PROJECT BRIEF

1.	Identifiers

Project Number:	n/a
Project Name:				CHINA: Barrier Removal for the Widespread 							Commercialization of Energy-Efficient CFC-Free 							Refrigerators in China
Project Duration:	60 months, starting September 1998
Implementing Agency:	United Nations Development Programme
Executing Agency:	UN OPS -/- National Execution
Requesting Country:	China
Eligibility:	Date of Ratification of FCCC: 5 January 1993
	Eligible under financial mechanism of UN-FCCC
GEF Focal Area:	Climate Change
GEF Programming Framework:	Removing Barriers to Energy Efficiency and Energy 
Conservation, Operational Program 5

2.	Summary

This project will reduce GHG emissions in China by removing barriers to the widespread commercialization of energy-efficient refrigerators.  The project addresses the key market, technological, social, and commercial barriers both to the adoption of high-efficiency refrigerator technology by Chinese manufacturers and  to the acceptance of high-efficient refrigerators by Chinese consumers. Activities include technical assistance and training for compressor and refrigerator manufacturers, incentives for energy efficient product design or modification and conversion of factory production lines, national efficiency standards, a national labeling program, consumer education and outreach, dealer and manufacturer incentive programs, and a consumer buyback/recycling program.

3.	Costs and Financing (million US$):

	GEF:		- Project		:			$  9,617,000
		- PDF 			:			$     243,000
		- Subtotal GEF		:			$  9,860,000

	Co-financing:	
			
			- Other International	:			$     200,000
			- Government	 	:			$  1,370,000	
			- Private		:			$29,719,500

	Total Project Cost:			:			$41,149,500

4.	Associated Financing (million US$):	

UNDP/MP:			$22,200,000
	UNDP/Energy Efficiency:	$  1,990,000

5.	Operational Focal Point Endorsement:

Name:	Chen Huan	Title:	GEF Operational Focal Point
Organization:	Ministry of Finance	Date:	31 December 1997

6.	IA Contact:	Yannick Glemarec
		Assistant Resident Representative
		UNDP Beijing
		e-mail: yannick.glemarec@undp.org

1. Background and Context (Baseline course of action)

1.	Eighty percent of electricity in China is produced from coal. In 1995, electricity production was responsible for one-third of China’s CO2 emissions. From 1980 to 1995, residential energy use rose from three percent to twelve percent of total electricity consumption.  Within the residential sector, it is estimated that refrigerators now account for approximately half of all residential electricity consumption.

2.	At current levels of power consumption and production levels, refrigerators produced over the next decade will require an additional 601 billion kWh of energy over their expected lifetimes, equivalent to an annual average of 60 million tons of additional CO2 emissions.  They would necessitate an estimated increase in power generation capacity of 5,700 MW (costing over US$5 billion in 1995 terms).  

3.	Production of household refrigerators in China has doubled since 1990, rising from 4.63 million units in 1990 to 9.28 million in 1996, second highest in the world. During this same period, the industry has undergone significant consolidation, with the number of producers falling from over 100 to 30 in 1996. In 1996 twelve Chinese firms alone accounted for 89% of production and 88% of total refrigerator sales of 9.3 million. Rising production and sales has also resulted in a rapidly growing stock of refrigerators. In 1992, there were a total of  39 million refrigerators in service, up from only 4 million in 1985 (38% average annual growth).  By 1996, the number of refrigerators in service surpassed an estimated 60 million.

4.	Refrigerators are penetrating urban markets rapidly.  According to a recent survey, the majority of future sales are likely to come from economically developed urban and affluent rural areas. In mature urban markets, over half of refrigerator purchases will be for replacement units, while “second tier” urban markets—provincial capitals and other smaller urban areas—still represent large markets for first-time purchases.

5.	CFC-free technologies have been adopted to some extent already by all of the big brands (in terms of market share) such as Haier, Rongsheng, Meiling, Shangling, and Xinfei.  Of 116 models manufactured by the top 12 domestic manufacturers in 1996, 58% used CFC-12 as refrigerant; 4% used isobutane (R600a); 17% used R134a; and 21% used mixtures such as R22-R152a. In retail outlets, most salespeople are willing to recommend CFC-free products to consumers.  In their perception, those products are more fashionable and are of higher quality. 

6.	High-efficiency refrigerators, common in Western markets, have yet to penetrate Chinese markets in substantial numbers. Although some of the newer CFC-free models are marketed with “energy efficient” labels, the labels follow inconsistent evaluation standards. Currently there are no uniform labeling standards nationwide, making the issue of energy consumption a continuing source of confusion to consumers. Consumers do not have easily accessible information with which to make informed purchase decisions. Even where such information is available, recent market research shows that consumers currently undervalue energy efficiency, and are likely to continue to do so unless provided with education about its benefits.  Finally, many manufacturers’ lack of familiarity with energy efficient design principles and the relatively lax current energy use standards mean that manufacturers do not have either the ability or the incentive to adopt energy efficiency measures.  These factors severely limit the ability of energy efficient products to establish themselves in the marketplace, unless these barriers are removed. 

7.	Recent studies have shown that existing Chinese refrigerator technology could be improved and corresponding energy consumption lowered by more than 40% for many currently popular refrigerator size ranges and models. These improvements could be made with modest cost increases in retail refrigerator prices, from $65 to $75 per unit, and could result in payback periods for consumers of less than five years, depending upon prevailing electricity prices. Because of the large projected increases in household refrigerator ownership, new models entering the market will have a large influence on the overall characteristics of the future stock. Consumer attitudes have become increasingly favorable to the marketing of high quality, reliable, energy-efficient refrigerators.  Nevertheless, refrigerator buyers remain highly sensitive to first costs and are unaware of or underestimate life-cycle benefits. . 

8.	The concentration of production among only a few domestic producers means that their designs will influence the future energy consumption of a large share of China’s refrigerator stock.  However, even the top domestic manufacturers have not explored or implemented technology improvements owing to the existence of numerous barriers.  These barriers can be expected to persist in the baseline case, and effectively prohibit a commercial market from developing in China. The key barriers are: . 

a.	Lack of awareness of the lifecycle economic benefits of high-efficiency refrigerators.  Consumers remain  highly sensitive to the first-costs of their purchases and prefer models with low purchase prices and higher electricity costs because they do not fully appreciate that total lifecycle costs can be much lower for high-efficiency models.

b.	Lack of reliable, comparative information available to consumers about specific models. Even if consumers want to purchase models with low lifecycle costs, they are unable to make comparisons between models because labels do not exist which provide such information in a consistent and easy-to-understand manner. Existing labels that have appeared recently on some models lack national certification based on national energy-efficiency criteria and provide inadequate information. This has led to consumer confusion and growing government concern over proliferation of multiple criteria.

c.	Manufacturer uncertainty about market demand for high-efficiency models. Manufacturers have had access to few, if any, market research studies about the potential demand for high-efficiency models in the Chinese market. Only recently, with rising electricity prices, more disposable income among a growing segment of Chinese society, and a greater emphasis on competitiveness in industry, has consumer attention turned to high-efficiency products.

d.	Manufacturer uncertainty about cost-effectiveness of high-efficiency models. Manufacturers are uncertain about both the costs of developing and producing high-efficiency models, and the price premium that high-efficiency models might command. Therefore, manufacturers are reluctant to commit the resources to develop and produce high-efficiency models. . 

e.	Lack of expertise in energy-efficient refrigerator design. The majority of Chinese manufacturers lack the engineering and design expertise to develop new energy-efficient refrigerator models or improve the efficiency of existing models for three reasons.  First, manufacturers have not cultivated the skill sets necessary for energy efficient refrigerator design. Second, most domestic manufacturers have relied heavily on imported or licensed technology and therefore are reluctant or unable to develop new energy efficient product designs. Finally, many domestic manufacturers have in the past relied on a limited and unchanging product line for their sales, and therefore have extremely limited experience in product design and redesign.  For these reasons, many manufacturers are uncertain of their ability to move in new technology directions without targeted training to impart the necessary skill sets.

f.	Higher-efficiency compressors are not available domestically.  In order for a Chinese refrigerator manufacturer to design and produce a high-efficiency model, a higher-efficiency compressor must be utilized. Currently such compressors are not available domestically; the higher cost of imported high-efficiency compressors is a strong disincentive  for domestic refrigerator manufacturers to utilize them.

g.	Dealer reluctance to stock or promote high-efficiency models.  Uncertainty about consumer demand; the need to educate their sales force; and fear of reduced sales due to higher prices all make dealers reluctant to stock high-efficiency models. Survey results have also indicated that sales staff are uneducated on the benefits of energy efficiency and unable to provide consumers with reliable information.

h.	Lack of an appliance recycling program.  The lack of an appliance recycling program means that often unnecessary refrigeration is occurring. As China’s refrigerator market matures, an increasing proportion of purchases involve the replacement of an old refrigerator. Unlike most developed countries, where older appliances are scrapped or recycled, market research indicates that 50% of new buyers in China will keep their old refrigerators. The older refrigerators still in use may offset much of the efficiency gains from the purchase of new refrigerators.

i.	Lax efficiency standards. Experience in countries adopting mandatory efficiency standards has proven them effective in removing the most inefficient models from the market and in creating expectations of periodic increases in minimum energy performance standards. China’s current efficiency standards, promulgated in the 1980s, were established in view of the needs of hundreds of small refrigerator producers. They are currently outdated, and provide no incentives for companies to increase the energy efficiency of their models.

