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SHINING THE LIGHT ON ENERGY EFFICIENCYACHIEVING HIGHER LEVELS OF ENERGY EFFICIENCY,INVESTING IN SOLUTIONS AND FINANCING THE ENERGY EFFICIENCY SECTOR
PUBLIC PAPER 01
Energy effi ciency – broadly defi ned as a way of managing energy usage so that more can be done with less – represents about 40 % of the greenhouse gas reduction potential that is globally required by 2050 to prevent the earth’s temperature from increasing by more than 2 °C.1
“As the saying goes, the Stone Age did not end because we ran out of stones; we transitioned to better solutions. The same opportunity lies be-fore us with energy effi ciency and clean energy.”
Steven Chu, Frmr US Secretary of Energy
Energy effi ciency is an extremely attractive area of upfront investment that pays for itself over time, while providing the added benefi ts of reducing the cost of energy and increasing the energy productivity of the economy. It is therefore not surprising that many governments have emphasized energy effi ciency opportu-nities during the current economic downturn as a way to stimulate their faltering economies. By focusing funding on energy-effi cient initiatives, governments hope to not only save or create jobs – the primary goal of spending – but to also reduce domestic dependence on foreign energy supplies and reduce carbon emissions associated with energy use.
Interest in energy effi ciency is nothing new. Companies, governments and con-sumer groups in developed and developing markets have sought for years to pow-er more economic activity and residential demand with less energy. While barriers across sectors – such as technology, fi nancing and government regulation – have hampered many projects and initiatives, there have also been clear successes, such as the gradual adoption of energy-saving appliances in some markets. In re-cent years, increased awareness of these pockets of success – coupled with grow-ing national competition for energy supplies, environmental concerns, increased pressure from growing demand on an aging energy infrastructure, and advances
INTRODUCTION
Interest in energy effi ciency is nothing new. Companies, governments and consumer groups in developed and developing markets have sought for years to power more ecnomic activity with less energy.
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in related technologies – have prompted renewed interest in energy effi ciency among the public and private sectors. Signifi cant injections of public funds in energy effi ciency in recent years, including public-private partnerships, have only added to the momentum.
This paper looks at the energy effi ciency opportunity and how to capture it in emerging markets. There is a compelling opportunity to substantially lower energy costs. Latin America could, for instance, achieve a reduction in energy consumption of 20–25 % over the next decade if comprehensive efforts are put in place to overcome barriers across the economy.2 Globally, the effi ciency potential is highly fragmented across more than a hundred million residential, commercial and industrial buildings, and millions of devices. Capturing the full potential will require global investments of around USD 500 billion per year for the next decade3
– and a holistic approach involving information and education, incentives, and new codes and standards. Public as well as private sector engagement will be needed. Private sector fi nance, in particular, will be an essential long-term conduit for the continued expansion and evolution of the effi ciency sector in the developing world.
1 International Energy Agency, ‘World Energy Outlook Special Report: Energy and Climate Change,’ 20152 Latin American Energy Organization, as quoted by Sandra Guzman in ‘Energy effi ciency in Latin America, the missing piece,’
2015. Available online: http://energytransition.de / 2015 / 02 / energy-effi ciency-in-latin-america-the-missing-piece / 3 International Energy Agency, ‘World Energy Outlook Special Report: Energy and Climate Change,’ 2015.
Capturing the global energy effi ciency opportunity will require global invest-ments of around USD 500 billion per year for the next decade.
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Signifi cant gains await developing countries if they increase their energy productivity: they could slow the growth of their energy demand by more than half over the next 12 years – to 1.4 % a year, from 3.4 % at present – which would leave demand around 25 % lower in 2020 than it would have been. The scale of this reduction exceeds total energy consumption in China today.4 Improvements in productivity on the back of more effi cient energy use are also the foremost drivers of long-term economic develop-ment, leading, eventually to improved livelihoods for many.
4 McKinsey & Company, ‘Energy Effi ciency: A compelling global resource,’ 2010.5 United Nations Population Fund, ‘Annual Report 2011: Delivering Results in a World of 7 Billion,’ 2012.6 Ibid.
ENERGY EFFICIENCY: UNLOCKING THE DEVELOPING MARKET OPPORTUNITY
GOOD TO KNOW
Between 2008 and 2035, non-OECD countries are expected to account for 83 % of global energy demand. China, India and Brazil are expected to account for 55 % of overall demand growth.
