Financing Mechanisms & Role of Banks in promoting uptake of EE Appliances IDLC Finance Limited 10th October 2022 Envisaged Outcomes of The World Bank Study in Bangladesh Supporting Building EE & Environment rating (BEEER) System through large scale implementation of appliance MEPS and EE labelling program in Bangladesh Larger uptake of EE appliances 01 S&L Program Increase private Strengthened These shall investments in EE 02 result into long term benefits Immediate Reduced energy demand and Outcome attain energy security 03 Implementation models Recommended for Capacities of Stakeholders uptake of EE appliance Enhanced Meeting NDC commitments 04 January 2022 2 Purpose of the Training The objective of this training is to make you : 1. Understand need of Energy Efficiency 2. Barriers to uptake of energy efficient appliances in Bangladesh 3. Familiarize different business models to promote uptake of energy efficient appliances in Bangladesh Agenda Let’s get started Introduction to Energy Efficiency Opportunities & Challenges of Appliance Energy Efficiency Barriers to Increased Uptake of EE Appliances Policy Framework to address Typical Barriers What is EE Financing Model Various EE Financing Models with Case Studies – Energy Savings Insurance, Dealer Financing, Green On-Wage Financing, Energy Efficiency Revolving Fund 4 Introduction to Energy Efficiency What is Energy Efficiency Energy efficiency simply means using less energy to perform the same task – that is, eliminating energy waste Energy Efficiency is using less energy to provide the same service It involves delivering equal or greater levels of energy output or service with less energy supply Act as an enabling provision for meeting any future obligation Energy is related to green consumed financing in / energy cooling, efficiency heating, financing lighting, motor operation, operating equipment and appliances, etc. Energy Efficiency is not Energy Conservation which is reducing or going without a service to save energy All devices, equipment, energy services that consume energy waste energy, so no energy consuming process is perfectly efficient The more efficient a device is, the less energy is wasted For Example: Turning off a light is energy conservation. Replacing a ‘Compact Fluorescent Lamp’ with ‘LED Lamp’ which uses less energy to produce the same amount of light is energy efficiency. 6 Energy Efficiency is Attracting Investments Globally Annual Global Investments in Energy Efficiency by Sectors, IEA (2015-21), Billion USD Energy Efficient 350 and Decarbonizing 300 Investments in Billion USD Technologies 37.4 250 36.9 37.6 37.4 35.3 34.9 36 64.4 200 87.4 71.1 52.3 Industry 73.4 74.5 76.2 150 Transport Building 100 193 Energy Financing 157.6 157.2 162 179 141.9 155.2 Efficiency mechanisms 50 Policies and and Business Regulations Models 0 2015 2016 2017 2018 2019 2020 2021 EE Policies / Regulations and Financing Investments in Energy Efficiency are growing at a CAGR of ~3.1 % annually Mechanisms are two critical enablers for 2015-21. EE investment share by sectors globally – 65% Buildings, 21% Clean Energy & Energy Efficiency Transport, 12% Industry in 2021, IEA investments in Developing Economies ~ USD 1 Trillion Estimated annual investments in the Energy Efficiency by 2030 in order to be on track for Net Zero, IEA Climate Investments in Bangladesh IFC estimates total climate-smart investment potential in Bangladesh to be approximately USD 172 billion between 2018-2030 mainly in green buildings, transport, RE, agri, waste management, agriculture and urban water 2011 2016 2016 Sectors of Green Bond Financing 2011 Environment Green Lending GTF introduced Green Banking Management Requirements – 200 million Initiative Risk Guidelines • Low Carbon Electricity, heating & cooling mandated for refinancing launched by BB for Banks Banks and FIs scheme • Green Establishment and built environment • Energy & resource efficiency in industry Annual Reports by Bangladesh Bank indicate that sustainable financing is gaining pace in Bangladesh. As per BB circular in Jan 2021, all banks • Low carbon transportation have to lend 15% for sustainable financing annually. Reporting on sustainable financing by banks happens on a quarterly basis. • Circular economy, wastewater and water management Since introduction of Green Lending Requirements in 2016, green lending by banks and FIs has increased from BDT 30 billion per year to BDT 100 • Agriculture & Land use billion per year since 2018. However, the industrial sector has received • Climate resilience and Climate Change bulk of lending in comparison to building sector. Adaptation Measures Bangladesh Bank has issued guidelines for rolling out green bonds in • Services associated with low carbon, climate September 2022. Lenders and firms will now be able to raise funds by resilience and Green Economy issuing green bonds in market to implement projects on CC Mitigation and Adaptation including resource efficiency. Investment Potential in Building EE Technologies in Bangladesh Equipment / Market Size Annual Sales Annual Investments Annual Investments in Energy Efficiency, Million Appliance per Annum in Million in EE @ 30% of USD @ 30% of Market Size Category (2019)* USD Market Size, Million Chillers USD 4% Refrigerators Chillers 91,000 TR 111.93 33.58 57% Split ACs (excluding Split ACs 650,000 units 377 113.1 VRFs) 13% LED Lights 64 million units 256 38.4 LED Lights Ceiling Fans 5 million units 610 183 Ceiling Fans 4% 22% Refrigerators 3.2 million units 1600 480 *The market size data is referenced from report by GIZ on “Energy Efficiency in Public Buildings in Total Investments of ~ 848 Million USD per Bangladesh – Assessment of Best Available Technologies published in 2021. Annual Sales are computed by considering pricing per unit or per TR of cooling appliance