Energy efficiency in China : case studies and economic analysis

3m280 C H INA ENERGY EFFICIENCY IN CHINA: CASE STUDIES AND ECONOMIC ANALYSIS ~~~E_ ,L~: Prepared by A joint Team from Clemson University and the Chinese Energy Research Institute December 1994   CHINA Issues and Options in Greenhouse Gas Emissions Control ENERGY EFFICIENCY IN CHINA: CASE STUDIES AND ECONOMIC ANALYSIS Report Number 4 Compiled by: Clemson University Energy Research Institute William A. Ward, Team Leader Li Junfeng, Team Leader James B. London Dai Yande Gary J. Wells Liu Jingru December 1994 Supported by the Global Environment Facility  The views expressed herein are those of the authors and do not necessanly represent those of the World Bank. Copyright 1994 Additional copies of this report may be obtained from The World Bank Industry and Energy Division China and Mongolia Department East Asian and Pacific Regional Office 1818 H Street, NW Washington, DC 20433 OTHER SUJBREPORTS IN TElS SERIES: Estimation of Greenhouse Gas Emissions and Sinks in China, 1990 August 1994. Report 1. Energy Demand in China Overview Report, February 1995, forthcoming. Report 2. Energy Efficiency in China: Technical and Sectoral Analysis, August 1994. Report 3 Alternative Energy Supply Options to Substitute for Carbon Intensive Fuels, December 1994. Report 5 Greenhouse Gas Control in the Forestry Sector, November 1994 Report 6 Greenhouse Gas Emissions Control in the Agricultural Sector, September 1994. Report 7. Valuing the Health Effects ofAir Pollution Application to Industrial Energy Efficiency Projects in China, October 1994. Report 8. Potential Climate Change Impacts on China, September 1994. Report 9. Residential and Commercial Energy Efficiency Opportunities: Taiyuan Case Study, September 1994, Report 10 Pre-Feasibility Study on High Efficiency Industrial Boilers, August 1994. Report 11.  FOREWORD This report is one of eleven subreports prepared as inputs' to the United Nations Development Programme (UNDP) technical assistance study, "China: Issues and Options m Greenhouse Gas Emissions Control," supported by the Global Environment Facility and executed by the Industry and Energy Division, China and Mongolia Department of the World Bank. This report is a joint effort of the State Planning Commission (including several ministries and research mstitutions) and the World Bank. It was prepared by a joint team of experts from the Energy Research Institute, State Planning Commission of China and Clemson University. The energy efficiency case studies that are the subject of this report were selected by international and Chinese experts, following the preparation of background reports on energy efficiency potential in China by experts from various Chinese ministnes, research mstitutes, and universities (see Energy Efficiency in China: Technical and Sectoral Analysis, August 1994, Subreport 3.) A group of energy experts from China were trained in case study analysis at a workshop organized by SPC in Beijing in November 1992. Individual case studies were conducted between November 1992 and May 1993 by the Chinese case study team with the assistance of international consultants. Data analysis was completed over the summer and fall of 1993 by Chinese experts and international consultants at Clemson University. The final report was then prepared during 1994. The case study work was carried out-by four groups: the data collection and analysis group included Li Junfeng, Dai Yande, Xu Ningnan, and Liu Jingru; the energy efficiency consultant group included Sun Yongguang, Zhang Jintong, Jiang Hanhua, Liu Dan, Sun Hongzheng, and Li Youhui; the senior advisory group including Shen Longhai, Zhou Fengqi, Zhu Liangdong, and Zhou Changyi, and; the sectoral