SHINING THE LIGHT ON
ENERGY EFFICIENCY
ACHIEVING HIGHER LEVELS OF ENERGY EFFICIENCY,
INVESTING IN SOLUTIONS AND FINANCING THE
ENERGY EFFICIENCY SECTOR
PUBLIC PAPER 01
INTRODUCTION
Energy efficiency – broadly defined 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 before us with energy efficiency and clean energy.”
Steven Chu, Frmr US Secretary of Energy
Interest in energy efficiency 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.
Energy efficiency is an extremely attractive area of upfront investment that pays
for itself over time, while providing the added benefits 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 efficiency opportunities during the current economic downturn as a way to stimulate their faltering
economies. By focusing funding on energy-efficient 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 efficiency is nothing new. Companies, governments and consumer groups in developed and developing markets have sought for years to power more economic activity and residential demand with less energy. While barriers
across sectors – such as technology, financing 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 recent years, increased awareness of these pockets of success – coupled with growing national competition for energy supplies, environmental concerns, increased
pressure from growing demand on an aging energy infrastructure, and advances
2
in related technologies – have prompted renewed interest in energy efficiency
among the public and private sectors. Significant injections of public funds in
energy efficiency in recent years, including public-private partnerships, have only
added to the momentum.
This paper looks at the energy efficiency 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 efficiency 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 finance, in particular, will be an essential long-term
conduit for the continued expansion and evolution of the efficiency sector in the
developing world.
Capturing the global energy efficiency
opportunity will require global investments of around USD 500 billion per
year for the next decade.
International Energy Agency, ‘World Energy Outlook Special Report: Energy and Climate Change,’ 2015
Latin American Energy Organization, as quoted by Sandra Guzman in ‘Energy efficiency in Latin America, the missing piece,’
2015. Available online: http://energytransition.de / 2015 / 02 / energy-efficiency-in-latin-america-the-missing-piece /
3
International Energy Agency, ‘World Energy Outlook Special Report: Energy and Climate Change,’ 2015.
1
2
3
ENERGY EFFICIENCY:
UNLOCKING THE DEVELOPING
MARKET OPPORTUNITY
Significant 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 efficient
energy use are also the foremost drivers of long-term economic development, leading, eventually to improved livelihoods for many.
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 reflect population growth, labor force participation, productivity
growth, national savings rates and capital accumulation. It is therefore unsurprising 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 energy-intensive commercial enterprises. For the first 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 projected growth will occur in the developing world.5 Between 2008 and 2035, non-Organization for Economic Cooperation and Development (OECD) countries are expected
to account for 83 % of energy demand; together, China, India, and Brazil are expected 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.
McKinsey & Company, ‘Energy Efficiency: A compelling global resource,’ 2010.
United Nations Population Fund, ‘Annual Report 2011: Delivering Results in a World of 7 Billion,’ 2012.
6
Ibid.
4
5
4
“We do not yet fully understand the consequences of rising
populations and increasing energy consumption on the
interwoven fabric of atmosphere, water, land and life.”
Martin Rees, British astrophysicist
Projected world energy consumption
900
800
700
Quadrillion Btu
600
500
400
300
200
100
0
Year
1990
2000
2010
non-OECD countries
2015
2020
2030
2040
OECD countries
Figure 1 Source: International Energy Outlook, 2014
Energy demand on this scale will put increasing pressure on global energy resources 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 models 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 efficient manner
– i. e. to do more with less.
7
8
The current scale of energy demand is
putting increasing pressure on global
energy resources and distribution networks. This is unsustainable without
a fundamental transformation of the
global energy system.
Capital Economics, ‘Zambia: Problems under the hood.’ Africa Economics Update, 11 September 2015.
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.
5
ENERGY SAVINGS
75 %
One very simple example of energy-efficient investments is Ghana’s appliance
labelling program under which appliances are labelled to indicate to consumers
the energy consumption and efficiency 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 generation investment. From 2005 to 2012, similar energy efficiency 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.
Higher levels of energy efficiency 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.
Indeed, higher levels of energy efficiency 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 office 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
efficiency 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 companies 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 firm 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 five million.15
Lawrence Berkeley National Laboratory, ‘Energy Efficiency Country Study: Republic of South Africa’, 2013.
McKinsey & Company, ‘Energy Efficiency: 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 Efficiency Standard Practice, Lawrence Berkeley National Laboratory.
14
Siemens, ‘Energy efficiency raises productivity. Glass: Answers for industry’ 2008.
15
Ibid.
9
10
6
A NECESSARY LONG-TERM
ENABLING FRAMEWORK
Until recently, a range of market failures and information barriers has
discouraged emerging economies from increasing their energy productivity: 1) fossil fuel subsidies; 2) a lack of adequate consumer information; 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 efficiency space as an attractive long-term growth market 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
KEEP IN MIND
In 2005, fossil fuel subsidies in developing 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.
