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einstitute.worldbank.org Financing Energy Efficiency: Leveraging Commercial Financing to Scale Up Implementation of Energy Efficiency Programs March 28, 2013 | 10:00 AM EDT Speaker: Dilip R. Limaye President & CEO, SRC Global Inc. Consultant, World Bank Institute

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Presentation Outline Barriers to Energy Efficiency Implementation Policy and Regulatory Instruments Recent Studies of Financing Mechanisms for EE Summary of Financing Mechanisms Energy Efficiency Funds Utility Financing Dedicated Credit Lines Risk Sharing Programs Performance Contracting and ESCOs Equity Funds Lessons Learned

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Importance of Energy Efficiency Energy Efficiency Most Cost-Effective Solution Most Cost-Effective Solution Mitigating Climate Change Impacts Mitigating Climate Change Impacts Economic Development Economic Development Without Compromising Reducing the Energy Supply/Demand Gap Reducing the Energy Supply/Demand Gap Enhancing Energy Security Enhancing Energy Security

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Role of Energy Efficiency in Mitigating Climate Change

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Large Potential but Limited Implementation Barriers to Energy Efficiency Policy/ Regulatory End-users Equipment/ Service Providers Financing Barriers Energy Efficiency: Highly desirable Attractive economics (low hanging fruit) High potential But, implementation of EE is far short of potential

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Barriers to EE Financing Financing Barriers Availability of funds Limited internal funds Limited borrowing capacity Lack of perceived incentives Information, awareness and communication Information for project hosts and ESCOs Communication between project developers and financiers Project development & transaction costs Small project size High project development costs Other soft costs Risk assessment & management Lenders' risk perceptions Collateralization M&V Need for new financial products and appraisal tools Lack of capacity Bank loan officers & risk managers Energy service providers Project hosts M&V agents

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Policy and Regulatory Instruments Demand-Side Management Demand-Side Management Tax and Other Incentives Tax and Other Incentives Energy Efficiency Obligations Energy Efficiency Obligations Energy Efficiency Laws Energy Efficiency Laws A wide range of policy and regulatory instruments can be adopted to address the EE financing barriers Government Policy and Regulatory Initiatives Financing Mechanisms Financing Mechanisms Donor Agencies

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Government Role vs. Market Role Government Role Government Role Provide Incentives Provide Incentives Develop Policies and Programs Develop Policies and Programs Stimulate Market development Stimulate Market development Long-Term Market Growth and Development Long-Term Market Growth and Development Active Participation of Banks and Financial Institutions Active Participation of Banks and Financial Institutions Sustainable Project Development and Commercial Financing Sustainable Project Development and Commercial Financing Need for Innovative Financing Mechanisms

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World Bank Study of Clean Energy Financing Documenting international experience in clean energy financing Addresses both Energy Efficiency & Renewable Energy Energy Efficiency section includes Energy Efficiency Funds Utility Financing Dedicated Credit lines Risk-Sharing Programs Leveraging Commercial Financing with Energy Saving Performance Contracts (ESPC) Equity Funds

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Financing Mechanisms Equity Funds Dedicated Credit Lines Risk-Sharing Programs Leveraged Commercial Financing Energy Efficiency Funds Utility Financing Public Public-Private Partnerships Private

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Energy Efficiency Funds

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Energy Efficiency Fund Funding Sources Donor agencies Government budget allocations Tariff levy on electricity sales Petroleum taxes Revenue bonds Funding Sources Donor agencies Government budget allocations Tariff levy on electricity sales Petroleum taxes Revenue bonds Project A Project B Project C Financing Mechanisms: Rebates, Incentives, Grants Low-interest loans, Pilot & demo projects, Subsidies for energy audits. Financing Mechanisms: Rebates, Incentives, Grants Low-interest loans, Pilot & demo projects, Subsidies for energy audits. Designed to overcome the lack of funding for EE projects

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Examples of Energy Efficiency Funds U.S. Originated Public Benefit Funds for EE over 20 States have such funds BEEF Bulgaria Energy Efficiency Fund FREE Romania Energy Efficiency Fund Czech Republic Energy Saving Fund South Africa Eskom EE/DSM Fund Korea Energy Management Fund Thailand Energy Conservation Fund State EC and Clean Energy Funds in India

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Utility Financing

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Utility Demand-Side Management (DSM) Regulatory mechanism requiring utilities to work with customers to modify energy use to improve system efficiency Costs of DSM recovered through tariff mechanism Substantial EE financing by utilities (US$ 5 billion) Utility Consumer Financing Financing the customers investment in energy efficiency projects or equipment Recovering the investment cost through repayments on the customers utility bills Overcomes the customers lack of funds and interest in EE; Facilitates processing and collection of loan repayments Benefits to utility as well as customers

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Dedicated Credit Lines

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Rationale 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 banks capacity in identifying and managing project risks Assist the participating bank in exploring business opportunities in other low carbon lending and carbon financing businesses.

