# Presentation: 127422

## Pollution Prevention & Energy Efficiency (P2E2)Business Model for Hong Kong and the Pearl River DeltaFinancing Private Sector Investment in Energy and Environment Technologies in China’s Cement SectorSeptember 26, 2006

**Stewart J. Ballard**
- Chief Commercial Consul
- U.S. Commercial Service
- American Consulate General
- Hong Kong and Macau

## P2E2 Business Model: Key Concepts

- Pollution Prevention and Energy Efficiency (P2E2)
- Closer Economic Partnership Agreement (CEPA)
- Environment Energy Service Company (EESCO)
- Performance  Contract (PERC)
- P2E2 Technology
- Measurement and Verification (M&V)
- Financing
- Guarantee

## P2E2 Business Model:Benefits

- No upfront capital cost to end user for P2E2 technology upgrades
- Outsourcing of environmental compliance to EESCO
- More production from E2 technology upgrade
- Outsourcing of energy conservation to EESCO
- New revenues from shared cost savings
- Higher returns from P2E2 EESCO’s for investors
- Enhanced corporate reputation for environmental protection
- Do P2E2 work in China, Get paid in Hong Kong

## P2E2 Business Model:Structure

- Parties:
- EESCO (Environment Energy Service Company)
- Suppliers of P2E2 Equipment & Technology
- M&V (Measurement & Verification) Firm
- End User (e.g., Factory, Power Plant or Real Estate Development)
- Commercial Bank
- Multilateral Development Bank
-     (Asian Development Bank or International Finance Corporation)
- Export Credit Agency (e.g., U.S. Export-Import Bank)
- Investors (e.g., Private Equity Funds or Corporations)

## P2E2 Business Model:Structure

- Contracts
- Guarantee Agreement
- Performance Contract
- Measurement & Verification
- Firm Engagement Contract
- Completion Support Contract
- Equipment Supply Contract
- Technical Performance Guarantee
- Loan Agreement
- Equipment Lease Agreement

***Continuation...***

## P2E2 Business Model:Structure

- Services
- P2E2 Services
- P2E2 Project Screening Advisory Services
- Banking Services
-     (Working Capital Loans, Trade Finance, Equipment Leasing)
- Legal Services
- Control
- M&V Services
- Payment
- Third Party Escrow Account Management

***Continuation...***

## P2E2 Business Model: EESCO Revenue

**Cost Savings under a Performance Contract**
- Raw Materials
- Water
- Fuel
- Electricity
- Waste Treatment
- Resource Recovery
- Streamlined Operations
- Reduced Maintenance
**Revenue Increases**
- Emissions Credits Sales
- Waste-To-Energy Tariffs
- Waste Treatment Products Sales

## PERFORMANCE CONTRACTING

**J**

**K**

**L**

**C O S T**

-  **Y E A R**

**G**

**H**

**D**

**I**

**15**

**10**

**5**

**0**

**A**

**C**

**E**

**F**

**B**

## PERFORMANCE CONTRACTING: EESCO REVENUE

- Total Cost Savings
-       EESCO’s debt service and EESCO’s revenue:	ACIL (red, yellow & green areas)
- Guaranteed Cost Savings
-       EESCO’s savings guarantee customer’s
-        debt service and EESCO’s revenue:		ABCD, DHEG, GJFK (yellow rectangles)
-        Excess savings shared
-        by customer & EESCO:			CDE, EGF, FKL (green triangles)
- Shared Cost Savings
-       EESCO’s debt service:			ABCD, DHEG, GJFK (yellow rectangles)
-       Customer savings share and EESCO’s revenue:	CDE, EGF, FKL (green triangles)
- Declining Baselines
-     Years 0-5, 5-10, 10-15:			AB, DH, GJ
-      Financial guarantees to secure EESCO’s revenue:	ABCE, DHEF, GJFL

## Energy Efficiency (E2) Cost Savings

- Examples of energy savings possible in various sectors are:
- U.S. Cement Industry			45%
- California Cement Industry		22%
- China Iron & Steel Industry		45%
- Mexico Iron & Steel Industry		34%
- U.S. Iron & Steel Industry		24%
- U.S. Pulp & Paper Industry		37%
- Source:  Lawrence Berkeley National Laboratory, U.S.A.

