SUSTAINABLE ENERGY FINANCE

THE OPPORTUNITIES IN PAKISTAN

Dr. Riccardo Ambrosini

Senior SEF Specialist, IFC

Karachi, November 27th 2014

SEF Market Opportunities in Pakistan

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani Fis in Maximizing SEF Market Potential 14

Annexes 21

2
These are some typical examples of SEF investments financed by
Banks, Leasing Companies, MFIs around the world...

Sector Potential Borrower Energy Efficient / Typical Banking Segment Interface

Renewable Energy Equipment

Agriculture Farmers, Cooperatives, Biomass/biogas digesters, Drip irrigation systems, efficient MF and Retail for Farmers, SME and
Supply chains and/or solar/biogas powered pumps, Efficient agro- Corporate depending on company size.
machineries, storage facilities Leasing

Residential/ Builders, home owners, Solar water heaters, wall/roof insulation, Water-saving Mainly MF and Retail for households, SME
Retail home owner associations, shower heads, Solar lighting, CFL, improved cook stoves, and Corporate depending on size. Real
individual households water purifiers, efficient refrigerators, efficient HVAC units, estate leasing
double glazing

Commercial Housing complexes
operators, maintenance
companies;
Housing developers,
Property Operators
Heating and ventilation equipment, Control and metering Corporate and SME. Leasing for major
systems, Electricity peak-load control systems, Air- equipment
conditioners, Heat pumps, solar water heaters

Municipal Municipalities, district heating Boilers for district heating as well as for public/municipal Mainly SME and Corporate, Public Finance
companies, street lighting buildings, Heat exchangers, pipes for infrastructure projects,
operators, public buildings Cogeneration units, Complex EE projects
operators

Industrial Industrial companies, Energy efficient production lines, Waste heat recovery SME and Corporate. Leasing for major
SMEs and MSMEs devices, Heating systems upgrades, Efficient boilers and equipment
heaters, Fuel switching (from coal to gas or biomass),
Electricity peak-load control systems, Cogeneration units

Renewable Project developers, Wastes to energy (wood waste etc.), production of fuel, Corporate and SME lending on captive
generation Corporates/SMEs biogas, biodiesel, solar (PV and thermal), hydro and wind generation. Project Finance for grid attached
power, geothermal RE plants. Specialized insurance product for
solar PV

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The main objective of IFC’s market study was to review the opportunities for
Sustainable Energy Finance in Pakistan given the needs of national economy

Unfortunately for the local economy, in Pakistan

high energy prices are coupled with high energy
intensity. Additionally, there is an increasing
supply-demand gap, estimated to be around
5,000 MW, high transmission and distribution
losses, low levels of grid penetration, etc...
This market review of SEF opportunities has been
conducted by IFC in the following economic
sectors of Pakistan:
 Industrial
 Residential
 Agribusiness
Given the market drivers pushing towards a
more sustainable use of Energy, it is of little
surprise that this market review indicates:
 Relatively low payback periods / high IRRs for
EE/RE investments
 Positive cash flows for potential customers of
FIs

4
SEF Market Opportunities in Pakistan

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani Fis in Maximizing SEF Market Potential 14

Annexes 21

5
Pakistan’s Energy Supply and Demand

 Total primary energy supply for year 2011-12 was 2,710,000 TJ (or 64.72 MTOE)
 More than 99 % of use through conventional energy sources
 Heavy reliance on expensive sources of energy, as 80 % from petroleum products
 12.5 % from large hydro and nuclear power
 6.6 % from coal
 Less than 1 % through micro/mini renewable energy (RE) sources

 Pakistan's total energy savings potential: 418,807 TJ (11.16 MTOE)

 In FY 2011-12, this amounted to 17.25% of primary energy use!!!

 Installed power generation capacity: 22,797 MW

 Insufficient considered increasing population and industrial requirement

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Identified Investment Potential in Energy Efficiency (“EE”) &
Renewable Energy (“RE”) in Major Sectors in Pakistan