9.	Recent CFC conversion activities for refrigerators in China have not addressed these barriers.  Currently, the Montreal Protocol Fund (MPF) is supporting the conversion of refrigerator and compressor factories to hydrocarbons and HFCs, but the MPF does not support the funding of energy efficiency measures beyond measures necessary to maintain the unit energy consumption in the face of CFC conversion. Since combining energy efficiency redesign and retooling with CFC conversion offers opportunities for implementing energy efficiency measures at lower cost than would otherwise be the case, it is important to take advantage of these planned changeovers to introduce new energy-efficient designs and technologies.  No proposed or approved Montreal Protocol projects have included or been complemented by energy efficiency components.  

10.	Communication between UNDP and the Secretariat of the Multilateral Fund (MF) of the Montreal Protocol has confirmed that there is no duplication of efforts between the proposed activities and those supported by the Montreal Protocol.  The provision of support to meet a second global environmental objective—in this case, the reduction of Greenhouse Gases through improved energy efficiency—goes beyond the goals of the Montreal Protocol and is considered additional to activities supported through Multilateral Fund.  

11.	In recent years a number of donor-funded technical-assistance projects for refrigerator technology in China have been underway. UNDP is implementing 8 projects for CFC replacement in the refrigerator sector, and the World Bank has approved and is implementing a number of projects.  However, none of these activities has addressed the key barriers to commercialization of energy-efficient refrigerators.  They provide the baseline for this project’s activities.

2. Rationale and Objectives  (Alternative)

12.	The goal of the project is to reduce China’s future GHG emissions through the transformation of the refrigerator market in China to the production and utilization of more energy-efficient models.  The application of non-proprietary energy efficiency technologies would significantly increase the efficiency of household refrigerators in China.  However, these technologies have not been widely applied because of the barriers discussed above.  These barriers must be removed to enable the commercialization of high-efficiency refrigerators in China to take place. A program for the removal of these barriers should support the introduction of energy efficiency technology to refrigerator and compressor manufacturers while stimulating the demand for energy-efficient refrigerators in the market.

13.	This project is designed to achieve widespread commercialization of energy-efficient refrigerators through removing key technical and market barriers to their production, sale and use. Technical barrier reduction measures will demonstrate the cost-effective nature of implementing proven technical measures for manufacturers, provide extensive technical training and economic incentives, and increase manufacturer confidence in sustained consumer demand for energy-efficient models. Market barrier reduction activities provide consumers with the assurance of increased savings through implementation of nationally regulated standards and energy-efficiency labeling, increase consumer knowledge and understanding of the benefits of energy-efficient refrigerators, and provide valuable information and assistance at the point of sale. The project builds on the substantial body of recent work on refrigerator energy efficiency. 

14.	One of the main goals of this project will be to demonstrate the win/win nature of energy efficiency investments to manufacturers, consumers, and lending agencies to ensure private sector sustainability of the project.  The project will implement an incentive program for manufacturers to maximize energy savings in their design or redesign of new refrigerator models that raise energy efficiency by 40% over current models (the “hurdle rate”). The provision of these incentives to the participating manufacturers will result in domestic refrigerator manufacturers investing the estimated $24 million necessary for the redesign of models and retooling of plants to produce high-efficiency refrigerators. Manufacturers will also be assisted by targeted training programs and technical assistance to develop bids for the incentive program, to acquire new design skills, to apply design skills to existing models, and to familiarize manufacturers with leading international refrigerator technology. Further, new standards will increase the minimum level of efficiency which manufacturers must attain thereby giving them an additional incentive to invest in developing energy efficient technology. 

15.	Most domestic manufacturers lack critical experience and skill sets for design and redesign of energy efficient refrigerators and compressors.  This project will address this crucial barrier to successful commercialization of energy efficient refrigerators through an intensive, targeted training program for refrigerator and compressor manufacturers.  The training program will draw on the results of prior energy efficiency work completed with funding from USEPA.  This work included energy efficiency design training for engineers from the China Household Electric Appliance Research Institute (CHEARI) and the Haier Group, a leading refrigerator manufacturer.  Based on the results of this training and joint development program, CHEARI and Haier engineers successfully developed prototypes and production models demonstrating energy efficiency gains of over 40% relative to the baseline model.  

16.	On the demand side, an extensive consumer education program will introduce refrigerator purchasers to the benefits of energy efficient refrigerators and the costs of using old, inefficient ones. A labeling program will allow consumers to identify energy efficient refrigerators. An incentive program at the point-of-sale-- in combination with the training program for retail staff-- will promote consumer acceptance of energy efficient models. A “mass purchasing program” that encourages purchase of energy efficient refrigerators for apartments, government buildings, and other large volume refrigerator buyers, will achieve greater purchasing economies of scale while increasing demand for energy efficient refrigerators. A consumer buyback and recycling program will provide purchasers with a credit towards purchase of a new energy efficient refrigerator upon turning in their old units. This program will also remove older and less efficient refrigerators from the market, reducing the high retention rate of refrigerators among Chinese households.  (Recycling will be supported with bilateral resources.)

17.	A key element of the project’s success is the prior research and testing which demonstrated that through the use of non-proprietary measures, it is possible to reduce energy utilization in refrigerators by over 40%.  Furthermore, tested efficiency measures are not design-specific; that is, manufacturers can chose from a range of measures to increase efficiency. By building on these past achievements, the project ensures lower costs, easier implementation, and broader participation, than would have been the case if patented or licensed proprietary  technology had been required. 

18.	This project is consistent with Operational Programme #5 of the GEF Operational Strategy, Removing Barriers to Improved Energy Efficiency and Conservation. 

19.	Chinese refrigerator manufacturers produced and sold approximately 9m refrigerators per year in 1996.  In that year, there were estimated to be approximately 60m refrigerators in operation in China.  The design enhancements being supported through this project would result in an average electricity consumption of 0.6 kWh/day per refrigerator, a 40% decrease from the current situation.  If each refrigerator ran for the entire year, that would represent a savings of 220 kWh per year for each efficient refrigerator.  Over its 15 year lifespan, each efficient refrigerator would be anticipated to save about 3,300 kWh.  The anticipated GHG savings from altering the design of 20,000,000 refrigerators in China is contained in the table below.  Note that this represents less than ½ of the output of the refrigerator industry in China over a five-year period  (for details, see supplemental annex information).

GHG Emissions Reductions Attributable to the Project
Total number of refrigerators affected (approximate)	20,000,000 
	
Lifetime energy savings (@3,300kWh)	66,000 million kWh 
	
Lifetime warming avoided	27,206,227 TCE 
99,756,167 ton CO2 equivalent 	
Annual energy savings	4,400 million kWh 	
Annual global warming equivalent avoided	1,813,748 TCE 
6,650,411 ton CO2 equivalent 	
GEF project cost	$9,617,000 
	
Unit abatement cost (UAC)	$0.35 per TCE 
$0.10 per ton CO2 equivalent 	
Unit abatement cost (UAC)/year	$5.30 per TCE 
$1.45 per ton CO2 equivalent 	

9.	This project is consistent with China's Agenda 21, the Country Plan for CFC phase-out, the CFC Substitute Strategy for the Chinese Refrigerator Industry, and China's Ninth Five-Year Plan (1996-2000) for economic development. The project has also been approved for inclusion in the National Plan of Environmental Protection Approval for China and is accorded a high priority by the government. The project will assist China to meet its plans for sustainable energy production and consumption by decreasing overall electricity demand, as specified in Chapter 12 of China's Agenda 21 Plan.

10.	This project builds upon the findings of the GEF-supported Issues and Options in GHG Emission Control in China. One of the conclusions of this report was that, given the rapid growth in the Chinese consumer sector, improvements in the energy-efficiency of household appliances (such as refrigerators) could yield major energy savings for the economy and reduce future carbon emissions. As the only project targeted at end-use energy conservation in the residential sector, this project forms an intrinsic component of a comprehensive energy conservation strategy for China.

