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Burning Issue For Beijing

Underground coal fires are blazing out of control on the mainland, contributing greatly to the world’s greenhouse gas emissions

Tim Johnson – SCMP | Updated on Nov 17, 2008

The barren hillsides give a hint of the inferno underfoot. White smoke billows from cracks in the earth, venting a sulfurous rotten smell into the air. The rocky ground is hot to the touch, and heat penetrates the soles of shoes. Beneath some rocks, a red glow betrays an unseen hell: the epicentre of a severe underground coal fire.

“Don’t stay too long,” warned Ma Ping, a retired coal miner. “The gases are poisonous.”

Another miner tugs on the sleeve of a visitor.

“You can cook a potato here,” said Zhou Ningsheng, his face still black from a just-finished shift, as he pointed to a vent in the earth. “You can see with your own eyes.”

The mainland has the worst underground coal fires of any place on Earth. The fires destroy as much as 20 million tonnes of coal annually, nearly the equivalent of Germany’s entire annual production. The costs go beyond the waste of a valuable fuel, however.

Scientists identify uncontrolled coal fires as a significant source of greenhouse gases, which lead to global warming. Unnoticed by most people, coal fires can burn for years – even decades and longer – producing carbon dioxide, methane and other gases that warm the atmosphere.

“Coal fires are a disaster for all of humanity. And it’s only due to global warming that people are finally beginning to pay attention,” said Guan Haiyan, a coal fire expert at Shenhua Remote Sensing and Geo-engineering.

The rising demand for coal to satisfy a worldwide hunger for energy has given way to increased mining, and a proliferation of fires in coal seams and abandoned mines. The mainland, which has tripled coal production in the past three decades, has mobilised thousands of firefighters to combat the 62 known coal fires scattered across the north.

Major fires have been extinguished. However, Dutch scientists scribbling back-of-the-envelope calculations say that fires on the mainland may still be the cause of 2 per cent to 3 per cent of the world’s annual emissions of carbon dioxide from burning fossil fuels. They call for greatly increasing efforts to extinguish the mainland’s fires – and those in places such as India, Russia and Indonesia – as a practical step to fighting global warming.

It’s a relatively cheap way to stop greenhouse gas emissions,” said Horst Rueter, a German geophysicist who is the scientific co-ordinator for a Sino-German initiative to combat coal fires.

Dr Rueter said that mainland coal fires accounted for at least half the global emissions from coal fires around the world, making them a steady source of pollutants.

Others said that such runaway fires, while significant, paled beside overall emissions from the United States, a fossil-fuel glutton that may give off a quarter of the world’s carbon emissions.

Coal fires can occur naturally and are not a new phenomenon. Australia’s Burning Mountain has smouldered for thousands of years. An underground coal fire in Centralia, Pennsylvania, began in 1962, eventually opening sinkholes that threatened to gobble and incinerate pets and children. Centralia became a ghost town, and experts say the fire there may burn for a century or more.

At the Rujigou coalfield in the Ningxia Autonomous Region of western China, fires have burned since the late Qing Dynasty (1644-1911). Legend has it that miners who were angry over not being paid started a coal fire more than a century ago. “It was industrial revenge,” Mr Guan said.

Many coal fires begin spontaneously when underground seams come in contact with the air – either through fault lines from earthquakes or mining activity – generating a chemical reaction that can slowly heat and ignite the coal. Human activity can intensify the fires, however, especially when workers abandon dust-filled mines without sealing the airshafts, allowing temperatures to build.

The mainland’s coal fires stretch across a northern belt that runs nearly 5,000km from east to west. A cluster of them are in Ningxia and a little to the north in Inner Mongolia , at the edge of the Gobi Desert. The concentration of coal fires in the region puts it in the running for one of the world’s worst ecological disasters, and only humans can extinguish the problem.

“These fires just don’t go out,” said Anupma Prakash, a University of Alaska at Fairbanks expert on mapping coal fires.

Coal fires pollute the air with putrid smoke and wreak havoc on water supplies and above-ground ecology, creating “heat islands” where little vegetation can grow, not even hardy grasses. Wildlife flees.

“There used to be rabbits and pheasants around here, but not any more,” said Liang Guobao, who oversees a generator facility at the San Kuang coal mine in the sprawling Wuda coalfields in Inner Mongolia. His generator powers fans to clear the air in underground shafts.