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 efficient solutions. Energy demand has
only continued to increase. As they are regressive in nature, most subsidy benefits
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, Latvia’s Cabinet of Ministers passed amendments requiring a significant 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
financial and economic benefits of curbing energy demand. The reasons vary from
country to country. For some, the savings generated through energy efficiency 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 Efficiency in 2008 established Perform, Achieve and Trade (PAT), an incentive scheme
McKinsey & Company, ‘Energy Efficiency: A compelling global resource,’ 2010.
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.
16
17
7
Governments are increasingly providing incentives for utilities to improve
energy efficiency and encourage their
customers to do the same.
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 certificates 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
efficiency and encourage their customers to do the same. Policies include revenue
incentives and certification programs that measure and reward progress toward
achieving efficiency 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 efficient products to replace traditional lighting.23
In various parts of the developing world, governments are also adopting mandatory appliance-labelling schemes like that in Ghana in an effort to empower
consumers to make energy-efficient choices. Such programs have proven successful 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 five-year energy management programme,
which included the mandatory labelling of energy efficient refrigerators. EGAT
first negotiated with manufacturers a voluntary labeling scheme for refrigerators
that awarded refrigerators a label designating efficiency from level 1 to level 5
(wherein which level 5 was the most efficient). 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 manufacturers to increase by 20 % the efficiency 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 consumption.24
The Polish Efficient 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, product labels and a series of books on efficient lighting design for households and
small businesses. Technological advances are also generating heightened consumer awareness, as well as new ways of understanding how energy in the emerging
markets is used.
Power, fertilizer, cement, iron and steel, chlor-alkali, aluminum, textile, and pulp and paper.
Center for Clean Air Policy, ‘CCAP Success Stories: India and Waste Sector,’ October 2012.
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.html
22
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-anddistribution / 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-efficient products: lessons from programs
in developing countries.’ Energy Policy, 2003.
19
20
21
8
BREAKING DOWN TECHNOLOGICAL BARRIERS
Indeed, discussions of technological advancements in energy efficiency 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 conditions. A traditional 60-watt incandescent bulb can produce about 750 to 1,000 lumens 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, efficiency upgrades to compressed air systems, for example, 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 advancements across various technologies is starting to define the energy efficiency
business. Advancements in metering (often by way of connection with mobile
phones) is one immediate example: the deployment of advanced metering infrastructure 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 financial and environmental gains. While such technologies are so far confined primarily to developed economies, their translation into the emerging market context
should be achievable in the future.
KEEP IN MIND
Increasingly, a holistic and systemwide approach that leverages advancements across various technologies is
starting to define the energy efficiency
business.
Fisher, Lucy and Matthew Wall, ‘Energy-saving technologies cutting firms’ fuel bills.’ BBC News, 9 May 2014.
Available online: http://www.bbc.com / news / business-27292314
26
Csanyi, Edvard ‘11 Energy-Efficiency Improvement Opportunities In Compressed Air Systems,’
Electrical Energy Portal, 24 July 2015.
27
Lacey, Stephen, ‘Intelligent Efficiency: Innovations Reshaping the Energy Efficiency Market.’ Greentech Efficiency, 2013.
25
9
FINANCING
ENERGY EFFICIENCY
Financing large numbers of attractive energy efficiency projects has
proven difficult, 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 undermine incentives but in a growing number of other markets, this is not
the case as a significant number of projects with attractive financial
returns exists.
The major proportion of energy
efficiency finance is provided by the
private sector, much of it in the form
of traditional traditional commercial
bank financing to businesses or
households.
In markets like Brazil, China and India, the primary issue is one of bringing strong
expertise to bear: for energy-efficient investments to be made, energy efficiency
concepts must be marketed and specific projects identified, designed and evaluated. This requires marketing, project development, and technical assessment
skills, typically provided by energy efficiency experts. For markets such as these,
the main challenge is how to most efficiently access existing project development
capacity.28
The energy efficiency finance landscape is large and diverse, and is a critical part
of the resources needed to support the efficiency market. To date, the major proportion of energy efficiency finance is provided by the private sector, much of it in
the form of traditional commercial bank financing to businesses or households.29
The most basic types of finance are debt, grants, guarantees and equity:
Annual green bond issuance by issuer type
Energy/utility companies
40
Coporates/banks
35
Other government/agency/local
KfW Bankengruppe
Equity, USD bn
30
Other Multilateral Development
Banks (MDB)
25
European Investment Bank (EIB)
20
International Finance (IFC)
World Bank (IBRD)
15
10
5
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
Figure 2 Data from Bloomberg and the World Bank; compiled by Julian Spector in ‘The Rise of Green Gonds, Explained.’
CityLab 11 August 2015.
