83060 Climate-Smart Business: About IFC INVESTMENT IFC, a member of the World Bank Group, is the larg- est global development institution focused exclusively governments. In FY13, our investments reached an all-time high of more than $25 billion, leveraging POTENTIAL in EMENA on the private sector. We help developing countries the power of the private sector to create jobs, spark achieve sustainable growth by financing investment, innovation, and tackle the world’s most pressing Mapping investment potential in renewable energy, mobilizing capital in international financial markets, development challenges. For more information, visit resource efficiency, and water in Emerging Europe, and providing advisory services to businesses and www.ifc.org. Central Asia, and the Middle East and North Africa Stay Connected Buyukdere Cad. No: 185 Contact Representative: www.facebook.com/IFCwbg Kanyon Ofis Blogu Kat 19 Basak Pamir Ulgen www.twitter.com/IFC_org Levent, 34394 Istanbul Corporate Relations www.youtube.com/IFCvideocasts Tel.: (90-212) 385-3000 BUlgen@ifc.org www.ifc.org/SocialMediaIndex Fax: (90-212) 385-3001 www.ifc.org/emena 2013 Climate-Smart Business: INVESTMENT POTENTIAL in EMENA Mapping investment potential in renewable energy, resource efficiency, and water in Emerging Europe, Central Asia, and the Middle East and North Africa 3 Executive summary I In this report we present our as- transmission and distribution. sessment of climate-smart invest- • $240 billion in energy efficiency ment opportunities in a vast region in the commercial and consumer that is both contributor to and victim sectors, via building insulation, of climate change: Europe, Central appliance upgrades, lighting, and Asia, and the Middle East and North water and space heating.1 Africa (EMENA). Geographically • At least $60 billion in cement, varied, EMENA spans 49 countries metals, and manufacturing, via and has of late seen unprecedented improved industrial processes increases in energy demand, popu- and equipment upgrades. lation growth, and urbanization, as • About $70 billion in improved wa- well as an acute need for improved ter usage, including for power.2 EE infrastructure for more efficient in- LT L dustry, transport, and utilities. Smart investors are already seiz- Y L Our report differs from others in ing the opportunities. In the Mid- S A that we sought out, pragmatically dle East and North Africa (MENA), SI S O M A O and specifically, private sector in- renewable energy investments ME AL M G GE G T AM A reached $2.9 billion in 2012, up 40 TM T vestment opportunities related to climate change mitigation and ad- percent from the previous year. In- L SY IQ A TN O I vestments in the Russian and Ka- MA aptation. Where are these opportu- nities, and will they deliver healthy zakh power and industrial sectors AL EG QA LY returns? These are important ques- are at an all-time high. And across SA AE OM tions, not least because in the wake the Balkans and Eastern Europe, YE of the global financial crisis, over- annual growth rates in the renew- stretched governments often need able energy sector have exceeded private sector help to meet climate 100 percent in recent years. Given business goals. these positive developments, we Our proprietary analysis of cli- also produced a less conservative mate-smart investment opportuni- estimate for climate-smart invest- ties in EMENA, in collaboration with ments of almost $1 trillion by 2020, A.T. Kearney, the global manage- which assumes greater reductions ment consulting firm, and Eco Ltd, in energy-related subsidies and sustainable energy sector special- ambitious and consistent public in- ists, estimates a conservative in- centive schemes, including funds, vestment potential of $640 billion tax exemptions, feed-in tariffs, and up to 2020 distributed across the mandatory efficiency standards. region in the following sectors: Climate change is real. Fortu- 1 In terms of energy efficiency investments, our analysis considered only the low-hanging fruit and big ticket items, such as building insulation, lighting, and major indus- • $270 billion in renewable energy nately, it’s also creating very real tries like cement. In reality, opportunities exist in practically every sector and across all technologies and processes. Our energy efficiency estimates should thus be seen as a lower boundary. generation, rehabilitation of pow- private sector investment opportu- 2 This report largely discusses water as a proxy for climate change adaptation. The topic is much broader, and the investment opportunities likely greater, yet the possi- bilities remain somewhat unclear for the private sector. Thus, we have taken water as a starting point, and focused only on a few applications, like wastewater treatment er infrastructure, and improved nities across EMENA. and improvements in soil management and water efficiency. Introduction 5 A As global temperatures rise, weather patterns shift, and another devastating storm dominates the headlines, the demand for climate-smart invest- ments grows. Released in September, the IPCC’s Fifth Assessment Report 3 states with 95 percent ties up to 2020 in a region that is both a contributor to and a victim of climate change: Europe, Central Asia, and the Middle East and North Africa (EMENA). A geographically varied region, EMENA spans 49 countries and holds more than half the world’s oil confidence that humans are the main cause of and three-quarters of its gas. It is also home to global warming. A world in which warming reaches hydrocarbon-poor energy importers. The region’s four degrees Celsius above preindustrial levels CO2 emissions and energy use are similar to those is likely to see unprecedented heat waves, severe of North America, but a 35 percent lower GDP drought, and major floods, disrupting regions and makes it the world’s most energy inefficient region. economies.4 Now more than ever, major invest- At the same time, EMENA is facing unprecedented ment is needed to help countries, businesses, and increases in energy demand, population growth, and consumers mitigate and adapt to climate change. urbanization, and an acute need for improved infra- According to the United Nations, 80 percent of that structure for more efficient industry, transport, and capital will need to come from the private sector.5 utilities. What’s more, the likely impacts of climate Climate change has become a priority for officials change - in particular land surface change and wa- and policymakers across the globe – and private ter scarcity - will be strongly felt across the region, sector involvement is not merely welcome, but criti- albeit in a geographically uneven manner. cal to this effort. Our report builds on existing research on climate change and identifies key investment needs. For in- mated that total investment in renewable energy In this report, we present our assessment of change that places low carbon and climate resilient stance, HSBC Global Research6 has estimated that may need to triple by 2030, from an annual $400 significant climate-smart investment opportuni- technologies at the center of responses to climate building the low-carbon energy market will require billion to $1.2 trillion, in order to double global re- $10 trillion of investment by 2020. In Sustainable newable energy capacity. The International Energy 3 IPCC, 2013, Climate Change 2013: The Physical Sci- on Climate Change. 5 UNDP, Catalyzing Climate Finance, 2011. Energy for All Global Tracking Framework, a report Agency’s Energy Efficiency Market Report 2013, ence Basis. Working Group I Contribution to the Fifth 4 World Bank, 2012, Turn down the heat: why a 4° 6 Sizing the Climate Economy, HSBC Global Research, Assessment Report of the Intergovernmental Panel warmer world must be avoided, Washington DC. 2010. released in May 2013, the World Bank Group esti- published in October 2013, puts current annual energy efficiency investments at up to $300 billion sector. It is thus a starting point for investors, one globally and predicts significant growth, principally we hope will generate follow-up analyses. driven by price and policy. As we explore throughout this report, opportuni- But our report differs from existing research on ties for climate-smart investors are not hard to find climate change in that we ask, pragmatically and in the EMENA region. We estimate an investment specifically, where are the attractive private sector potential of $640 billion distributed across the climate-smart investment opportunities, and will region in the following sectors: they deliver healthy returns? These are important • $270 billion worth of potential investments in questions, not least because in the wake of the energy generation. This includes renewable energy global financial crisis, over-stretched governments ($150 billion), reducing energy losses in gas pipe- often need help from the private sector to meet lines and electricity grids ($70 billion), and rehabili- climate business goals. tating thermal power infrastructure ($50 billion). We set out to answer these questions with a pro- • $240 billion worth of potential investments in prietary analysis of climate-smart investment op- energy efficiency in the commercial and consumer portunities (see box on Methodology) in EMENA, in sectors,7 including considerable potential in LED collaboration with A.T. Kearney, the global manage- lighting, appliances, and green buildings. 8 ment consulting firm, and Eco Ltd, sustainable en- • $60 billion worth of potential investments in ergy market specialists. The study is based on three cement, metals, and manufacturing via improved major pillars: existing reports and databases (World industrial processes and equipment upgrades. Note on figure: For the purpose of this analysis, Belarus is Bank Group and other leading databases, market • $70 billion worth of potential investments part of emerging Europe, and Ukraine and Georgia are part of the CIS (although, politically, Georgia is no longer a member reports, and research by various associations and in improving water usage and around the water- of the CIS) international organizations), expert interviews, and energy nexus.9 a bottom-up analysis of 44 business cases. Our re- This is not theoretical potential; smart investors gional analysis constitutes an ambitious attempt at are already seizing the opportunities. In the Middle percent from the previous year. Investments in the ties exceeding $190 billion are emerging as govern- locating growth opportunities arising from efforts to East and North Africa (MENA), renewable energy Russian and Kazakh power and industrial sectors ments firm up their commitments to resource and mitigate and adapt to climate change for the private investments reached $2.9 billion in 2012, up 40 are at an all-time high. And across the Balkans and energy efficiency at a time when population growth Eastern Europe, annual growth rates in the renew- and rapid urbanization herald sharply rising energy able energy sector have exceeded 100 percent in and water demands. While net energy exporting recent years. Given these positive developments, countries increasingly experience the opportunity we also produced a less conservative estimate for costs of subsidizing their spiraling consumption, en- climate-smart investments of almost $1 trillion by ergy importers feel the fiscal pressures that result 2020, which assumes greater reductions in energy- from unsustainably subsidized energy prices. As related subsidies and ambitious and stable public MENA greens its infrastructure (see section Trend 1: incentive schemes, including funds, tax exemptions, Green boom in MENA, page 11), its governments are feed-in tariffs, and mandatory efficiency standards. focused on the reciprocal relationship between en- EMENA is an internationally attractive market ergy and water (see section Trend 4: MENA’s water- to which global players are increasingly flocking - energy nexus, page 23) because water constraints including the Spanish firm ACCIONA, California’s raise serious concerns for the region’s agriculture, Conservatively estimated potential for climate- Energy Recovery Inc. (ERI), Dow Chemical, the CEZ industry, and people. smart investments up to 2020 in EMENA Group, Turkey-based Zorlu Enerji, and France’s Meanwhile, the transition countries of the Veolia, Bonduelle, and Lafarge. Yet across a region Commonwealth of Independent States (CIS) are as vast as EMENA, geography matters. Our research experiencing fiscal pressures at the national and linked clusters of private sector investment op- local levels. Across the entire region governments portunities to local drivers such as political will, are spending significantly on energy subsidies for resource endowments and scarcity, and infrastruc- industry and for inefficient and ageing buildings. 