Domestic Use of Electrical Energy Conference 1999
Page 146
FINANCING ENERGY EFFICIENCY IN THE HOME THROUGH
CLIMATE CHANGE FUNDING MECHANISMS
Khorommbi David Matibe & Yaw Afrane-Okese
Energy & Development Research Centre
ABSTRACT
This paper explores various funding opportunities from
potential funding sources to minimise the impacts of
residential sector energy use on global climate regimes
through energy efficiency initiatives. While the paper
focuses on this, it will also explore energy efficiency
financing systems to demonstrate how climate change
funding can be used.
A wide range of climate change funding opportunities
for energy efficiency including the Global
Environmental Facility (GEF), Clean Development
Mechanism (CDM), Multilateral Banks, are discussed.
With particular reference to South Africa, the paper
attempts to draw synergies between domestic energy
use and climate change.
1.
INTRODUCTION
Energy efficiency is recognised as one of the most
cost-effective ways to reduce energy-related emissions
associated with climate change. However, for many
years, efforts to finance energy efficiency and
conservation measures have bypassed the residential
sector and particularly focused on the industrial sector
and power plants, with increasing attention given to
energy-efficiency equipment and elimination of waste
energy. Utilities in some highly industrialised countries
have justified such initiatives by the energy savings
realised and the significant impact such initiatives have
had in reducing greenhouse gas emissions into the
atmosphere. Impressive savings have been achieved
and projections indicate that still more cost-effective
savings exist. This sort of scenario prompted many
investors to channel their resources to utilities while
overlooking residential sector energy use and its
impacts on climate change.
Recently, there has been a shift of emphasis towards
end-users to modify their behaviours and attitudes in
line with better energy usage. That in itself, created an
opportunity for the residential sector to make its voice
heard in the corridors of potential funding sources to
lobby for funding to finance energy efficiency issues in
the residential sector. Although there are available
potential funding mechanisms which are aimed at
minimising the impact that energy use has on the
environment, it is ironic that most of these sources still
overlook the residential sector as making any
significant impact on global climatic change.
This scenario created a rather unfortunate state of
affairs since the residential energy market share is a
fast growing sector in the developing world in terms of
energy demand and a substantial contributor to human
misery and possible disaster.
Eskom, South Africa’s main electricity supplier,
initiated a programme of mass electrification in 1991,
adopting the slogan ‘electricity for all’. This
programme was formalised as a national initiative
when the National Electrification Forum’s midrange
scenario for the implementation of a national
household
electrification
programme
(the
electrification of 2,5 million households by the year
1999) was adopted as a set of targets by the
Reconstruction and Development Programme (RDP)
and endorsed by Eskom and other distributors. Eskom
committed itself to achieving 1.75 million connections
by 1999, with municipalities and other distributors
responsible for the remainder (Gillian Simmonds &
Alix Clark, 1998). Endorsed by the newly elected
democratic government in 1994, the program mostly
targets low-income groups, in both urban and rural
areas. Considering that South Africa’s energy resource
is predominately coal and that the government is
aiming to raise the current figure of around 55% of
homes being electrified to 70% by the turn of the
century and 85% by 2010, it is clear that the residential
sector energy demand will increase substantially,
thereby exerting more pressure on existing power
plants. Given that South Africa’s electricity is
generated from coal-fired power stations, this could
have serious environmental consequences.
Most of Eskom’s power stations run at an efficiency of
35%, thereby contributing to South Africa’s record of
being the world’s 18th largest emitter of C02 and by far
the single largest emitter in Africa (World Energy
Council, 1998). Waste products extracted during the
processing and conversion of coal into oil at SASOL
threaten living vegetation, which plays a major role in
the C02 sink. This therefore means that electricity
generation and oil production from coal have direct and
indirect impacts on global climatic change - direct in
that the resultant C02 emissions contribute to climate
change, Indirect in that waste products released from
coal during its processing into oil damage plants and
the surrounding environment thereby threatening the
normal cycle of carbon.