11.	The project will support the large-scale application of energy-efficient refrigerators in China, and will complement China’s Country Plan for CFC phase-out for this sector under the Montreal Protocol. Under the Montreal Protocol, funding for energy efficiency improvements is not permitted. However, by taking advantage of the synergy available through targeting those manufacturers currently planning to undergo CFC conversion with Montreal Protocol Fund support, energy-efficiency improvements of up to 40% or more can be realized in a cost-effective manner.  Strategically, the objective is to alter the path of investment in China's refrigerator industry towards new energy-efficient CFC-free designs that are attractive to consumers, thereby reducing GHG emissions.

12.	The project also draws upon the experience of UNDP in the implementation of energy efficiency projects in the lighting and power sectors. The synergistic relationship between these two projects and the refrigerator project provides valuable assistance in the formulation and implementation of the project.  A complete project planning matrix is shown in Annex 2. 

3. Project Activities/Components and Expected Results

Objective 1: Support compressor manufacturers to produce high-efficiency compressors

13.	The purpose of these activities is to transfer technology to Chinese compressor manufacturers to allow for production of high-efficiency compressors.  These activities-- which include training, technical assistance, and support for upgrading compressor designs and production, have been designed to overcome the sixth barrier listed-- the lack of efficient refrigerator compressor being available locally.  The following five activities have been designed to remove this barrier:
Activity 1.1: Provide training on high-efficiency designs and production technologies;
Activity 1.2: Initiate a dialogue with compressor and refrigerator manufacturers to assure compressor manufacturers that demand for high-efficiency compressors will exist;
Activity 1.3: Provide technical assistance for preparation of business plans and financing proposals for upgrading designs and production technologies;
Activity 1.4: Provide technical assistance for upgrading designs and production technologies; and
Activity 1.5: Upgrading compressor designs and production technology.

Objective 2:  Support refrigerator manufacturers to produce high-efficiency refrigerators

14.	The purpose of this objective is to provide refrigerator manufacturers with the necessary technology and training to design and produce high-efficiency refrigerators. These activities are designed to overcome barriers 4 and 5 dealing with manufacturer uncertainty about the cost-effectiveness of high-efficiency models as well as the lack of expertise on the part of manufacturers to produce these models.  The seven proposed training activities have been developed on the basis of the work commissioned under the PDF:

Activity 2.1: Introduce refrigerator manufacturers to technology options available internationally;
Activity 2.2: Provide training on design modeling;
Activity 2.3: Provide intensive applied design training;
Activity 2.4: Provide training in technology options and selection;
Activity 2.5: Provide technical assistance to manufacturers for preparation of business plans and financing proposals for upgrading designs and production technologies;
Activity 2.6: Provide technical assistance for upgrading designs and production technologies; and
Activity 2.7: Upgrading product designs and factory production technology.

Objective 3 Create new regulatory requirements and market-based incentives for refrigerator manufacturers to design and produce high-efficiency refrigerators.

15.	Under this objective, the goal is both to modify the regulatory environment to favor the production of energy-efficient refrigerators and to create incentives for manufacturers and vendors to produce and sell the more efficient models.  These activities are designed to overcome barrier number 3 dealing with manufacturer uncertainty about market demand for the high-efficiency models;  barrier 7 addressing dealer reluctance to sell the more efficient models; barrier 9 with the lack of meaningful efficiency standards; and barrier 8, the lack of an appliance recycling program.  Five activities are proposed to remove these barriers:  

Activity 3.1 Efficiency standards;
Activity 3.2: Manufacturer incentive program;
Activity 3.3: Refrigerator mass purchase program;
Activity 3.4: Dealer incentive program; and
Activity 3.5: Consumer buyback/recycling program (supported from bilateral funds only—no GEF funds requested for this activity).

Objective 4: Create market conditions for increased sales of energy efficient refrigerators through consumer education
16.	The activities under this objective are intended to educate consumers and provide them with information that will make them both aware of the advantages of energy-efficient refrigerators and more willing to purchase them.  The following six activities are designed to overcome the first and second barriers listed, namely the lack of information for consumers to make informed decisions and the lack of consumer awareness of the favorable lifecycle economics of more efficient refrigerators: 
Activity 4.1  Technical assistance for development and implementation of labeling program;
Activity 4.2 Disseminate through broadcast and print media material informing consumers of the benefits of energy efficiency;
Activity 4.3 Disseminate in-store points-of-sale materials allowing consumers to understand the features, benefits, and savings of energy-efficient refrigerators;
Activity 4.4 Undertake public relations campaign to spread the core message of the benefits of energy-efficient refrigerators;
Activity 4.5  Train retail staff in communicating the benefits of energy-efficient refrigerators; and
Activity 4.6  Conduct consumer attitude tracking survey.

Objective 5: Monitoring and Evaluation

17.	The purpose of these activities is to establish management capacity for the project and to undertake ongoing monitoring and evaluation of project results during the project period. Where necessary, interim evaluation results will be used to modify project activities and/or implementation methodologies. The project’s final evaluation will be based on a comparison of the outcomes achieved at the end of the project with the success criteria developed on the basis of  baseline conditions.  In order to fulfill this objective, it is necessary to complete the following 6 tasks:
Activity 5.1. Establish baseline conditions;
Activity 5.2. Establish information center for long-term monitoring of project impacts; 
Activity 5.3. Develop metrics and format for information collection and analysis;
Activity 5.4. Undertake annual information collection and evaluation;
Activity 5.5 Track and measure consumer reaction and results of the consumer education activities; and
Activity 5.6 Provide project management and implementation oversight.

Related Activities

18.	US-China Refrigerator Project:  In 1989, the US-China Refrigerator Project was initiated as a joint project to combine non-CFC refrigerant, non-CFC foam, and increased energy efficiency. In 1990, USEPA established a cooperative agreement with the Beijing Household Electric Appliance Research (BHEARI) for a three year period to build institutional capacity at BHEARI and initiate research and development of energy-efficient substitutes for the CFCs used in Chinese household refrigerators. Work undertaken by BHEARI and the University of Maryland using modified versions of current production models demonstrated that by introducing new energy-efficient design measures, cost-effective energy savings of 40-50% can be obtained while at the same time maintaining low incremental manufacturing costs and minimizing price increases to consumers. Three Chinese factories began production of initial laboratory prototypes. 

19.	Montreal Protocol Fund:  The Montreal Protocol Executive Committee approved funding for continued prototype development in June 1993. Subsequent work in 1993 and 1994 focused on construction and continued refinement of advanced prototype units.  China selected the Haier Group of Qingdao for final prototype development.  An initial batch of 200 intermediate prototypes was built in December 1993 using thick-walled HFC-141b insulation and HCFC, HFC, and hydrocarbon refrigerants and refrigerant mixtures. Based on testing of these prototypes and international progress in movement to zero ODP foam blowing agents, final prototypes were produced in early 1995 using cyclopentane foam and isobutane refrigerant. These prototypes were field tested in 1995 and 1996 in Beijing, Shanghai, and Guangzhou, and demonstrated substantial savings (35% in Shanghai) in actual home use conditions. An agreement was reached between USEPA and the German GTZ to jointly fund the Montreal Protocol portion of the prototype conversion, which was approved by the Montreal Protocol Executive Committee in March 1995.

20.	World Bank:  The World Bank has served as implementing agency for the Montreal Protocol for most of the CFC conversion projects at refrigerator factories in China. This includes technical assistance and capacity building for foam testing, early conversions to 50%-reduced foam at Changling, Haier, Shangling, Shuangyuan, Xinfei, and foam and/or refrigerant replacement at Changling, Huayi, Shangling, Shuanglu, Xiling, Wanbao, Zhongyi, and other factories.

21.	UNIDO:  UNIDO has supported the preparation and implementation plans for CFC conversion projects at six Chinese compressor manufacturers in order to provide a domestic source for compressors for non-CFC refrigerators. These manufacturers include Jiaxipera, Huangshi, Wanbao, Zanussi, and Embraco. At Jiaxipera factory in Zhejiang and Wanbao in Guangdong, research has been ongoing on new efficiency measures and new technology options to increase the average efficiency of their models, which currently stands about 1.1 COP. US-China Refrigerator project activities have encouraged and supported this research. 

22.	UNDP:  UNDP has served as implementing agency for CFC phase-out at Guangdong Kelon, Changsha Zhongyi, Henan Polar Bear, Qingdao Haier, Hongxiang Laizhou, Debao Freezer, Wanbao Freezer, and Jilin Freezer.  