7 In terms of energy efficiency investments, our are more distributed and less prone to direct project 9 This report largely discusses water as a proxy tural and institutional legacies. We present four key Waste is systemic because economic incentives that analysis considered only the low-hanging fruit and big investments. Therefore, the potential business for climate change adaptation. The topic is much ticket items, such as building insulation, lighting, and models and investment structures in this market broader, and the investment opportunities likely regional trends that highlight how climate-smart would encourage efficiency, such as cost-recovering major industries like cement. In reality, opportunities differ substantially, ranging from credit lines by com- greater, yet the possibilities remain unclear for exist in practically every sector and across all tech- mercial banks to finance small business investments the private sector. Thus, we have taken water as a investment opportunities transcend national bor- energy and water prices, are largely absent. As nologies and processes. Thus, our energy efficiency such as solar hot water heaters to a public-private starting point, and focused only on a few applications, ders and individual sectors. governments push for greater resource efficiency, estimates should be seen as a lower boundary. partnership for waste management and street light- like wastewater treatment and improvements in soil 8 By their nature, many energy efficiency opportunities ing projects. management and water efficiency. In MENA, climate-smart investment opportuni- particularly energy efficiency (see section Trend Methodology for estimating climate-smart investment potential in EMENA The estimates in this report are based on a collabo- energy plants. Coal-based electricity in many EMENA ration between IFC, AT Kearney, and Eco Ltd. The countries is heavily subsidized, resulting in electric- study is based on three major pillars: existing reports ity costs as low as $0.01 to $0.03 per kWh for the end and databases (World Bank Group and other leading consumer. databases, market reports, and research by various Solar technology is entering a commercial ramp up associations and international organizations), expert phase, with solar PV leading the field. PV has already interviews, and a bottom-up analysis of 44 business experienced a decrease in system costs through its cases. The business case analysis was used to deter- surge in deployment, which in the short period from mine the overall volume of investment potential for 2008-2010 experienced a 59 percent increase. If CSP each opportunity as well as its commercial viability in and PV are expanded to more areas with high natural each country and region, e.g. based on countries’ en- potential and/or high energy resources, declining ergy prices and public incentive schemes. This quantification was approached by com- paring macro-level data with micro-level approximations and involved expert-ver- ified estimations and data extrapolations. Climate-smart business opportunities are defined as economically viable investments that contribute to climate change mitiga- 2: Modernizing the CIS, page 15), we estimate the (see Morocco’s big, fast green expansion, page 45), tion and adaption. A conservative approach market potential of turning waste into a business enters the top 100 of the World Bank’s Ease of Doing was used to quantify investment potentials opportunity at over $215 billion. Business index (along with Turkey). Ranked 110th, across technologies and regions and only In the countries of Emerging Europe, a region Pakistan (a largely agrarian economy like that of investments expected to materialize as stretching from the Baltic to the Balkans, we esti- Morocco) supports climate-smart business when commercially viable by 2020 have been mate, conservatively, a climate-smart investment it aligns with economic development imperatives, included. The criteria for financial viability potential of about $232 billion generated by the in particular access to infrastructure and energy differ across technologies and regions, de- pending on factors such as asset lifetimes parallel processes of political and financial inte- (see Pakistan’s climate-resilient growth, page 41). and country risk characteristics. gration (see section Trend 3: Emerging Europe looks Almost as energy hungry as Pakistan, Ukraine has For solar technologies such as PV or CSP, for ex- technology costs will continue. Through increased west, page 19). East, Central, and Southeast Europe green ambitions comparable to Morocco’s, yet its ample, political, technological, and financial factors adoption and technological efficiency, prices for solar are CO2 intensive and moving on from post-1990 economy is industrialized and energy inefficient and were taken into consideration in order to translate the are expected to decline by up to 30 percent from 2010 economic stagnation and uncertainty. In their bid for ranks 112nd out of 185 countries in Ease of Doing region’s irradiation levels into a successful commer- to 2020. To help close the current price gap, several EU accession and cooperation, states are increas- Business (see Ukraine’s growing pains, page 35). cial investment. Three key determining factors for EMENA countries have instituted policies to incen- ing their EU alignment and taking cues from the EU Its energy rich neighbor, Russia, has an even more the commercial viability included i) installation costs, tivize growth in the renewable energy sector. The when it comes to policy lessons and regulatory is- inefficient economy and is beginning to unlock its 2) the cost of competing conventional electricity, and existence of policies such as capacity targets, feed-in sues, with important implications for climate-smart energy saving potential (see Russia’s green awak- 3) the existence of supportive green energy policies. tariffs, investment subsidies, and tax reductions or investment opportunities. ening, page 31) owing to lost export revenues. Solar photovoltaic installation costs are $2-4 million credits are the most common tools in enhancing the In addition to these regional trends, we present The country spotlights and key regional trends per MWp, while concentrated solar power costs are commercial viability of solar technology. five country profiles in which we zoom in on individ- provide a reminder that climate change is very real. $3-4 million per MWp, resulting in a break-even cost Hence, figures presented throughout this report can ual countries settings to illustrate EMENA’s diverse From arid Yemen in the south to the permafrost of electricity, in the Arabian Peninsula as an example, be interpreted as a lower bound, with substantially of $0.12-0.20 per kWh. In comparison, the installation higher potential possible with the implementation of operating environments. For instance, Turkey is one of Siberia in the north, and from Casablanca in the cost of an efficient modern coal plant is in the range several government initiatives under discussion in of EMENA’s high growth economies (see Turkey, the West to Vladivostok in the Far East, no nation will be of $1-2 million per MW, with the added advantage of many EMENA countries. In particular, energy effi- Mediterranean Tiger, page 27), where hydrocarbon immune to its impact. Fortunately, the key finding of capacity factors above 75 percent producing electric- ciency potentials stem from an analysis of the largest scarcity and rising energy demands coincide with our analysis is that energy efficiency emerges as the ity at all times of the day. Non-subsidized fuel prices sectoral opportunities, but given that opportunities political stability and a strengthening private sector. winning strategy across the region. Climate change of $0.02 to $0.03 per kWh (coal) result in generation exist across the entire economy, we can expect the In contrast, the private sector is less consolidated in is creating legitimate private sector investment op- costs (LCOE) below $0.05 per kWh for coal-based actual total to be considerably larger. the remaining four countries, of which only Morocco portunities, right now and across EMENA. 11 Trend 1 Green boom in MENA financial incentives for end users are not present. This percent of its land mass) is still relatively expensive is the case for Egypt, where energy efficiency targets and faces water scarcity and grid integration issues. are in place and a fairly positive regulatory framework Equally as detrimental to investment opportunities is has been created. The significant fossil fuel subsidies, the shadow of political unrest that is cast over, for in- however, produce strong disincentives for commercial stance, the Libyan, Egyptian, Algerian, and Iraqi mar- investment. Morocco and Jordan - both net importers kets. It would seem that the 60-MW wind farm slated of energy - have relatively high electricity prices with for Al-Mokha, Yemen, has been a victim of shifting generally low subsidies, increasing the potential for priorities associated with the Arab Spring, which has commercial investment. We estimate the energy ef- focused the attention of governments and the interna- ficiency investment potential for select industrial sec- tional community on avoiding economic and political tors in MENA at $18 billion, with more than $10 billion collapse. in equipment upgrades and more than $7 billion in While challenges to private investment do exist, commercial industrial lighting (see figure 1). commercially, the MENA renewables market is at- The region has vast and largely untapped opportu- tractive and investments have been on the increase in nities for climate-smart investment in the renewable recent years. According to REN 21’s MENA Renewa- A sector. From Morocco in the west to Oman in the east, bles Status Report 2013, non-hydro renewable pow- As governments across MENA firm up their politi- the competitiveness of renewable power is rapidly cal commitments to green energy, investments in the MENA countries are improving, given the region’s strong resource base, renewable energy sector in the region reached $2.9 increasingly pursuing declining technology costs and increasing cost of The potential for billion in 2012.10 By our estimates, this annual figure - a 40 percent increase from the previous year - will significant energy conventional power. Theoretically, MENA could meet the world’s power requirements through solar energy commercial energy increase dramatically in the years to come. This is diversification initiatives alone. However, at a country level, the situation is less efficiency investments is favourable. For instance, Oman’s solar resources are because the economies of the region, whether net exporters or importers of energy, are almost entirely porting countries - such as Algeria, Bahrain, Oman, locked up in an opaque legislative regime, and large highest in countries with low reliant on hydrocarbons. At a time when population Saudi Arabia, UAE, and Yemen - increasingly experi- concentrating solar power (which could help meet the energy subsidies such as growth and rapid urbanization across the region her- Sultanate’s annual electricity demand using just 0.1 ald sharply rising demands for energy, this raises se- ence the costs of spiralling consumption and cast an eye on reaping the benefits of the high export value Morocco and Jordan rious questions for net exporters and importers alike. of hydrocarbons. In contrast, concerns over a secure Our estimates put the commercial climate-smart supply and the fiscal pressures that result from un- er outpaced conventional power generation growth, business investment potential in energy generation in sustainably subsidized energy prices are strongly felt more than doubling between 2008 and 2011 to almost the MENA region at $192 billion, almost a quarter of by energy importers Israel, Jordan, Lebanon, Moroc- 3 terawatt-hours (TWh). The more than 100 renewable which ($45 billion) is in renewables. The potential in co, Palestine, and Tunisia. In Egypt, public expendi- energy projects in the pipeline in the region in early resource efficiency is estimated at over $73 billion, of tures on energy subsidies are twice as large as those 2013 (with more than 7.5 GW of new capacity), have which $18 billion is in industrial energy efficiency. on health and education combined. The MENA region benefited from electricity sector liberalization. Ever MENA countries are increasingly pursuing sig- as a whole spends over $400 billion per year (post-tax) more independent power producers feed renewable nificant energy diversification, mainly by developing and almost 35 percent of total government revenues electricity into the grid at fixed tariffs, under quotas, or renewable energy and boosting energy efficiency. Ex- (almost 15 percent of GDP, including externalities and through power purchase agreements that have been tax considerations) on energy subsidies.11 negotiated or tendered for, as in Morocco and Saudi REN21, 2013, MENA Renewables Status Report, REN21, IRENA and UAE Arabia. 10 Ministry of Foreign Affairs. These pressures mean that, in some cases, energy Figure 1: Estimated commercial investment potential in se- 11 IMF, 2013. Energy subsidy reform: Lessons and implications. efficiency is a priority for governments, even when the lected industrial sectors in MENA By our estimates, the investment opportunities in 13 Ever more independent The growing construction power producers are market creates feeding renewable energy opportunities for green into the grid construction, with many new MENA’s renewables exceed $45 billion, coming most- examples in recent years ly from solar ($29 billion) and wind ($12 billion) (see of green building projects figure 2). Indeed, new solar and wind capacities are coming online all the time. Egypt, Tunisia, and Mo- rocco (see section Country Spotlight 5, page 45) have into commercial (office retail, hotel) and community expanded their installed wind capacity to, respectively, construction projects. While some have not lived up 550 MW, 291 MW, and 154 MW. Tunisia in particular to their green credentials, low energy and resource has experienced strong growth over the last five years, efficient buildings are now receiving a lot of attention with wind power capacity increasing eight-fold from from regulators and project developers due to attrac- 2008 to 2012. While lower in absolute capacity, solar tive economic and commercial benefits. There is also photovoltaic (PV) and large concentrating solar power increasing interest in building renovation, with reports (CSP) have seen faster growth than wind energy. Al- showing low-cost to no-cost upgrades can reduce geria’s first major solar plant of 25 MW, part of the The competitiveness of boost market penetration of SWH to 30 percent by 2020, including through ambitious regulations for new building energy consumption in the region by as much as 20 percent, creating plenty of incentive to make hybrid 150-MW Hassi R’Mel ISCC, was commissioned renewable power is rapidly constructions. Market penetration in both commercial small investments in building improvements. Across in 2011 and Abu Dhabi’s Shams 1 scheme (100MW) is and residential segments does not yet exceed 15 per- the world’s largest CSP plant since 2012. improving, given the region’s cent across the region (with the possible exception of the Middle East, more than 1,350 green projects are underway. Saudi investment alone in green construc- Building-scale solar water heating (SWH) is emerging as a strong growth sector in MENA, in par- strong resource base, Tunisia), and there are signs that market confidence tion exceeds $26 billion.13 along the entire supply chain is consolidating. Evi- ticular in North Africa. Greater regulatory measures declining technology costs dence from more advanced SWH markets - such