WORLD BANK GEF Energy Efficiency PORTFOLIO REVIEW AND PRACTITIONERS' HANDBOOK GLOBAL ENVIRONMENT FACILITY PROGRAM WORLD BANK GEF Energy Efficiency PORTFOLIO REVIEWAND PRACTITIONERS' HANDBOOK WORLD BANK GLOBAL ENVIRONMENTAL FACILITY PROGRAM © 2005 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street NW Washington DC 20433 USA Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org This report was prepared by Jas Singh. Special thanks to all the task team leaders who took time out of their busy schedules to provide project data and offer their perspectives, to members of the World Bank's GEF Coordination Team for their insights and contributions, and to members of the World Bank's Environment Department Climate Change Team, particularly Ajay Mathur, Todd Johnson, and Chandrasekar Govindarajalu, for their guidance and support. 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Contents Abbreviations and Acronyms iv Introduction 1 The Project Portfolio 2 Implementation Experiences 6 Utility DSM 6 Market Transformation 7 ESCO Development 8 Complementary Efforts 11 Energy Efficiency Financing Programs 12 Project Development and Audit Costs 12 Financing Instruments 14 Selecting the Appropriate Instruments 16 Fund Sizing and Leverage 19 Results to Date 19 Emerging Good Practices 20 for Financing Programs Conclusions 23 Rationale for Energy Efficiency 24 Lessons Learned from GEF EE 25 Portfolio Questions for Discussion 26 Appendix A Energy Efficiency Project Database 27 Appendix B Additional Resources 31 Endnotes 32 iii ABBREVIATIONS & ACRONYMS AFR Africa Region IFC International Finance Corporation ASTAE Asia Alternative Energy Program LAC Latin America and Caribbean Region CEEF Commercializing Energy Efficiency MLF Montreal Protocol Investment Fund Finance Project (IFC) MNA Middle East and North Africa Region DSM Demand-Side Management MSP medium-sized project EAP East Asia and Pacific Region MTR Mid-Term Review ECA Eastern Europe and Central Asia Region NGO Nongovernmental Organization EE energy efficiency PAD Project Appraisal Document ELI Efficient Lighting Initiative (IFC) PIU project implementation unit ESCO energy service company PSR Project Supervision Report FI financial institution REEF Renewable Energy and Energy Efficiency Fund (IFC) FSP full-sized project SAR South Asia Region FY fiscal year TA Technical Assistance GEF Global Environment Facility TTL Task Team Leader GFA guarantee framework agreement UNDP United Nations Development Programme HEECP Hungary Energy Efficiency Co-financing Program (IFC) IA implementing agency ICR Implementation Completion Report iv Introduction The World Bank's Global Environment Facility Coordination Team a review of Staff Appraisal Reports, Project Appraisal Documents commissioned this review of the Bank's GEF co-financed energy (PADs), Implementation Completion Reports (ICRs), Project Summary efficiency (EE) portfolio, in order to identify useful case studies Reports (PSRs), Mid-Term Review (MTR) Aide Memoires, GEF Project and good practices that could be made available to World Bank Briefs, and GEF Concept Notes were completed. All current EE task Group staff to support their EE operational work, particularly team leaders (TTLs) were contacted and several were interviewed financing programs. to assess the portfolio, the lessons learned, and challenges for the future. Some relevant GEF thematic and key Bank EE reports were In this regard, a review was undertaken of all GEF EE projects also reviewed. implemented by the Bank since the GEF's inception in 1991. As a first step, a GEF EE project portfolio database was developed This report summarizes the main findings of this review, assesses (see Appendix A). This was then analyzed to develop aggregate some trends in project designs and program models, highlights project data, analyze emerging trends, and identify various portfolio emerging lessons learned, and attempts to offer some insights, characteristics and other parameters of interest. In terms of project suggestions and issues for continued discussion in the years ahead. activities, for the purposes of this review the GEF portfolio was The report has five chapters: introduction, summary of the project divided into three main periods: a first wave of projects (FY93­97), portfolio, discussion of program models and implementation which can be considered the pilot period for GEF EE projects; a experiences to date, EE financing programs and emerging good second wave of projects based on emerging experiences with the practices, and conclusion. Given the high number of EE financing initial operations; and a third wave (FY03­06), which has begun to programs in the pipeline, the report places a particular emphasis show a high concentration of EE financing components. In addition, on this type of operation. 1 Since 1992, 42 EE projects have entered the GEF project pipeline: 28 World Bank full-sized projects (FSPs), 4 Bank medium-sized projects (MSPs), and 10 IFC investments (of which two are MSPs) (See Table 1). Nine of these have closed, 21 are under implementation, and the remaining 12 are under preparation. These programs would lead to more than $3.3 billion in total investments in EE, with about 11 percent ($380 million) in approved GEF support.1 Most of the project cofinancing is expected to be mobilized by the private sector and by client counterpart funding (about $2.5 billion), with some support from Bank lending and IFC investments ($490 million). THE PROJECT In terms of the evolution of the portfolio, project development PORTFOLIO has been rather sporadic (see Figure 1), with one to four projects approved per year over the past decade (FY93­02) and a considerable jump in EE operations in the current period (FY03­06). Project sizes have ranged from $500,000 to $33.8 million (GEF EE components only), with an average size of $8.1 million. Despite the common perception of declining trends, the average size of the GEF EE projects has not decreased, although fewer include Bank cofinancing than in earlier years. (IFC cofinancing opportunities for EE projects, however, are on the rise.) A number of other interesting findings from the Bank project data have emerged. But it should be noted that since only nine projects have closed to date, these data are merely indicative and will continually change as the portfolio ages and evolves. Project preparation times for Bank projects have ranged from 1.5 to 4.4 years, with an average of 2.6 years. Project implementation periods have increased, from three to five years in the first and second waves to six to seven years for most projects now under preparation. All closed projects required on average a one-year extension. This portfolio is expected to save over 475 million tons of carbon dioxide as a result of GEF support, although actual savings are as yet unknown. 2 Engergy Efficiency Portfolio Review and Practitioners' Handbook In terms of project designs, the first wave of projects (FY93­ 97) included nine projects for $80 million in GEF support and Figure 1. History of GEF EE Projects supported several pilot and demonstration efforts to generate some basic implementation experiences and test various program models. As a result, these operations were somewhat varied in their approaches, dealing with selected EE products and market transformation efforts (China, Mexico, Thailand, and Poland (IFC)), standards and codes (Sri Lanka and Thailand), utility demand-side management (DSM) (Jamaica, Mexico, Sri Lanka, and Thailand), gas distribution loss reduction (China and Russia), and a financing program (Hungary (IFC)). As initial results were obtained, the second wave of projects was designed (FY98­02); it included 14 projects for $105 million. These included some similar program types, such as EE products and market transformation (China, Mongolia, Thailand, Argentina 06) includes some 25 projects for an estimated $212 million, (IFC), and the Efficient Lighting Initiative (ELI) of IFC) and utility DSM and almost every GEF EE project now includes a major financing (Brazil and Ecuador), as well as more market-oriented models component, with many considering some type of partial loan such as energy service company (ESCO) development projects guarantee facility. (Brazil, China, and Côte d'Ivoire) and several more financing programs (India, Thailand, the Renewable Energy and Energy In terms of regional distribution, East Asia and the Pacific (EAP) Efficiency Fund (REEF) of IFC, and the Hungary Energy Efficiency has received by far the most GEF support for its EE activities, Co-financing Program (HEECP) 2 of IFC). The third wave (FY03­ with 13 projects totaling about $177 million, or 57 percent Table 1. Summary of GEF Energy Efficiency Project Portfolio Number of Total Project Costs Total GEF Support Project Projects (million dollars) (million dollars) Bank FSPs 28 2,824 305.6 Bank MSPs 4 16 3.0 IFC 10 530 73.7 TOTAL 42 3,370 382.2 Notes: This includes all projects that have entered the GEF project pipeline since 1992. The totals represent the GEF approved amount and do not reflect any cancellations (which amount to $5.8 million). These figures include proposed projects and projects on hold but not dropped projects or PDF B grants. 3 of the total GEF EE commitments (excluding IFC investments). commitments while new initiatives are being considered in other (See Table 2.) China has received about 75 percent of EAP's countries (DSM activities in Laos and distribution loss reduction in share ($131 million). Eastern Europe and Central Asia (ECA) Vietnam). Given the still rising demand for energy in many of these is the second largest beneficiary, receiving about $88 million, countries, however, considerably more work can be done, such of which IFC's program accounts for 40 percent. Latin America as ESCO development and financing in the Philippines, initiation and the Caribbean (LAC), South Asia (SAR), and IFC's global of some basic EE/DSM work in Indonesia, and work on power initiatives are each under 10 percent of the total portfolio. And EE sector regulations in China and Thailand. IFC's only involvement commitments to the Middle East and North Africa (MNA) and to in EAP to date has been the ELI program in the Philippines. Africa (AFR) have been minimal. This suggests that although the GEF has supported some $380 million in EE initiatives worldwide, ECA. The ECA Region was not active in the GEF EE program some regions and many countries still have enormous potential for until fairly recently, in part due to a fairly robust demand for Bank tapping GEF resources. lending for EE driven by ongoing reforms and rehabilitation of the district heating systems as well as necessary demand-side EAP. As indicated, the East Asia Region has been most measures and metering needed for such reforms and market-based consistently active in the Bank's GEF EE program. During pricing. Many of these countries are also sensitive to environmental this period, EAP's EE projects have largely dealt with a major concerns, with a number seeking EU membership. Recently, with climate change program in China (on gas distribution, ESCO reforms progressing, countries in the region have begun looking development and financing, boilers, and buildings), utility DSM for more market-oriented programs, creating ESCOs within utilities programs (Thailand and Vietnam), ESCO development (also (Poland and Croatia) and EE financing programs (Romania, Thailand and Vietnam), EE products (Thailand and Mongolia), Lithuania, Croatia, and Poland). The need to address the financing and a distribution loss reduction program (Philippines). In recent barrier is expected to continue in new operations in Serbia & years, the China program has seen a sharp decline in new Montenegro, Bulgaria, and Macedonia. The IFC has been very Table 2. GEF Energy Efficiency Projects by Region Number of Total Project Costs Total GEF Support Region Projects (million dollars) (million dollars) AFR 2 6 1.2 EAP 13 2,184 176.8 ECA 12 520 88.4 LAC 6 190 37.6 MNA 2 44 9.2 SAR 3 146 30.7 Global 4 281 38.2 TOTAL 42 3,370 382.2 Notes: This includes all Bank and IFC projects that have entered the GEF pipeline, including MSPs. 4 Engergy Efficiency Portfolio Review and Practitioners' Handbook active in the region, with lighting programs in Poland, the Czech reform agenda requires significant and simultaneous changes Republic, Hungary, and Latvia and the first GEF loan guarantee from three groups (government/regulator, utilities, and end-users) program in Hungary (HEECP). The IFC also recently launched a in order to move forward. Thus, while EE cannot address this five-country EE loan guarantee program (Commercializing Energy systemic problem, it seems that a comprehensive solution cannot Efficiency Finance Project, or CEEF) in Czech Republic, Slovak be formulated without considering and addressing the demand- Republic, Estonia, Latvia, and Lithuania. There remains a huge side of the equation. Two new activities have been proposed in potential for energy savings in the residential housing block sector India in t his regard--one dealing with agricultural pump sets within the region, although viable business models may need to (which is linked to reforms) and the other with EE policy (linked be further developed if GEF resources are to be mobilized. to the recently approved Energy Conservation Act). However, progress on both these initiatives has been very slow. LAC. EE programs in Latin America and the Caribbean have had a much more consistent involvement by power utilities than MNA. The MNA Region has also not been very active in other regions, which is in part due to the