Greater energy efficiency could double China’s economy sustainably

As first appeared on China Investment Magazine (中国投资) on 21st January 2021.

The ambitious goals China set in 2020 show how it is navigating its concept of crisis or “Wei‑ji” (危机), which combines the ideograms for danger (危) and opportunity (机). To turn the Covid‑19 crisis into an opportunity and to guide economic recovery, the government has announced a New Infrastructure initiative involving a shift from highly polluting, export-led manufacturing to an advanced, high-tech, service-driven economy. In September, President Xi surprised the global community by committing to carbon neutrality by 2060 and aspiring to double China’s economy by 2035.

The question is how to meet these goals in addition to existing ones, including achieving peak emissions by 2030. Greater productivity has been identified as an immediate and effective solution. As achieving greater output from the same inputs essentially equates to higher energy efficiency, efficiency improvements are essential to ensure that China’s energy sector can support the country’s transition to a modern green economy.

The IEA Sustainable Recovery Plan demonstrates that greater energy efficiency is fundamental to spur economic growth, create jobs and reduce structural emissions. Achieving sustainable recovery will require global investments of USD 1 trillion annually for the next three years, with most allocated to energy efficiency. 

Energy efficiency programmes that raise productivity in all end-use sectors would provide lasting economic benefits and create employment: in the buildings sector, for example, 15 jobs, mainly in retrofitting and other improvements, are created for every million dollars invested. Numerous jobs would also appear in the electricity sector, particularly pertaining to grids and renewables, and others would be created or saved in manufacturing, low-carbon transport and more efficient new energy vehicles – all of which are essential building blocks of the New Infrastructure programme. Furthermore, energy efficiency improvements reduce overall emissions more than any other measure according to the Sustainable Recovery Plan. 

China has already demonstrated that energy efficiency investments produce long-term socioeconomic benefits. After the 2008 financial crisis, China allocated 5% of its CNY 4‑trillion (USD 585‑billion) stimulus package to energy conservation, pollutant emissions reductions and environmental projects. More than CNY 40 billion was spent on energy efficiency, mainly through the Top Ten Energy Saving Projects.1 Coal consumption fell 19 million tonnes (Mt) per year, roughly 14% of China’s total energy savings in 2010, and the domestic market for energy efficiency services and technologies such as efficient boilers, electric motors and lighting expanded.

With financial institutions such as the Industrial and Commercial Bank of China increasingly investing in energy-saving projects, energy service companies (ESCOs) that deliver efficiency projects financed by energy savings have become more credible. China’s reinforced Five-Year-Plan (FYP) efficiency targets and generous government support and incentives have made it the world’s largest ESCO market (52% share in 2019).

In return, ESCOs have contributed to scaling up energy efficiency’s multiple benefits. In 2019, ESCO projects alone saved more than 38 Mt of coal equivalent (1.2 EJ) in energy – more than Austria’s total consumption – and emissions dropped 103 Mt CO₂ (IEA, forthcoming).

However, ESCO investment growth dropped for the first time in 2019 since their emergence in China. This trend correlates with a slowdown in Chinese and global energy intensity reductions – a key measure of an economy’s energy efficiency. The National Development and Reform Commission (NDRC) reported that energy efficiency improved only 2.6% in 2019, missing the 3% target set by Premier Li in 2019.

As a result of the Covid-19 pandemic, global energy intensity is expected to improve by only 0.8% in 2020, roughly half of the weather-corrected rate for 2019 (1.6%), while global investment in efficiency is projected to fall 9% in 2020. It remains to be seen whether China can meet its 14th FYP target of reducing energy intensity by 15% during 2016‑2020. 

In May 2020, the NDRC released Implementation Opinions on Building a Better Development Environment to Support the Healthy Development of Private Enterprises in the Energy-Saving and Environmental Protection Sector, presenting incentives such as reduced corporate income tax for energy conservation projects as well as energy management contracts. While this government support fortifies the market, China could attract more market-savvy commercial participants to boost energy efficiency investment and innovation.

One way to engage the private sector is to promote private venture capital (VC) funding for start-ups that develop innovative energy efficiency technologies. This private risk capital plays an important role in promoting the most market-ready technologies. In the energy sector, VC has been most effective in supporting start-ups with digital technologies or service offerings that can be quickly prototyped and are not capital intensive. So far, most VC investment has taken place in the United States, where regulations and financial support are well established, but there has also been growth in Europe and China in the past decade.

In 2019, US start-ups received the most efficiency-related VC (70%), while EU businesses garnered 16% and Chinese ventures 7%.

China’s green bonds market has grown exponentially since 2007, exemplifying the government’s centrality in spurring private investment in clean energy technologies. During 2016‑19, China’s green bond market quadrupled to nearly USD 120 billion, making it the world’s second-largest.

Dedicated government guidance and support for green bonds boosts energy efficiency and renewable energy projects, catalysing the clean-energy transition. Among the six green-bond categories,2 12% of all bonds issued in 2016-19 pertained to energy-saving, claiming third place behind clean transportation (25%) and clean energy (36%). In practice, the energy efficiency share exceeds 12%, as resource conservation and recycling and other categories also incorporate numerous energy efficiency measures.

Standards for defining energy efficiency projects have long been unclear, making rigorous monitoring, reporting and verification difficult. Progress was made in 2019, however, when Guidance for Taxonomy and Assessment of Energy Savings Financing Projects defined the term “energy efficiency investment”, and the new Green Bond Endorsed Project Catalogue, issued in 2020 for public consultation, introduced an “energy efficiency improvement” criterion. Clear guidance can encourage energy efficiency investment and facilitate systematic tracking and evaluation, creating useful benchmarks.

China is at a critical juncture, having set ambitious medium- and long-term targets, and its immediate decisions must ensure that energy sector evolutions align with the country’s sustainable development. Investing in energy efficiency is cost-effective and delivers numerous socio-economic benefits: three times the return on every dollar spent on energy efficiency can be expected from lower energy expenditures alone.

There are additional energy efficiency potentials that cannot be easily quantified. For instance, higher efficiency would ensure the most sustainable and productive rollout of the New Infrastructure plan and the transition to a modern digital economy, involving energy-intensive data centres and large-scale 5G network deployment. Many Chinese ESCOs are already adopting digital technologies to meet rising demand for intelligent, integrated energy services that promote smarter, more competitive industrial activity.

With rapid urbanisation continuing over the next decade, energy efficiency is also critical for smart cities. By prioritising energy efficiency in urban planning, local governments can construct green buildings and smart municipal infrastructure that improves the quality of life. Smart HVAC (heating, ventilation, and air-conditioning) systems, efficient local cold chains and new business models such as “cooling as a service” are all solutions to curb rapidly rising energy demand for cooling while making expanding cities more resilient.

China already has a clear vision of where it wants to be in ten years, and the right investments today will help China get there.