## E2 Costs

| Industrial Facility | Annual Electricity Consumption
GWh (Mn kWh) | Annual Electricity Costs – Guangdong | Annual Electricity Costs - China |
| --- | --- | --- | --- |
| Medium steel plant (400-600 tons/year production) | 800 | RMB 600 Mn
USD 72.64 Mn | RMB 360 Mn
USD 43.58 Mn |
| Large cement plant (1.3 Mn tons/year production) | Over 100 | RMB 75 Mn
USD 9.08 Mn | RMB 45 Mn
USD 5.45 Mn |
| Medium cement plant | 50 | RMB 37.5 Mn
USD 4.54 Mn | RMB 22.5 Mn
USD 2.72 Mn |
| Medium textile factory (raw cloth production) | 20 | RMB 15 Mn
USD 1.82 Mn | RMB 9 Mn
USD 1.09 Mn |
| Food processing plant | 10 | RMB 7.5 Mn
USD 0.91 Mn | RMB 4.5 Mn
USD 0.54 Mn |
| Metal / Electrical plant | 10-50 | RMB 7.5-37.5 Mn
USD 0.91-4.54 Mn | RMB 4.5-22.5 Mn
USD 0.54-2.72 Mn |

- RMB 8.26 = USD 1.00	Average electricity tariff in China:	RMB 0.40-0.50 / kWh
- 			Average electricity tariff in Guangdong:	RMB 0.70-0.80 / kWh

## E2 Costs

| Industrial Facility | Annual Electricity Consumption
GWh (Mn kWh) | Annual Electricity Costs – Guangdong | Annual Electricity Costs - China |
| --- | --- | --- | --- |
| Toy plant | 10-40 | RMB 7.5-30 Mn
USD 0.91-3.63 Mn | RMB 4.5-18 Mn
USD 0.54-2.18 Mn |
| Electronics plant | 10-30 | RMB 7.5-22.5 Mn
USD 0.91-2.72 Mn | RMB 4.5- 13.5 Mn
USD 0.54-1.63 Mn |
| Plastics plant | 5-20 | RMB 3.75-15 Mn
USD 0.45-1.82 Mn | RMB 2.25-9 Mn
USD 0.27-1.09 Mn |
| Paper / printing plant | 5-20 | RMB 3.75-15 Mn
USD 0.45-1.82 Mn | RMB 2.25-9 Mn
USD 0.27-1.09 Mn |
| Textile factory (finished clothing production) | 4-6.67 | RMB 3-5 Mn
USD 0.36-0.45 Mn | RMB 1.8-3Mn
USD 0.22-0.36Mn |
| Footwear plant | 1-5 | RMB 0.75-3.75 Mn
USD 0.09-0.45 Mn | RMB 0.45-2.25 Mn
USD 0.05-0.27 Mn |

- RMB 8.26 = USD 1.00	Average electricity tariff in China:	RMB 0.40-0.50 / kWh
- 			Average electricity tariff in Guangdong:	RMB 0.70-0.80 / kWh

## E2 Costs = EESCO Revenue

| Industrial Facility | % E2 Cost Savings | EESCO Revenue (Guangdong) | EESCO Revenue (China) |
| --- | --- | --- | --- |
| Medium steel plant (400-600 tons/year production) | 45% | RMB 270 Mn
USD 32.68 Mn | RMB 162 Mn
USD 19.61 Mn |
| Large cement plant (1.3 Mn tons/year production) | 50% | RMB 37.5 Mn
USD 4.54 Mn | RMB 22.5 Mn
USD 2.72 Mn |
| Medium cement plant | 50% | RMB 18.75 Mn
USD 2.27 Mn | RMB 11.25 Mn
USD 1.36 Mn |
| Medium textile factory (raw cloth production) | 35% | RMB 5.25 Mn
USD 0.63 Mn | RMB 3.15 Mn
USD 0.38 Mn |
| Food processing plant | 25% | RMB 1.87 Mn
USD 0.22 Mn | RMB 4.5 Mn
USD 0.13 Mn |
| Metal / Electrical plant | 35% | RMB2.62-13.12 Mn
USD 0.31-1.58 Mn | RMB1.57-7.87 Mn
USD 0.18-0.95 Mn |