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In South Africa, the residential energy sector currently
contributes more than 20% to the national peak
demand (Mathews, E H et al, 1998). With this everincreasing energy demand from the residential sector
and its overall contribution to peak demand it is now
increasingly becoming clear that domestic energy use
has a significant impact on global climatic change,
particular as a result of the pressure it exerts on coalfired power plants.
This paper explores various funding opportunities from
potential funding sources to minimise the impacts of
residential sector energy use on global climate regimes
through energy efficiency initiatives. While the paper
focuses on climate change funding opportunities for
residential energy use, it will also explore energy
efficiency financing systems to demonstrate how
climate change funding can be used.
A wide range of climate change funding opportunities
for energy efficiency are discussed, including Global
Environmental Facility (GEF), Clean Development
Mechanism (CDM) and Multilateral Banks. With
particular reference to South Africa, the paper attempts
to draw synergies between domestic energy use and
climate change.
The paper also argues that the residential energy sector
has long been overlooked as having a significant
impact on climate change, thus marginalising it from
securing funding aimed at mitigating the impact of
energy use on global climatic regimes.
2.
GOALS
The aim of this paper is to draw the attention of
relevant stakeholders such as potential funders to look
into ways of financing energy efficiency in the
residential sector through local, national and
international climate change funding mechanisms This is done by identifying synergies between
residential energy efficiency initiatives and climate
change funding mechanisms.
3.




OBJECTIVES
To change the perception that residential energy
use does not play any significant role in global
climatic change.
To identify potential funding sources to finance
domestic energy efficiency initiatives.
To engage (through research) local, regional and
international funding mechanisms to revisit the
issue of energy efficiency funding to accommodate
the residential sector in allocating financial
resources.
To evaluate the current climate change funding
mechanisms and determine how they can finance
domestic energy efficiency initiatives within the
context of reducing greenhouse gas emissions into
the atmosphere.
Domestic Use of Electrical Energy Conference 1999
4.
RATIONALE FOR FINANCING ENERGY
EFFICIENCY
THROUGH
CLIMATE
CHANGE FUNDING MECHANISMS
Potentially, domestic energy consumers hold the best
prospects for the success of energy efficiency
initiatives in other sectors of society. Since any society
is largely built from family units, it is likely that family
members who are conscious of energy efficiency issues
would take the same knowledge acquired at home to
their place of work, schools, recreational activities etc.
By so doing, half of the job of educating the world on
energy efficiency issues would have been done, in a
cost-effective way. If energy efficiency is facilitated at
home level, it will help concientise the whole society.
As a result, implementation of energy efficiency
measures would only require incentives and motivation
since the society would have already been concientised
(from home)
In Mauritius, domestic energy demand had some
serious effects on both generation and transmission of
electricity thereby exerting more pressure on the
utility’s output (Bhurtun, C et al, 1998)
According to the US Environmental Protection Agency
(EPA), homes provide a great opportunity for energy
savings and that a program aimed at replacing
incandescent bulbs with fluorescent bulbs could result
in as much as a 130 megawatt reduction in the
country’s average electricity demand. The EPA also
argue that upgrading the residential energy codes to
class 35 windows (e.g. windows with an insulation
value of U-3.5) for new construction is one costeffective option to reduce GHG emissions through
energy conservation, because the energy savings
exceed the cost of the upgraded windows. In South
Africa the mass housing programme provides an
opportunity to produce low-income housing in
conjunction with energy- efficiency measures. A huge
potential exists for international investment in domestic
energy use through better insulation and other energyefficiency measures.
World leaders are actively seeking for strategies that
can help reduce greenhouse gas emissions at the lowest
cost possible, and it is sensible that efforts and
resources be channelled to the residential market as it is
one of the fastest-growing energy sectors.
5.
WHOSE PLIGHT IS BEING ADDRESSED?
In South Africa, thousands of houses are being built
each year, with a target of a million new units by the
turn of the century. This ambitious programme is set to
change the lives of the impoverished majority for the
better. But recent research indicates that these lowincome residential units are being built without regard
to the costs of energy use. To most of the targeted
groups, domestic energy demand accounts for no less
than 20% of the total household income thereby
Domestic Use of Electrical Energy Conference 1999
making it difficult to afford and still buy bread for the
day.