The three basic drivers of energy demand are economic growth, population growth and technological innovation. Longer-term trends in economic growth for a particular economy depend on underlying demographic and productivity trends, which in turn refl ect population growth, labor force participation, productivity growth, national savings rates and capital accumulation. It is therefore unsurpri-sing that emerging economies are expected to account for a major part of the growth in energy demand in the coming decades: as they move from poverty to middle income status, there is a fundamental shift from agriculture to more en-ergy-intensive commercial enterprises. For the fi rst time in history, the majority of the world’s population has become urbanized, with the largest urban centers emerging in developing regions where energy costs remain a serious constraint. Outside urban areas access to energy sources remains a challenge. By 2050, the global population is expected to increase to 9.3 billion. Virtually all of this project-ed growth will occur in the developing world.5 Between 2008 and 2035, non-Organi-zation for Economic Cooperation and Development (OECD) countries are expected to account for 83 % of energy demand; together, China, India, and Brazil are expect-ed to account for 55 % of overall demand growth.6 Non-OECD demand growth in the rest of the world accounts for 28 % of the world total.
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4 McKinsey & Company, ‘Energy Effi ciency: A compelling global resource,’ 2010.5 United Nations Population Fund, ‘Annual Report 2011: Delivering Results in a World of 7 Billion,’ 2012.6 Ibid.
7 Capital Economics, ‘Zambia: Problems under the hood.’ Africa Economics Update, 11 September 2015. 8 Henning, Hans-Martin. ‘What will the energy transformation cost? Pathways for transforming the German Energy System by 2050.’
Fraunhofer-Institut für Solare Energiesysteme ISE, Press Release 28 / 15, 15 December 2015.
Year
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adri
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n B
tu
1990 2000 2010 2015 2020 2030 2040
0
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400
500
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non-OECD countries OECD countries
Figure 1 Source: International Energy Outlook, 2014
Projected world energy consumption
Energy demand on this scale will put increasing pressure on global energy re-sources and distribution networks. This is unsustainable without a fundamental transformation of the global energy system; the dominant fossil energy resources today, especially oil, are concentrated in only a few regions. Many governments therefore see energy security – i. e. potential disruptions in supply – as a potential threat to their economic well-being. In Zambia and South Africa, for example, the lack of an adequate energy supply has in recent years resulted in rolling power outages, with costly effects for the mining industry in both countries. In August 2015, Zambia’s copper mining industry, which consumes more than half of the country’s total electricity output, agreed to cut demand by 30 %. On the back of these disruptions, copper output is expected to fall by 15 % in 2016.7 The kind of energy transformations needed to meet growing demand are costly. Various mod-els estimate that it could cost USD 1100 billion through 2050 in developed markets, with even higher costs in less developed regions.8 Before systems are transformed, it is therefore imperative to maintain demand in a sustainable and effi cient manner – i. e. to do more with less.
“We do not yet fully understand the consequences of risingpopulations and increasing energy consumption on the interwoven fabric of atmosphere, water, land and life.”
Martin Rees, British astrophysicist
The current scale of energy demand is putting increasing pressure on global energy resources and distribution net-works. This is unsustainable without a fundamental transformation of the global energy system.
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One very simple example of energy-effi cient investments is Ghana’s appliance labelling program under which appliances are labelled to indicate to consumers the energy consumption and effi ciency of the products. Launched in 2000, these efforts have thus far resulted in a reduction of peak energy demand of over 120 mega-watts (MW) and have displaced the need for USD 105 million in genera-tion investment. From 2005 to 2012, similar energy effi ciency incentive programs in South Africa reduced peak electricity demand by 3 gigawatts (GW).9 According to McKinsey & Company, just by using existing technologies that would pay for themselves in future energy savings, consumers and businesses in emerging markets could save around USD 600 billion a year trough 2020.10 These savings are achievable with an investment of USD 90 billion annually over the next 12 years – only half of what these economies would otherwise need to spend on their energy supply infrastructure to keep pace with higher consumption.
