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Scaling up finance for building energy efficiency and green buildings in China

19 Dec 2018

By Felix Suerkemper and
 Dr. Chun Xia-Bauer, Wuppertal Institute for Climate, Environment and Energy

In the last decade, the Chinese Government has implemented multiple policies to promote building energy efficiency and green buildings, which is an imperative for sustainable development. Public financing, among others, provides a major incentive for various actors to improve building energy performance and construct green buildings.

However, it is evident that subsidies alone are far from sufficient to mainstream building energy efficiency and green buildings in China. Green financing, especially Energy Performance Contracting (EPC), as an essential way for attracting private investment to fill in the huge financial gaps, is becoming a priority globally for both financial institutions and policy makers across China. EPC is a popular market-based mechanism for building energy retrofits. Shared savings contracting model is most common in China, in which ESCOs not only finance the project but also provide performance guarantees of cost reductions or energy savings to their clients.  Supportive policies implemented at the national and local level include subsidies and awarding of national pilot projects of ambitious energy retrofits of existing buildings. Nevertheless, so far, the building sector has not received enough attention and the access to finance still remains an important challenge for building developers and energy service companies (ESCOs).

Against this background, the Wuppertal Institute hosted the Forum of Financing Sustainable Buildings within the framework of the EU Switch-Asia SusBuild project on 15 November 2018 in Chongqing (China), in collaboration with the China Association of Building Energy Efficiency (CABEE), the Sino-German Urbanisation Partnership, and two SusBuild local partners. This forum gathered around 80 participants from diverse institutions including the Ministry of Housing and Urban-Rural Development (MoHURD), Chongqing government, stakeholders from the building sector and financial institutions in China as well as European and other international organisations, to discuss how green finance can support building energy efficiency and green buildings in China in the coming years.

Financial institutions have developed innovative financial products to support building energy efficiency and green buildings

Green finance has become an emerging topic for domestic financial institutions in China. The institutions participating in the Forum, such as the Industrial Bank, Pudong Development Bank, and other local banks in Chongqing, have developed financial products for building energy efficiency and green buildings. These financial products range across loans, green bonds, asset-based bonds, leasing and forfeiting.

However, there are various challenges that impede the mainstreaming of these financial products. The insufficient market recognition ofthe green buildings ‘value has led to a low motivation of banks to set up separate loans for green buildings and low incentives for buyers to purchase green buildings. In addition, there is a lack of sophisticated mechanisms for financing green building projects. This particularly includes the sanction mechanisms, when borrowers cannot fulfil green building standards, the monitoring and verification mechanisms of energy, water savings and emission reductions achieved during the operation phase, and the mechanisms to address the challenge of high transaction costs of small-scale projects.

International experiences on accelerating finance for building energy efficiency and green buildings

There are many innovative instruments and good-practices supporting financial institutions in financing building energy efficiency and green buildings at the global stage. Participants of the forum, including policy makers, national and international organisations shared their valuable experiences on this topic.

Improving transparency of information through effective monitoring helps to reduce the perceived risks on the investments in energy efficiency and green buildings. The CABEE conducted a green asset evaluation based on dynamic data including green and energy saving benefits, asset operation, user behaviour and indoor environment. The evaluation indicated that certified green buildings operate in a sustainable way and that building owners generate a stable income from building operation. These results could help reducing the risk of default for banks, thereby enabling credit approval and improving financial conditions.

Mobilising capital markets by developing different financial products can provide large amounts of low-interest loans for building energy efficiency and green buildings. Green bonds have developed rapidly in the recentyears in China, but its potential in supporting building energy efficiency and green buildings is still largely untapped. The green equity index could be an innovative financial instrument to guide investors in taking into account the environmental dimension in their investment strategy. Securitisation can also be a promising means to enable energy renovation projects to access the capital market. Recently, the Chinese government issued a policy to support securitisation in the real estate sector. However, challenges in developing a green mortgage/asset-backed securities market cannot be overlooked. These include enforceability of loan covenants, difficulty in isolating the ‘green variable’ and difficulty to leverage post-securitisation to influence owner decisions on green performance.

The role of intermediary organisations to facilitate the coordination between ESCOs, building owners and financial institutions needs to be recognised. Such facilitators can provide a range of services including quality assurance, verification and certification of ESCOs or their services to support green bond issuers, financial advice to ESCOs and their clients, and aggregation of projects. These services are offered to reduce transaction costs and diversify the risks for financiers and ESCOs.

To provide guidance for G20 members to scale up energy efficiency investments, the Energy Efficiency Finance Task Group of IPEEC has developed the G20 Energy Efficiency Investment Toolkit in 2017 in partnership with UNEP FI and the IEA. The toolkit present voluntary options to scale-up energy efficiency investments, progress towards the G20 voluntary principles, and best-in-class approaches for investments from public and private financial institutions.

The presented instruments, financial products and good-practices at the forum will be part of a SusBuild Handbook “Unlocking ESCOs’ access to finance to boost building energy renovation”, which will be published by the Wuppertal Institute in the beginning of 2019.

Financing for building energy efficiency and green buildings is still at an early stage in China. The scale up is of vital importance and will require paradigm shifts of different stakeholders as well as an effective combination of policies and innovative mechanisms. The forum was the first of its kind in Western China to bring together various key actors from the building sector and the financial sector into a common dialogue and paved the foundation for further collaboration in the future.

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Felix Suerkemper 
is Project Coordinator and Senior Researcher in the Energy, Transport and Climate Policy division of the Wuppertal Institute. Since he joined the Institute in 2008, he has coordinated various national, European and international projects on policy design and evaluation in the fields of energy (efficiency) and climate policy. Felix Suerkemper studied economics at the Universities of Freiburg/Germany and Gothenburg/Sweden with a focus on Transport and Environmental Economics as well as Empirical Research/Econometrics.

 

Dr. Chun Xia-Bauer is a project coordinator in the Energy, Transport and Climate Policy division of the Wuppertal Institute. She has been coordinating and working in various international projects in the field of sustainable low carbon city projects and building energy efficiency. Among others, she is now coordinating the EU Switch-Asia SusBuild project.