as Climate-smart business is growing in the MENA region. Our estimates have identified significant in- and increasing cost of Israel, the Palestinian Territories, and Tunisia - sug- gests a substantial market for SWH applications. vestment potential in renewables as well as in energy conventional power The construction market in the region is growing efficiency improvements and green buildings, particu- larly in countries tackling unsustainably subsidized steadily. The estimated $4.3 trillion worth of building energy prices. Solar energy is the obvious candidate ensuring quality control and a higher level of confi- to be completed by 2020 should provide many oppor- for renewable energy development, but the region also dence in locally manufactured technologies mean tunities for green construction. Many green build- has good wind resources. Although there is variability that, increasingly, the lack of access to reliable sourc- ing projects have already emerged. Famously, Abu between countries, in general rising energy demand, es of financing is the main barrier to developing the Dhabi’s Masdar City is a regional and global pioneer policy support, and in some cases a good investment SWH market in the region. Tunisia is often cited as a initiative that aims to be the first zero-carbon, zero- environment have resulted in significant growth of the regional success story: despite still-high subsidies for waste and car-free city. In general, UAE firms have renewable energy and green building sectors, which liquefied petroleum gas (LPG), it boasts over 500,000 been early and strong green adopters.12 The greatest is expected to continue in the coming years. m2 of installed surface, following ambitious govern- number of green projects are in the institutional sec- Figure 2: Estimated commercial investment potential in ment schemes. With excellent irradiation conditions tor (schools, hospitals, government office building), energy generation, thermal power, and transmission and 12 McGraw-Hill Construction, 2013. World Green Building Trends. distribution in MENA and reasonable payback periods, Jordan intends to with the leadership-by-example effect spilling over 13 Sefaira, 2013. Green Building Booms in the Middle East. [online]. 15 Trend 2 Modernizing the CIS tCO2 per year globally.14 Capturing all that flared gas - equivalent to 75 percent of Russia’s gas exports - would create a market of some $68 billion per year. With combined volumes of over 43 billion cubic me- tres,15 Russia, Kazakhstan, Uzbekistan, and Azer- baijan, which are among the world’s top 20 flaring nations, are exploring the business case of commodi- fying, rather than squandering, this gas. Central to commercially harnessing flare gas is matching the costly up-front infrastructure investment needed for capture, transmission, and processing in each par- ticular case, with expected payback coming via sales. In Russia, a subsidiary of the OOO Monolit Corpora- tion, ZAO UgraGasProcessing, is capturing flare gas in the Khanty-Mansisk region of Western Siberia for commercial purposes. Converted into fuel, the flare W gas will be used to drive power stations at the gas pro- cessing plant on the Zapadnoe-Salymskoe oil and gas When it comes to infrastructure, most transi- Deep, systemic infrastructure field, jointly controlled by Royal Dutch Shell and Rus- tion countries of the Commonwealth of Independent States (CIS) could use a 21st century makeover. Even modernization programs are sia’s state-owned OAO Gazpromneft.16 more so than in Emerging Europe (see section Country being put in place across the CIS Upgrading transmission infrastructure offers an- The reduction of gas flaring is other potentially high-yield climate-smart opportu- Spotlight 2, page 31), basic infrastructures - buildings, temic infrastructural modernization programs. These nity, particularly where resources are destined for the most obvious climate-smart industry, power generation and transmission equip- programs, often involving ambitious target setting and export (and thus generate considerable waste). Our business opportunity ment – were mainly built before 1990 and are in dire attempts at institutional and pricing reforms, point to- conservative estimate is an investment potential of need of modernization and replacement. With such a ward the emergence of climate-smart business po- modernization in Russia, Ukraine, the Caucasus, and $32 billion in electricity transmission infrastructure baseline, investments in upgrades and resource effi- tential that in the past would have been unthinkable. the Central Asian Republics. The Russian Federal ciency have the potential to be highly lucrative. How- Overall, our estimates put the commercial cli- Grid Company of the Unified Energy System, the larg- ever, what should essentially be climate-smart in- mate-smart business investment potential in the CIS est publicly traded electricity transmission company vestments with short payback times, high net present (including Ukraine) at over $214 billion. In the sectors in the world, is investing heavily – $30 billion through values, and high internal rates of return, are frequent- we considered, investment potentials in consumer 2014 - in grid repairs, development, and upgrades of ly thwarted. Waste is endemic in the region, while in- and industrial energy efficiency are estimated at $93 27,079 kilometers of transmission and distribution frastructure is ageing and inefficient. Yet economic billion and $29 billion, respectively (see figure 3). The lines. The company lost 22,121 million kWh of elec- incentives that would encourage efficiency, such as rehabilitation of existing power infrastructure offers tricity due to inefficient transmission in 2009 (result- cost-recovering energy and water prices, are largely $54 billion of potential investment, while renewables ing in more than $477 million spent on electricity to absent. This places a considerable burden on federal, account for $27 billion. compensate). Under its “intelligent electricity grid” regional, and municipal budgets. In recognition of all In the power sector, the most obvious climate- this waste, estimated at over $112 billion for the Rus- smart business opportunity is the reduction of gas 14 EBRD, 2013. Share gas, don’t flare it. [online]. 15 The World Bank, 2011. Estimated flared volumes from satellite data, 2007- sian Federation alone (see section Country Spotlight 2, flaring (the burning of the gas by-product of oil drill- 2011. [online]. page 31), the trend across the region is to launch sys- Figure 3: Estimated commercial investment potential in se- ing), which causes emissions of over 400 million EBRD, 2010. EBRD raises $87 million to boost utilisation of associated gas in 16 lected industrial sectors in the CIS Russia. [online]. 17 investment program, Federal Grid Company hopes to Russia, Ukraine, the Caucasus, and the Central Asian East and Southeast Europe.18 achieve a 3.6 percent reduction in transmission loss- economies amounts to at least $12 billion. Payback A sector to watch in the medium term is building, In the buildings es, saving an annual $92.8 million.17 Further illustrat- times depend on project specifics, but generally small- where there is a great need for thermal envelope in- sector the energy saving ing the business case, the company invested $11 bil- scale improvement projects (including, for example, sulation, high efficiency boilers, district heating up- potential is lion in 2010 and experienced a return of 11 percent in energy management systems) will have shorter pay- grades, micro-CHP installation, solar thermal water considerable, but creating new invested capital from 2010-2012. back times than more capital-intensive larger-scale heaters, and geothermal and sewerage heat-pumps. As in the power sector, the region’s industrial projects. In Kazakhstan, for instance, an ISO50001 While the energy saving potential is considerable, it markets has proven tricky countries have an eye on the impact of waste on in- gap analysis at a KazPhosphate plant identified more has proven tricky to create markets for energy ef- dustrial competitiveness. Significantly, Russia (see than $1 million in potential annual energy savings, ficiency in the CIS, principally because state-based owing to Moldova’s energy pricing reforms in 2006, section Country Spotlight 2, page 31), Ukraine (see with payback periods of less than three years for all utility prices in most countries do not reflect the true Termocom, a district heating company, achieves section Country Spotlight 3, page 35), and Kazakhstan measures. The trend towards achieving ISO standards cost, nor are they consistently metered for individual around 40 percent savings when renovating apart- announced major modernization programs for their is also leading to investment opportunities in Ukraine clients. Yet across the transition countries, the build- ment buildings (including measures such as indi- principal industries - including metals, cement, pa- (see section Country Spotlight 3, page 35) and across ing sector is on a multi-speed track. For instance, vidual substations, envelope insulation, and heating system retrofitting - including horizontal distribution, Russia, Ukraine, and heat meters by apartment, thermostatic valves). Yet Kazakhstan have announced transition countries lag behind their East and Central European neighbours, which have more mature build- major modernization programs ing energy efficiency markets, based on business con- for the energy intensive cepts such as public-private partnerships and energy industries service companies (see section Trend 3: Emerging Eu- rope looks west, page 19). Provided governments in the per, plastics and oil and gas. These public initiatives transition region move forward on pricing reforms, create and enhance the enabling environment to ex- push for client-level metering, and ease borrowing ploit investment opportunities to upgrade industrial restrictions (e.g. on municipalities and housing man- equipment and improve resource efficiency. In the agement companies), an investment potential of $65 cement and metal industries of Kazakhstan, Russia, billion is not unlikely, across residential, public and and Ukraine, the investment potential is estimated at commercial buildings, and including measures such $5 billion each. There is also substantial commercial as insulation and upgrades of appliances, lighting, and investment potential in the oil and gas industries. water and space heating. In the meantime, however, Highly noteworthy is the region’s combined poten- progress is slow, even if seemingly inevitable. tial in more generic industrial technologies - electric There is a pressing need for infrastructure mod- drives, steam, and compressed air systems - which ernization in the CIS. Modernization programs with have energy savings potential of up to 50 percent. We ambitious targets, coupled with the needed reforms, estimate that the investment potential for replace- are leading to the emergence of viable climate in- ment and optimization (e.g. through insulation and vestment potential. Our estimates have identified maintenance) of these three systems in Kazakhstan, significant investment potential in energy efficiency improvement in all end-use sectors as well as in the 17 Federal Grid Company of Unified Energy System, 2011. Admission to the power sector. The reduction of gas flaring, transmis- Official List and to Trading on the London Stock Exchange of Global Depositary sion infrastructure upgrades, and industry moderni- Receipts. 18 USAID, 2013. Improving energy management in Kazakhstan [online]. zation have all been set in motion. 19 Trend 3 Emerging Europe looks west The ongoing process ments (in particular the installation of water shut-off valves). Across Emerging Europe, an estimated in- of alignment with EU vestment opportunity of at least $12 billion is associ- directives on environmental ated with increasing industrial efficiency in the metal performance has created many and cement industries, as well as generic industrial process improvements in lighting, air pressurized investments opportunities systems, steam systems, and electric drive systems in industrial facilities (see figure 4). As with industry, the power sector of East and has been a key theme in recent EU Member States Southeast Europe is looking west. The moderniza- and candidate countries, such as Serbia, Macedonia, tion of outdated power generation and transmission Montenegro, and Turkey. For example, in the case of infrastructure, in line with EU requirements, offers Bonduelle’s site in Hungary, new regulations required similarly capital-intensive investment opportunities. that the company build a wastewater treatment plant For instance, in Slovenia, the Šoštanj thermal power for its food processing factory in Nagykőrös. This in plant, run by HSE, is set to deliver CO2 emissions re- turn led to business partner Dalkia converting one of ductions of 35 percent using the best available tech- the site’s natural-gas-powered boilers to use biogas niques. Estimated as an investment opportunity of at I produced by the wastewater sludge instead of natural least $10 billion, up to 30 conventional power plants in gas (see box). There are many other examples of in- In Emerging Europe – a region stretching loosely About a third of the potential identified ($76 billion) is Europe’s East and Southeast are in line for upgrades dustries investing in improved environmental perfor- from the Baltic countries to the Balkans – investment in renewables, with a bit less in energy efficiency in in the next five years.20 Industry players such as Bilfin- mance, such as Bulgarian lead and zinc smelter KCM opportunities are strongly shaped by the region’s in- buildings ($60 billion). In the sectors we considered, ger Berger, which modernizes lignite power stations 2000 and Lafarge, which improved its cement plants’ creasing political and regulatory alignment with the the investment potential in industrial energy efficiency in Poland, Romania, and Macedonia, are securing performance in Beočin, Serbia, by installing a co-in- European Union. As in the CIS (see section Trend 2: is estimated at over $12 billion. contracts at volumes of $94-120 million per project. In cineration facility for solid municipal and industrial Modernizing the CIS, page 15), decades of under invest- Industry players take seriously the implications waste and, in Romania, cutting its water footprint by 20 Bulk Solids Handling, 2013. Bilfinger Berger to modernize boilers in power ment exacerbate high economy-wide energy intensity, of EU membership for their operations. Alignment plant in Macedonian [online]. 