Mr Liang walked with a visitor around the barren landscape, pointing out places where the ground had collapsed after subterranean coal fires ate away seams and left empty caverns.

“The mine started here in 1958, and almost immediately the fires began,” Mr Liang said.

Coal fuels the mainland’s roaring economy, powering its factories but also taking a human, social and environmental toll. The mainland uses coal for 70 per cent of its primary energy needs, far higher than the world average of 40 per cent. Mainland coal production topped 2.3 billion tonnes last year, equalling the output of the US, Russia, Australia and India combined, according to Yang Fuqiang of the Beijing office of The Energy Foundation, a San Francisco group that promotes energy efficiency.

Even as it provides power, coal exploitation leaves a trail of deaths.

Last year, 3,786 mainland miners died in accidents, a rate 70 times higher than for miners in the US.

Coal burning is a principal cause of air pollution on the mainland, where 400,000 people die each year from illnesses – mainly heart and lung diseases – related to that pollution, the World Bank estimates.

For those who grew up in the region, the scarring of the hilly environment from unseen coal fires is part of the landscape. Mr Ma recalled walking in the hills as a youth and discovering long, deep fissures in the earth.

“We wouldn’t know how deep they were. If we dropped a stone in, we could hear it bounce off the walls … but we couldn’t hear it hit bottom,” Mr Ma said.

As much as 40 per cent of the mainland’s coal comes from small local mines rather than big state-owned enterprises. Small operators follow a pattern when their mines catch fire.

“When they have a fire, they just leave and go to another place,” said Li Jing, the director of the Institute of Resource Technology at Beijing Normal University.

Over the past decade, Beijing has put far greater emphasis on attacking coal fires. The work is labour intensive, costly and dangerous in its initial stages. The blazes can reach underground temperatures of 700 to 800 degrees Celsius, imperiling firefighters.

“First, they shape the terrain and cool down the surface so the heavy machinery can work,” Dr Rueter said. Teams drill holes down through the burning coal in 50 to 60 spots and inject water for several months “to cool down the entire rock volume”.

Later, they may make up a slurry of sand, water, cement and some chemicals, and pour it into the holes. Once the fire is out, the entire rock area must fall below 70 degrees to ensure that the coal does not re-ignite. A layer of clay is put on top and trees planted to gauge whether the fire has begun anew.

Dr Prakash, the coal fire expert in Alaska, said she thought that worldwide efforts to combat coal fires had fallen short. “The coal exploration is more intense than the coal firefighting efforts,” she said. “In the areas I have seen – China, India, Indonesia, South Africa – they haven’t got any better.”

Beijing is sensitive to charges that it may not be doing enough to put out the fires. Fourteen months ago, it announced with much fanfare that it had finally put out the Rujigou coal fires in Ningxia that had burned for decades. A Xinhua report said the state had spent US$53 million over a decade to douse the fires.

A visit to the site, however, showed that the fires weren’t completely extinguished.

“The leaders said they’d put out all the fires,” said one miner, who preferred to remain anonymous.

There were many reasons that the work was never completed, he said. “One reason is that the investment to put out the fires was not enough. And the leaders changed too frequently.”



Seven Power Plants To Be Fined For Not Using Sulphur Filters

SCMP | 15th Nov 2008

Seven power plants, including ones operated by China Datang Group, Shenzhen Energy Group, China Power (SEHK: 2380) Investment Group, China Guodian Group and China Huadian Group, were found by the Ministry of Environmental Protection to have failed to turn on their desulphurisation equipment in certain periods last year as required. They were ordered to rectify the failings before year-end. They will have to disgorge higher power revenues they enjoyed for the periods in which they failed to operate the equipment, which filters out sulphur oxide pollutants. They will also be fined five times the extra revenue earned. Eric Ng

Beijing Defends Energy Policy After Scathing Report

Agence France-Presse in Beijing | Updated on Oct 28, 2008

Beijing on Tuesday defended its energy policy a day after three influential green organisations criticised its dependence on coal.

“The Chinese government attaches great importance to the development and exploration of clean energy,” foreign ministry spokeswoman Jiang Yu told reporters.

“It has been making great efforts to increase the share of clean energy in the energy mix.”

