PROJECT Development Facility

Request for pipeline entry Approval

Agency’s Project ID: 523295

GEFSEC Project ID: 2624

Country: China

Project Title: China Utility-Based Energy Efficiency Finance Program (CHUEE)

GEF Agency: IFC/World Bank

Other Executing Agency(ies)

Duration: 60 – 84 Months

GEF Focal Area: Climate Change

GEF Operational Program: OP5

GEF Strategic Priority: CC1, CC2

Estimated Starting Date (PDF):

Estimated Starting Date (Project): August 2005

Estimated WP Entry Date: March 2005

Pipeline Entry Date: October 2004

Financing Plan (US$)
GEF Allocation
Project (estimated) / 12,000,000 –16,500,000
Project Co-financing: / 97,800,000
PDF A*
PDF B**
PDF C

Sub-Total GEF PDF

PDF Co-financing (details provided in Part II, Section E – Budget)
Multiple sources
Sub-Total PDF Co-financing:
Total PDF Project Financing:

* Indicate approval date of PDFA

** If supplemental, indicate amount and date of originally approved PDF

Record of endorsement on behalf of the Government:

(Enter Name, Position, Ministry) / Date: (Month, day, year)
This proposal has been prepared in accordance with GEF policies and procedures and meets the standards of the GEF Project Review Criteria for approval.
Steve Gorman
GEF Executive Coordinator, World Bank / Alan Miller, GEF Coordinator
Date: (Month, Day, Year) / Tel. and email: 202-473-8324


PART I - Project Concept

A – Summary

This Project will support a partnership between gas utilities, suppliers of energy efficient equipment, and commercial lenders to promote the more rapid adoption of energy efficient equipment in China. This will be accomplished by organizing and providing marketing and financing services to commercial, industrial, residential, and municipal sector energy users in China to implement energy efficiency (EE) equipment installations (“sub-projects”) primarily associated with the expanded availability of natural gas in China. This approach is consistent with the GEF strategic priorities CC-2 Increased Access to Local Sources of Financing for Renewable Energy and Energy Efficiency and CC- 1 Transformation of Markets for High Volume Products and Processes. As a further benefit, it is expected that the project would promote more rapid and environmentally beneficial fuel switching to natural gas. However, fuel switching per se, would not be financed by GEF resources or included as an incremental global environmental benefit in the incremental cost calculation.

The need for this project arises from traditional barriers to the financing and purchase of higher capital cost, yet cost-effective energy efficient equipment. The situation is exacerbated by Chinese banking policies, and the disincentives to finance SME-scale business opportunities. In designing a response to these barriers, IFC has not only drawn on its extensive experience in energy efficiency finance in other regions, but also on its detailed knowledge of the unique constraints and opportunities involved in working in China. The result is an approach that builds on opportunities created by the expansion and marketing of natural gas in partnership with stakeholders more commonly engaged in promoting energy efficiency -- equipment suppliers and commercial lenders.

The first element in the approach is based on the rapid expansion of the gas infrastructure in China, which provides an opportunity to leverage the interests of entrepreneurial gas utilities. Specifically, gas utilities marketing to new customers provide a vehicle for wide-spread modernization of end-user facilities to bring about a significant improvement in the efficient use of energy. IFC will work with commercial financial intermediaries in partnership with those gas utilities capable and interested to provide new gas customers with access to debt financing and technical services. Building on initial activities with a gas utility already committed to the concept, the Project will include an extensive outreach component to identify and engage other utilities. This package of services will enable expanded investment in the modernization of end-users’ physical plants coincident with their investments in fuel-switching to gas.

The proposed Project’s focus is on increasing the efficiency of the energy-using equipment in the end-users’ facilities through comprehensive technical, installation, and finance services provided by commercial partners whose capacity building would be supported by the GEF Project. While emphasizing opportunities for efficiency improvements associated with the use of gas, the Project would not be limited to gas using equipment, and would explicitly seek opportunities for additional efficiency improvements as a package of services available to end-users. While the efficiency improvements are the focus of the program, the comprehensive efficiency improvement projects are also expected to enable additional gas-switching as a by-product of these investments, thereby enhancing the economics of gas as a fuel competing in a difficult market, characterized by extremely cheap, dirty coal. This merging of interests in enhancing end-use energy efficiency and marketing of natural gas is central to the success of the project and to the future replicability and sustainability of impacts.

