Case Study: Tools to finance industrial energy efficiency projects for Chinese SMEs

Panel: 6. The role of financing to improve industrial efficiency, global perspective

This is a peer-reviewed paper.

Authors:
David Hendrix, Dao Partners, Hong Kong
Ray Cheung, Dao Partners, Hong Kong
Weijia Ye, Dao Partners, Hong Kong

Abstract

Energy efficiency within the industrial sector is a top priority of the Chinese government as outlined in its 12th Five-Year-plan (FYP) of 2011-2015, with a particular emphasis on SMEs.

The Ministry of Industry and Information Technology (MIIT) is requiring Chinese SMEs reduce energy use by 25% by 2015: there are over 450,000 SMEs in the industrial sector with a gross domestic production of over RMB46 trillion/US$6.78 trillion, about 70% of China’s industrial production. However, as in many other emerging markets, Chinese SMEs lack access to the credit required to invest in EE because of real and perceived credit, operational and marketing risks. With limited access to bank and other forms of traditional finance, there has been a focus on energy performance contracts (EPCs), a key facet of China’s industry EE strategies. EPCs (or Energy Mgmn't contracts, EMCs) are a performance-based engineering, procurement, construction and financial mechanism, in which vendors of energy efficiency services and technologies accept the cash savings generated by energy-efficient upgrades from the users to finance the user’s energy efficiency improvements. The Chinese government underscores support of ECPs and energy saving companies (ESCOS) via new fiscal, tax, and financial incentives at both central and local gov't levels.

Applying successful risk analytic concepts and methodologies used in other emerging markets, this project demonstrates their successful use with the assessment, structuring and underwriting of EMCs as term financing solutions. The qualitative and quantitative measures employed are discussed in detail and how they conform to the basic principles of credit decision making. The concepts and experiences discussed supplement the tools available to credit and finance officers seeking to finance China’s industrial EE sector, stimulating credit availability to sound projects in the SME industry sector that will lead to significant cuts in GHG emissions.