23.	Australia Compressor Factory Project Loan:  In 1990-91, AusAID provided A$14.6 million for the conversion of the Huayi General Electric Company in Jingdezhen, Jiangxi. The project involved the provision of expertise, technology, machine tools and equipment to build a CFC-free refrigerator/freezer compressor factory with a design capacity of 1 million units per year. Construction took place from Dec. 1991 to 1993 and the plant went into trial operation in 1994. 

4. Risks and Sustainability

24.	Sustainability of project benefits will occur if the market barriers to high-efficiency refrigerator production and use are permanently removed resulting in a greater market share of high-efficiency models relative to the baseline. Sustainability means that consumer awareness and knowledge continues to grow even after project activities have terminated; that standards and label programs are supported through extra-project means and remain in place after the project; that technology for high-efficiency refrigerators continues to remain cost-effective for manufacturers; and that compressor manufacturers continue producing high-efficiency compressors. The sustainability of this project is strengthened significantly by its high-design intensity yet low-capital intensity. By relying on proven non-proprietary technical measures and an open product design, a permanent transfer of design knowledge for high-efficiency refrigerators and compressors can be effected through training. Other planned market barrier reduction activities ensure that the incentives to produce and to purchase high efficiency products remain in place.

25.	The retail price of electricity to Chinese consumers is an important consideration for the sustainability of this initiative and the life-cycle costs of refrigeration.  The calculations included in the life-cycle costing assume that the more efficient refrigerators have lower life-cycle costs that the less-efficient refrigerators at a retail price of electricity that approximates ¥0.6 per kWh (US $0.07/kWh).  According to the Ogilvy & Mather survey of consumers in five Chinese cities, the average kWh charge in 1997 was ¥ 0.55 per kWh, merely 9% below the threshold level.  In three of the five cities surveyed, the price already exceeds the target threshold.  Within the sample drawn, households in some regions paid from about ¥ 0.20 to over ¥ 1.40 /kWh. The average price increase from 1990 and 1993 was about 18% per year.  According to the Ogilvy & Mather survey, consumers expect that by the time the more efficient refrigerators are planned to reach the market, beginning in 2002, the price will be 30% higher.  While the failure of the electricity price to reach the target threshold does pose a risk to project success, this risk is considered to be so small as to be virtually insignificant.

26.	There are five principal risks to achieving sustainability of project results:

27.	High-efficiency refrigerator models may not be purchased once the market barriers targeted by this project are reduced, owing to other barriers that were not identified or not considered significant. For example, the project does not completely eliminate the higher first costs generally associated with high-efficiency models, given the determination that it would be cost-prohibitive to eliminate that discrepancy through a consumer rebate or other such price subsidy program. However, the project does address this issue by reducing the first cost discrepancy, by increasing consumer willingness to pay through consumer education, and by providing a targeted incentive for purchasers to trade in their old refrigerators and purchase a new energy efficient one. Hence, the risk that the remaining price discrepancy will bar market penetration of energy efficient models is not considered to be significant.

28.	The increased market penetration of energy efficient models attributable to enhanced performance standards would be compromised by difficulty in enforcing those standards. However, given the increasing concentration of the sector (with 12 domestic manufacturers controlling 88% of sales in 1996), the small number of major manufacturers simplifies enforcement.  Furthermore, planned consultations with manufacturers during the standard development and implementation process reduce the risk that manufacturers will either resist or be unaware of the standards. This risk is therefore considered small.

29.	The risk that enterprises would be unable to fund the development and implementation of new energy efficient measures would greatly reduce the extent to which the project could achieve its goals.  However, this risk is considered low, since commitments of adequate resources to the program will be a precondition to participation in the project. The risk that an insufficient number of enterprises will be willing to make such commitments is considered low, given that the major manufacturers have already been consulted and have expressed interest in participation and willingness to commit the necessary resources. Furthermore, refrigerator manufacturers are aware of the impact that new refrigerator performance standards and the proposed consumer education and dealer incentive programs will have on demand for more energy efficient refrigerators. Therefore, they are keenly interested in receiving the technical assistance that the project will provide so that they are able to produce such refrigerators.

30.	There is a risk that the availability of higher efficiency models will  influence the average size of purchased refrigerators and decisions to keep old or existing refrigerators in service, thereby decreasing emission reductions relative to the anticipated targets.  However, this risk is believed to be negligible, since research in other countries and market research completed in China under the PDF demonstrate that the trend in China toward purchase of larger refrigerators and retention of older models are existing independent trends, and are unrelated to new refrigerator energy efficiency.

31.	There is a risk that gains achieved as a result of this project will be short-term, i.e., that they would apply to one generation of models only, after which manufacturers would revert to production of non-efficient models due to unwillingness or inability to design and produce efficient ones. The project has been designed in order to minimize or eliminate this risk through a combination of demand and supply side measures.  The project organizers believe that the activities outlined in this brief at the level of effort proposed will be successful in eliminating this risk.  On the demand side, implementation of an energy efficiency labels, retail staff training and incentives, and consumer education will provide a sustained impetus for refrigerator buyers to purchase energy efficient models.  On the supply side, new energy efficiency standards, the manufacturer incentive program, and the creation of indigenous capacity for re-engineering refrigerator energy-efficiency design will all served to counter this risk.

5.  Stakeholder Participation and Implementation Arrangements

32.	During the PDF Phase of this project, the stakeholders have all been consulted and involved in the design of the proposed project activities.  The beneficiaries and stakeholders in the project are listed and described below:

a.	Compressor manufacturers.  Domestic compressor manufacturers must be involved in the project because a key component of an energy-efficient refrigerator is the compressor (in the prototype refrigerators tested during the project’s first stage, the use of high-efficiency compressors accounted for 20% of the 40% gain in energy efficiency). Virtually all domestic refrigerator manufacturers buy domestic compressors because imported compressors are more expensive. Yet domestic compressors are relatively inefficient (currently, the average COP of compressors produced in China ranges between 1 and 1.1, while a COP of 1.4 is achievable with the redesign of certain parts and the use of additional components).  They are the main participants under Objective 1.  

b.	Refrigerator manufacturers. Under Objective 2, the project will transfer energy efficiency technologies to Chinese refrigerator manufacturers and support implementation of energy efficiency measures in existing and new product designs. Chinese refrigerator manufacturers are often unaware of the variety of measures that can be applied to increase energy efficiency, and of ways in which these measures can be implemented.  Chinese refrigerator manufacturers confront both technical and commercial barriers to the adoption of new technologies, new refrigerator designs, and new manufacturing processes. Integration of new technology requires re-optimization of product design, and may require modifications to the production process. New designs often require new molds and machine tools, and producers face the uncertainty of consumer acceptance of new products incorporating new energy efficient technology and designs. In the case of energy-efficient refrigerators, the increased use of materials, such as foam insulation, and the incorporation of high-efficiency compressors also increases production costs, which are estimated at up to 15-25% greater than comparable cost for a non-efficient model.  

c.	Consumers.  Consumers are often unaware of absolute and relative energy consumption of the products they purchase and of the lifecycle savings obtainable with high-efficiency appliances. This lack of awareness is compounded by the absence of a national labeling program and lack of awareness among retail sales staff of the benefits of energy-efficient products.  Consumers therefore make purchase decisions without regard to energy efficiency, or purchase lower priced refrigerators with higher energy consumption in order to reduce first cost.  Transforming consumer attitudes and undertaking consumer education are activities under Objective 4 of the proposal.

d.	Dealers.  Under the project, dealers will become educated about high-efficiency refrigerators so that they can provide information to consumers at the point-of-sale.  In addition, dealer-incentive programs (Activity 3.4)  will encourage dealers to stock high-efficiency refrigerators as they will have little or no incentive to do so without such assistance.

e.	National government agencies.  These agencies and organizations will participate in the development and implementation of national refrigerator standards and labeling.

•	The China State Bureau of Technical Supervision (SBTS), which is responsible for mandatory standards and both mandatory and voluntary energy efficiency labeling programs;
•	The National Council for Light Industry (NCLI), which is the supervisory agency for the refrigerator industry;
•	The State Economic and Trade Commission (SETC), which oversees industry investment projects and national energy efficiency measures;
•	The China National Environmental Protection Agency (NEPA), which is responsible for environmental labeling programs;
•	The China Household Electric Appliance Association (CHEAA), which coordinates discussions with manufacturers regarding industry standards and protocols; and
•	The China Household Electric Appliance Research Institute (CHEARI), which performs national energy consumption and performance testing and appliance research and development activities.

43.	The United Nations Development Programme (UNDP) is the GEF implementing agency for this project. The project will be executed through UN-OPS and portions of it may be nationally executed.  The latter will be decided upon during project document finalization.

