target compliance or can be sold to (other) obliged parties. The key steps to establish the white certificate scheme include the following: Appoint an independent body for issuing of certificates. Clearly define certificates for size, technologies, eligibility, and validity. Formulate rules of the game for trading, parties, and compliance. Establish registration system and systems for monitoring and verification. Formulate compliance rules, and set penalties. Organize redemption of certificates. Measurement and verification (M&V) are the key for effective tradable certificates mechanism applied to the promotion of energy efficiency in end-use sectors. Since savings cannot be measured, they need to be calculated by comparing measurements of energy use and/or demand (that is, the baseline energy use) before and after implementation of the savings measure, as is illustrated in the figure below. Source: EuroWhiteCert Project 2006. 4.78. White certificate trading schemes require objective and fair certification systems, which may result in high transaction costs, at least initially. Probably a more difficult issue, however, is the fair but effective definition of baselines. The generally accepted principle is that the baseline energy efficiency level against which incremental energy savings efforts are credited should be business as usual (BAU). BAU does not mean do 77 Accelerating Energy Conservation in China`s Provinces nothing, but how should it be defined for a variety of different types of enterprises? For example, should simply changing incandescent lamps to compact fluorescent lamps (CFLs)s be considered above or below the baseline? How these complexities are dealt with may well define the end-result value of the entire program for meeting society`s energy efficiency goals. 4.79. In China`s case, if there is interest in trying to capture the fairness and economic efficiency advantages of a white certificate trading scheme married to current systems of enterprise energy savings responsibility contracts, it would seem prudent to try one or several small pilots. The focus of a pilot might best be a specific industrial subsector in a specific geographic area. This way, the technical issues and complexities of baseline definition should be substantially less, and pilots could focus on how certification and trading might be initiated. E. Market-Based Approaches for Use of Public Energy Efficiency Funds 4.80. Special publicly financed energy efficiency funds can play a key role to help encourage energy users to use energy more efficiently. Virtually all countries with success in promoting energy efficiency have developed special energy efficiency funds of various types. Most of China`s provinces have now established substantial special energy efficiency funds, in addition to the national special fund operated by the MOF (see Chapter 3, paras. 3.90­3.97). Primary uses of these funds during the first years of the 11th FYP have been for subsidies or awards to encourage energy investment, for capacity building, and for information dissemination, which are all common uses for such funds in other countries as well. 4.81. Looking forward, two key questions for provincial governments to consider include the following: (a) How can the greatest energy efficiency results be obtained from special publicly financed energy efficiency funds? (b) How can the financing of these funds be put on a more sustainable, multiyear footing? This section focuses especially on the first question, but also on the second. 4.82. In thinking about how to improve energy efficiency results from fund expenditures, perhaps the best question for policymakers and fund administrators to ask is, How can we buy the most energy efficiency with the limited public funds we have? In many other market economies, and especially where funds have been obtained from specific taxes on consumers, this is precisely the question that fund developers and operators are asked to address. It then results in two interrelated follow-up questions. First, what mechanisms can be employed to work with and take advantage of competitive market forces to help the government efficiently purchase the most energy efficiency? At times, it may be helpful to think of fund operation as a type of public procurement, focused on procurement of energy efficiency from whatever sources for the least public expenditure. Second, how can public money best leverage financing from other sources to obtain the greatest total results? Many energy efficiency investments can be quite 78 CHAPTER 4: Issues and Challenges for the Next Five Years profitable. Clever public energy efficiency procurement schemes can achieve large savings with limited final public expenditure. 4.83. In order to get the best deal purchasing something, however, it is essential to be clear what one is purchasing. To assess what mechanisms are most effective in delivering (leveraged) energy efficiency results, and to design improvements, it is critical to know how much energy savings have been delivered per RMB of special fund expenditure in different past and current programs, to estimate how much actual energy savings may be delivered per RMB from alternative program options for the future, and to monitor how those estimates play out in practice, so that the adjustments that surely will be necessary for best results can be made. This is why so many governments place very strong emphasis on objective and systematic M&V of energy efficiency results from public expenditure. The Importance of Monitoring and Verification 4.84. Government M&V of actual achievement of energy savings from the use of public energy efficiency funds is necessary to ensure that the funds are used for the purposes intended, to assess whether the planned results from the expenditures materialized as planned, and to provide a factual basis for developing further program improvements to attain maximum benefit from the public money. Strong M&V programs also provide strong incentives to those administering fund expenditure to use funds as wisely as possible. 4.85. Considerable experience in government M&V of energy savings has been achieved internationally, especially over the last decade. In the United States, for example, many state governments have developed quite sophisticated techniques, and have gained experience trying to balance costs and complexity in the best way possible on one hand with needs for objective and defendable information on the other. Common systems involve (a) submission of annual reports to state governments on fund expenditures and estimated energy savings achieved of verification by program implementing entities, based on agreed templates and methodologies; (b) government commissioning of third parties to complete reviews of expenditures and detailed validation of savings claims, based on both site investigations and more macro-level reviews of assumptions; and (c) publication of final government reports evaluating program costs and results, and usually also outlining plans for the future. In one major state, recent energy savings claims originally filed by electricity and gas utilities responsible for state government energy conservation program delivery over a two-year period were revised downward by the state government to only about one half of originally reported levels, after detailed site investigations and analysis. In the State of Vermont, discussed further below, 2008 total savings claims of the state`s EEU were revised more modestly in the state government`s 2009 report--resulting in a reduction in claimed savings of about 4 percent. However, a large number of project claims were adjusted, either upwards or downwards.34 34 Vermont Department of Public Service 2009 (available at www.state.vt.us/psb/EEU/oversightactivities). 