Potential Investment Main Equipment for investment

Sector Sub-
type Sector EE RE
EE RE
(M PKR) (M PKR)
Compressors, heat recovery, heat transfer equip., lights, meters, Solar water heaters
Textile 173,000 133,500 motors, power factor correction equip., main process, process (“SWH”), wind power,
control, steam system, variable frequency drives (“VFDs”) photovoltaics (“PV”)
Co-generation, heat recovery, transfer equip., motors, general
Sugar 105,000 16,700 Biomass, PV
process, process control, steam system, VFDs
Compressors, heat recovery, heat transfer, motors, power factor,
Leather 1,150 12,000 PV, SWH
main process control, steam systems
Industrial Compressors, heat recovery, motors, power factor, main
Paper 7,800 1,400 Biomass, SWH
process, process control, VFD
Wind power,
Co-generation, meters, motors, power factor, main process,
Cement 30,600 33,000 concentrated solar
process control, VFDs
power
Fertilizer 5,800 10,800 Heat recovery, heat transfer, main process PV
Other
80,800 52,000 Diverse process and ancillary equipment Various technologies
sectors
Direct combustion of
Tubewell replacements, trickle irrigation systems (drip and
Agriculture 168,000 647,600 biomass, biogas, solar
sprinklers mainly)
Non- water pumping
industrial Biomass from
Residential 111,000 166,000 Lighting, fans, air conditioning units, refrigerator replacement municipal waste and
animal manure, SWH
Total Investment
683,150 1,073,000
Potential

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Industrial EE Market Potential in Pakistan

Combined
Technology
investment for
other sectors
20%

VFD
Co-generation
2%
31%
Steam system
1%

Process Control
4%

Process
5%
Power Factor
0% Compressor
3%
Motors
7%
Meters
2%
Lights Heat transfer Heat recovery
1% 5% 19%

The overall investment potential for these energy efficiency measures in the
industrial sector is about PKR 400 billion, with typical 3 to 5 years payback periods

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Renewable Energy Potential in the Pakistani Industry
Investment Matrix – Sector vs. Technology

Total RE Industrial Investment

SWH (Solar (by Sector)
Sector \ Tech Photovoltaic Wind Energy
Water Heater) Cement
13%
Cement  Others
20% Leather
Leather   5%

Paper  Paper
1%
Sugar  Fertilizer
4% Sugar
Textile
Processing
 6%

Textile Spinning   Textile

Fertilizer  Processing
12%
Others    Textile
Spinning
39%

The industrial sector in Pakistan has long been suffering owing to unavailability of energy
(load shedding for gas and electricity):
 Part of this energy deficiency could be met by Renewable Energy (“RE”)
 Potential for private sector involvement: about USD 2.0 billion for 800 MW of installed
capacity

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 Investment Potential for EE & RE Equipment
in the Agricultural Sector

Potential Sector
Intervention
Saving
Investment  The major water-saving potential
Potential
(M PKR) exists in the Agri sector, as irrigation
Use of mechanical seal pumps instead
1-2 % accounts for ~93% of total water
of gland-packed pumps
consumption in Pakistan today
Use of energy efficient electric pumps,
20 %
motors and diesel engines  Drip irrigation could potentially
10,000
Installation of properly sized pumps 5% increase farmers’ water efficiency by
Proper maintenance of pumping system 5% 40-70%, at the same time improving
Installation of Variable Speed Drive
5% yields by 30% or more
(“VSD”)
 Sprinkler irrigation is suitable in all
Average annual Energy Potential types of soil except heavy clay and
Requirement, (kWh / hectare) Sector water, saving up to 30-50%
Crops Conventi Investme
Trickle nt (M
 Considering that in most locations
onal Savings
Irrigation
Irrigation PKR) water is not paid, the financial
Widely Spaced Crops suitable for Drip
1,667 1,389 278
benefits of water efficiency exercises
Irrigation
58,000 are fuel saved on pumping and
Closely Spaced Crops suitable for Drip
Irrigation
3,148 2,778 370 increased yields
Crops suitable for Sprinkler Irrigation 926 810 116 100,000

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SEF Market Opportunities in Pakistan

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani FIs in Maximizing SEF Market Potential 14

Annexes 21

11
Banks in Pakistan are already lending in most of the major
economic sectors where SEF lending is relevant

Sector-wise Bank Advances & NPLs as of June 30, 2014

Loans NPLs
Sectors NPL Ratio
USD Million USD Million
Insurance 9 - 0.1%
Sugar 1,675 53 3.2%
Production/Transmission of Energy 5,666 313 5.5%
Financial 1,273 83 6.6%
Chemical & Pharmaceuticals 1,890 129 6.8%
Agribusiness 3,955 403 10.2%
Individuals 4,070 498 12.2%
Shoes & Leather Garments 218 31 14.1%
Automobile/Transportation 633 110 17.4%
Electronics 619 125 20.2%
Cement 437 94 21.4%
Textile 7,300 2,050 28.1%
Others 19,487 2,141 11.0%
Totals / Average 47,232 6,031 12.8%

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The Pakistani SEF Paradox

There is an urgent need for capital investment in EE and RE, among

various sectors of the Pakistani economy, with an overall investment
potential of about 1.75 trillion PKR:
 Agriculture 46%
 Industrial 38%
 Residential and commercial 16%

There is liquidity available with FIs to invest in power generation and EE

projects.