as per expert judgement to evaluate annual sales. annum in energy efficiency across just 5 Technology categories Description Chillers Split ACs Solar PVs Low e-glass Investment (Incremental), USD 500 per TR 120 per TR 3472 for 5kWp 33.11 per sq-m Baseline 5502 kWh 2158 kWh/yr NA 277 kWh/m2/yr BAT 1620 kWh 1014 kWh/yr 7500 kWh/yr 263 kWh/m2/yr *The calculations for savings and pay-back period consider reasonable assumptions % Savings / yr. 70% 53% NA 5% for Bangladesh as per expert judgement. Analysis is done by project team. Annual Cost Savings @0.05 USD 337 USD 58 USD 525 USD 19.39 USD (R) and 0.087 USD (C) per kWh Pay Back < 2 years ~ 2 years < 7 years ~ 8 years Opportunities & Challenges - Energy Efficiency Challenges Opportunities Small Projects – High High Upfront cost in Monetary savings transaction cost Energy Efficiency Energy Savings from Utility Bills Lack of Awareness and Trust on EE benefits EE Compete with other among stakeholders investment priorities including financiers Creation of new Clean Environment Business Models Lack of Robust Policies Lack of Technical & Implementation Capacity Economic & Social Benefits Associated with Energy Efficiency Framework To Address Typical Barriers to Energy Efficiency Outcome Typical Barriers to Energy Efficiency A stronger and Resilient National Framework for Energy Efficiency is Established Policy Barrier a. Lack of policy and mandates on EE b. Inconsistent standards and technical codes c. Government’s low priority for EE investments Enabling Environment for energy Energy Performance is Measured, efficiency is created Verified & Reported across sectors Output Financial Barrier a. State budget constraints Rating of ESCOs, Energy Pilot Demonstrations b. Limited access to affordable finance Enforcement of Codes Auditors, Vehicle Labels, (Public / Private c. Lack of private sector investment and Regulations d. Lack of EE financing mechanisms Building Labelling, etc Sector) and implementation models Capacity Barrier Voluntary and Mandatory EE a. Weak stakeholder capacity on EE Energy Codes, Tailored Innovative Programs – For Industry, Building b. Less demonstration cases on EE Acts, Rules, etc Financing Programs Output Pathway and Transport Sectors Building Human Awareness Raising Mobilization of Funding for In order to overcome these barriers, there is a need for innovative financing mechanisms tailored to the needs Capital and Sensitization Energy Efficiency of Bangladesh including the following:  M&V Protocols Establish Governance and Coordination Mechanisms (Institutional  Risk Mitigation Instruments Arrangements) at Sub-National and National Level  Longer loan terms  Technical and financial assistance from IDAs including Conduct Country Specific Market Assessment for key Energy Consuming concessional lending Sectors, Assess Gaps, Barriers and Potential Opportunities Financing Mechanisms to increase uptake of Energy Efficiency in Buildings What is an EE Financing Model? An EE financing model is a mechanism that connects sources of capital with financiers and suppliers who then enable the process of supply of energy efficient solutions to end users which are generally coupled with risk mitigation instruments. Concessional Sources of Capital Benefits for Bank/Financiers: Donors – international funds and  Profitability Capital and Technical governments, multilateral, bilateral Technical Assistance Assistance development banks  Creditworthiness  Competitiveness  Meet required ESG targets and expanding green Suppliers Financiers Capital Technology Providers, Retailers, OEMs, portfolio Local banks, leasing companies, Technology installers, Vendors, microfinance institutions, etc  Public Relations Importers, etc. Benefits for Borrowers:  Overcome barriers to accessing funds Energy Efficiency Capital Target Market Solutions & Technical  Energy Cost Savings and Residential Consumers, SMEs, Industry, Support improved efficiencies Corporates, etc  Reduce perceived risk-return tradeoff perception Building Blocks of EE Financing Model Monitoring and Verification (M&V) Type of Financing Risk Mitigation Measures Mechanism • Can be debt, equity or grant. • Monitoring and verification • Risk mitigation instruments help • In debt financing, borrower repays the mechanisms must be established borrowers to access financing by principal and interest to lender based before rolling out of the program. mitigating and transferring risks from on an agreed schedule. • This ensures that the performance of project sponsors to third parties. • In equity financing, the end-user buys the program is in line with the targets • Ensures wider participation from and owns a stake in the company set or expected outcomes. borrowers as risk is lowered. receiving funding. • Monitoring helps to address risks in a • Insurance coverage may be taken to • In grant financing, a non-repayable timely manner and improve efficiency mitigate risks. fund is contributed by government or of the program. IDAs for specific purpose. Credit Guarantee List of Energy Efficient Third Party Validator Technical Assistance Component Products • Credit guarantees may be • In most models, there is a • A third-party validator may • Technical assistance may provided by IDAs to reduce need for a list of energy be hired by IDAs to perform be provided by International risk and improve technical efficient products which are due diligence of the project Development Agencies and financial confidence eligible programs. outcomes and establish (IDAs) to build capacity of amongst financial • These products may be necessary financing terms. all stakeholders involved. institutions on energy decided by a competent • They are required mainly for • This helps to inform efficiency projects as it agency based on existing large EE projects where the stakeholders how to design