Local Financing to Slash Energy
Waste in China, India, Brazil Said Crucial to
Forestalling Global Climate Change
May 30 2006 - With world energy
prices and climate-altering greenhouse gas emissions
ballooning in tandem with a surge in energy demand
from the hot economies of China, India and Brazil,
the world has a major stake in the success of
energy reduction efforts, particularly in those
three countries, warn experts concluding a four-year
international project.
Without significant gains from
energy efficiency efforts, China, India and Brazil
within a single human generation (by 2030) will
more than double their energy use and greenhouse
gas emissions, resulting in major impacts on global
energy markets and climate. However, experts estimate
that cost-effective retrofits could reduce those
countries’ energy use today by at least 25% and
advanced technologies could reduce their energy
use growth projected through 2030 by at least
10% (and reduce projected CO2 emission growth
by 16%).
Unlocking today’s potential
savings requires simple, highly cost-effective
renovation projects to identify and eliminate
energy waste. The keys are fostering corporate
awareness, supporting catalyst energy efficiency
practioners and enlightening commercial banks
to ease access to local financing for such projects.
“Improving energy efficiency
for existing buildings and other infrastructure
could cut current energy consumption by 25% or
more in India, China and Brazil, amounting to
millions of tonnes in reduced greenhouse gas emissions
and hundreds of millions of dollars in energy
savings,” says Robert Taylor, a World Bank Lead
Energy Specialist and leader of the 3 Country
Energy Efficiency Project (3CEE).
Conclusions from the project
were captured at a conference in Paris May 19-20
involving the project’s public and private sector
partners. An executive summary of those conclusions
will be published online May 29.
Despite the huge potential,
it has been difficult to achieve investments on
the ground so far, the project summary concludes.
"Many energy efficiency
projects quickly pay for themselves, with typical
returns on investment of 20 40%," says Chandra
Govindarajalu, a senior World Bank environmental
specialist. “Despite the demonstrated benefits,
though, companies often cite other, more immediate
investment and borrowing priorities. Meanwhile,
commercial banks in these countries are generally
unfamiliar with financing projects designed to
achieve cost savings, rather than develop new
product lines or other tangible assets.”
Other roadblocks within companies include:
• Lack of awareness/experience
with newer efficient technologies;
• High transaction costs for smaller sized projects
that inhibit implementation;
• High perceived risk by decision makers; and
• A lack of combined technical and financial skills
at finance institutions, preventing accurate appraisal
and structuring of potential efficiency projects.
Energy saved: cheapest,
easiest to produce
“Cutting energy waste is the
cheapest, easiest, fastest way to solve many energy
problems, improve the environment and enhance
both energy security and economic development,”
says Mr. Taylor. “What we must develop further
are systems to tap huge potential energy savings
through thousands of small projects scattered
across China, India, Brazil, as well as smaller
developing country economies,”
He says the reluctance of companies
to undertake energy retrofits is akin to that
of countless millions worldwide who fail to buy
energy efficient light bulbs for homes, despite
proof that they save enough in utility bills to
more than pay for themselves.
“Even people who know the financial
and environmental benefits of the bulbs may not
buy and install them – it seems like such a small
thing, why take the trouble? But from a national
or global point of view, the potential savings
add up to the electricity and pollution produced
by many large power plants.
“Imagine, however,” Taylor says,
“if I offered to install the efficient bulbs and
guaranteed they would pay for themselves in six
months or your money refunded. Perhaps then you
might then buy a package.
“Rapidly developing countries
such as China, India and Brazil need many people
and consulting firms to do that same thing at
the level of an industrial facility or apartment
building, for example, to identify energy efficiencies
across the board and exploit large-scale energy
use reduction opportunities, and enlightened banks
to finance them.”
Such retrofits involve installing,
for example, high efficiency lighting, air conditioners,
boilers and waste heat recovery systems for commercial
and public buildings, industrial plants and other
facilities. Project costs (and profits) can be
provided to energy service companies (ESCOs),
which design and implement energy conservation
projects, or participating banks, from a share
of utility bill savings.
"Money is available in
these countries but can't be accessed easily by
energy conservation promoters and ESCOs. This
is a big area for work in the future” says Mark
Radka, Head of the UNEP Energy Branch, based in
Paris. “It takes time and effort for local businesses,
banks, governments and aid organizations to develop
energy conservation delivery systems which work
and which can be supported by the financial community.”
While energy efficiency projects need to be customized
to local circumstances and business practices,
the project makes a host of recommendations, including:
• Foster the growth of ESCOs;
• Promote energy efficiency investments by local
utilities; and
• Develop special local bank lending arrangements
to provide energy conservation financing.