The key partners in this Project are the: (i) equipment suppliers and service providers (e.g., ESCO’s) who will market, implement, and service these investments; (ii) end-users who purchase and finance the systems designs, installation and equipment; (iii) financial institutions (FI) whose debt capital will enable the investments; and, (iv) utilities whose marketing and sales capabilities allows the Project to penetrate the market and access the end-user.

(i)  Equipment Suppliers and Service Providers. The Project design will organize the equipment suppliers to facilitate end-users' access to these services from reputable providers, while ensuring that opportunities for high efficiency project investments associated with new gas connections are recognized and realized. As such, the Project will encourage competition and develop greater capacity within the equipment supply and project development industry. As these companies are largely SMEs, the GEF support for capacity building and enhanced market access is important for the Project's sustained impact.

(ii)  End-Users. The equipment suppliers and service providers will be organized and aggregated within a network, which will be leveraged by the gas utilities as part of their marketing programs targeting the end-users. From the perspective of the end-user, the Project seeks to provide consumer education and information, enabling access to a network of credible service and equipment providers.

(iii)  Financial Institutions. The other key element of this package is the standardized finance products, which the FI partners will offer to the end-user in coordination with the gas utilities.

(iv)  Utilities. The utilities serve as the sales and marketing platform for delivering this comprehensive energy efficiency equipment financing package to the end-user.

By consolidating the equipment, design, service and finance as a single offering, the Project seeks to achieve a systematic transformation of the market for energy efficiency equipment finance. While the Project works directly with gas utilities to leverage their self-interest in expanding gas services, the key implementation partners at the sub-project level will be the equipment vendors and FIs who install and finance the efficiency projects for the end-users.

IFC estimates that the Project will finance US $ 93.3 MM in EE sub-project financing, which will achieve, in the aggregate, an estimated 1.98-5.12 million tons carbon equivalent emissions reductions with an estimated Project cost ranging from $1.71 to $6.30 per ton C; (these estimates are based on a $12 million Project GEF budget)[1]. The strategy to achieve these GHG emissions reductions is to “piggy back” natural gas equipment upgrades with a comprehensive energy efficiency finance program working with motivated private sector actors.

This Project’s design is based on three main findings. (1) Utilities can be effective agents and aggregators for marketing and delivering EE equipment and projects. (2) The associated investment process which is now needed to retrofit end-users’ energy systems to use gas presents a significant opportunity to simultaneously develop and implement comprehensive end-use EE projects with the same consumers. (3) The combination of displacing coal and carbon intensive fuels with less CO2 emitting natural gas and simultaneously promoting the accelerated use of more energy efficiency equipment has major potential for GHG emissions reduction in China[2].

Marketing capacities for EE equipment are underdeveloped in China and customers face knowledge and first-cost financing barriers to acquire EE and efficient gas-using equipment. By working with gas utilities as marketing agents, the Project will reach, educate, and deliver services to a large set of energy users systematically. The market reach of utilities will be combined with (i) a cooperating network of qualified EE equipment and service suppliers to co-market and implement projects, offering a range of EE equipment and services, (ii) partner FIs to provide loan financing to end-users, and (iii) a technical assistance program to support marketing and preparation of EE sub-projects for investment.

The gas industry is very young in China. Recent investments have been made in gas supply and transmission infrastructure. In their development to date, gas distribution utilities have generally concentrated their resources on gaining new concessions, building out distribution systems and connecting new customers. The next wave of investment need is on the customer side of the meter, where access to capital is limited and many small decision makers and a relatively undeveloped service industry impedes rapid uptake of new efficient technology. Thus, there is a need for utilities to offer services to customers to design and acquire gas using systems. In the process, opportunities exist to promote, develop and implement comprehensive EE measures in end-user facilities; the Project will facilitate these.