A report commissioned by Greenpeace, the Energy Foundation and WWF on Monday said China’s dependency on coal was creating hidden environmental and other costs worth more than seven per cent of its annual gross domestic product.

The unaccounted costs equated to an estimated 1.7 trillion yuan (US$250 billion), and would be even higher if the impacts in terms of climate change were included, according to the report.

China depends on coal for about 70 per cent of its booming energy needs, which is one factor in its huge increase in greenhouse gas output in recent years.

Ms Jiang said China had implemented a range of policies to tackle the problem.

“We have reissued a renewable energy law and encouraged development of all sorts of renewable energies, including green energy, solar energy, water and hydro energy, thermal energy,” she said.

“We also attach importance to the clean use of coal, and we have done a lot to control the emission of pollutants produced in burning coal.”

Still, China ranks alongside the United States as one of the world’s two biggest emitters of the gases that are blamed for climate change.

Ms Jiang said China would continue to step up efforts to develop renewable energy.

Energy Law Shows Way To Combat Global Warming

David Chan – SCMP | Updated on Nov 05, 2008

On October 1, National Day, an important piece of legislation known as the Civil Energy Act came into effect.

The law has six chapters and 45 articles detailing the country’s vision of how to deal with the effect of global warming. There are chapters on energy savings for new and existing buildings, savings that may be achieved through the energy supply system, and legal liabilities for non-compliance.

The legislation seeks to promote energy savings and increase efficiency in the use of energy in buildings. The provisions are all-encompassing and include residential, commercial, service, educational and health-care buildings. It also seeks to encourage the development of solar, geothermal and other alternative energy sources.

National state offices will be established for long-term planning, co-ordination, standard setting and implementation of policies, while provincial offices will be responsible for supervision and exploring financing options.

The law provides tax breaks and possible changes to tariffs to promote energy savings and also imposes penalties for violations.

Chapter 2 deals with new buildings and promotes the use of new technologies and state-of-the-art materials. It restricts the use of materials with high-energy consumption. It also has provisions for building design, including penalties for designs that are not energy-efficient, and compulsory use of better thermal materials, heating and cooling systems and lighting.

Chapter 3 details how existing buildings must make necessary changes in a co-ordinated manner and empowers local governments to make assessments on whether energy-saving systems can be retrofitted. All governmental buildings are to draw up feasibility plans while old private residential buildings are encouraged to make low-cost improvements.

In Chapter 4 the law provides regulations to monitor the operation of large public buildings and record annual energy consumption.

Due to the increased sophistication of building systems, the training of technicians should be enhanced and improved. Targets will be set by respective city governments for individual public buildings.

The new regulations will have an impact on developers and investors in the country’s property market. They need to keep themselves abreast with pertinent provisions of the law, especially on the available technologies and which are applicable and advantageous to their properties.

It will be interesting to see whether the new law will have a huge impact on the country’s air pollution problem and energy consumption.

The legislation may also see in the near term a commitment in other areas of building sustainability. It may also lead to a change in the voluntary rating system for building sustainability or the three-star labelling system which was introduced in 2006, into something mandatory.

This could encompass areas such as water efficiency, use of sustainable materials, waste and pollution reduction, and ecology.

For Hong Kong, the passage of the new law should put pressure on the administration of Chief Executive Donald Tsang Yam-kuen to also address issues pertaining to energy use and building design. At present, the city has no mandatory building energy code, although a proposal is likely to be sent to the Legislative Council next year.

A task force of consultants has been created to advise the Hong Kong government on the technicalities of such a legislation. While one hopes the scope of the bill will be comprehensive, the likely result would cover only energy consumption based on the current voluntary energy codes.

From a practical point of view, the legislation could encompass areas such as light pollution, that may raise controversies. Would locals and tourists alike prefer to see Hong Kong Island’s bright advertising lights dimmed to achieve cleaner air? Nonetheless, I’m sure all building users would welcome a reduction in management fees from lower electricity usage.

The proposed Hong Kong legislation is only targeting commercial buildings, or about 20 per cent of the city’s building stock.

While a phased introduction – that is, targeting larger energy-consuming buildings first – is desirable, we must not exclude residential buildings that account for 50 per cent of our building stock.