10
■ Debt: can be provided by the private or public sector in a
variety of ways, from simple consumer loans to more complex models such as pooled loans and on-bill financing.
Private financial institutions provide loans at market rates,
whereas public institutions more often – but not always –
provide concessional loans, e. g. at preferential rates. Funding 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 efficiency
context is provided through dedicated credit lines. These
lines typically involve public sector financing and are
often used when private commercial banks are not financing many energy efficiency 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 transactions typically involve a contractually more distant and
remote relationship between the lender, i. e. the public
or private financial institutions, and the borrower. Like
any other bond, a green bond is a fixed-income financial
instrument for raising capital through the debt capital
market. In its simplest form, the bond issuer raises a fixed
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 environmental benefit. Green bonds are becoming increasingly
prominent in the energy efficiency area: they have been
issued by a variety of issuers, with a sharp increase in issuances in 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 preferential rate as a result of credit enhancement mechanisms,
or are provided only with the enhancement in the first
place. Guarantees for energy efficiency are typically established by public entities to catalyze private investment.
(see Figure 2)
■ Grants are funds provided without any repayment obligation. In the context of energy efficiency, 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 specific piece of energy-efficiency equipment.
Grants are generally public funds used, for example, to
lower the capital requirements of an energy efficiency
activity that would otherwise (potentially) not be carried
out. Grants are often required to cover transaction costs
associated with energy efficiency investments (such as energy audits and subsequent monitoring and verification),
particularly when they are high relative to the size of the
underlying transaction. For example, a USD 2,000 rebate
for installing an energy-efficient boiler both reduces the
upfront capital requirement and improves the risk / return
profile of the investment.
■ Equity entails funding from investors who participate in
a company; it represents an infusion of cash into the company without a contractual repayment obligation but with
a potential revenue stream from dividends or enhanced
stock sale values. A number of energy-efficient projects
are financed through project companies, which may later
acquire energy-efficient assets. Equity is expected to be an
increasingly important source as markets develop.
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.
28
11
FINANCING
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
efficiency projects, it is private sector
finance that remains key for the longterm growth of the sector.
12
Two approaches are being taken by commercial banks: demand-driven and
strategy-driven approaches. The demand-driven approach involves repackaged
product extensions, such as lending for commercial refits, mortgages extended
to cover energy efficiency, or car loans for more energy-efficient cars. The strategy-driven approach assesses whether energy efficiency product types and target
markets fit within a bank’s existing strategy or portfolio mix. An example of the
strategy-driven approach would be to introduce energy efficiency lending products 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 strategy-driven approach is to realize that existing clients’ risk profile, and profitability
can be improved by enhancing energy through measures such as replacing inefficient machinery to benefit industrial clients.
Commercial banks also play an important role in channelling public finance towards energy efficiency. Many development banks, for example, channel funds
through local commercial banks, which in turn often provide complementary
financing. This, for example, is the case for the various risk-sharing facilities in
which commercial banks mobilize the actual liquidity that benefits from guarantee coverage. While the public sector can develop policy and regulatory instruments to overcome barriers and facilitate the scaling-up of investment in energy
efficiency projects, it is private sector finance that remains key for the long-term
growth and development of the energy efficiency market. Other sources are also
emerging, including institutional investors who look for long-term investments
with medium-term returns and low risk.
Private finance instruments, USD bn
Grants 3 %
Balance sheet
financing 48%
Low-cost
debt 22 %
Project-level
equity 5 %
Project-level market
rate debt 22%
Figure 3 Source: Climate Policy Initiative, “The Global Landscape of Climate Finance,” 2014.
CONCLUSION
It is easy to get excited about energy efficiency opportunities in emerging
markets. Proven pockets of success, growing economies, improving regulatory
environments and technological advances are all driving the potential of energy
efficient solutions. As markets mature, a vast number of companies, public institutions, and public and private financiers are are opening the way for a paradigm
shift based on more efficient energy usage. As utilities and other providers obtain
more information about how their consumers operate, the potential for efficiency
also increases. The examples mentioned in this paper represent only a small part
of the progress in the field of innovation and opportunity. Here, private sector
financing is especially important when it comes to deploying the long-term capital
needed to foster advances in efficiency, to reach end-users.
Embracing energy efficiency as a long-term growth sector in emerging markets is
still a new concept for many. However, the opportunities are there. Just like novel
microfinance investment vehicles unlocked previously inaccessible financing
resources for individuals at the base of the pyramid, governments, companies
and financiers are uncovering a deep well of energy efficiency opportunities that
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
what can be achieved.
13
FINANCING ENERGY EFFICIENCY
Antoine Prédour oversees development investments
in the energy sector globally at responsAbility Investments AG. He explains how successful results can be
achieved when investing in energy efficiency.
W
here do you see the greatest potential for development investments in the area of energy efficiency?
