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EUROCHAM SUSTAINABILITY COMMITTEE

NOV 2011

A systematic approach to opportunities and challenges in Southeast Asian Countries

MARKET POTENTIAL IN ENERGYEFFICIENCY IN SOUTHEAST ASIA

MARKET POTENTIAL IN ENERGY EFFICIENCY IN SOUTHEAST ASIA

02

SPECIAL THANKS

The Sustainability Committee of the European Chamber of Commerce, Singapore would like to thank the following stakeholders for their support and contributions to the report:

- Corporate members of the European Chamber of Commerce, Singapore- National Business Groups in Singapore- Corporate members of the National Business Groups in Singapore - Delegation of the European Union to Singapore- European Business Chamber of Commerce in Indonesia- EU-Malaysia Chamber of Commerce and Industry- European Chamber of Commerce in Vietnam- American Chamber of Commerce, Singapore- Singaporean Government Agencies

Disclaimer

None of the information within this document is to be copied, quoted, published, or divulged to others outside of your organisation. EuroCham does not assume any legal liability or responsibility for the completeness or accuracy of the information disclosed. Reference herein to any specific product, process or business does not constitute or imply its endorsement or recommendation. The views and opinions expressed in this report do not necessarily state or reflect those of the European Commission.

This paper is co-funded by the European Commission under the Industrialised Countries Instrument


03

CONTENTS

EXECUTIVE SUMMARY 6

INTRODUCTION 8

ENERGY SUPPLY AND DEMAND DYNAMICS IN SOUTHEAST ASIA 9

CURRENT ENERGY EFFICIENCY ASPIRATIONS AND OUTLOOK 13

SOUTHEAST ASIA: AN ATTRACTIVE AND GROWING MARKET 16FOR ENERGY EFFICIENCY TECHNOLOGY

BARRIERS TO THE DEVELOPMENT OF THE EE MARKET IN THE REGION 19

RECOMMENDATIONS TO UNLOCK EE MARKET POTENTIAL 24

LOOKING AHEAD 33

ABOUT THE SUSTAINABILITY COMMITTEE OF THE EUROPEAN CHAMBER OF COMMERCE 34

ABOUTTHE EUROPEAN CHAMBER OF COMMERCE, SINGAPORE 34

ABOUT ROLAND BERGER STRATEGY CONSULTANTS 35


04

LIST OF ABBREVIATIONS AND ACRONYMS

CAGR Compound Annual Growth Rate

EE Energy Efficiency

ESCO Energy Service Company

GWh Gigawatt-hour

HVAC Heating, ventilation and air-conditioning

IEA International Energy Agency

LNG Liquefied Natural Gas

koe Kilogrammes of oil equivalent

kWh Kilowatt-hour

mtoe Million tonnes of oil equivalent

TWh Terawatt-hour

$05p Constant 2005 international dollar (using purchasing power parity rates)


05

LIST OF FIGURES

Figure 1. Final energy consumption in selected ASEAN Countries ..................................................................................... 9

Figure 2. Power consumption projections by country by year ......................................................................................... 10

Figure 3. Current and pipelined power plant capacity as at August 2011 ........................................................................ 11

Figure 4. Energy intensity (energy consumed per GDP output) by country in 2000 and 2009 ........................................ 12

Figure 5. EE Targets and Policies in the Five Countries ..................................................................................................... 14

Figure 6. Comparison of energy intensity and regulatory effectiveness .......................................................................... 15

Figure 7. Growth in annual energy savings potential by country from 2010 to 2020 ...................................................... 16

Figure 8. Growth in annual electric energy consumption in the five countries from 2010 to 2020 ................................. 18

Figure 9. Barriers along the value chain (as identified by companies interviewed) ......................................................... 20

Figure 10. Possible ways for businesses to extend their product and service offerings ................................................... 31


06

EXECUTIVE SUMMARY

This study, conducted by the Sustainability Committee of the European Chamber of Commerce, Singapore in collaboration with Roland Berger Strategy Consultants, examines the market potential and business environment in the energy efficiency (EE) product and service industry in Southeast Asia. To narrow the focus of the study, five major countries were covered, namely Indonesia, Malaysia, Singapore, Thailand and Vietnam. Together, these five countries accounted for 86% of ASEAN’s total GDP in 20101 and thus serve as a good representative subset of the region as a whole. The main part of the study is based on interviews with a wide range of players and stakeholders in the EE eco-system including companies with high energy consumption, EE product and technology suppliers, energy service companies (ESCOs), government agencies and research institutes.

In light of the growing energy demand in Southeast Asia, energy efficiency programs would offer large energy saving potentials for the region and opens vast new business opportunities. Our analysis indicates that by 2020, Southeast Asia could achieve efficiency gains of between 12% and 30%, a projection that would translate into power savings ranging between 119 TWh and 297 TWh, or USD 15 billion and USD 43 billion. Nonetheless, the actual energy savings will ultimately depend on the commitment of both industry and governments.

Albeit increasing government effort and industry initiatives to improve energy efficiency in the region, there are still some major barriers to be addressed at multiple levels of the value chain to stimulate the diffusion of EE technologies. The following four key challenges have been identified:

1. Energy efficiency standards and policies are insufficient.

Where they exist, they are not stringently enforced, at the same time incentive application procedures are often cumbersome

2. Energy efficiency is still not seen as a top business priority by many companies.

EE related investments continue to be overshadowed by other investments deemed more critical to the company’s core business operation

3. Expectations mismatch and information asymmetries between stakeholders are pervasive within the industry.

Users perceive that suppliers do not commit enough resources to conduct a proper auditing process and are skeptical about energy saving potentials communicated by the suppliers. Suppliers and ESCOs complain about the low EE awareness of companies and the lack of commitment in investing in EE technologies by the users. Mistrust is created and spread across the industry.

4. There is a shortage of funding options to finance EE projects.

Financial institutions are still hesitant about financing EE projects due to concerns about the potential risks and unstable cash flows associated with investments in the EE sector

1. IMF 2010 nominal GDP estimates


07

While there is no “one-size-fits-all” panacea to fully unlock EE market potentials in the individual countries, this study proposes some concrete measures for both governments and businesses in the region to capture the EE market potentials.

Southeast Asian governments have to take decisive action in the coming few years in order to promote EE technologies. Five recommendations are proposed:

i. Provide an overarching policy framework by combining mandatory and voluntary policies and by strengthening the enforcement of EE-friendly policies

ii. Promote greater awareness of EE among users through campaigns aimed at communicating the potential benefits and latest developments of EE technologies

iii. Play an essential role as integrator of the value chain and establish funding mechanisms to jump-start EE financing, particularly in the short term

iv. Institutionalize standard-setting and enhance professionalism within the industry by creating proper accreditation and certification standards, as well as by publicizing more accurate information about EE product suppliers and ESCOs

v. Remove other barriers that distort markets such as energy subsidies

However, businesses should not only wait for governments to take action. Companies can play an equally important role in developing the EE industry in Southeast Asia. Our recommendations for businesses include:

i. Move towards an integrated value chain approach where suppliers extend their service portfolio to offer complete solutions ranging from auditing and consulting services to installation, maintenance and financing solutions

ii. Develop innovative financing vehicles for EE projects by collaborating with financial institutions and by developing expertise in EE project financing

iii. Increase awareness of EE and enhance professionalism of the industry from within. EE suppliers and ESCOs should adopt a more active role in promoting EE and in professionalizing the industry from within by setting standards and benchmarks. Multinationals should act as catalysts by bringing in the best practices from their experiences in other countries.


08

INTRODUCTION

Energy efficiency (EE) has become universally recognized as one of the most cost-effective ways of enhancing energy security, addressing climate change and promoting competitiveness in industry. Improving EE is perceived as the key strategy in making the world’s energy system more economically and environmentally sustainable. Potential improvements in EE exist in all economies across all sectors – at home, in factories, office buildings, airports, shopping malls, power plants, etc.

