Closing the Energy Efficiency Financing Gap:

World Bank Experience with Financing Approaches and

Implementation Models

Global Workshop to Accelerate Energy Efficiency

C2E2, Copenhagen, November 2015

Ashok Sarkar
Energy & Extractives Global Practice
The World Bank
 Energy Renewable Energy New Technologies
Abatement Efficiency (Cost Barriers) (Cost & Tech
cost (Market Barriers) Barriers)

0
Energy pricing reforms Abatement potential

•Feed-in Tariffs, •Support for R&D

•Regulations
Policy Tools Renewable Portfolio •Financing
•Financial incentives Standards, or Tendering incremental cost
•Institutional reform •Tax on fossil fuel •Transfer technologies
Financing
Instruments EE Market Segments RE Barriers New Tech Risks
Traditional bank Concessional
Credit Line Long-term tenure
clients (large/medium)
loan
Borderline (mitigate Mitigate technology
Guarantee perceived risks) risk s/extend tenure Technology
SMEs & Public SMEs/immature risk guarantee
Dedicated Sector financial market
Fund SMEs, ESCOs, clean SMEs and early-stage Venture capital
Equity Fund energy start-ups technology firms
2
Source: World Bank (2012)
Investments- Requirements, Trends, and Gaps

USD 1 Trillion annual investment required to meet the SE4All Goals

Source: SE4All (2015) 3
Annual average energy efficiency investment in
the 450 Scenario by region, 2014-2030

Source: IEA, SE4ALL

4
 Annual Energy Efficiency Investments

Current Policies Scenario - cumulative additional investment of $4.8 trillion are needed from 2014-2030
(or $280 billion per year, on average).
Investment in EE is anticipated to increase more than fourfold from today to 2030 in the central scenario, but needs to
increase a further 60% in 2030 to stay within a two degrees trajectory.

Source: IEA, SE4ALL

5
 Closing Global EE Financing Gaps
• Reaching the SE4ALL goal will require more than doubling the average
annual investment in energy efficiency from now until 2030.
• Requirements and Gaps:
• Average range of required EE investments of $500-600 billion per
year through 2030 (for target: 450 ppm)
• Average range of current EE investments of the order of US$130-
150 billion.
• Available Public and Climate public finance for EE  ~$50-60 billion
• Investment Gap – annual >$400 billion
• Private sector investments is the key solution ~80%
• Public Finance should be used for leveraging private capital (including
de-risking private investments)
• Public Finance should be used for creating enabling environment and
better EE investment climate through removing barriers, policies
• Public Investments should be used for consumer awareness and
capacity building, TA, standardization of tools and templates
• As urbanization takes place, focus will be on Financing at
Urban/City/Sub-national levels
6
 Sustainable Public EE Financing Mechanisms
Market
Commercial
Maturity
Financing
Advanced commercial or project financing (ESCOs)

Vendor credit, leasing

Public EE financing ladder

Commercial financing, bonds

Partial risk (first loss) guarantees

Credit line with commercial bank(s)

Credit line with municipal (development) bank

Public ESCOs (Super ESCOs)

EE Funds (Revolving, Special, Mezzanine)

Utility “on-bill” financing (DSM)

MOF financing w/ budget capture

Public Budget financing, grants w/ co-financing

Financing
Grants/ Subsidies
4
Source: World Bank (2015)
Typical Structure of EE Fund

Source: World Bank (2015) 8

 EE Funds - Examples

• Bulgaria Energy Efficiency Fund

• Romania Energy Efficiency Fund
• Armenia Renewable Energy and Energy Efficiency
Fund
• Thailand - Energy Conservation Fund (ENCON)
• Korea – Korea Energy Management Fund
• India – State Energy Conservation Funds
• Sri Lanka – Sustainable Energy Fund
• China - National incentive fund based on coal
savings
• South Africa – Central Energy Fund
9
 Armenia R2E2 Fund

 Renewable Resources and Energy Efficiency (R2E2) Fund established in

2005, started revolving mechanism in 2012 for public EE projects using
ESAs
 Project targeted US$9 million (about 100 municipal street lighting and
building retrofit projects) over 3 years
 To date, the R2E2 Fund has signed 55 ESAs totaling US$8.7 million
 Average project size is about US$150,000 (one US$1.2 million project
with a university)
 All ESAs are being repaid on time (or early)
 All projects are subcontracted to local construction firms under simplified
performance contracts; to date, all have met or exceeded savings
estimates
 Many new technologies have been introduced, since procurement is
based on highest NPV rather than lowest cost

10 Source: World Bank (2015)

 Utility DSM

 Utilities have many advantages for pursuing DSM

but also mixed incentives
 Load management vs. energy conservation
 Recent proliferation of utility CFL programs
 Post DSM models – DSM bidding, standard offer,
EE power plant, white certificates
Examples
Argentina Pakistan Thailand
Brazil Philippines Uruguay
Burundi Rwanda Vietnam
India South Africa Bangladesh
Mexico Sri Lanka
11
 In urban areas, a turnkey bundled
procurement implementation
scheme used, targeting low-
income families identified by
electricity consumption data.

