Financing Energy Efficiency: World Bank Global Experiences and Program in Russia Yuriy Myroshnychenko The World Bank Country Sector Coordinator for Russia Energy and Infrastructure Program The 10 th Joint Research Center Workshop Energy Efficiency Policies EU Delegation in Russia 25-26 June 2012, Moscow, Russia
CONTENTS I. World Bank Global Experiences in Financing Energy Efficiency II. World Bank Energy Efficiency Program in Russia
Barriers to Energy Efficiency Investments Policy / Regulatory Equipment/ Service Providers End User Financiers Energy pricing and collections Procurement policies favor lower cost Import duties on EE equipment Unclear or underdeveloped EE institutional framework Lack of appliance standards and building EE codes, lack of testing, poor enforcement Limited and poor data High project development costs Limited demand for EE goods/services Diffuse/diverse markets New contractual mechanisms (ESCOs) Limited technical, business, risk mgmt. skills Limited financing/ equity Lack of awareness, high discount rates High upfront and project development costs Ability/willingness to pay incremental cost Low EE benefits relative to other costs Perceived risks of new technologies/ systems Concept of EE is virtual cannot see Mixed incentives Behavioral biases Lack of credible data New technologies and contractual mechanisms Small sizes/widely dispersed high transaction costs High perceived risks not traditional asset-based financing Other higher return, lower risk projects Over-collateralization Behavioral biases
Why has Progress been so Slow? Numerous informational, technical, financial and behavioral barriers across a diverse range of stakeholders Institutional challenge need for appropriate delivery mechanisms to identify, package, finance and implement EE projects across sectors and end users in an effective manner Other challenges include: q Lack of international consensus on approaches (e.g., regulation vs. incentives vs. information) i.e., appropriate role of government q Overreliance on Western models - local markets require local solutions q EE is invisible, hard to measure need for consistent, credible data q Poor incentives - mixed institutional incentives, low prices, behavioral inertia
EE Financing Instruments Credit lines Credit guarantees Loan loss reserve funds Special purpose EE funds Mezzanine funds Investment grants Equity funds
EE Credit Lines Projects Closed: India, Hungary Ongoing: China, Tunisia, Turkey, Ukraine, Uzbekistan Under preparation: Russia, Turkey Conditions * well-developed banking sectors, banks are willing to accept risks and EE as line of business, sufficient market activity to develop project pipeline * need for parallel TA to develop strong demand, create sustained quality pipeline
Partial Credit Guarantees/ Loss Reserve Funds Projects Closed: Bulgaria, CEEF (IFC), China, Croatia, Hungary (IFC), Poland, Tunisia Ongoing: Macedonia, Philippines Conditions * well-developed banking sectors, banks are liquid and willing to accept some risks, sufficient market activity to develop project pipeline * guarantees cannot solve systemic banking or credit problems
EE Funds Projects Ongoing: Armenia, Bulgaria, Lithuania, Romania, Thailand, Uruguay Under preparation: China, Macedonia, Serbia Conditions * insufficient liquidity in banking sector, major aversion to risk among lenders * use of grant funds as subordinated debt can help mobilize commercial co-financing * TA to disseminate information on EE subproject performance/financial data critical to sustainability * Professional, well-incentivized Fund Manager/team is key
EE Investment Grants Projects Closed: Lithuania, Tunisia, Vietnam Ongoing: Armenia, Belarus, Macedonia, Montenegro, Serbia Under preparation: Kazakhstan, Russia Conditions * credit barrier is too high, underdeveloped banking sector, over-collateralization * grants should target new and underdeveloped markets, programs must be efficiently administered, initial subproject results should be intensely disseminated, need viable co-financing
Select Program Results q Bulgaria (2006-) created an EE Fund (BEEF) which has financed/guaranteed 160 projects valued at over $80 million q China (2004-10) loan guarantee program (US$22 million GEF) generated US$2.7 billion with more than 320 ESCOs q Hungary (IFC, 1997-2007) established a loan guarantee program which initiated $93 million in EE projects q India (1999-08) credit line (IREDA) completed $36 million in EE projects saving 90 MW, 249 GWh/year, 9.4 million tonnes CO 2
ESCO Business Models High service/risk Low service/risk Full service ESCOs design, implement, verify and get paid from actual energy saved (aka Shared Savings ) Energy supply contracting, take over equipment O&M and sell output at fixed unit price (aka Chauffage, Outsourcing, Contract Energy Management ) ESCOs w/third party financing, design/implement project, and guarantee minimum level of savings (aka Guaranteed Savings ) ESCOs w/variable term contract, act as full service ESCO, but contract term varies based on actual savings (e.g., First Out Contract ) ESCOs w/1-year contract, design/implement project, receives 60-70% of payment upon successful commissioning and the rest within 6-12 months Supplier credit, equipment vendor designs, implements and commissions project and is paid lump-sum or over time based on estimated savings Equipment leasing, similar to supplier credit except payments are generally fixed (based on est. energy savings) Consultant w/performance-based payments, agent assists client to design/ implement project and receives payments based on project performance (fixed payment w/penalties or bonuses) Consultant w/fixed payments, where consultant helps the client design and implement the project, offers advice and receives a fixed lump-sum fee Source: World Bank 2010
Building the Market
Lessons Learned so far Holistic market assessments to include financial and credit markets, demand, services and equipment Need to tailor banking products to suit critical market barriers and needs Careful selection of banking partners/fund managers Incorporate good practice program principles (commercial, flexible, share risks, transparent) Standardization can help lower transaction costs Build project pipeline early and intensely Appropriate and incentive marketing to ensure strong demand and pipeline Need for flexible schemes and monitoring so program can evolve with the market
Total Investment Needs in EE in Russia Exceeds $300 billion
Russia Energy Efficiency Financing Project World Bank GEF $300 mln. $22,7 mln. GPB GPB REA $600 mln. 70% 30% Industry Public Sector
Project Structure
Thank you!