79 Accelerating Energy Conservation in China`s Provinces 4.86. Some suggestions for provincial governments interested in improving M&V of the contribution of their energy efficiency special funds to realize energy savings targets include the following: Site investigations should be undertaken for projects that have received substantial public funds by government entities or entities contracted by the government. At a minimum, the investigations should verify reported installation and initial operations, and the reported efficiency levels of the new installations. Efforts launched to investigate results of projects supported with central government investment awards are a beginning. For investment project awards and subsidies, governments should require standardized and rigorous reporting by fund recipients of with and without project assumptions concerning operation of installations and other factors influencing actual energy saving claims, in addition to only energy efficiency gains (see para. 4.51 for a discussion of the difference). Such analysis should be included in both feasibility studies and post-installation reports. Detailed site investigations of post-installation energy savings achievements-- including several years after installation--should be completed through a scientifically designed survey of a randomly selected sample of projects. These investigations can validate the various types of assumptions used for project energy savings claims, and provide a basis for improvements based realities in the field. Scientifically designed surveys should be completed to provide information needed for estimation of energy savings from very small projects, information dissemination campaigns, and fiscal incentives, such as tax rebates. Although there still may be a large margin of error in resulting calculations, implementation of a methodology and tracking of basic results is still highly worthwhile. The Concept of Energy Efficiency Utilities and other Performance-Based Programs 4.87. An increasingly popular approach among various governments is to contract a third-party entity to deliver energy savings using public money in the most cost-efficient way possible. The third-party entity may be an energy supply utility, which is then obligated as part of the government`s regulatory policy to implement the government`s energy savings program with due compensation. Or, perhaps more attractive in some cases, the third-party entity may be focused solely on energy savings and perhaps renewable energy delivery, and may be selected through a market-based public procurement process. 4.88. Energy efficiency utilities. A number of state governments in the United States have created new EEUs, or similar institutions, which involve contracting special entities to implement the state`s main publicly funded energy conservation programs or key aspects of them. These are new institutions unrelated to electric power or other energy supply utilities, whose sole purpose is to realize energy savings requested by governments as effectively and cheaply as possible. The EEUs prepare comprehensive programs of investment project promotion, targeted subsidies, awareness-building activities, community organizing, and technical assistance, and execute these programs 80 CHAPTER 4: Issues and Challenges for the Next Five Years under a comprehensive contract with the state government. The EEUs operate under performance-based contracts, developed mainly in an effort to yield maximum energy savings at minimum cost. Entities to operate the EEUs are typically procured through a public bidding process, and the performance contracts provide for a tying of compensation to the energy savings levels validated by the state government.35 4.89. The State of Vermont`s EEU, named Efficiency Vermont, is described in Box 4.7. It is perhaps the best known, since it has been in operation for about 10 years. Some other states have begun to borrow from Efficiency Vermont`s experience, but have added innovations. The small state of Delaware, located on the Mid-Atlantic coast, approved the creation of a new nonprofit, state-owned Sustainable Energy Utility (SEU) in 2007. Delaware`s new SEU covers a broad scope, including all fuels and sectors, and unlike Efficiency Vermont, Delaware`s SEU is allowed to make revenue-earning investments. For example, the SEU aims to cofinance energy performance contracts with prequalified ESCOs in the state, beginning with the municipal government, schools, and hospital sectors. Also unlike Efficiency Vermont, Delaware`s SEU has been authorized to issue bonds against its future investment revenues. The SEU is not financed through energy consumption taxes, but rather through Delaware`s share of revenue from the Regional Greenhouse Gas Initiative (RGGI) thermal power plant cap-and-trade system of 10 northeast and Mid-Atlantic states, and through certain federal government funds provided to Delaware, planned bond issuance proceeds, and some operational revenues.36 Box 4.7: Vermont's Energy Efficiency Utility The government of the small State of Vermont, located in the northeastern part of the United States, approved the establishment of a new energy efficiency utility (EEU) program in 1999. The EEU called Efficiency Vermont is now well known among the population. The objective of the utility program is to supply the maximum amount of electricity savings for the least amount of public funding. The utility program is implemented by an independent corporation, the Vermont Energy Investment Corporation, under a contract with the state`s electric power regulatory agency, the Vermont Public Services Board. The contract was awarded following competitive bidding. The contract is for three years, but can be renewed for an additional three years. Every six years, a new competitive bidding procedure must be followed for awarding the contract, according to state law. 35 The idea of the Energy Efficiency Utility (EEU) should not be confused with a different idea called the Energy Efficiency Power Plant, being adopted by some provincial governments. The Energy Efficiency Power Plant concept focuses on presentation of various energy efficiency projects and programs in one umbrella package, with an overall savings and peak load reduction target, which then can be compared to the overall energy production and load supply of an electric power plant. However, the projects and programs are delivered by a variety of entities, implemented in a variety of ways. The EEU concept focuses on the development of one specific implementation entity (the EEU), which is contracted by the government for design, development, and delivery of savings for a specific fee. 36 For more information on the energy conservation programs of U.S. states and their possible relevance for China`s provinces, see Energy Pathways LLC (forthcoming). 81 Accelerating Energy Conservation in China`s Provinces The Public Services Board hires a Contract Administrator who oversees all the details of contract and EEU implementation. The contract is financed from an electricity sales surcharge amounting to 2.82% of the total payment consumers make in the state for electricity. The surcharge funds are collected from the State`s many electricity distribution companies and paid to the EEU contractor according to the terms of the contract by a Fiscal Agent, also hired by the Public Service Board. Rigorous and detailed monitoring and verification (M&V) of the actual electricity savings achieved by the EEU program is undertaken by the State`s Department of Public Service. The results of the independent verification of the savings achieved are an important factor in the payment of EEU contractor`s performance-based fee. The EEU program is considered among the most successful state energy efficiency programs in the US. As shown in the graph below, electricity savings have grown steadily as experience has been gained. Savings in 2007 and 2008 completely offset total electricity demand growth, despite a growth in the number of electricity consumers. The levelized cost per kWh saved in 2008 was 3.1 U.S. cents, compared to an avoided cost of electricity supply of 14 cents/kWh. One particularly successful measure adopted by the EEU is its business account management program. In this program, each participating large customer is assigned a specific staff contact at the EEU, who helps the customer to adopt customized energy efficiency solutions by organizing both technical and financial assistance. Other key programs include (i) programs for communities, organized through schools and religious groups, to increase awareness and undertake energy saving initiatives; (ii) programs to promote CFL and LED lighting; and (iii) programs to subsidize installation of key types of high- efficiency equipment. 