What are the steps? Incentives for energy efficient buildings

Buildings energy efficiency sessions done in partnership with: Energy Efficiency Training Week What are the steps? Incentives for energy efficient buildings Buildings Session 7

Energy Efficiency Training Week Buildings: Program 1. Where to start: Understanding building energy use 2. Where to start: Energy efficiency potential in buildings 3. Toolkit: Building technologies for low energy buildings 4. Toolkit: Building energy efficiency policies 5. What are the steps: Set targets and develop policies 6. What are the steps: Building energy codes 7. What are the steps: Incentives for energy efficient buildings 8. Did it work: Tracking progress with energy efficiency indicators 9. Did it work: Evaluating the multiple benefits of energy efficiency in buildings 10. Where do I get help: International collaborations

Objectives Appreciate the scale of energy efficiency investment to be mobilised Understand the financial barriers to financing energy efficiency projects and improvements Understand how public policy and economic instruments can address these barriers Learn how economic instruments can be funded (when necessary) Appreciate the potential for public private partnerships to mobilise energy efficiency financing

Module content The big picture on energy efficiency finance The barriers to financing energy efficiency in buildings Implementing economic policy instruments to promote energy efficient buildings How to fund economic instruments and EE investment Public Private approaches Group exercises

Main sources of information Hilke and Ryan (2012) Mobilising Investment in Energy Efficiency: Economic instruments for lowenergy buildings, IEA. Ryan et al. (2012) Plugging the Energy Efficiency Gap with Climate Finance, IEA. IEA (2011) Public Private Approaches to Energy Efficiency Finance. IEA (2014) Energy Efficiency Market Report.

Background: EEMR 2014 Highlights Energy efficiency market estimated value to be between USD 310 billion and USD 360 billion Most investment self financed but third party financing estimated in range of USD 120 billion and set to grow Energy efficiency market: diffuse, extensive and anticipated to grow

Energy Efficiency Investment Looking at future investment requirements by sector 1. To achieve the 2 degree scenario, broad investment is needed. 2. Compare current investments to estimated investment requirements. 27.8% 3.0% 46.2% 23.1% 5.3% 2.8% 83.4% 8.4% 7.9% 2.8% 79.3% 10.1% Source: IEA ETP 2015

450 400 350 300 250 200 150 100 50 0 Energy Efficiency Investment Additional investment needed by region and sector Buildings Transport Industry Power 2010-2030 2030-2050 2010-2030 2030-2050 2010-2030 2030-2050 2010-2030 2030-2050 OECD Other Major Economies Emerging Economies Least Developed Countries Annual incremental investments (USD bn)

Energy efficiency finance Investment needed in buildings energy efficiency Energy efficiency finance is expanding and innovating, becoming established Commercial banks provide bulk of financing, but: bilateral and multilateral development funding for energy efficiency was over USD 22 billion in 2012; creation of green banks diverse financial products and standards, often delivered by energy service companies (ESCOs) Question for policymakers: how can we encourage private individuals and investors to invest in energy efficiency?

Sources of Energy Efficiency Investment Example: Spending trend in the U.S.

Buildings energy efficiency sessions done in partnership with: Overcoming barriers to investment in energyefficient buildings with economic instruments Buildings Session 7

Why is private finance in energy efficient buildings so hard to mobilise? Market failures Split incentives Absence of clear legal responsibility Subsidies and price distortions Information failure Consumer awareness on the benefits of EE Lack of information on comparative efficiency of products Lack of training Financial barriers Externalities Long payback periods Lack of collateral Perceived risk Project size Transaction costs Capacity within the financial sector

Economic instruments Providing a price signal to energy users to invest in energy efficient buildings Economically efficient and effective if designed right Should be combined with regulatory instruments Utilities have a key delivery role to play Little evaluation means money wasted Can be revenue raisers for green investments

Economic instruments Economic policy instruments for energy efficiency Fiscal instruments Financial measures Market-based instruments Direct investment Tax relief Concessional Loans Emissions trading schemes Public procurement rules Taxes Grants White certificate schemes Public infrastructure User charges Risk guarantees RD&D investment

