Efficiency is often considered the fifth fuel after coal, hydrocarbons, nuclear and renewable energy. The best part is that it’s not a resource endowment like other fuels, but in fact, available globally and across a wide array of sectors.
Still, according to a recent study: ‘...energy efficiency projects improve energy productivity across the board, delivering economic, social, and environmental benefits while lowering energy use but represented only 14% of International Financial Institutions’ (IFI) energy portfolios from 2012 to 2014 and only 3% of IFI total investment portfolios (ranging from 0 to 9%)’ (Source: CPI).
So why is efficiency still not making headlines like other fuels?
One of the main constraints is a simple lack of awareness about potential energy efficiency opportunities among, surprisingly, both facility/ process owners as well as policy makers. Lack of obvious opportunities acts as a major barrier to growth in local capacity as well as the political will to develop a policy framework that supports uptake of efficiency measures. Furthermore, lack of data availability poses a challenge especially in the monitoring, reporting and verification context and, combined with a size of projects that is not attractive, there aren’t enough incentives for the market to come up with relevant and targeted solutions in this space.
The Clean Technology Fund (CTF), with over U$5 billion in funding resources, has invested over $1 billion split evenly between private and public sectors supporting district heating, end-use, smart grid and efficiency measures through financial intermediaries globally. More than half of these funds have gone to projects in Europe & Central Asia, followed closely by almost one-fifth in Latin America & the Caribbean. The CTF works through partner multilateral development banks (MDBs) operating in both private and public sectors. Over one-third of the funding has been channeled to public sector projects through the World Bank, and around one-fifth to private sector projects through the European Bank for Reconstruction and Development.
In Mexico, the residential sector accounts for around 16% of total energy use, or 3% of direct greenhouse gas emissions thanks, mostly, to the household use of air conditioning, refrigerators and other home appliances, a number of which are second-hand, inefficient units imported from its neighbors. The government, for its part, has demonstrated leadership in improving the sustainability of the country’s housing stock through a number of policy initiatives. CTF funding of $51 million through the Inter-American Development Bank, is financing developers through the Federal Mortgage Society to increase the production and scale-up of low carbon housing, a.k.a. ECOCASA, that uses less energy through a host of measures like better insulation, efficient boilers and refrigerators, solar water heaters, efficient windows etc. Part of the funding is intended to be used as a grant to strengthen efforts on monitoring and evaluation, knowledge management, and technical studies, amongst other things.
In India, there is an increasing demand for primary energy due to rapid economic growth followed by rising levels of urbanization, which makes energy efficiency a critical fifth fuel to support a sustainable future. Most of the opportunities exist in industries, especially micro, small and medium enterprises (MSME), which makes project development challenging due to factors including a lack of capacity, small size, higher transaction costs, and lack of financial credibility. The government has supported the sector through a variety of policy initiatives such as setting energy savings targets in industries, relevant financing instruments and efficient appliances. Building on that, in a first of its kind initiative in the country and possibly globally, CTF funding of $25 million through the World Bank, sought to establish a risk sharing facility that offered partial credit guarantees through the Small Industries Development Bank of India to cover a share of the default risk that financial institutions face in extending loans to eligible sub-projects in the MSME sector. In the process, the project would address the risk perception of such interventions and mobilize commercial financing in order to scale up energy efficiency investments in the country.
In Turkey, the government passed an energy efficiency law almost a decade ago that lays out principles and procedures for the implementation of such measures across generation and utilization processes. It also focused on awareness building and the role of innovative financial structures/instruments to support a sector that still faces a challenging environment due to barriers related to financing, size, and awareness. In this context, CTF funding of $51 million through IFC aims to address some of these barriers by working with commercial banks and leasing companies to on-lend to the SME sector for small-scale interventions, like technology upgrades and co-generation systems. Under another phase, funds will be channeled through financial intermediaries in a holistic program that provides green mortgages and also raises awareness among the prospective home buyers about the benefits of energy efficient housing. Part of the funding will be dedicated to financial intermediary and government awareness raising and capacity building through training programs.
Although the above experiences cover about 10% of CTF funding allocated to energy efficiency projects, they highlight the critical role of an enabling policy framework necessary to facilitate private sector participation, which can assist scale up of investments in the sector. Further, innovation is key, both in technology and financing, to identify targeted interventions and the most effective business models in order to lower transaction costs. Finally, capacity and awareness building through training programs and outreach campaigns must be a critical component of every program to ensure wider dissemination of accumulated skills and knowledge.
The conclusions drawn above are not difficult to discern, even though the principles might be. Well, at least for some. In short, save energy, reduce greenhouse gas emissions, mitigate climate change. Or if you’d prefer: save energy, save money, grow business. Whatever your mantra, there is a clear opportunity to drive the fifth fuel economy, and all stakeholders must take their allotted seats, for now is as good a time as any, and this ride must take off.