20 percent through process and equipment improve- while energy demand is expected to grow by as much with EU directives on environmental performance as a third by 2035 if current policies remain in place.19 rate of 100 percent. This saves the As the region moves on from post-1990 economic Wastewater treatment and plant almost 350,000 cubic meters stagnation and uncertainty, East, Central, and South- east Europe are taking a cue from the European Union renewable energy in Hungary of gas annually, thus avoiding the emission of 650 metric tons of CO2 when it comes to policy lessons and regulatory issues. When new Hungarian regula- to use biogas produced by the equivalent each year. The process As these countries are influenced by policies such as tions required Bonduelle to build wastewater sludge for steam can reduce energy bills by 17 per- the EU climate and energy package, opportunities for a wastewater treatment plant production. The converted boiler cent depending on the quantity of climate-smart investors are emerging across the re- for its food processing factory now supplies three metric tons biogas produced, while offering an gion. in Nagykőrös, Dalkia, one of the of industrial steam using biogas. economically efficient solution for Overall, our estimates put the commercial cli- food processor’s partners, of- All of the energy produced on-site treating biogas. mate-smart business investment potential in Emerg- fered to convert one of the site’s from biogas is thus re-used by the ing Europe (including Turkey) at over $232 billion. natural-gas-powered boilers Nagykőrös plant, for a recovery Source: Veolia website Figure 4: Estimated commercial investment potential in se- 19 International Energy Agency, 2012. World Energy Outlook Paris: OECD/IEA. lected industrial sectors in Emerging Europe 21 The modernization of outdated billion investment opportunity, including $12 billion in biomass, $18 billion in solar and more than $35 billion National targets and power generation and in wind. supportive frameworks for the transmission infrastructure, The impact of the EU’s push for renewable energy development of renewable in line with EU requirements, is being felt within as well as outside the EU. Similar energy have been instituted renewable energy targets have been adopted by En- offers significant ergy Community members, ranging from Ukraine’s across the region and are capital - intensive investment 11 percent to Bosnia and Herzegovina’s 40 percent. leading to high growth rates in opportunities, as is illustrated Reaching these targets will require significant invest- the sector by various recent projects ment from the private sector. Associated supportive policies, in particular feed-in tariffs and tax incentives, the EU, and with each other through regional ener- Poland, the company is modernizing the steam gener- have had substantial impact in the solar and biomass gy markets. While this may require the facilitation of ator at Europe’s largest lignite-burning power plant. sectors, as in Ukraine (see section Country Spotlight 3, multilateral bodies such as the World Bank, regional In Romania, the lignite-burning power plant Isalnita is page 35). While the feed-in tariff market is reaching a markets will lead to optimization of resources, lower being equipped with modern flue gas desulfurization point at which many governments are reviewing sup- environmental impacts, and lower electricity prices, systems that will enable it to meet stringent European port schemes, the consequences of regional energy and will provide many commercial investment oppor- broad figures, specific opportunities are situated standards. integration have been remarkable for cross-border tunities. The $1 billion 390-km Tivat-Pescara cable, across EU Member States and their neighbours. In Further mirroring EU policy, national targets and renewable energy trade. The Balkan states – Monte- supposed to connect Montenegro with Italy by 2015, Romania, for example, the national market for Energy supportive frameworks for the development of renew- negro, Serbia, Bosnia-Herzegovina, and Albania – are would run under the Adriatic Sea and save Italy $300 Services Companies (ESCOs), which undertake build- able energy have been instituted across the region. looking forward to cross-border electricity trade with million a year and help the country meet its EU renew- ing renovations, has been estimated at $67.5 million, Across Eastern Europe, wind power grew quickly in able energy consumption targets. with extremely high growth potential possibly reach- 2012:21 131 percent in Romania, 82 percent in Ukraine, Initiatives at the municipal level While governments negotiate in Brussels and at ing $200 million by 2020. 23 54 percent in Poland, and 46 percent in Baltic Estonia. the UNFCCC, the cities of Emerging Europe are taking In the newest Member State, Croatia, Spanish AC- seek to unlock the investment the lead in climate action. Initiatives such as the EU’s In Emerging Europe, political and financial inte- CIONA began operating the 30-MW Jelinak wind farm opportunities that exist in the Covenant of Mayors (including its recent Eastern ex- gration go hand in hand. The increasingly tight inte- gration between Emerging Europe and its Western in early 2013, contributing but a drop to the 1,200-MW building sector tension) and Energy Cities seek to unlock the climate- counterparts can be a double-edged sword, with target envisioned by Croatia’s Energy Strategy. Czech smart investment opportunities lying dormant in one the economic woes of the Eurozone effecting neigh- CEZ Group installed the 600-MW Fantanele-Cogealac of Europe’s key energy consumers: the public, resi- bouring economies. However, the closer relationship project in Romania at an investment of $1.62 billion dential, and commercial building sector. There is a lot has brought an overall trend of greater openness to with the aim of offsetting emissions from dirtier coal- of potential in the region for significant energy savings foreign direct investment and louder whistleblow- fired power plants it owns in the country. Germany’s at low cost. By our estimates, the building sector con- ing when irregularities occur. While the countries of RWE has 200 MW of onshore capacity operational in stitutes, at the very least, an investment opportunity Emerging Europe target EU markets, their own econ- Poland, which is one of the energy company’s premier of $36 billion (see figure 5). This includes measures omies are beginning to look better than those of West- markets, with a 2020 market potential as high as 11.5 such as building insulation, appliance upgrades, light- ern Europe. Still-high energy intensities, together with GW onshore (and 1.5 GW offshore).22 Across East and ing, and water and space heating across residential growing energy demand and the ongoing process of Southeast Europe, renewable energy presents a $76 ($23 billion) and public and commercial buildings ($13 alignment with EU directives, have led to the growth of billion). Meanwhile, new green building construction climate-smart investment opportunities in this region. 21 The World Wind Energy Association, 2012. Annual Report. could account for over $11 billion in East Europe, $9 22 European Wind Energy Association, 2013. Poland’s true wind energy potential Figure 5: Estimated commercial investment potential in the billion in Turkey, and $3.7 billion in Southeast Europe, 23 Marino, A. et al., 2010. Energy service companies market in Europe - Status is 13 GW by 2020 [online]. building sector up to 2020 in Emerging Europe exceeding $23 billion for the region. Within these report 2010. Luxembourg: Publications Office of the European Union. 23 Trend 4 MENA’s water-energy nexus for new hybrid and solar desalination capacity along MENA is also looking further downstream in the its Red Sea and Arabian Gulf coastlines.26 Japanese water cycle, where wastewater treatment and reuse firms and government agencies have jumped on this is emerging as a strong growth sector, with invest- opportunity, helping design models that combine so- ment opportunities estimated at over $16 billion, par- lar- and fuel-powered units to reduce the cost of fuel tially through public-private partnerships (see boxes used in desalination plants by 65 percent. In a bid to on pages 24-25). Tunisian authorities are also keen to move away from the otherwise dominant and far more improve domestic and industrial wastewater recycling energy intensive thermal desalination process, Saudi for agricultural use from the current 20-30 percent. Arabia is developing multiple-effect distillation sys- Remarkable for the region is the Tunisian govern- tems (which can cut fuel use by 40 percent) and has ment’s water pricing policy, which saw the price of ir- partnered with Japanese membrane manufacturer rigation water increase by a factor of four from 1998 Toyobo and factory builder Itochu to develop reverse to 2008. This has made the $44 million 27 water treat- osmosis membrane elements near Jeddah. The solar ment infrastructure rehabilitation project undertaken desalination sector stands out for its highly competi- by local industry player WABAG commercially viable. tive bidding process, with contracts being fought over Emerging more gradually, yet consistently, Morocco W by the sector’s giants, including Spanish firm ACCIO- 26 Oxford Business Group, 2013. Economic update Saudi Arabia : Water demands Wherever water and energy meet, important cli- NA Agua, California-based Energy Recovery Inc. (ERI), Globally, the water-energy continue to rise [online]. 27 African Development Bank, 2012. AfDB loans €32.5m to Tunisia to boost flow mate-smart business opportunities arise. Globally, Dow Chemical Company and French Veolia. nexus is one of the four of irrigation water to country’s farms [online]. the water-energy nexus is one of the four investment “megatrends” to watch, according to the U.S. National investment megatrends to watch Intelligence Council’s Global Trends 2030. Nowhere is this truer than in the Middle East and North Africa would imply. In these cases, water efficiency meas- (MENA), the world’s most water-scarce region (see ures can have significant economic benefits – and im- figure 6),24 where climate change is likely to exacer- ply that there are substantial opportunities for provid- bate existing water patterns. Yet water is almost uni- ers of environmental services and technology as well versally subsidized across MENA, often making direct as climate-smart investors. Climate change is also financial benefits from water efficiency measures too leading to a greater focus on the reciprocal relation- small to justify investment. ship between energy and water. As a result, emerging However, amidst earmarked government spending investment opportunities related to the water-energy on water infrastructure, there are also substantial in- nexus include desalination, wastewater treatment and vestment shortfalls across the region, with estimates reuse, and improved water-use efficiency. ranging from about $100 billion to $400 billion annu- The Gulf Cooperation Council (GCC) countries rep- ally by the World Bank.25 In addition, where water is resent the fastest growing investment opportunity in pumped from deep underground aquifers or is una- the region. Independent water and power projects vailable in sufficient quantities, it has a much greater (IWPP) are on the rise in these countries, with 15 pro- economic value than the nominal price of piped water jects in Saudi Arabia worth $8.8 billion, 19 projects in Kuwait worth $4.2 billion, and 10 projects in the 24 World Bank, 2012. Renewable energy desalination: An emerging solution to close the water gap in the Middle East and North Africa. Washington, DC: World UAE worth $1.5 billion. Saudi Arabia, referred to re- Bank. gionally as the “desalination nation,” is said to have Figure 6: Water resource availability and use in MENA countries showing agricultural, municipal and industrial water use against 25 The higher range represents a future in which no demand management op- tions are adopted. earmarked around $66 billion over the next decade total renewable water supply (Based on data from Aquastat). 