2018/96 Supported by K NKONW A A WELDEGDEG E OL N ONTOET E S ESREI R E ISE S F OFRO R P R&A C T HTEH E NEENREGRYG Y ETX ITCREA C T I V E S G L O B A L P R A C T I C E THE BOTTOM LINE Energy Efficiency in Industry The vast energy efficiency potential in industry remains largely untapped, impairing global efforts Why does energy efficiency in industry matter? and mitigates the environmental impacts of industrial energy to mitigate climate change. With production and use. Unless energy efficiency potential is harnessed, Although most analyses of the potential of industrial EE have the right steps, energy savings by 2035 could rise to 668 million industrial emissions of CO2 will soar, accelerating focused on upgrading energy-intensive industrial processes, most metric tons of oil equivalent climate change countries have the bulk of their manufacturing employment and GDP in OECD countries, and up to productivity in small and medium enterprises (SMEs). It is therefore In 2015 industry accounted for 29 percent of global energy consump- five times more in developing here, in SMEs, where the best opportunities exist for optimization tion and 36 percent of CO2 emissions (www.iea.org/statistics). By countries. Gains could be achieved and investment. But industrial EE should go beyond upgrading exist- 2050 population growth and economic development in developing through plant modernization, ing factories. Although some countries have large industrial bases countries are likely to increase demand for raw materials by 45 to 60 process improvements, and (for example, China, India, and Turkey) and others have a legacy of percent (relative to 2010). These in turn will increase energy demand deployment of the best available outmoded and inefficient plants (the former republics of the Soviet in the industrial sector. In the meantime, the vast energy efficiency technologies. Reducing energy Union), many more countries have ambitions for new or substantial (EE) potential in the sector remains untapped, even as industrial demand improves energy security, growth in industrialization (for example, Vietnam, Uzbekistan, and productivity has improved dramatically over the past few decades. opens infrastructure bottlenecks, nations in Sub-Saharan Africa). Unless the EE potential is realized, the Intergovernmental Panel on and mitigates the environmental Climate Change estimates that industrial emissions of CO2 will rise 50 impacts of industrial energy to 150 percent by 2050, impairing global efforts to mitigate climate What are the main challenges to greater energy production and use. It also makes change. efficiency in industry? factories more competitive. If EE were widely adopted, energy savings by 2035 could rise to Although efficiency improvements are good business practice, they 668 million metric tons of oil equivalent (Mtoe) in developed (OECD) do not happen on their own. Key systemic barriers include: Z  uzana Dobrotkova countries, increasing up to five times more, to 3,482 Mtoe, in devel- • Low energy pricing, which makes investments in EE less is an energy specialist in oping countries (IEA 2012).1 Such gains could be achieved through financially attractive, thereby encouraging overconsumption. ESMAP, part of the Energy plant modernization, process improvements and optimization, • Lack of data, both on energy use and baselines, as well and Extractives Global and deployment of the best available technologies. Improvements as credible data on the performance of newer systems and Practice at the World Bank. in industrial EE are also good public policy and good business. EE technologies. Energy audits and energy management systems  ditya Lukas is an A makes factories more competitive, and reduced energy demand in can provide such data, but the associated costs may be higher energy specialist in turn improves energy security, reduces infrastructure bottlenecks, than factories are willing to spend, particularly before they know ESMAP. the benefits. 1 For reference, the total final energy consumption of the United States is about 1,500 Mtoe. J  as Singh is a lead energy specialist in the Energy and Extractives Global Practice. 