Indeed, higher levels of energy effi ciency are attainable either by reductions in the energy consumed to produce the same level of energy services (e. g. a refrigerator in Ghana produces the same cooling output for less energy input), or by increasing the quantity and quality of economic output produced by the same level of energy services (e. g. providing higher-value added services in the same offi ce building). This is true on a household as well as an industrial scale. Many manufacturing companies in the emerging markets can, for example, improve the overall energy effi ciency of their operations by 10 % or more with relatively small investments and by up to 35 % when making substantially larger ones.11 Savings, of course, vary by sector. One Mexican chemical company, for example, estimates that it can trim 7 % off its energy costs at a cost of less than USD 30 million.12 Iron and steel com-panies can save around 10–30 % of their annual energy consumption and reduce their costs through better energy management, often just by making operational changes.13 Research conducted by the global technology fi rm Siemens suggests that energy savings of 5 % are possible in the glass industry14 – a sector that is becoming increasingly vital to the Ethiopian economy. This represents a savings of 6 terawatt hours per year for the global glass industry – approximately the same level of energy consumption as a city with a population of fi ve million.15
9 Lawrence Berkeley National Laboratory, ‘Energy Effi ciency Country Study: Republic of South Africa’, 2013.10 McKinsey & Company, ‘Energy Effi ciency: A compelling global resource,’ 2010.11 Ibid.12 Private interview conducted by responsAbility Investments AG, 7 March 2016.13 Sustainable Energy Authority of Ireland (SEAI) (2013), Large industry Energy Network (LIEN) Annual Report 2012.
DSTI / SU / SC(2014)14 / FINAL 30 Sustainable Energy Authority of Ireland (2011), Large industry Energy Network (LIEN) Annual Report 2010. McKane, A., D. Desai, M. Matteini, W. Meffert, R. Williams, and R. Risser (2009), Thinking Globally: How ISO 15001 – Energy Management Can Make Industrial Energy Effi ciency Standard Practice, Lawrence Berkeley National Laboratory.
14 Siemens, ‘Energy effi ciency raises productivity. Glass: Answers for industry’ 2008.15 Ibid.
Higher levels of energy effi ciency are attainable either trough reductions in the energy consumed to produce the same level of energy services or by increasing the quantity and quality of economic output produced by the same level of energy services.
ENERGY SAVINGS
75 %
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Until recently, a range of market failures and information barriers has discouraged emerging economies from increasing their energy produc-tivity: 1) fossil fuel subsidies; 2) a lack of adequate consumer informa-tion; 3) technological barriers; and 4) tight credit markets. At the same time, however, progress in each of these areas has increasingly opened up the energy effi ciency space as an attractive long-term growth mar-ket and an equally interesting investment opportunity. In fact, 65 % of all available positive-return opportunities to boost energy productivity can now be found in the developing regions.16
A NECESSARY LONG-TERM ENABLING FRAMEWORK
16 McKinsey & Company, ‘Energy Effi ciency: A compelling global resource,’ 2010.17 International Energy Agency, ‘World Energy Investment Outlook 2014: Special Report,’ 2014.18 Sdralevich, Carlo, Randa Sab, Younes Zouhar, and Giorgia Albertin, ‘Subsidy Reform in the Middle East and North Africa:
Recent Progress and Challenges Ahead.’ Washington DC: International Monetary Fund, 2014.
REMOVING FOSSIL FUEL SUBSIDIES
The International Energy Agency (IEA) estimates that in 2005, fossil fuel subsidies in developing countries totalled more than USD 250 billion annually – more than the annual investment needed to build their electricity supply infrastructure.17 In the Middle East and North Africa, such subsidies in 2011 amounted to over 8.5 % of regional GDP, or 22 % of total government revenue. Developing countries in Asia made up over 20 % of global energy subsidies the same year – equivalent to nearly 1 % of regional GDP.18 Governments in the developing world have pursued such subsidies as a way of promoting industrialization and of protecting the poor from the stress of high energy prices. However, the upshot of these efforts has been the rapid depletion of energy resources, overstretched government budgets and depressed investments in potential energy effi cient solutions. Energy demand has only continued to increase. As they are regressive in nature, most subsidy benefi ts have been captured by higher-income households, actually reinforcing inequality.
In recent years, however, there has been a major international push to identify and reduce such distortionary policies at a national level. In July 2013, for example, Lat-via’s Cabinet of Ministers passed amendments requiring a signifi cant reduction in natural gas plants’ subsidies. Countries including Turkey, Armenia, the Philippines, Brazil, Chile, Peru, South Africa, Kenya and Uganda have all attempted to push energy subsidy reforms. Indeed, government leaders increasingly recognize the fi nancial and economic benefi ts of curbing energy demand. The reasons vary from country to country. For some, the savings generated through energy effi ciency can be used for other economic activities in the private and public sectors. For others, diversifying the fuel mix to include more renewable sources is more cost effective than consuming more fossil fuels. In India, for example, the Bureau of Energy Effi -ciency in 2008 established Perform, Achieve and Trade (PAT), an incentive scheme
KEEP IN MIND
In 2005, fossil fuel subsidies in develop-ing countries totalled more than USD 250 billion annually. Governments in the developing world have pursued such subsidies as a way of promoting industrialization and of protecting the poor from high energy prices. However, the upshot of these efforts has been the reverse effect.
