2018/88 Supported by K NKONW A A WELDEGDEG E OL N ONTOET E S ESREI R E ISE S F OFRO R P R&A C T HTEH E NEENREGRYG Y ETX ITCREA C T I V E S G L O B A L P R A C T I C E THE BOTTOM LINE Financing Energy Efficiency, Part 1: Revolving Funds Projects that improve energy efficiency can pay back their initial investments over several Why is this issue important? (M&V), comparing alternative technologies, and making what are years through savings on often small and dispersed project investments. energy costs. But a variety of Energy efficiency promises huge economic returns, • Lack of awareness and information, including of credible energy barriers prevent end users from but market failures must first be overcome consumption data, information on energy efficiency potential and accessing commercial financing Energy efficiency should be the “first fuel” of energy policy makers opportunities, and evaluations of energy efficiency programs and for such investments. In some around the globe. It helps to meet growing energy demands cleanly their costs/impacts. contexts, so-called energy and cheaply, increases competitiveness, generates employment, • Lack of incentives to act, perhaps because the entities making efficiency revolving funds may enhances energy security, reduces poverty, and protects the environ- capital investment decisions are not the same as those that offer a viable way around these ment—thus contributing to the World Bank’s twin goals of poverty pay the energy bills and would benefit from energy efficiency, barriers. Such funds facilitate reduction and shared prosperity. According to the International or because they have competing priorities (e.g., production access to finance in the near Energy Agency (IEA), in the years 1974–2010, energy efficiency did expansion) or expect to see assured returns in a relatively short term while paving the way for more to meet growing energy demand in IEA member countries time frame. commercial financing in the than any single energy resource. Harnessing the benefits of energy • Behavioral inertia, or people’s reluctance to do things differently, medium to long term, particularly efficiency could facilitate more-efficient allocation of resources try new approaches, or take action in the face of perceived risk. in the public sector. across the global economy, potentially boosting economic output by This may be strengthened where consumers are not charged $18 trillion through 2035 (IEA 2014). cost-reflective energy tariffs. However, the potential gains of energy efficiency have been difficult to realize owing to prevailing market failures. Even though There are several ways to address these barriers. One involves investments in energy efficiency are generally profitable and cost-ef- creating incentives for business owners, public officials, and citizens fective, with energy savings repaying investment costs over time, to prioritize energy efficiency, whether through laws and regulations, many opportunities to invest in greater efficiency are overlooked taxes and subsidies, information, or a mix of these. A second involves because of systemic barriers, including: developing effective and scalable financing and implementation • Policy and regulatory issues, such as low energy pricing, lack mechanisms. These might include institutions and programs that Aditya Lukas is an of codes or standards, failure to enforce codes and standards match energy efficiency opportunities with financing and implemen- energy specialist in the tation, such as utility demand-side management programs, energy where they do exist, import duties on efficient equipment, and Energy Sector Management service companies (ESCOs), and energy audit/management systems. weaknesses within relevant institutions. Assistance Program • The high project development and transaction costs involved Without these and other positive actions, national goals to scale up (ESMAP) of the Energy in conducting energy audits and measurement and verification energy efficiency will remain out of reach. and Extractives Global Practice at the World Bank. 2 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s Figure 1. Financing energy efficiency: A ladder of options efficiency service markets, including ESCOs and energy auditors; and (iv) the technical and financial capabilities of targeted end users. Higher market maturity advanced commercial or project financing (EScos) Once the basic mechanisms are selected, they must be carefully commercial financing vendor credit, leasing adapted to suit the local context and target market. Their design commercial financing, bonds should also include elements to facilitate the transition to more EERFs are designed to Partial risk guarantees commercial schemes further up the ladder, including studies and be financially sustainable pilots. Of course, mechanisms may overlap, and governments need credit line with commercial bank(s) not use every step of the