82 CHAPTER 4: Issues and Challenges for the Next Five Years Incremental Annual MWh Savings In recent years, the state government has used its EEU to implement several additional special programs. In 2006 it authorized additional funds for the EEU to deliver specific electricity savings levels in several special locations (GeoTargeting--or GT--areas) where existing electricity use was causing serious congestion in the electric power grid. Achievement of savings in these areas allows deferment or delay of construction of new transmission and distribution infrastructure, which would have to be paid for by consumers at a much higher cost. In 2009, the state government authorized the EEU to undertake new programs to deliver fuel savings through improvements in home heating efficiency, since many families in the State have been particularly hard hit by rising oil costs. Source: Efficiency Vermont (2008) and www.efficiencyvermont.org. 4.90. If suitably adapted, the EEU concept could be a useful mechanism for some Chinese provinces to achieve high energy savings rates with a portion of special energy efficiency public funding. The main objective may be to provide validated energy savings in the province at attractively low cost--at least well below the levels provided in current energy efficiency investment award programs. Rigorous M&V would certainly need to be included. A permanent legal entity could be established or assigned to implement the EEU through a performance contract with the government or, as in the case of Vermont and Delaware, a permanent EEU program could be established, with its management and implementation contracted out in three- to four-year, competitively bid, renewable performance contracts. An advantage of the concept is that the government can assign specific markets for concentration (for example, public buildings, residential housing 83 Accelerating Energy Conservation in China`s Provinces block renovations, small and medium-size industry, energy performance contracting operations, or any others), with specifications being either narrow or broad. Governments can also decide if the EEU should be revenue earning or not, and how it may or may not interact or commingle funds with other financial players in the market. In some cases, a Super ESCO approach may be attractive, where the EEU provides financing for energy performance contracts developed by ESCOs in the province, in exchange for a substantial share of the profits. This would serve to both foster development of the local ESCO industry and yield energy savings at low (or even negative) cost. 4.91. Standard offers. Standard offer energy savings procurement schemes involve public agency (or energy utility) purchase of validated energy savings at a predetermined and published price, called the standard offer. The public agency establishes the price it is willing to pay (for example, RMB/tce) and invites entities to bid projects. Project proposals are then vetted by the agency before acceptance as to their conformity with the predetermined criteria. The mechanism has been used in some U.S. states, some sectors in India, and in South Africa. Usually specific technologies, measures, or sectors are targeted. Rigorous M&V are required, and this may involve fairly complex issues in establishing baselines, to avoid purchasing energy savings from projects that clearly would have happened anyway (for example, the so-called free rider issue). In China`s provinces, this concept might work best with initial concentration on an energy efficiency market sector or two that has been particularly difficult to develop, such as energy efficiency renovations in existing residential housing. A clear advantage of the approach is its openness to new innovation and new ideas, by allowing many different players to provide proposals with a level of comfort that they will be accepted at the published price if they meet the predetermined criteria. 4.92. Similar types of energy savings procurement schemes in principle can be developed where the public agency publishes a total quantity of energy savings it wishes to procure, along with predetermined eligibility criteria, and then selects proposed projects based on lowest evaluated price. Rigorous M&V measures would also be similarly required. Improving the Leverage of Public Funds 4.93. The big advantage of energy efficiency initiatives is that the financial returns of many projects are strong if various market barriers can be overcome. The main role for public funds is to catalyze opportunities so that savings can be achieved faster, at an increased scale, and within specific sectors that have proven difficult to capture under market forces alone. Often, public funds can be used in combination with commercial sources to overcome specific upfront problems of risk or lack of momentum, provide a sweetener to make larger financing schemes attractive, and/or provide a vehicle for demonstrating specific public support. Many types of mechanisms exist for such leveraging of public funds with commercial funds, either by operating in close coordination or by commingling of funds. 4.94. Internationally, one of the best sources of experience and program models for the leveraging of public energy efficiency funds for energy savings impact is the energy efficiency investment project portfolio of the GEF. A core objective of its expenditure of grant funds for energy efficiency in a given country is to obtain the greatest energy 84 CHAPTER 4: Issues and Challenges for the Next Five Years savings possible. With more than 15 years of operational experience, the GEF and its implementing agencies have developed high-leverage technical assistance programs embedded in investment financing projects, and a variety of investment cofinancing programs designed to mitigate various risks and catalyze broader commercial investment programs. The basic principle commonly used in project design is to examine specific problems or constraints holding back commercial investment, and then means to alleviate those constraints. In the energy efficiency business, this often involves public investment to mitigate risks perceived by investors and financiers. 4.95. Box 4.8 introduces one ongoing GEF project in China, which utilized grant funds to capitalize a loan guarantee fund to back commercial loans to ESCOs. Since the fund has basically retained its original value, the leverage value of public funds is exceptionally high. The out-of-pocket public costs of direct energy savings in projects, including technical assistance and incremental operating cost support, is currently estimated at about RMB 3 per tce (although the opportunity cost of placing the GEF principal funds in a static account for six years should also be considered). Another example of a GEF project with exceptionally high leverage is the China Utility Energy Efficiency Financing Project implemented with the IFC. In that project, GEF funds were placed in a first-loss reserve position, as the first line of cover for defaults on energy efficiency loans undertaken by participating commercial banks. With accompanying GEF-financed technical assistance, the energy efficiency loan portfolios of the participating banks have grown strongly, while GEF net outlays have been small. Box 4.8: China National Investment and Guarantee Company's ESCO Loan Guarantee Program Under GEF`s China Second Energy Conservation Project, implemented with the World Bank, China`s MOF and NDRC contracted the China National