2 E n erg y E f f icie n c y i n I n d u s tr y • Production bias and low priority for cost savings. Factory How have countries addressed these challenges? owners favor investments that expand production and avoid dis- Governments have developed a range of policies, ruptions. Energy costs may not be known or may represent only a small portion of production costs. Although technical information, programs, and approaches to surmount these energy audits, and so on provide information, decision makers at barriers Energy efficient production the factory level may not understand such technical assessments. National governments play a crucial role in creating successful EE makes factories more • Limited interest among financiers in financing EE. programs in industry. They enact policy frameworks and regulations, Investors favor loans for production expansion and traditional competitive. Reduced develop accountable institutions, and adopt broad-based market asset-based financing, rather than cost-saving measures and energy demand in turn principles (for example, setting energy prices at cost-recovery levels). cashflow-based loans. Prevailing short loan tenors, overcollater- As recent experiences in both industrial and emerging economies improves energy security, alization, inability to assess EE investments and their associated show, national governments also have a catalytic role in market reduces infrastructure risks, and weak creditworthiness of some factories (including development. They can remove barriers to the knowledge, incentives, SMEs) all further hamper bank lending for EE improvements. bottlenecks, and mitigates capacity, and finance needed to scale up industrial EE investments. the environmental impacts Barriers are classified in table 1. Developed countries with large industrial production sectors, like of industrial energy Table 1. Barriers to implementing energy efficiency projects in the industrial sector production and use. Industrial energy users Energy service or technology providers Financiers Knowledge, • Excessive management focus on short- • Limited demand for energy efficiency • Lack of information on energy-efficient capacity, and term benefits such as sales revenue services and technological innovations technologies and their benefits incentive and growth • New contractual mechanisms (for • Lack of customized financial products barriers • Low energy efficiency benefits relative example, energy savings performance and appraisal procedures to other costs and priorities contracts) that may increase business • Lack of capacity for measurement and • High perceived risks of new risks verification technologies or systems • Limited technical, business, and risk- • Limited understanding and capacity • Lack of credible data and information management skills among loan officers and risk managers needed for decision making • Poor communication with bankers • Inadequate technical and financial expertise • Poor access to energy-efficient technologies and relevant services Financial • High up-front capital costs, usually for • High project-development costs • High transaction costs associated with barriers energy-intensive industries • Limited access to financing and equity small and widely dispersed energy • High borrowing costs and limited efficiency projects access to financing, especially for SMEs • Competition for capital from other high- • Expectation of a high return on return, low-risk business opportunities investment (quick payback) • Financial risks associated with SMEs, • High project development and including energy service companies transaction costs relative to project size, particularly for SMEs Source: World Bank (2016a). Note: SMEs = small and medium enterprises. 3 E n erg y E f f icie n c y i n I n d u s tr y Japan and the Netherlands, have encouraged and at times mandated management; facilitation of commercial bank financing; support for industries to reach significant EE goals and targets. Other countries, energy-performance contracting, case studies, and implementation including Germany and Canada, have supported information sharing, guides; standardized templates for project investments; and support networks, and in some cases incentive schemes to encourage for training and information dissemination. industries to reduce energy waste. Spain implemented demand- Governments have a range of specific policy instruments at their A well-designed national side response for industry, driven by electricity price differences disposal: industrial EE program has between peak and off-peak hours. In emerging economies that have • Minimum energy performance standards for energy-consuming achieved consistent and substantial improvements in industrial EE, equipment (for example, boilers and electric motors) clear policy goals linked like China and India, governments have made deliberate efforts to • Voluntary or mandatory energy savings agreements with large with