Leveraging IFC to Affect Clean Energy Market Development: A Corporate Journey

Transcription

1 Leveraging IFC to Affect Clean Energy Market Development: A Corporate Journey Russell Sturm Sustainable Energy Team Leader International Finance Corportation

2 What s an IFC?

3 IFC: Private Sector Investment Arm of the World Bank Group IFC is owned by its 178 member countries, which collectively determine policies. International Bank for Reconstruction and Development, 1945 International Finance Corporation, 1956 International Development Association, 1960 International Centre for Settlement of Investment Disputes, 1966 Multilateral Investment Guarantee Agency, 1988

4 IFC s Mission To promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people s lives

5 IFC Financing in FY06 IFC Commitments FY06 Total: $8.3 billion U.S.$ billions Syndications IFC's own account* *Includes loans, equity, guarantees, risk management products

6 Why focus on Energy Efficiency? Source: EIA, International Energy Outlook, 2001 and EE offers cost effective way to meet growing demand and support sustainable economic development US$ 1 mm investment in new capacity yields 1 MW new power, OR 3-5 MW reduction in power consumption

7 How much are you emitting? 5.00 kg/$ Source: Key World Energy Statistics, 2006 Edition, International Energy Agency Information is for Japan USA China Russia China/Russia emit much more CO2 to achieve the same GDP output

8 Energy Efficiency: An opportunity lying in wait Cost-effective investments with compelling social, environmental, and economic benefits Barriers relate to nature of the underlying investments and human nature

9 What does IFC bring to the table?

10 Leveraging IFC s Comparative Advantage Able to mobilize big chunks of money Network of investee companies 45% of business done through financial intermediaries Big global players Substantial local players seeking to gain global stature Convening power/ private sector market focus Commitment and drive to innovate and the expertise to do so structuring/credit/risk mitigation A mission to support sustainable economic development Market focus and private sector orientation

11 And realistically speaking Inability to efficiently invest directly in small transactions

12 Leveraging IFC to Transform Markets Two Opportunities Two Approaches 1. Mobilizing commercial investment in EE through financial markets 2. Mobilizing market development for new technology

13 Markets vary and so do the needs and solutions Market diagnostics are critical before intervening

14 CASE 1: Cultivating the money tree With liquidity high in most markets the problem isn t a lack of capital availability

15 Matching IFC s Strengths to the Market s Needs Barrier Small deal size Lack of lending experience by FIs Limited FI knowledge of EE sector Unsophisticated vendors and developers IFC Response Work through IFC s highly developed financial markets business Support with credit enhancement/other financial products Support with TA for financial product development/marketing; aggregate the market Support with TA to prepare and standardize transactions

16 Playing to our comparative advantage Supporting local FIs in developing sustainable energy lending businesses Financial Markets leveraging interests and capacity of local Fis Matching deal size to institutional capacity Leveraging IFC s reach and expertise

17 Wholesaling through FIs: How do we work? On-lending SME/Corp. Loan or Guarantee IFC TA Commercial Bank Housing Loans TA ESCOs * Municipals *ESCO Energy Service Companies

18 End user inefficiency From To Russia 48% of production assets installed over 20 years ago

19 Building business for Partner Banks The Ceska Sporitelna Story Competition squeezing margins for leading bank Developed FINancing Energy Saving Applications (FINESA) product US$ 20 million in RE/EE loans in 36 months Current project pipeline US$ 58 million, Market Forces In Play

20 Playing to our comparative advantage Supporting local FIs in developing sustainable energy lending businesses Financial Markets leveraging interests and capacity of local Fis Matching deal size to institutional capacity Leveraging IFC s reach and expertise $500 million annual investment target in 3 years

21 Sustained, Concrete Impact = Moving markets

22 IFC continues to evolve its FI support and push the market Hungary the pilot continues to push the frontier Leverage of GEF money now greater than 100X Robust blockhouse renovation industry established Moving into more frontier markets with facilities Russia, China, Philippines Spinning off financial and TA products bank by bank Learning and refinement of delivery model Includes user-pays for TA Multiple marketing channels, including vendor networks, FIs, Utility partnerships

23 Program Achievements Cummulative Per Year CEEF Guarantees (as of 26 January 2007) 40,000,000 35,000,000 30,000,000 15,267,034 25,000,000 20,000,000 15,000,000 Guarantee in US$ 130,583 34, , , ,702 1,541,609 3,650,567 5,842, Year 10,000,000 6,367,950 5,000,000 0

