Speeches Shim
Financing for energy efficiency is facilitated by a diverse set of institutions, including multilateral development banks, donor agencies, government stakeholders, private sector banks, pension funds, and financial intermediaries.
Mobilizing finances to cover up-front costs represents a major barrier to developing and implementing energy efficiency programs.
Among the various institutions that have stepped in to facilitate financing for energy efficiency programs are international development banks, international donors, central and regional governments,and energy service companies (ESCOs). In addition, private banks and funds have become increasingly interested in funding energy efficiency projects.
These financiers use a range of strategies for project financing. For example, Energy Efficiency Services Limited (EESL), a state-promoted ESCO in India, is using an “on-bill” financing strategy to implement its Domestic Efficient Lighting Programme; consumers repay funds over time via their recurring utility bill. Other financing strategies include property tax financing (also known as Property Assessed Clean Energy or PACE bond financing) and energy service performance contracting (ESPC).
Learn more below about the primary actors in the energy finance field and the types of mechanisms they use.
International
Development Banks
Development banks can be public or private entities and are often funded by one or more governments. They are typically national or regional financial institutions that allocate medium- or long-term funding for projects that promote development objectives. Where governments may not have the resources or expertise to invest in and implement sustainable development projects, development banks can assist.
Nongovernmental Organizations (NGOs)
NGOs that are highly specialized or very knowledgeable of local conditions can serve as financing facilitators, connecting international donors and government ministries with other local stakeholders.
Example: NGO
SouthSouthNorth – This South Africa-based NGO seeks to mitigate the effects of climate change through sustainable development. SouthSouthNorth used its experience to support the launch of a pilot project to improve housing. The Kuyasa project brought an annual energy reduction of 7.4 million kWh (34 percent) to Cape Town, South Africa, while also adding jobs for 87 residents.
International Donors and Funding Mechanisms
Mission-driven international entities and agreements can create programs that support energy efficiency specifically or, more generally, climate change mitigation and sustainable development efforts.
International donors can act as guarantors, assisting local financial institutions by sharing risks for energy efficiency investments. They can also build capacity in the private sector around energy efficiency financing. International agreements may designate financing channels sought by local borrowers who hope to implement energy efficiency initiatives.
Examples: International Donors and Mechanisms
United States Agency for Development (USAID) Development Credit Authority (DCA) – USAID DCA serves as guarantor, sharing risks to leverage local private capital for development. USAID has facilitated over $3.7 billion in private financing since 1999. DCA can be an influential channel to convey the importance and value of energy efficiency investments to local banks.
UNFCCC Green Climate Fund (GCF) – GCF is a funding mechanism that is part of the UNFCCC framework to promote sustainable development in developing countries. Another goal is to redistribute funding from developed countries to developing countries through the issuance of grants and loans.
Clean Development Mechanism (CDM) – CDM is a flexibility mechanism as defined in the Kyoto Protocol. It recognizes emissions reduction projects that generate Certified Emission Reduction (CER) units (carbon offset credits). The credits can then be traded with Annex I countries (i.e., industrialized or transitioning) to help developed countries meet their emissions reduction targets.
Government
Ministries
Government ministries can operate under legislative authority to design and implement energy efficiency programs and initiatives. They can create incentives for first-movers adopting emerging technologies, launch education and awareness programs, and work with key stakeholders, such as utilities, to meet national goals.
Examples: Governments
India Ministry of Power, Bureau of Energy Efficiency (BEE) – BEE is tasked with implementing policies and programs to transition the Indian economy to more energy efficiency in all energy-consuming sectors. One such initiative, the Partial Risk Guarantee Fund, gives commercial banks partial coverage for risk exposure and promotes financing for energy efficiency.
Thailand Department of Alternative Energy Development and Efficiency – Energy Efficiency Revolving Fund – This fund stimulates financial sector involvement in energy efficiency projects. It creates dedicated credit lines (provided to Thai banks on a full-recourse basis with zero interest) and simplifies project evaluation and financing procedures.
Municipalities
Cities can either receive or fund energy efficiency investments, bridging the gap between national government objectives and community-level implementation. In a working paper on financing green urban infrastructure, the Organisation for Economic Co-operation and Development (OECD) posited that cities are key investors in green infrastructure because they can collect revenue from taxes on property, transit, waste, etc., and then use the proceeds to green these same sectors.
Example: Municipality
City of Cape Town – The city of Cape Town, South Africa, collaborated with the NGO SouthSouthNorth and the residents of a low-income housing estate to register a residential retrofit program as a Clean Development Mechanism (CDM). This effort resulted in opportunities to trade Certified Emission Reduction (CER) units and increased energy efficiency in the region where the Kuyasa pilot program took place.
Private
Commercial Banks
As traditional lenders, banks assess risks, weigh those risks against revenue and profit potential, and then decide accordingly whether to lend capital. Across the globe, commercial bank managers often do not understand or appreciate the value added by energy efficiency projects. Even in the U.S., pioneering programs to de-risk loans for energy efficiency, such as the Connecticut Green Bank Smart-E Loan, are not widespread. However, banks can be sources of energy efficiency project financing when accessed through existing funding mechanisms such as those involving the European Bank for Reconstruction and Development’s Sustainable Energy Financing Facilities.
Example: Commercial Banks.
Oikocredit (Ukraine) - USAID's Development Credit Authority (DCA) program, discussed above, is being used to help small businesses access the type of financing needed to implement efficiency. Oikocredit received a US $4 million Loan Portfolio Guarantee to support SMEs in the agricultural sector, generally, to improve their operations.
Pension Funds
Pension funds, like other institutional investors, are specialized investors that can be leveraged to invest in green infrastructure initiatives. Pension funds often invest in real estate and other energy-using asset portfolios as long-term holdings. In some cases, they are chartered to focus on specific sectors and needs. It is in their interest to invest in energy efficiency as an asset performance measure as well as a sustainability initiative.
Example: Pension Fund
Public Service Pensions Fund (Tanzania) – This organization is a major real estate investor responsible for constructing office buildings and residential apartments for medium- and low-income tenants.
Energy Service Companies (ESCOs)
ESCOs specialize in developing and implementing energy efficiency projects. They finance the project costs, and customers pay them back over time using their energy cost savings. ESCOs set up energy savings performance contracting based on their savings projections for a project. ESCOs typically take on the majority of the risk, and if their savings projections are not realized, they may take a loss in revenue.
Examples: ESCOs
Energy Efficiency Services Ltd. (India) – This ESCO is a joint venture run by state-owned power companies. It is best known for supporting the implementation of the Domestic Efficient Lighting Programme.
Johnson Controls Inc. (JCI) – JCI is a U.S.-based engineering company providing energy-efficient technologies for building envelopes (e.g., roof, siding, windows). JCI also assesses energy savings potential before and after energy efficiency projects are implemented.
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