2018/91 K NKONW A A WELDEGDEG E OL N ONTOET E S ESREI R E ISE S F OFRO R P R&A C T HTEH E NEENREGRYG Y ETX ITCREA C T I V E S G L O B A L P R A C T I C E THE BOTTOM LINE Projects that improve energy efficiency Financing Energy Efficiency, Part 2: Credit Lines can pay back their initial investments over several years through savings on energy costs. But a variety of market How do EE credit lines work? • Lack of awareness and information, including of credible failures keep project developers from energy consumption data, information on energy efficiency accessing commercial financing for such Energy efficiency promises huge economic returns, potential and opportunities, and evaluations of energy efficiency investments. Where domestic banks are but market failures must first be overcome programs and their costs/impacts strong, lines of credit offer access to finance in the near term, while paving Energy efficiency should be the “first fuel” of energy policy makers • Lack of incentives to act, perhaps because the entities mak- the way for commercial financing in the ing capital investment decisions are not the same as those that around the globe. It helps to meet growing energy demands cleanly medium to long term, particularly in the and cheaply, increases competitiveness, generates employment, pay the energy bills and would benefit from energy efficiency, industrial sector. It is unlikely that credit lines enhances energy security, reduces poverty, and protects the environ- or because they have competing priorities (e.g., production will overcome all constraints on the ment—thus contributing to the World Bank’s twin goals of poverty expansion) or expect to see assured returns in a relatively short commercial debt financing of energy reduction and shared prosperity. According to the International time frame efficiency projects, but with well-defined parameters, capacity building, and Energy Agency, in the years 1974–2010, energy efficiency did more • Behavioral inertia, or people’s reluctance to do things differ- the support of domestic banks and to meet growing energy demand in IEA member countries than any ently, try new approaches, or take action in the face of perceived government, credit lines can achieve single energy resource. Harnessing the benefits of energy efficiency risk. This may be strengthened where consumers are not dramatic results. could facilitate more efficient allocation of resources across the charged cost-reflective energy tariffs. global economy, potentially boosting economic output by $18 trillion through 2035 (IEA 2014). There are several ways to address these barriers. One involves Y  un Wu is an energy However, the potential gains of energy efficiency have been diffi- creating incentives for business owners, public officials, and citizens specialist in the Energy cult to realize due to prevailing market failures. Even though invest- to prioritize energy efficiency, whether through laws and regulations, and Extractives Global Practice at the World Bank, ments in energy efficiency are generally profitable and cost-effective, taxes and subsidies, information, or a mix of these. A second involves focusing on the East Asia with energy savings repaying investment costs over time, many developing effective and scalable financing and implementation and Pacific region. opportunities to invest in greater efficiency are overlooked because mechanisms. These might include institutions and programs that Jas Singh is a lead of systemic barriers, including: match energy efficiency opportunities with financing and implemen- energy specialist in • Policy and regulatory issues, such as low energy pricing, lack tation, such as utility demand-side-management programs, energy the Energy and of codes or standards, failure to enforce codes and standards service companies (ESCOs), and energy audit/management systems. Extractives Global where they do exist, import duties on efficient equipment, and Without these and other positive actions, national goals to scale up Practice. weaknesses within relevant institutions energy efficiency will remain out of reach. Dylan Karl Tucker is an • The high project development and transaction costs Countries around the world have used various types of financing energy analyst in the involved in conducting energy audits and measurement and and delivery mechanisms to support energy efficiency investments. Energy and Extractives verification (M&V), comparing alternative technologies, and While some of these are best suited to certain types of markets (e.g., Global Practice. making what are often small and dispersed project investments credit lines for large and mid-size industrial enterprises), others may 2 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s be adapted to serve multiple sectors. The spectrum of financing schemes further up the ladder, including studies and pilots. Of options may be conceptualized as a ladder (figure 1), advancing course, mechanisms may overlap, and governments need not use from those that rely more on public resources (e.g., grants and every step of the ladder. public revolving funds) to those that rely more on commercial capital (e.g., leasing and project financing). While the goal is to ascend How do energy efficiency credit lines work? The World Bank’s global the ladder and leverage commercial financing to protect scarce public resources, the World Bank’s global experience suggests that International donors loan funds to financial experience suggests that moving up the ladder too quickly may hamper the creation of market institutions, which then lend to project developers moving up the ladder capacity to sustain energy efficiency investments