leads to absorption of a MEPS/labelling standards capital expenditure is high. and run the program. portion of lender’s losses on or a detailed market loans in case of a default. assessment. EE Business Models While there are several different business models being implemented in different countries, some of which are mentioned below, we have highlighted only 4 of these in detail in the following slides: On-bill Financing Energy Service Performance Contracts Dealer/Vendor/Retailer Financing Demand Aggregation Green On-Wage Financing Energy Efficiency Revolving Fund Equipment-as-a-service Energy Service Insurance Credit lines/Incentives/Subsidies from Government or IDAs EE Business Models Covered Dealer/Vendor/Retailer Energy Efficiency Energy Savings On-bill Financing Financing Revolving Fund Performance Contracting Rationale behind Selecting the Business Models Models that seem comparatively relevant to the context of Building Energy Efficiency in Bangladesh and that require participation from FIs in its operationalization and overall development have been covered as part of this webinar. Dealer/Vendor/Retailer Financing Dealer/Vendor/Retailer Financing Components Description about the Model: Dealer Financing is a credit-based model where empaneled FIs finance for EE appliance procurement via authorized dealers which Pre-approved Empaneled Government as Eligibility criteria makes it affordable to procure EE appliances through easy Dealer/Vendor/ Financial Nodal Agency to for borrower Retailer List Institution implement repayment terms and by having concessional loan access. Key Features: • Authorized dealers facilitates a loan application for end users Credit Guarantee (Optional) with designated lenders (such as banks / financial institutions). Concessional Loan • Lenders assess the credit profile of the consumer and offer Co-Finance Government finance for the purchase of the energy efficient equipment. (Optional), IDAs (Nodal Agency for EE) • Post loan application process, the bank or financial institution Repayment pays the entire amount of the appliance, and all future repayments are made by the customer to the bank. Monthly Sales Concessional Supporting mechanisms: Report Loan • TA to implementing agency for empaneling financial institution Loan for the implementation of this model and set up M&V framework. Empaneled Financial • List of Approved EE Appliances / Equipment, sustainable Institution or Institutions technologies, and technology providers pre-approved for lending Monthly Payment by financial institutions Upfront Payment • Credit guarantees may be provided by IDAs which are designed to reduce risk in short and long-run and improve technical and financial confidence amongst financial institutions on energy EE Equipment Authorized Dealers for efficiency projects as it leads to absorption of a portion of Approved List of EE lender’s losses on loans in case of a default. Equipment Dealer/Vendor/Retailer Financing • There is a need for a robust risk mitigation mechanism in place to handle payment • Reduces the burden of high upfront cost of default from end-users (credit guarantees). EE appliances. • The list of EE appliances might require • Provides an easy access to finance to end- revision as per MEPS updates. users to encourage them to opt for more energy efficient appliances. • Requires strong policy & regulatory framework to ensure only high EE • Since the dealer facilitates loan application, appliances are covered under the model. it enables a wider end-consumer reach. Opportunities Limitation Key steps for successful implementation of Dealer/Vendor/Retailer Financing in Bangladesh: As a 1st Step an updated Preparation of list of EE Empanelment of FIs and Defining the MRV for S&L or EE benchmarking appliances by competent vendors/retailers by EE program followed with of appliances / agency nodal agency program roll out technologies is needed Dealer/Vendor/Retailer Financing Role of Key Actors in Dealer/Vendor/Retailer Financing Key Actor Role Responsibility  Technical Assistance to support bank and EE nodal agency to setup EE financing facility and International Development conduct due diligence of vendors, FIs to be empanelled as part of the EE appliance loan offering Agencies (IDAs) such as Technical Assistance & Co- (TA for Financial Programme Development and Implementation and establishing M&V protocols) World Bank, ADB, UNDP, Financing  Concessional loan or grant to the Implementing Agency and Executing agencies to initiate the GGGI etc. program in Bangladesh and expand the reach of the program  Credit guarantee may be offered by the IDA to mitigate the risks  Empanelment of FIs & Vendors Nodal Agency of the program (Typically nodal  Develop and maintain list of EE appliances to be financed through the programme and informing agency for Energy Efficiency Implementation Agency the Executing Agencies of the same in the country or the Finance  Develop M&V framework and conduct M&V of the programme Ministry)  Create platform for disseminating information on financial programme amongst retail consumers  Responsible for operation of financial programme for EE appliances including due diligence of Financial Institution or loan applications Institutions (Empaneled FIs Intermediary Banks & Executing  Provide information related to M&V for reporting to nodal agency as per the established – IDCOL, BIFFL, other Agency / Agencies procedures private banks, non-banking FIs)  Maintain records of Loans disbursed and EE appliances purchased and report the same to nodal agency from time to time.  