advanced state of developing GEF EE programs (and GEF programs in general). sector reforms in several countries. The Bank has initiated several Two activities have been initiated to date--an MSP in Morocco DSM programs with GEF support (Mexico, Jamaica, Brazil, to promote ESCOs and a larger proposed EE/ESCO financing and Ecuador) and has a new project in Uruguay. While these program in Tunisia. A similar operation is now under development programs include major roles for the utilities, the more recent in Algeria. All these programs have focused exclusively on the ones also include provisions for more private sector participation industrial sector, which accounts for an overwhelming portion of and commercial financing. These programs have had many the energy use and the savings potential. As further experience is positive impacts, although their longer-term viability has yet to be gained, similar modalities can be applied to other sectors within demonstrated. In addition, recent financial and energy crises in these countries as well as neighboring ones. some of these countries have shifted government priorities away from such efforts. The IFC has initiated lighting programs in AFR. Sub-Saharan Africa has the smallest GEF EE program. Argentina and Peru and is considering some financing programs. There have been some expressions of interest for small projects in Over the coming years, substantial opportunities will still remain end-use efficiency, but the small sizes and numbers have prevented for large-scale programs in the region, focusing on financing and any economies of scale. Electricity tariffs are well below the cost power sector regulations and the replication of successful schemes recovery threshold, and per capita energy use is low. Project in neighboring countries. partners are limited: the public sector has limited capacity, and the relatively small markets may not attract much private sector SAR. Considering its potential, the GEF EE program in interest. Two activities have been initiated to date--an ESCO South Asia has been disappointing.1 Aside from a modest utility development MSP in Côte d'Ivoire and a proposed DSM project DSM program in Sri Lanka and an EE credit line in India, little else in Burkina Faso. The IFC is supporting a lighting program in South has been implemented. The major issue facing India has been Africa. While there may be no clear potential for any large-scale the lack of meaningful progress on power sector reforms, which programs in Africa, future GEF programs could be developed severely inhibits proper incentives for EE and sustainable market to address energy use in public buildings, and some targeted development of EE products and services, although industrial DSM could be introduced in areas where it is cost-effective for tariffs are high. On the other hand, it appears that the stalled the utility. 1It should be mentioned that there has been limited Bank-GEF interventions across all GEF Focal Areas. 5 Implementation of the GEF project portfolio has been generally satisfactory, with only 3 projects out of 29 rated as unsatisfactory.2 A major issue with all EE programs has been their particular vulnerability to macroeconomic conditions and international energy prices. Macroeconomic shocks affect energy demand, equipment sales, financing, and credit, which can in turn reduce incentives and prioritization of EE investments (as in Thailand and Brazil). Changes in international energy prices also affect customers' long-term view of EE investments (as in Jamaica), particularly for fuel-switching investments. Other implementation issues identified have been specific to the various models of the EE programs. For the purposes of this review, Implementation five basic EE program models have been identified: utility DSM, Experiences market transformation, ESCO development, EE financing, and supply-side improvements. In addition, all models have included complementary activities, such as training and marketing. Given the growing size of the EE financing portfolio, this model is discussed in more depth in Chapter IV. The supply-side program only includes three operations at the moment (two under the first wave of GEF projects), so there is not enough experience from which to draw meaningful lessons; this component is therefore not included in this review. Utility DSM Since the Bank is already engaged in the power sector and has established relationships with many utilities, placing an EE program within a utility has been a logical choice for many operations. Some 16 projects have included DSM aspects within their designs. Key implementation issues associated with these programs have includedmixedincentivesforutilitiestoimplementDSM,inconsistent management support of DSM, frequent PIU management or staffing changes, improper skills mix within DSM units, subsidized tariffs, sector reforms that can affect the medium- to long-term institutional arrangements for DSM, unfair competition with existing private sector companies, unclear implementation arrangements, 6 Engergy Efficiency Portfolio Review and Practitioners' Handbook changing energy consumption patterns that could affect Eight lessons were also highlighted in a 2000 paper from the peak periods, coincidence factors and equipment operation, poor Asia Alternative Energy Program (ASTAE) and the Energy Sector or inadequate upfront program and evaluation planning, and Management Assistance Program on the Thai DSM program, the uncertain prospects for program sustainability. (The key Bank/ largest in the GEF portfolio: design DSM programs based on GEF projects are closed ones in Thailand, Mexico, Jamaica, and local cultural context; identify and recruit DSM champions early Sri Lanka; ongoing ones in Brazil, Lithuania, and Vietnam; and on; define DSM program objectives clearly to avoid mixed goals proposed projects in Uruguay and Burkina Faso.) and potential business conflicts; establish DSM programs and institutional and funding arrangements in the context of ongoing While many of these programs did achieve their intended goals, and planned sector reforms; where possible, distribution companies the broader issue of sustainability is an area of particular concern. should be heavily involved to make use of their established brand Although it can be argued that most of the energy savings will recognition and customer relationships; encourage systematic persist years after the GEF project is completed, and some program planning and evaluation; phase in implementation, markets permanently shifted, it is less clear whether further DSM to allow for a gradual buildup of DSM program portfolio and program implementation by the utilities will continue. Prospects scale-up of successful pilots as appropriate; and develop parallel for sustainability can be greatly improved by proper attention to financing facilities to support audits and other programs targeting three key issues: Does the utility have the incentive (either through industrial and commercial customers.3 regulation or cost recovery both for program costs and lost revenues) to implement such programs? Does the utility/regulator Market Transformation have the necessary staff and skills to evaluate such programs? And does the program include provisions to sustain itself through About 24 projects have dealt with improving the efficiency of ongoing and planned sector and pricing reforms? one or more products through a wide variety of models such as technology transfer, marketing, utility DSM, subsidies, labeling, Several other lessons were highlighted in project ICRs and MTRs: codes and standards, manufacture negotiations, financing, and n A supportive policy environment, including proactive bulk procurement/market aggregation or a combination of commitment by government and major energy sector players, these factors. Key implementation issues associated with these is essential for successful DSM programs. programs have included technology credibility (due to poor n Early, visible successes improve government and public quality products), socioeconomic instability, protection of local support for the continuation of such activities. manufacturing, limited capacity to enforce standards or codes, n While not a precondition for DSM, electricity tariffs should credibility of product labels, underdeveloped institutional and reflect long-run marginal costs. implementation arrangements, unrealistic timetables to develop n DSM programs should be complemented with financing new markets, concerns over market aggregation leading to programs, such as revolving funds for residential users monopolistic markets, effectiveness of static project designs in and parallel financing programs for commercial/industrial dynamic markets, poor quality power, lack of sufficient consumer customers. education, underutilized and underfunded testing laboratories, n Well-designed public awareness campaigns are critical to insufficient attention to important auxiliary equipment, and DSM program successes. questions of program sustainability. (The key Bank/GEF projects n DSM units must have managerial and financial autonomy. are closed ones in Thailand, Mexico, and Jamaica; ongoing 7 ones in China, Brazil, Thailand, Vietnam, and Mongolia; and n Program designs should be sufficiently robust and flexible to IFC projects in Poland, Argentina, and ELI.) allow for changing market conditions. n Market interventions and marketing efforts should be sensitive It should be noted that there is no consensus among Bank TTLs to the local environment. that such types of programs are within the Bank's comparative n Public education campaigns involving local government, advantage, given the lack of complementary investment financing nongovernmental organizations (NGOs), and schools can needs. The United Nations Development Programme (UNDP), be effective. which is more suited to technical assistance (TA) programs, may n Non-energy saving benefits of EE equipment can also be be a more logical partner. And in fact UNDP has done a lot in effective in marketing campaigns. this area, mostly on lighting, motors, refrigerators, and buildings. n Evaluation plans should consider not only market changes While the IFC has supported this model under ELI, the organization but also larger changes, such as macroeconomic changes, has concluded that such programs are not within its comparative energy use patterns, and policy changes. advantage and is unlikely to pursue similar programs in the future. n EE programs that have less quantifiable benefits, such as general market awareness, should develop appropriate Given the wide range of strategies used under this program model, measures for monitoring, which should be agreed at project it is difficult to summarize key experiences. Clearly, the use of market design stage. mechanisms to promote certain technologies or EE products has the n Some plans to evaluate markets at some sufficient time after best prospects of sustainability, as it allows market actors to make GEF project completion is needed to measure long-term decisions based on a product's commercial merits. Where market impacts and sustainability. imperfections exist or the government desires a strong push, however, well-designed interventions can be very effective. Such programs Eight fundamental design principles were also recommended in should be sensitive to the need to improve local manufacturing a recent GEF Working Paper: target both supply and demand capabilities as well as enhance competition. Introduction of voluntary sides of a market; take a holistic view of the market; leverage mechanisms first (labels, voluntary standards) before moving to competitive market forces when possible; build flexibility into mandatory labels and standards is also generally accepted good program design; consider vehicles for TA and transfer of know- practice. Judicious use of subsidies can help stimulate markets how that will be workable; emphasize standards, labeling, and and facilitate recruitment of participating manufacturers, but such building codes; allocate a portion of the program budget for interventions should be restricted to promotional periods and target activities that support replication and dissemination of results; and market segments, and explicit sunset provisions should be included. begin monitoring and evaluation early.4 Enforcement, when necessary, should be effective and efficient. And well-designed marketing efforts can be critical to bridge the ESCO Development gap between supply and demand. About 24 operations have included components to develop Several other lessons regarding market transformation are energy service company markets in client countries. Some included noteworthy: development of utility-based ESCOs as an element of a DSM or n Minimum program product technical specifications can help financing program, while others supported the development of an improve technology credibility. ESCO industry. To date, a number of implementation hurdles have 8 Engergy Efficiency Portfolio Review and Practitioners' Handbook beenfacedwiththeseefforts,includinglackofequitysourcesfornew test new business types. As further experiences are gained, it can ESCOs (particularly when offering off­balance sheet financing); be hoped that the portfolio will offer new ideas and approaches to legal and taxation issues associated with the ESCO business; the address some of these difficulties and help realize the vast potential inability of staff of new ESCOs to sufficiently identify, mitigate, that ESCOs can offer in developing sustainable EE markets. and manage risks; weak business and sales skills among ESCO