During the 11th FYP period, China invested a total of 2.59 trillion Yuan (US$411 billion) in clean energy, comprising 859.2 billion Yuan (US$136 billion) in energy-efficiency improvements and 1.73 trillion Yuan (US$275 billion) in new energy and renewable energy. Figure 1 is an illustration of the composition of China's green energy investment portfolio.
China's investments in clean energy have come from several sources, including direct government investments and incentives, internal capital of businesses, bank loans, public equity markets, venture capital, private equity, and carbon financing. Figure 2 provides a schematic description of primary financing mechanisms for green energy development in China.
Direct Government Support
During the past 5 years, Chinese governments—at both central and provincial level—have undertaken significant efforts to support and incentivize clean energy development and energy-efficiency improvement. A significant amount of public funding has been utilized to support a series of implementation and demonstration programs such as the Ten Key Projects for the use of more energy efficient technologies, the Top-1000 Program targeting the largest industrial energy users, the phase-out of outdated industrial capacity, various environmental protection measures, the Golden Sun Photovoltaic Demonstration Project, the Green Energy County Demonstration Project, as well as low-carbon city and small town demonstration programs.
Government Support to Industrial Facilities, Energy Service Companies, and Projects
To support industrial customers in retrofitting their facilities, China's central government offered financial incentives during the 11th FYP to qualified industrial facilities that achieved verified savings of over 10,000 tce (293 TJ). The awards were 200 Yuan per tce (US$1 per GJ) for facilities in the East region of China and 250 Yuan per tce (US$1.3 per GJ) for facilities in less developed Middle and West regions. The incentives to the country's industrial facilities are continued in the current FYP period (2011–2015); but the amount has been increased to 240 Yuan per tce (US$1.3 per GJ) for facilities in the East region and 300 Yuan per tce (US$1.6 per GJ) for facilities in Middle and West regions. The new incentive has also expanded its coverage to include smaller facilities, making achieving verified savings of 5000 tce (147 TJ) eligible for the award.
Provincial and local governments have also awarded energy-consuming enterprises for energy-efficiency improvements. The Shanghai Municipal Government, for example, awards 300 Yuan per tce (US$1.6 per GJ) of saved energy to enterprises that have achieved measured savings of 5000–10,000 tce (147–293 TJ). The Shanghai government is currently considering raising the level of the award to 500 Yuan per tce (US$2.7 per GJ).
To accelerate the implementation of energy-efficiency measures, the Chinese central government announced a new incentive program in June 2010 that offers a combination of a cash reward and favorable tax treatment to qualified energy service companies (ESCOs). This program targets smaller projects with energy savings anywhere between 500 and 10,000 tce (15–293 TJ) for industrial projects and between 100 and 10,000 tce (2.9–293 TJ) for projects in other sectors.
Central government's funding for ESCOs is matched by incentives from local governments. For every tce of verified energy savings, provincial governments are required to provide a minimum of 60 Yuan (US$9.52) to match the national incentive of 240 Yuan (US$38), making the combined award no less than 300 Yuan per tce (US$1.6 per GJ). The actual level of the local matching fund varies depending on the local situation. Shanghai, for example, has announced that it will match 360 Yuan per tce (US$1.9 per GJ), making the combined incentive to ESCOs 600 Yuan for every tce (US$3.2 per GJ) of energy saved. Beijing announced that the city will match 260 Yuan for each tce (US$1.4 per GJ) of energy saved to supplement the national award. For ESCOs that cannot meet the requirements for the national incentive, the municipal government in Beijing will either offer an award of 450 Yuan per tce (US$2.4 per GJ) or provide an incentive that is equivalent to 15–20% of the project cost.