Houses should be designed and built to use the least
possible energy while providing health, safety and
comfort needs. The full housing subsidies for the lowincome group should not be an excuse for the
government to provide inefficient, dangerous and low
quality houses. While it is undoubtedly true that some
of the targeted group can not afford costs beyond the
government’s contribution, it is unacceptable that these
poor people be provided with units which they would
find difficult to maintain. Whilst the initial cost of
providing inefficient housing may be small, the social
and environmental burdens of generating enough
energy for the up-keep of the inhabitants could be
unbearable.
The government has a responsibility, together with
society at large, to forge a housing programme that
would be sustainable. This poses a great challenge to
all relevant stakeholders. The following section
proposes mechanisms through which low-income
households could access and maintain energy- efficient
housing.
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advisory body to the GEF, providing objective,
strategic scientific and technical advice on GEF
policies, operational strategies and programmes. STAP
also provides advice to the GEF on ways to advance a
better understanding of the issues of the global
environment and how to address them. It is through
STAP that issues like energy mitigation strategies,
climate change and adaptation come to the fore. It is
through areas like these that lobbying for financial
assistance to finance domestic energy-efficiency can be
successfully launched. Since domestic energy use is
increasingly associated with global climatic change, the
GEF can go a long way into making financial inroads
to cater for domestic energy efficiency programmes. In
fact the GEF operates through various modalities, for
instance: grants, which come in the form either of an
initial lump sum, paid up-front, or in instalments as and
when incremental costs occur, concessional finance,
which is in the form of either a once-off repayable loan
at a below-market interest rate or revolving fund for
activities of a specified type, contingent finance, that
is a loan which is normally repayable, but all or part of
which may be excused (Gillian Simmonds & Alix
Clark, 1998)
6.2
6.
Domestic energy-efficiency financing activities should
be grounded upon rational business logic if it is to
secure sustainable funding sources that could in turn
make sensible business practices. Nowadays investors
are very critical of where they channel their resources
as well as looking at the rate of returns from their
investments. Barriers to energy-efficiency financing
should be looked at from a broader perspective with
business demands high on the agenda, although the
social agenda should always be considered. By so
doing, the business sector could start realising the
profitability of investing in domestic energy efficiency
activities thereby maximising shareholder value and
enhancing competitive spirit. Creating a conducive
business environment could attract some of the
following financing strategies:
6.1
CLEAN DEVELOPMENT MECHANISM
EXPLORING FUNDING OPPORTUNITIES
GLOBAL ENVIRONMENTAL FACILITY
The Global Environmental Facility (GEF) was
established as a joint international effort to help solve
global environmental problems. The GEF Trust Fund
was established by a World Bank resolution on March
14, 1991 while the Facility was formally established in
October 1991 as a joint programme between the United
Nations Development Programme (UNDP), United
Nations Environment Programme (UNEP) and the
World Bank. UNEP has a key role to play in GEF. It
catalyses the development of scientific and technical
analysis and advancing environmental management in
GEF-financed activities. UNEP appoints the Executive
Director of the Scientific and Technical Advisory Panel
(STAP) of the GEF. STAP acts as an independent,
The idea of financing energy efficiency in the home
through climate change funding mechanism comes at a
crucial time, when signatories to the United Nations
Framework Convention on Climate Change
(UNFCCC) are still negotiating on the modalities and
procedures through which the clean development
mechanism (CDM) can assist both Annex 1 and nonAnnex 1 countries in meeting their goals. The CDM is
a mechanism through which non-Annex1 Parties
(developing nations) can realise their aspirations for
achieving sustainable goals and in contributing to the
ultimate objective of the Convention, and to assist
Annex 1 Parties in achieving compliance with their
quantified emission limitation and reduction
commitments. Under the CDM, non-Annex 1 Parties
will benefit from project activities resulting in certified
emission. This is where South Africa, with its national
mass housing programme, can incorporate energy
efficiency in such mass housing drive as a matter of
priority
Flexible mechanisms such as CDM, Activities
Implemented Jointly and Joint Implementation serve as
a beacon of hope to forge trading agreements between
parties. If the Conference of Parties could manage to
finalise the modalities and procedures of these
mechanisms, the issue of financing energy efficiency in
the home through climate change funding mechanisms
could have a better opportunity to launch its case more
effectively both at national and international level.