Government of Mexico
(SENER) In rural areas, SENER will work
with an operator (FIDE/FIPATERM)
to bulk procure the CFLs, and
work with DICONSA (store that
reaches these areas) for CFL
Source: Mexico EE distribution and IL collection.
Lighting and Appliances
project of the World Bank

$$$ World Bank

$$$ Carbon
Finance 1
2
Mexico Residential Sector CFL Program…2
 45 million CFLs, free distribution
 1.4 million CFL pilots successful
 CDM funds along with World Bank
funds (plus GEF and CTF support)
 Exchange of ILs for CFLs at
approved retail stores (coupons)
SHCP
 10 million carbon credits - CERs ( Reembolso
USD
through 2021) generated 70 mill por parte del
Banco Mundial
 First CFL CDM PoA registered
SENER
 Target of 11 million low income
households, including 2 million in Ganancias por 45 millones de LFCs
Financiamiento
rural areas (4 CFLs each) de Carbono
FIDE o FIPATERM
( Coordinación a
cargo de SENER)

Distribución
gratuitaa
poblaciónde bajo
1
ingreso 3
India: Domestic Efficient Lighting Program (DELP)

 Managed and Implemented by EESL in India, in collaboration with electric

utilities (DISCOMs)
 Targeted Replacement of 770 million incandescent bulbs with LED bulbs; >25
million already distributed and replaced
 Payment upfront or in installments; 3-year warranty
 Expected savings of 100 billion kWh annually
 Consumer Savings of >$6 billion in consumer bills
 Average reduction of electricity bill of consumers by $2 to 6 per year per
LED
 Dramatic Reduction in price of LED bulbs

DELP Dashboard
http://www.delp.in

http://iledtheway.in

Source: Presentation at UNEP by N. Mohan, EESL (Nov 2015)

Typical Structure of Dedicated EE Credit Line

 Create interest on the part of commercial banks in financing EE projects

 Enhance technical capacity of banks to scale up EE lending
 Leverage parallel financing from the participating banks for EE financing
 Strengthen the participating bank’s capacity in identifying and managing project risks
 Assist banks in exploring business opportunities in other low carbon lending businesses.

15
Source: Sarkar et al (2014), Designing Credit Lines for Energy Efficiency, World Bank.
EE Credit Line - World Bank Examples

Source: Sarkar et al (2014), Designing Credit Lines for Energy Efficiency, World Bank.

16
 EE Credit Line Example –
China EE Financing Program (CHEEF)

World Bank China Energy Efficiency Financing Program

Credit lines from World Bank to 3 banks in China
Exim, Minsheng and Huaxia Bank

Project A
Local Bank and
World Bank
Other Sources Project B
$400 M
$1.5 B
Project C

70% Debt 30% Equity

Source: World Bank

17
China Energy Efficiency Financing Program
China Energy Efficiency Financing Project I, II, and III:
• WB loan ($400M): credit line to three local banks for EE investment
• GEF grant ($13.5M): capacity building to banks and EE policy
support
• Focus: large and medium industrial enterprises, recently expand
to ESCOs and building EE
• Achievements:
• $400M IBRD leveraged $1,900M; Annual energy savings of 3 Mton
of coal equivalent and CO2 emission reduction of 7.3 Mtons
• Substantially increased PFI’s interests, capacity, and confidence in
EE lending
• Lessons Learned:
• Participating banks’ internal organization: Management commitment,
dedicated teams, and incentives to staff are the most important success factor
• Technical Assistance to participating banks is critical with high pay-off
• Generating sufficient deal flows has not been easy
• New business model to bundle small-scale EE projects: target at
large enterprises, and aggregate small-scale EE investments at the
subsidiaries
• Encouraging participating banks to expand support to SMEs has been a
major challenge
Partial Credit Guarantees (Risk Sharing) for
Catalyzing EE Investments
• Designed to address the problem of access to finance
• Risk perception of banks and financial institutions
• Government or donor agency provides a partial
guarantee covering loan loss from default
• Participating banks sign agreements specifying loan
targets and conditions
• Banks conduct due diligence and process loans
• In case of loan default the guarantee covers a portion
of the loss – the program may also include a “first loss
reserve”
• Substantial technical assistance also provided to
banks, project hosts and project developers (ESCOs)
19
India PRSF for Energy Efficiency
(World Bank, approved 2015)
Partial Risk Sharing Facility
GEF $12 M + CTF $25 M