in the absence of Credit lines are among the most common financing mechanisms of financing options too continued public support. In fact, countries that have taken more used by international financial institutions (IFIs) and governments to quickly may hamper intermediate steps generally experience a more stable market-de- make funds available to local banks and financial institutions, which the creation of market velopment trajectory. As local markets evolve, energy efficiency in turn provide debt financing for smaller investments. Under a credit programs can evolve apace, climbing the financing ladder. line, a donor (such as an IFI, bilateral donor, or government) extends a capacity to sustain energy The selection of appropriate mechanisms and their subsequent low-interest or long-term loan to one or more financial institutions for efficiency investments in design will depend on several factors, including: (i) applicable a specific purpose (e.g., energy efficiency, renewable energy, clean pro- the absence of continued legislative, regulatory, and institutional frameworks; (ii) the maturity duction) or target market (e.g., small and medium enterprises, indus- public support.... As local of financial and credit markets; (iii) the current state of local energy trial parks, export industries, state-owned enterprises, commercial efficiency service markets, including ESCOs and energy auditors; and markets evolve, energy buildings). The recipient financial institutions then on-lend the funds at (iv) the technical and financial capabilities of target end users. Once the market rate to subborrowers that implement eligible investments efficiency programs can the basic mechanisms are selected, they must be carefully adapted (figure 2). One main rationale for credit lines is that they provide a evolve apace, climbing the to suit the local context and target market. Their design should also dedicated financing window for targeted investments, particularly in financing ladder. include elements to facilitate the transition to more commercial underdeveloped markets. While subborrowers are often commercial enterprises, credit lines dedicated to energy efficiency have been used to support residential building projects (e.g., in apartment buildings) Figure 1. Financing energy efficiency: A ladder of options and may be lent through other intermediaries (e.g., ESCOs, equipment Market Commercial suppliers, leasing firms, other banks) for eligible investments. maturity financing advanced commercial or project financing (EscOs) Vendor, credit, leasing commericial financing, bonds Figure 2. Typical design of an energy efficiency credit line Partial risk guarantees Lender Project credit lines with commercial bank(s) Donor (bank/financial institution) developer credit lines with development bank Project a Public or super EscOs International financial Bank/financial Project B EE revolving funds institution/government institution Utility (on-bill) financing Project c Budget financing, grants with co-financing Public grants Provides funds at adds funds, lends at Obtain project financing low interest and long tenor concessional or market rates financing Source: Authors’ compilation. Source: Adapted from Limaye (2011) by authors. Note: EE = energy efficiency; ESCO = energy service company. 3 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s Credit lines can also be used to help local financial institutions, IFI is much longer than for most subloans, enabling financial insti- both public and private, establish business lines by providing capital tutions to revolve the loan funds two to three times before the loan and technical assistance to help them develop financial products and must be repaid, creating an additional multiplier effect. This amplifies support a portfolio of energy efficiency projects. This enables financial the impact of a donor’s contribution by increasing investments and institutions to learn the common features of such projects firsthand, the corresponding energy and carbon savings. However, most IFIs do Credit lines are not as well as how to market and appraise them, develop risk profiles, not have mechanisms to track or mandate uses of credit line reflows. designed to address observe typical cash flows generated from the energy savings and systemic issues in the repayment streams, and so on. This knowledge and experience will, Where are credit lines a viable option? in turn, help them continue lending once the credit line resources are banking sector or solve fully utilized. In the process, they are introduced to and become famil- Credit lines offer a solution where domestic banks are underlying inefficient public iar with energy efficiency technologies and market players—including strong but are not lending to energy efficiency projects policies such as energy energy auditing firms, design and construction firms, equipment Credit lines are not designed to address systemic issues in the suppliers, ESCOs, and leasing firms. Credit lines can eventually banking sector or solve underlying inefficient public policies such as subsidies. reduce the transaction costs of financial institutions by helping them energy subsidies. But they can be an appropriate instrument where standardize project appraisals and loan procedures, templates for specific market barriers or information gaps prevent energy effi- energy audits, marketing and training materials, and energy saving ciency investments from being made. World Bank experience shows tools/savings estimates for simple energy efficiency measures. Often that credit lines have the potential to address a range of typical this technical assistance is supported by grant funds from