## E2 Costs = EESCO Revenue

| Industrial Facility | % E2 Cost Savings | EESCO Revenue (Guangdong) | EESCO Revenue (China) |
| --- | --- | --- | --- |
| Toy plant | 25% | RMB 1.87-7.5 Mn
USD 0.22-0.90 Mn | RMB 1.12-4.50 Mn
USD 0.13-0.54 Mn |
| Electronics plant | 35% | RMB 2.62-7.87 Mn
USD 0.31-0.95 Mn | RMB 1.57- 4.72 Mn
USD 0.18-0.57 Mn |
| Plastics plant | 35% | RMB 1.31-5.25 Mn
USD 0.15-0.63 Mn | RMB 0.78-3.15 Mn
USD 0.09-0.38 Mn |
| Paper / printing plant | 35% | RMB 1.31-5.25 Mn
USD 0.15-0.63 Mn | RMB 0.78-3.15 Mn
USD 0.09-0.38 Mn |
| Textile factory (finished clothing production) | 25% | RMB 0.75-1.25 Mn
USD 0.09-0.11 Mn | RMB 0.45-0.75 Mn
USD 0.05-0.09 Mn |
| Footwear plant | 25% | RMB 0.18-0.93 Mn
USD 0.02-0.11 Mn | RMB 0.11-0.56 Mn
USD 0.01-0.06 Mn |

## EESCO Revenue:  Sales of Credits for Emissions Reductions

- _Chinese Coal Thermal Power Plant Emissions:_
- CO2:		 920 kg per MWH
- SOx:		   10 kg per MWH
- NOx:		2.25 kg per MWH
- PM:		0.50 kg per MWH
- ----------------------------------------
- Total	        932.75 kg per MWH
- Adj. Total	**7.20 metric tons CO2 per day per MW **
- 		(= 300 kg/hr x 24 hours x 1/1000)

- Source:  	University of California at Berkeley Ph.D. Dissertation (Christopher Cherry, February 2006)

## EESCO Revenue:  Sales of Credits for Emissions Reductions

- _Sales of Credits for Reductions in CO2 Emissions_

| Coal-fired Thermal 
Power Station  | CO2 Emissions per day in 
metric tons  | 100% CO2 Reduction Annual Revenue at $22 per metric ton of CO2 reduced  |
| --- | --- | --- |
| 1,200 MW  | 8,640  | $ 69,379,200  |
|  600 MW  | 4,329  | $ 34,689,600 |
|  300 MW  | 2,160  | $ 17,344,800  |

## PRD P2E2 Scenario : HK Bank

## PRD P2E2 Scenario: PRC Bank

## Energy Efficiency Project Customers

**Commercial & Retail****	**** ****	****Institutional****	**
-    • Commercial office buildings	  • Airports
-    • Shopping centers	 		  • Correctional facilities
-    • Hotels and resorts 		  • Government buildings
- 				  • Foreign Trade Zones
**Industrial****	**  		  • Hospitals
-    • Aluminum 	  		  • Industrial parks
-    • Automotive	  		  • Municipal water/wastewater treatment plants
-    • Brickmaking 	  		  • Nonprofit organizations
-    • Cement 			  • Power plants
-    • Ceramics 			  • Science & Technology Parks
-    • Chemicals 			  • Schools
-    • Electrical/Electronics 		  • Telecommunications systems
-    • Food processing
-    • Iron & Steel
-    • Metalworking    			 **Residential**
-    • Pulp and paper	   		  • Universities
-    • Textiles	   		  • Multiple family housing 	 	   			 	  • Public housing authorities