measurable targets pursue market reforms and to pilot, demonstrate, and scale up policy energy users (when a third party can verify savings with “white and a range of policy interventions. certificates,” these can be bought by large energy users that are instruments to guide and A well-designed national industrial EE program has clear policy unable to meet targets) goals linked with measurable targets and a range of policy instru- • Tax incentives, for example, for the installation of efficient encourage action, facilitate ments to guide and encourage action, facilitate financing, and build equipment financing, and build the the implementation capacity of market participants. A portfolio of • Elimination of import duties on efficient technologies and bans implementation capacity of industrial EE policies and programs could include: on inefficient technologies market participants. Ambitious, yet realistic national targets based on sound • Incentive grants tied to verified energy savings market and technical analyses, understanding market gaps, cost-ef- • Special assistance to SMEs (for example, grants or in-kind fective investment opportunities, and available resources. Both assistance for energy audits and project development) China and the European Union provide examples. In China, targets • Assistance in establishing energy-management systems. for reducing energy intensity are set in each Five Year Plan. The 12th Five Year Plan targeted a 16 percent reduction by 2015, which was In addition to imposing policies and regulations, governments can overachieved; for the 13th Five Year Plan the target is a 15 percent inform and raise awareness about industrial EE. These campaigns reduction by 2020. The European Union’s 20-20-20 targets call for can cite sector-specific case studies and provide information about a 20 percent improvement in EE by 2020, as part of the EU’s 2020 technical needs and finance, subsector benchmarking, and manda- Climate and Energy Package. tory reporting. “Fame and shame” programs can identify high and Sector-specific programs and core policy instruments low performers. can contribute industrial inputs to help meet national EE targets. Governments can also help with the development of alternative Typical program elements include regulations, information, and delivery mechanisms, such as energy service companies (ESCOs), awareness-raising campaigns, in addition to financing and technical utility demand-side management (DSM) programs, and commercial assistance. Examples include China’s 10,000 Enterprise Program lending. ESCOs can be fostered through special equity/financing (based on mandatory energy savings agreements), India’s Perform- windows for contracting in industry. Utility mandates for industrial EE Achieve-Trade scheme (a market-based mechanism for trading programs are useful when they include on-bill financing. Programs certificates of industrial energy savings), and Denmark’s voluntary to train local banks to appraise EE projects are another way for agreements with some 300 industries, in place from 1996 to 2013. governments to support industrial energy efficiency. Typical financing Supplementary policies and implementation-support mechanisms for industrial EE include credit lines (box 1), special systems are important. Examples include requirements and lending programs, incentive schemes, credit guarantees, ESCOs, and support for enterprise energy managers, energy audits, and energy leasing. 4 E n erg y E f f icie n c y i n I n d u s tr y Box 1. Credit lines for industrial EE Credit lines are a standard financing mechanism for industrial EE. They also support bank lending, whereby factories access working capital and investment loans. Because the institutional setup of credit lines relies on banks and other financial institutions, no new mechanisms have to be established. As with all delivery mechanisms, however, credit lines have limitations. In developed financial markets—where the regulatory framework is “Fame and shame” strong and financial institutions have well-established project appraisal procedures, strong management commitment to pursue an EE lending business, and professional and technical expertise—implementation of the credit line may be more straightforward. In less-developed markets—where banking programs can identify high regulations are more restrictive and financial institutions’ capacity to manage EE projects is less developed—a credit line’s effectiveness may be more limited, and project-appraisal procedures may restrict the pool of borrowers