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to encourage energy savings in nearly 500 factories across eight industries.19 The PAT scheme is, in some respects, similar to the emissions trading schemes in parts of Europe and North America: companies that save more energy than their targets receive energy savings certifi cates that they can sell to companies that miss their goals. It is estimated that the PAT scheme could result in savings of as much as 12.5 % of India’s total energy consumption.20
INCREASED CONSUMER INFORMATION
Governments are increasingly providing incentives for utilities to improve energy effi ciency and encourage their customers to do the same. Policies include revenue incentives and certifi cation programs that measure and reward progress toward achieving effi ciency targets and also encourage the adoption of technologies such as smart metering that help households to better manage their energy use. In Latin America, for example, Ecuador is aiming to make smart meters ubiquitous by 2017.21 Such systems have already been adopted in Brazil as a way to mitigate electricity theft and fraud, a widespread problem in the region.22 In countries like Egypt, too, the sale of incandescent lights is gradually being phased out; Egypt intends to roll out a large-scale lighting upgrade after 2020 and to use energy effi -cient products to replace traditional lighting.23
In various parts of the developing world, governments are also adopting man-datory appliance-labelling schemes like that in Ghana in an effort to empower consumers to make energy-effi cient choices. Such programs have proven success-ful in regions where they have been in place for some time. In 1993, for instance, the Thai national electric power utility Energy Generating Authority of Thailand (EGAT) launched a comprehensive fi ve-year energy management programme, which included the mandatory labelling of energy effi cient refrigerators. EGAT fi rst negotiated with manufacturers a voluntary labeling scheme for refrigerators that awarded refrigerators a label designating effi ciency from level 1 to level 5 (wherein which level 5 was the most effi cient). EGAT also sponsored an advertising campaign to promote the label and partnered with a Thai technical standards institute to test domestically available refrigerators. A few years later, the label scheme was made mandatory, and EGAT reached agreement with the manufac-turers to increase by 20 % the effi ciency requirements for each label level. By 2000, all single-door and 60 % of two-door refrigerator models met level 5 requirements, contributing to an estimated 21 % reduction in overall refrigerator energy con-sumption.24
The Polish Effi cient Lighting Initiative, spearheaded by the World Bank, promoted a ‘green leaf’ product logo to identify high-quality and environmentally friendly products. In China, consumer education is fostered through retailer displays, prod-uct labels and a series of books on effi cient lighting design for households and small businesses. Technological advances are also generating heightened consum-er awareness, as well as new ways of understanding how energy in the emerging markets is used.
19 Power, fertilizer, cement, iron and steel, chlor-alkali, aluminum, textile, and pulp and paper.20 Center for Clean Air Policy, ‘CCAP Success Stories: India and Waste Sector,’ October 2012. 21 Electric Light & Power, ‘Smart metering investments to jump in South America,’ 10 June 2013. Available online:
http://www.elp.com / articles / 2013 / 06 / smart-metering-investments-to-jump-in-south-america.html22 O’Toole, Sean. ‘Revenue-securing technology for Latin America,’ The Siemens Customer Magazine, 1 October 2015.
Available online: https://www.siemens.com / customer-magazine / en / home / energy / power-transmission-and-distribution / revenue-securing-technology-forlatin-america.html
23 Chen, Skavy. ‘Top three emerging LED markets with huge economic potential,’ LEDInside, 22 September 2015. Available online: http://www.ledinside.com / outlook / 2015 / 9/ledinside_top_three_emerging_led_markets_with_huge_economic_potential
24 Briner, Sabrina and Eric Martinot, ‘Market transformations for energy-effi cient products: lessons from programs in developing countries.’ Energy Policy, 2003.
Governments are increasingly provid-ing incentives for utilities to improve energy effi ciency and encourage their customers to do the same.