In addition to direct financial support, the Chinese central government has developed a favorable taxation policy and streamlined accounting rules to strengthen the support for the ESCO industry. A policy notice that was issued jointly by China's Ministry of Finance (MOF) and the State Administration of Taxation in December 2010 and became effective on January 1, 2011 stipulated that ESCOs can be exempted from business tax and value-added tax for taxable revenues generated from carrying out shared-saving type of energy performance contract (EPC) projects. To qualify for this tax treatment, however, energy-savings measures adopted and performance contract terms used by an ESCO need to be in compliance with the requirements specified in the national standard entitled General Technical Rules for Energy Performance Contracting (GB/T24915–2010). In addition, the policy notice stipulated that income tax of ESCOs can be exempted in the first 3 years of earning income and reduced half from the fourth year to the sixth year. To qualify for the income tax treatment, ESCOs are required to have registered capital of at least one million Yuan (US$160,000) and can perform independent work on design, financing, installation, management, and training related to energy service projects. It is also required that the share of investment by an ESCO in any EPC project need be at least 70% in the total project investment and that energy-savings measures adopted and performance contract terms used by an ESCO need to be in compliance with the requirements of the GB/T24915–2010.
As a result of strong government support, by the end of 11th FYP period, the number of ESCO companies increased from 80 to over 800, the number of employees in this sector increased from 16,000 to 180,000, the ESCO market size was enlarged from 4.7 billion Yuan-worth (US$746 million) to 84 billion Yuan-worth (US$13 billion), and the annual energy-saving capacity rose from 600,000 to more than 13 million tce during the 11th FYP. Entering into the 12th FYP period, China's ESCO industry has seen a further growth. According to the ESCO Committee of China Energy Conservation Association (EMCA), by the end of 2011, the number of ESCOs has grown to nearly 4000 and employees in this sector have increased to 37,8000.
To support the rapid development and deployment of renewable energy technologies, the Government of China has created a renewable energy development fund, which includes both direct subsidies and interest payment support. The subsidies include 1350 Yuan (US$214) for producing each ton of fuel ethanol, 20 Yuan (US$3.17) per watt for building integrated photovoltaic (PV) systems, and a fund covering a maximum of 70% of the construction cost of an independent PV system. As of September 2011, the Chinese central government has provided a total subsidy of 10.2 billion Yuan (US$1.6 billion) supporting PV applications. In addition, the fund also provides interest payment support that discounts the interest rate for renewable energy projects by up to 3% for 1–3 years.
For many years, China lacked incentives to foster domestic solar energy use. As a result, merely 10% of solar panels produced by Chinese PV manufacturers were installed in China in 2010. However, China's first nationwide feed-in tariff scheme, announced in August 2011, could fuel the rapid growth of the domestic solar market. The newly issued feed-in tariff will allow project developers to sell solar generated electricity to utilities at a price of about US$0.15 per kWh, which could guarantee a payback in 7 years and cash yields for nearly another two decades. In just several months, the new feed-in tariff has increased estimated solar panel installation to 2000 megawatts in 2011 in China, twice the country's total installed capacity to date.
Government Support for Demonstration Programs
The Chinese central government is increasingly giving attention to funding demonstration programs to build experience and create best practices in developing and deploying clean energy. The Golden Sun Photovoltaic Demonstration Program is one of several national initiatives underway. Under this program, qualified PV projects including distributed PV applications, large PV facilities, stand-alone PV and PV hybrid applications in remote or unelectrified areas, commercialization of PV as well as PV-related technologies, capacity building, and PV system standardization are all eligible for government incentives, which account for half of the total project investment (70% for projects in unelectrified areas).
The Government of China is also investing 4.6 billion Yuan (US$730 million) to create a Green Energy County Demonstration Program in 108 rural counties to encourage green energy technologies and application in rural China. The types of qualified projects under this program range from centralized methane gas supply to biomass gasification, biofuel, rural renewable energy applications, and the development of rural energy service infrastructures.
In addition, the central government is providing up to 80 million Yuan (US$13 million) to each participating city that is selected as a pilot for the national demonstration program of renewable energy application in buildings. Cities that have taken early actions to adopt supporting policies in promotion of renewable energy applications in buildings will be given preferential treatment. In order to receive funding, large cities are required to cover at least three million square meters (32 million square feet) of building area by renewable energy, whereas smaller cities need to cover a minimum of two million square meters (21 million square feet). To augment the impacts of the government funding, pilot cities are encouraged to utilize the incentive to leverage private investment through credit enhancement and other market approaches.