ladder. by lending for energy credit line with development bank efficiency retrofits or Public or super EScos What are energy efficiency revolving funds? Energy efficiency revolving fund investing in projects utility (on-bill) financing EERFs are financially sustainable mechanisms for and then recovering the Budget financing, grants with cofinancing facilitating investments in energy efficiency investment costs and lower market maturity grants An energy efficiency revolving fund (EERF) provides financing and associated fees through Public financing related services to its clients—public or private entities—to facilitate the derived energy cost their investment in energy efficiency projects. It is important to Source: World Bank 2013. savings. differentiate between EERFs and energy efficiency funds. Many Note: ESCOs = energy service companies. developed countries have energy efficiency funds that receive annual government budgetary allocations or special tax revenues Countries around the world have used various types of financing (e.g., from energy surcharges) and offer grants or other incentives and delivery mechanisms to support energy efficiency investments. to their clients. Examples include ECoFund in Slovenia, the Rational While some of these are best suited to certain types of markets Energy Utilization Fund in the Republic of Korea, and state energy (e.g., credit lines for large and mid-size industrial enterprises), others conservation funds in the United States and India. Such funds may be adapted to serve multiple sectors. The spectrum of financing depend on continuous budgetary allocations or revenues to cover options may be conceptualized as a ladder (figure 1), advancing their administrative costs and maintain their programs. EERFs, on the from those that rely more on public resources (e.g., grants and other hand, are designed to be financially sustainable by lending for public revolving funds) to those that rely more on commercial capital energy efficiency retrofits or, in some cases, investing in projects and (e.g., leasing and project financing). While the goal is to ascend then recovering the investment costs and associated fees through the ladder and leverage commercial financing to protect scarce the derived energy cost savings. An EERF can help demonstrate the public resources, the World Bank’s global experience suggests that commercial viability of energy efficiency investments1 and provide moving up the ladder too quickly may hamper the creation of market a credit history for public agencies and other borrowers, paving capacity to sustain energy efficiency investments in the absence of the way for future commercial financing. EERFs may also cofinance continued public support. In fact, countries that have taken more projects with commercial banks or even offer guarantees to help intermediate steps generally experience a more stable market-de- bring in commercial financiers. Some EERFs have been designed to velopment trajectory. As local markets evolve, energy efficiency finance investments in both energy efficiency and renewable energy programs can evolve apace, climbing the financing ladder. (e.g., rooftop solar photovoltaic, solar water heating, biomass heating, The selection of appropriate mechanisms and their subsequent geothermal heat pumps). design will depend on several factors, including: (i) applicable legislative, regulatory, and institutional frameworks; (ii) the maturity 1 Such investments may include building-envelope measures (windows, doors, wall insulation, of financial and credit markets; (iii) the current state of local energy roofs), heating and cooling, lighting, pumps/fans, and sensors/controls, among others. 3 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s When is an EERF a viable option? Table 1 summarizes how EERFs can address typical barriers to energy efficiency improvements. EERFs can help overcome particularly difficult A key advantage of EERFs is that they can help pool funding obstacles, including market failures and from governments and different international financial institutions underdeveloped commercial financing and donors to facilitate coordination. Also, an EERF’s staff is per- A key advantage of EERFs manent—unlike typical project staff—allowing the EERF to recruit An EERF is a good option where there are market failures, where is that they can help pool excellent candidates and develop their capabilities over the long commercial financing is otherwise underdeveloped, or where local term. However, there are several prerequisites for EERFs to be a funding from governments banks perceive energy efficiency as too risky. Especially during an viable option: and different international EERF’s initial phase, it should focus on a single sector. Others may be • Demand for financing. A key prerequisite is the existence of added at a later stage, if end users in those sectors are not able to financial institutions