for the credit line. But in some cases, as with the World Bank China Energy and low performers. Efficiency Financing Project (see table 3), credit lines have been instrumental in helping energy service companies access financing for their projects, which can further facilitate industrial EE investments. The typical design of an EE credit line is depicted below: Credit line with PfI External Credit line with and developer financing Credit line PARTICIPATING PfI cofinancing financing DONOR FINANCIAL International PUBLIC AGENCY INSTITUTION SUB-BORROWER PROJECT financial Low interest Government (PFI) Market or End users institution rate Bank concessional rate Dedicated unit Repayment Repayment Repayment Repayment Technical assistance ADDRESSED • Lack of liquidity in financial • Perception of high financial risk of • Perception of high technical and Technical BARRIERS markets for commercial debt energy efficiency projects financial risks of energy efficiency organizations financing of energy efficiency investments among energy users and experts projects • Inadequate expertise and capacity to evaluate energy efficiency projects • Limited interest in using internal and understand financing needs financing for energy efficiency projects • High transaction costs for processing project financing Sources: World Bank (2014); World Bank (2016b). Note: Thickness of arrow represents relative magnitude of financial flows to depict leveraging. Public agencies may offer credit lines without the aid of external donors (dashed border). What has the World Bank done to help? The World Bank has supported industrial EE and competitiveness programs for public enterprises as well as large, medium, and small The World Bank’s portfolio of industrial EE private enterprises. It has supported a number of countries through investments is paying off, but constraints remain technical assistance. The current portfolio of industrial EE projects The World Bank uses a variety of instruments to support industrial (table 3) is estimated at about $1.53 billion in World Bank financing, EE financing in client countries, most often through credit lines and with total investments reaching $24.6 billion, including funds guarantee schemes (table 2). Over the past decade, the World Bank from financial institutions and cofinancing from counterparts and has developed multiple, large industrial EE programs in China and subborrowers. Turkey in addition to single operation projects in Brazil, Colombia, Table 4 includes results reported from some recently closed India, Jamaica, Tunisia, Vietnam, Ukraine, and Uzbekistan. operations. Although results vary and are difficult to aggregate, they 5 E n erg y E f f icie n c y i n I n d u s tr y Table 2. World Bank program models for industrial EE Program instruments Credit lines, loan guarantees, mezzanine funds Description Lending to one or more local banks to support portfolios of smaller EE investments in public/private enterprises Implementing agencies Development banks, public and commercial banks, guarantee companies Success factors • Sound market analyses to identify eligible and viable target markets Over the past decade, the • Strong, stable demand built through multiple channels and technical intermediation World Bank has developed • Appropriate financial products, standardized to lower transaction costs • Committed banking partners with internal capacity raised as needed through technical assistance multiple, large industrial Source: World Bank (2016c). EE programs in China and Turkey in addition to single Table 3. World Bank industrial EE projects (ongoing) operation projects in Brazil, Total project cost Colombia, India, Jamaica, (US$ million) Approval date/ Country Project [WB financing] Description/model/target market closing date Tunisia, Vietnam, Ukraine, Brazil Financial Instruments for Brazil $1,324.0 Unlock private financing by reducing credit risk and Jun 29, 2018/Dec 31, 2033 and Uzbekistan. Energy Efficient Cities [IBRD: $200.0; enhancing technical quality of street lighting and industrial CTF: $20.0] EE projects China Shandong Energy Efficiency $317.1 Support for financial leasing and energy performance Jun 9, 2011/Dec 31, 2018 [IBRD: $150.0] contracting of EE investments in selected industrial enterprises China Innovative Financing for Air $1,000.0 Program-for-results supporting replacement of inefficient Mar 22, 2016/June 30, 2022 Pollution Control in Jing-Jin-Ji [IBRD: $500.0] equipment, processes, and technologies in industry China Developing Market Based $17.8 Improve results