staff; lack of access to ESCO project financing; overly complex A broad range of business models all ultimately lead to energy energy performance contracts; creditworthy risks associated with savings and thus merit consideration.5 (See Box 1 for a many end-users; customers' and banks' unfamiliarity with ESCOs; representative, albeit not exhaustive, list of ESCO business models.) concerns over appropriate monitoring and verification needs; Unfortunately, the concept of ESCOs is often misrepresented as unclear procurement guidelines for selecting ESCOs for public one or two models, which may not work in many markets. This sector projects; concerns over creating monopolistic ESCOs within leads to misunderstandings about what ESCOs can and cannot utilities; and major gaps between ESCO training programs and do without allowing sufficient market evolution and adaptation. the successful operation of ESCO businesses. (The key ongoing In Vietnam, for example, the project used the term "project Bank/GEF projects are found in China, Brazil, India, Ecuador, agents" rather than ESCOs to represent service providers. This Vietnam, and Croatia; proposed projects are found in Uruguay, allowed agents to provide the types and range of services they Tunisia, and Bulgaria.) wished to offer rather than forcing Western-style ESCO models on them. In this project, agents include energy auditors, equipment ESCOs have been widely accepted by the Bank as an attractive suppliers, ESCOs, leasing companies, installation contractors, business model for bridging the gap between end-users and and engineering companies. financing. It involves private sector participation and financing, allows technical risks to be transferred away from end-users and Specifically, it is often assumed that ESCOs always provide full financiers, and includes inherent business incentives for ESCOs performance guarantees and provide off-balance sheet financing. to develop projects proactively. ESCOs can also specialize in While this model would appear to be ideally suited to developing packaging smaller EE projects, bundling procurement of goods countries, the reality is that the lack of proper legal and financial across several projects, and taking on project performance and infrastructure as well as the limited ability of local ESCOs to raise credit risks. Thus ESCOs can be seen as a mechanism to remove equity capital or secure sufficient project financing as well as their many of the commonly cited barriers to EE investments. unwillingness or inability to take on and properly manage risks can make this "full-service" ESCO model unviable in the near to Despite these promising attributes, creating strong and credible medium term. ESCOs--not to mention full ESCO markets--has proved very challenging. Client countries often lack the legal and financial Thus, to the extent possible, projects should seek to test a variety infrastructure to adapt to and support such business models. of ESCO models and assess which ones have the most potential New ESCOs often lack the proper skills (corporate management, for further development within a given market. Where possible, financial management and credit assessments, risk mitigation and programs should be designed to support a variety of business management, sales) and thus have limited credibility with potential models. Given the limited amount of TA resources, however, the customers and financiers. Developing countries often have limited most promising models should be identified early and aggressively equity markets and investors willing to create new companies and supported. Access to appropriate project financing, which would 9 Box 1. Examples of Different ESCO Business Models The list ranges from full-service/high-risk contracts to low-service/low-risk ones. Full-Service ESCO: The ESCO designs, finances, and implements the project; verifies energy savings; and shares an agreed percentage of the actual energy savings over a fixed period with the customer. This is also referred to as the "shared savings" approach in the United States. End-Use Outsourcing: The ESCO takes over operation and maintenance of the equipment and sells the output (such as steam, heating/cooling, or lighting) to the customer at an agreed price. Costs for all equipment upgrades, repairs, and so on are borne by the ESCO, but ownership typically remains with the customer. This model is also sometimes referred to as chauffage or contract energy management. ESCO with Third Party Financing: The ESCO designs and implements the project but does not finance it, although it may arrange for or facilitate financing. The ESCO guarantees that the energy savings will be sufficient to cover debt service payments. In the United States, this is also referred to as guaranteed savings. ESCO Variable Term Contract: This is similar to the full-service ESCO, except that the contract term can vary based on actual savings. If actual savings are less than expected, the contract can be extended to allow the ESCO to recover its agreed payment. A variation is the `first out' model, where the ESCO takes all the energy savings benefits until it has received its agreed payment. Equipment Supplier Credit: The equipment supplier designs and commissions the project, verifying that the performance and energy savings match expectations. Payment can be made either on a lump-sum basis after commissioning or over time (typically from the estimated energy savings). Ownership of the equipment is transferred to the customer immediately. Equipment Leasing: Similar to supplier credit, the supplier receives fixed payments from the estimated energy savings. In this case, however, the supplier owns the equipment until all the lease payments, and any transfer payments, are completed. Technical Consultant (with Performance-based Payments): The ESCO conducts an audit and assists with project implementation. The ESCO and customer agree on a performance-based fee, which can include penalties for lower energy savings and bonuses for higher savings. Technical Consultant (with Fixed Payments): The ESCO conducts an audit, designs the project, and either assists the customer to implement the project or simply advises the customer for a fixed, lump-sum fee. support a full range of ESCO transactions, should be an integral program, allows ESCOs to specialize, and improves prospects aspect of the project design. Use of demonstration projects, pilot for strong project pipelines. ESCOs (including utility-based companies), public sector ESCO procurement programs, and the use of utility programs to stimulate Other lessons learned include: the market through super-ESCO arrangements (where they recruit n Projects appear to have the most success when a variety of customers and subcontract with ESCOs) can all also be effective, ESCO business models are introduced and when those that provided they do not undermine the viability of a level playing field are most promising, and of interest by local stakeholders, are in the future and are followed up with a massive dissemination of supported. information. Encouraging ESCOs to target all markets--public, n Equity issues of new ESCOs need to be explicitly addressed industry, buildings, and residential--offers a more complete if off-balance sheet financing is to be promoted. 10 Engergy Efficiency Portfolio Review and Practitioners' Handbook n Utility-based ESCOs represent an attractive option when the measurable indicators. However, a number of general findings private sector is unwilling to accept prevailing market risks. were noted: n Parallel financing programs are critical to address the project n Marketing efforts should be designed with due finance barrier of ESCOs, but such facilities should support consideration to local cultural norms and traditional multiple transaction and financing models. media channels. n Complementary efforts to promote an enabling policy and n Where possible, marketing efforts should also include business environment, such as fostering of business associations, upfront indicators for assessing their success and cost- can improve impacts and allow for constituency building. effectiveness and should include interim feedback mechanisms for periodic adjustments. The GEF ESCO Thematic Review, which included 12 GEF Bank, n Training programs should consider a blend of lecture-style IFC, and UNDP ESCO projects, assessed progress and trends training with case studies and hands-on activities as well in ESCO projects. The following emerging lessons were cited: as more customized, one-on-one training. projects should consider a complete and phased plan for market n Training programs geared for new ESCOs should include development; energy pricing policies are critical to ESCO a major focus on financial management, risk management, development; large-scale, multidonor, long-term funding may be bank application preparation, and project selling. required to develop ESCO markets; ESCOs require key technical n Information dissemination and case studies should highlight and entrepreneurial skills; an active supply of EE equipment is both technical and financial aspects of successful projects essential to ESCO development; ESCO markets require educated and be designed to influence financial decision makers. end-users and financiers; managerial and cultural factors should n Informational programs should include upfront indicators be understood and taken into account; the local banking sector for assessing their overall effectiveness, including tracking should be closely involved; legal and taxation issues should be investments and changes that directly resulted from them. addressed; projects should develop sustainable institutions and Use of performance-based remuneration to information companies; ESCO programs should seek to offer viable business agencies has shown some success. models for all markets and projects; and specific target markets n Market and pipeline development is a very difficult business. can provide a strong base for ESCOs. Projects should seek multiple channels for originating projects; develop strategic partnerships with national Complementary Efforts associations, other government/donor TA programs, and NGOs; consider customer bidding schemes to draw in All the EE projects in the review included complementary TA new ESCOs and generate additional projects; and so on. components to help ensure achievement of the project objectives. n All such TA efforts should have clear sources of financing While some of the activities were specific to a particular operation, identified to sustain them after the GEF funds have been a number of common activities were observed, including exhausted. marketing, training, information dissemination, and market and pipeline development. In most cases, it was difficult to properly Given the amount of GEF resources allocated to these tasks within assess how the various TA activities actually contributed to the the portfolio, and noting that such activities are not limited to EE project outcomes or whether the specific activities really met their projects within the GEF portfolio, the overall effectiveness of such intended objectives, since these activities did not always have efforts merits further study. 11 Financing is often determined to be a key barrier to the widespread adoption of EE technologies and the development of service and product markets. Since typical EE investments have unique characteristics, they tend to fall outside traditional financing programs and thus justify special attention. Some of these features include relatively small investments (high transaction costs), high upfront project development costs, no production expansion or new product development (that is, no new revenues generated), small benefits relative to overall operating costs (high opportunity cost for end-users), inherent perceived risks associated with new technologies and practices, no corresponding asset for ESCO payments (for accounting purposes), and lack of bank understanding of EE financing modalities, risks, and the ESCO business. Energy Efficiency The creation of dedicated EE financing facilities using GEF funds is still a relatively new venture. About 28 projects involving EE financing Financing have now entered the portfolio, although fewer than half actually Programs involve dedicated GEF financing programs and only a handful to date are operational. (The key Bank/GEF Projects that are ongoing are in China, India, Thailand, Romania, Lithuania, and Croatia; proposed projects are found in the Philippines, Poland, Uruguay, Tunisia, Bulgaria, Serbia & Montenegro, Macedonia; IFC projects include REEF, CEEF, Russia, and Hungarian Energy Efficiency Credit Fund.) Project Development and Audit Costs Before an EE project can reach the financing stage, the project development barrier must first be addressed--that is, securing technical expertise and necessary funding for preliminary and subsequent investment-grade audits. While in some cases such studies are done in-house, particularly in industry, the developer may not have both a full range of technical expertise and the know-how, time, and inclination to do so. Since it is not known at the outset whether there will be an investment project with sufficiently attractive returns, this represents a major risk to both the project developer and the end-user. 12 Engergy Efficiency Portfolio Review and Practitioners' Handbook In developed markets, it is general practice for the ESCO to Box 2. Options to Overcome Audit conduct the audit and then, if suitable investments are identified Cost Barrier and the customer proceeds with the