analysis group. A complete list of participants is provided below. This report was drafted and edited by William A. Ward, Li Junfeng, James B. London, Dai Yande, Liu Jingru, and Gary J. Wells. Editoral assistance was also provided by Todd M. Johnson. Chinese Experts Shen Longhai, Director, Department of Spatial Planning and Regional Economy, State Planning Commission (SPC) Zhu Liangdong, Advisor and Senior Engineer, SPC Zhou Fengqi, Director, Energy Research Institute (ERI) Zhou Changyi, Division Chief, SPC Wang Shumao, Division Chief and Associate Professor, ERI Li Junfeng, Division Chief and Senior Engineer, ERI Dai Yande, Deputy Division Chief and Associate Professor, ERI Xu Ningnan, Engineer, SPC Liu Jingru, Engineer, ERI Liu Zhiping, Associate Professor, ERI Li Youhui, Associate Professor, ERI Ministry of Metallurgy Industry Xu Zhiqiang, Division Chief, Engineer, Energy Conservation Division, Production Department Zeng Wu, Engineer, Energy Conservation Division, Production Department  Jiang Hanhua, Senior Engineer, Anshan Thermal Energy Research Institute State Administration of Building Materials Chen Min, Eivision Chief, Senior Engineer, Energy Division Liu Dan, Senior Engineer, Research Institute of Building Materials Ministry of Chemical llndustry Zhang Jintong, Deputy Division Chief, Senior Engineer, Energy Saving Division Zhang Yuming, Engineer, Chemical Fertilizer Department Liu Fangbin, Engineer, Chemical Industry Departnent China National Nonferrous Mets Rndustry Corporation Song Shanring, Senior Engineer, Enterprise Bureau Li Yuhong, Deputy Division Chief, Senior Engineer, Production Technical Energy Division, Shangdong Aluminum Works Ministry of Energy Chen Yuji, Senior Engineer, Energy Conservation Department Wang Aijuan, Engineer, Energy Conservation Department China National Coal Corporation Hong Shaohe, Deputy Director, Senior Engineer Chen Shiming, Senior Engineer, Coal Cleaning Departnent Li Ping, Senior Engineer, Office of Energy Conservation Ji Maizhen, Associate Professor, Coal Management Institute Ministry of Machinery lIndustry Zhou Likun, Engineer, Science and Technology Department Yang Yuwu, Engineer, Energy Conservation Center Zhang Jinlan, Engineer, Shanghai Electric Apparatus Research Institute Teztile Industry Bi Guodian, Semor Engineer and Division Chief, Production and Coordination Departnent Xing Huilu, Senior Engineer, Economic Trading Division, China General Society Fang Kaijun, Deputy Director, Yangzhou Dyeing and Printing Plant Light l[ndustry Jiang Manxia, Manager, Senior Engineer, China Paper Development Corporation Su Jing, Deputy Division Chief, Senior Engineer, Economic Trading Division of China General Society Chen Zhongxin, Associate Chief Engineer, Beijing Design and Planning Institute ii  Other Sun Yongguang, Associate Professor, Research Institute of Technical Economics, Tsinghua University Zhang Li, Assistant Engineer, Energy Savings Center, China National Petrochemical and General Machinery Engineering Company Li Enshan, Engineer, Urban Construction Research Institute, Construction Ministry Sun Hongzheng, Professor, Economic Management Institute of Zhejiang Province Jiang Hongbo, Engineer, Zhejiang Power Bureau International Experts Clemson University William A. Ward, Professor, Department of Agricultural and Applied Economics James B. London, Professor of Economics, Department of Planning Studies Gary J. Wells, Professor, Department of Agricultural and Applied Economics Wang Fei, Researcher Li Tong, Researcher Diego Bumeo, Researcher Andy Nevin, Researcher Amy Luther, Researcher John White, Researcher Eta Buchberger, Researcher Zhang Wenying, Researcher The World Bank Li Junfeng, Senior Engineer and Energy Specialist, Consultant Barry G. Tunnah, Senior