Initiated in 2001, the 3CEE
Project has worked creatively to promote energy
efficiency projects in China, India, Brazil by
easing typical investment requirements of financial
institutions. The project is a joint initiative
of the World Bank, the UN Environment Programme’s
Denmark-based Risoe Centre (URC), and partners
in Brazil, China and India. The UN Foundation
and the World Bank Energy Sector Management Assistance
Program provided financial support, with complementary
activities supported by the Asia Alternative Energy
Program and the UK Department for International
Development.
“People worldwide have a vital
interest in the success of this initiative to
harness the power of the private sector to minimize
the energy required for these three countries
to realize their economic goals,” says Jyoti Painuly,
Senior Energy Planner at the UNEP Risoe Centre
on Energy, Climate and Sustainable Development.
Adds Juan Zak, a project team
member at the UNEP RISOE Centre: “Accelerated
polar ice melting is the latest indication that
severe climate change may be upon us. The current
380 parts per million of carbon dioxide in the
atmosphere seem already too high. Roughly half
of the global consumption of fossil fuels should
be avoided if climate is to be stabilized. Using
energy much more wisely is one of the very few
feasible ways that, combined, would move the world
towards this goal without economic disruption.”
Energy-Related CO2 Emissions
Growth to 2030 (Reference Scenario) Source: IEA
2004
The importance of improving
energy efficiency in China, India and Brazil (with
a combined 2.6 billion people, or almost 40% of
world population) is hard to overestimate.
China, India and Brazil, already
rank among the world’s top 10 energy consumers
with astonishing economic growth rates nearing
10 % per year; they are on track to becoming the
world’s major greenhouse gas emitters. Although
today they emit just 10% as much greenhouse gas
per capita as North America, their national emissions
are rising far faster. China's emissions, for
instance, are expected to double by 2020, in which
case China will surpass the US as the leading
source of climate-altering gases. By one estimate,
the China power market will require an average
48 gigawatts of new capacity every year, equal
to two-thirds of the UK’s total installed capacity.
Global GDP is projected to more
than double by 2030, 80% of that growth accounted
for by non-OECD countries, where current energy
intensity of GDP (expressed as barrels of oil
equivalent—BOE—per $1,000 of GDP) was approximately
three times that of the OECD countries in 2005.
Without gains in energy efficiency, such global
GDP growth would raise daily global energy demand
from 205 million BOE today to more than 500 million
BOE by 2030.
Much of that energy in India
and China will be supplied by coal. China is both
the world’s largest coal consumer and producer.
While coal in China’s overall energy mix is projected
to decline from 66% in 2002 to 41% in 2030, its
total CO2 emissions are still projected to increase
from 3307 Mt to 7144 Mt.
India’s installed capacity for
power generation has tripled over the last 20
years and now exceeds 101,000 MW. However, the
total demand is expected to increase by another
3.5 times in the next two decades, even under
a best-case scenario that envisions intensified
efforts to modernize power plants, improve transmission
and distribution efficiency, and adopt more efficient
generation technologies. The soaring power demand
will necessitate tripling installed generation
capacity from 101,000 to 292,000 MW over the next
two decades, much of it derived from poor quality
coal. Similar demand increases are forecast for
all fuels, and CO2 emissions are projected to
increase from 1016 Mt to 2254 Mt by 2030.
The 3CEE report notes that improvements
in energy efficiency will bring China, India and
other coal-dependent countries the important additional
benefits of cleaner air, better health and other
environmental improvements.
Brazil is the world’s 10th largest
energy consumer, yet its fossil fuel CO¬2
intensity per unit of energy consumed is low due
to widespread use of renewable energy from hydro
electricity, ethanol and other biomass. However,
Brazil's overall energy intensity (measured as
energy consumption per dollar of GDP) has been
increasing. Fossil fuel intensity increased 18%
between 11000 and 2004, while electricity increased
by 29%. Brazil’s economic growth has been much
slower than India’s or China’s over the past decade
and projections are also much lower, hence projected
energy supply increases are less dramatic – electricity
consumption would increase 65% (244 trillion kw/h)
by 2015, assuming annual GDP growth of 4%. The
International Energy Agency projects an increase
in Brazil CO2 emissions of 302 Mt to 665 Mt by
2030.
“Energy efficiency in these
three countries is a win-win strategy. It is one
of the cleanest, cheapest and fastest ways to
reduce carbon emissions,” says Timothy E. Wirth,
President of the UN Foundation (www.UNFoundation.org),
which provided the project’s core funding.
ESCOs Gain Traction
in China
Three pilot ESCOs in China were
given support and access to loans and grants from
the World Bank and the Global Environment Facility
in 1998. Their success inspired many more companies
to copy the business model. In 2005 alone China’s
new ESCO industry put into place over 300 energy
efficiency projects representing an investment
of over US $200 million, saving the energy equivalent
of 2.46 million tonnes of standard coal and an
annual decrease in CO2 emissions of nearly 7.0
million tonnes.
“We were told many times this
would never work in China because the concept
was too novel,” says Mr. Taylor. “However, Chinese
entrepreneurs have proved very nimble in adapting
the concepts to the Chinese market to both make
profits and save energy.”