cost-effective opportunities to invest in improving energy access commercial financing on their own. The public sector is often and donors to facilitate efficiency—e.g., investments that can be repaid from the actual a good place to start. Here, the potential to increase energy efficiency energy cost savings within 8–12 years, driven by demand from coordination. is generally high, access to affordable commercial financing or suf- potential beneficiaries, yet constrained by the market conditions ficient budget resources is often limited, and capacity to implement outlined above (insufficient liquidity in the banking sector, risk energy efficiency projects is often low. It is easy to bundle public aversion, borrowing constraints, etc.). projects—say, all the schools in a district—allowing for economies of scale, and to promote these as models for other sectors. Table 1. How EERFs can address key barriers to energy efficiency investments Barrier to energy efficiency investments How the EERF can address the barrier Low energy tariffs Provide longer financing tenors to allow investment costs to be fully repaid out of energy cost savings High project development and transaction Standardize agreements and procedures; aggregate similar projects costs due to small project sizes Potential beneficiaries lack awareness and Build demand for energy efficiency investments through outreach and marketing; demonstrate their information of project benefits commercial viability; provide turnkey services to make it easy to identify, finance, and implement energy efficiency measures Commercial banks charge high interest rates; Provide lower interest rates than commercial banks; enter into nondebt instruments with public entities (e.g., public entities are unable to borrow energy service agreements, lease contracts, energy performance contracts) Beneficiaries have limited capacity to Provide support services (e.g., conducting energy audits; developing technical designs; procuring equipment; implement energy efficiency measures supervising construction and installation; completing M&V; and providing training, case studies, and standard documents and templates) Service providers (e.g., auditors, construction Provide TA to service providers to strengthen their capacity; use simple ESCO contracts to help build local companies) have low capacity levels; ESCO ESCO industry market is underdeveloped Source: Authors’ compilation. Note: EERF = energy efficiency revolving fund; ESCO = energy service company; M&V = measurement and verification; TA = technical assistance. 4 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s • Ability to recover investment costs from energy cost savings.2 a plan for a second re-capitalization after 5–7 years, once successful Given that EERFs rely on the principle that energy cost savings performance has been demonstrated. from a project will be used to repay the initial investment An EERF may offer financing products that include debt financing, costs, energy pricing needs to reflect costs to a certain extent. energy service agreements (ESAs), guarantees, “budget capture”, Moreover, the EERF has to have the ability to capture the energy grants, and forfeiting. Table 2 provides an overview of these products In addition to offering cost savings. This may be challenging in the public sector, where and their suitability for different sectors. An EERF targeting the public financing, the EERF the legislative framework may prevent public agencies from sector should be designed to serve the needs of a range of public entering into multiyear obligations or from retaining and dispens- agencies and therefore include innovative financing products such as may provide support ing budgetary savings. ESAs (see box 1 for more on ESAs) or budget capture. If a sustained services—energy audits, • Access to financing/funding to capitalize the EERF. Access to funding source is available, or if there is an earmarked government technical designs, public budgets, independent revenue sources, financing from or donor grant, an EERF may also offer grants. For example, if a procurement of equipment, international financial institutions, or equity grants from donors is government (through special taxes, levies, or surcharges) or a donor generally required to capitalize the EERF in its initial phase. agency commits to providing grant financing for a given number of and supervision of • A competent EERF manager. The success of an EERF depends years, these grants could be blended with loans to beneficiaries to construction. A full-service on a good manager—ideally one who is professional, capable, improve projects’ financial feasibility. EERF is very attractive to and has sufficient incentives. While using a private sector EERF In addition to offering financing products, the EERF may also clients, particularly those manager to oversee public financial resources may not always provide support services. It may, for