Promotion of Energy Performance Contracting

The ESCO industry has developed rapidly in the last decades. The total number of ESCOs reached 2339 in 2012(GBPN, 2013). During the 11th Five-Year period, the cumulative investment in Energy Performance Contracting (EPC) projects reached 68.395 billion Yuan, and resulted in energy savings of 22.43 million tce per year, and CO₂ reduction 61.067 million tonnes per year. The industry sector takes up 71.7% of the total investment, for instance, metallurgy production, building material industry, and power industry etc. The building sector and transportation are 26.3% and 1.8% respectively. Based on an inspection for about 100 ESCOs, building energy saving service projects account for 58% of the total projects. However, the output values of building energy efficiency projects are less than 1/4 if the total output values of the ESCO industry (GBPN, 2013).In contrast, the potential market for EPC in the building sector is extremely huge due to the large demand of retrofitting existing buildings.
The dominant EPC model in China is shared saving contract. The shared model requires high upfront cost to be born by ESCOs. Most ESCOs in China are SMEs with relatively low financial capital and revenues, which has difficult to bear such a high costs. Meanwhile, financial institutions in China are generally unwilling to provide them finance.
The building owners lack motivation to implement EPC due to the low energy prices, unclear benefits, floor-area-based heating bills etc.

The overall aim of the policy set is to increase the use of EPC. EPC, in turn, usually optimises larger energy-using systems through investment in retrofits and through energy management.
Policy 1 and other local supportive policies have been regarded as the milestones for EPC development in the last 12 years, because EPC was first promoted by the central government in China.
Policy 1 aims (1) to foster a number of specialized energy service companies and establish a regulated energy service market by 2012 and; (2) to establish a comprehensive energy service system so that EPC will be one of the main approaches for energy retrofitting projects.

It is a national policy.

Relevant sectors

• Residential
• Services: Commercial and public services

The technological focus of this policy set includes both buildings and appliance technologies. However, it does not focus on particular technologies.

It targets various technical actions as well as energy management.

Relevant target groups

• Investor As customers of ESCOs who then do not have to invest their own money.
• Investor-occupier As customers of ESCOs who then do not have to invest their own money.
• Energy Service Company As providers of EPC
• Governmental actor Local governments are to promote EPC in their territory using the guidance and financial incentives from the national government.

Direct beneficiaries

• Investor

  The customers of EPC will benefit from improved building systems and lower energy bills.

• Investor-occupier

  The customers of EPC will benefit from improved building systems and lower energy bills.

• Energy Service Company

  ESCOs can increase their business due to the policy.

Indirect beneficiaries

• Tenant

  If the building owner enters into an EPC, the tenants may benefit from lower energy bills.

Relevant barriers

• Knowledge and information barriers: Policy 1 and Policy 3 mainly addressed the knowledge and information barriers, such as local governments’ uncertainty about the support on energy service industry development, customers’ uncertainty about the energy performance contracting procedure.
• Economic and financial barriers: The barrier addressed in Policy 2 is the access to financing/lack of capital by ESCOs.

Relevant incentives

• Saved energy costs: For ESCO customers
• Directly increasing earnings or profits for actors on the supply side: for ESCOs providing EPC

The following pre-conditions are necessary:
Agencies or other actors responsible for implementation
The local governments as well as Ministry of Housing and Urban and Rural Development (MOHURD) and their line offices at local level.

Funding
Financial incentives (including grants and tax incentives) are provided to EPC projects, based on the actual saving amount. The funding comes from the central and provincial governments’ budgets.

Quantified target
According to the Energy Conservation Service Industry Committee of China Energy Conservation Association (EMCA), during the 12th Five-Year period (2011-2015): 1) the number of ESCOs is expected to increase from 782 to 2500; 2) gross turnover will reach 300 billion Yuan; 3) EPC investment is to be more than 150 billion Yuan; 4)planned energy savings are planned at 40 million tce.

Actors responsible for implementation
The local governments as well as Ministry of Housing and Urban and Rural Development (MOHURD) and their line offices at a local level.

Monitoring
EPC projects are included in the annual inspection list by MOHURD.
In February every year, provincial financial departments should submit approved EPC projects and financial reports to the Ministry of Finance (MOF), who together with National Development and Reform Commission (NDRC) organize an inspection for the implementation and energy performance of subsidised projects at local level.