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BREAKING DOWN TECHNOLOGICAL BARRIERS
Indeed, discussions of technological advancements in energy effi ciency tend to focus on equipment upgrades and improvements in the physical components of facilities. This is suited to the here and now: at a household level, LED lights can now produce between 50 and 100 lumens per watt (lm / W) in normal working con-ditions. A traditional 60-watt incandescent bulb can produce about 750 to 1,000 lu-mens but 95 % of the energy used to create that light is typically wasted in heat.25
The payback on investments in LED lighting is typically between one and three years. Within industry, effi ciency upgrades to compressed air systems, for exam-ple, that are used for purposes as diverse as heating and cooling, railway breaking systems, and scuba diving, can recover 50 % to 90 % of lost thermal energy; more than 85 % of electrical energy input into air compressors is usually lost as waste heat, leaving less than 15 % of the electrical energy consumed to be converted into compressed air energy.26
Increasingly, however, a holistic and system-wide approach that leverages ad-vancements across various technologies is starting to defi ne the energy effi ciency business. Advancements in metering (often by way of connection with mobile phones) is one immediate example: the deployment of advanced metering infra-structure can increase the rate and volume of data generation. According to GTM Research’s report “The Soft Grid 2013–2020: Big Data & Utility Analytics for Smart Grid,” advanced meters create nearly 2,000 times the amount of data at 15-minute intervals compared to the traditional monthly readings of conventional meters.27
Such data can help companies make better energy decisions that result in fi nan-cial and environmental gains. While such technologies are so far confi ned primar-ily to developed economies, their translation into the emerging market context should be achievable in the future.
25 Fisher, Lucy and Matthew Wall, ‘Energy-saving technologies cutting fi rms’ fuel bills.’ BBC News, 9 May 2014. Available online: http://www.bbc.com / news / business-27292314
26 Csanyi, Edvard ‘11 Energy-Effi ciency Improvement Opportunities In Compressed Air Systems,’ Electrical Energy Portal, 24 July 2015.
27 Lacey, Stephen, ‘Intelligent Effi ciency: Innovations Reshaping the Energy Effi ciency Market.’ Greentech Effi ciency, 2013.
KEEP IN MIND
Increasingly, a holistic and system-wide approach that leverages advance-ments across various technologies is starting to defi ne the energy effi ciency business.
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Financing large numbers of attractive energy effi ciency projects has proven diffi cult, primarily because the intrinsic nature of the projects and their broader setting make it hard for effective markets to develop naturally. As discussed, in some countries, price distortions may under-mine incentives but in a growing number of other markets, this is not the case as a signifi cant number of projects with attractive fi nancial returns exists.
FINANCING ENERGY EFFICIENCY
Eq
uit
y, U
SD b
n
2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
30
35
40 Energy/utility companies
Coporates/banks
Other government/agency/local
KfW Bankengruppe
Other Multilateral Development Banks (MDB)
European Investment Bank (EIB)
International Finance (IFC)
World Bank (IBRD)
In markets like Brazil, China and India, the primary issue is one of bringing strong expertise to bear: for energy-effi cient investments to be made, energy effi ciency concepts must be marketed and specifi c projects identifi ed, designed and evalu-ated. This requires marketing, project development, and technical assessment skills, typically provided by energy effi ciency experts. For markets such as these, the main challenge is how to most effi ciently access existing project development capacity.28
The energy effi ciency fi nance landscape is large and diverse, and is a critical part of the resources needed to support the effi ciency market. To date, the major pro-portion of energy effi ciency fi nance is provided by the private sector, much of it in the form of traditional commercial bank fi nancing to businesses or households.29
The most basic types of fi nance are debt, grants, guarantees and equity:
Figure 2 Data from Bloomberg and the World Bank; compiled by Julian Spector in ‘The Rise of Green Gonds, Explained.’ CityLab 11 August 2015.
Annual green bond issuance by issuer type
The major proportion of energy effi ciency fi nance is provided by the private sector, much of it in the form of traditional traditional commercial bank fi nancing to businesses or households.
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■ Debt: can be provided by the private or public sector in a variety of ways, from simple consumer loans to more com-plex models such as pooled loans and on-bill fi nancing. Private fi nancial institutions provide loans at market rates, whereas public institutions more often – but not always – provide concessional loans, e. g. at preferential rates. Fund-ing from a private bank at a market interest rate can also be combined with public funding at below-market rates. A particular form of debt often used in the energy effi ciency context is provided through dedicated credit lines. These lines typically involve public sector fi nancing and are often used when private commercial banks are not fi nanc-ing many energy effi ciency projects (e. g. due to a lack of knowledge and understanding of their characteristics, or limited liquidity).
