Money Matters

Money Matters: Mitigating Risk to Spark Private Investments in Energy Efficiency

Executive Summary

This information paper, prepared for the Energy Efficiency Working Party, explores the challenges and opportunities in financing energy efficiency (EE) projects. It highlights the need to mitigate risks to attract private investments in this sector.

Introduction

Energy efficiency offers significant advantages, including reduced energy costs and environmental benefits. However, implementation faces several barriers, such as financial constraints and project risks. The paper discusses these issues and presents existing mechanisms to overcome them.

SECTION 1: Why is financing energy efficiency a challenge? A missed market opportunity

• Financial Barriers: High upfront costs and uncertain returns deter private investment.
• Traditional Financial Solutions: Conventional lending and financing methods are often insufficient.
• Project Risks: EE projects carry unique risks, such as technological uncertainty and regulatory changes.
• Local Administrative and Financial Structures: Local systems in countries like China and India pose additional challenges.
• Energy Efficiency Investment Gap: Significant funding gaps exist, hindering widespread adoption.

SECTION 2: Existing national and international mechanisms

• Case Study 1 - Contingency Financing: The IFC CHUEE program in China provides risk mitigation through contingency financing.
• Case Study 2 - Training and Capacity Programs: Cluster financing in India helps build capacity and reduce risk.
• Case Study 3 - Public/Private Partnerships: The Thailand revolving fund exemplifies successful public-private partnerships.
• Case Study 4 - International Mechanisms: The Clean Development Mechanism (CDM) and its lessons for EE financing are discussed.

SECTION 3: Policy Discussion and Recommendations

• Role of the Private Sector: Creative financing can seize business opportunities.
• Role of Governments: Governments play a crucial role in creating enabling environments.
• Summary and Way Forward: Recommendations focus on addressing financing challenges and improving timing in EE investments.

Conclusion

While financing EE remains challenging, various mechanisms and policy actions can help mitigate risks and attract private investments. The importance of timely and strategic interventions cannot be overstated.

References

• [List of references]

Annexes

• Annex A: Methodology for collecting public data.
• Annex B: Establishing public/private partnerships: ESCO market development in China and India.
• Annex C: Questionnaire sent to banks and participating institutions.

Figures, Tables, and Boxes

• Figure 1: Barriers preventing higher energy efficiency implementation.
• Figure 2: Risk associated with EE projects vs. wind projects.
• Figure 3: India and China final energy consumption by sector – 2008.
• Figure 4: Total final consumption by fuel by sector for India.
• Figure 5: Energy Efficiency commitments by WB, ADB, EBRD and IADB 2000/2009.
• Figure 6: New investment worldwide by financing type efficiency and power storage.
• Figure 7: New VC/PE investment worldwide by sector efficiency and power storage.
• Figure 8: Factors contributing to high risk perception and tools to help address the issue.
• Figure 9: The organization of an IFC/GEF guarantee programme.