Engineer and Energy Efficiency Specialist, Consultant Robert P. Taylor, Senior Energy Economist (Task Manager) Todd M. Johnson, Energy and Environmental Economist iii  CURRENCY EQUIVALENTS 1 US$ = 4.7 Chinese Yuan (1990) WEIGHTS AND MEASURES ton of coal = 0.7143 tce, average ton of crude oil = 1 43 tce 1000 m3 of natural gas = 1 33 tce Kilo(Watt) = 103 (Watts), Mega = 106 , Giga = 109, Tera = 1012 ABBREVIATIONS AND ACRONYMS BOF - basic oxygen furnace CO2 - carbon dioxide EIRR - economic intemal rate of return EEIRR - environmental economic internal rate of return FIRR - financial internal rate of return GEF - Global Environment Facility GHG - greenhouse gas GWh - gigawatt-hour kcal - kilocalories kgce - kilogram of coal equivalent kW - kilowatt kWh - kilowatt-hour LPG - liquified petroleum gas mtce - million tons of coal equivalent MW - megawatt NEPA - National Environmental Protection Agency of China NH3 - ammonia NOx - oxides of nitrogen NPV - net present value S02 - sulfur dioxide SPC - State Planning Commission of China t - metric ton tce - ton of coal equivalent TSP - total suspended particulate TVE - townshup and village enterprise UNDP - Umted Nations Development Program iv  CONTENTS EXECUTIVE SUMMARY vii PART 1 OVERVIEW OF CASE STUDIES AND ECONOMIC ANALYSIS L INTRODUCTION 1 IL PROJECT FINANCIAL ANALYSES 3 III. ECONOMIC ANALYSIS OF PROJECTS 7 IV. ENERGY CONSERVATION, THE BASELINE, AND THE DEFINITION OF "INCREMENTAL" 11 V. ENVIRONMENTAL ECONOMIC ANALYSIS OF PROJECTS 14 VL COMPARATIVE BENEFITS 19 VII. ANALYSIS OF PROJECT-IMPLEMENTING ENTERPRISES 20 A. ASSESSMENT OF THE FIRM IN RELATION TO THE ENTERPRISE 22 B. THE ENTERPRISE/PROJECT MODEL 25 C. APPLICATION OF THE ENTERPRISE/PROJECT MODEL 29 PART 2 ENERGY EFFICIENCY IN CHINA: CASE STUDIES L METALLURGY 1. REPLACEMENT OF OPEN HEARTH FURNACES WITH BOF PROCESS TECHNOLOGY AT ANSHAN 1 2. CONTINUOUS CASTING REPLACING INGOT CASTING TECHNOLOGY AT BENXI 8 3. RENOVATIONS OF REHEATING FURNACE AT DALIAN 15 4. BLAST FURNACE GAS RECOVERY FOR CO-GENERATI6N AT XINGTAI 22 5. INDUSTRIAL KILN RENOVATION AT SHANDONG ALUMINUM WORKS 28 IL CHEMICALS 1. MEDIUM SIZE COAL BASED AMMONIA PLANT RENOVATION AT SHIJIAZHUANG 34 2. WASTE GAS RECOVERY IN A SMALL SIZE COAL BASED AMMONIA PLANT AT SHOUGUANG 41 3. MEMBRANE ELECTROLYSIS PROCESS FOR CAUSTIC SODA PRODUCTION AT JIUJIANG 48 IIL BUILDING MATERIALS 1. KILN RENOVATIONS FOR OLD CEMENT PLANT AT QDaN 55 2. WET TO DRY PROCESS CONVERSION AT YINGDE CEMENT PLANT 62 3. VERTICAL KILN RENOVATION AT WEIFANG CEMENT PLANT 70 IV. PULP AND PAPER 1. CO-GENERATION PROJECT AT YALUnANG PAPER MILL 77 2. BLACK LIQUOR RECOVERY PROJECT AT BOSTENGHU PAPER MILL 84 V. TEXTILES 1. CO-GENERATION PROJECT IN YALUJIANG DYEING AND PRINTING PLANT 90 2. CAUSTIC SODARECOVERY IN YALUJIANG DYEING AND PRINTING PLANT 95 3. COMPUTER MANAGEMENT FOR ENERGY USE IN DYEING AND PRINTING PLANT 101 VL ELECTRIC MOTORS 1. HIGH EFFICIENCY MOTORS PROJECT AT WU)x 106  2. VARIABLE SPEED MOTORS PROJECT AT ZHEJIANG AND SHENYANG 114 3. ELECTRIC MOTORS REPAIR PROJECT IN SHANGHAI 122 4 STEAM TRAP PRODUCTION PROJECT AT YANGZHOU 128 VIL. COAL PROCESSING 1 CoAL BRIQUETTING FOR HOUSEHOLD AND BOILER USE IN LuANSHAN AND CHONGQING 133 2. STEAM COAL WASHING AND SCREENING IN DATONG AND XUZHOU 143 VI U POWER GENERATION AND DI[STRIBUTION 1. REDUCTION OF LINE LOSS IN Low VOLTAGE POWER DISTRIBUTION NETWORK IN ZHEJIANG 151 2. HIGH EFFICIENCY TECHNOLOGY USE IN THERMAL PLANTS AT ZHENHAI 158 1Lx RESIDDENTIAL BUILDINGS 1. ENERGY CONSERVATION FOR RESIDENTIAL BUILDINGS IN BEIJING 169  EXECUTIVE SUMMARY i The objectives of the study were (1) to develop and evaluate cost-benefit methods for implementing the incremental cost principle within the greenhouse gases component of the GEF, and (2) to use