Maintain approved list of EE appliances by coordinating with LFIs from time to time Approved EE Vendors Suppliers of EE Equipment  Facilitate consumers for filing loan application with FIs  Responsible for the overall supply and installation of the EE appliances Dealer/Vendor/Retailer Financing – Case Study Dealer Financing in Maldives Business Model Type: Dealer Financing with list-based GEF Grant (USD Central Government Financing scheme 775,000) Credit Guarantee Objective: Facility Transfer of grant to In 2022, the Ministry of Environment, Climate Change and Technology signed an agreement with Maldives Islamic Bank to Managing Entity provide a list-based financing scheme for Hakathari appliances to encourage buyers to go for more energy efficient appliances. Nodal Agency (Ministry of Environment, Climate Applicability: 3-, 4- and 5-star appliances Change and Technology) Pre-approved Vendor: Dealers/Vendors of Hakathari Appliances Funds Repayment Key Features: Loan disbursed to  This provides end-users access to 3-, 4- and 5-star Vendor as an up-front Hakathari appliances at affordable rates based on a list of payment items listed under the program. Maldives Islamic Dealers / Vendors of  A list of appliances of the pre-approved vendor are Bank Hakathari appliances selected for this program by the Nodal Agency.  The Ministry of Environment, Climate Change and Quotation and Loan request Technology handles the fund received from the central Loan Application government. followed by Facilitation Purchase instalment payment  Under this model, Hakathari appliances can be purchased Request (EMI) upon approval through a loan from Maldives Islamic Bank at an interest End-User rate of 10% p.a. Dealer Financing Variation - Green On-Wage Financing Green On-Wage Components Description about the Model: Green On-Wage Financing is a consumer finance product offered to Technology Financial Employer as the Employees salaried employees of public and private institutions to help them Provider Institution Guarantor meet their energy efficient needs with simple and flexible repayment terms. Employer acts as a guarantor. Key Features: • In this business model, the employer becomes the guarantor for the employee to obtain financial support from financial Funds institutions and the repayments are done based on regular Government Financier/ IDA salary deductions. • Financial Institutions and technology providers enter into Repayment consumer finance agreements and set up credit facilities. Both parties agree on the rebate scheme based on a minimum Funds Repayment percentage of the selling price of selected items which the technology provider sells. Payment Partner Financial • The repayment is flexible and can be done in various ways. For Institution employers who hold accounts with the FIs can make salary deductions for each employee on a monthly basis to repay the FI, while those employees who do not have an account with the Guarantor for end-user FI, can make direct payments through salary deductions. Monthly Supporting Mechanisms: Repayment from Employer • Financial support can be provided by IDAs or government in the salary deductions form of concessional loan, credit line or grant. EE Equipment • It can also be complemented by on-bill financing where the Partner Technology repayment can be done through the borrower's utility bills. End-user Provider Green On-Wage Financing – Case Study On-Wage Financing Program in Ghana Project Partners Business Model Type: On-wage Financing programme + Concessional loan (UNEP U4E and facility from climate fund and government resources BASE) Applicability: Refrigerators & Air Conditioners Funding & Technical Assistance Objective: Ghana’s Energy Funding Funding The programme aims at mobilizing at least USD 11 million by 2023 through Commission and Fund Kigali Cooling local financial institution to support purchase of over 15,000 efficient cooling Environmental Efficiency Program appliance and enable replacement of old existing appliance. Protection Agency Partner Banks: CalBank Plc, Ecobank Ghana Limited, Letshego Ghana Savings and Loans Plc Zero cost capital Partner Vendors: Ederick Limited, Electroland Ghana Limited, Hisense, Nesstra Ghana Limited and Services Merchandize Limited 3. Payment Features: Partner Local Financial Institution • ECOFRIDGES initiative is funded by the contributions from local government and Kigali Cooling Efficiency Program. • Salaried consumers are eligible to participate in the programme. Further Monthly payment of zero 2. Apply for the eligible consumers can either avail loans from partnered local interest loan from borrower’s Loan financial institutions or pay in cash to the technology provider for the wage 1. Loan Documents appliance. • Local financial institutions act as facilitator to disburse zero cost loans Partner Technology upon submission of loan application by the eligible consumer. End-users Provider • The typical ticket size of the loan is USD 500-1500 with tenure periods between 3 to 18 months. 4. Appliance Energy Efficiency Revolving Fund EERF Components Description about the Model: Revolving loan fund operate in a similar manner to commercial loans but are typically managed by a Participating EE Service Government as Revolving Fund government-backed entity, a community group or an NGO, Financial Provider Nodal Agency from IDAs Institution rather than by a financial institution such as a bank. However, a financial institution could be empaneled by the government entity to manage the operations of the fund. Key Features: EE Loan Borrower • Through a fixed pool of capital, funds are provided to customers for energy efficiency projects and then repaid with lower interest back to the fund. Repayment at lower Loan interest rates • The replenished money could be re-lent to new customers. Participating Participating Supporting Mechanisms: Financial Institution Financial Institution 1 ‘n’ • ESCOs can act as an intermediary in revolving funds where the ESCO can aggregate the EE requirements into a bucket to increase the ticket size thus