25 Improved soil Water recovery and management and recycling: Modern Karton water efficiency in agriculture can lead Looking to expand production and take ad- vantage of a boom in regional container demand, to significant crop Modern Karton, one of Turkey’s leading pro- yield increases, While the most valuable drop of water is the one ducers of paper-based containers, first needed which can make it that is not wasted, capital-intensive water purifica- access to a significant supply of water, a key tion and treatment schemes continue to dominate in- an attractive vestment opportunities at the water-energy nexus in ingredient for paper production. But 100 kilometers west of Istanbul, where Figure 7: Agricultural, municipal and industrial water use as percentage of the renewable investment MENA. Investments in independent water and power Modern Karton operates, water is increasingly water supply projects (IWPPs), producing both desalinated water hard to come by. As part of its first-ever climate and power, are concentrated mainly in GCC countries. adaptation project, IFC helped assess Modern is pursuing a $5 billion investment plan for improv- On the other hand, wastewater treatment and reuse New Cairo wastewater ing its wastewater infrastructure,28 having inaugurat- is an important investment opportunity across the re- Karton’s water needs and provided an $8 million ed the country’s (and North Africa’s) first membrane loan for the installation of the most sophisticated treatment plant wastewater treatment plant in mid-2013, producing gion, but mostly in those countries in which water pric- water recovery and recycling system in Turkey’s es are closer to reflecting its true cost. As is the case paper industry. Modern Karton is now able to high quality reusable effluents at Médiouna. New Cairo, a satellite city outside Cairo, with energy in the CIS (see section Trend 2: Modernizing Significantly, increasing water use efficiency will reduce the risks related to limited groundwater Egypt, is expected to grow from 550,000 peo- the CIS, page 15), it is difficult to locate the business have a positive impact on the agriculture sector, which availability and expand production by 50 percent ple to 3 million over the next 15 years. This case when resources are priced below their econom- accounts for around 85 percent of all water used in without increasing water use. explosive growth is sure to threaten the delivery ic value. Across the region, deregulating the price of MENA, though at a sector-wide efficiency of less than “Due to rapid industrial development and the of adequate sanitation and other municipal ser- water, which could incentivize investment, remains a 50 percent (see figure 7). However, at least for now, effects of climate change, access to sustainable vices, particularly in one of the world’s fastest sensitive political issue, as does better management.29 agricultural water management is mainly conducted water has been a real issue,” said Ahmet Eren, growing regions, in the world’s most water- Chairman of Eren Group, the parent company of scarce region. through tariff policies, subsidies for water-saving equipment and integrated water resource planning, In the Gulf Cooperation Modern Karton. “The government of Turkey is Enter Orasqualia, a joint consortium of and continues to constitute a challenging climate- Council countries the number encouraging water conservation and industrial Egypt’s Orascom Construction and Spain’s Aqualia, which recently completed a new waste- smart investment opportunity. of independent water and customers face limitations on water consump- water plant in New Cairo with a processing ca- As the world’s most water-scarce region, MENA power projects producing both tion.” Source: IFC offers investment opportunities of around $30 billion pacity of 250 million liters of water per day. The in water conservation alone. Improving soil manage- desalinated water and power, new facility will significantly boost sanitation ment and water efficiency in agriculture (via no-tillage, is growing and services in the booming satellite town. drip irrigation, furrow contouring, and more) can lead The $150 million project was the country’s Given sufficient water prices, sizable investment op- to significant crop yield increases, in addition to wa- first major public-private partnership (PPP). portunities in water-use efficiency are likely to emerge, ter savings, and is thus an attractive investment. Yet Orasqualia will run the plant for 20 years before particularly in agriculture, where the main advantage such practices are only in use on two percent of the handing it over to the Egyptian government, ex- of better water management is increased crop yields. region’s farmland, which is half the global average. pecting $485 million in revenue over that period. In the meantime, MENA’s broader water sector, with Source: IFC 28 Global Water Intelligence, 2010. Morocco catches up on wastewater treatment its large number of orders and transaction sizes, is one [online]. 29 National Intelligence Council, 2012. Global trends 2030: Alternative worlds. to watch. 27 Country spotlight 1 Turkey, the Mediterranean tiger including wind, solar, hydropower, biomass, and geo- thermal energy. With abundant potential, high spot- market power prices and reasonable feed-in tariffs32 Country snapshot in place, the renewables sector is ready for growth. Solidly rising demand, a grid that can accommodate Population: 74 million further capacity, and favourable policies are focused in particular on nurturing hydropower and wind, the HDI rank: 90th of 186 countries poster children of Turkey’s slowly maturing renew- able energy market. GDP (2012): 1,358 billion $ (PPP) These framework conditions support our estimate GDP/capita: 18,348 $ (PPP) of Turkey’s commercial investment potential of al- most $42 billion in energy generation, (see figure 8), FDI, net inflows (2012): 12,555 million $ with renewables representing $22 billion of this to- Investment in energy with tal. There is also $16 million of investment potential private participation (2012): 9,639 million $ in transmission and distribution (T&D) infrastructure D upgrade and repair, substantiated through electric- Ease of Doing Dubbed the “Tiger of the Mediterranean,” Turkey ity losses of 14 percent running across 46,000 km of Business Rank (2013): 69th of 185 countries has benefited from political stability, falling inflation, By 2023 Turkey’s 55 GW capacity lines, with a commercial potential of over $16 billion. and the strengthening of the private sector. Despite must double, to accommodate The fastest growing in the world, Turkey’s wind Energy use: 105 million toe (a third of Germany’s) recent turbulence, the country is still projected to rises in demand by 6.3 percent sector is booming. Right now, wind accounts for about grow healthily: 4 percent in 2013, according to the in the next two decades two percent of Turkey’s energy generation, yet only Energy trade: imports 69 percent IMF (compared to 0.2 percent for the Eurozone). How- of energy used ever, Turkey’s economy is experiencing pressure due price fluctuations, which could jeopardize econom- GDP / energy use: 11.0 $ PPP/toe to the country’s large current account deficit, which ic growth, Turkey has expressed a desire to reduce (USA: 6.5 $/toe) can be explained almost entirely by necessary ener- fossil fuel imports, which account for 60 percent of gy imports of oil and gas. This is a key driver for the Electricity price, industry: 13.6 $c per kWh power generation.31 Regarding water, Turkey faces a country to push for domestic energy (renewables, but geographical mismatch between resources, popula- 15.6 $c per kWh Electricity price, consumers: also coal and nuclear) and energy efficiency, and this tion, and industrial centers that calls for an integrated fact moves these strategic sectors towards the centre RE Share of total energy use: 14.2percent water resources management approach. stage of Turkey’s economic policy. Fortunately, what’s good for Turkey’s economy GHG emissions: 386 Mt CO2e Overall, our estimates put Turkey’s climate-smart could also be good for the global environment. If am- business investment potential at over $89 billion. In Per capita GHG emissions: 5.3 tCO2e bitious government targets are met, Turkey’s energy the sectors we considered, investment in energy gen- per capita supply will be 30 percent renewable by 2023, despite eration accounts for almost $42 billion, with over half Figure 8: Estimated commercial investment potential in en- significant planned investments in coal power. This of this ($22 billion) in renewables. Industrial and con- ergy generation, transmission and distribution in Turkey GHG emissions per GDP 422 tCO2e/million $ implies huge investments in the clean energy sector, sumer energy efficiency are estimated at over $4.5 GDP PPP billion and $30 billion, respectively. 32 At the time of writing, tariffs are $0.073 per kWh for wind and small hydro Sources: WDI, ATK, SE4ALL Global Tracking Framework (RE 30 Annual 6.3 percent increase over the next two decades: World Bank, 2013, power, plus a local content bonus of between $0.006 and $0.037 per kWh (wind), By the Turkish Republic’s centennial in 2023, its Wind, Water, and Steam – a Triple Win for Turkey’s Energy Sector, online $0.105 per kWh for geothermal power, plus local content bonus of between share), WRI (GHG emissions). Unless otherwise specified, all feature story, 30 May 2013. $0.007 and $0.027 per kWh, and $0.133 per kWh for solar PV and CSP, and values are in current $ and are from 2010. GHG emissions 55-GW capacity must double to accommodate ris- exclude LUCF. 31 World Bank, 2013, In Turkey: Power from the Earth, online feature story, 23 biogas power, with local content bonuses ranging between $0.004 and $0.092 ing demand.30 To reduce its exposure to supply and January 2013. per kWh, all for a period of 10 years. 29 five percent of its wind potential - estimated at about is known that the Cetin storage project for 517 MW 40 GW, onshore 33 – has been harnessed. In early 2013, of hydropower estimated the required investment at Energy efficiency is very much estimated, but it’s safe to say that many previously unviable investments are likely to become attractive. the sector attracted the turbines of General Electric $680 million. Owned by Statkraft of Norway, this plant seen nationally as a tool for This would include, for the automotive, white goods Co. and Siemens AG for combined orders exceeding is a good example of foreign involvement in the Turk- boosting the competitiveness of manufacturing, and aeronautical components indus- 150 MW. GE has announced potential investments into ish hydropower sector. the sector of $900 million34 and is operating several The sun is beginning to boost more than Turkish domestic businesses and tries,37 switchovers to new technologies and replace- ments of motors, compressors and pumps, as well as projects (the 22.5-MW Sares, 10-MW Karadag, and tourism and agriculture (see box). Assuming the avail- companies – with high power investments in lighting, insulation, and heating and the 35-MW, 13-turbine Gok ll in Izmir) through joint ability of attractive long-term debt financing, which is prices there is a good foundation cooling in commercial, public, and residential build- venture Gama Enerji, along with Gama Holding. Some still scarce, the country’s solar power capacity could for energy efficiency ings.38 We estimate commercial investment potential 20 GW are needed to meet Turkey’s 2023 target. The reach 3,000 MW by 2023. Although there are certain in select industrial sectors of $4.5 billion by 2020, with main hurdle may be administrative: the Turkish Ener- restrictions on land use and minimum radiation lev- Geothermal energy, in contrast, is mainly receiv- improvement of industrial equipment leading the way gy Market Regulatory Authority (EMRA) has reportedly els, license holders may choose either photovoltaic or ing attention for its power generation potential, with ($2.1 billion), followed by industrial lighting ($1.6 bil- struggled to keep its project screenings on pace with concentrating solar power technologies. Turkey’s first explorations underway for 600 MW of geothermal lion) and large-scale, capital intensive improvements the rate of project submissions.35 feed-in tariff scheme is starting with a first round of li- power by 2015. Two plants have been commissioned in heavy industry ($800 million)39 (see figure 9). Hydropower is also going strong, dominated by censing of 600 MW across 27 regions, to be completed by Celikler Jeotermal Elektrik Uretim A.S, with four Perhaps owing to its famed entrepreneurialism local developers such as Enerjisa and SPC Kalehan in early 2014. geothermal power trains and a total gross capacity of and vibrancy, Turkey is starting to embrace climate- Enerji Üretim, with capacities ranging between the Recent developments have also boosted Turkey’s 80 MW, serving the expansion of power plants near smart growth. This, as well as its geographic location 236-MW plant on the Coruh River in Arkun and 1100 two traditional renewable energy sources, geothermal Pamukören and Sultanhisar. Sweden’s Atlas Copco and the size of its domestic market, make Turkey an MW of power on the Murat River. Equipment, engi- and bio-energy. The emerging trend is the application and the Italian firm EXERGY are part of the consortium attractive investment destination. Our estimates have neering, and construction contracts have generally of these sources in industrial settings. The first large- delivering the project, at a half-order value of $23 mil- identified significant investment potential in tradi- been awarded to international players, such as Al- scale biogas plants based on energy generation from lion for two trains. tional energy generation, in renewables – wind, hydro, stom, Pöyry, Temelsu, and Andri. While costs vary, it chicken and cow manure could provide up to 750 MW Nationally, energy efficiency is very much seen as a solar and geothermal – and in industrial and consum- of electrical power. In the next decade this initiative tool for boosting the competitiveness of domestic busi- er energy efficiency. Turkey’s ambition to foster and 33 Nicola S & Sulugiuc G, 2013, Turkey Sees ‘Huge’ Clean-Energy Investment as Demand Bucks Trend, Bloomberg news, 4 February 2013. could result in as many 2000 biogas plants, each with nesses. Relatively high power prices (industrial tariffs promote climate-friendly investments derives from a 34 Tsagas I, 2013, GE plans $900 million Turkish investment, Windpower Monthly, 500-kWel of capacity, according to the Turkish R&D of $0.136 per kWh and consumer tariffs of $0.156 per commitment to overturning its status as a net energy 2 October 2013. 35 2012, Government Incentives Lead to a Wind energy Boom in Turkey, oilprice. organisation Tübitak. kWh) provide a solid foundation for energy efficiency. importer and reducing the resulting economic stress. com, 12 August 2012. In addition, the government has committed to reduce primary intensity 20 percent by 2023. A promising sign manufactured by Zhejiang Uni- Solar energy in Turkey versity Sunny Energy and 30 SMA of government commitment are the financial incen- tives made available under Turkey’s energy efficiency benefits from FIT scheme inverter units are used in the law and its Energy Market Regulatory Authority, to plant. The system is connected to sanction rises in retail prices for electricity and gas Turkey’s new renewable en- ducted in July 2012 and operations the Adana Cement Plant line and ergy policy has already had practi- beginning in May 2013. the cost of electricity generation is by almost 10 percent in October 2012.36 The exact im- cal results. Adana Cement Inc., approximately $0.013/kWh, with a plications of these developments have not yet been The project, with an annual which is part of OYAK, recently production capacity estimated at payback estimated at 11 years. 36 E&Y, 2013, Ernst & Young’s attractiveness survey Turkey 2013 The shift, the built a 499-kW photovoltaic plant. 