example, help conduct energy be politically desirable, this allows a performance-based contract audits, develop technical designs, procure equipment, supervise con- in the public sector, that and fosters independence from political influence. struction and installation, and complete M&V, particularly for public have limited capacity to agencies or other clients that have limited capacity to accomplish accomplish these tasks on How do EERFs work? these tasks on their own. A full-service EERF is very attractive to their own. clients, particularly those in the public sector, as the administrative EERFs invest in projects whose returns will be costs and risks are passed on to the EERF. Also, EERFs have the realized only after several years and through various opportunity to bundle several small projects together to obtain better mechanisms pricing and reduce transaction costs. Alternative procurement methods can be used to manage risks. In its initial phase, an EERF may be capitalized from sources as When using financing schemes that are directly tied to actual energy various as concessional loans, grants from donor agencies, govern- cost savings, such as ESAs, EERFs must minimize technical perfor- ment budget allocations, special tariffs on electricity sales, petroleum mance risks by increasing contractor accountability. One strategy taxes, and carbon revenues, among others. Since the repayment involves output- or performance-based procurement. In a traditional periods may be long (typically 5–8 years, but they have extended to scheme, the EERF would hire an energy auditor, then a designer, then 15 years in Eastern Europe and other places with low energy prices a construction contractor, and then an M&V expert. But disparate or chronic underheating/cooling), the initial capitalization of the EERF contractors can easily pass the blame around if a project does should be sufficient to cover operations until accumulated energy not perform as expected. Alternatively, the EERF could consider cost savings allow the EERF to sustain its annual investment targets. bundling some of these services and introducing the condition that Alternatively, the initial capitalization may be smaller, but this requires part of the final payment be tied to the energy savings generated. To accomplish this, the project’s parameters, as well as baseline 2 EERFs to date have focused on investing in upgrades of existing infrastructure that result conditions and energy-use patterns, must be clearly defined. So, in actual energy cost savings. Nevertheless, there are many “greenfield” opportunities (e.g., to for example, the EERF may conduct a preliminary audit to estimate expand street lighting) where the higher up-front investments needed for more-efficient design, the minimum energy savings and then (i) ask bidders to propose equipment, or materials would be financially feasible. 5 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s Table 2. EERF financing products Suitable for target sectors? Industrial/ Financing product Description Advantages and disadvantages Public Residential commercial Debt financing An EERF may provide traditional loans to clients, sometimes with a longer Loans are a common financing mechanism that 3 33 33 tenor than typical commercial loans, and up to 100 percent debt financing. is well understood, and may be helpful where It may waive the requirement for full collateral and instead ask clients to forecasted energy cost savings are low. But in pledge future energy cost savings or, for public clients, tax collections or many cases beneficiaries are not eligible for transfers from the Ministry of Finance. Alternatively, public clients may debt financing. also obtain guarantees from the Ministry of Finance to back up the loan repayment. Energy service Under an ESA, the beneficiary agrees to pay the current baseline energy ESAs can be very attractive to clients, since 33 3 3 agreements (ESAs) bill for the duration of the agreement. The EERF invests in the project, pays they do not involve incurring debt. For ESAs the new reduced energy bill, and uses the difference between the reduced to be suitable, the energy cost savings must energy bill and baseline payments to recover its investment costs and be sufficiently high to cover investment costs associated fees. The contract duration can be terminated after an agreed within the agreement period, clients must amount has been repaid to the EERF, thereby offering an incentive for the regularly pay their energy bills, and a legal beneficiary to save more energy. After the ESA ends, the beneficiary keeps framework for ESAs must be in place. all the energy cost savings. Guarantees By providig commercial banks or other financial institutions with a partial Guarantees can quickly bring local banks into 33 33 33 coverage of the risk involved in extending loans, credit guarantees can the energy efficiency financing market. But they encourage