Investment and Guarantee Company (I&G) to implement a partial-risk guarantee program for new loans from Chinese banks to emerging ESCOs in China. The objective of the component was to help Chinese ESCOs develop project financing channels with local banks, and thereby help foster the growth of Chinese ESCOs. The scope of the guarantee program was narrow--covering loans for energy performance contracting project investment only. The GEF provided a grant of US$22 million to the Government of China to create and operate a reserve fund to back the guarantees issued by I&G, as well as US$2.0 million in relevant technical assistance and support for incremental program operating costs. Implementation of the component spanned six years, ending in December 2009. Based on provisional tallies, I&G issued more than RMB 500 million in guarantees for 142 projects developed by 41 ESCOs during the first five years and nine months of the program. Energy performance contracting investment totaled about RMB 870 million, generating an annual energy savings capacity of about 520,000 tce. Over the life of the assets generated by the investment, total energy savings may be about 5.5 million tce. Capital in the reserve fund has been basically retained. Reserve fund income included 85 Accelerating Energy Conservation in China`s Provinces interest and guarantee fees. Expenditures included I&G`s management fee and payments for four project defaults (most of which have been recovered). At the end of September 2009, the reserve fund held about RMB 145 million (equivalent to US$21.2 million). The Chinese government has decided to use these funds to continue to support energy efficiency investments far into the future, using similar types of guarantee mechanisms. Adding outlays from the reserve fund, as well as technical assistance and incremental operating costs, the net public financing outlay amounted to only about RMB 3 per tce of expected energy savings directly from the projects supported by the guarantee program. In addition, perhaps the greatest benefits of the program have been the introduction of many of China`s emerging ESCOs to the financial community, creating new financing relationships. Sources: China National Investment and Guarantee Corporation, NDRC GEF/World Bank Energy Conservation Project Management Office. Achieving Greater Sustainability in Public Financing 4.96. Effective publicly financed energy efficiency programs require sustained effort, and a degree of predictability and reliability is needed for the most effective interaction with all the players involved. As all program administrators know, dramatic swings in financial support--with frequent changes in on-and-off signals--make it difficult to achieve good results. Although annual allocations of financial support are often critically important, they are usually less effective if they are unpredictable and subject to frequent change, as is typical in most government budgeting cycles in most countries. Typically, the most effective energy conservation programs have some form of multiyear financial support additional to annual government allocations. 4.97. Sustained sources of public grant financing usually involve the specific earmarking of various specific government revenue streams for allocation to specific energy efficiency or clean energy initiatives. The most common is the earmarking of different types of energy taxes or surcharges. Internationally, public benefits or wire charges to final electricity consumers are a common source of earmarked public financing for energy efficiency programs. Some provinces in China have also adopted similar approaches with encouragement from the central government during the severe power shortages around 2004, adding surcharges of 0.1­.2 fen/kWh as a means to finance load management or electricity conservation programs. Another approach is the enactment of resource taxes, such as the coal sustainable development levy in Shanxi Province that underpins Shanxi`s Coal Sustainable Development Fund (see Chapter 3, para. 3.106). Allocations from the Coal Sustainable Development Fund have provided the backbone financing for Shanxi`s Energy Conservation Special Fund and Special Compensation Fund for Eliminating Backward Production. In Europe, use of carbon emissions taxes is used by some as an option. Finally, an increasing popular option internationally is the earmarking for energy efficiency program use of a portion of the proceeds from government sale of carbon emissions allocations to key energy-using 86 CHAPTER 4: Issues and Challenges for the Next Five Years enterprises. This is now a key source of multiyear energy efficiency program finance in the 10 northeastern and Mid-Atlantic states of the United States participating in the Regional Greenhouse Gas Initiative thermal power plant carbon emissions cap-and-trade scheme (para. 4.89). 4.98. As they look toward the future, China`s provinces should each consider what options for development of multiyear earmarked financing for energy efficiency programs might best suit their conditions, and try to select one or two for implementation. In developing and processing proposals, it is also recommended that strong emphasis be placed on (a) specific M&V methods, procedures, and responsibilities to ensure that provincial governments can clearly see the actual energy savings results from fund expenditures, and (b) specific mechanisms and adoption of specific evaluation and adjustment procedures to allow clear and credible focus on realization of the maximum energy savings per unit public investment. 4.99. Provinces can also usefully consider energy efficiency program implementation schemes that generate self-financing revenue, such as the creation of EEUs that are allowed to pursue some types of revenue-earning business. However, introduction of revenue-earning schemes changes the nature of programs and the incentives for those managing them, and thus the pros and cons should be weighed for each circumstance. 87 Accelerating Energy Conservation in China`s Provinces CHAPTER 5: Recommendations 5.1. Previous chapters outlined the status and achievements of China`s current remarkable provincial-level energy conservation programs and a number of the key challenges and opportunities faced for the future. This chapter organizes and summarizes the main suggestions and recommendations from the discussions about the future for consideration for the 12th FYP period. A list of recommended specific actions that could be undertaken during the next one to two years also is provided, with special attention to topics that might best benefit from international cooperation. A. Some Suggested Directions for the Medium Term 5.2. The sections below summarize the study team`s main suggestions to provincial governments, and central government entities that support them, on how to further improve implementation of provincial-level energy efficiency programs over the medium term (for example, during the 12th FYP). Virtually all of these areas are also currently being discussed among various Chinese energy efficiency practitioner groups. It should be recognized that provincial differences will matter a lot concerning which recommendations are most relevant for specific provinces. The ideas provided below, therefore, should be considered a broad menu, from which provincial authorities and experts might wish to consider application to their specific circumstances. 