## ESCO Services:

**	**
****** ****Building Certification**
****** ****Commodity Risk Management  ****	**
****** ****Commodity Procurement ****	**
****** ****District Heating and Cooling****	**
****** ****Energy Consumption Reduction****	**
****** ****Electric Power & Gas Marketing & **
**     ****Brokering **
****** ****Financing****	**
****** ****Hazardous Waste Disposal****	**
****** ****Indoor Air Quality Assessment & **
**    ****Amelioration**

****** ****Installation****	**
****** ****Measurement & Verification of **
**     ****Energy Consumption & Efficiency **
**     ****Measures****	**
****** ****New Energy Supply****	**
****** ****Operations & Maintenance****	**
****** ****Power Quality Assurance****	**
****** ****Total Facility & Asset Management**
**      •  ****Training & Consulting****	**
**      •  ****Water & Sewage Management****	**

## Energy Efficiency Projects

****** ****Lighting projects****	****	****	**** ****	**
****** ****Reinstating outside air cycles on HVAC systems  **
**     ****(Cooling commercial buildings) ****	**
****** ****Repairs of faulty equipment****	****	****	**
****** ****Upgrades of equipment and infrastructure**
****** ****Replacement of oil-fired boilers**
****** ****Adoption of an “Energy Star” equipment purchase policy**
****** ****Reducing waste through recycling**
****** ****Adoption of a purchasing policy that minimizes packaging**
****** ****Adoption of a policy of purchasing electricity from renewable services**

## Energy Efficiency Projects

****** ****Offering a largely renewables-based system to off-grid customers**
****** ****Reducing network losses**
****** ****Energy auditing, energy management consulting, cooperative **
**        ****GHG reduction challenge agreements and performance contracting**
****** ****Programs that encourage cogeneration or fuel switching**
****** ****Use of the International Performance Measurement and Verification Protocol**
****** ****Upgrades of equipment: lighting, motors, HVAC, controls, engines & **
**       ****cogeneration systems**

***Continuation...***

## Products Used in Energy Efficiency Projects

**• ****Air distribution****	**
**• ****Boilers****	**
**• ****Chillers****	**
**• ****Cogeneration****	**
**• ****Control systems****	**
**• ****Distributed generation technologies**
**• ****Distribution transformers**
**• ****Electrical metering equipment**
**• ****Energy management systems**
**• ****HVAC products and services****	**
**• ****Lighting controls****	**
**• ****Lighting and electronic ballasts**
**• ****Measurement and monitoring **
**   ****equipment**

**• ****Motors, including integral horsepower motors**
**• ****Power monitoring equipment****	**
**• ****Power quality products**
**• ****Process head recovery****	**
**• ****Recycling****	**
**• ****Reflectors**
**• ****Software services****	**
**• ****Thermal storage systems****	**
**• ****Variable speed drives****	**
**• ****Water conservation programs**
**• ****Windows, doors & insulators****	**

## PACT Energy Services Solution

**Investment**

**Savings**

-                                                                               * Thermal energy storage
-                                                                                * Building envelope improvement
-                                                                       * Chiller plant upgrade/HVAC upgrade
-                                                                       * Chiller replacement
-                                                                       * Package Boiler retrofit
-                                                                       * Integrated control system
-                                                * Waste heat recovery
-                                      * Control system/Load management
-                             * Power Factor correction
-                             * Variable Frequency Drive/E-efficient equip.
-                    * Lighting retrofit
-   * Operation & Maintenance improvement

**Up to 35% of the total energy bills and O&M costs**
-   Equipment efficiency
-   Design
-   O&M practices
-   Operating time
-   Energy/water prices

- * Renewable energy use
- * Cogeneration systems

- Source:  Trane, Asia

**From less than **
**US$ 50K to**
**US$ 10Mn plus**
-    Equipment
-    Labor (Eng.,
-     Install,
-     Proj. Mgt.,
-     Test&Comm.)
-    Ongoing
-     services

## Leasing Costs

- Average 6% - 7% of total equipment cost per year
- EESCO leases equipment for use in P2E2 projects
- Leasing increases P2E2 project size, EESCO profitability and environmental benefits

