Public Finance Mechanisms to Increase Investment in Energy Efficiency
"The report identifies the market barriers and financing gaps that energy efficiency technologies, companies and projects encounter on the way from conception to commercialisation and highlights existing public sector finance mechanisms that address those gaps. It has been written for policymakers, energy efficiency stakeholders, public financing agencies and other finance practitioners and targets both developed and developing countries.
The report makes a distinction between three main areas of energy efficiency market activity: technology innovation, energy efficiency ventures and energy efficiency projects, and takes into consideration the different local conditions, particularly between developed and developing countries. The financing of technology innovation with venture capital, for instance, is more relevant for mature, developed country markets, whereas in developing countries the focus is on financing energy efficiency projects."
"Energy efficiency technology innovation involves inventions and technologies that make energy supply and use more efficient. Innovative public financing approaches are required for technology innovation throughout the entire finance continuum, which extends from research and development, demonstration up to commercialisation. The financing gaps typical for technology innovation occur between the demonstration and commercialisation stages. Innovative public sector finance mechanisms can include contingent grants, convertible loans and guarantees. Public sector backed venture capital funds like those found in the UK, US and Australia are one of the most innovative public sector finance mechanisms for energy efficiency technology innovation."
Energy Efficiency Ventures
"Energy efficiency ventures are small and medium-size enterprises (SMEs), including Energy Service Companies (ESCO s). These face critical financing gaps at the start-up and expansion stages. Seed financing and other later-stage forms of equity are needed until debt and guarantee mechanisms can be obtained for expansion."
Energy Efficiency Projects
"Though energy efficiency projects ideally pay for themselves through the energy they save down the road, the energy audit, assessment of energy use and recommendations for reductions have to be financed directly . Debt instruments, guarantees and third-party financing are finance mechanisms the public sector can make available to cover such costs. Non-financial public mechanisms including marketing, end-user education, capacity building and training are key for energy efficiency sector growth, because they encourage the participation of both end users and the financial institutions."
"The public sector can significantly affect investment in energy efficiency by creating policy and regulatory frameworks that support energy efficiency, such as standards and labelling on an international scale, as well as integrated legislation at local and regional levels that calls for low emissions / polluting practices.
- Raising awareness of the importance of and opportunities provided by energy efficiency is crucial to ensure buy-in from all parties including the general public, industry and financial institutions in order to increase demand and investment.
To contribute to the successful implementation of the public finance mechanisms to increase private investment in energy efficiency, the following recommendations and conclusions are noted:
- Approaches must be holistic and market-based
For the scale up of energy efficiency technologies, products and services, holistic approaches are needed that combine regulatory policy and locally appropriate and commercially viable financing mechanisms. They must address the entire finance continuum at all stages of technology, venture or project development and address the needs of all key stakeholders.
- Mechanisms must not distort the market and subsidies should remain “smart” and serve to catalyse market growth
Standards and labelling promote consumer and user awareness, which in turn affects economic savings and market growth. Increased international cooperation on standards and labelling is needed to enhance these efforts and continue to create aggregated demand for energy efficiency products and services.
- Mechanisms must be adapted to local market conditions
Strategies to close energy efficiency financing gaps must be adapted to local market financing conditions and energy efficiency market development. This applies especially for developing countries. The specific institutional and credit traits of target enduser sectors within the region or country must be considered.
- Successful public financing mechanisms to increase investment in energy efficiency need to be replicated
To facilitate the replication of existing public finance mechanisms and the development of new ones, it is suggested that a platform be created that enables financiers and energy efficiency stakeholders to exchange experience and expertise with the aim of improving ways for public sector capital to effectively promote innovation and private investment in the renewable energy and energy efficiency sectors. This could help developed markets optimise their strategies and help emerging markets strengthen their public finance approaches in the energy sector. Such a platform could serve as a neutral resource centre providing business tools for EE practitioners, including training and assistance for both financiers and project developers.
- Impact and innovation increase with public and private sector cooperation
The success of public financing mechanisms in increasing private investment in energy efficiency depends on how marketbased they are and how much they involve the private sector. Establishing partnerships with the right private financial entities early on - from the design of the financing programme through to implementation - is crucial. The public sector can fill an important role by facilitating dialogue between local project developers and local lenders."