Will China's factories go green?

October 5, 2015

Wan YangChina Country Director article first published in Greenbiz, October 2, 2015 

For many years, China has been the world’s fastest-growing economy. Its dizzying growth founded super-cities and necessitated mammoth factories to deliver cheaper goods to a public clamoring for more.

But now, with a slumping economy and internal pressure to improve the environment and make cities less polluted, China has shifted its focus towards sustainability.

At the head of these efforts is the government’s mandate for the largest energy-consuming enterprises to establish an energy management system (EnMS), which means these companies must track their energy use and report on it, and have a plan to become more energy efficient.

This is not a startling strategy, as industry accounts for more than 70 percent of the country’s annual energy consumption. And it’s a strategy that’s unlikely to change — even in if the Chinese economy slows faster than expected — as it makes sense for both the economy and the environment.

The energy management regulation was introduced in 2010 as part of the country’s 12th "Five-Year Plan," which outlined the main objectives for the country up to 2015. Despite the Chinese government’s customary single-mindedness to achieve its goals, things haven’t gone quite as planned, with many provinces falling well short of their targets.

For this, we can expect only more ambitious policies and stringent regulations in the 13th Five-Year Plan, which will be unveiled early next year. 

What kinds of policies and initiatives will the country need to move its colossal industry base towards energy efficiency, and thus lower greenhouse gas emissions? Let’s take a look at what is already happening in China and how it will affect the future.

Having already knocked off the easiest targets, such as energy efficiency upgrades of the biggest plants and the closing of small, old and inefficient facilities, China faces a much harder task to get smaller industrials participating in energy management efforts. Initial work in this area led to drastic cuts in energy intensity of almost 20 percent between 2006 and 2010 but we can’t expect the same level of reductions this time around.

That said, in November 2014, the government announced its intention to have greenhouse gas emissions peak by 2030 — and commentators already say this is conservative and could be achieved by 2025, particularly if efforts are stepped up as expected.

China already has announced it will implement a carbon trading system, which will help meet this goal, and it plans to install 100 gigawatts of solar power and 200 gigawatts of wind power by 2020. The government is also working on countrywide plans to improve air quality and reduce coal use.

To date, the government has focused primarily on the country’s largest industrial enterprises, what they call the Top-10,000 Energy-Consuming Enterprises, although that number is more like 17,000. At the introduction of the new regulations in 2010, these enterprises were expected to employ energy managers, monitor and report on their energy use, prepare energy reduction plans and achieve targets. However, this work has been stymied at the provincial level. This is largely because they have run into several implementation and scale-up barriers.

China will need to overcome these barriers if it is to meet its aggressive goals of cutting its energy intensity 16 percent more and its carbon intensity by 17 percent (compared to 2010 levels) by the end of this year.

While a few provinces have begun to show meaningful results, EnMS implementation is only just starting to take off in most provinces. In Shandong, the leader so far, 657 enterprises have established an EnMS and received certification or favorable performance evaluation by local officials. In Yunnan Province, far more typical of Chinese provinces, less than 30 of the approximately 400 Top-10,000 enterprises have a certified EnMS.

Several barriers limit the uptake of EnMS in the provinces. Many enterprises are struggling because they too often see EnMS as an administrative measure to meet regulatory requirements rather than a tool that can help them cut energy costs and be more productive.

Plus, as in many other multinational firms, senior management in Chinese firms is not engaged in the energy-saving efforts — a necessity if energy culture is to truly be transformed. Further, there are too few experienced, high-quality service providers to assist enterprises in establishing EnMS, leaving a huge gap between demand and supply. Incidentally, these barriers are not unique to China — all other countries face them to some degree.   

My organization, the Institute for Industrial Productivity (IIP), has been helping fill some of these gaps but the demand is so great that we will need many more such organizations to assist in the mammoth task if China is to meet its targets.

One of our most successful pilots took place in Shandong, one of the biggest manufacturing provinces in China. We worked with local partners there to help an inefficient paper mill cut its energy use, which accounted for 30 percent of its total costs.

The mill also was producing high levels of air and water pollution and was the intense focus of provincial environmental authorities that wanted it to clean up its act. After nine months of working with us on an energy management system, the mill had cut its annual energy consumption by 10 percent.

Those savings are equivalent to $800,000 per year. Many such firms are in China — those that are inefficient but just don’t have the know-how or the motivation to implement a successful energy management system. 

So, while the government lays an excellent policy foundation, implementation, tracking and verification of results and scale-up have proven problematic. This is especially the case in China’s most undeveloped areas in the west, and in the largest and dirtiest industries that are facing overcapacity challenges, such as iron and steel, cement and chemicals.

The other issue facing China is a lack of experience within the energy conservation authorities, which are responsible for ensuring that central government goals are met in the provinces. This is an especially acute problem with regard to the tracking and verification of energy efficiency measure implementation results.

About 2,000 such authorities are in China, and their capacity is variable. Again, international organizations such as IIP are stepping in to help them boost their knowledge and skills but there aren’t enough hands to go around.

As work steps up nationally and in the provinces, China also must contend with a changing economy. It has experienced a period of accelerated growth since the new millennium, driven by rapid urbanization and increasing consumption and living standards. But, starting in 2013, the country entered into what the government calls the "New Normal."

It is facing overcapacity in the iron and steel sectors, as well as in the cement and chemicals sectors, and severe air and water pollution, mainly a by-product of its colossal industry base. The economy is slowing down — with the stockmarket crisis the latest in a series of red flags — and this will hit heavy industry hardest.

However, while industry’s economic output will weaken, it will remain the No. 1 energy user. To transition its economy to sustainability, China will need to increase domestic consumption rather than rely on investment in infrastructure and fixed assets. This will mean producing goods in a more energy efficient way and ensuring they have a higher value-add.

The government is also looking at bolstering market-based mechanisms to complement its regulatory incentives for energy efficiency. These include energy price reforms and favorable tax treatment policies, the development of carbon cap-and-trade schemes, scaling up energy efficiency financing programs and continuing support for China’s rapidly growing energy performance contracting industry, which is operated by energy service companies (ESCOs).

China’s leadership essentially sees the market as the key to maintaining its growth and solving economic issues. By devolving power to the market, the government has decided to end subsidies for some energy efficiency programs, and limit market participation to entities that are accredited, registered and listed by the government.

The next few months will be very busy for the Chinese leadership as it prepares its 13th Five-Year Plan to take into account all of these issues. We can expect to see ramped-up efforts to address the country’s growing economic, energy and environmental challenges, and this most certainly will mean a more determined focus on reducing industry’s energy use through strategic energy management.

While China’s soaring energy use, greenhouse gas emissions and air pollution problems have resulted, in part, from international demand for consumer goods, its future is very much in the hands of its people. And right now, that future looks greener.