## P2E2 Technologies 

**For a P2E2 Power Generation Project**

- Continuous Emissions Monitoring System
- USD5 Mn purchase or USD300,000 annual lease
- Electrostatic Precipitator
- U.S. Origin
- 300 MW Plant:  USD 27 Mn purchase or USD 1.89 Mn lease
- 600 MW Plant:  USD 48 Mn purchase or USD 3.36 Mn lease
- 1200 MW Plant: USD 84 Mn purchase or USD 5.88 Mn lease
- Chinese Origin
- 300 MW Plant: USD 5.5 Mn purchase or USD 382,000 lease
- 600 MW Plant: USD 9.1 Mn purchase or USD 636,000 lease
- Flue Gas Desulfurization Equipment
- 300 MW Plant: USD 200 Mn purchase or USD 12 Mn annual lease
- 600 MW Plant: USD 300 Mn purchase or USD 18 Mn annual lease
- 1200 MW Plant: USD 500 Mn purchase or USD 30 Mn annual lease

## Sample P2E2 Technologiesfor a P2E2 Real Estate Project

- Air-Con System – monitoring system and purification system
- USD 650,000 purchase or USD 45,500 lease
- Central Refuse and Recycling System
- USD 1.0 Mn purchase or USD 70,000 lease
- Energy Efficient Glass Wall
- USD 500,000 purchase or USD 35,000 lease
- LED Lighting System
- USD 300,000 purchase or USD 21,000 lease
- Water Conservation System
- USD 800,000 purchase or USD 56,000 lease

## P2 TechnologiesFor a P2E2 Real Estate Project

- Water Efficiency Technologies
- Non-chemical water treatment systems
- Greywater irrigation systems
- Rainwater catchment systems
- Toilets, valves, cisterns & storage tanks
- Recyclables’ Collection & Storage Technologies
- Waste paper, glass, cardboard, plastics, metals

## P2 TechnologiesFor a P2E2 Real Estate Project

- Recycled Content Products
- Low polyethylene insulation
- Recycled rubber & nylon carpets
- Recycled content countertops
- Recycled content ceramic tiles
- Recycled content plastic shower partitions & toilets
- Gypsum panels made from power plant waste
- Fireproofing material made from gypsum, recycled EPS foam and recycled newsprint

## P2 TechnologiesFor a P2E2 Real Estate Project

- Indoor Environmental Quality Products
- HVAC load management control panels
- Dehumidification / air filtration systems
- Photocatalytic oxidation air purification systems
- Low- or no-VOC adhesives, sealants and paints
- Formaldehyde-free wheat straw wall paneling

## P2 TechnologiesFor a P2E2 Real Estate Project

- Other P2 Technologies
- Roof systems combining heat, power & cooling systems
- Off-peak thermal storage cooling systems
- Microturbine power systems

## P2E2:  Your Next Steps

- Talk to the U.S. Commercial Service in Hong Kong
- Assemble a Consortium (EESCO, M&V, Bank & Law Firm)
- Confirm Applicability of CEPA
- Meet Investors
- Meet End Users
- Carry Out Technical Assessments
- Obtain Suppliers’ Technical Performance Guarantees
- Negotiate Performance Contracts
- Obtain Bank Financing (Working Capital Loans & Trade Finance)

## P2E2:  Your Next Steps

- Obtain Lease Financing
- Start Work under the Performance Contract
- EESCO Invoices End User Based on Cost Savings
- M&V Firm Verifies EESCO’s Invoice
- EESCO Receives Payment from Third-Party Escrow Account
- EESCO Repays Banks, Leasing Companies and Investors
- EESCO Monitors Actual Cost Savings, Revenue Increases and Environmental Benefits
- EESCO Upgrades P2E2 Technologies Supplied Over Time

***Continuation...***

## Stewart BallardChief Commercial ConsulU.S. Commercial ServiceAmerican Consulate General Hong Kong and Macau26 Garden RoadCentral, Hong KongTel: 852-2521-1467Fax: 852-2845-9800Email: Hong.Kong.Office.Box@mail.doc.govWebsite:  www.BuyUSA.gov/hongkongAsia Now website: www.BuyUSA.gov/AsiaNOW