Green Industry Must Be Joined with Market
Aug. 16th, 2011
From Beijing
Energy conservation and emission reduction was confirmed as one of national policies for the first time in China at the 11th Five-year Plan, when the target was set to reducing energy consumption per unit GDP by 19.1%; the target is further set to a reduction by 16% in the 12th Fire-year Plan.
Apart from considerable effort made on developing solar and wind energy, a number of policies for saving current power consumption have also been put to market. By introduction of Energy Management Contract (EMC), DNRC aims at improving market of energy conservation industry for a win-win between energy conservation industry and companies. According to Mr. Xie Ji, Deputy Director of Resource Conservation and Environmental Protection Department, National Development and Reform Committee, “many companies have managed to be geared to capital market via adoption of EMC.” The reporter also visited Weldtech, a market leader previously acquired by HK BLDG & LOAN (00145) as its full subsidiary, to explore the current development of energy conservation industry.
How do HK companies in mainland benefit from national support to energy conservation and environmental industry? Most HK companies may regard themselves irrelevant to favorable policies as they are not involved in developing green energy, but the fact is the opposite. As was pointed out by Mr. Xie, Deputy Director of Resource Conservation and Environmental Protection Department, National Development and Reform Committee on Seminar for Integration between Chinese Energy Conservation Industry and Capital Market, “we need to promote energy conservation and emission reduction through development of energy service companies.” Despite familiarity with the concept of energy conservation and environmental protection, energy conservation industry is still rather new to HK companies.
According to Mr. Xie, energy service company can help save energy through EMC, where profits will be shared with service provider and receiver based on agreed ratio. Cooperation has started between energy service companies and clients such as Shanghai Corporate Avenue under Shuion（00272）and Beijing Oriental Plaza under CKH (00001). HK companies shall be able to enjoy energy conservation and profit through cooperation with appropriate energy service companies.
Mr. Xie first introduced the development of energy conservation and environmental protection: “The Central Government has made preliminary decomposition of the goal to reduce energy consumption per unit GDP by 16% during the 12th Five-year Plan and has informed each province and city, and will focus more on implementing laws and regulations as well as market system.” Such implementation includes three aspects, i.e. 1. To improve standard of energy efficiency by establishing instructive standard for favorable tax and price policies in addition to entry level provided for products. 2. To create pacemaker system according to Japan’s experience and to establish “available benchmark for companies to perform self-examination.” 3. To enhance development of energy service companies for the sake of promoting energy conservation and emission reduction.
Introduction of EMC Concept
According to Mr. Xie, EMC is primarily used in energy conservation industry in China. EMC refers to a system for managing investment to energy conservation, and energy service company is only allowed to share achievements with its client after the latter discovers benefits. “The concept came from the US in 1990s, and pilot projects have started in Beijing, Liaoning and Shandong with capital invested by World Bank to spread the concept of EMC in China.” Thanks to a total investment of over 40 billion RMB and completed projects of over 400, the three demonstrative companies have played an active role in market exploration.
However, serious problems also emerged from the process, firstly being money. “In terms of loans, projects of energy service companies are usually small and scattered compared to those commonly operated by commercial banks. While banks require guarantee for loans, the guarantee companies find it hard to provide such service since the projects are too complicated.” To solve the problem, NDRC established a service committee at Phase II of World Bank Project and meanwhile supported a guarantee company to serve energy service companies.
“Policies launched last year aim mostly at capital, tax, accounting and finance. And EMC projects have been incorporated in central budget investment. For projects made by energy service companies after April, an allowance of RMB240 will be allocated from central finance for each ton of standard coal saved, and financial allowance from provinces is required to be no less than RMB60 for each ton of standard coal saved.” Currently energy service company can receive at least RMB300 for each ton of standard coal saved. It is reported that the allowance is as high as RMB600 in Guangdong and RMB500 in Shanghai.
With regard to favorable tax policies, sales tax is exempted for energy service companies, and income tax is lowered or exempted for the first three years, along with exemption of VAT for transferring of equipments. In terms of accounting system, expenses by governmental and institutional organizations (require energy conservation most) can be listed as energy consumption expenditure even when they have started sharing benefit after signing energy service contract. Finally, companies belonging to energy conservation industry can enjoy favorable policies when applying for financing and guarantee from banks. “For capital chain, in particular, the government allows fixed asset emerged from contract project to function as guarantee for bank loans.”
Gain Profit through Sharing Benefits
Professional energy service companies use different strategies. “The earliest-introduced is benefit-sharing, meaning sharing benefits resulting from energy conservation according to proposed ratio during contract term.” However, another theory known as energy conservation assurance is formed during implementation: “Energy service company shall ensure the amount of energy saved, and shall be responsible if such target cannot be fulfilled.” Other strategies include energy cost trusteeship, financing and leasing, etc.