them to engage in energy efficiency projects. Guarantees require financial markets that are fairly well are designed to address the perception of lenders that energy efficiency developed in terms of liquidity, competition, investments are more risky than traditional investments, or to enable interest rates, and financial institutions that are lenders to lend to marginally creditworthy clients presenting attractive plans willing to face some risk. for investing in energy efficiency. Budget capture Recovering capital through future budget capture is possible only with Budget capture removes concerns about 33 public sector clients. The mechanism is possible when a public entity creditworthiness and repayment from the receives dedicated funds from the Ministry of Finance or another EERF setup. It can be used to support central, government agency to pay its energy bills. After the EERF completes an regional/state, and local governments. But the investment for a public agency, the government reduces its budgetary parent budget agency must agree to assume transfers to the public client by an amount equivalent to the energy cost the additional administrative burden. savings (thereby capturing the savings gained through energy efficiency) and transferring this amount to the EERF. Forfeiting Under a forfeiting arrangement, a local ESCO enters into direct energy Forfeiting allows private ESCOs to enter the 3 3 3 performance contracts with its clients, both public and private. The EERF market without huge up-front capital and then buys the receivables from the ESCO, thereby refinancing its portfolio significantly reduces the EERF’s risk because and allowing the ESCO to finance more projects. The EERF then continues to the EERF purchases the project only after it accept payments from the ESCO clients for the duration of the contracts. is completed and generating energy savings. The market must already have active ESCOs capable of prefinancing projects, as well as sufficient client demand. Source: Authors’ compilation. Note: 3 Suitable; 3 3 Highly suitable. EERF = energy efficiency revolving fund; EPCs = energy performance contracts; ESA = energy service agreement; ESCO = energy service company; SMEs = small and medium enterprises. 6 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s Box 1. Comparison of debt financing and a typical energy service agreement (ESA) Debt financing Energy service agreement Some EERFs have Energy xxxxxxxxxx Energy xxxxxxxxxx suppliers suppliers ll bi En ay exclusively financed energy gy n t er me p er me gy n En ay bi t efficiency investments, ll p while others have included Energy service Loan agreement Beneficiary agreement Beneficiary renewable energy or, more EERF xxxxxxxxxx (building/facility EERF xxxxxxxxxx (building/facility Loan repayment owner) Fixed payment owner) broadly, investments that based on baseline n energy bill support environmental at io io n Energy cost savings t at Performance-based Energy cost savings en t implementation implementation protection or urban em en contracts for Payment for pl em m pl ri m infrastructure. s fo ori ct tf tra en on ym C Pa Project Project implementation implementation Energy service services Buildings/ Energy service services Buildings/ xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx xxxxxxxxxx suppliers facilities suppliers facilities Contracts Services Payment flow Principle of an energy service agreement Under debt financing, the energy efficiency revolving fund (EERF) signs a loan agreement with the beneficiary. In such cases, it is then the responsibility of the beneficiary to contract service providers for audit, design, construction, installation, and other services needed to cost to beneficiary implement the project. The energy cost savings accruing from the project can then be used by the beneficiary to repay the principal, interest, and fees, which allows the EERF capital to revolve. Under an energy service agreement (ESA), the beneficiary agrees to make fixed payments based on the baseline energy bill to the EERF. Since the EERF pays the reduced energy bill and keeps the rest of the payments to recover its costs, it requires that actual energy cost savings be realized, which results in higher risk for the EERF under an ESA than under a traditional debt arrangement. Therefore, the EERF usually directly contracts service time providers to implement projects, and may pass on some of the risk to the contractors using Before during energy after various procurement strategies (e.g., output- and performance-based procurement). The fixed service agreement payments bundle together the energy bill payments and repayments to the EERF for cost recovery, which may provide the EERF some added leverage, since it can cut off the energy Energy savings retained by beneficiary supply should the beneficiary default on its payment obligations. Note that the ESA described Energy savings used for fixed