775 MWh , is expected to meet a growth and the promise. This is the first solar power plant significant portion of the electric- Sources: David Appleyard, Solar 37 FT, 2011, Special Report: Investing in Turkey. approved by Turkey’s distribution Power Surges on Turkish Policy Backing, 38 Climate Investment Funds, Portfolio Highlights, Turkey Promotes Energy ity needs for the administrative Renewable Energy World, 2013; Mahmut Conservation, Accessed Oct 2013. grid operator TEDAS, with the bid functions of Adana Cement. A total C. Selekoglu, Tapping the Sun’s Potential, 39 This figure is based on high metals production of 36 million tonnes per annum, for the plant having been con- Figure 9: Estimated commercial investment potential in of 2088 polycrystalline modules World Cement, December 2012 addressing less than a third of the facilities, and smaller-scale improvement programs in cement addressing almost half of the current production capacity selected industrial sectors in Turkey 31 Country spotlight 2 Russia’s green awakening T The sustainable energy giant is stirring, and with tion accounts for more than $48 billion, with less than tential savings. Typically, buildings have inadequate or good reason. Russia’s energy intensity, at over 2.5 a third of this ($14 billion) in renewables. non-existent regulating and control systems, old and times the world average, poses a risk to the country’s Perhaps unsurprisingly, Presidents Dmitry Med- inefficient boilers, inadequate insulation, and draughty Country snapshot economic competitiveness and puts undue pressure vedev and Vladimir Putin have over the past decade windows. Internal infrastructure is old and inefficient, on federal, regional, and municipal budgets. Russia is emphasized, with unprecedented urgency, the need with metering of heat and power not yet ubiquitous, losing more than 40 percent of the energy it generates, for energy efficiency. As a result, there has been some Population: 144 million causing significant overconsumption of energy. which is equivalent to the annual primary energy con- progress on energy pricing and legislative frameworks Residential buildings account for three-quarters of HDI rank (2012): 55th of 186 countries sumption of France.40 This wasted energy costs Rus- that make related investments more viable. There has the building sector’s energy consumption. Moderniza- sia $84 billion to $112 billion in lost export revenues been progress too in renewables, illustrated by the al- tion is urgently needed, with over 80 percent of the GDP (2012): 3,373 billion $ (PPP) Russia has by far the largest housing stock built before 1990. This represents a po- GDP/capita: 23,501 $ (PPP) tential opportunity for technology and material suppli- industrial energy efficiency ers able to partner with Russian companies to meet FDI, net inflows (2012): 51,416 million $ investment potential, estimated this need. While the commercial potential to finance Investment in energy with at over $19 billion in EMENA the modernization of residential buildings is con- private participation (2011): 5,256 million $ strained by low energy costs, indirect approaches to location of the country’s first wind and solar licenses. billing, and complex ownership and management ap- Ease of Doing Yet Russia is still very much dominated by fossil fuels, proaches, there have been significant recent changes Business Rank (2013): 92nd of 185 countries and may not fully commit to this effort. Still, despite to legislation on standards for certification of build- Energy use: 702 million toe low energy costs and subsidies in the residential sec- ings and a “Law on Capital Repairs” was passed in De- (double Germany’s) tor, Russia presents many emerging opportunities for cember 2012, creating “capital repairs funds.” These climate business. developments have potentially improved the bank- Energy trade: exports 46percent On aggregate, potential yields are high and pay- ability of modernization projects, opening the door to of energy produced back periods short. This is because energy prices are commercial investments in the sector. GDP / energy use: 4.2 $ PPP/toe rising rapidly and investments in energy efficiency are New energy efficient construction, in contrast, is (USA: 6.5 $/toe) characterized by energy-cost savings inherent to the Russian leaders have project. Across all sectors, the annual cost savings still in its infancy when compared to parallel devel- Electricity price, industry: 6.7 $c per kWh opments in the Arab Gulf States (see section Trend 1: emphasized the urgent need for for investors and end users could be as high as $80 Green boom in MENA, page 11), which have also been 11.0 $c per kWh Electricity price, consumers: improved energy efficiency billion.41 Given these estimates of aggregate invest- responding to rising prices and export prioritization. ment needs and cost savings, average payback times This opportunity is demonstrated by the 2011-2015 RE Share of total energy use: 3.3percent and $3 billion to $5 billion in federal and municipal on economy-wide investments are as short as four federal housing program, which expects to create over GHG emissions: 2,326 Mt CO2e spending on energy subsidies. If its energy efficiency years.42 Yet, as always, the devil is in the details, and 370 million square meters of dwelling space, mainly in potential were fully realized, Russia’s CO2 emissions every sector of the Russian economy presents its own and around St. Petersburg, Chelyabinsk, and Moscow. Per capita GHG emissions: 16.3 tCO2e in 2030 would be approximately 20 percent below its challenges. Associated developments include efforts to simplify per capita 1990 level. Of all energy consuming sectors, residential, com- formerly opaque legislation on housing development, 1,154 tCO2e/million $ GHG emissions per GDP Overall, we estimate that Russia’s commercial cli- mercial, and public buildings possess the largest po- GDP PPP mate-smart business investment potential is at least 40 IFC, 2011, Energy Efficiency in Russia, Untapped Reserves, International Recent developments have $134 billion. In the sectors we considered, potential investment totals in consumer and industrial energy Finance Corporation, Russian Country Office, Moscow. 41 Lychuk T, Evans M, Halverson M & Roshchanka V, 2012, Analysis of the Rus- improved the potential Sources: WDI, ATK, SE4ALL Global Tracking Framework (RE share), WRI (GHG emissions). Unless otherwise specified, all efficiency are estimated at $60 billion and $19 billion, sian Market for Building Energy Efficiency, Pacific Northwest National Labora- tory for the US Department of Energy. bankability of building values are in current $ and from 2010. GHG emissions exclude modernization projects 42 Mokveld, K, 2011, Energy efficiency in Russian Industry, Agentschap NL, The LU emissions. respectively. Potential investment in energy genera- Netherlands. 33 nual energy cost savings for investors and end-users. and distribution has been estimated at over $48 billion KKS Russia The important difference between the Russian Fed- (see figure 11). Commercially viable climate-smart Bioenergy saves money and KKS Group, an independent district heating eration and other industrial countries in EMENA - for investments in thermal power plants (TPPs), specifi- solves a waste problem utility in Russia, was looking to improve its sup- instance Egypt and Morocco (cement) and Pakistan cally the rehabilitation of TPPs and the expansion and UNK Agroprodukt wished to expand from ply of energy-efficient heating and hot water to and Turkey (metals) - is that Russia produces high replacement of cogeneration (CHP) capacity, have selling and shipping grain and sunflower oil customers in the country’s Tula and Kemerovo volumes but with generally more outdated equipment. been estimated at over $12 billion and $22 billion, to producing its own sunflower oil. On the one regions. Receiving a $14 million loan earlier this Significantly, industry experts estimate that at least respectively. The commercial renewable energy gen- hand, the new oil-producing equipment needed year, KKS is now able to increase the efficiency of 50-60 percent of equipment in the cement and metal eration potential consists of predominantly biomass a lot of energy. On the other hand, an inevitable its energy use, cut losses and reduce its green- industries is outdated, offering opportunities for mod- applications (mostly based on forestry and agriculture waste product of the production of sunflower oil house gas emissions by nearly 38,000 tons of ernization and upgrade programs with an estimated residues), which exceed $9 billion (from an estimat- is sunflower seed husks. The company decided CO2 per year. Ilya Brodsky, a director of Spring, a commercially viable investment of approximately $3 ed total of 12 GW of commercially viable capacity by to use the husks as biofuel and thus kill two research and investment group that is the biggest billion in metals production and $4 billion in the ce- 2020). An estimated 1.4 GW of additional wind power birds with one stone: reducing energy costs investor in KKS, said the investment would help ment industry. Steel industries could reduce their capacity could be commercially viable by 2020 – with and getting rid of the waste product. With the the firm “improve the quality and efficiency of our help of a loan from Center-Invest Bank that was energy consumption by up to 6 percent by using the an investment potential of $ 2.3 billion – based in part services.” ultimately financed by IFC’s Russia Sustain- gases emitted for power and heat production, which on government plans for tenders of 3.6 GW and feed- able Energy Finance Program (RSEFP), a $1.2 Source: IFC would entail switching from open-hearth furnaces to in tariffs of around $0.28 c/kWh, but with full imple- million boiler was purchased that saves the blast oxygen furnaces. mentation not expected by 2020. Russia is planning company $1 million in energy costs per year. the issuing of two green building standards and dem- Finally, Russia’s potential for climate-smart busi- very strong local content requirements, which will be Source: IFC onstration of sustainable design and construction al- ness investment in energy generation, transmission a significant challenge for the sector, potentially limit- ready underway for the Sochi 2014 Olympics. ing international investment in renewables. Russia has by far the region’s largest industrial energy efficiency investment potential, estimated at Energy efficient construction of The largest renewable energy On the whole, the drivers are unequivocal and over $19 billion in the sectors we considered (see fig- new buildings is supported by investment potential is for leading to a slow but sure awakening to the country’s energy investment potential. This is good news for pri- ure 10). Experts estimate the cost of saving one unit of new regulations, an opportunity biomass energy, mostly vate investors and technology suppliers across many energy through efficiency measures is more than six some investors have started to from forestry and sectors. Our estimates have identified significant in- times lower than the cost of increasing primary en- ergy supply by the same amount. take advantage of agriculture residues vestment potential in energy generation, particularly in the rehabilitation and efficiency improvement of The country’s major energy-intensive industries – existing thermal power plants and transmission and ferrous metals, pulp and paper, and cement – make distribution infrastructure (see in particular Trend 2: up approximately 53 percent of energy saving poten- Modernizing the CIS, page 14), as well as in industrial tial, with 39 percent concentrated in ferrous metals and building energy efficiency improvements. In the (less energy intensive industries – e.g. food process- past, the uptake of energy efficiency measures has ing, meat, and bakeries – constitute 42 percent of the been slow due for several reasons, including tradition- potential43). Most of the savings can be achieved by ally low energy prices and low management interest. improving the efficiency of electricity and heat use at Some indications of the increasingly favourable in- Russia’s manufacturing facilities,44 with $31 billion in vestment climate are Russia’s accession to the World investments required and $12 billion in associated an- Trade Organization in 2012 and the government’s 43 Mokveld, K, 2011, Energy efficiency in Russian Industry, Agentschap NL, The drive to lighten regulatory burdens for foreign inves- Netherlands. Figure 10: Estimated commercial investment potential in Figure 11: Estimated commercial investment potential in tors and foster greater consistency and transparency 44 IFC, 2011, Energy Efficiency in Russia, Untapped Reserves, International selected industrial sectors in Russia selected energy generation, T&D sectors in Russia in the application of commercial law. Finance Corporation, Russian Country Office, Moscow. 