As the first “Equator bank” as well as the forerunner and advocator of green finance in China, Industrial Bank (IB) released another innovative measure in green finance products this year.
“We began to release the energy performance contracting (EPC) financing product in individual cases in 2007, and so far, we have finished nearly 80 projects. This year, we have another major breakthrough in the product, namely, to pledge the future usufruct under an EPC as the guarantee so as to alleviate the financing and guarantee difficulties of energy-conserving projects”, the director of the Sustainable Finance Department of IB indicated.
To pledge the future usufruct under an EPC as the guarantee means that the EPC financing product which was handed case by case will become a standardized product, and this will help the energy-saving industry to enhance their production capacities effectively.
A big market for EPC
Although EPC has evolved for 14 years in China, few outsiders know it.
EPC means that an energy-saving service company enters into a contract with an energy consumer, reach the planned energy-saving objectives by providing such services as energy audit, project design, project financing, equipment purchase, engineering construction, equipment installation and commissioning, and personnel training, and finally recover investment and obtain profits from the energy-saving benefits of the consumer. In contrast with the conventional energy-saving model, to reduce energy consumption with EPC can not only achieve the effect of energy conservation and emission reduction, but also bring economic benefits for both contracting parties and achieve win-win results.
EPC is a foreign concept originating from the western developed countries. In 1970s, the outbreak of two oil crises in succession led to rocketing energy prices and tense supply, and governments in Europe and America all required dramatic reduction in energy cost. Against this background, energy-saving companies appeared one after another and they began to provide energy-saving schemes to energy consumers to solve the problems of insufficient supply and high energy cost. Hence, EPC came into being based on market operation as a new model. After its appearance, EPC won great popularity among energy consuming enterprises and governments. In such developed countries as US and Canada, in particular, EPC has evolved into an emerging energy-saving industry.
Although EPC has a history of over 30 years in Europe and America, it started late in China. “EPC was introduced into China in 1998, and this opened the curtain for the energy-saving industry of our country. Nonetheless, it witnessed significant development in 2006 and 2007. IB began to pay attention to the market in 2007, but most of the general public did not know EPC much then. Generally, people would imagine it as engineering service similar to BOT. EPC involves fund-supported construction, and adopts the model of integrating products, services and technologies in a systematic way to provide a package of services to owners, and the investment in a lump sum will be returned in installments. To some extent, it is similar to BOT", IB introduced.
EPC really entered the development stage in certain scale after 2010. While the energy and resource problems confronting the economic development of China become increasingly protruding and the energy conservation and emission reduction being pushed further forward, EPC attracts more and more attention from the government. After investigation, the concerned ministries and commissions issued relevant policies targeting at energy-conserving industry in 2010 and 2011 successively, including energy-saving reward financially and specific provisions on the collection of value-added tax or business tax from energy-saving service suppliers in the aspect of tax. With these policies, the environment for the development of energy-saving industry became mature.
Based on reaction of the market, the participants of CPE market were mainly small- and medium-sized business owners before 2010. After that, some systemic and grouped enterprises began to realize the merits of energy-saving transformation with EPC, and some large enterprise groups began to establish energy-saving service companies, or introduce energy-saving service suppliers and EPC model in their own project transformation.
IB observed, “EPC market was relatively scattered and weak before, but now it develops toward large scale, big size and specialization. It is the stage prior to maturity and fast development.”
While the state lays greater weight on energy conservation and emission reduction as well as the energy conservation and environmental protection industries, and the market players become increasingly strong, EPC is presenting big potential for market development.
On June 16 in this year, the State Council printed and issued the Twelfth Five-Year' Planning for the Development of Energy Conservation and Environmental Protection Industries , in which EPC was listed as one of the eight major works, and its development objective was set as “developing over 2,000 specialized energy-saving service companies by 2015 and 20 ones each with an annual output value over RMB 1 billion, and making the gross output value of the energy-saving industry break through RMB 300 billion”. It is hopeful that EPC will step into a golden development period in China.
Releasing standardized products to break through the financing bottleneck
In fact, the above “Twelfth Five-year Planning” objective set by the state is possible to be realized in advance.
Up to now, four groups of energy-saving companies have been filed in the National Development and Reform Commission and two groups in the Ministry of Industry and Information Technology, and the number of filed companies have exceeded 2,000. Meanwhile, the gross output value of the energy-saving service sector has surpassed RMB 100 billion. Optimistically, the gross output value of the industry may reach RMB 300 billion in the next year.
Despite the promising market prospect, the financing and guarantee difficulties remain to be the biggest obstacle restricting the development of energy-saving service market for a long period.
As introduced by IB, the funds required for the construction of an energy-saving project is usually provided by an energy-saving service company, which will recover its investment in the form of sharing the energy-saving benefits in a period of three to five years generally, or even a longer period. Nonetheless, energy-saving service companies only have limited funds, so they cannot undertake projects in a rolling manner. As a result, their developments are restricted. On the other hand, energy-saving service companies are small in size and have been established not long. Although equipped with technologies, they lack such guarantees as land and workshop that are more likely to be accepted. In addition, the energy-saving benefits are hard to define. Therefore, it has been hard for them to get the credit funds support.
As energy-saving service companies are obviously asset-light, and lack effective tangible guarantees, the conventional risk management methods of banks can hardly be applied. In addition, the operation quality and energy-saving benefits of an energy-saving project are difficult to quantify. Because they cannot judge the risks and incomes of such projects, banks are very prudent in granting credit support to them.
If the problem of guarantee and the conundrum of quantifying the energy-saving benefits can be resolved effectively, and banks can effectively control the credit risks, the financing difficulty of energy-saving companies can be reduced to a large extent.
After many years' practice, IB standardized the financing products applicable to energy-saving service projects formally in this year. The standardized products include two models: short-term financing and medium- and long-term financing. The longest financing term can reach five years. In terms of repayment method, the repayment period can be determined and the grace period can be set flexibly according to the actual cash flow of a project, and the repayment can be made in installment (month/quarter/year) after the project is put into operation, to alleviate the financial pressure of the borrower. The product is mainly to use the future usufruct under an EPC of the energy-saving company as the primary guarantee, to lower the requirements for traditional guarantees such as land and workshop.
Moreover, relying on the strength of both internal and external expert teams, IB also carries out quantitative evaluation over the energy-saving benefits with the professional technical evaluation capability, according to the technological maturity and the attainability of energy-saving benefits of an energy-saving project, so as to monitor the project risks and post-loan cash flow in an effective manner.
“As it is a standardized product, credit risks also exist. But now, the answers to such questions concerning the identification of risk points and degree of risk can be quantified more clearly. We can also clearly know what state the risk is in and which degree it reaches.” As indicated by IB, in such a condition, a bank can judge whether it can accept the credit application, and it shall decide a pricing level reasonably to cover such a risk.