While the EE industry has flourished in some countries, it has had difficulty taking off in others. Despite government efforts to introduce EE-related targets and regulations, progress in the development of the EE industry in Southeast Asia remains patchy. Why have companies so far overlooked this low-hanging opportunity to reduce their costs and increase competitiveness? What are the barriers that impede the EE market in the region from fulfilling its full potential? What actions can the key stakeholders in the EE marketplace take to overcome these barriers? These are some of the questions which the study seeks to answer.

The study focuses on Singapore, Malaysia, Indonesia, Thailand and Vietnam. Taken together, these five countries accounted for 86% of ASEAN’s total GDP in 2010, and present a sizeable market for EE technologies and products.

The study seeks to estimate the size of the potential EE market in the region in terms of potential power savings from the user perspective.2 It also outlines in detail the barriers to the continuous development of the EE market based on the results of stakeholder interviews and surveys, and proposes solutions to address these barriers in order to unlock the full potential of the regional EE market.

The study is based on survey questionnaires and face-to-face interviews with a diverse portfolio of companies, including EE technology suppliers, ESCOs, and EE product users. These included both European and non-European companies, spanning many industries including chemicals, energy generation & distribution, food & beverage, logistics, pharmaceuticals, property management and steel manufacturing. Several government agencies, financial institutions and academic institutes were also interviewed to obtain their perspectives on the EE issue in Southeast Asia.

This paper can hopefully serve as a broad guide on a possible way forward for key stakeholders in the EE industry in the region. The study draws upon the deep knowledge base and broad practical experience of international experts from the Sustainability Committee of the European Chamber of Commerce, Roland Berger Strategy Consultants and the various companies, government agencies and research institutes that participated in the interviews.

2. The study focusses on estimating potential savings in terms of electric energy usage only and not total final energy consumption (i.e. it does not take into account energy used as feedstock for petrochemical and other heavy industries, nor fossil fuels consumed by the ground, air and sea transportation sectors).


09

ENERGY SUPPLY AND DEMAND DYNAMICS IN SOUTHEAST ASIA

Southeast Asia is a resource-rich region. Historically, the region as a whole has been a key exporter of oil, natural gas and coal. Indonesia was the world’s second largest coal exporter in 20103. Vietnam is home to the world’s largest gas pipeline in terms of combined gas and liquids flow4, while Malaysia was the world’s third largest LNG exporter in 2010.5 Countries in the region mainly rely on oil, natural gas and coal as their energy and power sources, with minor contributions from hydro-electric, renewable and geothermal sources.

In 2009, the IEA forecasted that Southeast Asia will become a key global energy market and future growth driver. The region’s steadily growing economy is expected to lead to its energy and power consumption almost doubling between 2010 and 2020. Over the next few decades, the region is expected to witness an exponential increase in energy demand, energy related investments and spending.6

Figure 1. Final energy consumption in selected ASEAN Countries (mtoe)7

900

800

700

600

500

400

300

200

100

0

CAGR: 4.9%

CAGR: 5%

Vietnam

Thailand

Indonesia

Malaysia

Singapore

2030

907

2020

563

2010

346

1,000

Energy consumed (mtoe)

Source: BP World Energy June 201

3. BP Statistical Review of World Energy 4. American Chamber of Commerce in Vietnam5. BP Statistical Review of World Energy 6. IEA World Energy Outlook – 20097. 3rd ASEAN Energy Outlook

10


Zooming in on the five countries covered in the study, power demand is expected to increase by CAGR 6.5% during the 2010-2020 period from a baseline scenario8 which does not consider efficiency savings. The rapid growth in energy consumption levels will mainly be driven by rapid industrial growth in industrializing countries such as Indonesia, Thailand and Vietnam.

Figure 2. Power consumption projections by country by year (TWh)9

153.9

CAGR: 6.4%

CAGR: 6.5%

2030E

1,848.0

451.2

418.7

667.6

243.1 67.5

2020E

989.7

205.9

260.5

314.0

158.2 51.2

2010

38.0 102.2 150.7

81.6

526.4

Vietnam Thailand Indonesia Malaysia Singapore

To accommodate the expected growth in energy and power demand, the countries are actively building up power plants. As of August 2011, there were a total of 58.8 Giga-Watts of power plant capacity that had either been announced for construction or are currently under construction, representing an additional 42.5% of current power plant capacity. Among them, Indonesia, Malaysia and Vietnam have the most ambitious power plant expansion plans. To complement their traditional fossil fuel energy sources, several countries have also actively been exploring alternative sources of fuel, including nuclear energy. Generally, energy policy in the region has been dominated by a supply-led mindset whereby the default response to energy shortfalls has been to build more power plants.

8. Historical correlations of final energy consumption and economic activity from 1980 to 2007 have been used to project the baseline scenario. This scenario does not consider energy efficiency savings and is based on the 3rd ASEAN Energy Outlook and on a Roland Berger analysis

9. 3rd ASEAN Energy Outlook, Roland Berger

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Figure 3. Current and pipelined power plant capacity as at August 2011 (in GWh)10

Singapore

13.8

11.2

2.7

Vietnam

30.9

18.5

12.4

Malaysia

35.6

23.2

12.4

Indonesia

55.4

34.7

20.7

Thailand

56.2

47.2

9.1 Current Capacity

Pipelined Capacity

Notwithstanding these ambitious energy expansion plans, rapid energy consumption growth in the region will put a strain on efforts to ensure reliable energy supply on a continuous basis. Already, some countries such as Indonesia are facing difficulties in ensuring the reliability of their power delivery and distribution networks, and score rather high on the System Average Interruption Frequency Index (or SAIFI), an index commonly used as a reliability indicator by electric power utilities. These countries will likely take time to improve the reach and effectiveness of their power distribution networks.11

As countries look to improve their energy situation on the supply side, they should not neglect the concurrent need to explore ways to use their energy more efficiently on the demand side, in order to ensure that they stay on a balanced and sustainable growth path. Indeed, improving energy efficiency should form a cornerstone of any country’s strategy to enhance its energy security. Although the energy intensity has been improved across all countries compared to 2000, there remains much room for improvement in Southeast Asia in this regard. Currently, Vietnam, Indonesia, Thailand and Malaysia consume far more energy per GDP output compared to developed countries such as the US, UK, Germany and Japan as illustrated in Figure 4. On average, the five South-east Asian countries consume 31% more energy per GDP output compared to the US, 86% more compared to Japan and Germany and 123% more compared to UK. In order to achieve higher levels of EE in the region, countries need to step up their efforts to promote more widespread application of EE products and services across all sectors.

10. UN data & Business Monitor International for current capacity; Bloomberg for pipelined capacity11. The SAIFI index measures the average number of interruptions that a customer would experience over a year

12


Figure 4. Energy intensity (energy consumed per GDP output) by country in 2000 and 200912

Source: Enerdata Yearbook 2010, Roland Berger desk research

1) koe: kilogramme of oil equivalent; $05p: 2005 price with the purchasing power parity

Malaysia

Thailand

Indonesia

Japan

USA

Vietnam

Singapore Germany

India

China

Poland

Singapore

Germany Japan

Poland

Year

Vietnam

Malaysia

Indonesia Thailand

USA

India

China

0.35

0.25

0.30

0.20

0.10

0.15

Unit: koe1) /$05p

2002 2004 2006 2008 2010 2000

12. Enerdata Yearbook 2010

13


CURRENT ENERGY EFFICIENCY ASPIRATIONS AND OUTLOOK

Southeast Asian countries have different levels of EE laws and initiatives in place, with each country having achieved varying degrees of success.