increasing Credit accessibility to the funds. This can benefit smaller Lines to Repayment projects which are not eligible for several large loans. banks at very low interest rates Due to their technical expertise, they can support the implementation of EE projects. Govt. Entity or Revolving Fund Development • Financial support can be provided by IDAs in the form of Central Bank for Institution Funds/ credit line, grant or concessional loan at very low Fund Managing Funds Concessional interest rates to implementing FIs via central bank. Loan/Grant/Co- • Credit guarantee can act as a risk mitigation mechanism financing Energy Efficiency Revolving Fund • Lower interest rates and flexible collateral requirements • With limited capital, once the initial pool • Enhanced access of the finance scheme to has been lent, more lending cannot occur broader range of customers including from until the repayments are made, which weaker sections of society who struggle to takes place over many years. secure such loans. Opportunities Limitations Key steps for successful implementation of Energy Efficiency Revolving Fund in Bangladesh: Sign MOU between Empanelment of EE Establishing a fund Preparation of guidelines Implementing Agency and service providers or manager and defining the for project selection by Executing Agencies ESCOs by Implementing M&V for program followed Implementing Agency (Banks and Fis) Agency with program roll out Energy Efficiency Revolving Fund Role of Key Actors in EE Revolving Fund Key Actor Role Responsibility  MOU with Implementing Agency and shortlisted Executing Agency or Agencies (Banks / FIs) International  Disbursement of concessional credit towards EE Revolving Fund Development Agencies Technical Assistance &  Provide technical assistance to Implementing and Executing Agencies for design and (IDAs) such as World Co- Financing operationalization of EE Revolving Fund and EERF Programme Bank, ADB, UNDP, GGGI etc.  Support Executing Agency through TA in assessing the technical eligibility of the loan application.  Design and operationalization of the fund with assistance from IDAs  Facilitate selection of Executing Agency (banks/FIs) for creation of the financing facility Government Agency  Empanelment of Fis, EE technology suppliers (vendors / ESCOs / Retail Chains / etc.) through (Typically nodal agency Implementing market assessment and technical due diligence for Energy Efficiency in Agency  Developing and maintaining list of eligible EE projects to be financed through the program the country or the  Develop reporting framework for revolving fund and concessional loan program Finance Ministry)  Set up mechanisms for M&V of the EE sub-projects financed by the Revolving fund  Create outreach platform to disseminate information on financial programme  Responsible for design and operationalization of revolving fund, concessional loan program and Financial Institution (or any additional credit enhancement mechanisms a group of FIs  Availing co-finance for the revolving fund through collaboration with international development shortlisted/empaneled Executing Agency agencies by Implementing  Maintain records of funds disbursed and EE appliances purchased. Agency)  Feasibility checks in addition to technical due diligence supported by IDAs.  Facilitate consumers for filing loan application with empanelled FIs/Banks Approved EE Service Suppliers of EE  Responsible for the overall supply and installation and O&M of the EE equipment/appliances Providers Equipment or ESCOs and maintain the desired product quality and energy performance levels as laid out in the empanelment criteria Energy Efficiency Revolving Fund – Case Study Energy Efficiency Revolving Fund for Commercial Buildings, Co-Financier(s) Residential Buildings & Industries in Thailand Business Model Type: Concessional Loan Facility with Revolving Fund Repayment for EE investments in buildings and industries for energy conservation and energy efficiency Concessional Loans & Taxation on Fossil Fuel Green Credit Lines from EnCon Fund Objective: In Thailand, the Energy Conservation Promotion Fund DFIs (ENCON Fund) was established to provide financial support to Capital designated factories and buildings for investment in and operations of DEDE DEDE sets up energy conservation programmes. revolving fund Features: (Source: Gruning et al. (2012))  Interest rate on loan for commercial borrowers – max. 4% p.a Revolving Fund  Credit lines to banks / FIs – USD 2.5 to 10 million per bank (total FIs 11) EERF provide low- Repayment Funds interest loans to  ROI charged to FIs for repayment to EERF @ 0.5% p.a banks Commercial Banks (11 FIs) Loans with favorable Impact: interest rates for EE Repayment Funds projects The fund was active during the period of 2003 to 2010 with below impact statistics: Eligible Borrowers • Number of Projects funded - 335 projects (across RE and EE) • Total investments – 453 Million USD • Loan from EERF – 210 Million USD Buildings Industries Project Developers ESCOs • Average Pay-back – 3 years • Electricity savings – 1,170 Million kWh/year • Total Energy Savings – 154 Million USD / year On-Bill Financing On-Bill Financing Components Description about the Model: Participating Approved Approved In On-Bill Financing, the upfront capital for the Electrical Utility Financial Vendors Technologies Institution appliance is provided by a third party, typically a financial institution / bank, rather than the utility. In exchange for a management fee, the utility acts as a Repayment repayment conduit, collecting the payments through EE Nodal Agency Concessional the electricity bills for the original lenders. Repayment Funds Funds Loan Key Features: Utility Maintains List Support Mechanism Participating Financial • Energy savings are directly paired with the payment of