investment, to incorporate the audit costs to the full project financing package. In the event ESCO/Customer Pays: In developed markets, that no investments are found, the ESCO would absorb the audit the ESCO pays upfront for the audit. If no project cost; if attractive investments are identified but the customer opts is identified, the ESCO absorbs the audit cost; if a viable project is identified but the customer does not not to proceed with the project, then the customer would bear invest, then the customer reimburses the ESCO for the the audit costs. In developing countries, this arrangement is not full cost of the audit; if viable measures are identified and the project proceeds, then the cost of the audit is always practical. New ESCOs are often unable to bear upfront included in the total financing package (United States audit costs and customers are reluctant to accept any commitments and Canada). without knowing if good projects will be identified. For these Contingent Loans: Under this arrangement, the reasons, overcoming audit costs has been a major challenge with GEF grant administrator would lend funds for the audit EE projects worldwide. costs. If the project leads to an investment, then the audit loan is included in the project financing package; if the audit does not lead to a project, then the audit A number of interesting strategies are now being tested in recent loan is converted into a grant (Croatia and Uruguay). Bank/GEF EE projects to overcome the audit cost barrier. (See Audit Grants: Full or partial grants for energy Box 2.) In underdeveloped markets, audit support can greatly audits can help identify a pipeline of EE projects. This option is particularly useful in the early stages facilitate initial projects that can then be used as case studies of market development, as it allows ESCOs to gain for further replication. In such cases, proper and efficient hands-on experience without risk to themselves or their customers (Vietnam, Tunisia, Thailand, and Poland). administration is critical, and program safeguards may be needed to avoid creating incentives for customers not to proceed Product Lines: This approach relies on ESCOs reviewing a single technology or system rather than to the investment stage. Where possible, audit support should be the full facility. The advantage is that it reduces upfront partial and a portion held until the customer agrees to implement audit costs and can allow ESCOs to specialize. The downside is that it does not encourage a bundling of the project. With all such options, the appropriate intervention measures, which could lower overall transaction costs must be determined based on an in-depth analysis of country and lead to more energy savings (China). and market conditions, critical transaction barriers, current Project Phasing: Where access to financing is ESCO practices, and the availability of resources. Where the limited and ESCOs are new, phasing of projects can allow reduced upfront audit costs, transaction opportunities for high-return EE investments exist, the audit cost models to be tested, lower risks for all parties, and barrier may not need to be addressed. some incremental improvements on the part of ESCOs based on previous phases. It can also allow energy savings from the first phases to be used to It should be noted that a number of client countries are now finance subsequent phases. As with the product line approach, however, some natural economies-of-scale considering (Vietnam and Mongolia, for example) or have and bundling opportunities could be lost (Vietnam). already enacted (Thailand, India, and Tunisia) national energy conservation laws. In most cases, these call for mandatory audits of all facilities with over a certain energy consumption threshold. In some cases, the mandatory audits are supported with government grants and subsidies for such audits. 13 While most of these programs are still relatively new, the results to their overall performance (in terms of total lending, energy date are not promising. Legislated audits have tended to result in savings, and defaults) has been mixed. Results with EE credit lines customers and auditors or ESCOs conducting audits solely to satisfy have been similar. Common problems have included the lack of legal requirements. Incentives have led to audits to satisfy the law, commercial approach, proper incentives for the intermediary to with little attention to quality, comprehensiveness, or commercial proactively market the program, a lack of technical intermediary viability. Further, government agencies are faced with approving skills, and suitable mechanisms to identify and package projects. hundreds of audit reports and often lack the capacity to do so In some cases, project criteria have been too tight; in other cases, adequately. Many of the laws further require customers to implement the lender had little incentive to lend or take on end-user credit all commercially viable investments identified in the audit reports, risks; still others do not offer appropriate loan terms to be paid which can create incentives for customers and their auditors to find from energy savings. no such investments (and so avoid the need for further compliance). Thus while the spirit of these laws may be in the right place, there Shortcomings of these past interventions have led to the recent is a consensus that a focus on commercial approaches tends to creation of a number of new, more innovative financing provide better aligned incentives for all parties. mechanisms, largely funded by the GEF. The instruments that have been used or considered to date are summarized below: Even with effective mechanisms to address the audit cost barrier, it n Partial Loan Guarantees. GEF funds are placed into a is essential that projects be designed to maximize the percentage reserve account that is then used to underwrite partial credit of audits that lead to investments. This is necessary to ensure that guarantees for EE loans to end-users, ESCOs, and equipment a full audit and investment market is developed and ensures suppliers. For Bank projects, a local financial institution (FI) that limited GEF resources are used most efficiently. Efforts to is selected to serve as the project guarantor; IFC acts as the engage key decision makers, such as chief executive officers guarantor for its own programs. Some projects require the and chief financial officers, and to seek agreement on minimum guarantor to enter into guarantee framework agreements rate of return thresholds for EE projects prior to the audit can help (GFAs) with competitively selected banks, committing a portion the ESCO's other project developers screen potential customers. of the guarantee fund to each bank (in Hungary, Croatia, and Other ESCOs have used two-part contracts or memoranda of Poland, for instance); in other cases, the guarantor is free understanding to tie the audit to a subsequent project or have to work with any bank (in China and the Philippines). Most simply required some cost sharing of the audit to help "weed often, the guarantor serves as the administrator of the reserve out" marginal customers. Regardless, future projects must explore account, issuing guarantees based on predefined criteria and all options to maximize their investment-to-audit ratios and must appraisal methods. In a few cases, however, the guarantor include any necessary provisions within the project design. is required to leverage the reserve account with its own funds (in Poland, the Philippines, and the IFC); in all these latter Financing Instruments cases, the GEF funds are in a first-loss position vis-à-vis the guarantor funds. The program earns income from interest There are a wide array of instruments and models to support the from the reserve account balance along with guarantee fees, development of EE financing programs. A number of countries have which can help offset operation costs and initial defaults. considered or even implemented national energy conservation Other projects considering such instruments include ones in funds, which often include debt financing windows; unfortunately, Tunisia, Bulgaria, Macedonia, and Algeria. 14 Engergy Efficiency Portfolio Review and Practitioners' Handbook Conditions: Such instruments are most appropriate in well- investment-grade audits and initial projects until banks are developed banking sectors, where banks are liquid and willing willing to begin lending, even if they have access to a to accept some risks, and when there is sufficient baseline guarantee program (in Croatia and Algeria). Initial projects market activity to justify and support the program. These supported using these bridging loans could be refinanced by instruments are only meant to help share project financing commercial banks after commissioning and thus serve as a risks, marginally enhance credit, and improve loan terms; way to bring new banks into the EE financing business. they cannot solve systemic banking or credit problems. Conditions: Such options are more appropriate where there n Loan Loss Reserve Funds. GEF funds are deposited into an is insufficient liquidity in the banking sector or where there account with participating bank(s) to provide full or partial is major risk aversion among lenders. Funds can be used to coverage for a portfolio of small EE loans, usually where develop a critical mass of EE loan and project performance individual loan guarantees are not appropriate. In IFC's data that banks can then use to better assess and price risks Hungary program, such an instrument was used to cover associated with EE investments. In such cases, TA to effectively a portfolio of small residential loans. Participating banks disseminate this data is essential. Such instruments can also contributed 4 percent of the total loan portfolio amount and serve a public policy goal of aggregating EE loans in one GEF provided 11 percent; if defaults exceed 15 percent, the program to better track performance and environmental bank bears the incremental loss. A loss reserve fund is also benefits and to provide incentives and so on. included in the Croatia project for the utility-based ESCO. n EquityFunds. In a couple of cases, the Bank has provided GEF Conditions: As with guarantees, such an instrument is well funds as equity to ESCOs (in China and Uruguay), but such suited for developed and liquid banking sectors, where banks investments are uncommon and can raise equality, divestment are able and willing to take some risks. It is better suited protocol, and legal concerns. IFC established REEF in 1997 for a portfolio of small, standard loans and thus should be to provide equity (and debt) support for EE and renewable accompanied by appropriate TA to develop standardized energy projects, but the fund was unable to perform as loan applications and appraisal methods. hoped. Some reasons cited for the failure include that equity n Special Purpose Funds. Dedicated credit lines or revolving funds typically require high rates of return with secure exit in funds, either public or private, can facilitate access to EE 7­10 years, which is difficult in sectors with high competition project financing as they effectively remove the need for EE from traditional technologies; that REEF was launched before projects to compete with conventional projects for commercial the global energy sector saw a huge reduction in private financing. In some cases, the funds finance a large portion sector inflows; that many projects required both equity and of the investment (in Thailand and Lithuania); in other cases, long-term debt, the latter being more difficult to access; and fund managers are encouraged to leverage the GEF funds that managing a global equity funds is challenging. While with commercial financing (in Romania and Uruguay). For the project and ESCO equity remain key barriers, this instrument latter, GEF funds can be placed in a first-loss position to the does not appear to be viable in the near term. commercial funds in order to reduce risks to the cofinanciers Conditions: In cases where ESCO and project equity in the early years. Most of these projects rely on a proactive constraints are major barriers, such an instrument, if properly fund manager to originate new projects, recruit cofinanciers designed, could be an option. Project returns would have and facilitate transactions. In a few cases, a separate "bridge to be high and debt financing would have to be secured in financing" window has been established, typically to support parallel. 