bilateral barriers to the financing of energy efficiency projects, including donors, the Global Environment Facility (GEF), and others. perceptions of high technical and financial risks, lack of liquidity, For project developers, suppliers, and end users, credit lines can inadequate expertise and capacity, and high transaction costs. help expand the pool of commercial debt financing for their projects Table 1 illustrates how an energy efficiency credit line can address by establishing dedicated energy efficiency financing windows some of these common barriers. with bankers that understand the business. Technical assistance, Credit lines are most likely to achieve their desired objectives when: prevalent in most credit lines, can further build capacity and support • Financial institutions are financially strong, have sufficient capac- implementation by promoting subproject pipeline development and ity and willingness to take on energy efficiency as a new business marketing, energy audits and technical appraisals, training, energy line, have a solid client base with good potential for energy efficiency calculators, standardization of documents and templates, efficiency investment, and have well-established procedures for measurement and verification assessments, and case studies, the appraisal and processing of loans. among other things. Together, these elements collectively serve to • There is a strong commitment from management to an energy lower the perceived technical and financial risks of energy efficiency efficiency business line, to enhancing internal expertise, to investments and support the business line of financial institutions marketing the credit line, and to ensuring a strong “deal flow.” long after the credit line is completed. • The project units assigned to the credit lines have management The funds provided by donors or governments can be leveraged support and authority to direct business units and branch offices with additional funds provided by participating financial institutions as needed to effectively market the credit line, share lessons, to increase the total amount of the available credit line for energy institute procedural changes, and work together to ensure efficiency investments. In most cases, financial institutions also success. require equity contributions from their subborrowers for each invest- • There are creditworthy subborrowers who meet the appraisal ment, typically 20–30 percent, allowing the original credit line to be criteria of the financial institutions. (Credit lines are not designed further leveraged. Often, the time frame for repaying the loan to an 4 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s to encourage financial institutions to lend to uncreditworthy Table 1. How a credit line addresses barriers to energy efficiency clients, reduce collateral requirements, or engage in otherwise financing imprudent lending practices.) Barrier Potential impact of credit line • Technical assistance and capacity building are provided to finan- Project developers have little May be used to fund marketing and cial institutions and energy users to help reduce the perceived demand for loans for energy other efforts to raise awareness of World Bank experience risks of energy efficiency investments. efficiency (EE) projects EE investment opportunities, savings potential, and financing schemes shows that credit lines It is unlikely that credit lines will overcome all constraints on the Lack of liquidity in the financial Offers a dedicated window for have the potential to markets, or short loan tenors for EE projects seeking financing, commercial debt financing of energy efficiency projects, such as address a range of typical commercial debt financing of EE with longer tenors that match reliance on asset-based or balance sheet financing, overcollateral- projects the payback periods of many EE barriers to the financing of ization, a bias toward lending to revenue-generating projects rather investments energy efficiency projects, than cost-saving projects, and reluctance to finance small projects Lenders perceive EE projects By financing a portfolio of projects, or lend to public sector subborrowers. In fact, relatively few energy as having high financial risk, a credit line can help financial including perceptions of while financial institutions lack institutions better understand efficiency credit lines have targeted the public sector. This could be high technical and financial adequate expertise and capacity to typical EE project characteristics due to commercial lenders’ reluctance to provide debt financing to understand the financing needs of and refine marketing/appraisal risks, lack of liquidity, public agencies, and also to a lack of interest among public agencies EE projects and how to market and approaches, helping them to better in borrowing commercial funds on market terms. appraise them calibrate their risk perceptions to inadequate expertise actual market conditions, develop and capacity, and high specialized products, and develop transaction costs. What does the World Bank’s portfolio reveal internal pricing for these risks; this is achieved through technical about credit lines? assistance and learning by doing Under the right conditions, they can achieve The transaction costs of EE financing Helps to standardize and streamline are relatively high processes for project appraisals, risk dramatic results analyses, and loan processing A review of the World Bank’s energy efficiency project portfolio over Few EE projects are sponsored Specifically targets SME/ESCO by small and medium enterprises projects fiscal years 2008–18 turned up 12 credit lines (World Bank 2017a–i, (SMEs) and energy service 2018a–c). Table 2 presents data on all 12 credit lines. As of May companies (ESCOs) 2018, five of the projects were closed, of which three had received Subborrowers have limited Works with intermediaries, such as additional financing or an additional loan amount to further their borrowing capacity or low credit leasing firms and ESCOs, to arrange impact. Of the seven that remain active, five are more than half ratings for off-balance-sheet financing options for EE investments complete, while two were only recently approved. The 12 projects Source: Authors’ compilation. have been funded through the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), or specific funds such as the GEF or the Clean Technology Fund (CTF). 