35 Country spotlight 3 Ukraine’s growing pains Country snapshot Population: 46 million HDI rank (2012): 78th of 186 countries GDP (2012): 338 billion $ (PPP) GDP/capita: 7,421 $ (PPP) FDI, net inflows (2011): 7,207 million $ Investment in energy with private participation (2011): 343 million $ Ease of Doing Business Rank (2013): 112th of 185 countries Energy use: 130 million toe (less than half Germany’s) Energy trade: imports 32 percent of energy used GDP / energy use: 2.3 $ PPP/toe (USA: 6.5 $/toe) Electricity price, industry: 8.9 $c per kWh U Electricity price, consumers: 2.9 $c per kWh Ukraine is an energy hungry country that has and distribution accounts for at least $18 billion, with shown an appetite for expanding its renewable energy over half of this ($10 billion) in renewables. The po- RE Share of total energy use: 2.9percent sector and improving its energy efficiency. The country tentials for consumer and industrial energy efficiency GHG emissions: 390 Mt CO2e is dependent on Russian gas supply, yet seeks energy are estimated at more than $21 billion and $3 billion, cooperation with the EU. Ukraine’s wish to secure its respectively. Per capita GHG emissions: 8.5 tCO2e flailing energy sector–by attracting Western investors, per capita for instance-stands in contrast to reports of a perni- There is a large potential, GHG emissions per GDP 1,411 tCO2e/million $ ciously complex tax, legal and regulatory system, and estimated at over $6 billion for GDP PPP cases of weak enforcement of contract law. biomass energy, with Ukraine Overall, our estimates put the commercial cli- Sources: WDI, ATK, SE4ALL Global Tracking Framework (RE mate-smart business investment potential in Ukraine already a major exporter of share), WRI (GHG emissions). Unless otherwise specified, all values are in current $ and from 2010. GHG emissions at over $43 billion. In the sectors we considered, po- biomass pellets for energy Figure 12: Estimated commercial investment potential in se- lected energy generation, Transmission & Distribution sectors in exclude LU emissions. tential investment in energy generation, transmission generation Ukraine 37 Recent developments suggest Ukraine has taken its first steps towards an energy revolution. As part of the harmonization of Ukraine’s energy legislation with the EU acquis communautaire, legislative and regula- tory frameworks have recently been put in place that support renewable energy, including very favourable feed in tariffs – that are linked to the Euro and guar- anteed until 2030 – of $0.46 per kWh for solar pow- er, $0.15 per kWh for large wind power installations (>2MW), $0.17 for biomass energy, and at least $0.16 per kWh for small hydro (all for objects commissioned before 2015 45 ). In addition, Ukraine guarantees off- take of the electricity and provides corporate tax ben- efit until 2021. A recent “local content requirement” of up to 50 percent for wind, solar, biomass, and biogas installations aims to ensure Ukraine’s economy ben- efits alongside foreign investors, yet makes invest- ments more complex. The generous level of the solar feed-in tariff has raised questions about its mid- and The renewable energy sector is expected to continue growing at a rapid rate long-term sustainability. porter of pellets (mostly sunflower husk pellets), an by DTEK Group. The first solar power plants were also Based on major resource potentials (Ukraine has attractive and growing trade market driven by demand constructed in 2011, with Austria’s Activ Solar devel- a large agricultural sector), current low penetration, from Central Europe. oping a number of projects, including the 100-MW and strong public facilitation, biomass represents At the moment, however, Ukraine’s renewables Perovo project on the Crimean Peninsula, reportedly more than two-thirds of the total estimated renewable market remains in its infancy. The first private com- the largest photovoltaic project in Central and Eastern Figure 13: Estimated commercial investment potential in potential, offering opportunities estimated at over $6 mercial wind farms in the country – Novoazovskiy, Europe. selected industrial sectors in Ukraine billion. Public support is strong, and, with an attrac- Wind Park Ochakovskiy, and Novrossiyskiy – were Renewable capacities are still low, on the whole, 45 Renewable energy in Ukraine, Clifford Chance briefing note, July 2013. tive feed-in tariff in place, the biomass energy sector commissioned in 201146; in 2012, a deal for the 90-MW, and mostly a result of recent projects. Wind and so- 46 EBRD, Novoazovskiy Wind Project: summary document, [online.] is poised for take-off. Ukraine is already a major ex- $126 million Botievo Wind Farm Phase 1 was closed lar generation surged by 125.5 percent in the first 39 half of 2013, with wind capacity up from 50 MW to 350 time of changing an old and inefficient boiler to a new MW, solar capacity at 470 MW, and small hydropower efficient one is typically less than two years, and inter- (which receives the highest hydropower feed-in tariff) nal rate of return (IRR) can be over 50 percent. up 2.7 MW to 73.5 MW as of summer 2013. In Ukraine, favorable policy and regulatory devel- On the horizon, substantial longer-term oppor- opments are creating investment opportunities for tunities are likely to emerge in the traditional power both renewable energy and energy efficiency, in par- sector, which is trying to cope, on a shoestring, with ticular for biomass energy production and industrial mounting gas bills. Ukraine made a commitment to energy efficiency. However, similar to the situation further liberalize its electricity market when it joined in Russia and the rest of the CIS, any investor in the the Energy Community in 2011. Freeing tariffs as part sector will need to be savvy given Ukraine’s broader of this liberalization could turn the modernization of investment context – including challenges that may Ukraine’s vastly outdated power sector infrastructure arise with licensing, managing pre-investment risk, into a $3.9 billion investment opportunity. Investments and delays in land allocation. in the sector from global energy players may in fact Investment opportunities of Upgrade of PJSC over $ 3.2 billion in industrial Podilsky Cement (JI project) energy efficiency exist across industry sectors For a total investment of over $250 million, the PJSC Podilskyi Cement facility was completely modernized over the course of four years. Five West-Crimean inefficient wet-stage production lines were Windplant decommissioned and completely replaced by just one new dry process production line at equiva- lent total output capacity of an annual 3 million West-Crimean Windplant LLC has received tons of cement (production output of 1.4 million a construction permit and is building a 250-MW tons in 2011, at a market share of 17 percent). wind farm in the Chernomorske district of the Besides the major overhaul, which decreased outpace reforms if a bilateral agreement with the EU ficiency improvement of industrial energy equipment Crimea in Ukraine. The company is 50 percent energy intensity in clinker production by over 50 materializes that would position Ukraine as a regional and lighting. Over two-thirds of infrastructure and owned by Güris Construction and Engineer- percent, the project included the implementation energy hub. equipment is outdated due to a lack of moderniza- ing Co., Inc. (Turkey) and 50 percent owned by of integrated power supply, process control, and Greenworx Holding Company, a subdivision of Industrial energy efficiency is also a promising tion since the Soviet era. Investment potential in the niche. Ukraine is both one of the world’s largest en- metals sector has been estimated at over $1 billion. automation systems. The total potential energy the Saffelberg Investments (Belgium). savings are assessed at 200 thousand tons of oil The wind turbines will be Gamesa 4.5-MW ergy consumers and one of the most energy intensive Including modernization of the cement industry, the equivalent (ktoe) per year. While initially energy units. The first phase, of 126 MW, will be funded economies, with energy intensity in 2010 equal to that climate business potential is conservatively estimated use was almost double that of similar facilities by loans from IFC and EBRD, making this the of Russia in 1990. Ukraine has a strong industrial sec- at over $2.1 billion (see figure 13) (see case study for in Germany, it dropped to about 0.07 toe per ton first large renewable project in Ukraine devel- tor with approximately 32 percent industry value added an illustration of this potential). Natural gas prices in of clinker after the upgrade, below the German oped by foreign owners. to GDP, but low productivity at approximately $15,000 Ukraine have increased steeply in recent years, mak- average of 0.08 toe per ton. GDP PPP per worker. Investment opportunities exist ing other energy efficiency measures, beyond indus- Source: windplant.crimea.ua Source: A.T.Kearney across industry sectors for the replacement and ef- try, financially attractive. For instance, the payback 41 Country spotlight 4 Pakistan’s climate resilient ambitions C Climate-smart investments have a promising fu- ture in Pakistan, a country in which environmental objectives could coincide with economic development imperatives – in particular access to infrastructure and energy. On the political agenda, economic de- Country snapshot Population: 179 million velopment comes first, while attempts are also be- ing made to deal with high population growth, steep HDI rank (2012): 146th of 186 countries urbanization rates, persistent poverty and security Irrigated land: 93percent of cultivated area concerns, a complex political transition and devastat- ing natural disasters (floods in 2010 and 2011).47 Paki- GDP (2012): 518 billion $ (PPP) stan’s context poses significant challenges to private GDP/capita: 2,891 $ (PPP) sector investors due to corruption problems and the poor state of public finances. It is evident, however, FDI, net inflows (2012): 854 million $ that if Pakistan succeeds in dealing with its many challenges, economic and environmentally sustain- Investment in energy with private participation (2011): 659 million $ able development could support the transition from an agrarian society to one with larger industrial and Ease of Doing service sectors. Business Rank (2013): 110th of 185 countries Overall, our estimates put the commercial climate- straw, rice husk and straw, cane trash, bagasse, cot- Energy use: 85 million toe smart business investment potential in Pakistan at ton sticks), animal manure (especially cattle), and Pakistan’s severe power (a quarter of Germany’s) over $45 billion. In the sectors we considered, poten- municipal solid waste - estimated conservatively to be shortage is leading to the tial investment in energy generation is estimated at Energy trade: Imports 23percent more than $8 billion. Potential investment in the water able to yield at least 50,100 GWh per year combined. emergence of opportunities of energy used and agriculture sectors accounts for at least $20 bil- Despite risks related to the bankability of fuel sup- in the energy sector GDP / energy use: 5.5 $ PPP/toe ply chains, where these can be secured, commercial lion. opportunities exist. A number of biogas projects are (USA: 6.5 $/toe) Pakistan’s power shortage may be its greatest plant near Landhi Cattle Colony in Karachi. This is one planned or under construction, including a 24-MW hurdle to economic development. Thought to exceed of the largest biogas projects in the world, which is Electricity price, industry: 10.5 $c per kWh 6,000 MW, compared to an installed capacity of 22,500 solving a very serious environmental problem, as up Electricity price, consumers: 6.9 $c per kWh MW, the shortage results in 8-16 hours of load shed- to now the manure has been discharged into the sea. ding per day. Formerly abundant natural gas is now in Conventional (oil and gas) thermal power plant re- RE Share of total energy use: 46percent short supply. As this shortage takes political center habilitation and expansion projects are conservatively GHG emissions: 313 Mt CO2e stage, opportunities are emerging in the country’s en- estimated to constitute a $2.8 billion opportunity, pro- ergy landscape. vided Pakistan and its international partners succeed Per capita GHG emissions: 1.8 tCO2e In the energy sector, the idea of turning waste into in solving the reoccurring circular debt problem that per capita wealth underpins one of Pakistan’s climate-smart has paralyzed the energy sector, as well as other is- GHG emissions per GDP 753 tCO2e/million $ business opportunities: about $2.8 billion (see figure sues, such as substantial delays in tariff determina- GDP PPP 14) in cheap and abundantly available biomass fuel tion and notification. Alternative energy sources - es- sources, namely agricultural residues (e.g. wheat pecially wind and solar power - are also increasingly Sources: WDI, ATK, SE4ALL Global Tracking Framework (RE share), WRI (GHG emissions). Unless otherwise specified, all values are in Figure 14: Estimated commercial investment potential in se- attractive, given proposed feed-in tariffs of $0.23 per current $ and from 2010. GHG emissions exclude LU emissions. 47 World Bank, 2013, Rethinking Pakistan’s Development Choices: Contributions to the Emerging Agenda, Online feature story, 20 August 2013. lected energy generation, transmission and distribution sectors kWh for PV projects sized up to 100 MW and of approx- 43 in industries. Although Enercon, Pakistan’s National Biomass fuel sources are Pakistan’s agriculture is heavily Energy Conservation Center, was established by the Zorlu Pakistan cheap and abundantly government in the early 1990s, it has taken little ac- dependent on highly inefficient available. Wind and solar tion. The large potential for energy savings across the irrigation systems. Many Turkey-based Zorlu Enerji recently spot- energy are also buildings, industry, transport, and agriculture sectors, measures to improve water ted an opportunity to turn the steady breezes estimated in the range of 20 to 30 percent, remains increasingly attractive largely untapped. use efficiency are both sweeping across the vast plains of Pakistan’s Sindh Province into a source of power. In The opportunities offered by Pakistan’s energy technologically feasible and October 2011, Zorlu Enerji Pakistan, with the imately $0.15 per kWh for wind power. These feed-in shortages are paralleled by those presented by its commercially viable support of international backers, financed Paki- tariffs are complemented by other private sector in- water scarcity, amid fears that severe water short- stan’s first private wind farm, at a cost of $159 centives offered in Pakistan’s Policy for Development ages will be felt as soon as 2025. Wastewater treat- one percent to 75 percent. Many projects currently in million. Incentives offered by the Pakistani of Renewable Energy for Power Generation, which has ment, for instance, accounts for a $13.8 billion invest- the pipeline concern industrial wastewater treatment government, such as a generous feed-in tariff, a target of 9700 MW by 2030. ment opportunity. This level of investment, enabled - with Pakistan’s National Water Engineering claim- also helped get the project off the ground. Pakistan’s wind sector, while still in its infancy, by the combination of water scarcity, low levels of ing to have leveraged $2 billion to develop industrial The 56-MW Zorlu Pakistan wind project has particularly high potential in the coastal Gharo water treatment (either percent of municipal waste- wastewater treatment plants in Pakistan. recently