Many of Hong Kong’s residential buildings were built decades ago and will need significant upgrades, which means added cost, to make them compliant to even very basic energy standards.

Many of the new residential towers that are rising in the city have little or no energy-efficiency features.

As such, any new legislation on energy use in Hong Kong is likely to be less comprehensive than the mainland counterpart.

Still, a watered-down energy legislation is better than none at all, as it is still a significant step towards developing sustainable buildings. We could also assume that the Legco will pass the bill speedily as many members have publicly indicated their commitment to the environment.

The government can promote the issue of efficient energy use by engaging the community in an active and intelligent discussion of the issue.

The bill should provide government departments with the tools to effectively manage those who will be directly affected by the legislation, namely, developers and landlords, building management companies and building owners.

It is our hope that through such a legislation and its implementation, Hong Kong will do its bit in reducing global warming.

David Chan is an architect and a director of an international property consultancy

Urban Jungle – This Week: Recycling

Dr Eric Lai – SCMP | Updated on Oct 31, 2008

Paper exporters are reported to be cutting their intake of recycled paper and drastically reducing the price they pay to collectors. This has spelled trouble for those in the various tiers of the paper recycling sector. From the scavengers to the companies that collect from the scavengers and elsewhere, to the large factories that reprocess the paper, all have been affected by the downturn in the world economy.

Things are also not rosy in plastics recycling, with a fall in demand leading to a drop in the price paid for recovered plastic. And companies that collect unwanted electronic items for reuse and recycling have been closing down due to plummeting prices for metals such as steel and copper. The bleak economic outlook has forced many companies to suspend their recycling operations. Without government subsides many of these recycling companies simply cannot afford to stay in business.

The General Association of Recycling Business plans to stage a slow-drive protest on Monday specifically targeted at the paper-recycling exporters. It is inevitable that in the short- to medium-term, as the world struggles with the financial crisis, many businesses will be badly affected. Exporters of paper probably have no choice but to cut prices, but I think the government should learn from this fiasco and should have an established vision for the growth of green industries such as recycling. These industries only have a small share of the market and therefore are first to be affected by free-market forces.

Some 90 per cent of paper pulp comes from virgin wood sources, with only 16 per cent of this from trees specifically grown for paper production. It is estimated that if the world recycled 50 per cent of its waste paper, we would save an area of forest the size of Greece each year.

Supporters of paper recycling say using one tonne of recycled paper rather than new paper would save up to 4,000 kWh of electricity, which is roughly what an average Hong Kong household would use in a year. Opponents of the industry highlight that, energywise, recycling paper is far from perfect – that the process of recycling paper uses more energy than processing virgin-wood pulp. Most wood-processing plants are located far from urban areas and many use hydroelectric generating plants, saving on long-term costs, whereas recycled-paper plants are usually near urban areas and use the local energy grid, which most likely burn fossil fuels.

The area where recycling paper evens the ecological score is municipal landfills. About 35 per cent of the space in municipal dumps is occupied by waste-paper products. Recycling one tonne of paper saves about three cubic metres of landfill. And much of this waste paper is incinerated to save space and minimise the production, by the natural decomposition process, of methane, a very potent greenhouse gas. So not only does recycling paper save on scarce land but it saves on greenhouse gases. Overall, paper recycling decreases air pollution by 75 per cent and water pollution by 35 per cent compared with paper made from virgin pulp, a big win for the environment.

It is interesting to note that at a recent conference of the Waste & Resources Action Programme, an organisation in Britain aimed at recycling and reducing waste, it was said: “It is going to be the lower-quality end of the spectrum that will be squeezed out in an economic downturn, and the commercial drivers may prove stronger than the legislative ones.”

Highlighting the volatility of the recycling industry, it has been shown that prices for recovered recyclable material are determined by the prices of the virgin material. Companies attempt to buy recovered material to replace virgin material when virgin prices are high. In the case of plastics, it is crude-oil prices which determine how much companies buy.

Recovery of materials being ultimately tied to the cost of raw materials is not how a truly efficient market should operate.

The outlook for the recycling industry is determined by four factors: raw material prices; the global economic impact on demand; the Chinese economy and the growth of its various industries that use recycled products; and regulation. I don’t have much hope that a free-market economy will be driven by anything as sound as ecological considerations: it’s all about profit. The recycling industry is so small and fragile but so important that I think the government needs to continue to spend resources in the area to stimulate its growth. The free market lacks long-term vision for the environment and it is during such times that the government, with a far-sighted vision, can use its authority to rein in the free market when it is self-destructive.

