Energy Efficiency Financing: Which Financial Instruments Can Best Leverage

Energy Efficiency Financing

Dr. Xiaodong Wang Senior Energy Specialist

EASIN, World BankSDN Week, Energy Day

February 23, 2012

Structure of the Presentation

• Conductive policies are essential driver for catalyzing energy efficiency investments

• When to use public funds: overcome market barriers and risk perception

• How to select financing instruments: tailored to market barriers, segments, and local context

• How to most effectively implement financing instruments: lessons learned

• Conclusion

Conducive Policies: Driver for Catalyzing Private Investments in Energy Efficiency

• Pricing instruments: Suppress energy demand to increase market uptake for EE, but require strong political will– Energy pricing reform: removal of fossil fuel subsidies, time of use

tariff– Fuel and carbon taxes

• Regulations: Mandate EE to increase market demand for EE, but weak enforcement is a concern

– Targets: energy intensity reduction or energy savings– Standards and codes: appliance standards, building codes, industry

performance targets, fuel economy standards– EE Portfolio Standards, Obligations and White Certificates Trading

• Financial incentives: Overcome high upfront cost barrier, but require funding coming from taxpayers or ratepayers– Financial incentives: investment subsidies, tax credit, consumer rebate– Acquisition of EE resources: Standard Offer

When to Use Public Funds: Overcome Market Barriers and Risk Perception

• High upfront costs• Credit risks: Most banks rely on credit rating

criteria, while many EE developers and inefficient end-users are not creditworthy

• Performance risks: Lenders are not sure the expected energy savings will be realized, and measurement and verification is not an easy task

• Banks lack expertise and interest in EE financing• Small deals with high transaction costs

How to Select EE Financing Instruments: Tailored to Market Barriers, Segments, and Local Context

• Credit lines: Effective at increasing banks’ capacity and confidence in EE investments to large and medium sized clients and projects; BUT supporting SME investments is a challenge

• Partial risk guarantees: Effective at increasing banks’ confidence in the clients at margins of risk ratings such as ESCOs; BUT only reduce banks’ perceived risks not real risks

• Dedicated EE Funds: Effective at increasing access to EE financing for SMEs and public sector projects; BUT leverage, sustainability and scale-up key challenges

• Utility EE/DSM Funds: Effective at increasing electricity efficiency at end-user level; BUT they need strong regulatory incentives

• ESCO Financing: Effective at aggregating small deals; BUT not a magic bullet. Super-ESCO emerged as a viable model for government facilities

• Equity Funds: Effective at supporting SMEs, ESCOs, new EE technologies, and early-stage technology firms

• Consumer financing: Effective at helping consumers overcome high upfront cost barrier, BUT regulatory system needs to allow utility on-bill financing

Which EE Financing Instruments Maximize Financial Leverage ?

• Engaging domestic banks through credit lines and guarantees: high leverage of public funds and good prospects of sustainability

• Mezzanine and equity funds: High leverage of public funds, particularly double leverage from Fund-of-Funds

• Consumer financing: High leverage of public funds to provide low-interest rate, long-term consumer financing through utilities or financial institutions

• Technical Assistance (TA): critical with high pay-off, particularly when packaged with public financing instruments

Program Objectives Determine the Market Segments

Program Objectives:• Maximize greenhouse gas emission reductions: Most cost

effective to target at large and medium enterprises • Increase access to financing: Real value added to target at

SMEs

Financing SMEs remains the toughest market segment• SMEs have their own unique constraints regardless of sector

(i.e., lack of accounting, collateral, etc.)• Aggregating small-scale EE/RE projects is feasible: market

aggregation, ESCOs/vendors, Super-ESCO• Targeted subsidies to SMEs can play a catalytic role

How to Most Effectively ImplementEE Financing Instruments: Lessons Learned

• Technical Assistance is critical and should be provided to:– Financial institutions – EE project developers – EE policy makers and financial regulators

• Generating sufficient deal flows has been a major challenge: – Need to better match banks’ financing criteria with the targeted

market segments who most in need of financing– Need to expand beyond banks’ “comfort zones”: clients, sectors,

technologies– Need to motivate banks’ internal organization for project

origination• Governance and management of publicly funded programs is

critical to success. Some key factors:– Careful selection of managers of financing facilities– Ensuring their independence

Policy Tools Tailored to Technology Maturity and CostsFinancing Instruments Tailored to Market Segments and Barriers

EE Market Segments Traditional bank clients

(large/medium)

Borderline (mitigate perceived risks)

SMEs & Public Sector

SMEs, ESCOs, clean energy start-ups

RE Barriers

Long-term tenure

Mitigate technology risk s/extend tenure

SMEs/immature financial market

SMEs and early-stage technology firms

New Tech Risks

Concessional loan

Technology risk guarantee

Venture capital

Credit Line

Guarantee

Dedicated Fund

Equity Fund

Policy Tools •Regulations•Financial incentives•Institutional reform

•Feed-in Tariffs, Renewable Portfolio Standards, or Tendering•Tax on fossil fuel

•Support for R&D•Financing incremental cost •Transfer technologies

Abatement cost

Abatement potential

Energy Efficiency(Market Barriers)

Renewable Energy(Cost Barriers)

New Technologies(Cost & Tech Barriers)

0Energy pricing reforms

Financing Instruments