ESCOs and Building Retrofits in China

The opportunity for building energy efficiency retrofits in China is massive. Currently, 95% of buildings in China are classified by the government as "high-consuming", meaning they use 2-3 times more energy per square foot than buildings in the US and Europe. The China State Development Council Research Centre estimates that if done properly, energy efficiency could provide a quarter of China's new power needs by 2020. At current rates of power plant construction in China, this is about 25 500MW new coal plants avoided every year.

It's also cheaper to invest in energy efficiency. According to the Asia Business Council's recent report on building energy efficiency, gaining a new MW by building new power sources is 4 to 6 times more expensive than gaining the same MW by investing in energy efficiency.

The problem is that investing in these energy efficient solutions takes capital and financing. Wang Hong, technical director for Maunsell AECOM Beijing, thinks one of the problems plaguing energy efficiency investment and financing in China is that banks up to this point have not been very interested in existing buildings. Historically, more of the focus has been on lending to finance new construction and development, limiting funds available for retrofits. Hopefully as the development market cools, banks will start expanding credit to the many promising retrofit projects available. In a positive sign, the Asian Development Bank announced last week that it will invest 800 million yuan ($117 million) in energy efficiency retrofits in mainland China.

Energy service companies (ESCOs) have also started to take advantage of these opportunities to invest in energy efficiency in China and help fill the financing gap. ESCOs identify and finance building energy efficiency retrofits and use the energy savings to pay back the initial investment (more background on ESCOs). The first Chinese ESCOs sprang up in 1998 with help from the Chinese government, World Bank and several other governmental organizations. Since then, the ESCO industry has seen rapid growth. In 2006, about 100 ESCOs financed over 400 energy conservation projects in 16 provinces totaling US$280 million in investment. For comparison, American ESCO's invested about $2.5 billion in energy efficiency retrofits in 2006. Taking into account the higher level of ineffeciency in Chinese buildings along with the sheer amount of floor space in China, the ESCO business has a lot of room for growth in China.

Several large American ESCOs are moving rapidly into the market. At a presentation at a McGraw Hill green building conference in Shanghai in October, Shane Tedjarati, President of Honeywell India and China, described a project that Honeywell had done in collaboration with the Tsingtao Asahi beer factory in Shenzhen. Honeywell did an energy audit and upgrade that included heat recovery, optimization of the cooling and HVAC system, and a centralized control system, which ultimately resulted in 17% annual energy savings. Honeywell provided the financing on a 5-year contract, which meant that Tsingtao didn't have to put any capital into the project. The Asian Development Bank has also partnered with Johnson Controls for its new investment in energy efficiency, which will be a good foray into the market for Johnson.

Given the China-sized opportunity to both make money and reduce carbon emissions, I expect to see much more ESCO activity in China.