Energy efficiency policy, economic instrument and funding mechanism interaction BUILDINGS energy efficiency policy target Economic instrument Funding mechanism Residential buildings Commercial buildings Homeowners Landlords Social housing Public sector Private sector Fiscal instruments Financial instruments: Grants + loans MBI s Direct investment Treasury budget Private banks Public funds 3 rd party Special funds MLDB s ESCO s Utilities

Fiscal instruments for buildings Energy taxes Oil taxes and excise duty Carbon taxes VAT Equipment purchase taxes Electricity taxes Energy subsidies User charges Service charges Electricity tariffs timeof day pricing Preferential tax treatment for efficient products

Fossil fuel subsidies work against energy efficiency investments Source: IEA s World Energy Outlook 2011

Grants: Financial Measures Money provided to individuals or businesses that covers all or part of the energy efficiency investment May be for specific pieces of energy efficient equipment or tied to energy performance Concessional loans (e.g. preferential rates): Commercial and public banks Public private partnerships Dedicated credit lines Commercial and public banks Special instruments such as energy utility on bill finance or mortgage instruments for buildings efficiency renovation www.climatetechwiki.org

Financial barriers and financial policies to overcome them Financial barriers Policy options Long payback periods Co-financing, incentives Perceived credit risk Guarantee facilities Lack of collateral Small project size, high transaction costs Performance uncertainty Low capacity within the financial sector Concessional or dedicated financing facilities Aggregation, specialised credit lines Improved protocols, contractual devices Training and capacity building

Market based instruments White and green certificates Energy savings targets are placed on industries or large energy users Obligated entities can procure energy savings from others, via trading or a market Certificates provide the means to verify the savings and establish ownership Emissions trading Carbon cap and trade mechanisms European emissions trading scheme Regional Greenhouse Gas Reduction Initiative Voluntary schemes

Direct investment Public procurement rules Top Runner and ENERGY STAR purchasing requirements Spending obligations for regulated energy utilities Public infrastructure Targets for renovating public buildings R&D investment New energy efficiency technologies Codes and standards development

Example: Germany KfW loans and grants for EE in residential buildings Characteristics CO 2 refurbishment of buildings Energy efficient refurbishment Duration August 2001 March 2009 April 2009 - ongoing Type Target Eligible Measures Efficiency requirements Preferential loans, since 2007 also grants; no possibility to apply for both: loan and grant. Refurbishment of existing residential buildings Thermal insulation, HVAC, renewable energy (for warm water and heating) Choice of predefined packages of measures or since 10/2008 also measures leading to compliance with EnEV standards for new houses Preferential loans and grants. No possibility to apply for both. Loans for very ambitious retrofitting measures include a loan repayment allowance. Refurbishment of existing residential buildings Thermal insulation, HVAC, renewable energy (for warm water and heating) KfW Efficiency House as benchmark based on EnEV standard for new houses. Size of grants and loans depends on efficiency level compared to this benchmark. Also single measures eligible.

Example: Germany KfW loans and grants Programme results Results 2008 2009 2010 Total cost of the programmes (million ) 973 1 608 1 155 Total final energy savings achieved (GWh/year) 1 605 2 789 2 592 CO 2 e emission savings (tonnes/year) 572 000 995 000 946 000 Net estimated public revenue from employment effect* 2 335 million 5 126 million 5 810 million * Includes new buildings programme

Economic policy evaluation matrix Category Criteria Indicators Environmental effectiveness Economic efficiency Other criteria Impact on market Energy savings Rebound effect Free ridership Costs Uptake of programme (units product) Level of awareness/influence (%) Sales of qualifying products (units product) Gross energy saved (kwh or toe) Gross CO 2 emissions (tco2) Increase in sales of energy using equipment (%) Increase in use of energy efficient technologies (%) Share of tax incentives to purchasers who would have bought the energy efficient equipment anyway (%) Multiplier effects (%) Value of awarded tax incentives Administrative costs ( ) Total costs ( ) Cost effectiveness = total costs/energy saved ( /kwh) Policy interaction Qualitative analysis of policies Ease of administration Process features Transaction and administration costs ( ) Market distortion Price changes ( )

Group discussion Share with the group an economic instrument being used to promote energy efficiency in buildings your country What category does it fall into? Fiscal instrument Financial instrument Market based instrument Direct investment What financial barrier is the economic instrument intended to address? Individually use the evaluation matrix to evaluate it