payments to EErF here represents a typical example, but contractual arrangements and payment flows are often adopted to suit country-specific circumstances. Energy cost Source: Author’s compilation. Source: Adapted from Associated Renewable: www.associated renewable.com/content/energy-services-agreement-esa. 7 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s technical solutions to maximize energy savings; (ii) select a winning An EERF requires a legal framework. A provision for establishing bid by considering output in terms of net present value rather than an EERF may be included in a general energy law or a specific energy the lowest cost; and (iii) require that a commissioning test be linked efficiency law. A key decision to be made is whether the EERF will be to the contractor payment. set up on the basis of an existing fund (e.g., one devoted to municipal However, output- or performance-based procurement is signifi- development, the environment, or infrastructure) or development An EERF requires a legal cantly more complex than traditional procurement, requiring that bank, or established as an entirely new entity. If an existing orga- framework. A provision for both the EERF and contractors have sufficient capacity to monitor nization is appointed, changes to its legal charter and operating and verify results. Mechanisms for dispute resolution also need to be procedures may be required. If the government decides to establish establishing an EERF may developed and agreed on by all parties. a new entity, secondary legislation needs to be developed to specify be included in a general It is important that the EERF also provide technical assistance to its legal organization and ownership. energy law or a specific support both individual investment projects and the EERF’s overall energy efficiency law. A program. For projects, this may include support of energy audits and Where have EERFs been used? design, construction supervision, commissioning, and M&V. To sup- key decision to be made EERFs are found in many countries, including in Asia, port the EERF’s overall program, technical assistance may include: is whether the EERF will • Market development, including market assessments and out- Europe, and South America be set up on the basis of reach to build demand for energy efficiency investments through EERFs have been established around the globe, often with support an existing fund or as an workshops, flyers, websites, social media, advertising, and case from international financial institutions such as the World Bank or studies, among others. entirely new entity. from climate finance instruments such as the Global Environment • Development of procedures and standard documents, for Facility. Some EERFs have provided guarantees (e.g., in Bulgaria, example, standard legal agreements, tender and audit templates, Hungary, Slovenia) or credit lines (e.g., Thailand) to commercial banks environmental assessments, postproject inspections, and terms to mobilize private sector financing. Some have exclusively financed for the ESAs. energy efficiency investments, while others have included renewable • Capacity building to strengthen the ability of (i) energy auditors, energy (e.g., Armenia, Mexico) or, more broadly, investments that (ii) EERF staff and local banks (e.g., in screening, designing, support environmental protection (e.g., Slovenia) or urban infrastruc- evaluating, implementing, and monitoring energy efficiency ture (e.g., India). Table 3 describes EERFs supported by the World investments including M&V); (iii) energy service and equipment Bank, with a snapshot of results. All the EERFs listed are still active, providers, design firms, and construction companies (especially though the Hungary Energy Efficiency Guarantee Fund was merged in regard to output- and performance-based procurement); and into the regional Commercializing Energy Efficiency Finance Program (iv) beneficiaries (e.g., in operating and maintaining new equip- in 2005 to replicate its success across the Central Eastern European ment). Periodic training to share lessons from earlier projects, and Baltic States (the Czech Republic, Slovakia, Lithuania, Latvia, and common mistakes, and typical variances between audit and Estonia). actual savings can also be helpful. 