Celebrity vet Eric Lai shares his views on society through the eyes of animals. Give him your feedback at

Should There Be Laws To Control Light Pollution?

SCMP | Updated on Oct 31, 2008

It seems that people are becoming more aware of the effects of climate change.

We appreciate the threat posed by greenhouse gas emissions.

Yet although people have this awareness, many do little in the form of practical action to curb the effects of global warming.

We must address environmental issues, because the problems we create are damaging Hong Kong’s reputation.

For example, regulations must be introduced to control the problems caused by light pollution. You see brightly lit advertising signboards. They remain switched on throughout the night, which is unnecessary.

We must have laws that ban this waste of energy.

Mandy Chan Man-hang, Lai Chi Kok

Ministers Announce 10-year Smart Meter Roll-out For Households

New Energy Focus – 29-10-08

The government announced yesterday that it will require all households to have smart meters installed over the next decade.

The decision was announced by the energy
minister Lord Hunt of Kings Heath as the House of Lords debated the Energy Bill yesterday afternoon.

The move to introduce smart meters – which will tell householders exactly how much gas and electricity they are using – was seen by peers as integral to the success of a new renewable energy feed-in tariff.

Announcing the mandatory smart meters roll-out, Lord Hunt said: “This is a major step forward; no other country in the world has moved to an electricity and gas smart meter roll-out on this scale.
The government is looking at a number of options for how to roll out smarter meters for UK households that could tell exactly how much energy is being used – or generated through small-scale renewable systems

“We anticipate a period of around two years to resolve the issues and to design the full detail of a domestic roll-out. Our aim is then to ensure that the subsequent roll-out happens over a period of 10 years. This would see delivery of smart meters by the end of 2020 to align with our renewables targets,” the minister went on to say.


The government plans to present an amendment to the Energy Bill at its third reading in the Lords, scheduled for next Wednesday (November 5), to make clear the legal powers needed to introduce smart meters.

An impact assessment analysis is expected to be completed by the end of 2008 before the full details of a national smart meter roll-out are revealed. This analysis should provide up-to-date figures on costs and benefits, Lord Hunt told fellow peers yesterday.

Ministers are keen for smart meters to be rolled out as soon as possible, although details like how the initiative would fit with European free trade rules will have to be considered.

Consultations will have to be carried out to seek the views of both industry and energy regulator Ofgem before proposals are presented to Parliament, Lord Hunt said, adding that Secretary of State Ed Miliband is “keen to make rapid progress in this area”.

Lord Hunt concluded: “Once the details of a roll-out are drafted into licensed modifications, we must lay them before Parliament so that the complete design of the roll-out can be scrutinised.”

Yesterday’s report stage debate on the Energy Bill saw the government’s deputy chief whip, Lord Davies of Oldham, suggesting there were a number of options available for a national roll-out of smart meters.

It could see a centrally-planned programme carried out by companies awarded certain regional monopolies, with energy suppliers co-operating to allow the smart meters to be fitted. Or, it could take the form of a fully competitive metering market.

Lord Davies said: “The government are working with a range of stakeholders to define and evaluate various market models, and we expect to be in a position to reach final conclusions in due course as part of our broader work looking at the possible implementation of a domestic rollout.”

Feed-in tariff

Conservative peer Baroness Wilcox, who prompted the government announcement on smart meters through a probing amendment to the Bill yesterday, welcomed the decision to bring in smart meters across the country.

She suggested the smart meters would be a step towards feed-in tariffs for small-scale renewable energy, where householders will be able to benefit from long-term contracts to sell excess energy to the grid at above-market rates.

Baroness Wilcox said: “Smart meters are not only critical for energy savings at home but will soon be inextricably linked with the feed-in tariff. The government are as alert as we are to the fact that we in this country are very late in protecting our energy supply and energy usage, but this concession by them is a great step forward.”

True Cost Of Coal To Nation ‘Far Exceeds’ Market Price

Shi Jiangtao in Beijing – SCMP | Updated on Oct 28, 2008

The environmental and social costs of China’s reliance on coal as an energy source have been grossly underestimated, a joint study by environmentalists and economists says.