those methods to analyse twenty-five industrial energy efficiency investments in China. The twenty-five projects that were studied can be divided into two major groups which in turn are subdividable into four subgroups Manufacturing Efficiency Project * Fundamental enterprise restructuring projects, where the "energy efficiency project" constitutes a major rehabilitation investment for a large segment of the enterprise as a whole (MI Steel Openhearth to BOF Conversion; M2 Steel: Continuous Casting; CHI Chemicals Fertilizer Renovation, B 1 Cement: Medium-Scale Kiln Renovation, B2 Cement. Conversion from Wet to Dry Process -- both Scenarios, and CH3 Chemicals NaOH Membrane), * Traditional energy conservation projects, where the project affects a small part of the enterprise (M3 Steel Steel Rolling/Reheating Furnace Renovation, M4 Steel* Cogeneration/Blast Furnace Gas Recovery; CH2 Chemicals Small Ammonia Plant Waste Heat Recovery, B3 Cement. Small-Scale Kiln Renovation; LI Pulp & Paper Cogeneration; TI Textiles. Print/Dye Cogeneration; and T3 Textiles Computerized Energy Management System), * Combinations of the above, in which the project is too large to be considered "standard" but not large enough to constitute a restructuring (M5 Aluminum Kiln Renovation, L2 Pulp & Paper. Black Liquor Recovery, and T3 Textiles Caustic Soda Recovery) Energy Consuming Equipment/Feedstock Improvements * Projects whose effects will be felt by diffuse users of the good or service or in which the savings will be spread over a large number of applications (E High Efficiency Motors; E2 Variable Speed Motors, E3 Motor Repairs; E4 Steam Trap Production, CI Coal Briquetting; C2 Coal Washing; P1 Low Voltage Line Loss; P2 Thermal Power Plant, and HI Residential Buildings Energy Conservation) ii The 25 case studies considered herein reduce CO2 emissions by 1 28 million tons per year (Table 5) In general, the projects have high rates of return on investment evaluated on financial, economic and environmental economic criteria Twenty-four of 25 cases have financial and economic rates of return (FIRRs and EIRRs) above 12 percent, and 18 of the 25 cases have EIRRs above 20 percent (Table ES 1). Part of these returns resulted from efficiency improvements in terms of energy per unit of output, while the remainder resulted from scale and output value effects of the projects on the affected vii  enterprises. The output/value effects were adjusted out of the impacts before calculating the net cost per ton of GHG reduction (text Section IV, paras 4.3 and 4.4) iii. After adjusting for output effects, 20 of 24 cases have positive net benefits per ton of CO2 reduction as indicated in Table ES2.' These projects satisfy "no-regrets" criteria as the financial, economic and localized environmental health benefits retained within the Chinese accounting stance more than pay the costs associated with these alternatives for reducing emissions of GHGs. At face value, this outcome would suggest no "incremental costs" associated with these cases. iv. When FIRRs are calculated in which the scale effect due to increased output is retained within the individual project enterprise, returns on investment for 16 of the 17 industrial firms for which this analysis is relevant exceeds 18 percent (with 10 of the 17 having FIRRs exceeding 25 percent). This implies that the absence of an investment subsidy to these sixteen enterprises to achieve the GHG emissions reduction seems not to be the critical factor constraining implementation of the projects. v. Overall, 13 of 25 cases showed an increase in economic internal rate of return (EIRR) compared to the FIRR (Table 3). Two of the projects showed no significant difference between the EIRR and FIRR, and ten of the