15 n Investment Grants. While not addressing the financing follow that a guarantee facility or fund is the most appropriate barrier per se, subsidies or investment grants (bonuses) can intervention strategy. In some cases, there may be a need to help facilitate investments on the end-user side by improving first build the project development side of the market, through cash flow and reducing risks. Such instruments can also be ESCOs and other business models, to stimulate basic market useful in stimulating the market (as in Vietnam and Tunisia), activity, package projects, and create a demand for financing. providing demonstration case studies and initial project In other cases, banks may be willing and able to lend, provided performance data (again, Vietnam and Tunisia), deepening they have access to some TA on how to technically appraise EE EE retrofits within a given project (in Poland), reducing high- projects and assess their risks. In cases where there are only a cost investment barriers with new technologies (in Poland), or limited number of creditworthy customers, perhaps focusing on addressing social objectives (in Lithuania). public sector programs or some judicious access to grants and n Conditions: This can be an appropriate option where the TA may be all that is warranted until the credit situation improves. credit barrier is too high to support commercial financing or the banking sector is underdeveloped. It can also be developed In IFC's experience, some of the key issues with the EE financing in concert with other instruments, provided that one instrument barrier can be overcome with focused TA alone through a more does not undermine the other. To the extent possible, such systematized banking business focus on EE market development; programs should target new and underdeveloped markets the development of specialized financial products to address rather than compete with existing commercial activities and EE investment niches, where a well-tailored financial product financing. Such programs must be efficiently and effectively coupled with a streamlined appraisal process and complementary administered in order to prevent creating new bureaucratic marketing efforts can facilitate deal flow; and hand-holding and barriers to the market, include sunset provisions for when brokering key partnerships between banks and project developers the grant objectives have been achieved, and support the or ESCOs. intensive dissemination of initial transactions. There are many ways to assess the market barriers and select the Table 3 provides a summary of approved and proposed GEF- appropriate instruments. The key is to develop a systematic process supported financing programs over the FY97­04 period. As to identify the barriers and establish strategies to overcome them. indicated, only five programs are actually operational and Figure 2 offers an example of a tool that may help guide future three of these are just getting under way. The rest are still under project teams on the thinking process that would typically be done preparation. Thus while there is a need to glean lessons learned before the various project components are defined. This tool is not from these early projects, it must be stressed that the sum of meant to be followed mechanistically; rather, it represents a guide experiences to date is still very limited. to help establish a logical process in developing a financing barrier removal strategy. As further implementation experiences lead to Selecting the Appropriate an improved understanding of which strategies and instruments Instruments appear to be most effective and under what conditions, this or other tools should be developed and continually refined. While many countries may note that there is a lack of available financing for EE within their markets and thus correctly highlight The IFC has developed its own criteria for determining lack of financing as a key barrier, it does not automatically where such loan guarantees may be most appropriate, such 16 Engergy Efficiency Portfolio Review and Practitioners' Handbook Table 3. Specific Parameters for Various GEF Financing Programs (FY97-FY04) Country Fund Manager Financing Instrument Typical Project Financing Typical Loan Use of Other Notes (Reserve Amt) Size Charges Terms (years) GFAs Capacity Hungary IFC ($4.25m GEF, $12m 1. Partial (up to 50%) credit guarantee, 1. $500k max of guarantee Guarantee fee (GF): 1. 3­7 years Yes The pilot provided up to 50% Tranche 1 (pilot) approved 3/97 IFC) Capacity: $91.5m GEF funds in first loss position liability 1% 2. 1­2 years guarantee, HCEEP 2 offers Tranche 2 approved 10/01 only 35% guarantee. IFC is considering 2. Loss reserve fund (up to 11%) for 2. $300­1,000 changing terms for renewed GFAs in portfolio of small loans 2004 to 50% pari passu guarantee. Thailand International Finance Corp. Contingent loan fund $200k­250k Onlendingrate (OR): 7 years No Finances chillers only, balance Approved 6/01 of Thailand 0 % repaid to Bank/GEF in Thai Baht Effective 10/01 ($2.5m GEF, $2.5m MLF) Capacity: $5m Romania Romanian Energy Efficiency Revolving fund, up to 80% of project cost $100k­1m OR: 1.5­4 years No Forex risk borne by borrower, Approved 9/02 Fund ($8m GEF) LIBOR + 3.5­8.5% 1% (of loan amount) finder's Effective 2/03 Capacity: $63m fee payable upon deal closure China China National Investment & Partial (up to 90% initially) credit $300k­800k GF: 1­ 3.3% 1­3 years No Approved 10/02 Guarantee Co. ($22m GEF) guarantee Effective 6/03 Capacity: $250m CEEF (Global)1 IFC ($15m GEF, $30­75m IFC) Partial (up to 50% initially) credit $500k max (streamlined) GF: Market rate 7­8 year Yes Approved 10/02 Capacity: $90­180m guarantee, pari passu with FIs, GEF in first $1.88m max (non- max loss to IFC funds streamlined) Lithuania TBD Revolving fund, up to $2k­100k OR: TBD No Includes windows for both individual Approved 6/03 ($3m GEF) 80% of project cost Market rate and home owner association loans. Not yet effective Capacity: $3.8m Croatia Croatian Development Bank Partial (up to 50%) credit guaranteea $500k max GF: 1% + 0.25% 10 year max Yes Project also includes contingent grants, Approved 10/03 (HBOR) ($1.2m GEF) application fee bridge financing and loss reserve fund Not yet effective Capacity: $5.5m for utility ESCO Philippines2 Local Government Unit Guarantee Partial credit guarantee, GEF in first $2.5­3m max GF: 1.5% + 1% 15 year max No Lending to rural electric cooperatives (proposed) Corp. loss position application fee (ECs) (up to 80% guarantee coverage) ($10m GEF, $20m LGUGC) and EC investors (up to 50%). Capacity: $50m Russia IFC Partial guarantee facility, GEF in first TBD TBD 3­7 years Yes Maximum guarantee % not yet (proposed) ($2m GEF, $3­13m IFC) loss position determined; guarantee may be operated Capacity: $50m in concert with IFC EE credit lines.. Uruguay TBD Revolving fund, GEF cofinances up to 90% $80k­200k OR: 12% 1­3 years No UEEF can finance up to 90% of off- (proposed) ($1.7m GEF) of loan amount, GEF in first loss position balance sheet ESCO projects or 75% of Capacity: $9m (end-user) on-balance sheet projects. Poland Bank Gospodarstwa Krajowego Partial (up to 50%) $500k max GF: 1.2­2.0% 10 year max Yes BGK will maintain initial leverage ratio of (proposed) ($7m GEF, up to $14 BGK) credit guarantee, GEF 1.5 to 1. At Year 3, if the program is Capacity3: $39m in first loss position progressing well and defaults are under 15%, then BGK will extend the leverage to 3:1. Tunisia TBD Partial (up to 50%) credit guarantee $200k average GF: 1.5% 3 years No Guarantee is limited to ESCOs for (proposed) ($4m GEF) industrial sector only Capacity: $8m Notes: 1. Includes Czech Republic, Slovak Republic, Estonia, Latvia, and Lithuania. 2. Project data for all proposed projects are subject to change as the project details are finalized during appraisal/negotiations. 3.$2m of capacity set aside for utility ESCO. 17 Figure 2. Sample Decision Tree for EE Financing Programs Are there existing project developers/ESCOs that could NO ACTIONS: Promote ESCOs, develop pilot case studies and model transaction support/benefit from a financing program? documents, disseminate technical/financial info about EE projects, stimulate market with small grants, develop public sector EE programs, create utility ESCOs. YES Do local commercial banks have sufficient liquidity? NO Will banks accept some risks onlending GEF or other funds? YES NO YES ACTIONS:Create GEF EE co-financing fund. ACTIONS:create revolving fund; promote increased co-financing (e.g. Use GEF as Why aren't banks lending for EE now? subordinae debt). Don't under how to apprise and assess ACTIONS: Provide TA to banks. technical aspects of EE projects... Projects are too small... ACTIONS: support pilot transactions for dissemination, develop standardized appraisal methods and M&V protocol, develop partial guarantee program. Insufficient experience with appraising EE project ACTIONS: Provide TA to create standard applications and processing, develop risks, ESCOs, EE savings estimates... pooled financing structures, offer guarantees on a portfolio basis (loss reserve). No or low quality loan applications... ACTIONS: Develop ESCO market, TA to end-users/ESCOs to prepare bankable proposals, support pilots, disseminate model applications, market program extensively, support audit grants. Few creditworthy customers... ACTIONS: Focus on public sector, target strong industrial sub sectors, offer small grants. as adequate liquidity, attractive interest rates, reasonable that the project debt is the key barrier to the transaction. Such competition, and reasonably mature institutions in the capital instruments should not redefine the rules of lending or unduly markets. The institution notes that guarantees should be used distort normal lending practices; they must not make financially to mobilize existing resources and are most effective where unviable projects or uncreditworthy customers attractive. there is a real gap between banks' real and perceived risks. Economically viable EE investments should also be available, There have been concerns expressed that the Bank may be which generally means market energy pricing and interest rates overusing the guarantee instrument in a "one size fits all" approach. below 20 percent. But the IFC notes that guarantee funds only It is important to ensure that these programs are not introduced in address one element of the EE transaction, namely debt. They underdeveloped markets, that commercial banks are engaged do not address equity constraints within either the end-user or early enough, and that specific market and financing barriers are ESCO; they are not intended to deal with corporate debt issues, identified sufficiently. Such instruments, if not properly selected but to focus on project finance; and the use of guarantee implies and designed, could serve to impede market development. 18 Engergy Efficiency Portfolio Review and Practitioners' Handbook Fund Sizing and Leverage some "leverage inflation," in which each project promises slightly better leverage than the previous one, which in turn raises the Another issue that needs to be considered is the appropriate GEF's expectations. The reality, though, is that deal flow has been size of the fund or guarantee reserve and its ability to leverage substantially slower and more difficult than envisaged. Thus while commercial financing. In the previous era of EE credit lines, EE high leverage ratios are theoretically possible, no GEF EE financing technical and economic potential studies were conducted, and the program in operation has achieved a 1:1 ratio to date (total actual credit lines were generally based on estimated market penetration EE investments to GEF grant amount). Projects should continually rates. These GEF financing programs, which normally rely on a seek to leverage commercial funding as much as possible, but future more commercially oriented approach, have not always included projects may be better off focusing on market development and as much justification on their sizing. This can be partly attributed to deal flow, which will ultimately determine a program's success. the limited value of the earlier technical assessments, which often were unable to estimate reasonable deal flow adequately and Results to Date were thus not reliable. As many of these programs are just getting under way, actual results In some cases, the GEF fund sizes have been based on an to date remain limited. (Box 3 provides some key indicators of the assessment of the capacity for existing and new ESCOs and other various programs under implementation.) However, determining project developers to prepare and submit projects for financing, the right indicators for measuring and reporting results is still under along with assumed growth rates in business and market activity. development. Simply reporting aggregate program guarantee In other cases, the fund size was based on the perceived funding issues does not represent those deals that are able to close without needed to generate sufficient credibility within the given market, the guarantees, some of which the program may have supported which is more difficult to justify. Still others are based on the through TA or earlier market development. Nor do such figures amount of GEF grant funds a project can justify, given reasonable adequately represent how a program may have been able to estimates for carbon emission reductions along with leverage leverage commercial financing, manage risks (that is, defaults), assumptions. As more experiences are gained and more realistic ensure sustainability, or further affect the market with TA. deal flow assumptions can be developed, future projects should consider more rigorous methodologies for determining size. In the The reported impacts of IFC's HEECP offer some useful insights meantime, it may be more prudent to consider undersizing or at into other effects and market impacts from such programs. As least developing more conservative deal flow estimates over the a result of the program, participating banks have reduced their near term; successful funds can always find ways to increase their collateral, down payments, and equity requirements for EE leverage ratios or be expanded with other donor/government projects. Many banks have been able to structure debt service funds, whereas underutilized funds can harm both the credibility of to be covered fully from energy savings; others have allowed the fund within a given market and the GEF products themselves. for portfolio management, which further leverages funds and helps in risk management. Some banks have begun to finance The GEF Secretariat has increasingly viewed leverage potential as projects based on future revenue streams, to invest equity in a key metric for assessing new project concepts, given the need new ESCOs, to establish credit lines for specific ESCOs, and for attracting more commercial financing with the GEF's limited to lend for demonstrated transaction models without purchasing resources. While this may be fair, it has understandably led to the loan guarantee. 