For each tonne of coal consumed last year, China paid 150 yuan (HK$170) extra in environmental damage, according to “The True Cost of Coal”.

The report, commissioned by Greenpeace, the US-based Energy Foundation and WWF, was written by prominent mainland economists.

The report estimated that the true cost of coal in China last year was about 1.75 trillion yuan, nearly 7.1 per cent of gross domestic product that year.

The figure would be even higher if the impact of climate change were included, according to the report.

“Environmental and social damages are underestimated for using coal in China, as a result of market failures and weakness in government regulations,” said Mao Yushi , lead author of the report and founder of the privately funded Unirule Institute of Economics. “China must count these external costs and make the coal price reflect its true costs.”

The so-called external costs were air and water pollution, ecological degradation, increasing health costs, mining accidents and infrastructure damage.

It also took into account the price distortion caused by government regulations, such as land-ownership policies and poor worker safety and compensation systems, which keep the cost of coal down. Coal accounts for 70 per cent of China’s primary energy consumption and is the biggest single source of air pollution across the country.

It causes 85 per cent of sulfur dioxide emissions, 67 per cent of nitrogen oxide emissions and 70 per cent of airborne particles. Mining has contaminated water, degraded land and caused massive land subsidence.

Coal is also responsible for China’s enormous carbon dioxide emissions, which are believed to have made the nation the world’s largest greenhouse gas emitter.

Quoting the report, Yang Fuqiang , chief representative of the mainland office of the Energy Foundation, urged Beijing to impose energy and environmental taxes.

His view was supported by Professor Mao, whose study showed that the introduction of a coal tax would raise prices by up to 23 per cent and reduce consumption by about 12 per cent.

“But the taxation measures would have little impact on China’s economic growth,” the report said. “On the contrary, it would make China more competitive globally in the long run and increase China’s social wealth by 942 billion yuan.

“The government of China has the opportunity to make a real improvement to the environment by reforming the current coal pricing system.

Yang Ailun , Greenpeace’s climate and energy campaign manager, said recognising the true cost of coal would create incentives to developing cleaner, sustainable energy.

Cinderella Industries Await Their Prince

Potentially Lucrative Projects Devoted To Clean, Renewable Energy Languish For Want Of Financing

Eric Ng – SCMP | Updated on Oct 27, 2008

The United States’ property bust and the subsequent global credit crunch have many investors fretting that the mainland’s economic miracle is coming to an end. Yet, amid the gloom and doom, renewable energy, energy conservation and pollution control are being tipped to become the next wave of high-growth industries.

China, the world’s second-largest energy consumer and one of the most pollution-prone economies, has huge opportunities for projects devoted to energy efficiency improvement and the generation of clean and renewable energy. The question is how they will be financed.

The nation’s energy consumption per unit of economic output amounted to four times the world average, highlighting a dependence on industries that are energy-intensive but low in value addition and inefficient in their use of energy.

With 80 per cent of its electricity generated from air-polluting coal and with power generation capacity rising at alarming rates, the mainland has become the world’s biggest emitter of sulphur dioxide, which causes acid rain, and carbon dioxide, which contributes to the greenhouse effect.

According to the China Energy Conservation Association, electrical machinery on the mainland consume about 40 per cent more energy than their international counterparts, implying a vast market for solutions and products that improve energy efficiency.

The central government has targeted cutting the nation’s energy consumption per unit of economic output by 20 per cent between 2006 and 2010 and principal pollutants by 10 per cent mainly by ordering the phasing out of outdated and inefficient plants.

“This year is a turning point for the mainland economy’s development [given the drastic slowdown in exports], but I think a new growth area is the clean energy sector, which will become a pillar of growth,” said China Energy Investment Network chief executive Zhang Jie, an adviser to the central government on energy policies.

Beijing said last month it had earmarked 41.8 billion yuan (HK$47.4 billion) to fund projects for energy conservation and pollution reduction. Firms with energy-saving and pollution-cutting projects will also be eligible for reductions in profit and value-added taxes, although details are yet to be released.

This is a small drop in the pond. Lily Zhao Ming, secretary general of the conservation association’s committee on energy service companies, says the sector is estimated to require a whopping 1 trillion yuan of investment between 2006 and 2010 to meet government targets.