measurement and verification system; Mar 16, 2017/Apr 30, 2022 Energy Efficiency [GEF: $17.8] develop market-based mechanisms for EE Colombia Clean Energy Development $1,015.0 Increase nonconventional renewable energy and energy Jul 16, 2018/Jun 30, 2024 [IBRD: $41.0; savings in industrial sector through mobilization of private CTF: $40.0] investment India Financing Energy Efficiency at $87.8 Increase demand for EE investments in MSMEs and build May 27, 2010/May 4, 2019 MSMEs (including Additional [GEF: $16.5] their capacity to access commercial finance Financing) India Partial Risk Sharing Facility in $133.0 Partial risk-sharing facility to finance EE investments in SMEs Feb 25, 2015/Apr 1, 2022 Energy Efficiency [CTF: $25.0; and municipal street lighting GEF: $18.0] Turkey SME Energy Efficiency $233.64 Scaleup of commercial on-lending to EE in SMEs Mar 27, 2013/Sep 30, 2019 [IBRD: $201; GEF: $3.64] Uzbekistan EE Facility for Industrial $332.5 Line of credit to increase EE and competitiveness of Jan 30, 2018/Jan 31, 2023 Enterprises (Additional [IBRD: $200.0] industrial enterprises Financing) Vietnam Energy Efficiency Financing $158.0 Line of credit with cofinancing from participating financial Apr 14, 2017/Jul 31, 2022 [IBRD: $100.0; institutions to finance industrial EE IDA: $1.70] Source: Author’s compilation. Note: IBRD = International Bank for Reconstruction and Development; CTF = Clean Technology Fund; GEF = Global Environment Facility; IDA = International Development Association. 6 E n erg y E f f icie n c y i n I n d u s tr y show substantial energy savings. Increasing the industrial EE portfolio countries complete reforms of their energy sector and pricing, and as has been constrained, however, by governments unwilling to use new taxes are introduced to better reflect the externalities of energy their limited sovereign guarantee for private financing, which they use and industrial production, governments will want to increase see as space best occupied by commercial banks. These constraints their commitment to climate actions. By the same token, industry will are compounded by local banking partners unwilling to lend for have to reduce energy use to remain competitive. As more countries EE. Industrial owners, similarly, are reluctant to invest. But as more complete reforms of their energy sector and pricing, Table 4. Results from some recently closed World Bank industrial EE projects industry will have to reduce Total project cost energy use to remain Project name (US$ million) [implementation period] [WB financing] Description Reported results competitive. China Energy Efficiency Financing $752.5 [IBRD: $145.5] Line of credit to finance Lifetime energy savings of 33,374,000 MWh II and III (Additional Financing) industrial EE Lifetime carbon savings of 10,559,000 tons of CO2eq [June 2010–December 2016] China Energy Efficiency Promotion $24.1 [GEF: $3.8] Capacity building for energy Lifetime energy savings of 6,391,000 MWh in Industry [May 2011–June 2016] managers and policy support Lifetime carbon savings of tons of 1,963,000 CO2eq Facilitated 17 EE investments through demonstration projects and training programs Tunisia Energy Efficiency $40.0 [IBRD: $40.0] Line of credit to finance Lifetime energy savings of 1,019,137 MWh [June 2009–January 2016] industrial EE and cogeneration Lifetime carbon savings of 280,840 tons of CO2eq Turkey Private Sector Renewable $3,100.0 Line of credit to finance RE and Lifetime energy savings: 2,600 Tcal Energy and Energy Efficiency [IBRD: $500.0; CTF: $100.0] industrial EE Lifetime carbon savings of 1,468,000 tons of CO2eq [May 2009–December 2016 Ukraine Energy Efficiency $200.0 [IBRD: $200.0] Line of credit to finance Lifetime energy savings of 115,817,000 MWh [May 2010–March 2017] industrial EE Lifetime carbon savings of 8,561,000 tons of CO2eq Uzbekistan Energy Efficiency $178.3 [IDA: $108.7] Line of credit to finance Lifetime energy savings of 5,379,000 MWh Facility for Industrial Enterprises industrial EE Lifetime carbon savings of 8,748,000 tons of CO2eq [June 2010–January 2018] Leveraged about $70 million in EE investments Vietnam Clean Production and $4.2 [GEF: $2.4] Develop EE action plans for key Lifetime energy savings of 5,462,611 MWh Energy Efficiency industrial sectors and develop Lifetime carbon savings of 2,282,530 tons of CO2eq [July 2011-June 2017] energy service providers Source: Author’s compilation. Note: IBRD = International Bank for Reconstruction and Development; CTF = Clean Technology Fund; GEF = Global Environment Facility; IDA = International Development Association. 