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Structure of Dedicated Credit Line Bank/ Financial Institution Donor Agency Or Government Donor Agency Or Government Project A Project B Project C Provides Funds at Low Interest Adds Funds, Lends at Market or Concessional Rates Obtains Project Financing Public Agency Public or Private Bank/FI Project Developer

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Example CHEEF Program World Bank China Energy Efficiency Financing Program Credit lines from World Bank to 3 banks in China (Exim, Minsheng and Huaxia Banks) Local Bank $100 M World Bank $100 M World Bank $100 M Project A Project B Project C 70% Debt30% EquityTotal Project Financing - $286M

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Other Examples IFC credit lines in many countries EBRD Sustainable Energy Finance Facilities Deutsche Bank - European Energy Efficiency Fund (EEEF) Public-Private Partnership KfW Credit lines for SME and residential energy efficiency loans Thailand Energy Efficiency Revolving Fund

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Risk Sharing Programs

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Partial Credit and Risk Guarantees Designed to address the 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)

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IFC/GEF Central & Eastern Europe Successfully implemented the Commercializing Energy Efficiency Finance Program (CEEF) IFC/ GEF Participating Banks Project Developers GFA*Loans IFC/GEF guaranteed 50% of the loss due to loan defaults Provided $49.5 million in partial risk guarantees (PRG) Default rate < 0.5% Demonstrated low risk & high return of EE projects Increased bank financing of EE projects High leveraging of IFC/GEF funds achieved Investment > $200 M IFC program being replicated in Vietnam and Philippines Indias Bureau of Energy Efficiency is launching a PRG program *Note: GFA = Guarantee Facility Agreement

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Leveraging Commercial Finance through Performance Contracting

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Energy Savings Performance Contracts Energy Savings Performance Contracting (ESPC) Approach Energy Savings Performance Contracting (ESPC) Approach Implementing Energy Efficiency Projects Implementing Energy Efficiency Projects Turn-key basis Offered by Energy Service Companies (ESCOs) or other energy service providers (ESPs)

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ESPC Services Engineering Commissioning Construction Design Installation Measurement and Verification ESPC Services

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Guaranteed Savings Guaranteed Savings Shared Savings Shared Savings Energy Supply Contracting Energy Supply Contracting Business Models for ESPC Common ESCO Business Models

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The Super ESCO Approach Super ESCO Performance Contracts For Energy Savings ESCO Capacity Building Facilitate Access to Financing Equipment Financing & Leasing Government Public Buildings/ Facilities Public Buildings & Facilities Private Sector ESCOs Banks and Financial Institutions Equipment Suppliers & Vendors

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Examples of Super ESCOs Fedesco Belgium Hebei Fakai Company, China Energy Efficiency Services Limited, India Renewable Resources and Energy Efficiency (R2E2) Fund, Armenia HEP ESCO, Croatia New York Power Authority, USA 30

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Equity Funds

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Role of Equity Funds Provide equity capital for commercializing of new or innovative EE technologies Provide equity capital to ESCOs for project development and financing Participate in EE projects as equity partners Difficulties in implementation due to relatively high cost of due diligence Private Finance Assistance Network (PFAN) is actively pursuing EE equity financing

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Examples of Equity Funds Private Sector Equity Funds : FE Clean Energy Group Emerald Capital Milestone Holdings Public Sector Equity Funds Thailand ESCO Fund India Venture Capital Fund for Energy Efficiency Public-Private Partnerships GEEREF - Global Energy Efficiency & Renewable Energy Fund Nordic Climate Facility

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Lessons Learned

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Major Lessons Learned Public financing strategies are needed when commercial markets are immature, but should be designed to leverage commercial financing Technical assistance is a critical element of financing strategies Financing of EE projects in buildings (particularly in the public sector) has been challenging Capacity building of banks and financial institutions is important for leveraging commercial financing National development banks may have a role in financing EE, but need TA and capacity building Effective governance and management of publicly funded programs are critical to success Governments need to strengthen their own capacity to develop and evaluate energy efficiency financing programs.

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Moving from Public to Commercial Financing Public Financing Commercial Financing Market Maturity Dedicated Credit Lines Equity Funds Partial Credit or Risk Guarantees Energy Efficiency Funds Utility Financing Leveraging Commercial Financing through ESCOs Leveraging Commercial Financing through ESCOs Public-Private Partnerships

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Financing Mechanisms Financing Mechanisms Financing Barriers Financing Barriers Maturity of Financial Markets Maturity of Financial Markets Market Segments Market Segments Legislative/ Regulatory Framework Legislative/ Regulatory Framework Designing the Financing Mechanisms Selection of mechanisms depends on local conditions Different mechanisms may be needed for different sectors Combinations of mechanisms may be more effective International experience provides useful information, but must be adapted to local conditions

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Thank you Dilip R. Limaye, Consultant dlimaye@attglobal.net