Accelerating energy efficiency in China’s existing commercial buildings Part 2: Solutions and policy recommendations

Accelerating Energy Efficiency in China’s Existing Commercial Buildings – Part 2: Solutions and Policy Recommendations (Part 2, for short) discusses potential policy solutions that can tackle the barriers of the Chinese building energy efficiency market. Those barriers were identified in Accelerating Energy Efficiency in China’s Existing Commercial Buildings – Part 1: Barrier Analysis (Part 1).

Many energy service companies were established due to government policies and subsidies that favored them during the Twelfth Five-Year Plan (FYP). Those companies now serve as the main market driver for building energy efficiency retrofits in commercial buildings, except for government-mandated energy efficiency upgrades in government buildings. Barriers exist because stakeholders other than energy service companies, such as building hosts and financial institutions, are not sufficiently motivated to retrofit buildings.

Part 1 described barriers facing building energy efficiency upgrades for various stakeholders such as energy service companies, privately owned commercial building hosts, government-owned public building hosts, property management companies, measurement and verification (M&V) companies, government, and commercial banks. Barriers are summarized by stakeholder group below.

Barriers facing key stakeholders:

Energy Service Companies (ESCOs)

Building energy efficiency-focused ESCOs with limited growth potential

• High transaction cost: a burdensome customer acquisition process
• Untrustworthy hosts that add financial risks for ESCOs
• Difficulty gaining third-party financing from commercial banks to cover project capital

Privately owned commercial building hosts

• Split incentives
• Lack of motivations from hosts

Government-owned public building hosts

• Energy costs are a part of the government budget. However, there is no motivation to invest in building energy efficiency upgrades, because government agencies are not interested in having a decreased budget in the upcoming year.

Property management companies

• Lack of technical capability
• Lack of motivation by individual property managers, because conducting energy efficiency upgrades are not considered in their performance reviews

Measurement and verification (M&V) companies

• Lack of a comprehensive whole building M&V protocol
• To please potential customers, M&V companies might exaggerate energy saved resulting from energy efficiency retrofits.
• Inadequate quality control for M&V companies’ results

Government

• As designed currently, in the privately owned building energy efficiency market, subsidies and grants are given to energy service companies only, which does not motivate other stakeholders.
• Inter-agency government policies are generally lacking.

Commercial banks

• Commercial banks’ loan service and ESCOs lending request are mismatched.

For privately owned commercial building retrofits, incentive policies and programs are primarily designed to encourage ESCOs. Those incentives are typically in the form of government subsidies. Therefore, for privately owned commercial building retrofit projects, ESCOs are the main drivers of energy efficiency upgrades, and they engage other stakeholders, including building hosts, financial institutions, property managers, and M&V companies. It is a difficult business for ESCOs because other stakeholders are not motivated enough.

For publically owned government building retrofits, policies and programs are primarily designed to encourage hosts, such as the voluntary building energy efficiency Top Runner program (NDRC, 2015). Government building hosts can apply for grants from government agencies to conduct building energy efficiency upgrades. In this case, government building hosts become the main driver and engage other stakeholders, including equipment vendors and ESCOs.

In building energy efficiency upgrades for both privately owned commercial buildings and publically owned government buildings, not all stakeholders are properly incentivized, which causes barriers. It is important to create a healthy business ecosystem with strong stakeholder motivation on each side.

Summary of recommendations for addressing the barriers:

• Solutions to motivate hosts

Create policies or programs that encourage or incentivize hosts to procure energy efficiency upgrades. Educate hosts about building energy efficiency upgrades. Provide connections to the right financing providers and building energy efficiency service providers.

How it addresses barriers: Creating a supportive business environment for hosts motivates them to take actions and engage in building energy efficiency, which in turn reduces energy service companies’ customer acquisition burden, and helps to scale the market. Third-party financing has been difficult for the building energy efficiency market. When a building owner is the energy efficiency lender instead of the energy service company, financial institutions are more interested in providing a loan, because a building host often has a substantial asset, and can provide the collateral that banks require. Light-asset energy service companies cannot provide that.

• Solutions to motivate property management companies

Build a supportive policy ecosystem to motivate property management companies. Promote new energy saving business model where property management companies, such as Property Energy Management (PEM), are the main drivers.

How it addresses barriers: Motivating property management companies to retrofit buildings transforms them from passive participants to active market drivers. As the crucial intermediary between ESCOs and hosts, the active participation of a property management company helps to overcome some split incentives barriers and helps to scale-up building energy efficiency retrofits.

• Solutions to motivate financial institutions to provide suitable energy efficiency project loans

Build a supportive policy ecosystem to provide a supporting mechanism for financial institutions to lower risks and improve return on building energy efficiency projects.

How it addresses barriers: Lowering risks for financial institutions motivates them to provide loans to building energy efficiency projects. Sufficient third-party financing helps to scale-up building energy efficiency retrofits.

• Suggestions for comprehensive government policy

Design innovative interdepartmental government policies by encouraging “smarter” government spending, in addition to subsidies and grants, that can effectively promote building energy efficiency upgrades. Government should create new laws to support energy efficiency upgrades, and encourage data transparency. Take advantage of the ongoing electricity reform and encourage business models that relate to building energy efficiency upgrades.

How it addresses barriers: By engaging in other types of government spending, in addition to subsidies such as those for public–private partnerships, governments can effectively bolster private spending to scale-up building energy efficiency projects. Creating laws or regulations such as data disclosure also helps to scale-up building energy efficiency projects. Data transparency helps to mitigate the difficulty of not being able to access data and to verify energy saved through energy efficiency improvements. Increasing interdepartmental collaboration within government agencies helps to create more comprehensive policies that are covered by different government agencies. The ongoing electricity market reform, where an electricity retailer might be able to engage with an energy service company to implement building energy efficiency, also creates additional opportunities for energy service companies and for motivating hosts.

• Standardize building energy efficiency projects

Standardization of building energy efficiency projects helps to create standardized M&V protocols, and assists commercial banks in assessing building energy efficiency financing loans efficiently and to scale.

How it addresses barriers: Each building energy efficiency project is unique. No action has been taken to categorize those projects so they may be standardized by retrofit types. Doing so would help commercial banks access financing quickly and at scale. Standardized projects also help governments create programs that can be suitable for each category.