Only a fraction of the potential has been tapped.'
For bankers, lending for efficiency is a new challenge.
Start small before investing big, book recommends.
February 27, 2008 —Imagine a world where developing countries use almost twice as much energy as they do now and greenhouse gases soar, pushing the planet toward catastrophic climate change.
That scenario could become reality by 2030 if developing countries, particularly fast-growing ones, don't curb their fossil-fuel needs, warns the International Energy Agency. It says the cheapest and fastest way to do that is by becoming more energy efficient.
"Everyone agrees energy efficiency is a win-win situation," says Bob Taylor, a World Bank energy economist and lead author of Financing Energy Efficiency: Lessons from Brazil, China, India, and Beyond, released today in Washington. "It reduces environmental impacts of energy use, it's clearly the cheapest way to go, it makes money, and it has huge potential."
But, as the book reveals, it takes years and a lot of effort to jumpstart energy efficiency in a developing country—or anywhere else. "Only a fraction of the potential has been tapped," says the book.
China, India, and Brazil as Big 3 of Developing World
The book focuses on China, India, and Brazil as three of the globe's top 10 energy consumers. The three countries hold 40 percent of the world's population and account for well over half of all energy demand by developing countries. By 2030, they'll be responsible for 42 percent of growth in energy demand worldwide.
Energy efficiency is critical in those three countries "for reasons of energy supply security, economic competitiveness, improvement in livelihoods, and environmental sustainability," says the book.
Around the world, many thousands of energy efficiency projects with potentially strong financial returns have not been tried. One reason is both businesses and banks have to be convinced that investing in more efficient boilers, waste heat recovery systems, or energy-saving lighting pays off enough to justify the cost and risk. Another is the special skill involved in packaging and delivering attractive (money-making) energy efficiency projects.
"It's not the kind of project a banker is used to," Taylor explains. "They're used to lending working capital or providing a loan for a new production line or a new factory, something concrete. Now you're asking for a loan to reduce your consumption—it's nebulous."
In China, a commercially viable energy efficiency sector is now emerging after a decade of strong government support. In India, new bank lending programs for financing energy efficiency projects in small and medium certain industries are now ready to be scaled up. In Brazil, an energy efficiency fund derived from utility company revenues provides one platform for further improvements.
World Bank Is Part of Efficiency Initiative
The book draws extensively on the results of a multiyear, global technical assistance effort known as the Three Country Energy Efficiency Project, a joint initiative of the World Bank, the UN Environment Programme's Denmark-based Risoe Centre (URC), and partners in Brazil, China, and India.
It looks at the different ways of financing energy efficiency, including:
ESCOs (energy service companies) that work with businesses or governments to identify and design energy efficiency projects, arrange financing, and implement the projects.
Energy efficiency loan financing and loan guarantees to encourage commercial banks to lend money for energy efficiency projects.
Using energy distribution utilities to finance and implement an energy efficiency program.
The book emphasizes that any financing approach requires thorough knowledge of the local institutional environment and enough flexibility to adjust a program or customize it as it is being scaled up.
Thrust of Projects Should Be Profit, Book Says
And it warns that externally identified, development assistance-funded energy efficiency investments will never "fix" the problem by themselves.
"Much more can be done when such projects and programs are focused upon helping to develop markets that will spontaneously move toward finding energy efficiencies and fixing them as profit-making activity without a government official or an external export ever having had to be involved or even to think about it."
Besides China, India, and Brazil, Financing Energy Efficiency includes case studies of energy efficiency financial mechanisms used in Hungary, Romania, Lithuania, United States, Canada, and Sri Lanka.