19 Emerging Good Practices for Box 3. Results to Date for Ongoing Financing Programs GEF EE Financing Programs Based on this review, a number of good practices and underlying Hungary (HEECP): A total of $5.6 million in principles for such programs are emerging. While many of these total EE investments has been directly supported through the guarantee program; five GFAs were may seem self-evident, putting them into practice consistently has signed for $16m in guarantee commitments, a proved to be challenging. As further implementation progress is probablized pipeline of $13m, and $0 in loan defaults. These figures do not include investments achieved over the coming years, these recommendations will that have occurred without guarantees or ones that need to be further elaborated and refined. only received TA support. Thailand (Chillers): As of October 2003, 1. Conduct a full assessment of the EE market, from banks Industrial Finance Corporation of Thailand had a pipeline of 29 loan applications and all 17 chillers and project developers to equipment suppliers and end- under contract (about $3.4m) have been replaced. users, early in the project preparation process. In addition Romania: As of December 2003, no transactions to a review of overall macroeconomic and policy conditions, had been closed, although two proposals were a holistic assessment of the market should be conducted. This expected to reach the investment committee within the coming weeks. review should include a review of the banking sector and its lending practices, credit availability for various sectors, China: The fund went into operation November 12, 2003, and has closed three initial transactions project developer and ESCO capabilities and activities, ($360k). Four more are expected over the next equipment supplier product efficiencies and production month, and the project still anticipates meeting its first year's investment target of $10m. capabilities, end-user capabilities and willingness to invest in EE, and some indications of the potential for EE (such as CEEF: As of December 2003, five GFAs were signed with local banks and three more were technical, economic, financial, and achievable potential). under negotiation. These banks have closed three deals ($5.3m in total project costs) and identified a probablized project pipeline of $6.4m in EE 2. Identify critical barriers to the implementation of EE investments. projects within the target market(s) and establish priorities for them. Allocation of GEF resources within a project should be based on a well-defined prioritization of key barriers within the target sectors of a particular country. First, the market inability for new ESCOs to sell EE projects to end-users (to assessment should lead to a thorough analysis of the barriers close deals), common end-user biases toward production that most critically inhibit deal flow for EE projects. (In some enhancements (revenue generation) rather than operating cost cases, generic EE barriers, such as lack of awareness of EE reduction investments, and so forth. and ESCOs, high project development costs, and so on are overstated, perhaps because they are easier to overcome.) Second, priorities must be established on eliminating these Projects that will have the best chance of success are those barriers. A project need not, and probably should not, seek to that seek to explicitly address the most critical and difficult remove all barriers at once. Sometimes a sequencing of barrier barriers to deal flow and market development, which may removal efforts may be warranted; in other cases, the actual involve more difficult issues such as lack of ESCO equity, barriers may only be known once initial barriers are removed. 20 Engergy Efficiency Portfolio Review and Practitioners' Handbook It is likely that GEF resources will be inadequate to address the with the development of EE and ESCO markets has already entire market properly at once, so programs can be more effective led to more programmatic efforts (in China, Brazil, Hungary, if they can focus their objectives on the highest-ranked barriers. and Vietnam) and longer project implementation periods (from Use of facilitated stakeholder consultations, with representation typically four to five years to typically six to seven years). from various market actors, to discuss EE transactions and rank barriers and options to address them has been identified as one 4. Incorporate good practice principles in detailed project tool for conducting such analyses. design, which include: n Commercial Orientation. The program should be based 3. Select appropriate program interventions to address on commercial principles and investment-driven and should key barriers on a sustainable basis. Too often, financing avoid unduly distorting the market (for instance, lending to one instruments are pre-selected at the concept stage, before sector or supporting only certain transaction/ESCO models). sufficient market analyses have been conducted. Options The program structure should carefully consider cost-recovery to address the identified barriers must be developed and by leveraging commercial financing and maximizing private customized to the particular country or market. Where sector participation and local competition. Appropriate fees credit enhancement mechanisms are determined to be the for GEF products and risks should be adopted to ensure appropriate instrument, issues of how credit can be improved market incentives guide decision-making. TA is most effective on a sustained basis need to be addressed. when focused on transactions and targeted to creditworthy end-users. Government and Bank procedural requirements In some cases, the guarantee program is determined to be (that is, procurement, disbursements, and reporting) should a permanent need and thus the guarantee program must be be minimized as much as possible. designed as such, with appropriate institutional arrangements n Program Flexibility. The program structure should be and cost recovery fees (and a willingness for the market designed to allow for different business models and to bear such fees). In other cases, it is expected that the financing (that is, ESCOs, direct lending to end-users, off- guarantee program would generate sufficient market data on balance sheet financing, and leasing) and for procedures EE loan performance so that commercial banks could begin to be adjusted based on changing market conditions, pricing such financing without further guarantees; here, a clear demands, and early implementation experience. Programs exit strategy for the program and funds should be defined, should also have built-in mechanisms for market actors to preferably with market indicators for when exit procedures provide feedback to program implementing agencies on should be instituted. options to improve and further streamline administration. n Sharing of Risks and Incentives. Risks should be shared Where liquidity is a barrier and a fund is envisaged, the among all program participants (including guarantors, design should consider how long the fund would operate lenders, ESCOs, equipment suppliers, and end-users) and an exit strategy formulated once the liquidity situation to avoid moral hazard and should be allocated based improves. Realistic timetables for the removal of such barriers on comparative advantages--that is, technical risks to and development of markets should be carefully assessed and ESCOs, credit risks to banks, equipment performance appropriate project terms, sequencing of projects, and use of risks to suppliers, and operating risks to end-users. Proper programmatic approaches should be developed. Experience incentives must be provided to all stakeholders to promote 21 high volumes of successful projects. Fund managers should financial institution on a sole-source basis or based solely on be given proper incentives to be proactive in identifying their qualifications early in the project cycle, before the project new business and helping applicants improve the quality of was fully designed. There was obvious advantages to the latter their proposals. approach, since the selected FI can help advise on some of the n Transparency. Program criteria, appraisal methods, program details, can draft project and operation manuals, can procedures, evaluation procedures, access to training begin recruiting partner banks and ESCOs or project developers, and TA, and so on must be provided in an open and and can make use of existing internal business practices (such transparent manner. as appraisal methods, credit ratings). However, this often placed the Bank and its clients at a disadvantage in negotiating the 5. Build the project pipeline early and intensively. Programs contractual terms, since the FI was already selected. In addition, should begin seeking potential transactions early in the project such a process may lead to the FI advising on its own rules and preparation cycle and be designed to allow a wide range project procedures, which may not always be appropriate. of channels for projects to be identified and developed. Early transactions will allow the program procedures to be tested early In terms of the contract itself, efforts need to be made to on, provide the implementing agencies with immediate hands-on balance incentives for deal flow and appropriate risk taking (for experience, and build early successful case studies and credibility incrementally high perceived risks) while maintaining a need for the program. This is particularly important given the historic for GEF fund preservation and minimized market distortions. mixed disbursement performance of many of the EE funds and Remuneration clauses should consider the need to match payment credit lines in the past. options with FI needs, such as fixed payments for their fixed costs (staff, overhead, training, other start-up costs); output-based ChannelsthathavebeenusedorconsideredinBank/GEFprojects payments for their other services (such as program marketing, have included fund managers, partner commercial banks, ESCOs, manual preparation, workshop delivery, and reporting); and ESCO associations, industry or bank associations, government performance-based payments for their application reviews, deal programs, and utility DSM programs. Where possible, some flow, and defaults. incentive mechanisms, such as sharing of project origination fees, could help improve cooperation with other agencies and 7. Continually monitor and market the program. In the early programs. Of course, such pipeline building efforts must consider years, it is expected that a number of implementation issues will realistic timing of the program's effectiveness and the availability arise that need to be addressed quickly and properly. Initial of funds; having full project proposals too early could harm ESCO proposals will test the robustness of the program procedures and business cycles and damage the program's credibility. the administrator's capacity to follow them. Intensive efforts must be made to monitor and facilitate these initial transactions, adjust 6. Encourage competition for the selection of program procedures as required, and use early successes to market the guarantor/fund manager. Program success and sustainability program further. (Of the projects under implementation, most have can be greatly facilitated by selecting the best financial partners. taken about a year to close their initial deals.) Program credibility Some Bank projects have selected fund managers based on will be largely based on the ability to generate successful both cost and quality criteria after the project was fully designed, projects; thus success stories should be disseminated widely. which is recommended. Most, however, either selected the 22 Engergy Efficiency Portfolio Review and Practitioners' Handbook Conclusions The GEF EE portfolio within the World Bank Group has evolved trend for GEF EE programs, which is now appearing globally, is considerably over the past 12 years and in general can be the greater emphasis on developing financial sector interventions considered quite successful. It has leveraged substantial policy and instruments to support EE investment programs. This does not changes to support EE, developed and transformed markets, imply that other modalities of EE programs have been deemed created a greater supply of EE products and services, leveraged unsuccessful, but rather that a consensus is emerging that achieving some $2.5 billion, and increased local capacity to operate such a significant impact in EE markets requires an explicit strategy programs in over 30 countries. The portfolio has also provided to overcome a lack of appropriate and affordable financing. useful insights on how to improve the preparation of commercial The recent expansion of GEF's strategy to use GEF funds in a EE programs--from effective business models to appropriate contingent manner has also led to more innovative financial financing instruments. instruments, and 18 operations across the Bank and the IFC have used or proposed using GEF contingent financing. Despite these attributes, the Bank does need to improve its track record on the implementation side, particularly with respect to In some ways, EE projects at the Bank are