However, demand and supply are not converging into substantial

levels of energy related financing portfolios for the banks…

WHY?
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Feedback from the Industry
Challenges:
 Lack of awareness, and lack of
skilled workforce
 High investment/capital expenditure
 Perceived high payback period (in
case of solar energy PV projects)
 Non tested technology (in Pakistan)
 Absence of government policies and
incentives, no preferential treatment
 Illegal and refurbished market
 Political instability of country
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Initiatives:
 Shift towards coal power generation
 Exhausted/depleted tires for
extracting furnace oil through
combustion
 Third party energy and / or
environmental audits
 Large industrial setups having sound
financial base are ready to invest in
energy efficiency and later in
renewable energy projects
 Key performance indicators (KPI) for
efficient use of energy still being
developed
Feedback from Industry Associations

Challenges:
 The associations are tackling energy shortages issues and environmental obligations
with limited technical capacity
 The emergency preparedness is dealt by individual industry and not at the associations’
level diluting the overall effectiveness
 Lack of mandate for utilities distribution & bill collection

Initiatives:
 Plans for combined power plants and wastewater treatment plants at industrial estate
level
 Awareness raising campaigns
 Partnered with international donors for energy / environmental projects
 Some have established technical cells

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Feedback from non-Industrial Consumers

Challenges:
 Very high cost of alternative arrangements
 Limited capacity of alternative arrangement
 Rising cost of diesel operated tube wells
 40,000 off-grid villages where taking the national grid would not be cost effective
 Lack of access to finance and incentives from government (i.e. on import duties)

Initiatives:
 Few tubewells utilizing solar panels
 Biogas plants for domestic fuelling needs have met with increasing success during
the past 5 years
 General switch over to energy efficient equipment

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Feedback from Banks and other FIs

Challenges
 No skills for technical details of any energy related financing application
 Serious lack of demonstrated successful alternate energy technologies
 Unavailability of performance guarantees and/or after-sale service from vendors
 Low levels of technology sales and support networks throughout the country
 Secondary market for energy equipment is not developed
 Slow arbitration of banking disputes
 Collaterals for SMEs are generally difficult for them

Initiatives
 On an opportunistic basis, without detailed knowledge of SEF concepts and benefits

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Feedback from Equipment Vendors

Challenges:
 Lack of awareness in clients
 No criteria for assessing existing equipment
 Reluctance in major investments
 Limited promotion of equipment and services
 Lack of coordination with FIs

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 Feedback from Government Institutions
Challenges
 Lack of coordination for mandates of different ministries and line departments
 Absence of regulations
 Low level of awareness
 WAPDA infrastructure does not support feed-in tariff for small projects
 Current pricing of gas is hampering RE
 Energy inefficiency is widespread, hence its cost can be generally passed through the value chain,
resulting in low levels of major investments in the industrial sector
 Corrupt practices including electricity theft
 Low emphasis on EE within environmental approval mechanisms of projects (EIA/IEE)

Initiatives:
 RE & EE products exempted for ST and customs duty.
 Revival of Motor Vehicle Tune Up centers program by ENERCON
 New sector wise guidelines for preparation of IEE and EIA by MOCC.
 WAPDA is executing CFL (compact fluorescent lamp) project
 AEDB is facilitating investors for on-grid RE projects
 MOCC negotiating with the World Bank and ADB to fund the CDM documentation and preparation
charges for new projects on Success Rate Model
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Consultation with market players indicates the following as positive
steps to be taken in order to develop SEF in Pakistan
Regulatory:
 SBP to encourage increasing SEF transactions in portfolio of commercial banks, for example through
directives related to FIs‘ portfolio structuring
 Encourage use of ADR mechanisms to resolve disputes
Market Development:
 RE has been widely developed worldwide. However local technical expertise needs to be developed,
initially leveraging on partnerships of FIs with equipment vendors
 A secondary market for industrial equipment already exists in Pakistan, however asset managers,
vendors, etc. need to be made aware of the business opportunities for EE. For RE, a secondary market
is already in place in Western Countries, this could offer some opportunities
Financial:
 Energy financing can be tailored to energy conservation/efficiency and RE generation projects
 EE products are specific to defined industrial sectors, hence are suitable for FIs that are used to work
within these business areas. Here a financial product matching technical requirement is most
competitive
 Banks in Pakistan are not generally aware of the benefits (for the banks, their client and society) of
implementing EE measures or developing RE projects, hence training of banks on simple SEF
methodologies should be one of the top priorities

