Program Type - Description
Dedicated EE credit lines provided to the government of China (GoC) which are on-lent to the PFIs which, in turn, on-lend to end-users.
Increase the availability of commercial financing in support expanded investment for EE in medium and large-sized enterprises in China.
Energy Efficiency / GHG Goals
Main barrier addressed:
- A lack of commercial financing for EE projects – aggregate financing required to achieve the 20% target by 2010 is estimated at USD 50 billion.
- Lack of technical knowledge and institutional capacity among the financial institutions
- The perception of high technical and financial risks – in particular with respect to the project performance i.e., the expected future savings.
- The relatively small size of EE projects and commensurately high transaction costs, requiring a programmatic approach.
- A heavy reliance on on-balance sheet financing that requires a track record from borrowers and/or collateral; both of which favour large scale investors and project developers. The concept of project finance for EE projects had not gained traction in China.
Financial intermediary lending mechanism whereby an IBRD loan is made to GoC and on-lent to Chinese PFIs which is, in turn, on-lent to sub-borrowers (end users implementing EE projects). CHEEF I (May 2008): 2 large IBRD loans of USD 100 M to the China EXIM and Huaxia Bank. 1 GEF grant of USD 13.5 M for technical assistance (TA) to the government to support national EE policy and to the participating banks to build capacity in EE finance. CHEEF II (June 2010): IBRD loan of USD 100 M to Minsheng Bank was approved in June 2010. CHEEF III (October 2010): IBRD loan of USD 100 M to EXIM Bank to pilot financing to energy service companies (ESCOs) to enable an expansion of EE investment into the building sector.
Key Features of Energy Conservation Investment Lending:
Borrower Eligibility: enterprises should be medium and large total revenue > RMB 30 M (based on last statement of income, less than 2 years old).
By CHEEF III eligibility includes (i) industrial of all sizes; (ii) ESCOs; (iii) building owners (and district heating & cooling).
Project Eligibility: Renovation and rehabilitation (adjustment, replacement or extension) of existing physical component(s) and system(s) with the objective of achieving higher energy efficiency. Installations must be within the existing footprint of borrowers facilities i.e., no new land acquisition required for the project.
The cash flow benefit arising from energy savings associated with the sub-project must alone be sufficient to repay the total investment cost of the sub-project within a period of 10 years.
PFI’s Credit Criteria No credit enhancement was provided meaning that PFIs’ absorbed all of the borrowers’ credit risk. PFIs’ credit criteria continued to rely heavily on the sub-borrowers’ credit rating and also to follow the eligibility criteria required in the Operational Manual.
Average Size, Payback Period and Type of EE Investments: The average project size was around USD 20 M. Financing comprised equity from end-users (sub-borrowers), the IBRD loan (on-lent by PFIs) and debt contributions from PFIs. The end-users (sub-borrowers) contribute about 30 percent of project costs in equity. The required leverage ratio of the IBRD loan to PFI’s contribution is 1:1 under CHEEF I, and increased to 1:2 under CHEEF III.
Terms and Conditions: The IBRD loan is on-lent by the GOC to three banks: USD 200 M to EXIM, USD l00 M to Huaxia, and USD 100 M to Minsheng, using IBRD terms. The banks in turn on-lend the funds to industrial enterprises and/or ESCOs for energy conservation investment subprojects at market rate.
Credit lines for Chinese banks and GEF support for technical assistance to government as well as government advisory programs to support technical transition.
The majority of sub-projects for CHEEF I and II were directed to waste heat recovery projects in cement, iron/steel and chemical sectors.
At the end of 2011 after three-year implementation of the CHEEF I Project, two PFIs (China EXIM and Huaxia Bank) have invested USD 577 M in industrial energy efficiency, of which USD 115 M was from IBRD. This leveraged USD 462 M from two PFIs and industrial enterprises, achieving a leverage ratio of 1:4. These investments are expected to save energy equivalent to 1.7 M tonnes of coal and reduce CO2 emissions of 4.2 M tonnes. The leverage ratio achieved for CHEEF III is expected to be higher given the increased ratio of PFI finance to the IBRD on-lending (2:1 vs. 1:1 for CHEEF I). The CHEEF program has played an important role in increasing the PFIs interest and capacity and in mainstreaming EE financing among Chinese banks. The IBRD financing also leveraged additional financing for EE to two of the participating banks from KfW, AFD and EIB.
- Results, so far, indicate that credit lines combined with technical assistance contribute to increasing the participation of commercial financial institutions. There is also a high propensity for commercial financial institutions to revolve funding back into EE financing.
- Having the support from the government and strong signal concerning EE commitments was key in bringing success (i.e. in this case the 11th Five Year Plan with very strong EE targets, combined with government funding of USD 15 billion for EE sector between 2007 and 2009).
- The TA program has been critical in ensuring the sustainability and independence of the project.
This program has not addressed the over-reliance of banks on on-balance sheet financing. As a consequence, project funded by the program were mostly large industrial projects such as waste-heat recovery / iron & steel. These results are similar to the experience on CHUEE.