5.3. Recommendations are organized around two core categories of needs that emerged from the study team`s review: (a) needs to improve quality in provincial program implementation, and (b) needs to increase the use of market-based tools in the delivery of the energy conservation program overall. Improving Quality in Provincial Program Implementation 5.4. China`s provinces have made extraordinary efforts during 2006­09 to put a wide range of comprehensive new energy conservation programs in place. The success achieved has taken great efforts in issuing new policies, plans, and procedures; in organizing implementation with local governments and enterprises; and in bringing new staff into the energy conservation business and training them. Yet, the tasks required are very large scale, and need intensive as well as extensive effort if high-quality results are to be assured over the next FYP. For the quality implementation of administrative systems, two key needs are (a) improved, even-handed, and consistent enforcement of the many important existing regulations, codes, and standards; and (b) further improvement in enterprise energy savings targeting systems. Needs exist in many other areas as well, such as coordinating work that municipalities are responsible for, disseminating information and fostering of cross-exchange, and further improving programs using energy efficiency special funds. 5.5. Five broad areas worthy of provincial government attention that are discussed in more detail in the main parts of the report include the following: Strengthening local human infrastructure for energy conservation program delivery. Continued major investments in the human infrastructure needed to 88 Accelerating Energy Conservation in China`s Provinces further implement the country`s ambitious energy conservation goals are absolutely essential. If governments are to deliver the roles assigned to them effectively, staffing levels and skills in relevant provincial, prefecture, and even county government units must be upgraded. Enterprises and third-party service entities have urgent staffing needs as well. Investments are especially needed for (a) a wider range of both short-term and long-term programs and training activities with concrete results in increasing the numbers and qualifications of local government staff, enterprise energy managers, and all types of independent experts; and (b) increased information exchange, especially on new technology and for cross-fertilization of program ideas and experience (see paras. 4.15­4.23). Development of improved enterprise energy use data reporting systems. In the coming years, most if not all provinces will need to develop and operationalize new and improved enterprise energy use data collection, reporting, monitoring, valuation, and analysis systems. This is critical for both effective monitoring and supervision and for development of policies and programs to meet the actual needs of enterprises. In undertaking this work, the study team recommends (a) emphasis on data quality control as a priority; (b) attention to standardization of energy and output accounting conventions; (c) attention to data security to ensure confidentiality of certain enterprise data; (d) upfront definition of plans and procedures for government validation of data entered by enterprises: (e) attention to clear definition of institutional responsibilities; and (f) pilot testing on a limited number of enterprises before rollout (see para. 4.24). Supporting innovation at local levels. Provincial governments are in an excellent position to promote innovation at municipal levels by (a) providing strong support for experiments and specific pilots; (b) carefully reviewing experiences from other provinces or even abroad, and introducing relevant cases to local authorities; and (c) intensely propagating successful pilot cases in the province to others. Two example areas in the building energy efficiency and heat system reform areas where creativity at local levels in northern China is especially needed and worthy of support include schemes to implement consumption-based heat billing and to implement energy efficient renovation programs for existing homes (see para. 3.82 for further details). Options review for further expanding energy savings results from provincial energy conservation special funds. Provincial government energy conservation special funds are already playing an important role in the energy conservation effort of many provinces. Efforts to maximize the greatest possible energy savings from these funds can be furthered by (a) completing careful and scientific assessments of the actual energy savings achieved through the various uses of these funds to date, followed by (b) strategizing and implementing program adjustments for the future in order to obtain the greatest amount of verifiable energy savings with the least amount of public money (see paras. 4.80­4.95). Consideration of how to develop multiple-year, sustainable financing sources for provincial energy conservation special funds. Achievement of the best results from public energy efficiency funds requires sustained effort over a number of years, which in turn requires predictable and steady financial support. This usually requires earmarking of some types of specific public revenues to energy 89 Accelerating Energy Conservation in China`s Provinces efficiency funds. A common option internationally, which has also been adopted by some provinces and can be further considered by others, is the allocation of a portion of certain energy use surcharges (see paras. 4.96­4.99). 5.6. Probably the most important program area for many provinces in the future is the key enterprise energy savings program and the various initiatives associated with it. Further improvements in key enterprise energy savings targeting and energy management should provide a core of energy savings results during the next FYP. Three important aspects include the following: Increased customization in enterprise energy savings targeting. Government- enterprise agreements on mandatory energy savings targets in responsibility contracts in the future need to be aligned better with the real-life potential of individual enterprises for achieving savings at reasonable cost. Further capacity building of government officials and engaged experts, strengthening of the role and qualifications of enterprise energy managers, adoption of enterprise EMSs, and improvement and standardization of data collection, reporting, and validation can all help provide improved foundations for this, with increasing reliance on their own analysis and initiatives of enterprises. Improved data can also allow improved comparative analysis between enterprising and increasingly more meaningful use of unit energy consumption benchmarking. Industrial subsector energy savings assessments, including comparative international, national, and provincial enterprise comparative analysis, should be completed to provide an improved basis for provincial-level target setting for enterprises producing energy-intensive commodities (paras. 4.66­4.75). Supporting competence in enterprise energy managers. As part of broad efforts to strengthen enterprise energy savings responsibility systems, through greater reliance on the own efforts of enterprises and increasing target customization, provincial governments need to implement major programs to ensure that enterprise energy managers are in place as required by law, and that these managers are suitably qualified. The study team recommends that the central government seriously consider development and implementation of one standardized national examination and licensing system for the required enterprise energy managers as a key support effort (paras. 4.51­4.54). Fostering the adoption of rigorous and standardized energy management systems in key enterprises. Quality implementation of standardized enterprise EMSs can (a) help enterprises customize energy conservation activities to achieve the best benefits for themselves, (b) provide an excellent framework for supervising enterprise compliance with the Energy Conservation Law, and (c) provide a systematic mechanism for identification of energy efficiency investment projects. However, EMSs cannot be adopted in a lackluster manner and still be effective. Proper adoption is likely to require several years for most enterprises, and steady attention thereafter as well. The study team recommends that provinces initiate deliberate efforts to assist enterprises to adopt EMS systems, and that the central government provide strong support, using the new national EMS standard. Government leadership is especially important at this initial stage. The study team recommends that China consider adoption of formal government 90 Accelerating Energy Conservation in China`s Provinces supervision and review mechanisms to ensure that enterprises that claim adoption of EMSs meet standardized adoption criteria. A two-stage review process is recommended, with the second stage proceeding one to two years after initial adoption, and requiring demonstration of satisfactory operation of the EMSs with concrete results (paras. 