(Green) bonds: are another form of debt; these transac-tions typically involve a contractually more distant and remote relationship between the lender, i. e. the public or private fi nancial institutions, and the borrower. Like any other bond, a green bond is a fi xed-income fi nancial instrument for raising capital through the debt capital market. In its simplest form, the bond issuer raises a fi xed amount of capital from investors over a set period of time, repaying the capital when the bond matures and paying an agreed amount of interest (coupons) along the way. The key difference between a ‘green’ bond and a regular bond is that the issuer publicly states it is raising capital to fund ‘green’ projects, assets or business activities with an envi-ronmental benefi t. Green bonds are becoming increasingly pro minent in the energy effi ciency area: they have been issued by a variety of issuers, with a sharp increase in issu-ances in 2014.
28 Yeager, Kurt et al., ‘Energy and Economy’ in Global Energy Assessment – Toward a Sustainable Future. Cambridge UK and New York NY: Cambridge University Press and International Institute for Applied Systems Analysis, Laxenburg, Austria, 2012.
29 International Energy Agency, ‘World Energy Investment Outlook 2014: Special Report,’ 2014.
■ Guarantees and other credit support mechanisms (insurance, derivatives) reduce or spread the risk of project debt. A guarantee is designed to encourage the lender (such as a commercial bank, for example) to provide a loan; normally these loans can be provided at a preferen-tial rate as a result of credit enhancement mechanisms, or are provided only with the enhancement in the fi rst place. Guarantees for energy effi ciency are typically estab-lished by public entities to catalyze private investment. (see Figure 2)
■ Grants are funds provided without any repayment obliga-tion. In the context of energy effi ciency, they are typically used for small-scale projects to incentivize households or businesses. They may cover all or part of an investment, e. g. in a specifi c piece of energy-effi ciency equipment. Grants are generally public funds used, for example, to lower the capital requirements of an energy effi ciency activity that would otherwise (potentially) not be carried out. Grants are often required to cover transaction costs associated with energy effi ciency investments (such as en-ergy audits and subsequent monitoring and verifi cation), particularly when they are high relative to the size of the underlying transaction. For example, a USD 2,000 rebate for installing an energy-effi cient boiler both reduces the upfront capital requirement and improves the risk / return profi le of the investment.
■ Equity entails funding from investors who participate in a company; it represents an infusion of cash into the com-pany without a contractual repayment obligation but with a potential revenue stream from dividends or enhanced stock sale values. A number of energy-effi cient projects are fi nanced through project companies, which may later acquire energy-effi cient assets. Equity is expected to be an increasingly important source as markets develop.
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KEEP IN MIND
While the public sector can develop policy and regulatory instruments to overcome barriers and facilitate the scaling-up of investment in energy effi ciency projects, it is private sector fi nance that remains key for the long-term growth of the sector.
FINANCINGFINANCING
Two approaches are being taken by commercial banks: demand-driven and Two approaches are being taken by commercial banks: demand-driven and strategy- driven approaches. The demand-driven approach involves repackaged strategy- driven approaches. The demand-driven approach involves repackaged product extensions, such as lending for commercial refi ts, mortgages extended product extensions, such as lending for commercial refi ts, mortgages extended to cover energy effi ciency, or car loans for more energy-effi cient cars. The strate-to cover energy effi ciency, or car loans for more energy-effi cient cars. The strate-gy-driven approach assesses whether energy effi ciency product types and target markets fi t within a bank’s existing strategy or portfolio mix. An example of the strategy-driven approach would be to introduce energy effi ciency lending prod-ucts as part of a multi-tiered programme to grow the SME business segment, with the objective of diversifying revenue and credit risk. The objective of the strate-gy-driven approach is to realize that existing clients’ risk profi le, and profi tability can be improved by enhancing energy through measures such as replacing ineffi -cient machinery to benefi t industrial clients.
Commercial banks also play an important role in channelling public fi nance to-wards energy effi ciency. Many development banks, for example, channel funds through local commercial banks, which in turn often provide complementary fi nancing. This, for example, is the case for the various risk-sharing facilities in which commercial banks mobilize the actual liquidity that benefi ts from guaran-tee coverage. While the public sector can develop policy and regulatory instru-ments to overcome barriers and facilitate the scaling-up of investment in energy effi ciency projects, it is private sector fi nance that remains key for the long-term growth and development of the energy effi ciency market. Other sources are also emerging, including institutional investors who look for long-term investments with medium-term returns and low risk.
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CONCLUSION
Balance sheet financing 48%
Project-level marketrate debt 22%
Project-level equity 5 %
Low-cost debt 22 %
Grants 3%
Figure 3 Source: Climate Policy Initiative, “The Global Landscape of Climate Finance,” 2014.