began operations, producing enough corridor and in Sindh. The sector has been gaining water and one percent of industrial effluents) and the Providing improved drinking water supplies and electricity for 350,000 people and cutting CO2 momentum (see case study on Zorlu Pakistan), pass- region’s highest water prices ($ 0.62 per m3), would sanitation to 90 percent of Pakistan’s population is emissions by 90,000 tons each year. “By dem- ing the 100-MW mark in 2012, with over 200 MW ap- bring Pakistan’s wastewater treatment capacity from also expected to engender significant opportunities. onstrating the viability of Pakistan’s local and A World Bank study calculates the costs of achieving renewable resources, this project is expected proaching financial closure. Solar energy, in contrast, is off to a slower start, The combination of water this target at $4.8 billion, with associated annual re- to have a considerable impact on the economy,” with the country’s first installation, with an installed scarcity, currently low levels of curring costs of $828 million.48 said Zorlu Enerji General Manager Arif Özozan. Indeed, Zorlu is so satisfied with their invest- capacity of 356 kW, coming online in 2012. However, treatment and relatively high Pakistan’s agriculture is heavily dependent on ment that they’ve begun looking into another the Punjab government’s plan to develop 700 MW of mostly inefficient and aging irrigation systems. In desert PV capacity is attracting a range of players, in- water prices lead to Punjab, sometimes referred to as the breadbasket of Pakistan wind project, with 200 MW of capacity. cluding German solar company AEG, a consortium of opportunities in both Pakistan, the network of irrigation canals, built in the Source: IFC European countries, and China North Industries Cor- domestic and industrial 1960s, is in poor repair. Low water-use efficiency and over-exploitation of groundwater also need to be ad- velopment. As its agrarian economy gradually shifts poration (NORINCO). The latter is a telling illustration wastewater treatment dressed. to services and manufacturing, Pakistan shares acute of a key regional trend - namely the economic and energy-based rapprochement between China and its The upgrading of irrigation systems has great po- resilience challenges and massive infrastructural Western neighbours. This trend could have significant tential, since 61 percent of water is lost in watercours- needs with many countries in the region and beyond. implications for the region’s solar sector: consider the es and fields. While no estimates of potential savings Energy needs are spiralling, while key strategic sec- recent establishment of a $3 billion fund dedicated to currently exist, measures such as canal lining, dredg- tors are exposed to the adverse effects of climate solar energy in Pakistan. ing, and on-farm water storage are technologically change. However, these challenges also inject urgen- Boosting energy efficiency could be one of the feasible and - given famers’ have access to finance cy and dynamism into Pakistan’s struggles to find a most cost-effective ways to narrow the power defi- - commercially viable investments.49 At the smaller path to sustainable development, resolving the envi- cit in Pakistan while addressing both load shedding end of the spectrum, Micro Drip has invested $500,000 ronment vs. development dilemma. and energy shortages. Current low-hanging fruit op- since 2008 in improving smallholder famers’ yields by 48 World Bank, 2005, Pakistan Country Water Resources Assistance Strategy, tions range from improvements in lighting and air- more than 40 percent at input cost savings of about Paper 3. conditioning in buildings to street lighting and water Figure 15: Estimated investment potential in water and agri- 30 percent. 49 Absar SM, Fuss S, Reuter WH, 2013, Investment in Water-Saving Irrigation Options under Uncertainties – A Comparative Analysis – interim report, Interna- pumping in municipalities and waste heat recovery culture in Pakistan As yet, Pakistan is no exemplar of sustainable de- tional Institute for Applied Systems Analysis, Austria. 45 Country spotlight 5 Morocco’s big, fast green expansion M Morocco’s future could be bright and breezy. In- deed, given a conservative investment potential of $13.4 billion, there is little doubt that renewable ener- gy is a substantial growth sector in this hydrocarbon- poor kingdom (see figure 16). While largely dependent Finance Fossil Fuel Subsidies 6 Independent Power Country snapshot and Population: 33 million 5 Producers on energy imports from its North African neighbours Investment 4 (and Spain for surplus electricity needs) – Morocco 3 (IPP) HDI rank (2012): 130th of 186 countries imports 96 percent of its energy – the country’s tech- 2 1 nical potential for wind and solar power is excellent: 0 GDP (2012): 172 billion $ (PPP) The International Renewable Energy Agency (IRENA) GDP/capita: 5,192 $ (PPP) estimates as much as 3,200 MW of new capacity is Institutional Supporting economically achievable for wind by 2020.50 In addi- Support FDI, net inflows (2011): 2,521 million $ Policies tion, electricity prices in Morocco are among the high- est in the region. This means that even at current Grid Acces Ease of Doing energy prices, many renewable energy options and Business Rank (2013): 87th of 185 countries other investments are viable, and price increases and Figure 17: Barrier analysis of the Moroccan renewa- bles support framework (high figures indicating no Energy use: 17 million toe the gradual reduction of subsidies will drive further barriers and low indicating substantial barriers investment. (Source: RCREEE country profile, 2010) (20 times less than Germany) Overall, our estimates put the commercial cli- Energy trade: imports 96percent mate-smart business investment potential in Moroc- 2020, Morocco is planning big and fast. In addition to a of energy used co at over $13 billion. In the sectors we considered, sizeable hydroelectric capacity (of 1,745 MW), the aim is to increase installed renewable capacity to 2 GW of GDP / energy use: 9.4 $ PPP/toe Renewable energy is a solar, 2 GW of wind, and 2 GW of hydropower. For each (USA: 6.5 $/toe) substantial growth sector in renewable energy source, meeting the target would Electricity price, industry: 17.2 $c per kWh mean additional capacities of, respectively, approxi- Morocco, with many viable mately 1,980 MW (solar), 1,661 MW (wind), and 255 Figure 16: Estimated commercial investment potential and top Electricity price, consumers: 12.8 $c per kWh investment options 5 business cases (by value) in Morocco MW (hydro). At present, the bulk of Renewable Energy Sources (RES) capacity (in particular wind, 1.5 GW, RE Share of total energy use: 7.2percent potential investment in energy generation and trans- deregulated electricity sectors in the MENA region, and solar, 170 MW) is in the pipeline stage – with more mission accounts for more than $6 billion, almost all Morocco implemented new energy subsidy reforms wind than solar either in operation or under construc- GHG emissions: 44 MtCO2e in renewables. The potential for energy efficiency in affecting the price of diesel, gasoline, and fuel oil in tion in 2013. However, if the current pipeline of govern- Per capita GHG emissions: 1.4 tCO2e the consumer and industrial sectors is estimated at mid-2013, and several laws aimed at project develop- ment projects is realized, the target of 2 GW is likely more than $3 billion. per capita ers and investors, including the use of power purchas- to be significantly exceeded by 2020. We estimate that Morocco’s ambitious renewables expansion is ing agreements and tenders, the obligation to award the commercially viable investment potential by 2020 GHG emissions per GDP 323 tCO2e/million $ supported by the state-owned investment company public projects through competitive tenders (e.g. for is over $3 billion for wind power, $1.7 billion for Con- GDP PPP SIE (Société d’Investissements Energetiques) and by municipalities wishing to contract renewable energy centrated Solar Power (CSP), and $800 million for PV. a regulatory and legal framework that is progressive projects), and the authorization (albeit no take-off ob- In the renewable energy sector, Morocco is keen Sources: WDI, ATK, SE4ALL Global Tracking Framework by regional standards (see figure 17). One of the most ligation) to supply local, national, and international to build up a track record and gain experience. For (RE share), WRI (GHG emissions). Unless otherwise specified, all values are in current $ and from 2010. GHG 50 IRENA, 2013, IRENA Case Study 2013 – Morocco Wind Atlas, IRENA, Abu markets (i.e. through cross-border transmission). instance, to foster confidence that the development emissions exclude LU emissions. Dhabi. With a target of 42 percent renewable energy by of the renewables sector is robust, an early CSP pro- 47 ject tender pre-qualified only reputable companies with existing CSP experience (see case study box, Competitive water Ouarzazate and Tarfaya). A potential challenge for prices mean that many international investors is Morocco’s “local content investments in water supply provision,” which is stipulated as a key criterion for awarding tenders in the Moroccan Solar Plan and and wastewater Wind Energy Program. While developing component treatment, as well as supply chains (e.g. PV films cells and panels, thermo- improved irrigation, are electric mirrors, control systems, and condensers), commercially viable the government is also supporting the development of Ouarzazate and Tarfaya local expertise through new agencies and training and certification programs.51 Trend 4: MENA’s Water energy nexus, page 23), the en- The Moroccan Agency for Solar Energy Besides green growth in the energy sector, Mo- ergy requirements for desalination are substantial, (MASEN) is planning to construct a 500-MW rocco is using the momentum generated by public and the high cost of water purification means incen- solar power complex in Ouarzazate to meet tives for energy and water efficiency are needed. The national renewable energy policy objec- investment potential for improved water efficiency in tives. A consortium, led by the Saudi Arabian Subsidy reforms, agriculture, based on a large amount of addressable, project developer, investor, and operator a deregulated electricity irrigated land (total area of irrigated land:1.5 million ACWA Power, was awarded the EPC for the sector, and a progressive hectares) is conservatively estimated at $700 million. first phase of the project in September 2012, Investments in agricultural water efficiency are finan- regulatory and legal framework cially attractive due to water savings, but especially which will produce 160 MW using parabolic solar power concentration technology. This all support the expansion due to crop yield improvements of approximately two investment, valued at $1.16 billion, has re- of renewables percent. In addition, we estimate investment oppor- ceived finance from the African Development tunities to expand wastewater treatment capacity (by Bank (AfDB), the European Investment Bank sector reforms to improve its water supply for use by around 0.4 billion cubic meters per year), at $2.3 bil- (EIB), the International Bank for Reconstruc- both people and agriculture (see also section Trend 4: lion (given that over 80 percent of current wastewater tion and Development (IBRD), the German de- MENA’s Water energy nexus, page 23). Like Pakistan is left untreated). These investments are commercially velopment bank (KfW), the French develop- (see section Country Spotlight 4, page 41), Morocco is viable due to competitive water prices of approximate- ment agency (AFD), and the Clean Technology an agrarian economy whose economic fate is tied to ly $0.9 per m3, though investments remain challeng- Fund (CTF), along with World Bank financing its ability to adapt to climate change. Morocco has ing given the high capital intensiveness and relatively through the Climate Technology Fund. arid and desert regions in which rainfall is scarce and low yield of the business. A 300-MW wind farm at Tarfaya in Mo- water resources unevenly distributed. In the South On the whole, the government of Morocco has tak- rocco also obtained debt financing, of $563 of the country -Laâyoune, Boujdour, Tarfaya, and en some positive first steps to generate a favourable million from the Banque Centrale Populaire Tan-Tan - over 10 desalination stations have already investment climate for investors in the energy and and the Attijariwafa Bank, as well as equity been installed. While the sector suffers from under- water sectors. Our estimates suggest considerable funding from Nareva Holdings SA in 2012. investment, the aim to desalinate 200,000 m3/day of investment potential in renewable energy generation, This project is being developed by the Moroc- drinking water would require an investment of $178 particularly solar and wind power. In the water sec- can company Nareva Holdings SA and Inter- million by 2016. As discussed elsewhere (see section tor, an increase in the percentage of water supplied national Power plc. through desalination also means investments in water Source: REN21, 2013, AfDB website 51 REN21, 2013, MENA Renewables Status Report, REN21, IRENA and UAE use efficiency will be unavoidable. Ministry of Foreign Affairs Acknowledgements This report has been prepared by a core IFC team led by Patrick Avato and Hendrik Engelmann Pilger.The report is based on a principal business case analysis by A.T. Kearney, comprising Carsten Gerhard, Andre Jerenz, Denis Bassler, Elisabeth Chasia, Simon Welter and Britta Meinert. ECO Ltd., led by Grant Ballard-Tre- meer, Anne Maassen and Morna Isaac, synthesized the analysis into this report and provided further country context and analysis. The report has substantially benefited from comments by Martin Dasek, Robin Sandenburg, Selcuk Tanatar, Alexios Pantelias, George Konda, Rapti Goonesekere, Hester Marie de Casper, Alasdair Miller, Efstratios Ta- voulareas, Fuphan Chou, Bryanne Tait, Viera Feckova, Patrick Willems, Sean Whittaker, Luiz Maurer and Anastasia Gekis. In addition, Lotte Pang, Başak Ülgen, Berrin Akyıldız and David Lepeska provided important editorial, strategic and production support. www.ifc.org/emena 2013