March 14, 2013 / 9:01 PM / 5 years ago

Credit crunch stifles Chinese energy savings sector

* Big banks shunning many of China’s 4,200 energy service companies

* Lenders balk at unfamiliar business models, lack of collateral

* Industry shakeout to thwart Beijing’s green efforts

By Charlie Zhu

HONG KONG, March 15 (Reuters) - A credit crunch is stifling thousands of mostly small, private companies in China that coax energy savings from smokestack industries, further dealing a blow to Beijing’s drive to foster green innovation and ease choking pollution.

China’s big, state-owned banks are shunning many of the 4,200 energy service companies (ESCOs), industry experts say, raising fears of a shakeout alongside the malaise now afflicting the solar panel, wind generator and LED industries.

The banks, traditionally lenders to state-owned enterprises, are reluctant to extend credit to ESCOs which sell energy-saving advice and technology to wasteful industry including steel mills, cement factories and petrochemical plants.

Loan officers at the state banks are wary of these companies because of their unfamiliar business models and a lack of collateral compared with other industrial borrowers.

“ESCOs go to banks for loans, but most banks just ignore them,” said Sun Xiaoliang, assistant to the chairman of the ESCO Committee of China Energy Conservation Association, an industry lobby with more than 800 members from this sector.

And, to compound the funding crisis, demand for their services is easing as China’s economy slows. Expansion in industrial output at the start of the year was at its weakest since early 2009, according to official statistics.

A looming shakeout for ESCOs comes as overcapacity and a collapse in demand batter China’s wind generator and solar panel makers - two industries which Beijing had championed to lead a green energy revolution.

Similar problems are hurting the makers of LED lighting, a technology that offers sizeable energy savings for the world’s second-ranked economy and biggest energy user.


ESCOs in China provide services that include replacing inefficient processing equipment, modifying building design, upgrading lighting and installing improved air conditioning. Some help factories recycle waste heat.

Like their counterparts in the U.S. and Europe, they pay upfront for these efficiency upgrades under so-called energy performance contracts in exchange for a share of long-term savings from reduced energy bills.

For China, which relies on burning coal for 80 percent of its electricity, ESCOs have an important role to play in minimising waste in industries that lag far behind developed countries in energy efficiency, experts say.

In a bid to turn this around, Beijing has been pouring billions of dollars into improving fuel efficiency and fostering renewable power as it strives to slash its “carbon intensity” - carbon dioxide emissions per unit of economic growth - by 40-45 percent from 2005 levels by 2020.

This drive sparked a decade of rapid growth in the number of ESCOs as they sucked billions of dollars in equity and debt capital from venture capitalists, small domestic banks and foreign institutions like Luxembourg-based Global Energy Efficiency and Renewable Energy Fund.

Despite this heady expansion, most remained small. Of China ESCOs, only 18 had revenue of more than 500 million yuan in 2012. Just six had revenue exceeding 1 billion yuan.

But, without the backing of the big state banks in a sluggish economy, many of these companies are now struggling to survive.

The International Finance Corp (IFC) has helped arrange about $780 million in loans to energy efficiency projects since 2006, mostly from smaller lenders including Shanghai Pudong Development Bank Co Ltd.

“That’s only a drop in the bucket and the large four banks will have a far greater impact,” said William Beloe, Beijing-based senior operations officer for the IFC who oversees energy efficiency financing for the World Bank unit.

A spokesman for state-run giant Industrial and Commercial Bank of China (ICBC) said the bank had been ramping up lending to small and micro businesses.

“But we don’t lend money to all kinds of businesses, just like elsewhere,” he said, when asked if ICBC extends loans to ESCOs.


Growth in the sector is now slowing sharply. Project investment by ESCOs expanded 23 percent to 51 billion yuan ($8.1 billion) in 2012, compared with an average annual growth of over 65 percent between 2003 and 2010, industry figures show.

Lack of finance is not the only reason some small ESCOs are going out of business as the industry consolidates.

“Sometimes it’s because their clients had run into financial problems and defaulted on payment,” said China Energy Conservation Association’s Sun. “Sometimes it’s because clients violated contracts.”

As the slowdown bites, customers are negotiating energy performance contracts that run longer than the typical term of between three and eight years, delaying returns and increasing risk for the service companies.

All contracts of Top Resource Conservation Engineering , a major Chinese ESCO specialising in heat recycling for power generation, carry maturities of 20 years, said Cheng Yan, an official at the Beijing-based firm’s securities office.


Most likely to survive a shakeout are ESCOs with rich, powerful parents including China’s Baosteel, France’s Schneider Electric SA, Johnson Controls Inc and Honeywell International Inc.

Schneider bought energy-saving products maker Beijing Leader & Harvest in 2011 for $650 million from Asia private equity funds Affinity Equity Partners and Unitas Capital.

Some relatively big ESCOs listed on the domestic stock market have also snapped up smaller rivals.

Shenzhen DAS Intellitech Co Ltd last year spent 201 million yuan to buy a Shanghai-based company specialising in energy-saving services for buildings from a group of domestic venture capital firms.

Zhejiang Dun‘an Artificial Environment Co Ltd, which is also involved in energy-saving businesses, has made a string of acquisitions in the last few years to expand its ESCO business.

Still, there is a pressing need to curb energy waste. The heavy, toxic smog that blanketed Beijing and much of northern China in January may serve as a strong wake-up call for the government to take stronger measures to support ESCOs and cap emissions, industry officials say.

Beijing has already vowed to spend 590 billion yuan on energy-saving and waste recycling projects between 2011 and 2015 and nurture 1,000 ESCOs. ($1 = 6.2213 Chinese yuan) (Editing by David Lague and Ryan Woo)

Our Standards:The Thomson Reuters Trust Principles.
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