Exploiting the full potential of energy efficiency

19 January 2012

Improvements in energy efficiency can achieve a whole array of economic, societal and environmental benefits, often at low cost. In many cases it seems unexplainable that consumers, business and government authorities do not exploit the full potential of energy efficiency, yet there are a range of market and human behavioural failures that stop us from doing so.

Improving energy efficiency often requires an initial upfront cost, for example, for a more advanced or new piece of technology, a change in process, or the refurbishment of a building, that is paid back later through reduced energy bills. Even though the rate of return in investment in energy efficiency can be high, lack of finance can still be a key barrier to investment in energy efficiency.

Because of the finance challenges often associated with energy efficiency projects, the IEA encourages governments to support private investment in energy efficiency measures. The IEA recommends that governments facilitate private investment in energy efficiency through collaboration with private financial institutions to develop public-private partnerships (PPPs) and other frameworks that facilitate energy efficiency financing. Now, in a new report on public-private approaches to energy efficiency finance, the IEA provides guidance on the essential steps and milestones in implementing PPPs in financing energy efficiency measures.

The latest IEA Policy Pathway report, “Joint public-private approaches for energy efficiency finance”, aims to support policy makers at all levels of government and other relevant stakeholders who seek practical ways to develop, support, monitor or modify energy efficiency policies in their home country and abroad.

PPPs are mechanisms that use public policies, regulations and/or funding to leverage private-sector financing for energy efficiency projects. The active participation of commercial banks and financial institutions is needed for the long-term growth and development of the market for delivering energy efficiency financing and implementation services. PPP mechanisms can be used to obtain such leveraging of commercial financing and to reduce the cost of energy efficiency finance to the public purse.

This Policy Pathway describes how to implement three particular kinds of PPPs - Dedicated Credit Lines where credit lines are established by a public entity (such as a government agency and/or donor organisation) to enable financing of energy efficiency projects by a private-sector organisation (bank or financial institution); Risk-Sharing Facilities involving a partial risk or partial credit guarantee programme established by a public entity (such as a government agency and/or donor organisation) to reduce the risk of energy efficiency project financing to the private sector (by sharing the risk through a guarantee mechanism), thereby enabling increased private sector lending to energy efficiency projects; and Energy Saving Performance Contracts (ESPCs) which are public-sector initiatives, in the form of legislation or regulation, to facilitate the implementation by energy service companies (ESCOs) of performance-based contracts using private-sector financing.

This publication proposes a policy pathway that supports the development and implementation of PPPs comprising ten critical steps in the following four stages.

  • Plan: policy makers begin the PPP process by identifying the market segment where energy efficiency needs to be improved, choosing among the different public-sector intervention approaches available, and structuring an agreement between the public and private partners.
  • Implement: the public partner defines the implementation steps and manage the implementation process, while the private-sector partner takes the lead in implementation of the PPP mechanism, making adjustments as necessary to meet objectives and respond to market changes.
  • Monitor: the public partner manages the contract to ensure delivery of services (including authorising payments and maintaining records) and assesses performance relative to the standards defined in the PPP agreement.
  • Evaluate: an independent third-party organisation evaluates the PPP design and implementation to assess its success in meeting objectives, factors affecting performance, and key lessons learned.

Countries around the world have accumulated considerable experience with PPPs for energy efficiency financing, which should be useful for other policymakers setting up such programmes. Case studies included in the Policy Pathway report (the Thailand Energy Efficiency Revolving Fund, the Commercialising Energy Efficiency Finance programme across six countries in central and eastern Europe, and the US Federal Energy Management Programme) should provide insights along the policy pathway for others. Nonetheless, to be effective in addressing the particular financing barriers to energy efficiency in a given country, PPPs must be adapted and customised to local legislative, regulatory, institutional, financial and energy services market conditions.

The IEA is grateful for the support of the European Bank for Reconstruction and Development (EBRD) Shareholder Special Fund for this work.