Utility Partnerships

The Project would be national in scope, with the intention of developing a broad network of gas utility partners ultimately participating on a competitive basis with the Project’s commercial FI partners. In preparing this Concept Note, IFC has conducted a comprehensive scoping exercise to evaluate those gas utilities most active and interested in such a partnership. The process identified a strong potential gas utility partner with which IFC is currently engaged in developing the initial design for the Project’s gas utility partnership component. In IFC’s experience working to foster development in frontier markets such as this one, it has been critical to identify a strong “first-mover” private sector partner. The IFC/GEF Efficient Lighting Initiative (ELI) and Commercializing Energy Efficiency Finance (CEEF) Programs further show that it is essential to initially undertake a focused effort with a partner committed, focused, and culturally entrepreneurial in order to build a broad constituency among private sector players in the market.

Based upon extensive due diligence in the Chinese gas market, IFC has identified Xinao Gas Holdings, Ltd., (Xinao), as a promising initial partner. Xinao operates under government concessions in 39 cities serving over 18.5 million people, primarily in middle-size cities in central and eastern China. Consequently, the environmental and economic developmental benefits of a Xinao partnership would reach the interior China populations providing substantial developmental benefits. Based upon current discussions with Xinao, the initial focus of a Xinao partnership would be Shijiazhuang in Hebei province, an industrialized and heavily polluted city of approximately 4 million people 200 km southwest of Beijing.[3] Xinao estimates a total demand for financing in four of its territories for gas using equipment alone in the range of 600-800 million RMB ($70-95 million).

Though the initial due diligence has identified Xinao as a motivated partner, the Project budget will support an extensive outreach program to develop partnerships with additional utilities, besides Xinao, including gas and electric. As part of the Project budget, GEF resources will be allocated to cover the implementation costs associated with launching the utility based energy finance program with multiple utility partners. The inclusion of additional utility partners will depend on their willingness to participate, and the level of their financial and managerial resource commitments to the Project, and their ability to generate sub-project investments. The outreach program to engage additional utilities that will be part of the Project implementation, will be defined and developed during pre-appraisal prior to work program submission.

B - Country ownership

1.  Country Eligibility

The People’s Republic of China ratified the UNFCCC on January 5, 1993.

2.  Country Drivenness

The rationale for the Project’s key elements -- a gas-utility based energy efficiency program -- is based on China’s energy and gas market conditions and the Chinese government’s priorities concerning energy conservation and energy supply.

Chinese Government Support. The Project is a product of a request made by the Ministry of Finance/GEF Focal Point to IFC to design and implement a new private-sector based energy efficiency (EE) and/or renewable energy (RE) finance initiative, to be supported by GEF funds under the Climate Change focal area. On-going dialogue between IFC, and the Ministry of Finance and several motivated private sector actors, including Xinao Gas, several Chinese FIs, equipment suppliers and service providers, has enabled IFC’s Project design team to develop a country driven project, which: (i) addresses the government’s strategic priorities as set-forth by the National Development and Reform Commission, Eleventh Five-Year Plan and the “energy conservation law”[4]; (ii) supports the government’s priorities for accelerating the use of cleaner burning natural gas; (iii) operates in the context of the commercial realities of an existing, viable private sector participant in the market; and, (iv) responds to the market’s demands and shortcomings. At each stage of development over the past 12 months IFC has been in communication with the Ministry of Finance.

3. MARKET BACKGROUND SUPPORTING PROJECT RATIONALE

China’s Energy Sector. China ranks as the world’s second largest energy consumer and the second largest national source of greenhouse gas emissions, mainly as a result of fossil fuel combustion. China’s energy-related carbon dioxide emissions in 2001 totaled nearly 870 million tons of carbon. The nation’s per capita energy use and emissions, nevertheless, average only one-twelfth that of the United States, the largest emissions source, and just over half that of the world as a whole. Chinese leaders have for decades combined population planning, economic reform, and energy-efficiency policies to hold the GDP elasticity of energy demand well below one, meaning that energy use has grown only about 60 percent as fast as the economy.[5] However, recent data indicate that energy demand grew perhaps one-third faster than GDP in 2002-2003 as production of energy intensive materials such as steel, cement, and chemicals expanded at extraordinarily high rates. Electricity consumption grew over 15% in 2003 and the country is experiencing broad power shortages in the summer peak months.