Evaluation
Evaluation of the energy service industry development is conducted by organizations such as Energy Conservation Service Industry Committee of China Energy Conservation Association (EMCA).
Based on the submitted reports and the inspection results, MOF and NDRC will make the plan for next year.

• Dynamic market transformation and/or innovation: The policy set explicitly aims at accelerating EPC development in China.
• Avoiding lost opportunities: This policy set avoids the loss of opportunities for energy saving in those buildings or systems and components that, for example, would otherwise not be energy-efficiently retrofitted.
• Minimising rebound effects: The policy set contributes to minimise rebound effects, because energy management of the building is part of the service.
• Minimising snap-back effects: The policy set supports the market growth of EPC and thus can minimize the snap-back effect.
• Minimising free-rider effects: As most of the clients for EPC would not have been able to realise the energy savings themselves due to manifold barriers, the free-rider effect is likely to be small.
• Creating Spill-over effects: The policy set aims at the transformation of the EPC market and will thus create spill-over effects. For example, spill-over effect can be increased through training provided by EMCA. However, the spill-over effect is still limited, for instance, by the lack of standardisation.

• Financial institutions are unwilling to provide them finance, due to (1) financial institutions’ lack of information and knowledge of EPC; (2) the inconsistency of the financial institutions’ operational mode based on conventional financing rules and the saving stream cash-flow financing for energy service companies; (3) financial institutions’ lack of technical expertise and standardized method to evaluate EPC projects (GBPN, 2013).
• Many of ESCOs were previously providers of single equipment and technologies (Long, 2008). Thus, they lack the technical expertise to implement systematic energy efficiency projects (IFC 2011). Despite the large number of ESCOs, ESCO industry is rather underdeveloped in China. Most observers believe many ESCOs were merely established to take advantages of ESCO’s status to obtain tax preference(Kostka and Shin, 2013) 
• Insufficient measurement and verification of energy savings: three methods stipulated in national regulations are being commonly applied for measuring and verifying energy savings. However, no clear guidelines of these methods are given. Additionally, the three methods do not enable systematic evaluation of building energy consumption. Different third party auditing organisations thus use different methods to verify energy savings, which leads to different results. In addition, in total, there are only 26 certified third party auditing organisations, which is very limited given the rapidly increased number of ESCOs (GBPN, 2013).
• Energy savings from single building projects are small, which may not compensate the high transaction costs(GBPN, 2013). Compared to EPC in the industry sector, the administrative procedures of EPC in the building sector are more complex (Real Estate News, 2011 ).
• It is very difficult to reach 100 tce annual energy savings through building energy efficiency retrofitting (the average energy savings from building energy retrofitting is about 12 kgce/m² (Xinhua, 2014)), which makes it difficult for ESCOs to obtain the subsidies (Real Estate News, 2011 ).

• Capacity building and awareness raising for clients, financial institutions and fund managers as well as relevant governmental agencies 
• Creation of credit guarantee mechanism for ESCOs through public and international fund;
• Capacity building for ESCO professionals;
• Standardisation of ESCO activities 
• Development of support schemes for independent project and market facilitators 
• Increasing confidence in ESCOs e.g. through an improved accreditation or certification scheme, the establishment of a transparent list of trustworthy ESCOs

Concrete figures in energy savings/year
Achieved energy savings data is only available for the 11th Five-Year (2006-2010) period: the energy savings were 22.43 million tce per year, and CO₂ reduction 61.067 million tonnes per year.

For the buildings of energy efficiency projects, the energy saving should reach 100-10000 tce/year. Subsidies are provided by the central and provincial governments together, in which the central government and provincial government provides 240 Yuan/tce and no less than 60 Yuan/tce, respectively. Some local governments provide higher subsidy than that which is specified by the national standard, for example, Shanghai and Beijing provide financial support with 600 Yuan/tce and 500 Yuan/tce, respectively.
The cumulative investment in EPC projects during the 11th Five-Year (2006-2010) period reached 68.395 billion RMB.
According to the ESCO committee - the China Energy Conservation Association (EMCA), up to 3900 companies had been registered in energy saving service sector by the end of 2011. 1472 companies have had Energy Performance Contracting (EPC) projects, increasing by 88.23% compared to that in 2010. The gross output value of the energy saving service industry was 125.026 billion Yuan in 2011 exceeding 100 billion Yuan for the first time.