5 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s Table 2. The World Bank Group’s energy efficiency credit line portfolio Months to Average Lifetime energy WB Number commit project savings in MWh loan size of partner Co-financing first 10% size Project Primary (lifetime CO2 Technical assistance Project name ($m) FIs ($m) of CL ($m) restructuring subproject sectors savings in tons) included Completed China EE Financing I & III 312 2 1,128 25 35.1 1 restructuring: 527m in AF Waste heat, iron and steel 309,030,250 GEF funded TA (CHEEF) (CHEEF III) manufacturing (97,650,000) China EE Financing II 46 1 180 24 75.0 Cancelled Waste heat, iron and steel 28,489,430 TA provided through (CHEEF) manufacturing (9,099,000) CHEEF I Turkey Private Sector 1,050 2 2,050 12 37.8 1 restructuring: US650m in AF Renewable energy, heavy indus- 45,359,167* Funded by German Renewable Energy and EE try (cement, steel, chemicals) (48,218,745) Development Bank (KfW) (PSREEE) Uzbekistan EE I and II 109 3 70 36 2.4 2 restructurings with AF: US153m Oil and gas, chemicals, cement 5,378,805 IDA funded TA and (UZEEF) (UZEEF II); US333m (UZEEF III) (8,748,405) capacity building Ukraine EE 200 1 339 24 4.5 1 restructuring: 12 month Agriculture, construction 115,817,355 No TA (2) extension and one partner FI materials, food and beverage (8,560,965) removed Tunisian EE 34 2 9 48 3.6 2 restructurings: cut US15m in Cogeneration at industrial 1,019,137 No TA funds and removed a partner FI; facilities (280,840) 16-month extension Ongoing—forecasted results Shanghai Low-Carbon City 104 2 152 48 0.6–3.5 No Building retrofits 12,211,500 Funded by GEF and (3,240,000) district government Turkey Small-Medium 205 3 29 24 N/A 2 restructurings: first cut co-fi- Metals, textiles, food and 7,500,000 GEF funded TA Enterprises EE nancing requirement; 12-month beverage, buildings (3,300,000) extension Vietnam EE (VEEIE) 102 2 56 N/A 2.6 Risk guarantee to increase FI Cement, steel 4,639,000 IDA funded TA lending is awaiting approval (75,405,000) Jamaica—Energy Security 6 1 1 12 0.15–0.3 1 restructuring: 22-month exten- Lighting, insulation, solar water N/A IBRD funded TA and Enhancement (10) sion and US1m diverted from heaters another component to the CL Ethiopia—Network 65 1 10 24 N/A 2 restructurings: US25m in AF; Solar home system, solar lamps, N/A IDA funded TA Reinforcement & Expansion 12-month extension lighting, biogas units China P4R—Innovative 500 1 500 11 N/A No Renewable energy, industrial and 122,115,000** TA provided through Financing for Air Pollution building efficiency (36,915,000) CHEEF and a non-CL Control in Jing-Jin-Ji Chinese proejct (CRESP) Uzbekistan EE III (UZEEF) 200 6 133 N/A 10.1 No Waste heat recovery, cement, 5,790,000 IBRD funded TA chemicals (11,985,000) Source: Authors’ compilation from World Bank (2017a–i and 2018a–c). Note: AF = additional financing; CHEEF = China Energy Efficiency Financing; CL = credit line; CO2 = carbon dioxide; CRESP = China Renewable Energy Scale-up Program; EE = energy efficiency; FI = financial institution; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; MWh = megawatt-hour; P4R = Program for Results; PSREEE = Private Sector Renewable Energy and Energy Efficiency project; RE = renewable energy; TA = technical assistance; UZEEF = Uzbekistan Energy Efficiency Facility for Industrial Enterprises; VEEIE = Vietnam Energy Efficiency for Industrial Enterprises; WB = World Bank; N/A = not available. * Energy savings tracked only for EE investments. ** Energy savings are from both EE and RE subprojects. 6 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s The review shows that the World Bank has approved more than • Technical assistance was included as a project component $2.9 billion for energy efficiency credit lines since FY2008, including in all but two of the credit lines. This assistance was backed by a share for renewable energy. This amount includes external funds GEF grants, IDA credits, IBRD loans, and funds from other donors. managed by the World Bank, such as of the CTF, the GEF, and the All the Chinese and the Turkey SME EE credit lines relied on the Energy Small and Medium Enterprises Trust Fund (ESME). These credit GEF. An initial GEF grant for the China Energy Efficiency Financing It is unlikely that credit lines were able to leverage $4.7 billion of cofinancing, leading to total (CHEEF) I was expanded in scope to train financial institutions lines will overcome expected investments of $7.6 billion (159 percent leverage ratio). added in later projects, supplemented by district government The portfolio is concentrated in Europe and Central Asia (Turkey, funds in the case of Shanghai. Three projects used IDA funds all constraints on the Ukraine, Uzbekistan) and East Asia and Pacific (China and Vietnam). from the World Bank to support technical assistance and capac- commercial debt financing The three smallest credit lines were in Sub-Saharan Africa (Ethiopia), ity building, and two more used IBRD funds. The Turkey PSREEE of energy efficiency Latin America and the Caribbean (Jamaica), and the Middle East and credit line was able to secure technical assistance funds from projects, such as reliance North Africa (Tunisia). No credit lines focused on South Asia (although the German Development Bank (KfW) to focus on training staff there was one credit guarantee program). With the exception of engineers at industrial-focused banks. Two credit lines (Ukraine on asset-based or Uzbekistan and Ethiopia, these projects were in high-income coun- and Tunisia) included no dedicated technical assistance funds. balance sheet financing, tries with developed banking sectors, a fact that further underlines While both these credit lines struggled in their early years, their overcollateralization, a bias how enabling economic, policy, and regulatory environments are implementation occurred during a time of political and economic toward lending to revenue- needed for credit lines to function properly. uncertainty, so it is unclear to what extent the lack of technical Credit line design. Several other key attributes of the credit assistance contributed to the credit line performance. generating projects line portfolio include the following, organized by topic. rather than cost-saving • Size. This varied greatly, from $7 million in Jamaica to support Eligibility requirements. Each credit line contained subloan projects, and reluctance household appliances (implemented alongside an electricity eligibility requirements. Below is a summary of key criteria for to finance small projects access credit line), to $3.1 billion in Turkey (for the Private Sector subprojects under the credit line portfolio. or lend to public sector Renewable Energy and Energy Efficiency project, PSREEE), which • Focus. Eight credit lines were dedicated solely to energy included $1.05 billion in financing from the World Bank and efficiency; the other four (in Turkey, Jamaica, Ethiopia, and for air subborrowers. CTF, and the rest from financial institutions, private developers, pollution in China) also financed renewable energy investments. industrial clients, and others. The credit lines’ differences in size The targeted subborrowers were mainly state-owned and private reflect differences in the characteristics of the financial institu- industries, especially energy-intensive factories for cement, tions, sectors, and measures involved. metal/steel, and chemicals. More recent credit lines have • Financial institution partners. The World Bank worked with 24 expanded to include SMEs, commercial buildings, and household financial institutions1 that included state-owned firms, develop- appliances, despite the challenges posed by the small size of the ment banks, and private banks, many with a particular focus on subprojects. None has focused on public sector clients. Credit industrial clients. The credit lines in Ukraine and Jamaica involved lines are also doing more to promote lending to ESCOs and their only one bank; however, the World Bank allowed them to on-lend customers, as in Turkey and Uzbekistan. The Ethiopia credit line to partner banks with expertise in one slice of the market. Those provides loans to private enterprises and microfinance institu- credit lines involving three or more financial institution partners tions to promote efficient off-grid energy solutions for residential tended to disburse smaller loans to more customers. users. A credit line for SMEs in Turkey helps vendors offer credit to their customers and leasing companies. 1 The Uzbekistan Energy Efficiency Facility for Industrial Enterprises (UZEEF) III project, for example, had three financial institution partners in its initial two phases and added three more in the last phase. All were required to provide 20 percent cofinancing for subprojects. 7 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s • Financial criteria. For subprojects to be eligible to borrow emission reductions. For some projects, a payback period with under the credit lines, most had to meet certain financial criteria. energy savings as the only revenue stream was also included in These included specified subborrower equity/cofinancing levels, the technical criteria. The general objective is to ensure that the minimum financial rates of return (FIRRs), payback periods, and funds from multilateral development banks are spent on energy a debt service coverage ratio2 (DSCR). Five projects set cofi- efficiency rather than on production/capacity expansion or other In almost all cases, nancing minimums for subborrowers, although the Turkey SME’s investments only remotely associated with energy efficiency. committing the credit minimum of 25 percent was waived in restructuring after an Finally, five credit lines introduced specific lists of technologies or economic downturn and currency devaluation limited the ability products that would be eligible under the credit line. Some credit line’s first 10 percent took of subborrowers to provide finance. The other four ranged from lines also specified the scope of eligible EE investments and time. While in some cases 10–20 percent in Jamaica to 40 percent in UZEEF, which required subborrowers—for example, whether greenfields are allowed the delay was prolonged 20 percent from subborrowers in addition to the 20 percent from and how energy efficiency should be measured. by external economic financial institutions mentioned above. Furthermore, the UZEEF subborrower requirement was increased to 25 percent for the Implementation experiences and adjustments. In almost all and political factors, a third phase of the credit line. Three had