EE is not a totally new concept in Southeast Asia. Over the years, governments in the region have come to realize the importance of EE policies in helping to mitigate power shortage and reliability problems, in improving the economic performance of companies, and in enhancing their competitiveness in the global economy.

At the regional level, within ASEAN, several EE-related capacity building activities are currently being undertaken to promote cooperation and information sharing among ASEAN members on EE practices, in order to work towards achieving the aspirational goal of reducing regional energy intensity by at least 8% by 2015 (based on 2005 levels)13. The EE and Conservation Programme under the ASEAN Plan of Action for Energy Cooperation (APAEC) 2010-2015, adopted by the ASEAN Energy Ministers in Mandalay, Myanmar on 29 July 2009, aims to strengthen cooperation in EE and conservation through institutional capacity building in areas such as energy intensity assessment guidelines, energy auditing, increasing general EE awareness and increasing private sector involvement. While the focus has been predominantly on capacity building and information exchange, this is a promising start that will hopefully pave the way for more forward-looking region-wide measures such as the harmonization of energy testing procedures, EE standards and labeling.

Each of the Southeast Asian countries has also been introducing EE-related legislation and policies at a national level. Thailand was one of the first countries in the region to do so. Its National Energy Conservation Promotion Act enacted in 1992 forms the backbone of its EE improvement and energy conservation policy. Under this Act, the Energy Conservation Promotion Fund (ENCON Fund) was established to provide financial support to government agencies, state enterprises, NGOs, individuals, and businesses that wish to implement EE measures. Other governments in the region have also established various agencies to centralize the formulation and implementation of EE policies and programmes, in order to drive EE improvement in the country. These include the EE Programme Office (E2PO) in Singapore, the Energy Information Bureau (EIB) in Malaysia, the EE and Conservation Clearing House Indonesia (EECCHI) and the EE and Conservation Office (EE&CO) in Vietnam. Among the five countries covered in the study, Thailand and Singapore today are widely perceived by experts to have the most comprehensive policy and regulatory schemes in place. Figure 5 summarizes the EE-related targets which the five countries have set for themselves, as well as some of the policies which they have implemented in order to achieve these targets.

13. ASEAN Centre for Energy

14


Figure 5. EE targets and policies in the five countries

Country Targets Policies/Programmes

Singapore Reduce energy intensity by 20% by 2020

and by 35% by 2030 from the 2005 level

Sustainable Singapore Blueprint (incentives for EE investments in different industrial sectors) – 2009

Environmental Protection and Management Act (mandatory energy labeling for HVAC, etc) – 2008

Building Control Act (energy labeling for new buildings) – 2008

Malaysia Reduce final energy consumption in the

industrial, commercial and residential sectors by 10% from 2011 to 2030

Malaysian Industrial Energy Efficiency Improvement Programme (removing barriers to EE in industry) – 2002

Indonesia Reduce final energy consumption by

1% per year from the business-as-usual scenario

National Energy Conservation Master Programme (incentives to reduce energy by 1% p.a. until 2025) – 2005

Thailand Save 22% of total energy in 2030 relative

to the business-as-usual scenario Energy Conservation Act (promotions for conservation

investments in building sector) – 1992

Vietnam Reduce energy consumption by 3-5% by

2010 and between 5-8% by 2010-2015 Vietnam National Efficiency Programme (gradual savings of

3-10% national energy consumption by 2015) – 2006

EE laws and initiatives are expected to be ramped up in the coming years throughout the region. For instance, the Singapore government will be enacting an Energy Conservation Act from 2013 onwards which will introduce minimum energy management standards and mandatory energy management requirements for energy users that consume more than 15 GWh per annum in the industrial sector. In Malaysia, the Ministry of Energy, Green Technology & Water is currently developing a Master Plan to accelerate the development of EE for the 10th Malaysian Plan and beyond. In Thailand, the Mainstreaming Energy Efficiency Measures in Thai Municipalities Project will soon decentralize decision-making authority to individual municipalities to identify, design, finance and implement EE measures. Each country has also announced EE-related targets that they hope to achieve in the coming years.

Different levels of EE policies implemented within the region have given rise to varying scales and scopes of ESCO industries across the five countries. ESCOs play an important role in the EE marketplace as they serve as specialized vehicles that help companies realize energy savings potential. Thailand and Singapore currently have a number of active ESCOs. In contrast, the ESCO markets in Indonesia and Vietnam remain underdeveloped. Apart from differences in the overall size of the ESCO industries in the five countries, the ESCOs themselves vary in terms of their level of technical expertise (in the areas of financing and credit assessment, risk mitigation & management, sales, etc) to implement EE projects.

However, the existence of a regulatory framework by itself does not necessarily translate into higher levels of energy efficiency in a country (see Figure 6). While regulation does represent a powerful instrument to promote energy efficiency, its effectiveness ultimately depends on how well policies and standards are enforced by the relevant government agencies, and whether there are mechanisms in place to ensure strict compliance.

15


Figure 6. Comparison of energy intensity and regulatory effectiveness14

Energy consumedper GDP output

Vietnam

Thailand Indonesia

Malaysia

Singapore

Regulatorycapacity index1)

Strong regulatoryframework but roomfor improvement inEE levels

Room forimprovement in both regulatoryframework andEE levels

Strong regulatoryframework and highEE levels achieved

Source: Enerdata Yearbook 2010, ReExCapitalAsia

1) Scores by ReExCapitalAsia

The size of the bubble represents the size of country GDP in 2010

14. Energydata Yearbook 2010 and Frédéric Crampé, "EE in Southeast Asia", ReExCapitalAsia

16


SOUTHEAST ASIA: AN ATTRACTIVE AND GROWING MARKET FOR ENERGY EFFICIENCY TECHNOLOGY

Based on the projected growth in GDP and energy consumption levels in the coming years, as well as the growing attention from governments based on the EE issue in their respective countries, Southeast Asia will present an increasing number of market opportunities for suppliers of EE technologies, products and services.

The Southeast Asian energy efficiency market is still in its infancy. In order to gauge the attractiveness of this growing market, the study estimates the energy saving potentials that can be achieved in three different scenarios in terms of electric energy usage15. The projection is based on energy consumption growth as well as on a set of energy saving estimates, which resulted from an in-depth analysis made with industry experts and supported by previous case studies.

The outcome of the study indicates that by 2020, Southeast Asia could achieve efficiency gains of between 12% and 30%, a projection that would translate into power savings ranging between 119 TWh and 297 TWh, or USD 15 billion and USD 43 billion.

Figure 7. Growth in annual electric energy savings potential in the five countries from 2010 to 202016

Source: Roland Berger

86 58

2010 2020E

144

2015E 2020E 2010

9

2015E

Technology Intense Scenario (TIS) Policy Intense Scenario (PIS)Autonomous Progress Scenario (APS)

35%

25%

15%

Savings

2015E 2020E

25%

15%

10%

Each of the three scenarios is characterized by different adoption levels of EE technologies as well as different levels of energy subsides and energy prices.

15. This study does not look at savings in terms of total final energy consumption (i.e. it does not take into account energy used as feedstock for petrochemical and other heavy industries, nor fossil fuels consumed in the ground, air and sea transportation sectors)

16. Roland Berger analysis

17


1. The Autonomous Progress Scenario (APS) assumes that governments are able to achieve their current energy efficiency saving goals and that prices increase on average by 5%, as no major changes in energy subsidy levels are expected.

In this scenario Southeast Asia could save 58 TWh in 2015 and 119 TWh in 2020 by realizing saving rates of respectively 8% and 12%. In nominal terms, power savings could amount to USD 6 billion in 2015 and to USD 15 billion in 2020.