44.	For national implementation of the project, the National Environmental Protection Agency will be responsible for overall project implementation, and will be assisted by the National Council for Light Industry in coordination of project activities.

45.	A Project Coordination Office (PCO) will be established to act as a secretariat for the project and a technical resource center for the different project components. It will closely liaise with the executing and implementing agency and monitor the progress of each program component. It will regularly report to all co-financing agencies. It will be headed by a full-time National Programme Director (NPD). An international advisor, who will be hired on a two-year, full-time contract, and a multinational team of consultants will provide assistance to the NPD. The PCO will also house the information center described under Activity 5.2 and promote the exchange of information among project participants.

6. Incremental Cost and Project Financing

46.	In the absence of this project to remove the barriers to the production and sale of energy efficient CFC-free refrigerators in China, sales of relatively inefficient refrigerators would continue to grow at a rapid pace.  These refrigerators would operate for  a 10 to 15 year lifetime using electricity which was generated largely from coal-based power generation.  The incremental costs of this project, as presented in more detail in Annex I, are the costs of overcoming or removing the barriers preventing the transformation of this market.  The actual investments in retrofitting the compressor and refrigerator assembly lines will be the responsibility of the factory owners themselves.

47.	The estimated cost of all project activities totals US$40,906,500. The GEF contribution will cover only the incremental costs of these activities; the bulk of the funding will be provided by the beneficiary enterprises themselves.  Of this amount, US$8,904,630 is requested from the GEF in direct costs along with US$712,370 in support costs.  The total amount requested from GEF, including the PDF Block B ($243,000), is US$9,860,000.  The table below presents the budget broken down by objectives and source of financing.  A detailed budgetary breakdown is included at the end of the body of the brief.

Outputs	GEF	Co-financing	Total	
1. Compressor Factory Technical Assistance	$   852,500	$  1,579,500	$  2,432,000 
	
2. Refrigerator Factory Technical Assistance	$1,503,090	$24,265,000	$25,768,090
	
3. Incentive Programs	$3,095,000	$    660,000	$  3,755,000
	
4. Consumer Education Program	$2,984,940	$  4,450,000
	$  7,434,940
	
5. Project Management, Monitoring and Evaluation	$  469,100	$    335,000	$     804,100	
6. Support Costs (@8%)	$  712,370		$      712,370	
Project Subtotal	$9,617,000	$31,289,500	$40,906,500	
PDF	$   243,000			
TOTAL	$9,860,000	31,289,500	$41,149,500	

7. Monitoring , Evaluation and Dissemination

43.	The project will be subject to tripartite review (joint review by representatives of the Government, executing agency and UNDP) at least once every 12 months. The first such meeting will be held within 12 months of the start of full implementation. The executing agency will prepare and submit to each tripartite review meeting a Project Performance Evaluation Report (PPER). Additional PPERs may be requested, if necessary, during the project. 

44.	In addition to normal UNDP project monitoring and evaluation activities, long-term impact assessment will be initiated during the course of the project and provisions will be made to continue this assessment activity after the project is completed. Indicators will be developed, a baseline will be established for the indicators, and the indicators will be tracked over time relative to the baseline. Examples of “market response” indicators include market share by class of energy-efficient refrigerator, the number of dealers or distributors who are stocking and selling high-efficiency models, and household retention rates. More directly, the project will attempt to monitor reductions in market barriers, such as:  (a) availability of energy-efficient compressors produced domestically; (b) understanding of consumers of the benefits of high-efficiency refrigerators; (c) anticipation by manufacturers that markets for high-efficiency refrigerators will expand in the future; (d) plans by manufacturers to produce high-efficiency models; (e) refrigerators sold carrying nationally certified and easy-to-understanding labeling as to annual operating costs; and (f) dealer incentives to stock and sell high-efficiency models. An “Information Center” will be established in order to facilitate the collection and analysis of the market response indicators.

45.	The STAP roster technical review is included as Annex 3 to the Project Brief.  In it, the reviewer supports the project, but raises several questions about the proposed project activities.  The first point raised by the reviewer involves the possible need to license high-efficiency compressors for use in the CFC-free refrigerators.  The reviewer is correct in that all compressors currently produced in China have been introduced through technical licensing from abroad.  Non-CFC compressors have also been licensed under the terms of the MP conversion projects.  However, these non-CFC compressors operate at relatively low efficiency levels.  This project offers a series of non-proprietary design changes that raise compressor efficiency significantly.  No additional licensing will be needed to adopt these efficiency measures (though the project design does not rule out licensing of technology or individual technology measures where participating factories so choose).  The second question raised by the reviewer involves the participation of Haier and CHEARI in this project.  It is to be noted that Haier is eligible to participate in the project on the same basis as the other manufacturers.  CHEARI is a testing laboratory available to the entire sector, and they, along with GEARI, will both benefit from elements of the training program.  Neither entity has the capacity to complete the transformation of the refrigerator sector in China without the support being provided in this project.  The third question involves the identification of the ways in which the US and EU experiences with improving the efficiency of CFC-free refrigerators might be used to inform the Chinese experience.  It should be noted that the PDF activities which resulted in the preparation of the project brief has reviewed and drawn lessons from the experiences of the US, the EU, Japan, Australia and Hong Kong in improving the refrigerator efficiency.  These experiences are already incorporated into project design.  In his fourth point the reviewer suggests that other criteria, such as noise, should be included on the refrigerator labels.  This suggestion has already been incorporated into the design of the energy efficiency label.  The next suggestion made by the reviewer is that training should be provided for service engineers and safety in refrigerant handling in the context of the more efficient refrigerators.  With respect to this point, training materials for servicing the new refrigerators will be provided under the project.  However, training for the safe handling of the refrigerant is covered under the projects supported by the Montreal Protocol.  Therefore, including support for the safety-related activities was not considered to be necessary under this project.  Finally, the question about the removal of the old models from the market is rather complex.  While this activity has been designed keeping in mind the need to safely dispose of the non-CFC-free refrigerant and foam, no allowance has been made for refurbishing old refrigerators given that refurbishing will generally not result in the desired energy efficiency gains.  Specific guidelines for the recycling program will be developed in conjunction with the Project Document and as the project enters into implementation.  However, it should be noted that the GEF is not being asked to pay for the costs of the refrigerator recycling program.

Annex 1: Incremental Cost Annex

1.1 Broad Development Goal

1.	The broad development objective being pursued by the Government of China and the relevant industrial actors is the provision of refrigerators to the Chinese public at affordable prices.  The benefits of refrigeration for food preservation and dietary improvement are well known.  To date, this equipment has been supplied without concern for its relative energy efficiency.  

1.2 Baseline

2.	Under the baseline, a number of barriers exist to the improvement of the energy efficiency of the refrigerators being manufactured and marketed in China.  Without these barriers being removed through this project, it is unlikely that any action would be taken to improve the efficiency of refrigerators on the market in China.  The market would continue to proliferate low first-cost refrigerators that are relatively energy inefficient.

3.	In the baseline, it may be assumed that at least 100 million domestically-produced refrigerators would be sold to consumers during the period 2002-2012 with an average efficiency of 550 kWh/year and a cost of ¥3000 each. Assuming an average power tariff of ¥0.6 /kWh (US$0.07/kWh), the lifecycle costs of these refrigerators to consumers, represented as net present value, and the CO2 emissions are as follows:

Lifecycle costs = ¥3000+NPV[(550 kWh/yr.)(¥0.6 /kWh), 15 years, 14%] = ¥5030
Emissions = (15 yr.)(550 kWh/yr.)(1.5 kg CO2/kWh) = 12.4 tons CO2

4.	The compressor and refrigerator manufacturers might be expected to spend some of their resources to increase their production in the baseline.  However, it is doubtful that the expenditures would both be of the same magnitude and occur as early as in the project case.  Refrigerator manufacturers are moving away from the use of ozone-depleting substances in their refrigerators, but it is very unlikely that they would take the additional steps to improve significantly the energy efficiency of their refrigerators unless the barriers identified in this project proposal are removed.

1.3 Global Environmental Objectives

5.	The global environmental objective being pursued is the reduction of GHG emissions by the refrigerator sector in China through the improvement of the efficiency of energy use.  This project has been designed to be consistent with GEF Operational Program 5, Removing Barriers to Improved Energy Efficiency and Conservation.

1.4	GEF Project Activities

1.	Under the project scenario, the GEF project would focus on removing barriers to the improvement of energy efficiency of the refrigerators produced, sold and utilized in China.  The five activities described in the body of the brief have been designed to systematically remove the nine barriers that have been identified through project preparation activities.  They are described in the accompanying project framework annex and in greater details in the supplementary annex documentation.  