The committee implements energy conservation programmes on the mainland funded by the World Bank and Global Environment Facility. .

The mainland’s energy consumption per unit of gross domestic product fell 1.79 per cent year on year in 2006, 3.66 per cent last year and 2.88 per cent in the first half of this year. Given the 20 per cent reduction target between 2006 and 2010, it has a lot of catching up to do.

The lacklustre performance, in part, has to do with the tight control on energy prices at levels much lower than international ones to protect consumers and ensure social stability amid inflation that is the highest in a decade.

High prices have proven to be an effective way to drive conservation and efficiency gains, given experience drawn from the oil crises in the 1970s and 1980s in the US, Europe and Japan.

With inflation easing to a 15-month low last month, all eyes are on Beijing to introduce a new round of price increases for fuel and electricity to ease losses at energy producers. The mainland energy conservation industry’s output, measured as the value of contracts to save energy plus the cost of equipment installed, rocketed to 21.6 billion yuan last year from 1.7 billion yuan in 2003.

The industry is expected to see further explosive growth as more people discover its profit potential, Ms Zhao said on the sidelines of the China Power Oil & Gas conference in Guangzhou last month.

On the renewable energy front, the central government has estimated that it will take 2 trillion yuan of investment to realise its targets for generation capacity in 2020.

So far, wind power has seen the biggest growth, with installed generation capacity expected to surpass 10,000 megawatts this year and reach 20,000 MW by 2010, compared with 5,600 MW last year and 2,600 MW in 2006.

Given the mainland’s less developed markets for bonds, private equity and venture capital – and the fact that the equity market is primarily for companies with established track records of profits – bank loans are the main financing channel for energy efficiency and renewable-energy projects.

However, these are considered nascent, non-mainstream and more risky ventures that are not normally inside the comfort zone of bankers.

Daniel Zhu, president of Transpacific Resources China, an investor in renewable energy and energy efficiency projects, says companies are struggling to find enough funds to tap mushrooming market opportunities.

“At the moment, developers are scrambling to grab hold of projects, but their funding demand is far from being met,” he said. “There is a chicken or egg problem.”

Financiers are cautious about funding start-up projects, but if projects do not get funded, the sector cannot reach maturity.

Venture capital funds, a traditional capital source for start-ups, tend not to be keen to energy efficiency improvement projects because they prefer to invest in highly profitable projects that can be scaled up in size rapidly, Mr Zhu said.

Private equity funds and banks have taken greater interest. A multitude of domestic and overseas funds are seeking opportunities to invest in renewable energy and energy efficiency projects.

While some banks are willing to entertain loan requests, industry insiders say commercial bankers have yet to fully appreciate the business model of energy efficiency projects and tend to be cautious.

“Unlike the construction of fixed assets, such as railways and buildings, energy conservation is often intangible, and its risk and return are a new topic for bankers,” Ms Zhao said. Her association has provided seminars and training courses to commercial bankers to familiarise them with the nascent sector, spurring the likes of Beijing Bank, Huaxia Bank, Industrial Bank and Shanghai Pudong Development Bank to set up specialised departments to tap the sector, she said.

Even so, banks, the main supplier of funds to the sector, require guarantees and collateral based on future cash flows from projects.

Despite the general lack of understanding of energy efficiency projects among outsiders, industry practitioners say energy efficiency projects can be extremely lucrative. They say return on investment can reach as high as 200 per cent, although the norm is closer to 30 per cent.

“People say property is a sector with extravagant profits. I’d say profits in the energy conservation industry are even more extravagant,” Ms Zhao said.

Wang Shaohong, director of the Energy Saving Investment Promotion Centre, cited the mainland’s seventh-largest steelmaker, Shougang, as an example. He said the company spent less than 100 million yuan on nine energy-saving programmes but was able to save more than 118 million yuan a year on energy expenses.

Mr Wang said the fundamental problem with a lack of financing for energy efficiency projects lies in their complexity.

“As energy conservation virtually involves all industries, it is very difficult to find financial experts who also know the industries well,” he said.

In other cases, state banks are often constrained by blanket orders from Beijing not to lend to highly pollution-prone, energy-intensive industries and those with over-capacity problems, even though such companies may want to use the money to enhance energy efficiency.