Article 12 paragraph 9 of the CDM provides that
participation may involve private and public entities,
while article 12 paragraph 5 provides that emission
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reductions resulting from each project activity shall be
certified on the basis of real measurable, long-term
benefits related to the mitigation climate change and
reduction in emissions that are additional to any that
would occur in the absence of the certified project
activity. Such provisions indicates that domestic energy
use could qualify as one of the projects aimed at
offsetting climate change threats.
The CDM provides that Parties which are signatories to
the convention should determine their national
priorities in line with CDM objectives. This is where
the issue of household energy efficiency initiatives fit
perfectly. If South Africa uses, as one of its national
priorities, domestic energy efficiency, and that project
gets the approval of the relevant bodies such the
certification and verification bodies then the issue of
climate change domestic energy financing could
become a reality, thus setting a precedent.
Domestic energy efficiency in the developing world
and South Africa in particular could make use of the
Renewable Energy and Efficiency Fund (REEF).
Although REEF is not yet fully developed, once it is in
place, it will be the first global financing vehicle
dedicated to investing in renewable energy (both grid
and off-grid) and energy efficiency in developing
countries. It is proposed to include equity and debt
financing focusing on small and medium size projects.
REEF would also require the support of GEF. Through
the support of GEF, REEF will be able to include
projects that would otherwise be problematic for an
international fund to consider. When this support is
secured, organisations like the International Finance
Corporation will review the process of investments to
ensure that they are in compliance with host country
environmental laws and regulations as well as World
Bank environmental standards.
6.5
6.3
ENERGY EFFICIENCY
FINANCING
MORTGAGE
While the mass housing programme in South Africa
has been cited as a window of opportunity for
incorporating energy efficiency in low-income
housing, the question that remains unanswered is how
to finance such a programme. This is particularly
significant considering that the majority of people
accessing those housing units are poor and
unemployed. Consideration of mortgage financing
might seem inappropriate, especially taking into
account the already complicated housing subsidy
currently in operation. How can one make business
sense out of such a complex housing scheme? Also,
how can one attract potential investors in such
circumstances?
With all this in mind, people should always ask
whether the current mass housing programme is
actually delivering houses that are affordable,
comfortable and environmentally sustainable. Building
such houses is not and will never be an easy task. This
is where the question of mortgage financing comes in.
Although mortgage financing is a common
phenomenon amongst many South Africans, few if any
have ever engaged in such a loan to finance energy
efficiency. With mortgage financing to cater for
energy efficiency products for domestic use in place,
borrowers would be able to increase their buying
power by being entitled to longer interest rates and tax
benefits. The small increase in mortgage payment is
typically more than offset by energy savings. Homes
offering greater comfort, affordability and energy
efficiency that can be paid for over the life of the
mortgage by utility bill savings is an idea whose time
has come.
6.4
GLOBAL RENEWAL ENERGY
ENERGY EFFICIENCY FUND
AND
THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
The European Bank for Reconstruction and
Development is actually providing funding to develop
a network of energy services companies (ESCOs) for
Central and Eastern Europe and countries in transition.
What is interesting about this source of funding is that
it also extends its funding activities to energy
efficiency projects. ESCOs focus on promoting energy
saving opportunities in the private and public sectors.
They can install at their own expense appropriate
technology in their clients’ premises to reduce energy
consumption and provide a guaranteed level of service
in terms of heating, lighting and other energy related
needs. In this scenario ESCOs recover their cost from
the energy savings that will result from the project.
Clients will have access to capital through this form of
contracted services, known as energy performance
contracting.