The World Bank and the Global
Environment Facility set up a bank loan guarantee
mechanism to help ESCOs (there are now 52 of them
and an ESCO association in China) finance for
these unique ventures. It also invested efforts
in training ESCOs, educating potential clients,
showing senior bank officials how to evaluate
ESCOs; and working with state tax officials and
auditors.
“We were creating a new way
of doing things and it could have easily died
if not for the strong support of the central Chinese
government,” says Mr. Taylor.
The 3 CEE project now has moved
on to help China develop lending programs in a
local banks for large-scale energy efficiency
projects, to be financed in part by a $200 million
World Bank loan.
China has called for a "conservation
society" and its commitment to a further
20% improvement in energy intensity over 2005
levels by 2010 and the project initiatives fit
well with that objective. The topic of energy
efficiency is now granted special attention (along
with “energy development”) in all of China’s energy-related
planning. The project report highlights potential
savings as well in the industrial, construction
and transportation sectors.
“Our hope is that we can generate
some successes in new energy efficiency delivery
systems in these three countries, which can work
by themselves to generate big energy savings over
the coming decade,” says Mr. Taylor.
Hopefully other countries will
see that success and create a similar programs
to meet their needs and apply it to other natural
resource areas such as water where inefficiencies
are equally high he says.
New Approaches for Energy
Efficiency in Indian Banks
India’s potential energy efficiency
market is estimated at more than US $3.1 billion,
which would produce a savings of 54 terawatt hours
per year. To help realize this impressive potential,
the Indian Government established a Bureau of
Energy Efficiency (BEE) under its Energy Conservation
Act to institutionalize energy efficiency services,
enable delivery mechanisms in the country and
provide leadership to key players in the energy
conservation movement. A variety of commercial
interests are beginning to pick up the energy
efficiency business, but more support and financial
backing is required.
Introduced to the energy efficiency
business through the 3CEE Project, five of India’s
largest banks –
holding 35% of the country’s total bank assets
– have developed new energy efficiency lending
programs. Though small, the programs are growing
and attracting increasing attention. Indian banks
have targeted small and medium enterprises (SMEs),
where energy waste is often particularly high,
but knowledge about more efficient options and
the financing to implement them is scarce.
“The Indian banks developed
a particularly innovative ‘cluster’ approach for
their energy efficiency lending businesses, “
says Jeremy Levin, a World Bank consultant and
project team member. “A series of template-type
loans are being developed quickly for batches
of projects using the same types of technical
innovationss in targeted small industries.”
The banks have slotted energy
efficiency lending schemes into existing SME lending
practices. Bank managers point out that the program
helps improve cost competitiveness and profitability
of SME clients, which can lead to further client
growth and bank lending opportunities.
The 3CEE project organized several
meetings between Indian, Chinese and Brazilian
ESCOs, to exchange ideas, business strategies
and ways to help each other. Benefiting from the
experiences of ESCOs in China and Brazil, India’s
young ESCO companies are creating an association
to increase awareness of their business and its
potential.
“There is much work to be done
before the ESCO concept is widely accepted and
practiced in India,” says Levin. “One promising
idea to help drive the market in India is to develop
ESCOs specialized in reducing energy waste in
government buildings, including hospitals and
schools.”
Energy Efficiency in
Brazil
Brazil’s annual untapped energy
savings potential is estimated at US$ 2.25 billion
and many projects would enjoy an average payback
of less than 30 months.
Brazil’s ESCO industry is the oldest among the
three countries, with a vibrant national ESCO
association (ABESCO).
It is also among the few developing
countries to have established a “wire charge,”
which streams a small portion of power companies’
revenues into energy conservation and other public
energy benefits.
The utilities spend 0.25% of annual revenues on
energy saving projects in customer facilities
and general conservation education efforts. The
wire charge fund provided about $250 million to
efficiency initiatives between 1998 and 2004 and
many utilities work with ESCOs to fulfill these
requirements, helping the ESCO industry grow.
The 3 EEC project has worked
with the energy efficiency and banking communities,
to develop new ideas to ease and accelerate the
financing of energy efficiency projects.
Via workshops, training and
other initiatives, including an international
roundtable on energy efficiency financing in Rio
de Janeiro April 2, attracting scores of banking,
energy efficiency and government experts, the
3CEE project helped clarify roadblocks to progress
and potential solutions.
At the Paris meeting, the Brazilian
Development Bank (BDNES) announced a new guarantee
program to assist ESCOs and accept 80% of loan
risks on accepted energy reduction projects.
“Mutual understanding of the
requirements and opportunities of each agent in
the market had been minimal prior to the 3CEE
project,” says Mr. Taylor. “The project put forward
several proposals for Brazil, the most important
of these being the proposed loan guarantee mechanism
for EE initiatives and the Brazilian Development
Bank has earned sincere congratulations for having
accepted the challenge.”