2.	Turning to the individual components of the project, under the baseline, compressor manufacturers would continue to produce the same compressors that they are presently without redesigning for increased energy efficiency.  The purpose of Component 1 is to ensure that they have the technical capability to produce the more efficient compressors.  If they are not given technical assistance to help them redesign and re-engineer their compressors, the entire refrigerator sector will lack access to more efficient compressors, thus impeding them from improving overall efficiency of the refrigerators.  GEF is being requested to provide the US$850,000 for training the compressor manufacturers.

3.	Component 2 is designed to undertake a similar activity for refrigerator producers.  In the baseline, refrigerator manufacturers will continue to replace the equipment in their factories without redesigning their products and production lines to make a more efficient refrigerator.  At present, they lack both the know-how and incentives to re-engineer their  products.  This component is intended to assist them in redesigning their products with respect to the energy efficiency of their operation.  The baseline costs of over US$24 million represent the contributions that refrigerator producers might be expected to invest in model design and production line re-tooling.  The GEF is asked to provide US$1.5 m to redirect this investment toward refrigerators that will be more energy efficient.

4.	Component 3 is intended to create new regulatory requirements and market-based incentives for refrigerator manufacturers to design and produce high-efficiency refrigerators.  If left to their own devices, refrigerator manufacturers would be unlikely to make any changes in their designs in order to reduce unit specific energy consumption because of the extra costs involved.  Component 3 will seek to remove this barrier by first putting in place a solid, internationally consistent set of energy efficiency standards for refrigerators.  Then the project will provide for a manufacturer incentive program whereby manufacturers will submit closed competitive bids for funding their project incremental costs to develop, produce, and market energy efficient products.  The bidding process will be structured so as to maximize the efficiency gains attributable to the measures implemented and the market penetration of the resultant high-efficiency models. One grand prize will be awarded and 11 smaller prizes will be given to compensate manufacturers for a portion of the incremental costs of altering their design and producing more efficient refrigerators.  The third activity under this component will work to provide incentives by organizing mass purchase programs for the more efficient models.  This will help reduce the market uptake risk to producers by ensuring them that there is an adequate market for the more efficient product.  The fourth activity will encourage, through sales competitions, vendors and sales staff to sell the more efficient models by providing small cash prizes for the most successful vendors and sales people in the five largest markets in China.  This also will ensure that the newer, more efficient models get the sales promotion that they will require to win market acceptance.  The final activity, which will not be supported by GEF, is a consumer  buyback program designed to remove older, inefficient refrigerators from the market.  The activities under Component 3 are necessary to ensure that the producers, vendors, and sales staff in the supply chain have the incentives for the desired market transformation.  GEF is being asked to provide US$ 3m to cover the incremental costs of these incentive programs.  This money is required to ensure that the nearly $30m to be invested by compressor and refrigerator manufacturers is forthcoming and serves to address the desired end of improving the energy efficiency of the refrigerator sector in China.

5.	Under Component 4 of the project, the activities will create market conditions for increased sales of energy efficient refrigerators through consumer education.  Without this consumer education program, consumers are liable to focus on the first-cost of refrigerators instead of the lifecycle cost, thereby taking the decision to purchase the initially cheaper but less efficient models.  If this happens, the market will never be transformed.  The activities to be supported under this component include a refrigerator efficiency labeling program to inform consumers about the life-cycle costs of the refrigerators they are considering.  It will also include a public information campaign through both print and broadcast media to inform consumers of the benefits of the more efficient refrigerators.  In addition, it will print and disseminate point-of-sale material on the more efficient models; provide public relations information and information to retail staff; and monitor consumer attitudes to the more efficient models. These activities are necessary to shift consumer attitudes to desire more efficient models.  Baseline advertising by Chinese refrigerator manufacturers over the five years of project implementation are expected to exceed US$100 million (see Background Annex 5 Market Research Report). GEF is being asked to provide US$2.98m to support these activities designed to ensure the creation of a consumer demand for these more efficient models and to leverage US$ 4.5m of baseline funds as cooperative advertising for energy efficient products.

6.	Component 5 will create a careful monitoring and evaluation program.  As part of this activity, information on the current situation will be established and an information center will be supported that will make the information from this project widely available both inside and outside China.  The information to be collected on an annual basis will include consumer reactions, the results of public education activities, and market behavior.  GEF is being asked to provide US$469,100 as these are considered the incremental portion of the costs of the activity of US$ 800 thousand.

7.	Viewing these project components as a whole, they are designed to transform the refrigerator market in China to a more efficient level.  To demonstrate the impact of the project, during the period 2002-2012, it can be assumed that 20% of these 100 million domestically-produced refrigerators (20 million) are high-efficiency models resulting from the project interventions, with an average efficiency of 350 kWh/year and a cost of ¥3600 each. Assuming an average power tariff of ¥0.6 /kWh (US$0.07/kWh), the lifecycle costs of these refrigerators to consumers, represented as net present value, and the CO2 emissions are as follows:

Lifecycle costs = ¥3600 + NPV[(350 kWh/yr.)(¥0.6/kWh), 15 years, 14%)] = ¥4890
Emissions = (15 yr.)(330 kWh/yr.)(1.5 kg CO2/kWh)= 7.4 tons CO2

8.	Once these barriers are removed, the consumers will experience a net savings over the life of the refrigerators, due to their lower operating costs.  One of the challenges of the project is to reassure consumers that these savings are real and can be capitalized.

1.5 System Boundary

9.	The Chinese energy system is the system in which the analysis and discussion takes place.  While there are some system-wide benefits, as is shown below, it is not clear that these benefits can all be captured by those taking the action.

1.6 Additional benefits

10.	Because of this project, there are some additional benefits that will be encountered.  In the first instance, consumers purchasing more efficient refrigerators will experience a net savings over the course of the refrigerator’s life due to reduced energy consumption.  In addition, those manufacturers able to capitalize on the more efficient designs may be able to garner a larger share of the benefits from increased sales than are those who lag behind.

11.	In addition, electric power generators will experience a reduced load requirement for refrigeration.  The economic and financial benefits of avoided power generation are more difficult to quantify and are not quantified in the incremental cost/benefit table. Financial benefits depend upon tariff structures, the degree to which tariffs reflect long-run marginal costs (including long-run marginal fuel costs), and the degree to which residential consumers are cross-subsidized by or cross-subsidize other classes of consumers. Power generation costs in China range from $800/kW to $1200/kW. If 20 million consumers reduce their consumption by 220 kWh/year, then total consumption is reduced by 4.4 billion kWh/year. Assuming no reserve margin, this reduction in aggregate demand should result in reduced power capacity requirements of approximately 500 MW and avoided capacity cost of about $500 million per year.  However, at present, there is no way that these additional benefits can be captured and funneled to consumers.

12.	In addition, the reduced power generation will also result in a reduction of SOx emissions from power generation.  This benefit has not been taken into account in the calculations.

1.7 Incremental cost matrix

13.	The above discussion is summarized in the Incremental Cost Matrix, Table I.1 below.  The costs of the project, US$9.6m (excluding PDF costs of US$243,000) are required to remove barriers to the widespread production and adoption of energy efficient refrigerators.  The total project costs include about US$ 31 m of contributions from the Chinese Government and the refrigerator and compressor manufacturers.  Without these barrier removal activities, it is very unlikely that the  transformation of the refrigerator sector to a more efficient equilibrium would take place.   The rationale for each project component and the barriers they are designed to remove are explained in the body of the brief.