This kind of service can also be applied to a domestic
energy set up, especially if domestic energy consumers
organise themselves into groups and enter into a
contract as a group. This type of exercise would require
government intervention with guaranteed security to
investors.
South Africa can also benefit regionally if a similar
bank in Africa could be established. The question that
remains unanswered is how could such an initiative
apply to individual homes. As an answer to this, houses
can be grouped together and enter into a contract as a
group with government acting as surety. This could
help deter fears from potential investors that their
investment might not be recovered.
6.6
MULTILATERAL BANKS
Multilateral Development Banks are international
lending institutions owned by member countries. The
objective of the bank is to promote economic and
Domestic Use of Electrical Energy Conference 1999
social progress in developing nations by providing
loans, technical assistance and help with economic
development plans. South Africa can obtain
development
assistance
from
the
African
Development Bank and the World Bank.
6.7
U.S. AGENCY FOR INTERNATIONAL
DEVELOPMENT (USAID)
As an effort to combat global climatic change threats,
USAID undertook to reinvigorate its mandate to
reducing long-term threats to the global environment,
particularly loss of biodiversity and climate change
threats by promoting sustainable economic growth,
energy
efficiency
and
sustainable
land-use
management (Hagler Bailly Consulting, 1998)
Although it has limited grant resources available each
year, the USAID creates favourable conditions for the
host countries to carry out USAID-funded projects
more effectively. USAID highlights the importance of
collaborating with other bilateral donors, multilateral
development Banks and indigenous institutions, from
project conceptualisation through implementation, and
from local to international levels of interaction. Since
USAID grants require permission from host countries,
it is recommended that domestic energy efficiency
projects be in line with the host government’s national
priorities. This would ensure accountability and
transparency on all the stakeholders involved.
6.8
OTHER AGENCIES
Development agencies such as the Norwegian Agency
for International Development (NORAD), Germany
Institute for Technical assistance (GTZ), Danish Cooperation for Environment and Development
(DANCED) etc can go a long way into addressing
some of the domestic energy efficiency financial needs.
These organisations are already providing funding in
many developing countries, making it easier for them
to be accessed for project extension or developing new
projects altogether.
7.
DEVELOPING STRATEGIC GUIDELINES
FOR ACCESSING CLIMATE CHANGE
FUNDING MECHANISMS
When compared to other developing countries South
Africa is in a good position to carry forward the idea of
financing energy efficiency through climate change
funding mechanisms. South Africa has institutions and
programmes in place that could carry out the task more
effectively at national and local level. Programmes
such as FINESSE (Financing Energy Services for
Small Scale Energy Users), Appliance Labelling
Programme [Department of Minerals and Energy
(DME) - funded programme], Household Energy
Action Training (HEAT) Programme and many others
serve as good indicators that South Africa could take
the idea much further. The DME has also
commissioned consultants to develop a business plan
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for a proposed Energy Efficiency Agency which will
provide an implementation vehicle for current DME
energy-efficiency activities and provide a home for all
further energy-efficiency-related activities (Gillian
Simmonds, 1998).
Domestic energy-efficiency financing would also
require the formation of a stakeholder forum where all
relevant participants can participate effectively. Such a
forum could serve as pool for synthesising domestic
energy efficiency issues with full support of people on
the ground. A list of other strategies is suggested.
These would be set up in a way that the residential
energy sector could pull potential investors into the
domestic energy market.
 Making business sense out of residential sector
energy use (making sure the project makes returns
and also benefits the community through direct and
indirect job creation.
 Promote power utility involvement in energy
efficiency financing
 Establish
country-and-region-specific
energy
efficiency funds
 The project should be structured in a way that
encourages stakeholder participation
 Grouping the newly built and soon to be built
homes into ‘investment clusters’ i.e. trying to
amalgamate as many communities as possible to
form groups that can make a reasonable contractual
agreement.
 Keeping communities up to date with climate
change negotiations. This can be done by either
using existing structures in the community or
establishing new climate change structures in an
effort to carry out climate change message to all
inhabitants.