Let me give you some examples. The
first 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 university has therefore replaced all of its air
conditioning systems with the latest
models, has insulated all the rooms
in its buildings and has fitted 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, firms 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 partner bank to develop a programme to
enable hybrid machines to be used.
During the day, these machines run on
green solar energy, significantly reducing CO2 emissions.
In San José in Costa Rica, we are planning 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.
14
The fourth example is the replacement
by Indian farmers of the existing irrigation systems in their fields with
energy-efficient 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 fields of sugar cane and
33 % on banana plantations.
Y
ou make these investments possible. What are the main challenges
you face?
The greatest challenge is to ensure
that the need for energy efficiency is
entrenched in people’s minds. If we can
convince decision-makers of the potential 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 efficiency – primarily in our dialogue with top managers. They are often unaware of ways of
lowering electricity consumption and
thus saving money. We can make progress in this area if, for example, the top
managers of a potential local financing
partner are convinced of the benefits
of energy efficiency. When talking to
them about this, we present economic
arguments, such as new market opportunities, cost savings and an enhanced
image – making them more attractive to
clients and the labour market. There is a
growing desire among people in developing countries and emerging markets
to work for ‘green companies’ and this
helps us to promote energy efficiency.
W
hat does it take to succeed when
providing financing for energy
efficiency?
Many developing countries and emerging economies are growing rapidly.
Decision-makers in these countries
face major management challenges
on a daily basis. This means we must
first 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 financial intermediaries
do not yet have engineers with expertise in the area of energy efficiency. Co
investments can therefore make sense
at first. They give our partners the guarantee 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 first investments. Private investors
come later and significantly 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 define the niche area that they
believe offers significant potential and
is highly scalable. They then carry out
initial financing to test the market and
scale up their offering from there.
“We all stand to benefit when
we identify potential, supply
additional capital and thus
facilitate increased financing.”
Antoine Prédour
Y
ou define 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 benefit when we identify new
potential, supply additional capital and
thus facilitate increased financing.
responsAbility’s Antoine Prédour oversees financing projects in the energy sector globally.
Measures to improve energy efficiency
require long-term access to capital. It is
a question of finding investors who are
prepared to make a long-term commitment and can act as reliable partners to
local banks.
Y
ou consider the provision of technical assistance to be important.
How does it contribute to the success
of financing?
In 2015, we carried out 16 Technical
Assistance projects. For example, specialists 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 advising the bank on the implementation
of green lending, the analysis of market
potential and the development of new
products.
Our Technical Assistance offering is
financially 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
efficiency and on realizing specific
profit 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.
In specific terms, this partnership
means that we don’t interfere with
the business models of the banks concerned. 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 concentrate on making the most valuable
contribution we can: We demonstrate
the business potential of development
investments in the area of energy efficiency and we assist them in finding
and financing lucrative projects.
Reliability and the rapid execution of
processes is what local financial intermediaries 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 whether they can focus their green lending
programme on a two or ten-year horizon. They also want a partner who is
able to finance the growth of their
programme at a later point in time.
15
OUR OFFICES
March 2016
SWITZERLAND, ZURICH (HEAD OFFICE)
INDIA, MUMBAI
NORWAY, OSLO
responsAbility Investments AG
info@responsAbility.com
responsAbility India Business
asia@responsAbility.com
responsAbility Nordics AS
nordics@responsAbility.com
BRANCH OFFICE, GENEVA
KENYA, NAIROBI
PERU, LIMA
responsAbility Investments AG
info@responsAbility.com
responsAbility Africa Ltd.
africa@responsAbility.com
responsAbility America Latina S. A.C.
latam@responsAbility.com
FRANCE, PARIS
LUXEMBOURG
THAILAND, BANGKOK
responsAbility France SAS
france@responsAbility.com
responsAbility Management
luxembourg@responsAbility.com
responsAbility Thailand Ltd.
asia@responsAbility.com
HONG KONG
responsAbility Hong Kong Limited
asia@responsAbility.com
ABOUT RESPONSABILITY
responsAbility Investments AG is one of the world’s leading
asset managers in the field of development investments and
offers professionally-managed investment solutions to private,
institutional and public investors. The company’s investment
vehicles supply debt and equity financing to non-listed firms in
emerging and developing economies. Through their inclusive
business models, these firms help to meet the basic needs of
broad sections of the population and to drive economic development – leading to greater prosperity in the long term.
RESPONSABILITY RESEARCH
research@responsAbility.com
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regard to its content and completeness and does not accept any liability for losses
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writing and are subject to change at any time without notice. If nothing is indicated
to the contrary, all figures are unaudited. This information material is provided for
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Texts: responsAbility Research
Interview: Dave Hertig
Editing: Tracy Turner
Photography: Willy Spiller
Design and layout: Liebchen + Liebchen GmbH
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Phone: +41 44 250 99 30
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