minimum FIRR thresh- cases, committing the credit line’s first 10 percent took time. For slow start is typical and olds: both Turkey credit lines required an 8 percent FIRR; UZEEF some, it took a year; most took two years. This reflects the time should be considered had a 10 percent minimum. Three projects specified a maximum needed to plan for deal flows, identify a pipeline of eligible subproj- when developing realistic payback period: Shanghai was set at 12 years; air pollution in ects, and refine the appraisal and approval processes. While in some China at 10 years; and the Turkey PSREEE at 4 years for the IBRD cases the delay was prolonged by external economic and political implementation and loan and 7 years for the CTF credit for emerging clean energy factors (e.g., in Tunisia, Turkey), a slow start is typical and should be disbursement projections. technologies. Finally, three projects set a minimum DSCR—UZEEF considered when developing realistic implementation and disburse- was set at 1.1:1, Ukraine was lowered from 1.3:1 to 1.1:1 after ment projections. Only three credit lines were able to disburse their restructuring, and the Turkey SME was lowered from 1.2:1 to initial 10 percent within the first year. 1.1:1 after the credit line was restructured. Developing a robust subproject pipeline is necessary for • Energy and technical criteria. To ensure minimum levels of successful implementation. Under these projects, governments, energy savings, most credit lines included energy, emissions, and financial institutions, and other entities (e.g., industrial associations, technology criteria, while some technical criteria were added to energy agencies) have partnered to educate potential subborrowers eliminate potential free riders. The Ukraine credit line limited the and high-demand energy users about energy efficiency and the FIRR indicator to benefits accruing from energy cost savings (and availability of credit lines to help finance such investments. Efforts not other financial benefits such as increased production/sales, have included: the sale of renewable energy power to the grid, reduced main- • Directives or incentives from the government (e.g., mandating tenance, etc.). Both Turkey credit lines stated that subprojects that large energy consumers appoint energy managers and must either achieve at least 20 percent energy savings (based undergo energy audits, as in Turkey, or oblige large industrial on energy per unit of output or specific energy consumption, users to implement energy efficiency measures in the govern- SEC), or at least 50 percent of the FIRR indicator must be derived ment’s national development plan, as in China) from the energy cost savings. UZEEF required at least 20 percent • Incentives from financial institutions’ management (e.g., rewards energy savings, and Shanghai required at least 10 percent for employees to meet lending targets) 2 In corporate finance, DSCR is a measure of the cash flow available to pay current debt obligations. 8 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s • Technical assistance supporting pipeline development through, • Intensifying marketing, including through outreach events at for example, market studies in specific sectors, benchmarking industrial parks and among associations, equipment suppliers and exercises, innovative financial products for energy efficiency ESCOs, as well as through online outlets, including social media. (e.g., loans based on cash flow), and support in negotiating/ implementing new regulations and monitoring requirements Cost-effectiveness. All the completed credit lines (except All the completed credit • Partnerships with a broad range of institutions, including public CHEEF II, which was cancelled) achieved or exceeded their lines achieved or exceeded sector agencies, ESCOs, equipment suppliers, utilities, and performance indicator targets for energy savings and reductions leasing firms, among others. in carbon dioxide (CO2) emissions. Overall, the completed credit their performance indicator lines will save 505 terawatt-hours (TWh) over the lifetime of invest- targets for energy savings Experience also illustrates that continued close monitoring and ments made and avoid 172.6 million tons of carbon dioxide equiv- and reductions in carbon periodic adjustments based on changing market conditions are alent (tCO2e). Forecasts from ongoing credit line projects indicate dioxide emissions. Overall, necessary. Every completed credit line in the portfolio had to be energy savings of 152 TWh and 130.8 million tCO2e.3 The CHEEF restructured and extended at least once (except CHEEF II, which was I credit line in China, including its additional financing, achieved the completed credit lines cancelled). Three of the ongoing projects were restructured. Across greater carbon and energy savings than all the other completed will save 505 terawatt- restructured projects, eligibility requirements, cofinancing amounts, or projects combined. It was also the most cost-efficient, with a savings hours over the lifetime of the sizes of the credit lines were adjusted to reflect market demand. rate of $14.75/tCO2e. The CHEEF I and Ukraine credit lines tied for the investments made and CHEEF, Turkey PSREEE, UZEEF, Jamaica, and Ethiopia all received most efficient energy savings rate of $4.66/megawatt-hour (MWh). avoid 172.6 million tons of additional financing, while Vietnam is awaiting approval for a guaran- The reported results of energy efficiency projects were all consid- tee facility to increase lending by $250 million. On the other hand, the ered cost-effective (in dollars per kilowatt-hour). Tunisia spent $152.08 carbon dioxide equivalent. Tunisia