2018 marked the 40th anniversary of China’s Economic Reform and 20th anniversary of China’s ESCO industry. China’s ESCO market now represents 59% of global total. Much progress has been made since the beginning of China's reform, and the industry is gearing towards greater focus on quality, productivity and deeper structural changes.
According to the EMCA’s Annual Report 2018 the ESCO market grew by 15.1%, project investment by 5.2%, employment grew by 44000 people. Total number of ESCOs is now 6439 (+302 compared to 2017). Industry still takes up majority share of ESCO market (67%), but the number of ESCO projects in buildings sector is growing as well as size of projects.
The ESCO market is still poised for growth. Energy related costs still represent around 30% of production cost in energy intensive sectors. There is significant potential in the building sector too, with 60 million square meters currently under renovation. Ministry of Housing and Urban-Rural Development (MoHURD) is providing support to ESCOs with new guarantees to facilitate ESCO projects in the building sector.
ESCO projects in China are still primarily focused on delivering energy savings. However, some companies are starting to buy energy directly from the wholesale market (from utilities who have an energy efficiency target) to distribute to end users.
While EPC shared savings where the only type of ESCO contracts available in the early stages of China's ESCO market, the market has since diversified significantly. Today EPCs with shared savings still represent around half of the market, but there are increasingly more other models, including energy supply contracts, BOO/BT/BOT/BOOT, as well as engineering procurement contracts.
Contract length tends to vary between 5-8 years (avg. 7 years).
ESCO projects are largely financed via money supplied by ESCOs (50% borrowed from banks and 50% from ESCO equity). Some ESCOs are co-operating with leasing companies.
EMCA hosts an investment platform that connects ESCOs with financial institutions. Through this platform, EMCA provides a range of professional services, including inter alia feasibility assessments, financing strategy analysis, and identification of projects. This type of activity be of interest to other National ESCO Associations.
China’s ESCO market growth has been a result of favourable policies in the 12th Five-Year Plan (2011-2015). Policies including tax incentives, a directive specifically for ESCOs and accounting systems that have accommodated ESCO projects are responsible for ESCOs central role in delivering energy efficiency improvements in China.
In June 2010, the Ministry of Finance (MOF) and National Development and Reform Commission (NDRC) pledged USD 3 million to support ESCOs projects in industry, building and transport sectors. Local governments followed central government lead by enacting policies to promote ESCO activity. A further act of good faith towards ESCOs followed in December 2010 when the Ministry of Finance and Tax Bureau detailed financial incentives for ESCOs including; three years of corporate income tax exemption, 50% reduction in corporate income tax the following three years, exemption from sales tax VAT, and a statement ensuring that ESCOs may be subsidised by both central and local governments for eligible EPC projects (IFC 2015).
The 12th Five-Year Plan for Energy Saving and Emission Reduction enacted in 2012 set the targets for a 16% reduction in energy consumption per unit of GDP by 2015 compared to 2010, a decrease of 8-10% in total emissions of major pollutants for the same period, and established specific goals for industries, key areas and major energy-consuming equipment. Additionally public institutions were requested to undertake energy efficiency operations and actions. Motivation to achieve entity targets is ensured by incorporating the achievement of goals into provincial government assessment.
Following the launch of the 13th Five-Year Plan, many of these policies have been withdrawn or changed. The withdrawal of these beneficial ESCO policies has not initially caused disruption to existing energy efficiency trends due to the advanced development of the Chinese ESCO market. However, those companies, which were reliant on the favourable policies without other robust competitive advantages are gradually being crowded out of the market.
There are a number of barriers, which may be addressed in order for China's ESCO market to evolve and scale up further:
- Awareness of energy savings potential and available supportive mechanisms
- Insufficient capacity in the ESCO sector
- Difficulty accessing financing for projects
- Lack of trust and a strong enabling policy environment
- Shortage of talent with interdisciplinary skillset