China uses more than triple (3.4 times) the world average of energy to produce one widget. This is grotesquely inefficient, expensive and environmentally disastrous. It's also a potential national security threat to an energy importer, as China is. Its government has set ambitious national goals for energy efficiency improvements (20 percent by 2010) and assigned each province and provincial-level city an energy-reduction target (ranging from 30 percent to 12 percent).

The results for 2006 are not encouraging. Through the first half of last year, energy use per production unit rose by 0.8 percent, and the yearend figure reportedly missed a 4-percent reduction target by a significant margin. As might be expected, more stringent measures are being implemented to get the numbers moving in the right direction.

New Efforts Mean New Requirements

One of those measures will affect any entity planning a "fixed asset investment" in China in 2007. At the end of 2006, the National Development and Reform Commission (NDRC) issued a notice entitled, "On Strengthening Energy Conservation Evaluation and Review of Fixed Asset Investment Projects" (Fa Gai Tou Zi [2006] no. 2787) (Energy Conservation Notice).1

The Energy Conservation Notice requires that after January 1, 2007 all project-feasibility and project-application reports submitted to the NDRC for approval must contain a chapter called "Energy Conservation Analysis." If an application does not include this chapter, the NDRC will reject it. The Energy Conservation Notice appears to implement a widely ignored provision of PRC law on conserving energy that took effect January 1, 1998 (Energy Conservation Law), which requires that fixed asset projects be "designed and constructed in conformity with the standards for rational use of energy and for energy conservation design" and prohibits the approval of projects which failed to conform to the applicable standards.

Definitions and Applicability

The first thing to ask about the new Energy Conservation Notice, of course, is to whom does it apply? The Notice is clear that it applies to all fixed asset investment projects, but the term fixed asset investment is not defined in the Notice or the Energy Conservation Law. The National Bureau of Statistics (NBS) uses a rather detailed definition of the term. Basically, pursuant to the NBS definition, it includes an investment of more than RMB500,000 by an enterprise, institution or authority in a new construction, expansion or renovation project, or any project designed to enhance production capability or project efficiency.2 Informal inquiries to the NDRC confirm that the NDRC intends to use this definition in applying the Energy Conservation Notice.

Given this expansive definition and its relatively low monetary thresholds, we can assume that if any project involving construction requires the filing of a feasibility study or a project application report with the NDRC for approval, it should include an energy conservation analysis.

If a project is subject only to local government approvals, the application of the Energy Conservation Notice is less clear, but inclusion of an energy conservation analysis is advised. The Energy Conservation Notice itself encourages local authorities to:

...formulate measures for energy conservation evaluation and review of local fixed asset investment projects, by reference to the requirements of the State Development and Reform Commission for project examination and approval, and carry out energy conservation evaluation and review work by integrating existing examination and approval procedures for fixed asset investment projects and on the basis of local and national standards for rational energy utilization and energy conservation design.

This is one area in which the national government has clearly informed the local governments that it will be watching closely. It has made clear that energy conservation goals are a key national government priority, assigned each province and provincial-level city a specific reduction target, and accurately reported and publicly critiqued poor performance in 2006. Most local governments will therefore likely opt for compliance with the national standard.

Analyzing Conservation

What must an energy conservation analysis analyze? The Notice states it shall be prepared:

...on principles of rationally utilizing energy and improving energy efficiencies by following national standards for rational energy consumption and codes for energy conservation design [and contain] analysis of the types and quantity of energy consumption ..., analysis of the energy supply status in places where the projects are located, targeted energy consumption and analysis of energy conservation measures and effect.

The NDRC issued "Guidelines for Energy Conservation Evaluation and Review of Fixed Asset Investment Projects" (Fa Gai Huan Zi [2007] No. 21) (Guidelines) on January 5, 2007 and directed them to all "development and reform commissions and economic and trade committees of all provinces, autonomous regions, municipalities, cities under independent development programs and relevant departments of the State Council."

The Guidelines collect "the existing applicable laws and regulations, industrial and technological policies, standards and design codes" to serve as a basis for the energy-saving evaluation and review of fixed asset investment projects. They are extremely comprehensive, including approximately 155 laws, regulations and policies. They specifically address several sectors (e.g., the "Building" sector) and include specific relevant guidelines for each (e.g., "Standards for Evaluation of Green Buildings" (Ref. GB/T50378-2006)). The guidelines are also meant to speed up formulation of new energy conservation standards or amendment of existing ones, "given that some of the standards were launched a considerable time ago."

Ongoing Oversight

Even after project approval, the Energy Conservation Notice provides that the monitoring of project construction is to be "enhanced in order to ensure energy measures are implemented and energy efficiency targets are met." If a construction-phase inspection reveals noncompliance, "an order shall be issued to urge stopping the construction and making corrections within a prescribed time, while relevant entities shall be held liable therefore according to law."

This provision reflects the fact that the gap between projects "as designed" and projects "as built" has become a significant problem. As the Xinhua News Agency reported on January 19, 2007:

[w]hile new buildings in China are designed with energy conservation measures, barely half of them are actually built that way, according to official statistics. The Ministry of Construction inspected over 600 construction projects around the country last year and ordered those that failed to comply with energy saving codes to make repairs so that they meet the standard. (emphasis added)

In 2007, then, we can expect increased project-construction inspections to confirm compliance with energy conserving codes and requirements. Moreover, additional measures encouraging energy conservation can be expected in 2007, especially after the planned amendments to the 1997 Energy Conservation Law are adopted, probably in the second half of the year.

Earnest Improvement

There is simply no excuse for China's abysmal energy efficiency record. The central government realizes this and has started in earnest to correct the situation. And it means business. If you plan construction in China in 2007, keep this fact in mind.

1 The English translations of the Notice and Guidelines, referenced below, were prepared by Squire, Sanders & Dempsey L.L.P. They are considered accurate, but are unofficial. If you would like a copy of the translations, please contact the author at cmcelwee@ssd.com.

2 National Bureau of Statistics of China official website, www.stats.gov.cn/tjzd/tjzbjs/t20020327_14286.htm

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The information in this bulletin was compiled by the China offices of
Squire, Sanders & Dempsey L.L.P.

This newsletter provides free information on the Chinese legal environment but does not constitute legal advice.