credit line was reduced due to low demand, the withdrawal of for every ton of carbon abated, the highest cost in the portfolio, but one financial institution, and political/economic conditions. its energy savings were comparable to the others at $41.91/MWh. • Beyond changes in credit lines’ implementation period and Turkey’s PSREEE credit line involved the highest cost for energy financing, various adjustments have been made to strengthen savings, at $68.33/MWh. The ongoing Shanghai project, the only one implementation, including: targeting building efficiency through retrofits, expects to achieve • Broadening the scope of the credit line, such as expanding the energy savings at $31/MWh and carbon reduction at $79/ton. geographic coverage (as in Turkey and Shanghai) or eligibility Project implementation management. In most of the credit criteria lines, energy efficiency investments were implemented by financial • Introducing more flexibility in the credit line manuals, such institutions, often with oversight from a government agency.4 In as by lowering the minimum DSCR (as in Ukraine and for Uzbekistan, Turkey, and Ukraine, project implementation units (PIUs) SMEs in Turkey), reducing cofinancing requirements (SMEs in were established within each financial institution, with designated Turkey), increasing the maximum subloan size (SMEs in Turkey, staff responsible for marketing and managing the credit line. The PIUs Uzbekistan), and simplifying environmental and social manage- usually consisted of a director, safeguards expert, engineer, procure- ment frameworks and procedures (e.g., Shanghai) ment specialist, and financial management specialist. In Turkey and • Removing nonperforming financial institutions (as in Ukraine and Ukraine, the PIUs were also responsible for day-to-day supervision, Tunisia) management, monitoring and evaluation (M&E), marketing, and/or • Specifying a minimum share of the credit line to be used for implementing technical assistance. energy efficiency (for credit lines that also financed renewable energy) as in Turkey PSREEE 3 The ongoing Jamaica and Ethiopia credit lines measure their results in terms of units sold. 4 The National Agency for Energy Conservation in Tunisia, the Ministry of Energy and Natural Resources in Turkey, the National Energy Conservation Center in China, and the State Bank of Vietnam and Ministry of Industry and Trade in Vietnam. 9 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s For those projects that included a government agency as an The capacity of financial institutions to undertake implementing agency or project partner, PIUs were also created to technical and financial assessments of energy efficiency support the project’s overall coordination as well as the govern- investments must be enhanced. Some early credit lines split ment’s oversight responsibility, and the implementation of capacity the work of conducting technical assessments and energy audits building, technical assistance , and monitoring and reporting. (generally with energy agencies or ministries) and credit appraisals Most successful credit lines In Turkey (in the project focused on SMEs) and Vietnam, gov- (with financial institutions). Several technically eligible subprojects have made adjustments to ernment agencies also collaborated with financial institutions to ultimately could not be financed because borrowers were not complete technical appraisals, ESCO contracts, and energy audit creditworthy. As financial institutions build their internal capabilities their eligibility criteria and reports. For the CHEEF credit line, the PIU functioned mainly in an to conduct technical and financial due diligence, they can begin procedures over the course advisory and coordinating capacity. In Shanghai, steering and execu- standardizing their processes and assessments, which will eventually of project implementation, tive committees were set up to coordinate day-to-day operations at allow them to lower transaction costs, particularly for smaller invest- as market conditions and the municipal and district level. ments. Tunisia’s National Agency for Energy Conservation supported screening and technical reviews in the early years, until the financial policies evolve. What are the key lessons learned? institutions built up their internal capacities and were able to take on this function. The commitment of governments and domestic A project pipeline should be built up and sustained. banks is critical Financial institutions and host governments should use multiple Key experiences and lessons from our review of the World Bank’s channels to market the credit lines to potential subborrowers, foster portfolio of credit lines for energy efficiency projects are summarized strategic partnerships, and replicate successful projects. Financial below: institutions can also use technical assistance to increase the Policy support and high-level government commitment knowledge and capacity of their business departments and subbor- are key. A conducive policy and regulatory environment can help rowers, and to expand their network and channels for business boost industry demand for energy efficiency investments, which in development. turn will generate interest among financial institutions. In China and Flexibility is needed. Most successful credit lines have made Uzbekistan, the government provided regulatory support and clear adjustments to their eligibility criteria and procedures over the course guidance on energy efficiency measures and encouraged industrial of project implementation, as market conditions and policies evolve. enterprises to undertake such investments. Feedback loops should be set up