24 CEEF Housing Portfolio Individual Guarantees Portfolio Guarantees $60,000,000 $52,142,159 $50,000, deals $40,000,000 $30,000,000 $20,000,000 3 deals 18 deals 35 deals $10,000,000 $0 $5,357,553 $448,863 $1,243,

25 Szemünk Fénye Structure Risk Sharing Facility OTP BANK Sub- contractors Equipment Suppliers Project Implementation Credit Line ESCO Caminus Services fees Sub-Sovereign Sovereign Project Packages

26 Scaling up better leverage of funds US$250 mn Financing OTP Bank ESCO US$125mn Risk Sharing IFC $122.5 m GEF $2.5m Suppliers/ Contractors Project Implementation Municipality Project Impacts Lower Energy cost municipal fiscal balances Reduced gas import dependence New GE factory (supplier) providing FDI and jobs AND >100 x 1 leverage of GEF funds Improved Health, Safety & Learning Conditions for Children!!

27 Program Achievements >200 supported transactions;majority housing renovation projects $250 million investment under the scope of the Szemünk Fénye Program in the upcoming 5 years >25 transactions in EE for SME and RES sectors US$34 millions guarantees resulted in the $88 mil. EE and RE loans, total CAPEX US$154 millions Avoided GHG emmisions 140 th./year Largest housing renovation portfolio in IFC history First ESCo forfaiting trasaction guaranteed in EU Second mortgage product introduced for Baltic countries First wind power project at IFC ever (2MW) Largest European ESCO projects supported (OTP) Dedicated financial product and even EE and RE projects department in the CS bank Largest CEE PV solar plant (0,69 MW)

28 # Power Generation Waste Energy # Recovery for Steam Production Boiler EE # # Industry Process Renovation Upgrading District Heating & # Cooling Substitution of # Coal/Oil with NG Electricity # DSM Biodiesel # ` CHUEE Deal Map

29 1 st Project Haizi Coking Plant Coking Gas Recovery for Power Generation: $2 million loan to Shengdong Machinery Company Limited 20 units of gas-fired power generators Emission reduction of more than 30,000 tons of CO2 per year

30 CHUEE Loans ($ Million) $1,590 1,600 1,400 1,200 1, $150 $10 - Source: CHUEE Target Actual Pipeline

31 Emission of GHGs (000 tons) 40,000 36,536 35,000 30,000 25,000 20,000 15,000 10,000 6,000 5,000 1,237 - Source: CHUEE Target Actual Pipeline

32 CHUEE II: The future is NOW Dynamism and scale far beyond our experience elsewhere Truly transforming, not just riding, capital markets Opportunity (and need) for multi-multilateral collaboration and engagement of Equator banks

33 The scaling challenge - CHUEE Must develop strategic partnerships with global players Equator Banks and Global FIs, IFIs, Foundations, EU, Governments Volume USD CHUEE TargetCHUEE Actual CHUEE Pipeline IFC China Commitments 2006

34 So what would it take? Some dedicated funding but not a massive new dedicated investment fund; Specialized funding to cover: Soft costs/transaction costs Engineering assessments/audits, project definition, project identification, marketing ideas to clients Credit enhancement and other financial products beyond institutional comfort zone eg, Mezzanine financing for RE projects Above all else far greater cooperation and leverage of the current players!

35 What if.? Senior Operations Manager Project Implementation Project Team Implementation Project Team Implementation Teams Senior Operations Manager Project Implementation Project Team Implementation Project Team Implementation Teams Information Regional BD and portfolio teams Programme design and Management Information Regional BD and portfolio teams IFIs Financial Products Private Equity Financial Products Knowledge Management Strategic advice information sharing Cadre of EE Finance Experts Equator Banks Financial Products Strategic Guidance Foundations Financial Products Financial products Senior Operations Manager Project Implementation Project Team Implementation Project Team Implementation Teams Senior Operations Manager Project Implementation Project Team Implementation Project Team Implementation Teams Information Information Regional BD and portfolio teams Regional BD and portfolio teams

36 The Market Force What lies beneath the ice?

37 Fostering Market Acceleration

38 A model to build on $15 million project funded by the Global Environment Facility (GEF), implemented by the International Finance Corporation (IFC) ELI s goal: accelerate the development of local markets for energy-efficient lighting. ELI countries: Argentina, the Czech Republic, Hungary, Latvia, Peru, Philippines, South Africa

39 The IFC/GEF Efficient Lighting Initiative: Successful Market Acceleration Model ELI sought long-term and sustained impact on markets through: Increasing consumer knowledge and demand, Improved accessibility of capital, Increasing sales volume, and product availability Enhancing Competition / Producing downward pressure on prices.