2. The Policy Intense Scenario (PIS) is driven by a number of new energy efficiency policy measures that would increase the utilization of EE technologies, decrease energy subsidies and therefore increase energy prices by an average of 6% per year (with the exception of Singapore where prices are assumed to increase at a yearly rate of 5% as energy prices are not subsidized)

In this scenario efficiency gains are projected to be 12% in 2015 and 20% in 2020, with potential power savings of respectively USD 9 billion (or 86 TWh) and USD 26 billion (or 198 TWh)

3. In the Technology Intense Scenario (TIS) a high diffusion of EE technological innovations is assumed, supported by important policy programs (aiming at government dedication to remove barriers to energy efficiency) and by yearly price increases of 7% (except for Singapore, where prices are assumed to increase constantly at a yearly average of 5%)

With efficiency gains projected to reach 20% in 2015 and 30% in 2020, the power saving potentials in this scenario could reach USD 15 billion (or 144 TWh) in 2015 and USD 43 billion (or 297 TWh) in 2020.

To summarize the impact of different scenarios, the following chart shows energy consumption growth in three scenarios compared to baseline scenario, where no energy saving is realized at all.

Figure 8. Potential growth in annual electric energy consumption in the five countries from 2010 to 202017 (in Twh)

575

633

661

719

CAGR 2010 - 2020

6.5%

5.2%

4.2%

2.8%

Base Case

Technology Intense Scenario

Policy Intense Scenario

Autonomous Progress Scenario

Other regions and countries, such as the European Union and the US, have already demonstrated the long term benefits of energy efficiency and continue to implement measures and develop technologies to further increase their energy savings.

17. Roland Berger analysis. Base Case refers to no energy efficiency measures in place

18


Energy savings in the European Union18

Energy efficiency has played a key role on the agenda of European policy makers for over two decades, improving the ability of European economies to produce more with less energy. In the period 1996-2007, the EU-27 energy efficiency index ODEX19 improved on average by 13 % with energy savings of about 160 Mtoe (1,860 TWh). In terms of sectors, the largest energy efficiency gains resulted from industry (1.9 %/year on average) followed by the transport sector (1%/year ) and by households (0.7%/year).

Major energy savings have been achieved in Poland and Romania where the energy efficiency index ODEX decreased by over 30% between 1991 and 2008. During the same period of time, the German efficiency index improved by 26% which is equivalent to an energy efficiency improvement of 1.4 %/year on average.

A study commissioned by the European Commission in 2009 revealed that further potentials for energy savings remain, even with the cautious approach taken in that study which used rather low energy price levels and took into account the duration of investment cycles. The study suggested additional potential savings until 2020 of between 15% and 29% with respect to the base scenario (which comprises autonomous progress and the effect of earlier policies), depending on the successful implementation of additional regulations and the development of new energy saving technologies.

Power savings in the U.S20

The United states has seen an increasing number of energy saving initiatives over the past two decades. A recent study released by the Electric Power Research Institute (EPRI), a non-profit research company, concluded that energy efficiency programs could realistically reduce the electricity consumption growth rate by 22% over the next two decades in the U.S. These savings could translate into 236 TWh if key policies are introduced and key barriers overcome by 2030.

Energy efficiency programs offer large energy saving potentials for the region and open vast new business opportunities. However the region will only benefit from these opportunities if governments are able to adopt and implement a range of innovative measures that unlock the full potential of energy efficiency.

The following two chapters will outline the major barriers currently impeding the development of the EE market and subsequently outline a range of recommendation, both to governments and to businesses, on how to overcome these barriers.

18. Source: “Study on the Energy Savings Potentials in EU Member States, Candidate Countries and EEA Countries Final Report” [2009]; Fraunhofer-Institute for Systems and Innovation Research, Institute of, Studies for the Integration of Systems ISIS (Rome, Italy), Technical University (Vienna, Austria)

19. ODEX: is an energy efficiency index utilized in the ODYSSEE-MURE project (which supports the Energy Europe Programme of the European Commission) to measure the energy efficiency progress by main sector (industry, transport, households) and for the whole economy (all final consumers)

20. Source: Assessment of Achievable Potential from Energy Efficiency and Demand Response Programs in the U.S. (2010–2030)[2009]; The Electronic Power Research Institute

19


BARRIERS TO THE DEVELOPMENT OF THE EE MARKET IN THE REGION

Despite the untapped energy cost savings opportunities in the region, the EE industry in Southeast Asia remains underdeveloped due to a number of barriers impeding the development of the EE market. During the interviews, companies – which included both users and suppliers of EE technologies and products – where asked to share their first-hand views and experiences on what some of these key barriers are.

The EE market, like all other industries, is a multi-stage value chain requiring close cooperation among a variety of stakeholders, namely users, suppliers, ESCOs, banks and governments. Interviewed companies were asked to describe the ideal roles that different stakeholders should play at each stage of the value chain to allow the EE market to operate effectively, from the initial phase of demand identification, to manufacture and sale of products, evaluation and investment phase, delivery and installation of products, and finally to long-term operations & maintenance. Companies were also asked to single out the areas in which these stakeholders do not fulfill their expected roles. The feedback gathered from these companies suggested that stakeholders in the EE marketplace are currently not fulfilling their expected roles in a satisfactory manner, resulting in disruptions at each stage of the value chain. A summary of the key findings is captured in Figure 9.

Figure 9. Key barriers along the EE value chain as identified by companies

VALUE CHAIN

1. Identification of demand

2. Manufacture and sale of products

3. Evaluation and Investment

4. Delivery and Installation

5. Long-term Operations and Maintenance

Overall, lack of an effective overarching and comprehensive EE policy framework Insufficient role as facilitator to integrate different stakeholders in the marketplace

Governments Insufficient provision of information channels to match users and suppliers

Insufficient financial support and assistance

Insufficient technical training provided

Lack of standards on energy auditing methods

Room for improvement in awareness-raising efforts

Suppliers/ESCOs

Difficulty in identifying demand

Lack of commitment to pro-vide sufficient resources to gauge savings potential

Difficulty in convincing clients of benefits of EE equipment

Lack of technical know-how to carry out product installation

Lack of integration into users‘ business lifecycle

Users EE often not regarded as a business priority

Lack of confidence that equipment can achieve projected savings

Difficulty in identifying customized products to suit specific needs

“Quick-win” investments favoured over EE projects with longer payback periods

Lack of awareness on energy efficiency

Lack of consistent investment plans in EE products and technologies

FinancialInstitutions

Lack of familiarity with EE financing

Lack of confidence in return on EE projects

20


The study singles out four key challenges that need to be addressed in EE markets in the region:

1. EE standards and policies are insufficient. Where they exist, they are not stringently enforced, while incentive application procedures are often cumbersome.

Several companies shared that government support in terms of policies and measures is not sufficient. While the regulatory framework in countries like Singapore and Thailand is comprehensive and supportive of companies’ adoption of EE technology, legislation and policy regimes in some other countries are still lacking and under-developed. Very often, ambitious energy saving targets announced are not followed up with well-designed policies and realistic milestones to achieve these goals.

A rule is only as good as how well it is enforced by the relevant government agency. Where administrative systems are weak, mandatory rules and regulations are not stringently enforced, resulting in low levels of compliance. A European chemicals manufacturer shared with us that while there were specific guidelines limiting the amount of energy companies could consume per unit of gross floor area in several countries in the region, such guidelines were often not adhered to.

In countries where more than one government agency oversees EE policies, these agencies do not coordinate their policies with one another well and issues are not clearly delineated among them, leading to confusion in the marketplace and inconsistency in policy implementation.

Some companies also reflected that where governments have introduced financial incentive schemes such as low-interest loans and subsidies for EE technologies, the application process can be time-consuming and tedious, deterring would-be applicants from signing up.

Finally, many EE product suppliers shared that energy subsidies in several countries in the region hid the true cost of energy and thus reduced the motivation for companies to make investments in EE.