at a crossroads: the disbursements and high volume transactions. Project preparation more innovative uses of GEF funds in using contingency financing times for GEF EE projects, which have been higher than mechanism have reduced the need for Bank co-financing. Yet the conventional Bank energy projects, need to be reduced. Other recent renewal of infrastructure programs and the focus on Bank areas, such as improved project planning, better prioritization lending may serve to divert attention away from stand-alone GEF of market barriers and strategies to overcome them, and more EE projects. In addition, recent years have seen a decline in EE realistic implementation and procurement schedules will all help thematic group work and dedicated EE specialists (for example, in strengthen the Bank's GEF EE program in the years ahead. While the ASTAE). This loss of institutional experience could reasonably each program model has had some successes, no single model result in both a decline in new project development and project has emerged as a clear favorite. Thus continued adaptation and design innovations. innovation will be necessary in the future. As the portfolio further develops, new program modalities will emerge and require Some project models with very little demonstrated success, such as continued review and refining by the Bank. the use of guarantees, are already being extensively replicated. While this could be a good sign, the portfolio could become Unfortunately, the Bank lacks a long-term strategy to develop overextended in certain areas, with insufficient time for lessons to such operations; as a result, there is considerable variation in be incorporated into later projects. There is a fair risk that some regional uptake of and commitment to GEF operations. In projects may seek to copy previous operational designs rather general, GEF programs have been stronger in regions where than adapt and refine them, which could undermine the Bank's prospects for investment lending have been limited. One strong program in the years ahead. The IFC has noted that expanded 23 opportunities for GEF non-grant contingent financing modalities Figure 3: Energy Efficiency-- in the EE sector has led to increased opportunities for IFC A Convergence of Interests co-investment and even greater leverage of IFC and private sector investment. Management commitment and dedicated staff within the IFC have reflected this. Rationale for Energy Efficiency Government While the EE portfolio is relatively strong in terms of geographic diversity and size, there remain substantial opportunities for Utilities End-Users greater support for EE programs throughout the Bank's client countries. Recent changes in institutional goals and strategic EE priorities require such programs to continually justify how they meet current objectives. The recent Infrastructure Action Plan notes the need for a greater focus on service delivery, development of new, innovative financing instruments, and Private Sector Society better leverage of local financing--all of which EE programs support. The promotion of EE is consistent with the Bank's Fuel for Thought paper, which emphasizes the need for a more environmentally sound approach to the development of energy sectors in these countries, and with the Bank's priority of environmental protection and efficient use of country resources EE programs can also offer cost-effective or low-cost solutions to (both natural and economic). global environmental mitigation strategies and provide benefits to a number of stakeholders in client countries. The Bank should EE programs offer potential solutions to address a number of critical thus continue to work with these stakeholders to seek areas of issues facing Bank clients and provide outputs consistent with the convergence between these groups. (See Figure 3.) Governments Bank's overall mission. (See Table 4.) The rational use of energy is and societies benefit from a better allocation of financial and important to assist clients to mitigate the adverse impacts of energy natural resources and from environmental protection, utilities gain generation and its use on the environment. It also conserves natural from better management of energy demand and improved service, resources, reduces countries' dependence on fossil fuels imports end-users can reduce operating costs and increase productivity, and fossil fuel­based generation, eases infrastructure bottlenecks, and the private sector benefits from increased opportunities for and improves industrial and commercial competitiveness through potentially high return investments and demand for efficiency reductions in operating costs and increased productivity. With services, products, and financing. The challenge is to identify huge projected investments needed in the energy sector in the suitable delivery mechanisms to achieve large-scale impacts for developing world over the next few decades, EE considerations such investment opportunities, given that such benefits are often must form an essential component of the planning process. distributed among a wide variety of stakeholders. 24 Engergy Efficiency Portfolio Review and Practitioners' Handbook Lessons Learned from Table 4: Energy Efficiency Program GEF EE Portfolio Objective Tree Analysis While many of the lessons learned from the entire GEF EE portfolio Narrative Summary are specific to the various models, a number of common lessons Bank Mission: have emerged. Many simply reinforce practices for proper and 1. Ensure environmental protection 2. Foster public/private partnerships disciplined project design and preparation for Bank projects. The 3. Further sustainable reduction of poverty key lessons and findings from this review are summarized here: 4. Achieve institutional excellence n Policy: A number of policy considerations have been GEF Operational Program: highlighted, including the need for a supportive policy 1. Climate Change: Promote EE to reduce greenhouse gas framework for EE programs, the need for energy prices to emissions reflect true costs and thus provide sufficient incentives for EE Bank Objectives: investments, removal of price distortions for equipment (such 1. Environmental protection 2a. Improved delivery of government services as import tariffs), consideration of legal/taxation issues for 2b. Private business development ESCOs, and proper coordination with parallel EE programs 2c. Private investment facilitation 3a. Improved social services to avoid potential overlaps and conflicts. 3b. Enhanced income among rural/urban poor n Institutional: There is a need for strong institutional ownership 4a. Knowledge management 4b. Capacity building of programs (rather than just a few champions) to help ensure success, adequate institutional arrangements and capabilities Global Objective: 1. Sustainable removal of commercial barriers to EE for implementation (including centralized planning and decentralized implementation and monitoring), sound Outputs: project and financial management capabilities within project 1a. Establish EE FI mechanisms and facilities 1b. ESCO development implementation units, properly aligned incentives for all 1c. Improved EE in buildings program agencies to ensure a successful program outcome, 1d. Energy efficient equipment promotion 1e. Links to global/climate change programs and implementation arrangements that can withstand ongoing 1f. Technical assistance and proposed reforms. 2aa. Utility load management/DSM n Market Analysis: Projects should seek to undertake 2ab. Municipal EE (water, government buildings) comprehensive, holistic assessments of the markets up front, 2ba. ESCO development 2bb. Market development of EE equipment/services engaging all stakeholders and market actors, including 2ca. Establish EE FI mechanisms and facilities financiers. Such assessments should then lead to an analysis 2cb. Manufacturer partnerships to improve EE products and prioritization of key barriers to EE transactions, along with 3a. EE in health/education sectors specific intervention strategies and instruments developed for 3b. Rural EE (agricultural, rural sectors) each one, customized to the country and target markets. New 4a. Information dissemination products and business models should be introduced using 4ba. Information dissemination market principles and should ensure that program models 4bb. Technical assistance adequately take into account expected reforms in energy, banking, and other relevant sectors. 25 n Program Design: Lessons dealing with program design Questions for Discussion include allowing for some flexibility in program design; maintaining a critical look at program sustainability early in A number of questions also need to be considered and further project preparation; establishing credibility of technologies discussed as we move forward. Some of the key questions are: through development and enforcement of minimum program n Do EE programs fit within the new Infrastructure Action Plan equipment performance standards; adapting international and, if so, is there a continued need for Bank co-financing models to account for local conditions; initiating marketing for them? If not, is the Bank committed to such non-lending campaigns to generate public awareness and energy-efficient programs? product uptake; demonstrating projects, business models, n Given the tremendous projected investments in the energy and institutional arrangements to help given credibility to EE sector in our client countries over the next 20­30 years, can mechanisms; and creating evaluation plans up front. EE programs be scaled up and, if so, how? n Implementation Planning: Project implementation plans n Have there been sufficient macroeconomic analyses of supply- should be achievable, with clear milestones for procurement side versus demand-side options to meet growing energy of key assignments, development of initial Terms of Reference demands within client countries, and dissemination of the and advertisements by project appraisal, and more realistic results? Should such analyses be incorporated into the planning expectations for time required to develop new markets, process in restructured electricity sector frameworks? transform existing ones, create project pipelines, and so on. n Should the Bank have a more integrated EE strategy across n Sustainability: The program should address institutional regions or convergence of approaches and program models? and financial sustainability early in the project development If so, would a convergence reduce innovation? stages. Whether through public sector budgetary support, n Has the existing Bank EE portfolio missed potentially surcharges and taxes, or purely commercial terms, the significant opportunities in EE? Have options for EE in rural program should be viable, including any necessary parallel areas (including traditional fuels), non-electricity uses, public TA activities. Institutional arrangements, whether from DSM sector EE programs, cross-sectoral EE, and other issues been units or newly created EE agencies, should develop plans sufficiently explored? to sustain themselves or to wind activities down once their n Has the existing Bank GEF EE program leveraged sufficient objectives have been fully met. conducive EE/energy policies? n Should project designs be overly concerned with creating one or only a few market players (such as banks or ESCOs) versus seeking to develop a more equitable and competitive market up front? n Is the GEF increasingly bearing risks that are not incremental to EE projects, such as corporate credit, macroeconomic, political, and other factors? Is an assessment needed later to determine the nature of loan defaults to see their relationship with the EE project? 26 Engergy Efficiency Portfolio Review and Practitioners' Handbook APPENDIX A Energy Efficiency Project Database Project EE of% for % 100% 100 100% 2.8% 3.4% 100% 100% 100% 100% 42.6% 00%1 100% 16% 12% 100% 100% 0%01 0% 100% 100% 4% 100% 100% 100% 100% 100% 100% 100% 100% 100% 10 6% 100% 100% 100% 00%1 100% 100% 100% Project Extension (years) 2 1 1 0 0 1.5 0.9 1 3 0 0 0 0 0 0 0 0 0 0 0.3 1 0 1 0 1 Project emTi Status Preparation 2.0 2.0 2.5 2.8 2.4 1.5 2.2 2.0 82. 