project ElRRs were below the respective FIRRs. However, only one of the projects has an EIRR less than 12 percent (the typical target rate of return for project analysis in China), while 18 of the 25 projects have EIRRs above 20 percent. Another three projects might be considered marginal, with EIRRs above 18 percent but below 20 percent. Only one of the projects "switches" from being unattractive to being attractive (greater than 20 percent IRR) with the imposition of economic prices as opposed to financial prices, while none of the projects switch to being unattractive when economic values are used. This analysis suggests that price reform is not the only issue constraining investment in the projects that were analyzed, and that moving to "free market prices" will not by itself lead enterprises to implement these energy efficiency investments. Instead, the price reforms must be combined with targeted interventions designed to identify and break the actual constraints that appear to impede efficiency improvements vi. For the most part, project rankings did not change drastically as the analysis moved from rate of return rankings to costs per ton of coal saved and per ton of CO2 emissions reduction (Table ES3). Exceptions included M2 Continuous Casting, which showed low IRRs but relatively good cost effectiveness ratio calculations, and E3 Motors Repairs which experienced the opposite fate. vii Seven projects achieved substantial GHG reductions by restructuring the implementing enterprises. However, serious questions arose as to the ability of these ' The analysis also calculated net costs per ton of CO2 These costs are project costs in the classic cost-benefit analysis sense. When discussing benefits and "costs" associated with GHG removal, this report will be referring to the net project benefits that are available to pay for GHG removal. viii  enterprises to finance the proposed projects (Table 8 and paras 7.21-7.24) and as to the financial sustainability of the post-project enterprises. viii. The analysis of twenty-five case studies reported herein suggest the following conclusions: * Enterprise viability should be a prerequisite for project financing, implying that the form of analysis used must not look only at model project analyses but also must analyze viability of enterprises within which the projects are proposed. This criterion is particularly critical for "restructuring" projects. * Accounts derived from partial budgets should be used with great care in assessing energy efficiency and other efficiency-oriented project investments in enterprises particularly in formerly-planned and restructuring economic environments. * In restructuring economic environments, the energy efficiency gains to be had from the structural and policy reform process likely will be much greater than those from a series of incremental investments in "standard" energy efficiency projects in enterprises which need restructuring * Neither price reform to drive financial prices towards economic prices nor Pigouvian subsidies to "internalize" the economic and environmental impacts into financial accounts will by themselves be sufficient to bring about the implementation of the technologies for energy efficiency improvements assessed as part of this project. * Other interventions, including management reform, identification of actual constraints, and technical assistance must complement the pricing and structural reform process. * Studies should be undertaken to determine the actual reasons for the failure to implement high-FIRR, efficiency-improving projects. These studies should be used to identify interventions that promote the use of technology that is economically efficient and environmentally benign. ix  libDh IE$