TABLE I.1  INCREMENTAL COST/BENEFIT TABLE
Component	BASELINE	ALTERNATIVE	INCREMENT
	
Component 1:  Compressor Factory Conversion
	Global: Current compressor designs inefficient- more efficient designs not available

Domestic:  Producers use existing designs

Cost:  US$1,579,500	Global:  Compressor manufacturers learn to make efficient designs

Domestic:  Producers improve designs

Cost:  US$2,432,000	Global:   Chinese industry able to design more efficient refrigerators

Domestic: Efficient compressors available to manufacturers

Cost:  US$852,500	
Component 2:  Refrigerator Factory Conversions
	Global:  Refrigerator producers continue producing inefficient designs

Domestic:  Manufacturers use existing facilities and designs

Cost:  US$24,265,000	Global:  Refrigerator producers helped redesign factories for more efficient refrigerators 

Domestic:  Manufacturers invest in production of more efficient refrigerators

Cost:  US$25,768,090	Global: Refrigerator Producers shift to production of efficient refrigerators

Domestic:  New investments in new factories

Cost:  US$1,503,090		
Component 3:  Incentive Programs	Global:  Producers and sales staff lack incentives to produce and sell more efficient refrigerators and will not make investments to do so

Domestic:  Sales of inefficient refrigerators continues

Cost:  US$660,000	Global: Incentive systems induce refrigerator producers to produce and sell more efficient refrigerators

Domestic:  Increased sales of more efficient refrigerators

Cost:  US$3,755,000	Global:  Market for efficient refrigerators grows on supply side

Domestic:  Producers see economic value in more efficient design

Cost:  US$3,095,000	
Component 4:  Consumer Education Program	Global:  Consumers unaware of advantages of more efficient models

Domestic:  No sales of more efficient refrigerators

Cost:  US$4,450,000	Global:  Consumers educated about costs and savings of efficient models

Domestic:  Consumers begin to buy more efficient refrigerators

Cost:  US$7,434,940	Global:  Demand-side of market transformed

Domestic:  Market for efficient models created

Cost:  US$2,984,940	
Component 5:  Monitoring and Evaluation	Global:  Information on refrigerator performance & sales lacking
Domestic:  No info required

Cost:  US$335,000	Global:  Information on project activities is available
Domestic:  Adequate monitoring

Cost:  US$804,100	Global: Information on transformation of market made available
Domestic:  Market transformation tracked
Cost:  US$469,100	

Incremental Cost Matrix (continued)
TOTAL PROJECT

Global Environmental Benefits	Barriers prevent the improvement of energy efficiency in refrigerator sector

Per household: 12.4 tons CO2 emitted due to refrigeration over 15 years

20 million households:
Approximately 250 million tons CO2 
Emissions over 15 years
	Barriers to improved energy efficiency of refrigerators removed

Per household: 7.4 tons CO2 over 15 years

20 million households:
Approximately 150 million tons CO2  emissions over 15 years
	Barriers removed—refrigerator market transformed to more efficiency model

Per household: 5.0 tons CO2 emissions avoided over 15 years

20 million households:
Approximately 100 million tons CO2 avoided emissions over 15 years
	
Domestic Benefits	Refrigeration for 15 years	Refrigeration for 15 years

Avoided electric power system costs of 220 kWh/yr less electricity consumption for 20 million households

Increased competitiveness of domestic manufacturers in international markets	

Avoided electric power system costs of 220 kWh/yr less electricity consumption for 20 million households

Increased competitiveness of domestic manufacturers in international markets	
Costs	Per household: ¥5030 lifecycle costs

Participants will spend about $31.3m on factories and refrigerator design	Per household: ¥4890 lifecycle costs

Project costs of US$40.9 million to reduce barriers	Per household: ¥140 lifecycle costs savings

Incremental project costs of US$9.6 million to remove barriers	

Annex 2:  Project Planning Matrix
Project Strategy	Objectively Verifiable Indicators	Means of Verification	Assumptions	
Development Goal: 

Promote the adoption of energy-efficient designs and technologies in the refrigerator industry in China and build a domestic market for high-efficiency models
	1. Market share  of energy-efficient refrigerators relative to less-efficient models
2. Number of dealers and distributors that are stocking and selling energy-efficient refrigerators
3. Average efficiency levels for Chinese refrigerators relative to past levels and to levels in other countries	a. Market surveys
b. Information provided by dealers
c. Manufacturer  production and sales data
	i. Household refrigerators are a large opportunity and priority for reducing greenhouse gas emissions

ii. More-efficient refrigerator designs and an expanded domestic market for high-efficiency refrigerators will result in reduced greenhouse-gas emissions

iii. Availability of higher efficiency models doesn’t significantly influence the purchased refrigerator size (same size purchased as baseline), or decision to keep old refrigerator in service.
	
Project Purpose:  

Reduce key market, technological, social, and commercial barriers both to adoption of high-efficiency refrigerator technology by manufacturers and acceptance of high-efficient refrigerators by Chinese consumers

These barriers include:

a. More-efficient compressors are not available domestically
b. Consumers aren’t aware of the life-cycle benefits of energy-efficient refrigerators
c. Manufacturers uncertain if market demand exists
d. Manufacturer uncertainty over cost-effectiveness of new technology
e. Consumers lack specific information about life-cycle costs of models
f. Lack of appropriate standards
g. No national certification of energy-efficiency labels
h. Dealer reluctance to stock high-efficiency models	1. Availability of energy efficient compressors domestically
2. Consumer understanding of benefits of energy efficiency
3. Manufacturers anticipation of expanding market for energy efficient products
4. Manufacturers plans to produce energy-efficient models
5. Nationally certified energy-efficient label developed
6. Labeling of new refrigerators (energy-efficient refrigerators sold carry labels giving annual operating costs compared to “average”)
7. New standards enacted and implemented 
8. Manufacturer anticipation of stricter standards in the future
9. Number of dealers stocking new energy-efficient models
10. Dealer incentive program exists
	a. Consumer surveys
b. Manufacturer surveys
c. Dealer surveys
d. Market surveys	i. The rising price of electricity towards a level reflecting true costs of production also increases demand for energy-efficient refrigerators
ii. Barrier-reduction necessity:  market responses will be reduced or delayed unless at least these key barriers are reduced
iii. Barrier sufficiency: reduction of identified key barriers to a sufficient degree will result in market responses; other barriers not addressed by the project are not critical to achieving market responses.
iv. Barrier reduction sustainability: consumer awareness of life-cycle benefits grows; standards and label programs remain in place; energy-efficient technology remains cost-effective for manufacturers; dealers continue to promote energy-efficient models
Higher first costs not a critical barrier
v. Higher first costs not an  absolute barrier, if other barriers are removed or reduced.
	
Outputs and Activities (see below):

1. Compressor Factory Technical Assistance

2. Refrigerator Factory Technical Assistance

3. Incentive Programs

4. Consumer Education Program

5. Project Management, Monitoring, and Evaluation

1. Compressor factories converted and able to begin production
2. Refrigerator factories converted and able to begin production
3. Incentive programs in place and operating 
4. Consumer education campaigns conducted
5. Project management in place and operating; project evaluations conducted	

a. Contractor/consultant reports
b. Factory reports and inspections
c. Samples of media reports and presentations
d. Consumer surveys
e. Project management and evaluation reports	

i. Project budget sufficient to produce these outputs
ii. Project management equipped, trained, and capable of producing outputs
iii. Manufacturers are capable of making the necessary conversions with appropriate technical assistance and financing
iv. Labeling can be applied nationwide
v. All 12 major manufacturers can be targeted
vi. Pilot program of dealer incentives can be replicated nationwide

Activities:

1. Compressor Factory Technical Assistance (4 years)

1.1: Provide training on high-efficiency designs and production technologies
1.2: Conduct a planning dialogue with compressor and refrigerator manufacturers to assure compressor manufacturers that demand for high-efficiency compressors will exist
1.3: Provide technical assistance for preparation of business plans and financing proposals for upgrading designs and production technologies
1.4: Provide technical assistance for upgrading designs and production technologies
1.5: Design and implement new energy-efficient compressors

2. Refrigerator Factory Technical Assistance (4 years)

2.1: Introduce refrigerator manufacturers to technology options available internationally
2.2: Provide training on design modeling
2.3: Provide intensive applied design training
2.4: Provide training in technology options and selection
2.5  Provide technical assistance to manufacturers for preparation of business plans and financing proposals for upgrading designs and production technologies
2.6: Provide technical assistance for upgrading designs and production technologies
2.7: Design and implement new energy-efficient refrigerator models

3. Incentive Programs (3 years)

3.1 Develop program for establishment of national efficiency standards; undertake technical, economic, and financial impact of proposed standards; implement new standards among manufacturers and provide technical assistance in understanding proposed or enacted standards
3.2  Design and conduct manufacturer incentive programs
3.3  Design and conduct mass purchasing program
3.4  Design and conduct dealer incentive programs
3.5  Design and conduct consumer buyback/recycling program

4. Consumer Education Program (3 years)

4.1  Develop proposed national labeling concept and program, support legislative passage of labeling program, and provide technical assistance to dealer networks in understanding and implementing labeling program
4.2 Disseminate through broadcast and print media material informing consumers of the benefits of energy efficiency.
4.3 Disseminate at in-store points-of-sale materials allowing consumers to understand the features, benefits, and savings of energy-efficient refrigerators on sale
4.4 Undertake public relations campaign to spread the core message of the benefits of energy-efficient refrigerators
4.5 Provide training to retail staff in communicating the benefits of energy-efficient refrigerators.
4.6 Undertake consumer survey to track the change in consumer attitudes in response to education activities.