Designing economic instruments for low energy buildings Which economic instruments can mobilize the large investments needed for deep retrofits and green buildings? Economic instruments must address the diffuse diversity within the buildings sector Public/private Office/apartments/commercial Owned/rented Only combinations of policies regulatory/economic can overcome multiple barriers facing the sector

Building New buildings Economic instruments for the buildings sector Policy objectives Encourage EE design and construction Economic instrument Tax relief, grants Policy linkage Building codes and labels Status quo Mainly unambitious Support finance of low energy new buildings Loans, 3 rd party finance Building codes, labels Few programmes but some better Existing buildings Increase rate of EE renovation Energy prices/taxes, grants Labels, awareness Low success so far Encourage deeper renovation Energy prices, tax relief, grants, loans Regulation, training professionals Mainly target equipment, insulation replacement Support finance Loans, 3 rd party finance Building codes, technical assistance Fewer programmes, less ambitious

Choice of instrument Choice of instrument is depending on context: Sector Target group Existing barriers Energy savings target Local economic, legal and infrastructure conditions Choice of instruments affects the funding mechanism

Energy efficiency policy Design issues and interaction Design issues may have even stronger influence on effectiveness and economic efficiency: Uptake of the instrument Free riders Marked distortion created Technology lock in Administrative burden Spill over effects Policy interaction: Incentives should always be referenced to existing regulation and building codes Ambitious performance criteria are needed as a basis However, no performance without strict enforcement of regulation and building codes

Buildings energy efficiency sessions done in partnership with: How to fund economic instruments and investment in energy efficient buildings Buildings Session 7

Government role in raising finance for energy efficient buildings Government Role Provide Incentives Develop Policies and Programs Stimulate Market development Long-Term Market Growth and Development Sustainable Project Development and Commercial Financing Active Participation of Commercial Financial Institutions Need for Innovative Financing Mechanisms Source: Dilip Limaye

Building energy efficiency sources of funding Public budgets Public Banks Dedicated Funds and Agencies Financial Institutions Energy providers Other private investors

Economic instruments: a resource and burden on public funds. Public budgets Energy taxes and prices Public Banks Dedicated Funds and Agencies Financial Institutions Energy providers Other private investors Financing arrangements Tax incentives Grants Loans White certificates Emission trading Financing energy efficiency measures

Intermediaries and arrangements Energy efficiency agencies Dedicated funds Public banks Green bonds www.energylivenews.com

Buildings energy efficiency sessions done in partnership with: Public private approaches Buildings Session 7

What are Public Private Approaches? Policies, regulations, and economic instruments that leverage private sector financing for EE projects A contractual relationship between a public entity and a private organisation A way to apportion risk between public and private partners to create bankable project A strategy to open up new market opportunities for private EE companies to pursue A method to build the credibility of EE projects with lenders and building owners A way to reduce the high transaction costs associated with developing EE projects

Moving from Public to Commercial Financing: 3 different approaches PPP mechanisms involve different levels of public and private financing depending on maturity of the commercial financing market. Leveraging Commercial Financing through Performance Contracts Commercial Financing More Mature Market Partial Credit or Risk Guarantees Dedicated Credit Lines Public Financing Less Mature Market

1. Dedicated credit lines Create interest on the part of commercial banks in financing EE projects Enhance technical capacity of banks to scale up EE lending Leverage co financing from the participating banks for EE financing Strengthen the participating bank s capacity in identifying and managing project risks Assist the participating bank in exploring business opportunities in EE as well as other low carbon lending and carbon financing businesses.

