FINANCIAL MARKETS SUSTAINABILITY Energy Efficiency ENERGY EFFICIENCY FINANCE for SMEs Why is energy efficiency important for small 94820 themselves over time. Usually most of an SME's energy con- sumption is regarded as a fixed cost, so cash flow resulting businesses (SMEs)? from energy savings is typically less risky then the core busi- Rising energy costs can lead to higher production and distribu- ness of the SME. tion costs for businesses, eroding long-term competitiveness Increased debt capacity: Cash flow generated by energy sav- and profitability. SMEs are particularly vulnerable due to limit- ings, together with the company’s enhanced competitive ed resources and tight operating margins. Cutting energy position in the market, may increase a client’s credit quality waste can be a quick way for them to reduce costs, but they and enable the SME to access new debt to finance invest- often lack the knowledge, financing and dedicated personnel ment necessary for further growth. needed to identify efficiency opportunities and implement Value-added services to clients: FIs can incorporate energy improvements. Potential savings can be unlocked through sim- efficiency products into SME lending practices to improve the ple measures, such as retrofitting or replacing old equipment competitiveness and profitability of existing SME clients; this with new technologies, and including energy savings targets can also result in new client growth and expanded market into long-term performance strategies. Local FIs can help reach for the FI. SMEs finance energy efficiency projects through investments Market differentiation: FIs that develop products featuring that often pay for themselves and also offer a healthy return energy efficiency technologies are likely to benefit from over time. “first-mover” advantages in the market; they will also enjoy reputational benefits with policy-makers, shareholders, and What do projects involve? customers who support sustainability practices in business. Energy efficiency projects typically include improvements to production lines, energy generation processes, and regulation Sample SME Project: Heating System Upgrades of energy use in the workplace: for Construction Company, Czech Republic Energy efficiency in production process i) Replacing obsolete and energy inefficient production lines Purpose Replacement of old and inefficient ii) Waste heat recovery coal-fired heating system with new, decentralized natural gas-fired system iii) Improved regulation and control of the production process FI IFC partner bank, Czech Republic Efficient generation of energy inputs Borrower Established manufacturer of i) Combined heat and power production (CHP), also known as construction materials cogeneration IFC role Risk sharing and technical assistance ii)High efficiency boilers and decentralization of heat produc- Project size US$ 150,000 tion iii) Improved insulation of heat/steam pipes Loan amount US$ 133,000 iv) Fuel switching and/or renewable energy utilization Loan maturity 4 years Efficient use of energy in the workplace Simple payback 6 years i) Improved regulation of indoor temperature Environmental impact 713 tons of carbon dioxide annually ii) Improved thermal insulation of buildings iii) High efficiency lighting systems What are the opportunities for financial institutions (FIs)? Large potential market: Energy efficient technologies are tried-and-tested and widely available on the market, making projects broadly attractive to SME clients and other indus- FMS-EO-EEF-SME-0706E tries in the FI’s portfolio. Improved client cash flow: Cash flow from implementation of efficiency measures often completely or partially covers necessary financing costs, allowing investments to pay for INTERNATIONAL FINANCE CORPORATION | GLOBAL FINANCIAL MARKETS | 2121 PENNSYLVANIA AVE. | WASHINGTON, DC, 20433 | WWW.IFC.ORG/FMS FINANCIAL MARKETS SUSTAINABILITY Energy Efficiency ENERGY EFFICIENCY FINANCE for SMEs What are the key issues–questions to ask? What is the SME borrower’s knowledge of energy efficiency? Since energy efficiency improvements are not usually the primary activity of SMEs, do they possess the know-how and skills necessary to operate new equipment? What are the SME’s key objectives? Are energy efficiency upgrades focused on generating energy savings and increased cash flow for the SME, or improvements in the qual- ity and reliability of the production process? If efficiency upgrades focus on process improvements, the borrower should be aware that energy savings and increased cash flow may not be immediate, and are often realized over time. Is local technical expertise available? Is an energy audit necessary to identify specific energy saving measures for the SME borrower? Are local specialists available to assist with this technical aspect of projects? How can IFC help? IFC, supported by world class experts, has ten years of experience working with partner FIs in the area of sustainable energy finance. IFC’s offering includes: ·Partnership: IFC partners with selected client FIs to develop approaches to take advantage of energy efficiency and renewable energy market opportunities. ·Product design and structuring: IFC can provide sector expertise to FIs to assist in product design and financial structuring. Who to contact at IFC? ·Financial offering: IFC offers flexible finance options to FIs that Eva Szalkai evszalkai@ifc.org develop sustainable energy lending portfolios, including T: + 1 202 473 0755 medium to long term credit lines and guarantees. IFC may also offer special financial enhancements such as partial first loss Russell Sturm rsturm@ifc.org coverage on portfolios and performance incentives. T: + 1 202 458 9668 ·Technical assistance: IFC may provide customized technical assistance, including advisors, market analysis, feasibility studies, energy savings calculations, project preparation assistance, audits, engineering support, and capacity building programs. ·Ongoing innovation: IFC continues to develop sustainable energy finance products based on extensive experience, The mission of IFC is to promote sustainable private sector investment in client needs, and market developments. Future product developing and transition countries, helping to reduce poverty and improve people’s lives. Since its founding in 1956 through FY05, IFC has offerings will enable client FIs and their customers to access committed more than $49 billion of its own funds and arranged $24 billion carbon credit revenue streams as an additional benefit to in syndications for 3,319 companies in 140 developing countries. implementing sustainable energy projects. For more information, visit www.ifc.org. INTERNATIONAL FINANCE CORPORATION | GLOBAL FINANCIAL MARKETS | 2121 PENNSYLVANIA AVE. | WASHINGTON, DC, 20433 | WWW.IFC.ORG/FMS