8 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s Table 3. Examples of EERFs supported by the World Bank Fund name Supported Target Financing Results (at the end of the World Bank’s (period of activity) Description investments sectors products support) Armenia: Renewable Resources Provides turnkey services (energy audit, procurement, detailed Energy Public Loans Results as of 2016 and Energy Efficiency Fund design, financing, construction, and monitoring) efficiency ESAs • No. of projects: 63 (2005–present) Capitalization: IDA, GEF, Armenia Renewable • Investments: $10 million energy • Lifetime energy savings (MWh): 8.1 million • Lifetime carbon savings (tCO2e): 2.2 million Bulgaria: Energy Efficiency and Incorporating lessons learned from the Romanian EERF, this Energy Public Loans Results as of 2010 Renewable Sources Fund fund has a simpler institutional structure, stronger focus on efficiency Commercial/ Guarantees • No. of projects: 112 (2005–present) marketing, and a different menu of financial products. industrial • Investments: $39 million Capitalization: GEF, Austria, Bulgaria, private shareholders • Lifetime energy savings (toe): 130,000 • Lifetime carbon savings (tCO2e): 1.1 million Romania: Energy Efficiency Provides loans for energy efficiency upgrades on a commercial Energy Public Loans Results as of 2009 Fund basis. efficiency Commercial/ • No. of projects: 16 (2003–present) Capitalization: GEF industrial • Investment: $34 million • Lifetime carbon savings (tCO2e): 2.8 million Hungary: Energy Efficiency Broke ground by being the first such fund to use guarantees to Energy Commercial/ Guarantees The fund was merged into the regional Guarantee Fund facilitate commercial energy efficiency lending. efficiency industrial Commercializing Energy Efficiency Finance (1997–2005) Capitalization: GEF, IFC Residential Program in 2005 India: Tamil Nadu Urban Extends long-term loans to creditworthy municipalities, public Energy Public Loans Results for 1999–2004 Development Fund undertakings, and private investors for the financing of urban efficiency Commercial/ • Investment: $160 million (1996–present) infrastructure projects including municipal energy efficiency Other industrial • Supported infrastructure improvement in over projects (e.g., street lighting). 25 municipalities Capitalization: IBRD, JICA, KfW Results for 2005–14 • Investment: $390 million • 100% project loan recovery, no nonperforming assets Mexico: Energy Efficiency in Operated by Fideicomiso para el Ahorro de Energía Eléctrica, Energy Public ESAs World Bank support ongoing Public Facilities the fund uses ESAs to finance energy efficiency measures in efficiency • One project under implementation (2016–present) municipal street lighting, buildings (e.g., schools, hospitals), ($3.5 million) and wastewater utilities. During the fund’s initial phase, • Two projects under procurement ($5 million) the government of Mexico provided subsidies to support • One project to be tendered ($0.35 million) investments. • Six projects in preparation Capitalization: IBRD, Mexico Source: World Bank 2005, 2008, 2009, 2010, 2014, 2016, 2018. Note: EERF = energy efficiency revolving fund; ESA = energy service agreement; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation; JICA = Japan International Cooperation Agency; MWh = megawatt-hour; tCO2e = tons of carbon dioxide equivalent; toe = tons of oil equivalent. 9 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s What are the key lessons learned? their strong balance sheets. ESAs, meanwhile, may be best suited to public sector clients. Many clients prefer full-service EERFs that offer EERFs are best suited to unserved markets, and in a turnkey energy efficiency projects. form carefully tailored to the context An EERF’s governance and management structure must offer Experience with EERFs to date has yielded the following key lessons: sufficient incentives for high performance. To be most effective, an Experience shows that An EERF should serve an unserved market. As discussed earlier, EERF is established as an independent organization, governed by a the role and functions EERFs are suitable where there are market failures or in sectors management board comprising both public sector and private sector where commercial financing is otherwise underdeveloped and local members; managed by a well-incentivized fund manager; staffed of an EERF as defined banks perceive high risk. It is important that an EERF not compete with competent, motivated experts with adequate compensation; in its design phase may and operated based on transparent procedures. Offering the EERF with local lenders or lead to a distortion of the financial market by need to change during offering below-market interest rates, which could hinder commercial team an additional bonus for strong results and low defaults can implementation to adapt lending. EERFs and commercial bank financing are not mutually help. At the same time, the institutional design should be simple—the exclusive; when EERFs provide only a portion of the financing, EERF needs to be lean to limit its operational costs and ensure to changing market efforts should be made to coordinate with local banks to streamline financial sustainability. The progress of the EERF’s activities and conditions—for example, applications and approvals, and build the capacity of these banks. their impact should be monitored and evaluated periodically to test when financing or services Starting with one market segment allows the EERF time to build its planning assumptions, fine-tune implementation