Furthermore, the Government of China is providing an unspecified amount of funding to support comprehensive measures targeting all sectors with integrated solutions from policies, planning, structural changes, to technology applications and the use of market-based approaches. The Green and Low-Carbon Small Town Demonstration Project and the Demonstration Project of Utilizing Comprehensive Fiscal Policies to Promote Energy Conservation and Pollution Reduction are two major national initiatives launched by the Chinese Government for identifying integrated solutions. To date, seven small towns and eight cities have been selected as the first round of pilot sites under the two demonstration projects.[39, 40]
Government Support for Promoting the Use of Energy-Efficient Products
As part of the government's nationwide campaign for energy conservation and emission reductions, the Chinese government has provided significant incentives to promote the use of energy-efficient products. In 2008, for example, China launched a nationwide compact florescent lighting (CFL) promotion program aimed at greatly increasing the use of energy-efficient light bulbs. Under this program, the government offered a 30% subsidy on wholesale purchases and a 50% subsidy on retail sales of energy-saving light bulbs. A total of 360 million subsidized CFLs were sold to consumers between 2008 and 2010. This helped the market share of high-efficiency illumination products to reach 67% in China during the 11th FYP period.
In May 2009, the Chinese government launched a nationwide program promoting energy-efficient appliances and equipments. The Energy-Efficient Products for the Benefit of the People program promoted the widespread use of energy-efficient appliances and equipments including air conditioners (ACs), refrigerators, washers, TV, computer displays, and electric motors. For example, the central government offers subsidies of 500–850 Yuan (US$79–135) per unit for grade 1 AC products and 300–650 Yuan (US$47–103) per unit for grade 2 AC products. Local governments provided an additional subsidy of 150 Yuan (US$24) for grade 1 AC units and 100 Yuan (US$16) for grade 2 units. These subsidies have helped promote 30 million high-efficiency ACs. Within just 2 years, the market share of high-efficiency AC units in China increased 13-fold to 70% from 5%.
In June 2010, the Chinese government launched a pilot program in six Chinese cities to provide direct subsidies to buyers of electric and hybrid cars. The pilot provided a discount of 60,000 Yuan (US$8800) for purchasing electric vehicles and 50,000 Yuan (US$7320) for plug-in hybrids. In addition, the Chinese government offered a nationwide subsidy of 3000 Yuan (US$476) on purchases of cars with 1.6-L engines or smaller and that consume 20% less fuel than the current fuel economy standards. So far, the central government has allocated 4.3 billion Yuan (US$683 million) to support the energy-efficient automobile program.
In addition, Chinese governments at all levels have invested directly in energy-efficient products through the green procurement program. According to data released by the Ministry of Finance, in 2010 alone, governments at different levels in China spent a combined 72.1 billion Yuan (US$11.4 billion) in procuring energy-efficient supplies, accounting for 77.3% of the total supplies of the same types.
Government Support for Developing Strategic Emerging Industries
To enable the country become a leader in vital emerging market sectors, China has made the development of seven key strategic emerging industries the country's strategic focus of economic development in the 12th FYP period and beyond. The strategic emerging industries include energy efficiency, information technology, biotechnology, high-end equipment manufacturing, new energy, advanced materials, and new-energy vehicles. The Chinese government has created a special fund and allocated four billion Yuan (US$634 million) supporting the development of these emerging sectors in 2011. The Government's allocation can be used as venture capital investment, subsidies for accelerating commercialization, and incentives for spurring consumption in these strategic emerging sectors.
The Role of China's Banks
In addition to the direct incentives, the Chinese Government also offers low-interest loans and large credit lines through its policy bank, the China Development Bank (CDB), to finance the country's clean energy development. The CDB is primarily responsible for raising funds for large infrastructure projects and serves as the engine that powers the national government's economic development policies. In 2011, the CDB lent a total of 658 billion Yuan (US$104 billion) in financing for energy-saving and pollution-control projects. It also provided China's major solar panel manufacturers with a combined total of 203 billion Yuan (US$32.2 billion) in loans to assist them in increasing production capacity and expanding overseas operations. This expansion could double global solar cell production capacity and enable these Chinese companies to gain larger shares in important markets. Governments’ financial support to foster the growth of domestic clean energy business is common outside China. The U.S. Department of Energy (DOE), for example, created a loan guarantee program as part of the Energy Policy Act of 2005 to support clean energy development. The program leverages federal dollars by allowing the DOE to guarantee the debt of clean energy developers and manufacturing companies. To date, the DOE has finalized or issued conditional commitments for nearly US$36 billion in loan guarantees and has supported a diverse portfolio of over 40 projects.