5. Project Management, Monitoring, and Evaluation (5 years)

5.1  Establish baseline conditions
5.2  Establish information center for long-term monitoring of project impacts
5.3  Develop metrics and format for information collection and analysis
5.4  Undertake annual information collection and evaluation
5.5 Track and evaluate consumer reaction and results of the consumer education activities
5.6 Provide project management and implementation oversight	
Annex 3: STAP Technical Review
Introduction

This technical review encompasses consideration of the issues of the reduction of energy-efficiency brought about by the replacement of CFCs in refrigerators and of  the measures which are proposed in this project to remedy this situation. The scope of the project is presumed to cover both types of domestic "cold appliances" - that is, refrigerators and freezers plus the popular combination units.

Energy-Efficiency of CFC Replacement Technology
.
Prior to the Montreal Protocol the use of CFCs had been almost universal in domestic refrigerators.  CFC 12 was the compressor gas and CFC 11 performed the important role of being the foam blowing agent  and the gas in the cells of the insulating foam.  In the latter function polyurethane rigid foam had almost universally replaced glass fibre.

In China, the rapidly expanding refrigerator-producing industry had been using these two compounds since the comparatively recent birth of the industry. The replacement programmes in China have involved the following:

CFC 12 is being replaced, in the main by HFC 134a. The newer alternative of iso butane, which is now widely used in Western Europe is also being used in China including by those enterprises who export to Europe. Neither is available from domestic production but iso butane of the required purity could be made available quite readily. There has been a heated debate between the proponents of the two replacement technologies as to which gives the better energy-efficiency. One point emerging is that the compressor has to be modified around the thermo-dynamic characteristics of the particular gas. That being done, the energy efficiency of the two options is similar and is then equivalent to that of CFC 12. Thus, the main measure, which is being addressed by this project, is to optimise the design of the compressor.

CFC 11 is being replaced by one of two options.  The transitional technology using HCFC 14b is less costly to convert to and offers the better insulation efficiency.  However, it will eventually have to be replaced since the phaseout of HCFCs is included in the  Montreal Protocol.  A hydrocarbon option, initially cyclopentane, is now being used by several of the larger Chinese enterprises.  Despite the higher conversion costs, because of the precautions in the factory required to handle a flammable blowing agent, it is finding favour because it represents a long term solution.

Several Chinese enterprises also used “reduced CFC 11” foam formulations as an interim step in the period 1993 to 1995 before embarking on the change to either HCFC 14lb or cyclopentane from 1995 onwards.  The complete changeover from CFFC 11 will take several more years for the entire industry to complete.  However, all of these replacement technologies give a higher foam thermal conductivity which is translated into a higher electricity consumption.  The increases in consumption are, typically 2-4% for HCFC 14lb and 4-6% for cyclopentane.  The options to ameliorate this effect include increasing the thickness of the refrigerator walls as has been investigated by the US China Refrigerator Project referred to in the project document (page 8).

This is considerable scope, when using CFC replacement technologies for both the compressor and the insulating foam, to achieve substantial savings in energy use.  This has been demonstrated by the projects in China and by the actions of manufacturers in Europe, Japan and the USA.  The paths they have followed are based on a combination of measures.  These include the optimisation of compressor design, the improvement of door  seals and increases in the foam thickness.  The “green” market in Germany has resulted  in several manufacturers producing models which attain the highest classification (class A) in the European Union system.  In the USA there has been a “Green carrot” competition to develop energy-efficient technology.  The use of vacuum insulating panels to further improve insulation efficiency has not, as yet, been widely applied by broader application is expected in the next few years as the EU (9/1999) and the USA (7/2001) introduce new, more stringent, energy standards.

Comments on the Proposed Project Activities

1)	High-Efficiency Compressors

The activities listed are supported.  Is there a need to license designs available elsewhere which have been optimised around the CFC replacement refrigerants?

2)	Production of high-efficiency refrigerators

The activities listed are supported.  The Chinese market is highly competitive – how will Haier’s participation be seen by their competitors.  In addition, with some knowledge of Haier’s and CHEARI’s technical resources – are these sufficient to role out a programme across the country?

3)	Regulatory Requirements and Market-Based Incentives

The activities listed are supported.  Regulatory requirements have already proven to be effective in the EU and the USA (combined with labelling).  There is a lot of experience in these areas to draw upon- how will this be collected and used in China?

4)	Creation of Market Conditions

These measures are supported.  The labelling should have simple guide to energy consumption but also have provision for other parameter, such as noise.  Consumer and retail staff education will be a critical element.  

5)	Monitoring and Evaluation

The measures are supported.
One element which  is not covered is the provision of an efficient after sales or maintenance network to ensure that the energy-efficient refrigerators that are placed on the market continue to operate in such a manner.  This may need a verification programme for service engineer.  The safety elements of servicing compressors in a market with three types of refrigerants (CFC 12, HFC 134a and iso butane)  should be included in this.
SAFETY AND ENVIRONMENTAL ISSUES

The design studies should include TEWI (Total Equivalent Warming Index) analysis of new designs.

The removal from the market of the old models raises several issues.  If they are to be destroyed then there should be a recycling facility in place to recover the CFC 12 from the compressor and, at lease some, of the CFC 11 from the foam to prevent these ozone depleting gases being emitted to the atmosphere.  The best environmental option may be to refurbish these older units. 

The safety issue relating to hydrocarbon-based compressor has been mentioned above. 

The project addresses a key environmental issue. The impact of the electricity consumption of refrigerators has been well documented and is broadly recognised.  In the case of China, the programme is of even higher priority because of the use of coal in power generation.
PROJECT COSTS

The project is cost effective to the GEF, especially taking into account the leveraging to be achieved through co-financing.  The largest element is the Refrigerator Factory Technical Assistance.  The implementation of the new energy-efficient designs in production is a key step and re-tooling costs are included in the $24 million of co-funding for this element.  Is this sufficient and will this render some moneys already spent from the Montreal Protocol Multilateral Fund redundant?  This represents an expenditure of the order of only 1 million per manufacturer.

The cost/benefit arguments are clearly displayed.

IMPLEMENTATION TIMEFRAME

The timeframe of five years should be achievable.

RECOMMENDATION

The project is supported.

Annex 4:  Background Documents

1.	Correspondence between UNDP/GEF and Multilateral Fund Secretariat Regarding the Proposed Project: This correspondence was undertaken to ensure that there exists no duplication of efforts between the activities included in this proposal and the activities being undertaken with the support of the Multilateral Fund.

2.	Montreal Protocol Proposal: This proposal was funded under Montreal Protocol Multilateral Fund for funding of CFC-free refrigerator prototype development and production.

3.	Project Prototype Technical Report: This technical report details the energy efficiency and CFC-replacement measures, including their energy use impact, developed and implemented n the prototype refrigerator.  The report reviews and illustrates the menu of energy efficiency options available for redesign of household refrigerators in China.  The report also includes a compendium of laboratory and field test results, and the results of preliminary research on market potential for energy efficiency refrigerators. 

4.	Refrigerator and Compressor Sector Survey: This is a survey of major manufacturers completed with PDF funding and including details regarding production levels, technologies used and energy use for the Chinese refrigerator and compressor sectors.

5.	Market Research Report: This research report by Ogilvy & Mather, Beijing, was prepared under the PDF.  It focuses on consumer preferences for refrigerators and the market potential for energy efficient refrigerators.  Market research included an opinion survey of over 2000 individuals in five Chinese cities, the results of which are statistically analyzed.  On the basis of this analysis, Ogilvy & Mather prepared recommendations for a public education campaign designed to overcome market barriers to the dissemination of energy efficient refrigerators.  

6.	Compressor Efficiency Upgrade Report: This technical analysis was completed under the PDF by international compressor industry experts regarding technical options for improving the energy efficiency of Chinese household refrigerator compressors and estimated costs of raising efficiency levels.  The study reviewed and evaluated a range of efficiency measures for a range of compressor sizes (70-200W) and refrigerants (including HFC-134a and isobutane).

7.	Training Proposal Completed Under PDF: This document includes a research report and recommendations completed under the PDF for a comprehensive multi-year training program for Chinese refrigerator and compressor manufacturers in the development and implementation of energy efficiency techniques.  

8.	Efficiency Standards Proposal: This is a survey report and recommendation completed under the PDF for revisions to Chinese household refrigerator energy use standards in order to promote adoption by Chinese refrigerator and compressor manufacturers of energy efficiency techniques.

9.	Incentive Program Analysis: This contains research and evaluation of possible manufacturer, retailer, and consumer incentive programs to promote increased production and sales of energy efficient household refrigerators completed during the PDF period.