Private fi nance instruments, USD bn
CONCLUSION
It is easy to get excited about energy effi ciency opportunities in emerging It is easy to get excited about energy effi ciency opportunities in emerging markets. Proven pockets of success, growing economies, improving regulatory markets. Proven pockets of success, growing economies, improving regulatory environments and technological advances are all driving the potential of energy environments and technological advances are all driving the potential of energy effi cient solutions. As markets mature, a vast number of companies, public insti-effi cient solutions. As markets mature, a vast number of companies, public insti-tutions, and public and private fi nanciers are are opening the way for a paradigm tutions, and public and private fi nanciers are are opening the way for a paradigm shift based on more effi cient energy usage. As utilities and other providers obtain shift based on more effi cient energy usage. As utilities and other providers obtain more information about how their consumers operate, the potential for effi ciency more information about how their consumers operate, the potential for effi ciency also increases. The examples mentioned in this paper represent only a small part also increases. The examples mentioned in this paper represent only a small part of the progress in the fi eld of innovation and opportunity. Here, private sector of the progress in the fi eld of innovation and opportunity. Here, private sector fi nancing is especially important when it comes to deploying the long-term capital fi nancing is especially important when it comes to deploying the long-term capital needed to foster advances in effi ciency, to reach end-users.needed to foster advances in effi ciency, to reach end-users.
Embracing energy effi ciency as a long-term growth sector in emerging markets is Embracing energy effi ciency as a long-term growth sector in emerging markets is still a new concept for many. However, the opportunities are there. Just like novel microfi nance investment vehicles unlocked previously inaccessible fi nancing microfi nance investment vehicles unlocked previously inaccessible fi nancing resources for individuals at the base of the pyramid, governments, companies resources for individuals at the base of the pyramid, governments, companies and fi nanciers are uncovering a deep well of energy effi ciency opportunities that and fi nanciers are uncovering a deep well of energy effi ciency opportunities that are slowly reshaping the way individuals and businesses in the developing world are slowly reshaping the way individuals and businesses in the developing world think about how they use energy. We have only begun to scratch the surface of think about how they use energy. We have only begun to scratch the surface of what can be achieved.
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The fourth example is the replacement by Indian farmers of the existing ir-rigation systems in their fi elds with energy-effi cient drip irrigation systems. These modern systems are better for the soil and also lead to increased crop yields. The estimated amount of water saved is 47 % in fi elds of sugar cane and 33 % on banana plantations.
You make these investments possi-ble. What are the main challenges
you face?
The greatest challenge is to ensure that the need for energy effi ciency is entrenched in people’s minds. If we can convince decision-makers of the poten-tial of state-of-the-art energy solutions, this opens the way for investments and makes it possible to seize economic opportunities.
At responsAbility, we strive to raise awareness of energy effi ciency – pri-marily in our dialogue with top manag-ers. They are often unaware of ways of lowering electricity consumption and thus saving money. We can make pro-gress in this area if, for example, the top managers of a potential local fi nancing partner are convinced of the benefi ts of energy effi ciency. When talking to them about this, we present economic arguments, such as new market oppor-tunities, cost savings and an enhanced image – making them more attractive to clients and the labour market. There is a growing desire among people in devel-oping countries and emerging markets
Where do you see the greatest po-tential for development invest-
ments in the area of energy effi ciency?
Let me give you some examples. The fi rst is air-conditioning systems, which are a key topic in developing countries and emerging economies with a hot climate. These systems often waste a lot of energy due to the use of outdated technology. In Nicaragua, one univer-sity has therefore replaced all of its air conditioning systems with the latest models, has insulated all the rooms in its buildings and has fi tted better windows and ceilings. As a result, the rooms are now cooler, students are performing better and the university has reduced its energy bills by more than 30 %. The investment paid off in a very short period of time as a result of electricity savings.
In many countries, fi rms use emergency generators to cope with power cuts. These generators tend to use large quantities of diesel. In the Dominican Republic, we are working with a part-ner bank to develop a programme to enable hybrid machines to be used. During the day, these machines run on green solar energy, signifi cantly reduc-ing CO
2 emissions.
In San José in Costa Rica, we are plan-ning to replace old buses used for public transport with new vehicles that mainly run on natural gas. This means that green fuel will be used in the new buses. These vehicles also consume less energy and are safer.
to work for ‘green companies’ and this helps us to promote energy effi ciency.
What does it take to succeed when providing fi nancing for energy
effi ciency?