40 How did ELI work? Five main ELI tools: education and marketing, utility partnerships, financial transaction support, bulk purchases, Limited and highly targeted one-time subsidies Each ELI country program used a combination of those tools, adapted to meet local market barriers and opportunities.

41 Giving Consumers the Power of Information

42 Spotlight on Results CFL prices fall (ex: prices in Argentina fall from $20 to $3 per unit, despite economic crisis) CFL sales increase (ex: sales increase by 21 times over life of program in Peru) Sales of incandescent lamps decrease (South Africa, Peru) New EE lighting businesses are founded and sustained (ex: South Africa or Peru, local manufacture of luminaires; lighting-based ESCOs founded in the Philippines, Latvia ) Sustainable Market Impacts

43 Driving REAL Market Transformation in South Africa Impact of ELI on Sales of CFLs and Incandescent Lamps, South Africa 6,000,000 70,000,000 CFLs Sales (Units) 5,000,000 4,000,000 3,000,000 2,000,000 1,000, ,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Incandescent Lamps Sales (Units) Sales of CFLs Sales of Incandescent Lamps

44 Responding to opportunity: Leveraging new policies and initiatives in S. Africa Improving People s Lives in South Africa: CFLs enable increased access to modern energy services

45 Reality Where s the POWER, Harriett? 1.6 billion people live in the dark

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47 A closer look into lighting End-users hurt by inefficient product Fuel-based lighting often most expensive energy item in household up to 50% of energy expenses, as much as 33% of household income Limits small-scale productive activities Indoor pollution leads to serious health problems Safety/fire issues epidemic Limits educational access

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49 The Moment At Hand: Leveraging Technology to Transform a Market and People s Lives

50 New Rays of Light Emerge 1. Technology Performance, cost Packaged as single light systems 2. Lessons of experience in the market Business models for the bottom of the pyramid Package products at price point to match market Solar home system business models demonstrated, but limited impact IFC s experience in market development 3. Substantial international political focus Energy access Climate change

51 A closer look into lighting LEDs open new opportunities Tanzania: shoe seller - flame [left]; 1-watt white LED [right] Photos: Evan Mills

52 IFC ASKED Is There an Opportunity for a Large-Scale Commercial Solution To Increase Access to Modern Energy Services? Are those 1.6 billion lacking access to modern energy services a market? If so, can global and local private companies be engaged to develop this market commercially? Does a market, commercial solution that increases access to modern energy services serve our development objectives?

53 Lot s of people lot s of need But is it a market? GNI/per capita Global Population Total Income US$ 26,490 US$ 5,110 High Income Upper Middle Income 966 Million 329 Million US$ 25 Trillion US$ 1.7 Trillion Mostly Developed US$ 1,400 Lower Middle Income 2.4 Billion US$ 3.4 Trillion Mostly Undeveloped US$ 430 Low Income 2.5 Billion US$ 1 Trillion Mobilizing the global lighting industry Note: Based on the The Fortune at the Bottom of the Pyramid, C.K. Prahalad and World Bank Development Indicators, 2004

54 A closer look into lighting: Fuel-based lighting is ALREADY a very large market Global Annual Spending on Lighting $38 Billion Electric Lighting Fuel-Based Lighting Fuel-based lighting accounts for 17% of global lighting market a US$ 38 billion/year demand ($17 billion in Africa) $185 Billion Source: Evan Mills, International Association of Energy Efficient Lighting and Lawrence Berkeley National Laboratory It is a commercial, functioning market established value-chain collection systems spare parts, repairs services, etc

55 Global Lighting firms competing in saturated markets An Industry Motivated to Find New, High Growth Areas Currently focused in mature markets Competing for shares of static market

56 A segmented $17 billion Africa market for fuel-based lighting Productive uses drive the market Night fishermen (e.g.,lake Victoria) Lake Victoria: $600 mill/yr; 2 million people supported. Kiosks Night markets Household (reading/task lighting) Walking (motive uses) Household (general illumination)

57 and important lessons are emerging. Poor, even poorest of the poor, can be a profitable market Need to price service or product to meet income constraint Success requires brand new business models, often created locally organic solutions Different needs of the poor can be met by large scale, commercial solutions promoting higher quality of life and overall development The key is to stay out of the way of the entrepreneurial genius of the market.