4.55­4.65). Increasing Use of Market-Based Tools 5.7. Clearly, both administrative and market-based tools are needed in China`s energy conservation program. With the strong development of administrative tools during the 11th FYP, however, increased emphasis on market-based tools is now needed during the 12th FYP to provide better balance and create greater synergy between the two. Efforts need to be made in two broad areas: (a) improving conditions for energy efficiency investment projects to be implemented through regular market mechanisms, and (b) adoption of market-based approaches for program implementation where suitable, as a means to increase implementation efficacy. 5.8. Four areas discussed in detail in the text where provincial governments can help energy efficiency investment markets to work better include the following: Expanded use of energy pricing tools. Provincial governments should review the areas where they have permission to adjust energy prices or add specific energy surcharges, and undertake such adjustments where they can help improve market incentives for more efficient use of energy without unduly compromising vulnerable groups. Where appropriate, the revenue from such surcharges can be explicitly returned to energy-using taxpayers in general, through various types of soft support or subsidized services for energy efficiency investment, or other programs (paras. 4.39­4.43). Fostering development of local energy efficiency service industries. Local energy institutes and energy efficiency companies of various types are essential for effective delivery of technical analyses, such as energy audits, completion of all types of macro and micro assessments, detailed energy use monitoring and review, identification of good investment projects, and packaging and implementation of such projects. Provincial governments should support the strong development of this industry through (a) formal policy support and legitimization of the industry, including energy performance contracting business; (b) use of government contracts and contracting procedures to help bolster the industry; (c) fostering training and information exchange; and (d) support for development of local energy efficiency service industry associations, where appropriate (paras. 4.27­4.32). Encouraging the expansion of energy efficiency lending by local financial institutions. As project-focused, operating cost­reduction investment loans, energy efficiency loans rarely fall into standard loan categories for local banks. Special efforts are usually required to generate effective and profitable banking business lines in this area. Provincial governments can help spur development of energy efficiency lending in local banks by (a) convening regular forums on energy efficiency project financing, (b) helping to arrange technical assistance on how to develop energy efficiency lending businesses, (c) cost-sharing of 91 Accelerating Energy Conservation in China`s Provinces preparation and/or appraisal costs for certain energy efficiency projects and, possibly; (d) facilitation of the use of government energy efficiency investment awards as a form of loan security (paras. 4.33­4.38). Moving to commodification of energy savings. Institution of consistent methodologies for determining actual energy savings from enterprise energy efficiency investments and completed action plans, backed up with suitable data, should be made a priority. Energy savings calculations need to be reliably comparable across enterprises and projects. Consistent calculations are needed to properly assess enterprise target compliance, to assess the contribution of various projects to target achievement, and to assess the results of public energy efficiency fund expenditures. Consistent calculations also are very useful commercially, to facilitate financing by improving the definition of investment project benefits. Credible calculations of energy savings naturally lead to the commodification of energy savings--an increasing trend globally that surely also can play an increasing role in China. Concepts of energy savings commodification are already being employed in China`s energy performance contracting business and the carbon credit trade, and can be further expanded on (paras. 4.44­4.47). 5.9. Market-based approaches can be used as mechanisms to improve efficiency and the results of various public sector energy efficiency programs. Two examples worthy of consideration by provincial governments include the following: Piloting trade in energy savings certificates. Internationally, most countries that have instituted energy savings obligations on enterprises have also instituted schemes to allow trade in certified energy savings between enterprises. This can increase the fairness and economic efficiency of the system. As a specific aspect of moving to the commodification of energy savings, China should consider experiments in allowing trade in certified energy savings with a predefined limited scope, to assess the practical potential and implementation possibilities under local Chinese conditions. Provinces may be an ideal level for experimentation, perhaps involving a small group of enterprises in a similar line of business and for technical measures where definition of energy savings is relatively straightforward (paras. 4.76­4.79). Developing possible new programs to expand results from provincial government energy conservation funds. One option presented in Chapter 4 is for provincial governments to establish EEUs, managed by contracted entities under performance contract with governments for the sole purpose of delivering energy efficiency savings in the public interest as cost-efficiently as possible (paras. 4.87­4.90). EEUs can be revenue earning or not. Another set of options is the establishment and partial government financing support of partnerships with financial institutions or multiple-sourced energy efficiency investment funds to leverage public energy efficiency funds with other financing sources to achieve greater energy savings (paras. 4.93­4.95). B. Suggestions for Follow-up over the Shorter Term 5.10. Below are listed specific activities and concepts relating to provincial energy conservation programs that the study team considers priorities for implementation 92 Accelerating Energy Conservation in China`s Provinces involving international cooperation and/or cross-province exchange, depending on the interests of provinces. China`s provinces can gain much from introduction of practical and hands-on methodologies, program designs, and program implementation experiences abroad, especially from Europe, Japan, and North America (including the 50 U.S. states). Much also can be gained through exchange of ideas and implementation experience between provinces, including through forums on specific issues involving some three to five provinces with varied approaches or experiences. The World Bank plans to support a number of the concepts listed below through two new planned GEF-financed projects, the proposed Provincial Energy Efficiency Project with Shandong, Shanxi, and Jiangxi Provinces, and the proposed China Industrial Energy Efficiency Project with the Ministry of Industry and Information Technology. However, there are enormous needs for far greater support across all of China`s provinces. Economic Policy Studies 5.11. Provincial-level energy pricing options reviews. One or more reviews may be completed to identify the most practical energy pricing adjustment options within provincial-level authority to further spur energy efficiency investment and behavior. Analysis should cover the means to reduce impacts on vulnerable groups and might also cover options for earmarking any increased revenue. Reviews would best also include national-level participation and coordination assistance, to ensure policy consistency and potential scale-up of any successful experiences. 