1.8 1.9 2.9 2.7 2.8 3.6 2.5 2.6 2.3 2.5 2.5 2.58 4.42 3.5 3.5 oject Ratings Pr DO/IO S/S S/S S/S U/U S/S S/S S/U S/S SS/ S/S S/S S/S S/S S/S S/S S/S S/S S/S 6/06 12/06 closes closes 2/04 5/03; 12/03d scheduled 6/03 reform Appraisal ed 1/05 12/03 scheduled negotiations written 12/04 revision written revision written on n MTR sector dropped yet approv yet yet Status 6/04 project project for for 7/03 MTR for 5/02 expected expecte approved 1/04 5/04 be 10/03, /31/03 ed not under not not under not 12 restructured closes 2/03; 11/03,e note pending ompleted,c 11/03 may 12/03 note note note note note note due completed completed completed completed complet 12/03 complete; complete; scheduled scheduled completed scheduled approved expected expected submitted implementation implementati implementatio implementation 6/05 hold hold; ICR ICR ICR ICR ICR ICR Project MTR Project MTR MTR MTR Effectiveness MTR MTR Effectiveness Effective 6/05 MTR Effectiv for Concept Brief Brief On issues Appraisal 1/04 Appraisal Brief On Brief 2/04 Appraisal Concept Concept Concept Concept Concept Concept Under Under Under Under Date Closing 30/06 6/30/03 12/31/99 12/31/97 6/30/99 12/31/02 6/30/00 12/31/04 6/30/04 6/30/06 12/31/06 6/30/10 6/30/10 6/30/06 3/31/06 6/30/08 12/31/07 9/30/05 6/30/07 12/31/11 6/30/09 6/30/08 12/31/03 3/31/05 12/31/04 6/ Standing? blended blended blended blended blended blended blended blended blended standing standing blended blended blended standing blended standing blended blended blended standing standing standing standing blended standing standing standing standing standing blended alone blended standing standing standing Free Partially Free Free Fully Fully Partially Fully Free Fully Partially Free Fully Fully Fully Free Free Free Partially Free Fully Free Partially Free Partially Partially Free Free Partially Free Fully Stand Fully Free Free Partially Free Other nancing ($m) Co-fi $59.70 $8.70 $13.00 $0.50 $0.20 $179.50 $261.60 $67.10 $68.57 $65.80 $344.88 $255.20 $27.80 $5.37 $12.00 $33.60 $24.00 $2.48 $7.86 $914.66 $53.50 $1.00 $485.00 $82.50 $50.50 $53.42 $8.73 $200.00 $23.30 $14.03 $971.98 $32.00 $40.00 $0.25 $1.20 $73.45 $2,221.69 $0.27 $0.80 $0.81 $10.95 $12.82 Bank nancing ($m) Co-fi $53.00 $- $- $- $1.00 $- $54.00 $43.40 $- $63.00 $165.00 $- $5.00 $0.51 $20.00 $- $- $- $5.20 $302.11 $- $3.50 $- $- $- $- $11.00 $- $- $- $14.50 $- $- $1.00 $3.00 $4.00 $374.61 $- $- $- $- $0.00 Details Amount oject ($m) GEF $10.00 $3.80 $10.00 $3.20 $0.70 $9.50 $37.20 $15.00 $32.81 $22.00 $25.00 $26.00 $7.00 $1.23 $5.00 $6.50 $10.00 $2.50 $5.50 $158.54 $10.00 $0.50 $15.00 $25.00 $12.00 $11.00 $6.00 $15.00 $8.50 $6.88 $109.88 $10.00 $9.00 $1.00 $4.00 $24.00 $329.62 $0.70 $0.75 $0.75 $0.75 $2.95 Pr Project ($m) otalT Cost $122.70 $12.50 $23.00 $3.70 $1.90 $189.00 $352.80 $125.50 $101.38 $150.80 $534.88 $281.20 $39.80 $7.11 $37.00 $40.10 $34.00 $4.98 $18.56 $1,375.31 $63.50 $5.00 $500.00 $107.50 $62.50 $64.42 $25.73 $215.00 $31.80 $20.90 $1,096.35 $42.00 $49.00 $2.25 $8.20 $101.45 $2,925.91 $0.96 $1.55 $1.56 $11.70 $15.77 Region EAP LAC LAC ECA SAR EAP LAC EAP EAP EAP EAP ECA LAC SAR ECA ECA EAP EAP ECA AFR EAP SAR EAP ECA ECA EAP MNA LAC MNA SAR EAP ECA EAP EAP AFR EAP EAP MNA Date Board -04 -04 1/31/94 3/31/94 3/8/94 12/19/95 3/18/97 4/7/93 10/5/99 12/23/96 3/26/98 6/20/00 10/24/02 10/7/03 11/20/01 6/28/00 6/10/03 9/19/02 6/1/01 6/24/03 Oct-04 Jun-04 Nov-04 May-05 Jan-04 Apr Aug-04 May-05 Jun-04 Mar FY06 FY05 FY05 FY06 FY05 FY06 4/1/99 2/6/01 11/8/01 7/2/03 ID Project 3404 7400 7492 8799 39965 4647 6 47309 35693 37859 64924 67337 71461 72527 55906 73242 68062 69027 71019 12 84831 73358 72721 73913 66532 70246 85099 65972 78131 68124 10 75357 80054 80074 6 43 61324 68108 70161 74686 4 y Faso Countr & Ivoired Lanka China Jamaica Mexico Russia Sri Thailand Brazil China China China China Croatia Ecuador India Lithuania Romania Thailand Vietnam Bulgaria Burkina China India Philippines Poland Serbia Montenegro Thailand unisiaT Uruguay Algeria India Laos Macedonia Vietnam Vietnam Cote Mongolia China Morocco Park Industrial ciency Effi oject ciency TION Pr Effi cation Projects Bernoussi Energy) ciency DH) ARA ciency Centers Sidi (PROMEC) Effi Sector Energy& of of Effi Energy Reduction Sector Electrifi CLOSED Distribution PREP Clinics and Demonstration ONGOING Sectors vices Renewable (Vilnius and Energy Loss PROPOSED Implementation Rural Urbanin Pilot y Energy Boilers Ser Development Industrial Market vation Pumpsets Industrial ONGOING Health Upgrading Rural UNDER System the Policy Management vice Stoves Name Lighting Reduction Deliver (Second Building for thein Replacement Provinces Ser Rural ransmissionT Management Gas Electricity Industrial vation Environment Conser and Management Management Reform Company and vation Energy for vices of ciency ciency Communications ciency ciency ciency Agricultural ciency ciency vice ciency ciency ciency ciency Gas ciency Medium-Sized ciency Household Ser Effi cient Conser Second Energy Effi Chiller Effi and Effi Effi Effi Sector Cooperative Effi Effi Ser Effi Effi Effi Conser Southern Effi Rural Demand-Side Demand Reform LA Effi Solar Environment& Sichuan Demand-Side High Greenhouse Energy Promotion Subtotal Energy Fuel-Effi Energy Beijing Second Energy Power Modernization Energy Heat Energy Building Demand-Side Subtotal Energy Energy Heat Improving Electric Energy Energy Energy Energy Energy Subtotal Energy Energy Second Energy Second Second Subtotal TOT GEF Energy Improved Passive Energy otalT CO2 $1.10 $4.09 $0.71 $0.18 $0.65 $0.25 $1.11 $7.29 $0.57 $1.80 $4.26 $1.60 $5.75 $4.04 $1.25 $7.86 $2.00 $2.67 $5.33 $5.68 $1.74 $5.36 $0.94 $1.50 $2.38 $/ton $271.43 $13.51 $72.54 $24.30 $15.00 GEF ts Ratio 12.27 3.29 2.30 1.16 2.71 19.89 6.9 8.37 3.09 6.85 21.40 10.82 5.69 5.78 7.40 6.17 3.40 1.99 3.37 7.03 6.35 10.00 33.33 4.30 5.21 5.86 4.29 14.33 3.74 3.04 9.05 5.44 2.25 2.05 3.25 Leverage 1.38 2.06 2.08 15.60 5.28 Benefi Sav- Actual (million CO2) Carbon ings tons oject 0.014 0.74 2.9 0 2.32 6.0 Pr En- Savings Actual ergy (GWh/yr) 13 114.3 0 3,140 3,267 tons 0 40.6 0.1 0.7 12.8 1.2 55.4 21.0 181 33.7 98.6 23.5 1.0 2.2 2.8 1.5 6.2 0.1 1.0 8.0 0.0 1.4 3.0 CO2) 372.6 0.80 3.18 1.29 17.7 0.4 0.1 0.8 0.5 1.84 Estimated Carbon Savings (million gniknaB 0 a a 3 a a a 6 a a 3 0 laitnediseR a a 4 a a a a a 6 a 3 a a 3 a 1 cilbuP 0 a a a 3 aa a 4 0 0 sgnidliuB Sectors a a 2 a a a a 10 a 5 a a 4 a 2 yrtsudnI getraT 2 a aa aa aa 8 aa aa 4 aa a 3 aa a 2 gnitaeH .tsiD 1 aa aaa 3 aaaa aa aa aa 4 aaa 1 0 saG & liO a aa 2 aaaa 1 0 0 0 rewoP ?gnicnaniF aa aa aa aa 4 aa aa aa aa 4 aa aa aa aa 4 aa aa a a 4 0 tnegnitnoC n n n n n n 0 n n n n y y n n n y y n 4 y n n n y y y y y y 7 y n n n 1 n n n n 0 rehtO a 3 a 1 0 a 1 a 1 ediS-ylppuS aa aa 2 0 a 3 1 0 gnicnaniF EE 0 a a 7 aa a a 8 a a a 3 a 1 ofnI/gnitekraM a a 3 7 a a 6 a a 3 a a 3 yciloP EE Elements 0 2 aa aaaa aa 4 a a aa 3 0 .veD OCSE 1 aa aa aa 8 aa aaaa 4 a aa 4 aa 2 oject sedoC/sdradnatS Pr 1 aaaa aaaa 2 a 1 1 1 stcudorP EE a aaa 3 a aa aa aa aaa 5 a 1 0 aa 1 stiduA EE 3 aaa aaa 2 aa aa 3 aa aa 4 aa 1 OCSE ytilitU 0 a 1 aa 2 0 0 MSD ytilitU aa aa aaa aa 4 a aa a 3 aa a aaa 3 aaa aa 2 0 y Faso & Lanka Ivoired Countr China Jamaica Mexico Russia Sri Thailand Brazil China China China China Croatia Ecuador India Lithuania Romania Thailand Vietnam Bulgaria Burkina China India Philippines Poland Serbia Montenegro Thailand unisiaT Uruguay Algeria India Laos Macedonia Vietnam Vietnam Cote Mongolia China Morocco ciency Effi ciency oject Effi TION cation Projects Bernoussi Energy) Pr ciency Modernization DH) ciency ARA Effi Sector Sector Energy& Centers Sidi Effi Reduction Electrifi of of Distribution Energy Demonstration Sectors Clinics Loss CLOSED and Renewable (Vilnius and Pilot PREP Energy Implementation Rural Urbanin y Energy Boilers Development Industrial ONGOING vation Pumpsets Industrial Market Health Upgrading (PROMEC) System the PROPOSED Reduction Deliver (Second Building for thein Policy Management ONGOING vice Stoves Provinces Ser Rural Name ransmissionT Management Lighting Replacement Gas Electricity Industrial vation Environment Conser vices Management Management Reform Company vation vices of ciency ciency Communications Ser ciency ciency UNDER and Energy for ciency Agricultural ciency ciency vice ciency ciency ciency ciency Gas ciency Ser Effi cient Conser Medium-Sized ciency Household Park Second Energy Effi Chiller Effi and Effi Effi Effi Sector Cooperative Effi Effi Ser Effi Effi Effi Conser Southern Effi Rural Demand-Side Solar Rural Demand Reform LA Effi Environment& Sichuan Demand-Side High Greenhouse Energy Promotion Subtotal Energy Fuel-Effi Energy Beijing Second Energy Power and Energy Heat Energy Building Demand-Side Subtotal Energy Energy Heat Improving Electric Energy Energy Energy Energy Energy Subtotal Energy Energy Second Energy Second Second Subtotal TOT GEF Energy Improved Passive Energy Industrial otalT 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% $1.82 $1.82 $2.01 $2.43 $2.09 $1.20 $0.27 $1.23 $1.61 Project EE $/ton of% for GEF CO2 0 0 1 1 0 1.00 5.00 1.00 3.94 4.66 6.84 8.00 9.70 8.92 0.4 134.14 18.32 Leverage Ratio Project Extension (years) ts 2.75 1.5 0.6 1.3 1.8 2.5 1.5 Benefi Carbon tons Project emTi Actual Savings (million CO2) Preparation oject Pr 2,320 En- Savings Ratings HS/HS S/HS S/HS US/HU HS/HS Actual ergy (GWh/yr) DO/IO 0.2 2.8 0.4 7.4 4.6 4.7 2.6 6.5 2 Sav- 29.1 be CO2) project 10/04 5/04 to (million 5/04 evaluated reinvesteds HEECPin evaluated approved, approved, Estimated Carbon ings tons restructured Brief Brief note and and gniknaB Status fund implementation implementation implementation 10/02, be implementation note note submitted to Closed Closed der Concept a a a a a 6 Closed, Un Under Under closed Under Concept Concept laitnediseR Fund a a a a 8 cilbuP Date a a a Jun-98 6 Dec-01 Dec-10 Dec-03 Dec-03 Dec-07 Dec-09 sgnidliuB Closing a 6 yrtsudnI Design/Model a aaaaa aaa 3 blended blended blended blended blended blended blended blended standing blended standing gnitaeH .tsiD Details Standing? Free Free aa aa a aa a 5 Free Partially Partially Partially Partially Partially Partially Partially Partially Partially oject saG & liO Pr 1 oject rewoP Pr $0.00 $20.00 $0.00 $2.85 $31.00 $29.50 $87.50 $80.80 $50.60 $33.00 aa aa aa aa aa a a 7 Other nancing? Projects ($m) $335.25 Projects Co-fi $- $- $- GEF Contingent Financing? n y n y n n y y y y 6 $50.00 $4.00 $3.50 $17.50 $12.40 $19.00 $14.50 GEF Bank nancing ($m) $120.90 rehtO 0 IFC Co-fi IFC ediS-ylppuS 0 $5.00 $5.00 $0.74 $18.00 $9.58 $5.65 $15.00 $0.70 $8.00 $6.00 $73.67 gnicnaniF EE Amount ($m) a a a a a 9 GEF ofnI/gnitekraM a 5 yciloP EE $5.00 Project ($m) $25.00 $0.74 $70.85 $44.58 $38.65 $120.00 $93.90 $77.60 $53.50 $529.82 0 otalT Cost Design/Model .veD OCSE aa aa aa aa aa 5 sedoC/sdradnatS ECA ECA LAC ECA GLO GLO GLO ECA TBD ECA SAR oject aa aa aa 3 Region Pr stcudorP EE a 5 FY05 FY06 stiduA EE Date 6/9/95 3/3/97 Jun-04 Approval 10/27/98 10/31/02 6/24/99 3/21/00 12/3/97 10/22/01 0 OCSE ytilitU ID 11 0 502217 502220 502226 506396 502238 502238 502222 505970 507694 521184 MSD ytilitU Project aa aa aa aa 4 y y y y y y Countr Poland Hungar Argentina Global Global Global Global Hungar TBD Russia India Countr Poland Hungar Argentina Global Global Global Global Hungar TBD Russia India (CEEF) 1 2 (CEEF) 1 2 (HEECP) oject Finance (MSP)2 (HEECP) (MSP)2 oject ciency TION/ Fund rancheT- rancheT- ciency TION/ Finance Effi Fund Fund rancheT- rancheT- Effi Fund Pr ciency (ELI) (ELI) Effi ARA Pr ciency (ELI) (ELI) ARA of (MSP) Energy Facility of (MSP) Effi Energy Facility CLOSED (PELP) Co-Financing and and Lighting Energy Initiative Initiative Co-Financing PREP Credit (FEER) CLOSED (PELP) Co-Financing Initiative Initiative Co-Financing PREP Credit (FEER) ONGOING PROPOSED Lighting Energy ONGOING PROPOSED ciency Energy ciency ciency ciency ciency Energy ciency ciency ciency Name Lighting Effi Street Lighting Lighting Effi Effi Effi Lighting (REEF) Name Effi Street Lighting Lighting Effi Effi Effi 29 cient cient cient cient UNDER Lighting (REEF) cient cient cient cient UNDER Lighting Effi Energy Effi Commercializing Effi Effi Renewable Fund Energy Energy Energy LED otalT Effi Energy Effi Commercializing Effi Effi Renewable Fund Energy Energy Energy LED otalT APPENDIX B Additional Resources GEF Documents Birner, S., and E. Martinot. "The GEF Energy-Efficient Product Portfolio ­ Emerging Experiences and Lessons," GEF Monitoring and Evaluation Working Paper 9, World Bank Report No. 24712, July 2002. Martinot, E., and O. McDoom. "Promoting Energy Efficiency and Renewable Energy ­ GEF Climate Change Projects and Impacts," Global Environment Facility, June 2000. DSM Papers Singh, J., and C. Mulholland. "DSM In Thailand: A Case Study," ESMAP Technical Paper No. 008/00, October 2000. "Operating Utility DSM Programs in a Restructuring Electricity Sector ­ Summary," ESMAP Workshop Proceedings, October 2000. ESCO Papers "ESCO Practitioners Workshop ­ Summary," ESMAP Workshop Proceedings, April 1999. EE Financing Papers "Developing Financial Intermediation Mechanisms For Energy Efficiency Projects ­ Focus on Commercial Banking Windows for Energy Efficiency ­ Summary," ESMAP Workshop Proceedings, January 2002. "Private Sector Participation in Market-Based Energy-Efficiency Financing Schemes: Lessons Learned from Romania and Internal Experiences," ESMAP Report, December 2003. Other Bank EE Publications "Reducing Energy Costs in Water Utilities Through Energy Efficiency," ESMAP Project Experiences in Brazil, China and Central Asia, June 2003. "District Heating Practitioners' Workshop ­ Summary," ESMAP Workshop Proceedings, January 2000. "Energy Efficiency Fund Practitioners Workshop," ESMAP Workshop Proceedings, April 2000. Sample Project Documents for EE Financing Projects China Second Energy Conservation Project Project Appraisal Document (PAD) Croatia Energy Efficiency Project PAD Romania Energy Efficiency Project PAD IFC's Hungary Energy Efficiency Co-financing Project (HEECP) Project Document (Phase 1), Project Document (Phase 2) Project Models IFC's Commercial Energy Efficiency Financing Project (CEEF) PAD 31 ENDNOTES 1 All dollar amounts are current U.S. dollars. 2 These include the Russia Greenhouse Gas Reduction (closed), Brazil Energy Efficiency (restructured), and IFC's Renewable Energy and Energy Efficiency Fund (being restructured) Projects. 3 J. Singh and C. Mulholland, "DSM In Thailand: A Case Study," ESMAP Technical Paper No. 008/00, October 2000. 4 S. Birner and E. Martinot, "The GEF Energy-Efficient Product Portfolio--Emerging Experiences and Lessons," GEF Monitoring and Evaluation Working Paper 9, World Bank Report No. 24712, July 2002. 5 See also "GEF ESCO Thematic Review--Final Report," Draft GEF Working Paper, AEA Technology, April 2001. 32 Engergy Efficiency Portfolio Review and Practitioners' Handbook Global Environment Facility Coordination Team Environment Department THE WORLD BANK 1818 H Street, NW Washington, D.C. 20433, USA Telephone: 202.473.1816 Fax: 202.522.3256 Email: GEOnline@worldbank.org Web: www.worldbank.org/gef