58 A Highly Successful Analogy: Mobile Telephone Sales In Kenya Number of Telephone Customers 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Landline Customers Mobile Telephone Customers Annual Growth Rate = 84% Mobile telephone use in Kenya has skyrocketed to nearly 6,000,000 customers since introduction of the technology in 1997 Source: CCK, 2006 and Jacobson, 2004

59 Source: Jacobson, 2006 Price Trend for Mobile Telephone Handsets Inflation Adjusted Retail Price for a Basic Mobile Telephone Handset* in Kenya ( ) $500 $400 $300 $200 $100 $0 Dec/1/2000 Mar/25/2002 Jul/17/2003 Nov/7/2004 Mobile Telephone Price (2006 Inflation Adjusted $US) Mar/1/2006 Embedded LED technology enabled this technology advance *Prices are for a Nokia 3310 Handset

60 Mobile Telephone Markets in Africa: Experiences and Lessons from Kenya MOBILE PHONES LED LIGHTING Blinding growth in 5 years New service mrkt. emerged without any established market (not a substitute) Required massive infrastructure establishment (capital costs) Mature technology with established developed country market Organic niche industry Potential to replace inferior service in established $38 billion market Infrastructure mostly in place to support modern lighting Rapidly developing technology with established niche developed country markets

61 Mobile Telephone Charging by Off-Grid Customers LED synergy How do off-grid users keep their phones charged?

62 Market Barriers are Stifling Lighting Market Findings from Private Sector and GEF Projects Main Barriers To Market Development Perceived Lighting companies as complex perceive market rural, Perceive developing as country market difficult consumers to penetrate as complex market and difficult to penetrate End - user needs not understood by supplier Systems lack required functionality High Transaction Costs to Understand Market Lack of understanding of end-user needs and product requirements to compete against fuel - based lighting I nability to obtain replacement parts (lamps) locally and in a timely manner Lack of understanding of alternative value chains or delivery systems High first cost and affordability Lack of consumer financing Product quality varies substantially Lack of successful business model to deliver the right product through the right value chain a the right price Quality of product delivered varies substantially Uncertain technological track record Lack of Business Skills and Financing Lack of necessary institutional underpinnings to support market development Industry Consultation

63 Reduce Risk of Market Entry Regulatory Risks Market Risks Financial Risks How Does IFC Support Market Entry? Responding to Industry Request and Suggestions, the Project will: Reduce Transaction Costs of Market Entry Market Assessment Testing and Certifying Products Identifying Distribution Channels Assessing Regulatory Environment

64 Project Phases Phase 1: Form Private Sector Consortium Phase 2: Understand Consumer Behavior Phase 3: Identify and Profile Distribution Channels Phase 4: Support Individual Company s Strategies Phase 5: Build Institutions to Support Market Development

65 Key Elements Key Goal: Support Successful Market Entry of LED Firms in the African Market for Off-Grid Lighting A Partnership Between IFC and LED Companies Over 130 companies expressed interest in participating Over 60 stakeholders (NGOs, research centers, universities, etc) Starts in Kenya and Ghana Planned expansion to at least 6-10 other African countries

66 The WBG Response: Step 1 IFC s Ghana-Kenya Pilot Project Pilot Project: IFC/GEF Lighting the Bottom of the Pyramid Started with 3 year IFC engagement with industry to determine whether an intervention is needed GEF funding of $5.4 million for a 4 year pilot project focused on Ghana and Kenya $3.5 European Commission Commitment/ $.5million from Luxembourg Driven by Industry from start to finish Not picking winners, just supporting the foundation of the market, catalyzing competition, mobilizing investment Responds to industry guidance to IFC to fill gaps in the market builds on IFC comparative advantage

67 The WBG Response Part 2 Lighting Africa Joint World Bank/IFC Initiative Goal: Rapid scale-up of access to clean, reliable and affordable lighting & basic energy services for 250 million people across Africa by 2030

68 The Moment at Hand The Stakes are high The market dynamics are powerful Technology offers opportunities Competition in its place Need discipline to ensure institutional comparative advantage

69 The stakes are too high to work at cross-purposes