Technical Assistance
Risk Sharing Facility
(GEF $6 M)

EESL SIDBI

Access to Risk Independent M&V Agency

Sharing
Monitoring &
Verification
Lenders - Participating Financial
Institutions (PFIs)

Participants in Energy
Efficiency Lending under
PRSF
Energy Service Companies (ESCOs)
Host Entity (Municipalities, Large
Industries, MSMEs, and Commercial
Buildings)

20
 Sustainable Public EE Financing Mechanisms
Market
Commercial
Maturity
Financing
Advanced commercial or project financing (ESCOs)

Vendor credit, leasing

Public EE financing ladder

Commercial financing, bonds

Partial risk (first loss) guarantees

Credit line with commercial bank(s)

Credit line with municipal (development) bank

Public ESCOs (Super ESCOs)

EE Funds (Revolving, Special, Mezzanine)

Utility “on-bill” financing (DSM)

MOF financing w/ budget capture

Public Budget financing, grants w/ co-financing

Financing
Grants/Subsidies
4
Source: World Bank (2015)
Factors Determining Choice of EE Financing Mechanism

 Selection of mechanisms
depends on local conditions
Country End-use
Context Sector  Different mechanisms may
be needed for different
sectors
Financing  Combinations of
Mechanisms mechanisms may be more
effective
 International experience
Maturity of Legislative/
Financial Regulatory
provides useful information,
Markets Framework but must be adapted to
local conditions

22
Elements of an integrated enabling environment
for energy efficiency

Source: World Bank (2015) 23

 Thank You

For questions, please contact:

Ashok Sarkar, Ph.D.

Senior Energy Specialist & Task Team Lead for Energy Efficiency- South Asia Region,
Energy & Extractives Global Practice
World Bank Group, Washington DC
asarkar@worldbank.org
24
EXTRA Slides
Annual Energy Intensity Improvements
(between 2010-2030)

Source: IEA, SE4ALL

26
Objectives and Rationale for (WB) EE Programs
EE measures are “Public Goods” with “Private Benefits”
PUBLIC GOODS PRIVATE BENEFITS
(Global) (Country/ Individual)

Ensure Economic
Development and
Competitiveness
(including creating jobs) Meet Energy Needs
Improve at Lower Cost
Environmental to Consumers
Sustainability & ENERGY EFFICIENCY
Climate Change
Mitigation Improve Fiscal
Situation
Enhance Energy Security,
(Balance of payments,
Provide reliable energy supply &
World Bank’s EE Programs oil imports)
address shortages
Lighting
WB EE commitments vary significantly year to year
Financing and Leverage
WB: More supply-side EE than demand-side

Total commitments FY10-15: $5.17 billion

 Financing Sources and Instruments for
Large Scale EE Investment Programs
Public Investments (by Government and electric utilities)
Support from Development Finance Institutions such as the World Bank
through following instruments:
- Soft/low interest investment lending,
- Grant finance, mostly for technical assistance,
- Lending through utilities or financial intermediaries (incl. private capital
leverage)
- Development Policy Credit
Support from Global Climate Finance Mechanisms
- Carbon Finance – Clean Development Mechanism
- Nationally Appropriate Mitigation Actions (NAMAs)
- Clean Technology Fund (CTF)…..also GCF
- Global Environment Facility (GEF)
Modality of Finance
- Stand –alone
- Blended
- PPPs
 How World Bank Supports EE Programs
(Financing Sources & Technical Assistance)
Technical Assistance
& Capacity Building/ Global
Training Environment
•Utility Load Research
Facility
•Program Design and Domestic Finance
Implementation Development
•Consumer Surveys
Assistance (IDA or Climate
•Technical Specifications
•Procurement IBRD) Finance
•Testing and Quality Leveraging (CTF, etc.)
Issues
•M&V and Impact Private Sector
Evaluation Capital
•Tariffs or Financial
Policy Incentives (Taxes) Carbon Market/
•Inefficient EE Lighting
CDM
(IL) Phase Out Policies

Institutions: Electric Supply/Distribution Utilities; Municipalities, etc

32
 Bulgaria Energy Efficiency Fund
Bulgaria Energy Efficiency Fund ($10M GEF and $5M
from others):
• Debt financing facility
• Partial credit guarantees: ESCO portfolio
guarantee (the first 5% of defaults in the portfolio)
and project guarantees (up to 80% cover)
• Technical assistance

Fund management structure: An independent legal entity,

with fund manager consortium competitively selected
• Achievements by the end of the project (March 2010)
• $16M loans led to $24M investments
• $2M guarantees leveraged $15M investments
• Clients: Municipalities, hospitals, SMEs, ESCOs
 Potential for EE Funds in ECA Region