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SEF Market Opportunities in Pakistan

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani Fis in Maximizing SEF Market Potential 14

Annexes 21

21
IFC’s Value Proposition

IFC works with banks in the following areas

• Strategy development
• Seminars, awareness raising for the sector-> informed clients
• ESCO development-> business management, deal generation
• Facilitate interaction between potential clients and FIs (i.e. textiles, poultry, zones) -> awareness, access
to audits
• Identify key aggregators and sectors for financing
• Periodic mining of bank’s portfolio
• Work on public policy related to EE/RE scale up
• Publications, marketing and communication materials
• Customized training for bank staff
• Specialized products for the niche market
• Share different calculation tools

The Bank/Leasing Co/MFI:

• Direct Sales
• Advertising
• Specialized team to drive this effort

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Main Areas of Intervention for IFC’s SEF Advisory

1 3 4 5
Market Product Pipeline Result
Strategy Development Development Measurement

Transaction
Scoping (Target
Support via
clients, Target Product Policy Calculator
Tools and
products)*
Resources

Meeting with Examples of

Key Players Marketing
Clients success

Provide Links
Training FI’s
Champion with vendors,
Staff
suppliers
2

IFC consistently delivers – all around the world – structured SEF products and build FIs’
capacity to independently manage a broader service offering to meet their client needs for
financing of RE projects, EE measures and clean technology upgrades
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 Growth, inflation, trends Economy

Energy – mix, grid, power quality and

reliability, policy plans and priorities

Demand side - Energy prices and

outlook. Subsidies.
Supply side – RE tariffs: feed-in
Energy Market
tariffs, hydropower, biomass, biogas
etc.
Broad market context

Activities of IFIs and donors: climate

related EE/RE projects, work with FIs

Micro

Residential EE

Green Mortgages
within the Pakistani context

Rural/off grid
Market Segments
SMEs

Corporate segment

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Municipal/public

ESCOs

Energy and resource efficiency

Module 1: Assessment of FI’s SEF potential

Sustainable energy market

RE - potential, investments and

drivers SEF Sectors

Green buildings - potential,

investments and drivers

Energy auditors and consultants

EE equipment suppliers
Service and
Technology Providers

RE equipment suppliers

Financial Aggregators
market

Financial Products
Financial
Residential Energy Efficiency Offering

As Residential EE transactions are normally small in size, they are normally best suited for
the Retail and Microfinance segments
 Due to high replicability of these transactions, the first option is usually the production of financial
products with marketing/information material available in branch, although the marketing channels
can vary considerably depending on local context
 Use of aggregators – ESCOs/consultants, equipment suppliers, Municipalities, larger retail chains –
with different partnership models available
 Typical EE measures to include solar water heaters, efficient lighting/heating/cooling equipment,
domestic equipment, wall/roof insulation, double glazing and smaller solar PV installations
EE Credit Lines in the SME/Corporate Segments

Typical equipment financed by Banks in the MENA region

include:
 Energy efficient production lines
 Waste heat recovery devices
 Heating/cooling systems upgrades
 Efficient boilers and heaters
 Electricity peak-load control systems
 Cogeneration units

These opportunities are present in all industrial and

commercial sectors of MENA’s economy

These are familiar sectors for Commercial Banks already,

best fitting Corporate, SME, Leasing and Islamic Banking
operations
RE Financing

Main renewable energy equipment to be financed:

 Solar water heaters (“SWHs”)
 Biogas/Landfill gas (cogeneration) units
 Solar photovoltaic (“PV”) units
 Concentrated solar power (“CSP”) plants
 Wind farms
 Hydro power plants

Best fitting SME, Corporate and Leasing

operations, depending on type and size of projects
Sustainable Energy Finance for Rural Banking