5.12. Provincial-level energy efficiency fiscal incentive options review. A review for one or more provinces may be undertaken on options for very targeted adjustments in provincial level taxation policies to further spur energy efficiency investment and expanded use of highly energy-efficient equipment. Analysis should include review of options used abroad and a strong focus on the demonstrated cost-effectiveness of specific alternative fiscal incentive approaches, in terms of energy savings results per unit tax revenue foregone. As with the suggested pricing review(s), such efforts would also best include national-level participation and coordination assistance. Program Design Advice and Technical Assistance 5.13. Preparation of national-level guidance on the design of provincial key enterprise energy use data reporting systems. Detailed central government­level guidance and technical support to provinces is needed on the design and rollout of enterprise data collection, reporting, and validation systems being prepared to meet requirements under the Energy Conservation Law. A strong measure of consistency and standardization is especially needed in energy and output accounting conventions and measurement protocols to enable proper data comparability. Advice from experts with many years` experience in enterprise energy use data collection, validation, and analysis in other countries would be very helpful. 5.14. Enterprise energy use data collection, reporting, validation, and analysis system construction support. As provinces develop and launch these required new systems, advice and support is needed from experienced experts on the most cost-effective infrastructure, implementation phasing (including piloting and initial testing), scope and coverage, operational protocols, validation requirement and procedures, and design of basic analysis capacities. 93 Accelerating Energy Conservation in China`s Provinces 5.15. Development and rollout of provincial energy efficiency service industry support programs. Such an effort could include (a) completion of an assessment of the current status of the local energy efficiency service industry (including technical institutes and energy auditing entities, specialized academic groups, and certain energy efficiency equipment suppliers in addition to ESCOs); (b) convening of forums to discuss the needs of the government and the industry; and (c) preparation and implementation of specific policy and program support measures accordingly. 5.16. Definition of strategies for promoting high-quality EMS adoption in key enterprises, followed by implementation training and piloting. Proper roll-out of standardized EMSs among key enterprises in China is a major, long-term undertaking. A strong program involving national and provincial entities might best include (a) an initial stocktaking of lessons learned so far in China (for example, in Shandong Province and with other industrial management standards), (b) review of international implementation experience, (c) definition of a phased piloting program with interested enterprises, (d) preparation and phased delivery of large-scale training programs, (e) development of supportive policies to help increase enterprise incentives for effective EMS adoption, (f) evaluation of actual experiences and energy savings achieved in pilot efforts and, as recommended by the study team, (g) design and implementation of a nationally recognized EMS review and evaluation scheme. To help encourage adoption, government supervisors could use various incentive measures, such as shifting to more indirect supervision and providing priority consideration for energy investment project support, including awards for enterprises with certified EMS adoption. 5.17. Preparation of medium-term provincial industrial subsector energy efficiency programs and targets. Together with industrial associations, analysis of the current energy use patterns in key energy-intensive industrial subsectors, variations between enterprises using unit energy consumption benchmarking, and opportunities for application of more efficient, specific technologies and process optimization during the next FYP can provide a core tool for provincial governments and enterprises to establish energy savings targets more aligned with variations in enterprise potential. Cross- exchange with practitioners in Europe and Japan also pursuing such sector approaches may be useful. 5.18. Definition and piloting of approaches to validate energy savings from key energy efficiency investment projects, followed by piloting of an experimental energy savings certification and limited-scope trading scheme. Validation of energy savings is an important process for evaluating results from public energy efficiency fund expenditures and for assessing target compliance. Building on knowledge existing in the carbon finance and energy performance contracting businesses, an approach paper can establish simplified methodologies for a series of relatively standard projects in one or several key industrial subsectors in one or several provinces. Following application to a series of completed projects, if the validated savings analyses are considered robust, issuance of formal energy savings certificates can be pursued on a pilot basis, as potential instruments for demonstration of energy savings target compliance and possible trade between obligated parties. 5.19. Design and implementation of provincial energy efficiency programs for government and other public facilities. With recent increasing policy support from 94 Accelerating Energy Conservation in China`s Provinces national levels, new and aggressive programs to increase energy efficiency in government buildings, schools, and hospitals can be developed and put into operation. New concepts can be piloted, such as the use of energy performance contracting and/or policies that greatly increase building occupant incentives by allowing use of a share of savings of original energy cost budgets for other agreed types of expenditure of high local interest. 5.20. Development and implementation of methodologies to assess the cost- effectiveness of different uses for public energy efficiency special funds. Practitioners in several other countries have gained experience in new and sophisticated methods to survey and assess the energy savings results actually achieved from a variety of public financial support programs in a variety of sectors. Selected methodologies can be adapted for application in one or several provinces to assess the energy savings results achieved by different types of programs and investment promotion initiatives, as an input for defining priorities for the future fund operations. 5.21. Design and launch of one or more provincial energy efficiency utilities. EEU schemes would involve provincial governments entering into performance-based contracts with specialized entities for the delivery of maximum energy savings at minimum cost. A design effort might best enlist advice from EEU managers and specialized staff from abroad, and focus on definition of the target markets of greatest local interest, institutional arrangements, financing options, performance contract framework options, and options for selection of the best management and operation entities. 5.22. Design and launch of financial partnership schemes to leverage provincial energy efficiency funds. Following a definition of objectives and review of experience abroad and elsewhere in China, promising options can be defined in operational detail for achieving high leverage of provincial energy efficiency funds by partnering with financial institutions and other market players. Operation of loan guarantee facilities or development of new energy efficiency investment funds are two among a variety of possibilities. The most practical and appropriate options should then be launched. 