 To cultivate interest amongst inhabitants about
climate change issues - this could entail running
competitions through local radios and TVs or
primarily through road shows.
 Encouraging energy self-monitoring activities and
monthly compilation of such findings by individual
inhabitants.
 Building a few energy-efficient model houses and
allow residents to occupy such houses and use them
as a opportunity to see for themselves what a true
energy-efficient house looks like.
 Lobby the government to make housing one of the
national priorities for climate change funding
opportunities
 Encourage research activities in this field through
funding commitment
 Guarantee long-term investment return and security
for investors.
 Aggregate groups of end-users by type and locate
financing.
 Increase the participation of commercial credit
providers. Commercial banks, credit agencies,
international financing agencies, and leasing
companies should actively learn about energy
efficiency investments by becoming active
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Domestic Use of Electrical Energy Conference 1999
participants in the market.
8.
World Energy Council, South African Energy Profile,
SANEA (South African National Energy Association).
1998
CONCLUSION
Energy-efficiency financing in the home through
climate change funding mechanisms is indeed an issue
that is going to dominate regional and international
debates on climate change projects financing in the
next decade or so. As a result of this, further research
needs to be undertaken to investigate other issues
surrounding this idea. Many questions such as how to
put the idea into practice still need more inputs and
clarity if this issue could be implemented in future.
Synergies between domestic energy use and climate
change have been discussed in this paper, and further
input in the matter is appreciated. The fluidity and
complexity of the negotiation process at the
Conference Of Parties may however, change the
direction and operation of some funding mechanisms,
especially the GEF whose modalities and procedures
are issues of hot debates at the COP.
9.
REFERENCES
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it means for America. Henry Holt and Company, Inc
1997.
Bhurtun, C et al. Problems of domestic load and effects
the national grid in Mauritius, (paper presented at
DUEE Conference, 1998).
Corporate Relations Unit-World Bank, Global
renewable Energy and Energy Efficiency, September
1997.
Global Environmental Facility:
http://www.undp.org.br/gefing.ht
E-Mail Address
Hagler Bailly Consulting, Inc: Global Climatic
Change: The USAID Response, Arlington, USA, 1998
Hill Rebecca: East European Energy Waste tackled by
European Bank for Reconstruction and Development
(EBRD),
London,
UK,
(June)1997
http://www.weea.org/newsletter/01/01.t
Mathews, E H et al: The role of thermal performance
of houses in strategic RDSM planning (paper presented
at DUEE Conference, 1998)
Simmonds, G and Clark, A: Energy strategies for the
urban poor, Energy and Development Research Centre,
CT, January 1998
Zak, J Project for promoting Rational use of energy
and environmental Protection Technology (EURELA),
March 1998:
10.
AUTHORS
Principal Author: Khorommbi David Matibe holds
a Masters Degree in Environmental Management from
Nottingham University (UK), a BED degree from
RAU, a BA degree from the University of Venda and a
University Education Diploma from the same
institution. He is currently working as a researcher in
the Energy, Efficiency and Environment Programme at
the Energy and Development Research Centre,
University of Cape Town. His address is:
Energy and Development Research Centre
University of Cape Town
Private Bag, Rondebosch
7701
Tel: (021) 650 3973
Fax: (021) 650 2830
Email: david@energetic.uct.ac.za
Co-author: Yaw Afrane-Okese holds a BSc (Hons)
degree in Chemical Engineering from the University of
Science and Technology, Kumasi, Ghana and an MSc
(Eng) degree in Energy Studies from the University of
Cape Town (UCT). He is currently working as a
researcher in the Energy, Efficiency and Environment
Programme at the Energy & Development Research
Centre, UCT. Prior to this he worked in the Energy,
Poverty and Development Programme at the same
institution. His address is:
Energy & Development Research Centre
University of Cape Town
Private Bag, Rondebosch
7701.
Tel: (021) 650 3973
Fax: (021) 650 2830
Email: Yaw@energetic.uct.ac.za
The paper is presented by Khorommbi David Matibe