Despite strong financial support from China's governments at both the central and local levels, the majority of the green investments in China during the 11th FYP period have come from domestic financial institutions. In the area of energy-efficiency investment, for example, public funding accounted only for 14.7%, whereas the majority (85%) came from the commercial sector. Loans made by China's commercial banks have played an essential role in meeting the financial needs of the clean energy development in China and at the same time have helped phase out the inefficient operations.
Actions taken by domestic financial institutions in restricting the expansion of highly polluting and highly inefficient (liang gao) industries and promoting green development have been largely driven by the adoption of a ‘Green Credit’ Policy that mandates lenders to link banks’ lending decisions with borrowers’ energy and environmental performance. The ‘Green Credit’ policy had helped to move loans away from the liang gao sectors. According to the China Banking Association, the share of commercial loans issued to major energy-consuming and environmental-polluting industries such as iron and steel, cement, glass, coal chemical, calcium carbide, and shipbuilding in China's total commercial lending was only 3.57% in 2010. In 2009 alone, the total loan amount supporting energy conservation and pollution reduction reached 856 billion Yuan (US$135 billion). The loan volume of China's commercial banks in financing energy-efficiency and environmental-protection projects has quadrupled in 2010 from the 2006 level.
To meet the growing demands for financing and to address the barriers to accessing financing (discussed in a following section), some Chinese banks have taken innovative approaches. The Bank of Beijing, for example, announced in April 2011 that it signed a strategic collaboration agreement with the nation's ESCO industry trade group, the ESCO Committee of China Energy Conservation Association (EMCA), to provide EMCA's member companies with a special line of credit worth a total of 10 billion Yuan (US$1.6 billion) for the next 5 years. A special loan program has recently been launched in some banks, through which industrial facility owners or ESCOs that have limited equity/asset can pledge their entitled shared-savings as collateral. As of February 2011, for example, the Pudong Development Bank has issued 47.4 million Yuan (US$7.5 million) of this type of loans.
Information Disclosure to Facilitate Green Financing and Investment
In 2006, China's central bank, the People's Bank of China, created a nationwide credit database, which today consists of credit information as well as information on administrative penalties for 600 million individuals and 16 million businesses across China. The database allows various government agencies to share information and it is accessible to all banks and financial institutions that rely upon the information to make their investment decisions. Most significant information in the database is related to environmental compliance of businesses. At the end of 2010, 40,000 entries on environmental violation information and 3000 environmental assessment results were entered into the database by the MEP. To a significant extent, the information sharing and disclosure has helped Chinese financial institutions to make informed decisions regarding their investments and direct their financing toward environmentally sound projects.[59, 60]
Support From International Donor Agencies
International donors have also played an important role in facilitating green financing and building capacity for domestic financial institutions in providing green financing in China. As early as 1998, the China Energy Conservation Project was launched with a grant from the European Commission and the Global Environment Facility (GEF) and a loan from the World Bank. This project provided lines of credit to three Chinese ESCOs and helped them adapt energy performance contracting to China's market. It also created a loan guarantee program to help build a three-party investment mechanism involving project hosts, banks, and ESCOs. In addition, it supported the creation of China's ESCO association, EMCA, to build the institutional support for ESCOs and make it a representative of this emerging industry in China.
During the 11th FYP period, the World Bank and the GEF launched a 5-year China Energy Efficiency Financing Project (CHEEF) with multiple goals. The first goal was to provide energy-conservation investment lending to industrial enterprises or ESCOs through carefully selected domestic financial intermediaries (DFIs) who in turn will on-lend the World Bank/GEF funds along with equal amount of loans committed from their own resources. The second goal is to demonstrate to China's domestic banks effective business models and institutional arrangements for the preparation and financing of energy conservation projects, focusing primarily on preinvestment activities such as feasibility studies, due diligence, development of new financing mechanisms, and institutional arrangements. Other goals of CHEEF include strengthening the government's capacity in implementing national energy-conservation policies and programs and supporting program monitoring and reporting.