“The government take an overly cautious approach when granting subsidies for EE technology. Applicants need to go through a complex process and the application procedures are tedious and take a longer time than stipulated by the website.”

- SEA-based food & beverage company

21


2. EE is still not seen as a top business priority by many companies.

A common problem encountered by EE product suppliers is that companies in the region generally lack an adequate level of EE consciousness and do not view EE as an agenda item important enough to be discussed within the boardroom. If discussed at all, EE would be a topic often relegated to meetings among mid-level managers and seldom among the top C-level suite.

EE initiatives are still not viewed as a leading way for firms to reduce their costs and to increase their competitiveness, especially in the case of companies where energy does not make up a large proportion of total input costs. In particular, the management of publicly listed companies often faces considerable pressure from their shareholders to ensure that every investment decision that they make generates quick returns. EE-related investments are often pushed to the bottom when annual budgets are prepared, and are overshadowed by other investments that are deemed more critical to the company’s core business operations such as gaining market share or international expansion.

This particular problem manifests itself more acutely in certain sectors. For example, in the industrial sector, manufacturing companies are reluctant to realize EE improvements if they involve core production processes, since such projects require them to give outsiders access to their proprietary knowledge. Industrial companies may also face the challenge of operational interruption, as replacing old equipment often requires a temporary shut-down of a portion of the company’s operations.

“We cannot hope to tap the market potential if mindsets are not changed. We need to put more programmes to increase general consciousness in the region of EE and its benefits. Fortunately, information sharing on best practices is quite common in the pharmaceutical sector in Singapore.”

- European pharmaceutical company

“Companies pay lip service to the need to improve EE levels. They see it as a way to enhance their Corporate Social Responsibility credentials, rather than as an opportunity to improve their bottom-line and heighten their competitiveness.”

– European metal manufacturer

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3. Expectations mismatch and information asymmetries between stakeholders are pervasive within the industry.

Based on the interviews, gaps in expectations between suppliers and users appear to be widespread across the region. As an illustration, several companies shared the view that suppliers or ESCOs do not commit sufficient resources to help their clients conduct a proper projection of potential energy savings. The reason for this, as shared by the suppliers and ESCOs, is that the users often ultimately do not purchase their products and services after the expensive auditing process is completed. An investment in a proper energy audit and saving assessment is too risky without true commitment from the client. At the same time, many clients are often unable to provide suppliers with thorough and accurate data about their historical energy consumption patterns required as a starting point for the auditing process. As a result, suppliers or ESCOs are only able to provide vague projections of energy savings, and users cannot be fully confident that ESCOs can deliver on the projected savings. Mistrust between users and suppliers is created and spread through the industry.

Many users also shared that they lack the information required to make sound decisions on the EE initiatives they are exploring. For example, some users find it difficult to distinguish between different ESCOs and suppliers, specifically to discern which ones are reliable and can be counted on to deliver the energy savings that they promised. Users also lack knowledge concerning which suppliers or ESCOs currently possess (or could develop) products suited to their specific needs. Instead, they are often left to scout the market and assemble the products and technologies on their own. Many companies reflected that in several countries in the region, there is currently no good platform or mechanism to bridge these information gaps and to match suppliers and users effectively.

“The main problem we are facing in the EE industry is that the main stakeholders – technology suppliers, users and financial institutions – are working in silos and not talking to each other, and no platform exists to facilitate dialogue.”

- European EE technology provider

“Many companies here are not willing to put in the money for energy service providers to conduct a proper and thorough energy auditing. You can’t expect a Mercedes if you are only willing to pay for a lower-end car!”

- European energy solutions provider

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4. There is a shortage of funding options to finance EE projects.

The shortage of capital to fund EE projects was one of the most commonly raised concerns during the interviews. Due to the large-scale retrofitting and installation required, such projects usually involve high upfront set-up costs and long payback periods which often exceed three years. As many high energy-consuming companies are not willing to commit their own internal funds for these reasons, ensuring that users have good access to funding from other sources is critical for the EE marketplace to function smoothly.

In contrast with more mature markets in Europe and the US where projects are commonly funded via third-party financing, far fewer external financial products exist in Southeast Asia which are specifically designed to serve the EE market. Companies shared that banks in the region tend to be much less ready to fund EE ventures because of their lack of experience and technical expertise dealing with EE markets. Due to the nature of financing schemes for EE projects, which depends on the potential energy saving resulted from investment in EE technology, the risks associated with such projects are often too high for financial institutions. Financing difficulties are more obvious for SMEs where EE project sizes are smaller and risks are perceived to be higher.

Smaller ESCOs, which have no choice but to approach banks for funding given that they have little capital of their own, face difficulty convincing banks of their credit worthiness. They often end up having their funding requests declined by banks or offered loans with unattractive interest rates.

“We need better financial incentives like grants and soft loans to incentivize users. High investment cost remains one of the most important barriers.”

- SEA-based energy service company

“Currently, the payback period for EE technology like PV cells is as good as infinity. It is unlikely that businesses will adopt the technology without substantial incentives or subsidies.”

- European infrastructure solutions provider

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RECOMMENDATIONS TO UNLOCK EE MARKET POTENTIAL

The companies interviewed proposed a broad range of measures that governments and businesses could take in order to address the barriers they identified. It is important to emphasize at the outset that there is no one-size-fits-all panacea to unlock the EE market potential in a country. While experiences and lessons learnt should be shared between countries, governments ultimately need to develop and implement a unique approach that best suits their specific circumstances. The proposed measures are divided into two categories: what governments can do and what steps businesses themselves can take.

Recommendations for governments

(i) Provide overarching policy framework through a combination of mandatory and voluntary policies

Companies called on governments in the region to play a more proactive role as a promoter of EE products and technologies, and as a market facilitator to link up the value chain in a more cohesive way. They would like to see governments step up their implementation and strengthen their enforcement of EE-friendly policies to support the industry. Indeed, a comprehensive raft of well-formulated EE programmes and policies has been a critical prerequisite for success in all developed EE industries across the globe. While regulations and standards are normally mandatory and legally oblige energy users to take certain actions, incentive-based policies implemented on a voluntary basis can also be effective in motivating companies to adopt EE-friendly measures.

Minimum energy performance standards and product labeling schemes have proven to be especially effective methods of transforming the market and slowing electricity demand growth in the residential and commercial building sectors. Standards and labeling are complementary policy tools: the former help ensure that the least-energy efficient products are removed from the market, while the latter encourage consumers and companies to purchase more efficient products. The effectiveness of such measures is well-documented. For instance, an IEA report published in 2007 highlighted a 40% drop in average energy consumption of refrigerators in Australia since the introduction of EE regulations in 1993, as well as the 60% drop in energy consumption of refrigerators and freezers in the US from 1980 to 2001, following the introduction of minimum energy performance standards in 1993.21 Such standards and labelling schemes can be applied not only to electrical appliances but also to the building sector: in Germany, it is now mandatory for property owners to provide an Energy Pass (i.e. a certificate showing how much energy the building consumes) on the request of those interested in purchasing or renting a dwelling.

21. Experience with Energy Efficiency Regulations for Electrical Equipment, Information paper, IEA (2007)

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Governments can also use regulations to ensure that companies, especially ones with high energy consumption levels, monitor and report on their energy use regularly and accurately. In Singapore, the government will be introducing an Energy Conservation Act which will come into force in 2013. The new legislation will set minimum energy management requirements for large industrial energy users. Users that consume more than the equivalent of 15 GWh of energy annually will be required to appoint an energy manager, as well as monitor and report their energy use to the National Environment Agency (NEA) and develop and submit their EE improvement plans. Several countries in the developed world have gone beyond requiring mandatory declaration of energy consumption levels to imposing strict limits on how much a building can consume per unit of gross floor area.