Chan Ka-keung, head of Greater China investment for Climate Change Capital, a financier of clean-energy projects, said: “Mainland bankers may not be sophisticated enough to understand the ins and outs of energy conservation projects. Sometimes they just cut lending to the banned sectors entirely without taking into account energy conservation projects.”

This is partly mitigated by guarantee programmes provided by development agencies such as the International Finance Corp, a unit of the World Bank, and Asian Development Bank. These agencies act as guarantors whose participation supports the business case for commercial banks to lend to project developers.

There are other ways for companies engaging in renewable energy and energy efficiency improvement projects to apply for financial subsidies. One of them is the so-called Clean Development Mechanism (CDM), a United Nations-led scheme that allows polluters in developed nations subject to pollution caps to meet their obligations by providing funding to projects for the reduction of greenhouse gas emissions in developing nations instead of cutting their own emissions.

Project developers in developing nations can sell emission reduction credits to polluters in developed nations but must demonstrate that without the subsidies their projects would not be viable.

The emission rights trading industry is set for big changes. Reduction commitments under the Kyoto Protocol, to which the CDM is linked, are due to expire in 2012, and negotiators want to seal a new pact at a UN conference in Copenhagen in December next year.

James Graham, commercial director of Camco Group, a company based in Britain that finances and develops greenhouse gas emission reduction projects internationally, expressed optimism about progress towards a global deal.

“The US has indicated that it would like to see larger and industrialising developing nations such as China, India and Brazil make some form of commitment to emission reduction. It is still open as to what form the commitment will take, but hard negotiations are going on at the highest level of governments,” he said.

If China agrees to some form of self-imposed emission reduction target, it would be a boon to the growth of the domestic renewable energy and energy efficiency industry. Mr Graham believes the country will bargain for transfers of technology – such as carbon capture and storage know-how – in exchange for binding commitments, beyond voluntary emission cuts via CDM projects.

The driving forces for greater development of renewable energy and energy conservation projects – higher energy prices, increasing pressure to reduce emissions to avert climate change, and greater government incentives – appear to be in confluence. There could well be a silver lining in the dark clouds of the global economic slowdown.

Companies Look For Short Payback Period When Investing In Green Projects

Eric Ng – SCMP | Updated on Oct 27, 2008

Energy conservation and pollution reduction are industries that have been around for decades, but their fastest growth could well lie ahead given the mainland’s status as the world’s factory and rising pressure for it to get its act together on sustainable development.

Manufacturers can either install the necessary equipment on their own or outsource the job to so-called energy services companies (Escos). Escos typically examine a firm’s energy consumption efficiency and provide solutions to achieve desired targets. They usually share the financial reward from the energy-saving effort with their customers at a pre-agreed formula over multiple years.

Eric Jiang Haibo, South China sales manager of US-based industry major Honeywell, says the company generally does not require its clients to modify their production processes, and its solutions can achieve 15 per cent to 30 per cent of energy savings. “On the mainland, clients tend to be interested if an energy-saving project can pay itself back in two to four years,” he said. “Those with payback periods of more than five years tend to have a hard time moving factory owners into action.”

Honeywell entered the mainland market in 2005. Mr Jiang said its first project was for a brewery in Shenzhen, which contracted Honeywell to save 5.4 million yuan (HK$6.13 million) a year, or 17 per cent of its energy bill.

He said a major obstacle in pushing energy conservation was management’s preoccupation with production or other issues. “I had a customer who kept delaying signing a contract with us as his firm underwent production adjustments, although he knew the payback period was less than two years.”

Focus Energy, a Hong Kong start-up established in 2006, is also pitching projects to help firms save money by revamping their air-conditioning, boiler and water systems.

Managing director Simon Cheung said a new policy in Guangdong requiring all factories to cut sewage discharge by at least half from between 2006 and 2010 and Beijing’s recent rule requiring all cement plants to install waste-heat recovery systems had proved to be a boon.

He said a chrome-plating plant consuming 700 cubic metres of water a day could save some 29 million yuan over 10 years by investing 7 million yuan in a three-year period.

A typical cement plant with daily output of 2,500 tonnes could achieve breakeven in 2.4 years after investing 60 million yuan in equipment that would allow it to capture heat from the production process to generate 25 million yuan worth of electricity, he said.