The Export-Import Bank of China (EXIM), one of China's policy banks that normally serves large customers, and the Huaxia Bank, a joint stock bank that traditionally serves smaller customers, were selected as the two DFIs participating in the CHEEF project. As of March 31, 2011, CHEEF phase I has disbursed US$95 million and leveraged investments of US$177 million from EXIM and Huaxia and US$216 million from industrial facilities, which is estimated to result in 1.5 million tce of energy savings and four million tons of CO2 emissions reductions every year once these projects are in operation. The World Bank has approved loans of US$100 million for each of two following phases of CHEEF and selected EXIM and the private Min Sheng Bank, separately, as the implementing DFIs.[63, 64]
The French Development Agency (FDA) signed a collaboration agreement with MOF in 2007 to jointly launch a green loan project under which the FDA provided 60 million Euro (US$78 million) to the MOF for carrying out a financial intermediary lending operation for energy-efficiency retrofit and renewable-energy development projects. Three Chinese joint stock banks—Huaxia, China Merchants Bank, and Pudong Development Bank—were selected as the three DFIs to provide the FDA loan to qualified projects at below-market rates. The goals of the FDA loan are not only to finance green energy but also to enhance the capacity of China's banks in assessing energy-efficiency and renewable-energy potentials and improving their lending practices in green energy. The development and dissemination of a guidebook on energy-efficiency and renewable-energy project financing was an important output from this collaboration. Because of the initial success in implementing this project, the FDA and MOF decided in 2010 to extend the operation to the second phase and increase the FDA loan to 120 million Euro (US$156 million).
In addition to providing loans to support China's green development, international donors have also provided China with other support. In March 2011, the World Bank launched the Provincial Energy Efficiency Scale-Up Program in China, assisting three Chinese provinces to meet their energy-efficiency goals by strengthening their institutional systems, improving local implementation capacity, and deploying more market-based incentive mechanisms for energy-efficiency investments. One of the three provinces, Shandong, was offered a loan of US$150 million to improve its energy efficiency, particularly through lease financing.
International donors have also provided China with significant support in mitigating the financial risks associated with green lending. As part of its China's Energy Conservation Project, the World Bank/GEF launched a major loan guarantee program in China in late 2003 with a total of US$26 million in GEF grant financing. Unlike traditional guarantee programs that support broader energy-efficiency investments, this guarantee program was designed solely to support the development of the local Chinese ESCO industry. The program was operated by China's largest guarantee company, the China National Investment & Guaranty Co. (I&G), using GEF resources held by the Government of China as reserve resources to back the loan guarantees issued. As of the end of 2009, I&G had worked with 12 banks and six provincial guaranty companies to provide a total of 516 million Yuan (US$82 million) guarantees to 148 energy-efficiency projects carried out by 42 ESCOs.
The International Finance Corporation (IFC), a member of the World Bank Group, launched the 6-year China Utility-Based Energy Efficiency Finance Program (CHUEE) in 2006. The CHUEE program was jointly funded by the IFC, the GEF, the Ministry of Employment and Economy of Finland, and the Norwegian Agency for Development Cooperation. The primary goals of this program are to reduce greenhouse gases emissions by financing energy-efficiency projects in China and to create an effective financial system for Chinese enterprises and project developers to invest in energy-efficiency projects. Under this program, the IFC would provide a combined package of risk-sharing facility, technical assistance, and advisory services to multiple players including commercial banks, ESCOs, energy-efficiency equipment suppliers, and utilities.
As an important part of CHUEE program, IFC cooperates with Chinese commercial banks, offering them a risk-sharing facility under which IFC bears a certain portion of the loss for all loans made by Chinese banks within the energy-efficiency financing portfolio. Since the launch of the program, three Chinese banks have participated in the CHUEE program—the Industrial Bank, the Bank of Beijing, and the Shanghai Pudong Development Bank. With the support of CHUEE, participating banks jointly provided loans totaling 3.5 billion Yuan (US$555 million) as of June 2009, which financed 98 energy-efficiency projects such as heat and gas recovery power generation and the introduction of energy-efficient production systems. Although the steel, chemical, and cement industries have benefited the most from these targeted investments, China's financial institutions have learned a great deal in risk-based lending. In addition, an independent evaluation of CHUEE's program found that members in the CHUEE-supported ESCO network enhanced their chances of obtaining bank financing by 31% and technical assistance to ESCOs independent of membership increased the probability of projects obtaining financing by 27%.