Example of credit lines Fund established using petroleum taxes Dedicated low interest credit line and technical support provided to banks Project A EERF Fund Low-interest Credit line Local Banks Bank Co- Financing Project B Project C Project Loans 70/30 Debt/Equity

Examples of credit lines

2. Risk Sharing Addresses the perception of some banks and financial institutions that EE is riskier than other investments Government or donor agency provides a partial guarantee covering loan loss from default Participating banks sign agreements specifying loan targets and conditions Banks conduct due diligence and process loans In case of loan default the guarantee covers a portion of the loss the program may also include a first loss reserve Substantial technical assistance also provided to banks, project hosts and project developers (ESCOs)

Risk Sharing Basic structure

3. Energy Savings Performance Contracts for the Public Sector Energy Savings Performance Contracting (ESPC) Approach Turn-key basis Offered by Energy Service Companies (ESCOs) or other energy service providers (ESPs) Implementing Energy Efficiency Projects

Energy Savings Performance Contracts Different types of models

Energy Savings Performance Contracts Examples

Group exercise (short) Discuss the case study you have been given Nominate a spokesperson for the group to tell the rest of the group the main points of this case study

Case Study 1: Revolving Fund in Thailand Introduction What: Energy Efficiency Revolving Fund established in 2003 by government Aim: to leverage commercial financing for energy efficiency projects How: capital provided to Thai banks, banks provide low interest loans to clients, standard contracts Planning Legislation: Energy Conservation Promotion Act Department: Alternative Energy Development & Efficiency Implementation o Process: eligibility, financial analysis, government assessment, bank approval, project implementation, loan repayment o Monitoring: government uses key performance indicators (KPIs) Evaluation Results: USD 453m investment, USD 154m cost savings Lessons: strength: attractive to banks, weakness: clients with strong balance sheets chosen

Case Study 2: Risk Guarantees in Eastern Europe Introduction What: Commercialising Energy Efficiency Finance Programme (CEEF) launched in 2003 jointly by IFC and GEF How: through risk sharing and technical assistance Planning Overcoming barriers: guarantee to support lending, credit analysis skills support, partial guarantee to mitigate risk, selection of attractive markets and support to ESCOs Implementation o Project design: increase awareness of local financial institutions, establish guarantee facility agreements, reduce credit risk of individual projects, lower transaction costs o Monitoring: carried out by CEEF field offices in each country Evaluation Results: USD 208m investment, 846 TJ energy savings Lessons: strength: successful & now being applied in other countries, weakness: less successful in the Baltic countries due to energy efficiency market being less developed

Case Study 3: Energy Performance Contracting in the US Introduction What: Federal Energy Management Program Utility Energy Services Contracts (FEMP/UESC) How: through partnerships between federal agency facilities and private local utilities Planning Legislation: Energy Policy Act of 2005 Implementation o Contracts: area wide, site specific, model utility service agreements, master or basic ordering agreements o Monitoring: no mandatory requirement Evaluation Lessons: strength: competition led to more costeffective solutions, weakness: large amount of planning required and competition not possible where only one utility exists

Why Public Private Partnerships (PPPs)? Can be faster at delivering programmes to improve EE Reduced costs to public sector More efficient allocation of risk Better incentives based on performance Improve the value of public sector assets Can leverage larger change

Designing PPP Mechanisms Country Context Financial Markets End-use Sector Financing Mechanisms Legislative/ Regulatory Conditions PPP design depends on local conditions Different designs may be needed for different sectors Combinations of policies regulatory, economic will contribute to success Effective in developed and developing countries

Checklist for PPPs

Final group exercise on economic instruments and financing EE projects Within each group: Make a list of the barriers that prevent financing of EE projects for buildings in your countries Discuss which types of economic instruments could help overcome these barriers Develop a funding design (PPP or other) that would make sense for buildings in your countries Report back to the entire group

Key takeaways for this session On economic instruments for buildings. Wide use of grants, growing use of preferential loans but EE criteria in many countries lack ambition Most effective economic instruments are tied to ambitious energy performance regulations and information A combination of incentives to both encourage and enable investors is needed. On funding economic instruments. Options other than direct public budgets should be considered, i.e. financial institutions, green bonds etc. Long term goal should be to enable private investors to sustain the EE market.

Discussion

Energy Efficiency Training Week (Buildings) 7. What are the steps: Incentives for energy efficient buildings Trainer: Lisa Ryan Purpose: To teach emerging professionals in the emerging economies about potential incentives that can be used or examined to increase energy efficiency in the buildings sectors. Content: This course will discuss the economic, financial and other incentives that can be used to create market transformation for energy efficiency in buildings. The course will review grants, rebates, tax policy, corporate social responsibility, and other incentives that impacts decisions on energy efficiency for buildings.