approved Institution/s of electricity bill vendors/contractors and appliances Funds • Utilities can maintain a list of the approved vendors Repayment Approved and list of technologies which are applicable. Vendors / Electrical Utility Supporting Mechanisms: Contractors Pays Outsourced Capital for Loan Request • Donor contributions from IDAs could facilitate credit for purchase of Vendor Installation guarantees and concessional loans to help scaling Loan EE Appliance up successful bulk procurement programmes for Loan repayment Approval EE equipment by the Electricity utility. Approved List via monthly of Appliances electricity bills • Maintaining a positive list of EE Appliances and technologies from time to time and scheduling their Installs the EE Appliance procurement in phase wise manner can help reduce the risks attributable to high inventory of unsold appliances. On-Bill Financing • Payment Security and less risk of defaults with repayments for purchased EE • Complex lending terms appliances. • Utility may need to modify their existing • Overcomes barriers with high upfront cost of billing system to accommodate ‘on-bill’ EE appliances • Transferability of Ownership financing Opportunities Limitations Key steps for successful implementation of On-Bill Financing in Bangladesh: Identification of utility Empanelment of FIs and Defining the MRV for providers in the region Preparation of list of EE vendors/retailers by nodal program followed with and establishing them as appliances and agency program roll out executing agency On-Bill Financing Role of Key Actors in On-Bill Financing Key Actor Role Responsibility International Development Agencies  Technical Assistance (TA) to support electricity utilities to design and implementation of on-bill Technical Assistance & financing model (IDAs) such as World Co- Financing Bank, ADB, UNDP,  Concessional financing to electricity utilities through appropriate channels GGGI etc.  Set up the program and maintain fund flow from financiers/IDAs to the participating financial Government Entity institutions Nodal Agency / (National Development  Empanelment of financial institutions and vendors/retailers Implementing Agency Bank)  Set procedures for loan disbursement and M&V protocols  Develop and maintain list of EE appliances and equipment  Avail financing from EE Nodal Agency  Due diligence of loan applications Participating Financial Intermediary Bank  Issue credits to electrical utility at concessional rates Institution  Revenue collection in the form of monthly repayments from electrical utility as per the agreed contract  Avail financing from IDAs through participating financial institution  Set procedures for on-bill financing program Electricity Utility  Due diligence of loan applications (BPDB, DESCO, DPDC, Executing Agency  Utilize funds to pay for EE appliances and equipment on behalf of loan applicants etc.)  Maintain list of approved vendors and EE equipment from nodal agency  Revenue collection in the form of monthly payments integrated with billing system of electricity  Responsible for M&V for the programme  Facilitate consumers for filing on-bill financing application with Utility Approved Vendors Technology Supplier  Responsible for the overall supply and installation of the EE appliances On-Bill Financing – Case Study Hawaii’s GEM$ On Bill Program Repayment from Monthly Business Model Type: On-Bill Financing through Hawaiian Electric Bills from Companies Green Energy Market Customers Objective: In 2019, Hawaii Green Infrastructure Authority (HGIA) Securitization under HGIA launched Green Energy Money Saver (GEM$) On-Bill Program to Vendors / make energy improvements affordable for both residential and Contractors commercial customers. Key Features: Pays Capital  Under the program, both residential and commercial consumers of Outsourced for Installation Hawaiian Electric Companies can avail loans at fixed interest rate Vendor HECO of 5 % for a period up to 20 years from the utilities for energy improvement projects including rooftop solar panels, solar water heaters, heat pump water heaters, and other energy-efficient Loan Approval equipment and repairs and maintenance of energy consuming Approved Loan systems. List of repayment  Targeted at renters and low-income households, the repayment is Appliances via monthly tied to the utility meter instead of any individual via a line-item electricity bills charge on their monthly utility bill.  The upfront cost is provided by the Green Energy Market Securitization which is managed by the Hawaii Green Installs the EE Infrastructure Authority (HGIA). Appliance  Eligible customers are those under the Hawaiian Electric Customers of HECO Companies (HECO) which comprises of Hawaiian Electric, Maui Electric and Hawaiian Electric Light Company which account for 95% of the state population. Energy Savings Performance Contracting (ESPC) � Energy Savings Performance Contracting (ESPC) allows for procurement of energy savings and facility improvements with no up-front capital costs. It is a partnership between an agency and energy service company (ESCO) and is mostly applicable for EE retrofits in existing facilities. � Energy Service Companies or ESCOs provide a range of energy solutions and look to derive profits from the amount of energy saved. Some of the services they provide include designing and implementation of energy savings projects, retrofitting, energy conservation, energy infrastructure outsourcing, power generation, energy supply, and risk management. ESCO Repayment ESCO Assumes credit risk and Financial Institution Assumes technical risk technical risk Loan Savings Guarantee & EE Project Repayment according to ESCO Guarantee Repayment based on Equipment sharing of energy saving Implementation Loan Facility Owner Financial Institution Facility