5.23. Review of options for sustainable financing of provincial energy efficiency funds. Options often used elsewhere include use of earmarked revenue streams (for example, from special surcharges) and institution of publicly funded energy efficiency programs that generate revenue (or allow bond issuance backed by such revenue). Advice from practitioners from elsewhere may be useful for provincial governments wishing to develop new sustainable financing sources. Training Programs 5.24. Detailed design and rollout of new training programs for enterprise energy managers. Large-scale training programs for enterprise energy managers urgently need to be designed, organized, and delivered. The study team suggests national agency leadership to develop and implement one standardized national examination and licensing system, as has been successful in Japan. Training course delivery could involve a variety of qualified institutions in different regions and provinces. 5.25. Support for technical training on energy efficiency topics, including sophisticated energy auditing. Needs for technical training in the provinces are vast. 95 Accelerating Energy Conservation in China`s Provinces International experts and practitioners may provide particular value as resource persons for specific technical areas, for assistance in course design and to help train trainers. 5.26. Support for building the human capacity of provincial and prefectural government energy conservation monitoring and supervision entities. Training needs within new and expanding provincial and local government monitoring and supervision units are also very large and require support. Addition to regular course content of case studies and lessons from experience elsewhere (especially in other provinces in China) may help enrich training. Cross-Exchange Activities 5.27. Cross-province exchanges on program conceptualization, development, and implementation experiences. Given the commonality in objectives, but differences in many details of implementation experience, cross-exchange between provincial and local government officials and experts working on energy conservation programs can be especially productive as a means to generate and exchange ideas and lessons from experience. Two of the many potential types of worthwhile activities include preparation and dissemination of practical case studies, and organization of workshops on special, operationally focused topics, perhaps involving some three to six provinces at a time.37 5.28. Energy efficiency technology information exchange events. More opportunities to learn more about new technologies and their application is one of the most frequently requested types of assistance mentioned by provincial and local technical staff. 5.29. Cross-municipality exchanges on implementation experiences in building energy efficiency and heat reform. There are particular needs for increased exposure of city officials and experts to the successful experiences promoting energy efficiency in new and existing buildings and especially on introduction of heat system reforms, such as consumption-based billing. Case study presentations and workshops could draw together staff from different cities in one or several provinces. 5.30. Provincial-level energy efficiency financing workshops. Mutual understanding and bank lending flow for energy efficiency investments could be greatly facilitated by the convening of regular provincial-level information exchange meetings between energy efficiency agencies, local banks, major energy efficiency service companies engaged in project financing, and perhaps selected enterprises. 37 In 2008, the NDRC`s Energy Conservation Information Dissemination Center (now merged into the larger National Energy Conservation Center) completed a series of case studies of innovative provincial energy conservation program approaches, and conducted several workshops on these case studies. This effort was warmly welcomed by provincial experts and staff. 96 Accelerating Energy Conservation in China`s Provinces Annex 1: Sample Template for Evaluating Progress on Key Energy-Consuming Enterprise Responsibility Contracts Energy Conservation Responsibility Contract for Key Energy Consuming Enterprises Evaluation Score Card Name of Enterprise: 2009 Evaluation No. Evaluation Full Evaluation Details Score Indicator Content Score Obtained Energy 1 Energy savings 25 Annual energy saving target: Conservation ___tce, verified energy saving: Target (40) ____tce, ___% of target accomplished. Progress 10 11th FYP total energy saving target: toward 11th ___tce, verified accumulative FYP target energy saving: ___tce, accumulative progress:___% Annual energy 5 Targeted annual energy consumption consumption per RMB 10,000 per value added: ___tce/RMB 10,000, RMB 10,000 verified annual energy consumption value added per RMB 10,000 value added: ___tce/ RMB 10,000, ___% of target accomplished. Energy 2 Energy 5 1. Establish energy conservation Conservation conservation leadership group led by key Measures organization enterprise decision makers and (60) and organize energy conservation management activities periodically (3). 2. Establish or delegate special department for energy conservation management and provide support (2). 97 Annex 1: Sample Template for Evaluating Progress on Key Energy-Consuming Enterprise Responsibility Contracts Evaluation No. Evaluation Full Evaluation Details Score Indicator Content Score Obtained 3 Energy 10 1. Status of breaking down energy conservation conservation target and target allocating to workshops, groups, breakdown and and individuals (3). implementation 2. Status of evaluating the status implementation of energy conservation target (3). 3. Status of implementing energy conservation rewarding and punishing system (4). 4 Energy 25 1. Rank of unit or overall energy conservation consumption level of main technology products among the 1,000 key advancement enterprises in the same industry and (10). implementation 2. Has the enterprise arranged of technology special fund for energy improvement conservation R&D and increased of energy the fund over the year? (4) conservation 3. Implementation status of annual energy conservation technology improvement plan and energy conservation effect (4). 4. Status of eliminating backward energy consuming process, equipment, and products according to the regulation. (7) 5 Implementation 10 1. Has the enterprise issued the of Energy relevant documents to implement Conservation the Energy Conservation Law Law and and associated local regulations? regulations (2) 2. Status of implementing energy consumption quota for high energy-consuming products. (4) 3. Status of implementing the quota management system for high energy-consuming equipment. (2) 4. Has the new, renovating, or 98 Accelerating Energy Conservation in China`s Provinces Evaluation No. Evaluation Full Evaluation Details Score Indicator Content Score Obtained expanding project been constructed based on energy conservation design standard and energy consuming standard? (2) 6 Implementation 1. Has the enterprise conducted of energy energy audit or monitoring, conservation submitted energy consumption management status report, and implemented improvement measures? (2) 2. Establishment of energy statistics position, set up of energy statistic accounting, and reporting on energy statistics periodically (3) 3. Has the enterprise set up measurement equipment and measure and verified energy consumption periodically according to the relevant law and regulations? (3) 4. Energy conservation dissemination (1): Has the enterprise attended energy conservation technology training according to the national and provincial regulations? 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