Finally, governments need to commit adequate resources to ensure compliance of mandatory regulations and increase the credibility of their policies. Ideally, they should establish dedicated and integrated monitoring and enforcement agencies with clear lines of responsibility, sufficient funding, credible penalties for rule violations, and clear procedures for dispute settlement.

Example of Dispute Resolution Mechanism: Bilateral Verification Procedure (BVP)

In Europe, the European Committee of Domestic Appliance Manufacturers (CECED) has set up an innovative protocol to aid in the correction of inaccurate declarations on product energy use labels. Under this system, an organization can challenge the declaration of a given energy label if it has good reason to. The “plaintiff” and “defendant” have two weeks to share documentation and reach an agreement. If no agreement is achieved, then there is a one-week period to select a certified laboratory to verify the declaration. The laboratory has four weeks to conduct testing, of which costs will be borne by the loser of the dispute.

(ii) Promote greater awareness of EE among users

Governments also need to take steps to increase the general knowledge base about EE in their countries, and to change persistent mindsets that EE is not a worthwhile investment to make by instilling a deeper consciousness among their people and companies of the need to use energy more efficiently. They can achieve this by organizing nation-wide or regional- and local-level seminars and workshops in collaboration with EE technology suppliers and ESCOs to showcase the latest EE technologies available in the market, as well as incorporating the subject of EE in school curricula to ensure that people are exposed to the idea from an early age.

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Example of EE Awareness Campaign: Initiative EnergieEffizienz in Germany

The Initiative EnergieEffizienz is a nationwide platform in Germany for the efficient use of electricity in all consumer sectors. It provides the end consumer, professionals and opinion makers with information and advice on the potential for energy efficiency that exists wherever electricity is used.

The Initiative was launched on 29 October 2002 by the German energy agency Dena and is organised as a public-private partnership project. It was supported by the three main associates of the electricity supply companies (VDEW, VRE, VKU) and sponsored by the Federal Ministry of Economics and Technology (BMWi) and by the Federal Environment Foundation (Bundesstiftung Umwelt).

The Initiative EnergieEffizienz provides comprehensive information and advice in campaigns and projects throughout Germany targeted at the end consumer in private households, in trade and industry and in the services sector. It informs electricity users and specialist target groups throughout the consumption sectors of the possibilities of efficient use of energy and its cost savings potential. Consumers and multipliers of all consumption sectors are being motivated to make intelligent purchasing and investment decisions and to optimise the usage of their electric and electronic appliances, devices and systems. Information and advice ranging from high impact consumer campaigns through energy advice for industrial companies to internet-based help in selecting energy efficient office equipment is provided under the motto "EnergieEffizienz lohnt sich" (energy efficiency pays off).

In 2007, the Initiative cooperated with more then 8,000 retail traders and electricians as well as many customer advice centres nationwide. The partners received a wide range of information material to support the consultancy of their customers at the point of sale. Other further sale activities included seminars and regional promotions, together with highly effective media and advertising campaigns.

Governments should also lead by example and launch demonstration projects to convince energy users across the residential, commercial building and industrial sectors of the real economic benefits of adopting EE technology. Such state-led demonstration projects have been central to the early-stage growth of EE markets in developed countries, and have played an important role in stimulating demand in the industry. For example, the 1995 Energy Saving Partnership in Germany whereby the municipality of Berlin bundled about 100 municipal buildings together and contracted several ESCOs to improve their EE, was the first major ESCO project in Germany and helped to trigger the rapid development of its home-based EE industry.

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Example of Demonstration Project: Punggol Eco-town in Singapore

In countries where the EE industry has flourished, governments have often played a catalytic role by launching pilot demonstration projects to showcase the benefits of adopting EE technology and to stimulate demand. Such projects are often collaborative efforts between the public and private sectors.

Singapore’s Punggol Eco-town is an example of such a demonstration project. The project is a collaboration between Japanese electronics giant Panasonic and government agencies - the Housing and Development Board (HDB), the Economic Development Board (EDB) and the Energy Market Authority (EMA). As a start, it aims to get 10 households in the block of HDB flats to participate, but may include more homes later. An integrated energy system will help families reduce their carbon footprint as well as their utilities bill. Energy-producing solar panels will be fitted on the block of flats that will help power lifts and lighting during the day. Excess electricity generated by the solar panels will be stored in batteries, which households can tap on for energy at night.

In the participating homes, Panasonic will help upgrade appliances like air-conditioning to more energy-efficient models at no cost to them. A new technology called the Home Energy Management Systems will be introduced to link the homes up to smart meters of the potential smart grid in future. Unlike a traditional grid which relies on the passive transmission of electricity from generators to consumers, a smart grid can integrate the actions and responses of connected parties such as the grid operator, utility retailers, businesses and consumers to reap efficiency-savings. The project will start this year and will run until 2013.

(iii) Play an essential role as integrator of the value chain and establish funding mechanisms to jump-start EE financing

Given the fragmented nature of the early-stage EE industry and the lack of scalability of individual EE projects, there needs to be an agency to intervene in the market to assemble small, disparate players together and to help them achieve a critical mass which they would otherwise have difficulty attaining on their own. The government is best-positioned to play this role as it has the authority to introduce policies to shape and regulate each stage of the value chain. One way it can do so is by creating a mechanism to help suppliers aggregate small EE projects into a diversified portfolio, in order to reduce their overall risk and make them more attractive for banks to finance.

The government can also smoothen out the value chain by serving as an intermediary between different stakeholders in the EE marketplace, such as between EE technology suppliers and financial institutions. Governments can do so by introducing financing support structures in collaboration with banks to catalyze the financing component of the EE value chain. The government’s role in the area of financial assistance is especially critical in Southeast Asia at a time where the EE industry is in its infancy, and when financial institutions still lack the familiarity and expertise to develop financial products for players in the EE market.

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A wide variety of financial instruments can be employed to catalyze the EE industry. Co-financing schemes such as grants and preferential loans administered by the government can help companies overcome the initial high set-up costs of adopting EE technology, while partial risk guarantee schemes can help them mitigate some of the risks involved and increase the pick-up rate of EE projects. In Brazil, the government has created a guarantee facility specifically targeted at EE projects called PROESCO, by which Brazil’s national development bank takes on up to 80% of the credit risk of a project, with the remaining 20% borne by the intermediary bank. In Hungary, widely known for its booming EE industry, a number of large-volume national grants, preferential loans and guarantee schemes are available for suppliers and ESCOs. In Singapore, the Building and Construction Authority (BCA) recently announced the launch of a pilot financing schemes in collaboration with several financial institutions to provide funding to property owners to retrofit their buildings to increase their energy efficiency. BCA will share the risk of any loan default with the banks. Other financial support mechanisms that may be used by governments include loan loss reserve funds, special purpose funds or interest credits, and EE revolving funds.

Example: EE Revolving Fund in Thailand

In a revolving fund, the institution earmarks a specific sum of money for a capital pool that is lent out to different groups applying for EE project funding. As the projects begin to recover operational cost-savings, those resources return to the capital pool and can be redeployed to fund new projects.

Much of the involvement of the Thai banking sector has been fostered through the government EE Revolving Fund started in 2003, a key tool for promoting commercial bank interest and expertise in EE lending. The fund has mobilized three tranches of government funds over three phases, each amounting to approximately USD 55 million. As a result of the programme, several Thai banks have established specific EE departments, in some cases with a team of in-house engineers for analyzing projects. According to a study conducted by the APEC Energy Working Group in 2005, every dollar lent from the Fund leverages approximately 60 cents in commercial bank lending.