 There are now several active EE Revolving Funds in the region: Armenia (R2E2
Fund), Bulgaria (EERSF), Moldova (FEE), Slovenia (ECO Fund), Romania
(FREE)
 Bosnia & Herzegovina: Assigned EE to existing Environmental Funds, allocating
grants for now, UNDP and World Bank plan option papers for revolving fund
 Croatia: Environmental/EE Fund in place offering grants, World Bank prepared
proposal for EE revolving fund for municipalities now under consideration,
status?
 Kosovo: World Bank will undertake an options study and design a proposed
Fund; World Bank and EC agreed to consider funding in 2017
 Montenegro: No dedicated EE Fund structure in place, EE program budget line
item in place, IPA support for options study planned in 2015/16
 Serbia: World Bank prepared EE Fund options paper with Min of Energy but
MOF/gov’t has not yet agreed due to fiscal consolidation constraints
 EE Funds are now being considered in several countries in the region, including
Belarus, Kazakhstan, Macedonia, Turkey, Ukraine
34
Pros and cons of selected financing mechanisms
[
Financing mechanism Application
Direct subsidies to customers or
Investment manufacturers to lower the appliance
subsidies purchase or cost of production or to
promote research and development.
Provides tax incentives such as tax rebates
on EE equipment, import duty concessions,
Fiscal incentives
tax holidays, tax credits, and accelerated
depreciation for purchase of EE appliances.
Dedicated EE fund to finance EE projects.
EE funds Funded through public finance and/or MDB
and donor funds.
Provides concessional finance for EE in
countries with low market capitalization,
Public financing
Concessional high cost of financing, and/or short loan
loans tenors.
Provides line of credit to commercial FIs to Can incentivize local FIs to finance EE
finance EE at concessional or market terms. and gain experience leading to
Lines of credit
Similar to concessional loans or line-of-
credit, provides a source of funds in
countries with illiquid capital markets.
Revolving funds
Lowers the risk of financing EE projects
Risk mitigation through first-loss facilities, partial loan
products guarantees, etc.
Title of Presentation
Advantages Disadvantages
Stimulates market demand by lowering Can distort market pricing. Appliance sales
first cost, and can help achieve market may go down when subsidy is phased out.
transformation.
Reduces the cost of installing EE Tax incentives need effective tax collection
appliances. Better option than direct systems.
subsidies.
Ideal for countries with weak banking Does not help create a sustainable financing
systems. Financing can be a grant or mechanism for EE. Needs strong and
loan. transparent fund management.
Can stimulate financing for EE if on-lent Can distort market financing terms.
through local FIs with a requirement to Commercial financing may not take place
leverage additional commercial capital. after concessional terms are withdrawn.
Can help local FIs develop experience Works only in countries with functional
with EE. banking systems.
Commercial financing may not take place
after the credit line is exhausted or
sustainable commercial financing concessional terms are withdrawn. Works
mechanisms. only in countries with functional banking
systems.
Funds leveraged with commercial Works only in countries with functional
financing can sustain operations. Can banking systems.
incentivize local FIs to finance EE and
gain experience leading to sustainable
commercial financing mechanisms.
Reduces real and perceived risks of EE; Works only in countries with functional
helps local FIs build capacity and banking systems. Additional fee adds to cost
establish commercial EE financing. of financing.
35
Pros and cons of selected financing mechanisms

Financing mechanism Application Advantages Disadvantages

Finances EE through guaranteed-savings Financing can be channeled through FIs often reluctant to finance ESCOs,
or shared-savings contract. ESCOs (shared savings) or through which may lack credit history or
customers (guaranteed savings). Lowers adequate collateral for traditional
performance risk. banking operations. ESCOs work better
with strong enabling environments.
ESCO financing
Private financing

Finances EE installation—financing could Uses utilities’ relationship with Utilities reluctant to engage in financing
be through grants, customer charges, customers. Allows repayment in operations. Repayment systems add
concessional financing or commercial installments through customer bills. complexity to billing.
Utility financing financing.

Traditional financing of projects. Customer finances cost-effective Customers rarely take on debt for EE
projects through normal credit and debt projects. Cost-reflective energy prices
channels of financing. and attractive financing terms help
Customer financing motivate customers.

Title of Presentation 36
 Success factors for EE financing programs

Build strong, Effective technical Good banking

stable demand intermediation capacity
Examples Examples Examples
• Regulations • Energy auditing • Loan officer EE
• Energy pricing programs training
• Awareness raising • Energy managers • Specialized EE
and education • EE equipment financial products
• Tools and guides leasing/vendor (e.g., cashflow-
• Information and financing based financing)
case studies • ESCOs • Procedures for
• Awards and • Benchmarking technical/financial
recognition • National standards due diligence
• Incentives • EE marketing
• Loan officer
awards, recognition