Borrowers in the Rural sector include farmers,

cooperatives, supply chains operators

Potential projects include installation / replacement of

the following equipment:
 Biomass/biogas digesters
 Irrigation systems
 Efficient and/or solar/biogas powered pumping
 Efficient agro-machineries
 Cold storage facilities
 Rural (off-grid) power solutions
Financial products cutting through Microfinance,
SME, Corporate, Rural and Islamic Banking
operations
Energy Performance Insurance

An EPI is an instrument that a service provider (equipment supplier/ESCO etc.) or end-

beneficiary can procure to hedge against underperformance of EE/RE installations
 The insurance premium is priced based on the expected energy savings/energy
generation
 If the guaranteed EE savings/RE generation are not met, the insurer compensates
the end beneficiary for the shortfall
With the technology risk mitigated, financial institutions “only” need to evaluate the
payment/credit risk of the client, which is their core business
An EPI is a good fit for both ESCO’s and vendor’s EE implementation needs:
 Currently, ESCOs are using their own equity to absorb any EE implementation risk,
which is limited and finite. EPI will help to secure external debt and allow them to
upscale
 Equipment vendors are looking to expand their offering to clients but are reluctant
to guarantee their sub-contractors. With an EPI, vendors can offer service as well
as performance contracts without taking on additional risks
SEF Market Opportunities in Pakistan

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani Fis in Maximizing SEF Market Potential 14

Annexes 21

30
 EMENA SEF program:
Over $ 400m portfolio, over $50m annual energy savings

IFC Credit line + Advisory

TCB Bank LOCKO-Bank Credit Bank of Moscow Center-Invest Bank NBD Bank MDM Bank URSA Bank

USD 18 million USD 20 million USD 20 million USD 10 million USD 8 million USD 50 million USD 53 million
2011 2010 2010 2010 2008 2008 2008
RUSSIA

USD 4 million USD 35 million

2008 2007

IFC Advisory

SME Bank Prime Finance Bank Agropromcredit Bank Tatfondbank

2011 2009 2009 2007

IFC Credit line + Advisory

Ukraine Belarus Armenia Jordan Lebanon Jordan Lebanon
EMENA

Erste Bank MTBank AmeriaBank Tamweelcom Banque Libano- Ejara Leasing Fransabank
Francaise
2010 USD 10 million USD 15 million USD 3 million
2011 2010 2011 2012 2013 2014

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China SEF Program

 Started in FY 2007
 As of 2013:
• 3 partner banks
• Total loan amount: > $ 783 million
• Total investment: > $ 1.7 billion
• Annual GHG emission reduction:
19.33 million tons CO2e
• Annual energy saved: >44.2 million
MWh

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Philippines SEF Program

 Started in FY08
 As of end 2013:
• 3 partner banks
• Total loan amount: > $ 257 million
• Total investment: $ 422.5 million
• Annual energy saved: 82,526 MWh
• Annual RE generated: 345,250 MWh
• Annual GHG reduction: 703,743 tСО2

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Key Success Factors:
SEF aligned with bank’s strategy

Russian commercial bank, pioneer of Sustainable Energy Finance:

 Focus on industrial SMEs that are using old, energy inefficient production equipment and
technologies
 In 2005 the bank launched its Sustainable Banking Framework, integrating SEF in its
business model
• IFC assisted the bank in the development of SEF
internal capacity to identify, assess and process SEF
deals. The bank has demonstrated SEF portfolio growth
from $ 4 million up to $ 200 million in 6 years.
• Proven SEF methodology, trained staff and solid track
records helped the bank to attract several multinational
investors to fund its SEF lending operations.
• The bank reports a two-digits profitability of its SEF
operations and is considering to further develop its SEF
operations.
• The bank’s leadership has been recognized by
international community, including The Financial Times
From $ 4 million in 2006 to $ 200 million in 2012
Sustainability Awards in 2007 and 2013
Portfolio growth and diversified sources of funding

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Key Success Factors:
Building SEF Portfolio with existing clients

Leading bank in the Middle East, an In two years the bank has achieved
IFC client, launched SEF project in results as follows:
2012  $ 110 million portfolio of SEF projects
IFC advisory helped the bank to create  $ 200 million of total project costs
internal capacity and build the pipeline:
 Experience in different sectors from
 Detailed analysis of the existing EE industrial equipment to RE solar
portfolio in order to identify SEF PV, Green Buildings, Residential EE
potential
 High conversion rate from site visits
 Comprehensive training program for and energy audits completed into
loan officers and branch managers financed transactions
 Transaction support:
• Joint client site visits to identify
eligible projects
• Supervision for energy audits
• Sector industry guides for loan
officers

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