The fund operates by providing capital at no cost to the Thai banks which then provide energy-efficiency project proponents with loans at low cost. The loan principals repaid to the fund by banks become available for recycling into new loans to other banks, hence the term ’revolving fund’. Once the system is at "cruising speed", no new capital needs to be injected.

Due to growing pressure on their budgets from other competing priorities, governments in Southeast Asia may not always be well-placed to play the co-financier task. In such cases, international agencies could step in to provide financial support for EE initiatives in a country. Indeed, a critical factor that has aided the growth of the EE industry in China has been the substantial amount of funding pumped in by multilateral institutions such as World Bank, ADB and the UN agencies to kickstart the infant ESCO industry in the 1990s. Aside from providing financing support, the World Bank was also instrumental in helping to set up China’s Energy Management Association which today serves to promote the interests of the ESCO industry.

It should be emphasized that financial support from governments, while important in the early phase, should not be viewed as a long-term solution. What is more critical to ensure a vibrant and self-sustaining EE eco-system is to nurture a mature local banking community that understands the business opportunities presented by EE projects and proactively invests in them. This transition from public funding to commercial financing is challenging and needs to be managed carefully.

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(iv) Institutionalize standard-setting and enhance professionalism within the industry

Governments need to publicize more accurate information about EE product suppliers and ESCOs and establish a proper accreditation and certification system to help users distinguish between them. This will enhance professionalism within the EE industry and reduce the incidence of false claims and promises. Among the five countries, Singapore, Thailand and Malaysia currently have systems to accredit and certify ESCOs. Possible criteria to be used for accreditation purposes could include the breadth of services offered, whether they have a proven financing and project management track record, and the strength of their monitoring & verification capabilities. Once such accreditation systems are established, it is important that accredited companies are regularly rechecked to ensure that their standards are maintained and that the system does not lose credibility. Looking forward, ASEAN could also consider developing criteria and a mechanism for a pan-ASEAN accreditation system to increase competitivity in the regional ESCO market.

Another method to address information gaps in the industry would be for the energy regulatory agencies to mandate the standardization of key provisions within energy performance contracts, including savings calculations metholodologies and baseline consumptions, payback periods and minimum guaranteed savings for the client, and dispute resolution mechanisms. Although most ESCOs understandably prefer not to be bound by standard contracts, standardizing some of the key provisions in these contracts would go a long way in improving client and financial institution understanding of how ESCOs operate, as well as alleviating their concerns about their reliability.

Finally, relevant government agencies should also work closely with energy service providers to harmonize measurement methodologies and to standardize data collection and assessment guidelines where appropriate. These are important steps to help attract loan underwriters and investors, and to reduce the perceived risks associated with EE investment opportunities.

(v) Remove other market barriers

Even as companies wish to see governments introduce more EE-friendly legislation, they also hope to see governments phase out policies which distort the market, in particular subsidies that a number of countries currently have in place to reduce the price of energy in their countries. Such energy price subsidies reduce the incentive for consumers and companies to acquire EE equipment, since energy becomes a smaller proportion of total input costs. In order to allow market forces and price signals to function freely and incentivize users to reduce their energy consumption, governments in Southeast Asia must continue to work towards phasing out subsidies that hide the true cost of energy.

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Recommendations for businesses

The existing literature on EE has predominantly focused on what policies governments can implement to give a boost to the EE industry. However, companies need not wait for governments to make the first move. There are concrete steps which businesses can take on their own to help the EE industry develop.

(i) Move towards an integrated value chain approach

To break the current silos along the EE technology value chain, the suppliers and ESCOs need to move from product sales to holistic solutions. Once the users’ energy savings needs are identified, they should try to avoid being circumscribed by their existing product portfolio, but instead explore ways to tailor their energy solutions to suit clients’ needs. They could consider undertaking a wider variety of energy management services that might make them more attractive as total service providers to clients, either by themselves if they have the internal capacity or alternatively in collaboration with external parties. Figure 10 shows some ways to achieve this. Some options include offering broader packages of sustainable energy options (including renewables and biofuels), or undertaking property and facility management services for the client. Dalkia, Europe’s leading provider of energy services to local authorities and businesses, already does this in some developing countries including Brazil. In markets where users prefer to lease rather than purchase EE equipment, ESCOs could serve as equipment leasing organizations.

Figure 10: Possible ways for businesses to extend their product and service offerings

1. Identification of demand

2. Manufacture and sale of products

3. Evaluation and Investment

4. Delivery and Installation

5. Long-term Operations and Maintenance

Core activity

Undertake more auditing and energy consulting services for clients as the trusted partners to provide solutions

Provide customized solutions for clients

Build up own internal financing capabilities

Work closely with financial institutions to build up their energy financing capabilities

Find aggregators in the market which can bundle individual projects to make funding more attractive to banks

Improve and upgrade existing technical skills and capabilities

Conduct regular technical reviews to optimize solutions on a continuous basis

Establish long-term relationships with customers to understand clients‘ needs in their operations

Such adaptations to prevailing market trends occur not only in developing markets, but also in more advanced EE industries in other parts of the world. In the US for instance, ESCOs are increasingly selling more holistic energy solutions to their clients, and are extending their service portfolio to include more value-added services like development, design and construction of complex facility projects as well as risk management products.

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(ii) Develop innovative financing vehicles for EE projects

Banks and other financial institutions in the region need to be educated and convinced about the real economic benefits presented by EE projects. Here, suppliers and ESCOs can play a role by meeting regularly with the banking community, building up their technical expertise in energy efficiency project financing. In the meantime, while banks build up their financing capacity, larger ESCOs should be ready to finance projects internally using their own equity or collaborate with external partners to develop innovative financing schemes to encourage their clients to invest in EE equipment.

Example: Siemens/Carbon Trust Energy Efficiency Financing Schemes

Restricted access to credit from traditional lenders such as banks is forcing manufacturers to come up with innovative finance schemes to encourage their customers to invest in EE equipment.

Siemens has joined forces with the Carbon Trust to provide £550 million of green equipment financing over the next three years for the purchase of EE equipment such as biomass heating. Siemens Financial Services will provide the funding for the Energy Efficiency Financing schemes, while the not-for-profit Carbon Trust will independently assess the carbon, energy and cost savings of any investment project, enabling engineering firms to accurately establish payback periods.

These schemes are available for a wide variety of projects including building technologies such as pipe insulation and air conditioning, and industrial process technologies, including compressed air, refrigeration and specialized production equipment. The schemes may also be used to fund combined projects, such as replacing heating and lighting. Financing is available for £1,000 upwards, with no set upper limit. However, the schemes do include lending costs in the form of annual percentage rate (APR) interest.

The financial community often does not recognize individual EE projects as attractive investment opportunities due to their fragmented nature as well as the high level of perceived risks associated with them. Project bundling can be an effective way to address these challenges and render smaller scale projects more attractive for financiers. Bundling can be geographical (i.e. buildings located close to one another), technological (i.e. focused on industrial clusters with common technological requirements) or industrial (i.e. focused on certain types of industries). In models used in more developed EE markets, a third-party intermediary such as an investment fund establishes a contractual structure to aggregate multiple EE projects into a single portfolio that is funded through a mixture of equity and debt. ESCOs can also act on their own to pool their individual projects together in order to reduce their overall risk. This is the case in China where larger ESCOs act as project aggregators that reduce risk borne by the financiers by diversifying project portfolios.

Such project aggregation models have proven successful in some countries. In the US, Metrus Energy and Green Campus Partners (GCP), companies that serve large industrial and commercial facilities, are two prominent firms that employ this structure effectively. GCP has also pioneered an approach for bundling efficiency projects into loans for resale, an innovation that could help prompt the development of secondary markets for EE assets. However, there has yet to emerge a robust group of project aggregators in the EE marketplace in Southeast Asia.