Many developing countries and emerg-ing economies are growing rapidly. Decision-makers in these countries face major management challenges on a daily basis. This means we must fi rst capture their attention if we want to approach them about a new topic. Once we get to the point of being able to show them the business case, this represents a major step forward.
Many of these fi nancial intermediaries do not yet have engineers with exper-tise in the area of energy effi ciency. Co investments can therefore make sense at fi rst. They give our partners the guar-antee that we share the same goals, are there to support them and will train their specialists in the process.
In a new market, it is typical for public sector funds to lead the way and make the fi rst investments. Private investors come later and signifi cantly leverage the impact of the initial investments. Our role is to open up these opportunities for investment and to present attractive projects to private investors. Our local partners defi ne the niche area that they believe offers signifi cant potential and is highly scalable. They then carry out initial fi nancing to test the market and scale up their offering from there.
Antoine Prédour oversees development investments in the energy sector globally at responsAbility Invest-ments AG. He explains how successful results can be achieved when investing in energy effi ciency.
FINANCING ENERGY EFFICIENCY
14
You defi ne yourself as a partner to local banks. What does that mean?
Being a partner is all about engaging with one another on equal terms and joining forces to enter new markets.
Our partner banks share the same interests as responsAbility and the companies that invest with us. We all stand to benefi t when we identify new potential, supply additional capital and thus facilitate increased fi nancing.
In specifi c terms, this partnership means that we don’t interfere with the business models of the banks con-cerned. They know their market and their organization and we trust their approach. We see ourselves solely as a consultant who is there to advise them on their new green lending business. Equally, we don’t try to implement one standard process. Instead, we concen-trate on making the most valuable contribution we can: We demonstrate the business potential of development investments in the area of energy ef-fi ciency and we assist them in fi nding and fi nancing lucrative projects.
Reliability and the rapid execution of processes is what local fi nancial inter-mediaries want from us. Our role is to provide technical advice and to arrange the supply of long-term capital. It makes a big difference to them wheth-er they can focus their green lending programme on a two or ten-year hori-zon. They also want a partner who is able to fi nance the growth of their programme at a later point in time.
Measures to improve energy effi ciency require long-term access to capital. It is a question of fi nding investors who are prepared to make a long-term commit-ment and can act as reliable partners to local banks.
You consider the provision of tech-nical assistance to be important.
How does it contribute to the success of fi nancing?
In 2015, we carried out 16 Technical Assistance projects. For example, spe-cialists selected by responsAbility are offering practical support and advice to a local bank that is setting up a green lending programme.
Our Technical Assistance teams are ad-vising the bank on the implementation
of green lending, the analysis of market potential and the development of new products.
Our Technical Assistance offering is fi nancially viable for us because we use it in a very targeted way. It is only deployed in a brief start-up phase and helps our partners to swiftly become independent. This is invaluable for us and our investors since local partners can then further develop the market on their own. All of our joint activities focus on achieving increased energy effi ciency and on realizing specifi c profi t targets and key performance indicators. Other institutions also offer technical assistance. If, in a next step, we could work together to ensure that our activities as market participants are better coordinated, we could achieve an increased impact.
“We all stand to benefi t when we identify potential, supply additional capital and thus facilitate increased fi nancing.”
Antoine Prédour
responsAbility’s Antoine Prédour oversees fi nancing projects in the energy sector globally.
15
RESPONSABILITY RESEARCH
DISCLAIMER
Disclaimer: This information material was produced by responsAbility Investments AG and / or its affi liates with the greatest of care and to the best of its knowledge and belief. However, responsAbility Investments AG provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this information material are those of responsAbility Investments AG at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all fi gures are unaudited. This information material is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell fi nancial instruments or ser-vices and does not release the recipient from exercising his / her own judgment. This information material may not be reproduced either in part or in full without the written permission of responsAbility Investments AG. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Neither this information material nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person. It should be noted that historical returns and fi nancial market scenarios are no guarantee of future performance.
Texts: responsAbility ResearchInterview: Dave HertigEditing: Tracy TurnerPhotography: Willy SpillerDesign and layout: Liebchen + Liebchen GmbH
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ABOUT RESPONSABILITY
responsAbility Investments AG is one of the world’s leading
asset managers in the fi eld of development investments and
offers professionally-managed investment solutions to private,
institutional and public investors. The company’s investment
vehicles supply debt and equity fi nancing to non-listed fi rms in
emerging and developing economies. Through their inclusive
business models, these fi rms help to meet the basic needs of
broad sections of the population and to drive economic devel-
opment – leading to greater prosperity in the long term.