Capacity Building of Banks and Financial Institutions for Energy Efficiency Project Financing

1. Capacity Building of Banks and Financial Institutions for Energy Efficiency Project Financing Module 1Market Opportunity Partnership to Advance Clean Energy-Deployment (PACE-D)Technical Assistance Program

2. Presentation Outline • Introduction to NMEEE and EEFP • Need for Capacity Building • Project Objectives • Business Opportunity in EE Financing • Market Studies • Perspectives, Issues and Challenges • Government Policies and Programs • Achieving the Potential

3. Importance of Energy Efficiency

4. Role of Energy Efficiency in Mitigating Climate Change Source – International Energy Agency, World Energy Outlook, 2011

5. National Mission for Enhanced Energy Efficiency (NMEEE)

6. Energy Efficiency Financing Platform Ensuring availability of finance at reasonable rates for energy efficiency projects NMEEE Creating demand for energy efficient products, goods and services Energy Efficiency Financing Platform Promotion of performance contracting and energy service companies (ESCOs) Credible monitoring and verification protocols to confirm energy savings Capacity building of banks and FIs

7. GoI commitment to climate change India has made a commitment to reduce its emissions per unit of GDP by 20- 25% below 2005 levels by 2020. • To meet and exceed this goal, India is increasing fuel efficiency standards by 2011; • Adopting building energy codes by 2012; • Increasing forest cover to sequester 10 percent of its annual emissions; and • Increasing the fraction of electricity derived from wind, solar, and small hydro from the current 8 percent to 20 percent by 2020.

8. Need for Capacity Building BEE statement in EEFP “There is need to enhance capacity of banks and financial institutions by imparting training to bank officials on opportunities for financing energy efficiency projects in different sectors of the economy. The capacity building is intended to help bankers in understanding the importance and viability of financing energy efficiency projects, type and size of projects, and ways and means to tap the huge potential in this area.”

9. Capacity Building Modules • Market Opportunity • EE Project Characteristics • Implementation Models • Project Appraisal • Measurement & Verification

10. The Market Opportunity

11. Long-Term Opportunity for Financing of EE Projects Government Role Provide Incentives Develop Policies and Programs Stimulate Market development Sustainable Project Development and Commercial Financing Long-Term Market Growth and Development Active Participation of Banks and Financial Institutions

12. World Bank Study Planning Commission Low-Carbon Study CII/IREDA Study of Industrial EE Studies of Market Potential ADB Study National Studies of Energy Efficiency Market Potential NPC Study for BEE NPC Study For BEE While the results vary, they all point out the large potential market for EE project implementation

13. World Bank and CII/IREDA Studies • World Bank • Three-country study (India, China, Brazil) • Included detailed estimates of EE potential • Estimated potential in India – 50 billion kWh • Investment potential – INR 140 billion • CII/IREDA Study of Industrial EE Potential • Prepared Investor’s Manual for Industrial EE • Identified technologies to improve energy efficiency, equipment suppliers, and government policies / incentives for the sector • Estimated potential – 37.5 billion kWh • Investment potential - INR 82.5 billion

14. National Productivity Council Study for BEE • Sectors • Agricultural Pumping • Municipal Pumping • Street Lighting • Commercial Buildings • SMEs NPC Study for BEE State by State Energy Savings Potential Investment Potential At estimated 4 year payback Energy Savings Potential (15% ) INR 150,000 Crores 75 Billion Units Source: National Productivity Council, State-wise Electricity Consumption & Conservation Potential in India, Prepared for Bureau of Energy Efficiency, New Delhi, 2010.

15. Planning Commission Low-Carbon Future Estimates of energy savings in Billion kWh Source; Planning Commission, Low Carbon Strategies for Inclusive Growth - An Interim Report, Government of India, New Delhi, 2011.

16. Why Has Implementation been Low ? Despite the large market size, EE project implementation has been substantially lower than anticipated Source: World Bank, Unlocking Commercial Financing for Clean Energy In East Asia, Washington, D.C., 2013

17. Bankers’ Perspectives on EE Projects • Small project size - high transaction costs • High project development costs (“soft costs”) • Difficulties is collateralizing project assets • Lack of well-established payment security mechanisms • Limited appraisal experience • Poor creditworthiness of borrowers • No standard contracts/agreements • Credibility of savings estimates • Limited availability of formal M&V approaches • Cash flow may be already pledged to existing banker

18. Project Risks

19. Risk Management • Using proven technologies • Project bundling • Customized financial products • Rigorous project appraisal • Innovative ways to collateralize project assets • Payment security mechanisms • Standard contracts and agreements • Formal third-party measurement and verification (M&V)

20. Tools and Resources from BEE • PAT scheme for large energy users • Partial Risk Guarantee Fund for EE (PRGFEE) • Venture Capital Fund for EE (VCFEE) • Energy audits of buildings, municipalities and SMEs • Establishment of EESL to facilitate public sector EE • Performance contracting based demonstration projects • ESCO accreditation • ESCO capacity building • SME program with SIDBI • M&V protocols

21. International Perspectives

22. International Experience - USA Directed agencies to achieve savings Changed procurement regulations Facilitated shared savings contracts Selected ESCOs under IQC contracting U.S. Federal Government Initiatives Similar legislation, regulations and directives to State agencies – focus on municipal, schools and hospitals markets U.S. State Government Initiatives Mature market - EE project financing Excellent collaborative relationships between banks and ESCOs 100% project financing available Results

23. IFC/GEF – Central & Eastern Europe – Risk Sharing Successfully implemented the Risk Sharing program in 6 countries Commercializing Energy Efficiency Finance Program GFA Loans Project Developers IFC/ GEF Participating Banks • RESULTS • Provided risk guarantees to large number of projects - default < 0.5% • Demonstrated low risk & high return of EE projects • Induced banks to substantially increase loan portfolio • High leveraging of IFC/GEF funds achieved • Bank lending without PRG exceeded with PRG (in Hungary 10x) • Bank lending activity continued after end of IFC program

24. Examples of Experience in India Financed a number of EE projects using funds from USAID and other donors ICICI Bank Technology Finance Group Financing EE projects in SMEs with Credit lines from JICA/KfW/AfD SIDBI Energy Efficiency Cell Demonstration projects for performance contracting Government & Municipal Projects BEE

25. Other Debt Financing Projects in India • ADB/IDBI – Industrial Energy Efficiency Program • World Bank/IREDA EE Financing Scheme • KfW Credit Lines for EE (SIDBI and EESL) • BEE PRGFEE • World Bank Partial Risk Sharing Scheme • Govt. of India – Technology Innovation Fund • Commercial bank financing activities • State Bank of India • ICICI Bank • Yes Bank • Canara Bank • Union Bank

26. Moving Forward Moving Forward

27. Achieving the Potential What banks/FIs need to do: • Management commitment to EE financing as a business line • Identification of target markets • Establishment of Energy Efficiency Unit or Cell • Understanding of EE financing and implementation business models • Identification of available government and donor incentive programs • Development of customized financial products • Training and capacity building of loan officers and risk managers • Establishment of relationships with ESCOs and other energy service providers

28. Thank youDilip R. LimayeFinance Team LeaderUSAID PACE-D Technical Assistance Programdlimaye@srcglobal.comwww.pace-d.com