By 2010, energy service industry has entered rapid development phase. The number of energy service companies authorized by energy service industry committee has approaches 800, and the total production value of the industry is already over 836.29, a 43.8% increase compared to that in 2009. He emphasized that “while the main field of energy conservation is manufacturing industry in the 11th Five-year Plan, the development will change the focus on construction and transportation in the 12th Five-year Plan.”
Company Investigation
Weldtech to Save Energy and Cost for Buildings through Self-Developed Technology
According to Xie, EMC is the most commonly used strategy by energy service companies in China in order to be geared to capital market. One example is the 2007-founded Weldtech, which was recently acquired by HK BLDG & LOAN as its fully owned subsidiary specialized in providing energy service for air conditioning. Zheng Yutian, Managing Director of Weldtech said to the reporter that they had noted the business opportunity as early as 2005 when restriction of carbon emission was imposed due to implementation of the Kyoto Treaty.
“AC plant room accounts for 40% of power consumption in a building. Despite high efficiency of individual units, the combination does not achieve desirable result. If the total cost of electricity is 10 million, AC plant room will take over 4 million.” Presented with such massive and blank market, Weldtech invested 20 million on its own and developed Ultra Performance Plant Control (UPPC®), a system that had acquired 6 China patents by 2009.
Fame from Shuion Project
With technology and products, Weldtech set out seeking for projects, the first being Shuion’s Corporate Avenue, one of the largest energy consumers in Luwan District, Shanghai. “Back then world famous companies such as Disney and Oracle had established offices in Corporate Avenue, which was known for its huge energy consumption due to 24-hour power supply. And thus energy service is desperately needed in order to lower cost.” Despite being there for over 8 years, Corporate Avenue had turned down a number of energy service companies. But Weldtech proposed EMC mode that not only redevelops AC system in Corporate Avenue through sharing of benefits, but also takes risks on its own.
Shuion’s Corporate Avenue enjoyed all benefits from energy conservation without any relevant expenses in the experimental period starting from 2009. During the period Weldtech managed to save power consumption by 27%, amounting to RMB800, 000 to RMB900, 000 per year. Official contract was signed between Corporate Avenue and Weldtech in 2010. “According to the Contract, the allocation of benefit between Weldtech and Shuion shall be 9:1 for the first two years, and 6:4 for from 3rd to 5th year. Project cost can be recovered in the first year.”
Corporate Avenue was awarded RMB100, 000 from Luwan Government in 2010 for achievement in energy conservation, and Weldtech was given a financial allowance of over 120,000 together with acceptance by the industry, where Shuion KIC, SHK (00016), Hua Hong NEC, FAW Wuxi Diesel Engine Works and Skyworth Digital Research Center started to cooperate with Weldtech in AC energy conservation projects. He pointed out that “a minimum 20% of energy can be saved through these projects, and the contract term is usually 5 to 8 years.”
The reporter also paid a visit to Beijing Legendale Hotel where energy conservation system developed by Weldtech was used. Located in city center, Legendale is one of the most luxurious 5+ hotels in Beijing and consists of hotel and service apartment. According to Wu Gang, Technical Director of Weldtech, the AC system in hotel consumed energy up to 34,000,000 kwh before redevelopment. “After the reformation, the amount of energy saved is estimated to be at least over 20% each year.”
Exclusive Technology Marching Overseas
Apart from Beijing, Weldtech has signed letter of intent with Taizhou Government in Jiangsu and CNPC Headquarter in Shanghai. “There are more business clients in the South as air conditioning is acceptable all year round in areas such as Guangzhou, Shenzhen and Hong Kong. On the other hand, clients are more industrial-oriented in the North.”
As for financing which remains a problem to all energy service companies, Weldtech managed to get through by being acquired by HK BLDG & LOAN. “We prefer being acquired by a listed company to financing from stock market on our own. Through issuance of shares, we received 1 billion HK dollars, where 700 million is used for Weldtech to develop business. Our profit this year will be at least 80 million HK dollars, which is 20 times more than that of last year.” Completion of the acquisition had changed the main business of HK BLDG & LOAN, who stopped profit-making to loss of 33,727 million by the end of last year, to energy conservation service. Energy service contracts signed by Weldtech had brought a guaranteed profit of over 0.23 billion to its parent company by March, 2013.
Weldtech also applied for Patent Cooperation Treaty, an alliance of over 140 countries, for the company to enter overseas market along with its advanced energy conservation technology. “We are going to countries that use air conditioning frequently, including the entire Southeast Asia, Middle East, Europe and the US. We have already started investigating Taiwan, Singapore, Malaysia, Indonesia, etc.”
