Empirical Study on Annual Energy-Saving Performance of Energy Performance Contracting in China

Created by: Hongquan Ruan
Revised by: Chaya Zeng

A lack of trust in Energy Service Company (ESCo) is the most critical factor affecting the development of Energy Performance Contracting (EPC) in China compared with other constraints. One cannot easily estimate the energy-saving performance of an EPC project. Under that condition, lack of trust may cause the Energy-Consuming Unit (ECU) to suspect the energy-saving performance promised by the ESCo, thus leaving potentially profitable projects without necessary funding. Currently, specific studies taking an across-projects viewpoint on annual energy-saving performance of EPC projects in multiple subsectors objectively and quantitatively are lacking. This paper studies the regression relationships of annual energy-saving quantity in terms of revamping cost and the regression relationships of annual cost saving in terms of revamping cost. The regression results show that there are statistically significant correlations in the above relationships in the nine subsectors investigated. This is significant for ESCos and ECUs because knowledge on energy-saving performance could contribute to EPC investment decisions and trust relationships between ESCos and ECUs. Then a multiple linear regression model of revamping cost is set up to analyze its influencing factors. The model indicates that the subsector the sample belongs to, financing, registered capital of the ESCo, and contract period have significant effects on revamping cost. Thus, policy implications regarding innovation of EE promotion technology, clarifying ESCos’ exit mechanism, innovation of financing mechanism, and improving the market credit environment for promoting investment in EPC projects are provided.

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In 2016, energy consumption of China’s GDP of 10,000 CNY fell by 5.0%[1] , and it was 0.675 tce/10,000 CNY at 2010 constant prices (tce is the abbreviation of ton of standard coal equivalent). However, China’s energy intensity still ranked ninth in the world that year[2]. In fact, the Law of the People’s Republic of China on Conserving Energy was enacted as early as 1997, requiring improvements in the exploitation, processing, conversion, transmission, and supply of energy so as to gradually raise the efficiency of energy utilization and promote the development of the national economy in an energy-efficient manner[3]. In addition, from the Eleventh Five-Year Plan for Energy Development in 2007, all previous Five-Year Plans for Energy Development require national goals for energy efficiency (EE) promotion[4][5][6]. If the latest plan is achieved, by 2020 energy consumption per unit of GDP in 2020 will be 15% lower than in 2015[6]. The decline in energy intensity needs to be achieved by optimizing the industrial structure and strengthening technological progress. Comparatively, the former is a medium- and long-term process, so greater efforts should be made to improve the efficiency of energy utilization. To achieve universal and potential EE, and also to adapt to the profound social change from a planned economy to a market economy so as to integrate EE projects into the market trading system, learning from the experience of developed countries, China has also gradually popularized the Energy Performance Contracting (EPC) mechanism.

The market for EPC has huge potential in China[7] [8]. In 2010, a milestone policy document on opinions of speeding up the implementation of energy performance contracting and promoting the development of the energy-saving service industry was issued[9] . It gives unprecedented policy support to the development of EPC from the aspects of finance, taxation, accounting standards, and financial support. Then, the General Technical Rules for Energy Performance Contracting, the first document on contract specifications for EPC projects, was put out the same year[10] . EPC has achieved rapid development since then: the total output value of the EPC industry increased from 83,629 million CNY in 2010 to 356,742 million CNY in 2016, with an average annual increase of 27.35%; annual energy-saving capacity of EPC projects increased from 10,648,500 tce in 2010 to 35,785,000 tce in 2016, with an annual increase of 22.39%. Despite the rapid development of EPC in China, EPC project investment in the public and private sectors is still facing bottlenecks considering the wide market space for EE promotion and the increasing policy support. The growth rate of EPC project investment has reduced in recent years, as shown in Figure 1. Apart from risk factors[11] [12] and financing factors[13] [14] that have been widely studied, industry environmental factors such as the market credit environment also hinder the rapid development of EPC. On-site fieldwork has found that a lack of trust in Energy Service Companies (ESCos) is the most critical factor affecting the development of EPC in China compared with other constraints, particularly trust in private ESCos characterized by light assets[15]. In China’s current situation, the energy service industry is in its nascent period, the measurement and verification of energy savings are not standardized, and a lack of integrity is a very serious problem[16]. Research has also shown sustainable building energy efficiency retrofits in hotels under the EPC mechanism are largely based on trust, accurate measurement and verification, and team workers’ technical skills[17]. At present, ESCos are generally small companies in China, which determines that their company strength and credibility are very common [18]. Under such conditions, Energy-Consuming Units (ECUs) will question whether an ESCo’s commitment is true[18]. Other research deems that with the transformation of the market from playing a basic role to playing a decisive role in allocating resources in the new era in China, the long-established government-leading EPC pattern will inhibit development of the EPC market, and there is a relationship between EPC, carbon trading, and energy conservation transactions [19]. The institutional measures and mode integration measures adopted for the above two aspects are the necessary guarantees to face the market integrity[19].