between loan officers and the PIUs Financial institutions must show commitment and have so that marketing strategies and credit line criteria, among other strong organizational structures. The commitment of financial things, can be adjusted based on the responses of potential clients. institutions’ management is critical from the beginning to direct Capacity building and technical assistance are important. staff and align the actions of various departments. This includes the Both are vital components of credit lines and should go hand in hand formation of long-term support for dedicated teams and PIUs, pro- with lending, in order to address the many institutional and market visions of incentives to PIU staff and high-performing loan officers, barriers noted here. As is evident from the World Bank’s credit line willingness to market and brand the credit line, and flexibility and portfolio, technical assistance has clarified unfamiliar market seg- innovation in developing and adapting financial products to suit the ments, raised awareness of new market opportunities, and informed energy efficiency market. For the most recent credit line (Vietnam), the design of new products to take advantage of those opportunities. financial institutions were competitively selected. Strong capacity for fiduciary safeguards will help financial institutions meet the requirements of the World Bank and other IFIs. 10 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 2 : C r e d i t L i n e s Sustainability should be considered throughout. Credit ———. 2017e. “Implementation Status and Results Report: Jamaica MAKE FURTHER lines are meant to develop a commercially viable energy efficiency Energy Security and Efficiency Enhancement Project.” ISR28151. CONNECTIONS lending business in the long run. Thus, it is critical to design them to World Bank, Washington, DC. May. be self-sustaining once the credit line is depleted. A good internal ———. 2017f. “Implementation Completion and Results Report: Live Wire 2014/11. “Designing setup, technical capacity, continued pipeline development, and Private Sector Renewable Energy and Energy Efficiency Project.” Credit Lines for Energy Efficiency,” by Ashok Sarkar, Jonathan Sinton, proper internal systems for appraisals and monitoring are needed. ICR00004069. World Bank, Washington, DC. June. and Joeri de Wit. These provisions will help ensure that efforts to expand energy ———. 2017g. “Implementation Completion and Results Report: efficiency grow even after the credit line closes. Ukraine Energy Efficiency Project.” ICR00004191. World Bank, Live Wire 2014/18. “Exploiting Market- Based Mechanisms to Meet Utilities’ Washington, DC. September. Energy Efficiency Obligations,” by References and sources ———. 2017h. “Implementation Completion and Results Report: Jonathan Sinton and Joeri de Wit. Uzbekistan Energy Efficiency Facility for Industrial Enterprises.” IEA (International Energy Agency). 2014. “Capturing the Multiple Live Wire 2014/25. “Doubling the Rate ICR00004302. World Bank, Washington, DC. January. Benefits of Energy Efficiency.” IEA/OECD. Paris, France. of Improvement of Energy Efficiency,” ———. 2017i. “Project Appraisal Document: Vietnam Energy Limaye, Dilip. 2013. “Energy Efficiency Credit Lines: A Synthesis by Jonathan Sinton, Ivan Jacques, Efficiency for Industrial Enterprises.” PAD1719. World Bank, Ashok Sarkar, and Irina Bushueva. Paper.” Energy Efficiency Community of Practice, World Bank, Washington, DC. March. Washington, DC. April. Live Wire 2016/53. “Why Energy ———. 2018a. “Implementation Status and Results Report: Electricity World Bank. 2016. “Implementation Completion and Results Report: Efficiency Matters and How to Scale Network Reinforcement and Expansion Project.” ISR32703. World It Up,” by Jas Singh. Tunisia Energy Efficiency Project.” ICR00003836. World Bank, Bank, Washington, DC. June. Washington, DC. September. Live Wire 2016/54. “Fostering the ———. 2018b. “Implementation Status and Results Report: ———. 2017a. “Implementation Completion and Results Report: Development of ESCO Markets for Turkey SME Energy Efficiency Project.” ISR30498. World Bank, Energy Efficiency,” by Kathrin Hofer, China Energy Efficiency Financing Project.” ICR00004130. World Washington, DC. January. Dilip Limaye, and Jas Singh. Bank, Washington, DC. June. ———. 2018c. “Project Paper: Uzbekistan Energy Efficiency Facility ———. 2017b. “Implementation Completion and Results Report: Live Wire 2016/55. “Designing for Industrial Enterprises, Phase 3.” PAD2597. World Bank, Effective National Industrial Energy China Energy Efficiency Financing II Project.” ICR00004116. World Washington, DC. January. Efficiency Programs,” by Feng Liu Bank, Washington, DC. June. and Robert Tromop. Wang, Xiaodong, Richard Stern, Dilip Limaye, Wolfgang Mostert, and ———. 2017c. “Implementation Status and Results Report: Green Yabei Zhang. 2013. “Unlocking Commercial Financing for Clean Live Wire 2017/82. “Exploiting Energy Schemes for Low-Carbon City in Shanghai.” ISR30738. Energy in East Asia.” World Bank. Washington, DC.  Synergies between Rooftop Solar PV World Bank, Washington, DC. December. and Energy Efficiency Investments ———. 2017d. “Implementation Status and Results Report: in the Built Environment,” by Pedzi Makumbe. Innovative Financing for Air Pollution Control in Jing-Jin-Ji.” ISR30547. World Bank, Washington, DC. December. Live Wire 2018/88. “Financing Energy Efficiency, Part 1: Revolving Funds,” by Aditya Lukas. Live Wire 2018/92. “Transforming Energy Efficiency Markets in Developing Countries: The Emerging Possibilities of Super-ESCOs,” by Ashok Sarkar and Sarah Moin. 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