7 E n erg y E f f icie n c y i n I n d u s tr y What lessons have been learned? • Selection of capable banking partners. Trusted and commit- MAKE FURTHER ted local banking partners are crucial. Industrial enterprises will Implementing EE in the industry sector hinges on CONNECTIONS be dealing with these financial companies on a day-to-day basis. overcoming information barriers, addressing incentives Technical assistance to commercial banks needs to be incorpo- Live Wire 2014/11. “Designing Credit Lines for Energy Efficiency,” and capacity gaps, and enabling access to finance rated into the project design so that EE lending can be scaled up by Ashok Sarkar, Jonathan Sinton, over time without international assistance. and Joeri de Wit. Lessons from recently implemented projects suggest that the • Monitoring and evaluation. Robust monitoring and evaluation success of an industrial EE project depends on the following factors: Live Wire 2014/18. “Exploiting Market- plans should be set up at the outset, including a timeline for Based Mechanisms to Meet Utilities’ • Strong policy frameworks. A sound policy framework is reviews of the project. In addition to tracking project perfor- Energy Efficiency Obligations,” by critical for developing a national-scale program. Broad programs Jonathan Sinton and Joeri de Wit. mance, M&E permits early detection of possible problems. provide the mandates, incentives, tools, and other mechanisms Additionally, good data make for better communication about the Live Wire 2014/25. “Doubling the Rate to help financing programs reach their lending goals. of Improvement of Energy Efficiency,” project’s performance and impact, helping to raise awareness • Comprehensive market assessments. A holistic market by Jonathan Sinton, Ashok Sarkar, about the benefits of EE. Ivan Jaques, and Irina Bushueva. assessment is a precondition for early identification of a pipeline of projects to be financed. Market assessments do best when Live Wire 2016/53. “Why Energy they identify geographical areas, energy-intensive subsectors, References Efficiency Matters and How to Scale It Up,” by Jas Singh. and appropriate technologies. International Energy Agency. 2012. “World Energy Outlook.” OECD/ Live Wire 2016/54. “Fostering the • Building strong demand. Once the market is identified, IEA, Paris, France, 2012. Development of ESCO Markets for projects need to be designed in a way that builds demand for ———. n.d. IEA statistics website: https://www.iea.org/statistics/ Energy Efficiency,” by Kathrin Hofer, World Bank. 2014. “Designing Credit Lines for Energy Efficiency.” Live the product or program using multiple channels and technical Dilip Limaye, and Jas Singh. intermediation. Marketing of EE, particularly to SMEs, requires Wire 2014/11. Live Wire 2016/55. “Designing Effective intensive technical assistance to build knowledge, acceptance, ———. 2016a. “Designing Effective National Programs to Improve National Programs to Improve Industrial Energy Efficiency,” by Feng Liu and and trust. Flexible program design is also important to allow Industrial Energy Efficiency.” Live Wire 2016/55. Robert Tromop. pipelines to adjust to changing market conditions. ———. 2016b. “Fostering Development of ESCO Markets for Energy Live Wire 2018/88. “Financing Energy • Standardization and aggregation. EE loans tend to be small, Efficiency.” Live Wire 2016/54. Efficiency, Part 1: Revolving Funds, particularly for SMEs. So transaction costs must be managed with ———. 2016c. “Why Energy Efficiency Matters and How to Scale It by Aditya Lukas. appropriate financial products and standardization. These costs Up.” Live Wire 2016/53. Live Wire 2018/91. “Financing Energy can also be lowered with aggregation mechanisms, ESCOs, or Efficiency, Part 1: Credit Lines,” by Yun The internal World Bank briefing note on which this Live Wire is based was clustering that is geographically based and industry-specific. Wu, Jas Singh, and Dylan Karl Tucker. prepared in July 2016 and reviewed by Gevorg Sargsyan, Jas Singh, and Martina Bosi. Live Wire 2018/92. “Transforming Energy Efficiency Markets in Developing Countries : The Emerging Possibilities of Super ESCOs,” by Ashok Sarkar and Sarah Moin. Live Wire 2018/94. “Energy Efficiency in the Public Sector,” by Jas Singh. Live Wire 2018/95. “Residential Energy Efficiency,” by Aditya Lukas. Find these and the entire Live Wire archive at https://openknowledge. worldbank.org/handle/10986/17135. 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