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(iii) Increase awareness of EE and enhance professionalism of the industry from within

Along with governments, companies should also find creative ways to disseminate information about EE and convince users of the business case of adopting EE technology more consistently. Businesses should initiate collaboration with governments to organize conferences and industry events to share best practices and exchange positive experiences. Such conferences should also serve as a platform to bring in international practitioners from more advanced EE markets to share their knowledge. Multinational companies are well positioned to increase energy efficiency awareness and act as catalysts for the EE market through bringing in the best practices from their experiences in other countries. By applying the same guidelines for energy utilization and ensuring that best practices are adopted across their international operations, these companies can set the standard in EE for their industries and act as role models in South-east Asia. GlaxoSmithKline is one example: by leveraging the EE expertise it amassed in Europe to install sophisticated energy monitoring and targeting systems in its manufacturing facility in Singapore, as well as by establishing a cross-functional team in Singapore to drive energy management issues since 2002, the company has managed to exceed its target of reducing energy usage by 5% in absolute terms since 2008 every year, and was awarded the inaugural Energy Efficiency National Partnership Award from the Singapore government earlier this year.

In addition, ESCOs should seek to drive efforts to professionalize their industry on a national level from within by setting standards and benchmarking. In countries where the EE industry has taken off successfully, the existence of an active ESCO association often proves to be a critical factor. Such associations can increase the credibility of ESCOs, build up trust among users and help serve as an “advertising agent” of the opportunities that ESCOs offer.

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LOOKING AHEAD

The five Southeast Asian countries covered in the study present considerable market opportunities for EE product and service providers, and ESCOs. In order to fully realize these opportunities, a number of barriers need to be addressed at each stage of the EE value chain, including inadequate regulatory frameworks, lack of awareness and priority for energy efficiency, mismatch in expectations between users and suppliers, and shortage of available capital to fund EE projects.

Companies interviewed as a part of this study call on all the key stakeholders in the EE industry to play a proactive role in surmounting these barriers. Most importantly, governments need to play a central role as a promoter of EE products and technologies, as well as a market facilitator to integrate different players in the value chain. Governments are expected to provide the overarching policy framework to support the industry through a combination of mandatory and voluntary policies. They should promote greater EE awareness among consumers and companies by effective campaign and education, as well as the launch of nation-wide, regional and local demonstration projects to showcase the benefits of adopting EE technology. They also need to introduce financial support schemes to catalyze the EE ecosystem in its infancy phase. Finally, they should bridge information asymmetries in the market through standard setting, such as establishing proper energy auditing system, and a proper ESCO accreditation and certification system.

On their end, EE product and service suppliers and ESCOs need to explore ways to transcend the current product-centric toward a more service-driven business model, by extending their portfolio to include services most needed by their clients. They should also continue to work closely with governments and the banking community to make the business case for EE technologies, to increase awareness and build up technical expertise.

While this study has broadly examined the EE industries in the five Southeast Asian countries from a big-picture level, it has been beyond its scope to delve deeper into the unique dynamics of the EE market in each country. This report recommends that further research be conducted on this to identify barriers in specific sectors in each individual country, and to propose detailed sector-specific measures that governments and businesses can take to develop the relevant EE product and technology markets.

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ABOUT THE SUSTAINABILITY COMMITTEE OF THE EUROPEAN CHAMBER OF COMMERCE

The Sustainability Committee aims to increase awareness of sustainability issues within the European business community and to develop links with Singaporean businesses and government institutions. The Committee provides a European level platform for firms to exchange best practices, develop partnerships and identify issues to be addressed at policy level. The Committee also seeks to create a European brand of excellence in sustainability by combining the best that European companies have to offer. While individual countries have prowess in certain areas, Europe as a whole is a world leader in sustainable business practices and technology implementation.

Contact:Mr. Matteo VezzosiEuropean Chamber of Commerce (Singapore)350 Orchard Road #19-06 Shaw House Singapore 238868Tel: +65 6836 6681Fax: +65 6737 3660email: [email protected]

ABOUT THE EUROPEAN CHAMBER OF COMMERCE, SINGAPORE

The European Chamber of Commerce in Singapore, known as EuroCham, has the mission to represent the common interests of the European Business Community in promoting bilateral trade, services and investments between Europe and Singapore and Asia-Pacific.

EuroCham is a non-profit membership fee based organization with a membership composed of direct corporate members as well as the European National Business Groups in Singapore.

EuroCham gives its members access to the European Business Community in Singapore and provides a unique information and exchange forum and a lobbying channel to Singaporean, ASEAN and European political & economic circles. EuroCham is the sole European representative at the Singapore Business Federation (SBF) council.

For the study, please contact:Matteo VezzosiProject Manager, [email protected]

General contact:European Chamber of Commerce (Singapore) 350 Orchard Road #19-06 Shaw House Singapore 238868 Tel: +65 6836 6681 Fax: +65 6737 3660email: [email protected]

For more information www.eurocham.org.sg

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ABOUT ROLAND BERGER STRATEGY CONSULTANTS

Roland Berger Strategy Consultants, founded in 1967, is one of the world’s leading strategy consultancies. With roughly 2,000 employees working in 43 offices in 31 countries worldwide, we have successful operations in all major international markets. The strategy consultancy is an independent partnership exclusively owned by about 200 Partners.

Roland Berger supports leading international corporations, non-profit organizations and public institutions in all management issues - ranging from strategic alignment and introducing new business models and processes to organizational structures and IT strategy. Roland Berger is based on global Competence Centers that are organized along functional and industry lines. This allows us to offer tailor-made solutions devised by our interdisciplinary teams of experts drawn from different Competence Centers.

At Roland Berger we develop customized, creative strategies together with our clients. Providing support in the implementation phase is particularly important to us. In so doing, we create value for our clients. That’s why our approach is based on the entrepreneurial character and individuality of our consultants – “It’s character that creates impact”. All employees at Roland Berger Strategy Consultants strive to adhere to our three core values: excellence, entrepreneurship and partnership.

Roland Berger Strategy Consultants is committed to three core values:

Entre preneurship

Excel lence

Partnership

We are a network of entrepreneurs who provide pragmatic and practical solutions.

We build trust-based relationships in our company and with our clients, and we are committed to constructive teamwork.

We achieve excellent results and develop global best practices for measurable and sustainable success.

For the study, please contact:Jihong HePrincipalRoland BergerStrategy Consultants Pte [email protected]: +65 6622 5764Fax: +65 6622 5761www.rolandberger.com

General Contacts:Singapore office:Roland BergerStrategy Consultants Pte LtdOne Raffles Quay, North Tower,#25-00 Singapore 048583Tel: +65 6622 5760Fax: +65 6622 5761www.rolandberger.com

Malaysia office:Roland BergerStrategy Consultants Sdn Bhd Level 39, Menara Standard Chartered,30 Jalan Sultan Ismail50250 Kuala Lumpur, MalaysiaTel: +60 3 2203 8600Fax: +60 3 2117 5151www.rolandberger.com

Contact:European Chamber of Commerce (Singapore)350 Orchard Road#19-06 Shaw HouseSingapore 238868Tel: +65 6836 6681Fax: +65 6737 3660email: [email protected] For more information www.eurocham.org.sg

EUROPEAN CHAMBER OF COMMERCE, SINGAPORE

The European Chamber of Commerce in Singapore, known as EuroCham, has the mission to represent the common interests of the European Business Community in promoting bilateral trade, services and investments between Europe and Singapore and Asia-Pacific. EuroCham is a non-profit membership fee based organization with a membership composed of direct corporate members as well as the European National Business Groups in Singapore. EuroCham gives its members access to the European Business Community in Singapore and provides a unique information and exchange forum and a lobbying channel to Singaporean, ASEAN and European political & economic circles. EuroCham is the sole European representative at the Singapore Business Federation (SBF) council.

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