processes, and from other donors become capabilities. incorporate lessons learned to improve the EERF’s future operations. available or as the private The EERF needs to be flexible to adapt to changing market An EERF should operate based on transparent rules and make conditions. Experience shows that the role and functions of an EERF use of standardization and aggregation to reduce transaction costs. sector starts to develop. as defined in its design phase may need to change during implemen- An EERF should have an operations manual that lays out principles tation to adapt to changing market conditions—for example, when and procedures, including for fund management, project implemen- financing or services from other donors become available or as the tation, and results monitoring. The use of standard documents (e.g., private sector starts to develop. For example, an EERF might be able legal agreements, tender and audit templates) and the bundling of to shift from providing loans to guarantees as the private sector similar, small projects can further reduce transaction costs. develops, or shift from the public to residential sector as public Access to technical assistance and the development of a project financing enters the mainstream. Fee structures should be designed pipeline are crucial. As described earlier, it is important that the EERF to cover costs while remaining affordable. provides technical assistance to build support for both its day-to-day The financial products and services offered should be designed operations and longer-term sustainability. Substantial time and train- for the target market and aimed at lifting prevailing barriers. For ing are often required to build the capacity of service and equipment example, guarantees can mobilize commercial financing and develop providers, in particular when the EERF introduces new financing ESCOs, which may have weak balance sheets, if applied in appro- products and innovative procurement and contract schemes. Given priate markets (where there is adequate liquidity, attractive interest that EERFs are demand driven, early marketing is critical to raise rates, competition, and reasonably mature financial institutions that awareness and build a project pipeline. Experience also shows that are willing to accept some risks). However, guarantees alone cannot due to the innovative financing mechanisms offered by EERFs, clients solve systemic banking or credit problems and do not help com- are often reluctant to move forward before initial successes have mercial banks to extend loans to public sector borrowers that have been achieved. One way to address this issue is to implement one to good repayment records and companies that receive loans based on two projects on a pilot basis to showcase early success. 10 F i n a n c i n g E n e r g y E ffi c ie n c y, P a r t 1 : Re v o l v i n g F u n d s References ———. 2013. Scaling Up Energy Efficiency in Buildings in the Western MAKE FURTHER Associated Renewable. n.d. “Energy Service Agreements.” Balkans. World Bank, Washington, DC. CONNECTIONS ———. 2014. Implementation Completion and Results Report: http://www.associatedrenewable.com/content/ Third Tamil Nadu Urban Development Project. Washington, DC: energy-services-agreement-esa. Live Wire 2014/11. World Bank. World Bank. 2005. Implementation Completion and Results Report: “Designing Credit Lines for ———. 2016. Implementation Completion and Results Report: Second Tamil Nadu Urban Development Project. World Bank, Energy Efficiency,” by Ashok Armenia Energy Efficiency Project. Washington, DC: World Bank. Washington, DC. Sarkar, Jonathan Sinton, and ———. 2018. “Additional Financing for Energy Efficiency in ———. 2008. Financing Energy Efficiency—Lessons from Brazil, Joeri de Wit. Public Facilities Project: Mexico.” Project Paper, World Bank, China, India and Beyond. Washington, DC: World Bank. Washington, DC. Live Wire 2014/25. “Doubling ———. 2009. Implementation Completion and Results Report: the Rate of Improvement of Romania Energy Efficiency Project. Washington, DC: World Bank. Energy Efficiency,” by Jonathan ———. 2010. Implementation Completion and Results Report: Sinton, Ashok Sarkar, Ivan Bulgaria Energy Efficiency Project. Washington, DC: World Bank. Jaques, and Irina Bushueva. Live Wire 2016/53. “Why Energy Efficiency Matters and How to Scale It Up,” by Jas Singh. Live Wire 2016/54. “Fostering the Development of ESCO Markets for Energy Efficiency,” by Kathrin Hofer, Dilip Lemaye, and Jas Singh. Live Wire 2016/55. “Designing Effective National Programs to Improve Industrial Energy Efficiency,” by Feng Liu and Robert Tromop. Live Wire 2017/82. “Exploiting Synergies between Rooftop Solar PV and Energy Efficiency Investments in the Built Environment,” by Pedzi Makumbe. Find these and the entire Live Wire archive at https://openknowledge. worldbank.org/handle/10986/17135. 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