Profit expectation is the power source of EPC. In the EPC mechanism, what an ESCo sells is no longer a specific product or technology, but a specific energy-saving performance service. Its purpose is to sell energy-saving quantity to ECUs[20]. One cannot easily estimate the energy-saving performance of an EPC project, because that does not occur in the project development phase. Under that condition, lack of trust may cause the ECU to suspect the energy-saving performance promised by the ESCo, thus leaving potentially profitable projects without necessary funding. It might be interpreted that one of the main obstacles to developing EE projects is ECUs’ lack of information on energy-saving quantity[21] [22]. Energy performance estimation plays an essential role in the success of an EPC project for the owner and the ESCo, and several factors are involved that affect the real energy performance, including the EE investment, the energy-saving amount, and the energy market prices[23].

There are existing studies focusing on energy saving quantity of EPC projects. For example, Lee et al. [24] present a probabilistic approach to estimating a range of possible energy savings with the associated confidence levels for chiller replacement in existing buildings, taking into account the annual variations in the influential parameters affecting energy savings. Lu et al. [25] incorporate renters’ rebound effect and investigate the impact that major variables have on the rebound effect to predict more accurate energy saving amounts and design proper retrofitting contracts of EPC. Walter et al.[21] develop a multivariate linear regression model with numerical predictors (e.g., operating hours) and categorical indicator variables (e.g., climate zone) to predict energy use intensity. The model quantifies the contribution of building characteristics and systems to energy use, and the study use it to infer the expected savings when modifying particular equipment[21]. Meanwhile, there are many studies on energy cost saving of EPC projects or energy efficiency programs [23][26][27]. However, specific studies taking an across-projects viewpoint on estimation of annual energy-saving quantity and annual cost saving in multiple subsectors (e.g., machinery manufacture subsector, chemical subsector, light subsector, coal subsector, building materials subsector, power subsector, metallurgical subsector, building subsector, public facilities subsector) objectively and quantitatively are lacking and a cost-effective method is needed. This is significant for ESCos and ECUs because knowledge on energy-saving performance could contribute to EPC investment decisions and trust relationships between them, which contribute to promotion of EPC project investment in the public and private sectors. At present, the estimation of annual energy-saving quantity and annual cost saving of EPC projects stays at the operating level of each project, lacking a systematic summary. This paper tries to fill this void.

Before signing an EPC contract, an ESCo first performs EE diagnosis, and then the EE promotion scheme is determined based on the same kind of facilities at the advanced level of energy consumption. Only by these preparations can the ESCo estimate the investment amount corresponding to the scheme and the energy-saving performance (mainly annual energy-saving quantity and annual cost saving in this paper) generated by the project. Because different EPC projects take different risks and adopt different technologies, there are great differences in energy-saving performance. Projects with higher reference standards (usually with higher investment) generally have better energy-saving performance. This paper uses the ESCo Committee of China Energy Conservation Association’s (EMCA’s) statistical data on 205 EPC projects running from 2011 to 2016 to study the relationships of annual energy-saving quantity in terms of revamping cost and the relationships of annual cost saving in terms of revamping cost by the linear regression method. The regression results show that revamping cost of EPC projects in most subsectors has the diseconomy of scale, and there are statistically significant correlations of the above relationships. As a result, ESCos and ECUs can calculate annual energy-saving performance in terms of revamping cost according to the subsector which the project belongs to.

Further, the multiple linear regression method is used to analyze the influencing factors of EPC revamping cost. It finds that the sector the sample belongs to, financing, the registered capital of the ESCo, and the contract period have a significant impact on revamping cost, while the impacts of registered capital of the ECU, fiscal incentive, and tax preference on revamping cost are not obvious. Therefore, in order to promote EPC investment, it is suggested that ESCos should innovate EE promotion technology and push forward transformation contents from single equipment, single project to energy system optimization and regional EE promotion, and should integrate upstream and downstream resources to enhance the competitive ability. Moreover, the government should innovate effective financing mechanisms and create an environment for both sides of EPC projects to sign long-term contracts. Policy implications are provided accordingly. These policy implications are of great reference significance, particularly it is of reference and actual meanings to countries whose market for EPC needs further development. Taking China as an example, although the potential of the EPC market is huge and the momentum of policy promotion is great, most newly established ESCos have weak financial strength and poor financing ability, which has led to a bottleneck in recent years' investment in EPC. Thus it is important to provide low cost of capital for ESCos so that greater potential of energy efficiency can be reached through EPC projects. Therefore, policy making in China should be changed from providing financial incentive or tax preference to providing a good financing environment.

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