Owner Repayment with funds from energy savings Shared Savings Model Guaranteed Savings Model Under this model, the ESCO undertakes the financing, project Under this model, the ESCO guarantees predefined savings on the development as well as the implementation of the EE improvements energy bill of the facility owner. The technical risk in this model lies with and the energy savings are shared between the ESCO and facility the ESCO while the credit risk lies with the facility owner. Based on the owner for the duration of the contract. The ESCO assumes both the energy savings, the facility owner pays the contractually defined fees to technical and credit risk in this model. the ESCO either through a bank loan or their own resources. Simple ESPC Models for Developing Economies Financing Model Description Countries Under this model, the facility owner pays a predetermined amount to the Standard product model with ESCO for the installation of specific products for which the energy South Africa “deemed savings� savings are well-known or agreed in advance. Under this model, the ESCO installs and owns the energy efficient equipment under a leasing model. The facility owner gets ownership of Equipment leasing with People’s Republic of China, the equipment after all lease payments are made. Payments are verified savings India, Turkey, and Viet Nam decided based on energy cost savings and measurements are taken during commissioning. One-year contract with partial Under this model, the ESCO is paid 60-70% of the payment based on performance payment measurements taken during commissioning and the remaining is paid Armenia, Mexico, and Turkey (modification of guaranteed after 6-12 months provided there is continued savings on the savings model) equipment. Under this model, the energy service firm finances and implements the Energy service agreements project and recovers the payment through a predetermined fixed cost on (modification of shared savings an annual basis. Generally, the contracts are typically for 5 to a 15-year Armenia and Mexico model and is also known as ‘pay period. During contract period customer pays reduced electricity bill and as you save’) an ESA payment which together are less than original utility bill attributable to energy service. ESPC Model • Fair distribution of risks associated with realizing • Involves multiple entities to participate in the energy cost savings by way of performance delivery of services and operationalization of contracting followed with 3rd party verification. model. • Helps build trust in energy efficiency investments. • Lack of technical experience of the • For Guaranteed Savings Model, facility owner stakeholders involved in implementing the enjoys energy savings benefits from the start model while for Shared Savings model they get • Engaging first movers as awareness is low ownership after the contract period. among commercial building owners and financial institutions Opportunities Limitations Key steps for successful implementation of Energy Savings Insurance in Bangladesh: Piloting of few projects Create Demand for EE Energy benchmarking of under ESPC model with Empanelment of EE retrofits in existing Roll-out the model under buildings followed with funding support from Service providers or buildings (Presently EE existing EE schemes or setting up of Energy IDAs, etc. with FIs as ESCOs with necessary regulation is absent for as a separate program. Management Program conduit for project technical capacity Existing buildings) financing ESPC Model Role of Key Actors in Energy Savings Insurance Model Financing Key Actor Role Responsibility  Technical Assistance to support bank to setup EE financing facility(TA for Financial International Development Programme Development and Implementation) Agencies (IDAs) such as Technical Assistance & Co-  Concessional financing to the Implementing Agency and Executing agencies to World Bank, ADB, UNDP, Financing expand the reach of the program GGGI etc.  MOU with EE Nodal agency & Fis  Coordinates third-party technical validation of technology provider Government Entity (National  Set up the program and maintain fund flow from financiers/IDAs to the participating Implementing Agency Development Bank) financial institutions  Avail financing from National Development Banks or the IDAs  Set procedures for ESI financing program Partner Financial Institution Executing Agency and  Due diligence of loan applications (PFI) Intermediary Bank  Issue credits to borrowers  Revenue collection in the form of monthly repayments from borrower as per the agreed contract  Due diligence to prepare the terms of the energy savings performance contract between the commercial building owner and the technology provider / ESCO Third Party Validation Entity Technical Validator  Evaluate the past performance of the technology provider to ensure quality of the for MV&E provider  Act as arbiter in case of disagreements Energy Savings Performance Contracting – Case Study ESPC Model for Buildings and Industries in Dubai, UAE Business Model Type: ESCO Model with Public ESCO firm as facilitator and Private ESCOs as service providers for deploying Building owner energy conservation measures and water conservation based on guaranteed savings model. EE equipment and services Applicable Sectors: Commercial Buildings, Residential Buildings shared savings (for project developers) and Industries for EE projects with quick pay- backs. Audit Impact: Tendering and bid negotiation Loan Total 135 projects have been executed under the ESCO route for Project Management Building EE retrofits in Dubai with the following investments, energy Repayment Measurement and verification savings and water savings: Bank of savings Reporting Investments & 2014 2015 2016 2017 Savings Cumulative Payment Supply of retrofit work Investment (Million 4.5 109 194 452 Guarantee of savings AED) ESCOs Annual Energy 4.4 12.1 86 194 Savings (GWh) Annual Water 2.2 2.5 246 132 Savings (MIG) Session Summary Financing mechanisms are the levers that drive EE investments in any country. There can be many financing mechanisms, but they are not one-shoe-fits-all strategies. As seen with the different case studies presented for each of the business models, they need to be streamlined to fit the needs of the country or even different sectors. While some might be successful when implemented for industries, they might fail for buildings. For example, as seen in Dealer financing which can be implemented for appliances like ACs and refrigerators in residential households, ESPC is more suited for technologies in commercial buildings. Further, banks and financial institutions have a major role to play in generating awareness amongst consumers through well- designed marketing campaigns. Thus, they must have a deep understanding of these mechanisms and their eligibility to be able to implement them on a large-scale. Action Steps for Banks and FIs 1. To ensure that their green financing guidelines are in line with those of other countries which have implemented such guidelines as well as those recommended by IDAs. 2. While Bangladesh Bank has enforced some policy guidelines on Green Banking, these have not made much impact in promoting investments in energy efficiency of building sector. Thus, FIs can assess the capabilities of EE service providers and empanel them to support in their due diligence of EE projects in building sector. This way a large portion of EE market in building sector could be serviced. 3. Access green credit lines and climate finance from multilateral development agencies or and climate funds for expanding green lending portfolio and to seek funding to implement the business models which can promote EE investments in building sector. Develop in-house capacity to assess financial viability of EE projects in buildings to make a business case for such investments. Q&A 36 Discussion Points Does IDCL have experience with any of the EE financing mechanisms discussed or something on similar lines Which EE Financing Models seem relevant for Bangladesh of EE lending in building sector FI’s internal team’s capacity for doing due diligence for energy efficiency projects. Do you depend on 3rd party firms offering assistance / services for due diligence. Areas of support for project evaluation and feasibility in the context of EE projects in building sector Whether a mechanism involving rating and empanelment of energy solution and service providers in Bangladesh could compliment FIs to undertake due diligence of EE projects Has IDLC approached international development banks for accessing green credit lines for green lending in the past. If yes, how has been the experience so far. Thank you pwc.com © 2022 PwC. All rights reserved. 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EE Financing Mechanism Applicability & Relevance for Bangladesh Financing Applicability for Building Sector Relevance for Bangladesh Model To address the high upfront cost barrier, the incremental price of EE It is applicable for promoting energy efficient appliances could be lowered through concessional lending terms Dealer appliances in the domestic market. A robust S&L attributable to availability of soft loans and grants from multilateral Financing program in place with list of energy EE appliances development banks or co-financing. At present a robust S&L with is recommended. ambitious MEPS is absent for major appliance categories in Bangladesh. Such funds could have cross-sectoral use to Already Bangladesh Bank has set up ‘Green Transformation fund’ Energy promote EE. However, it is more favorable for via re-financing scheme for manufacturing and export-oriented Efficiency funding of commercial scale EE interventions in the industries. With a precedence of a model similar to EERF in Revolving Fund building sector for e.g., Development of Green Bangladesh, existing system could be strengthened to invite Building Projects, EE retrofits in existing buildings. applications from building sector More suitable for promoting sales of EE appliances The model has past precedence in Bangladesh where 100 million at large scale in domestic and commercial building CFL lamps were distributed by utilities to major households. Already On-bill sectors with minimum hurdles in obtaining procuring utilities in Bangladesh have experience of participating in Financing appliances. Repayment is linked with electricity bills deployment of similar programs. Financial institutions can lend to and can be recovered with minimum default risk. utilities for availing soft loans. ESPC is suitable for commercial building energy Not in the short term but in the long term, energy efficiency market Energy Savings efficiency retrofits where a baseline energy could transition to ESPC which requires complex contracting terms Performance performance is pre-agreed between the energy involving the loan borrower, lender and EE Solution provider. An Contracting service provider and the project proponent. The insurer could be involved to fairly distribute the repayment risk payment terms are linked with realized savings. arising from realization of cost savings and repayment. Building Blocks for Selected Business Models Energy Savings Dealer/Vendor/Retailer Energy Efficiency Parameter On-Bill Financing Performance Financing Revolving Fund Contracting Debt, (Could involve a Type of Financing Debt, Equity, Grant Debt, Grant Debt, Equity, Grant Grant component) M&V Protocols Risk Mitigation Instruments Credit Guarantee Optional Optional Optional Optional List of Eligible Optional Optional Products Third Party Validator Mostly required Technical Assistance