European Bank for Reconstruction
and Development

Mechanisms to Finance
Climate Friendly Technologies

Author: Karen McClellan

EBRD's ENERGY EFFICIENCY PROJECTS

• Since 1994, the EBRD financed projects worth Euro 440 million, providing Euro 220 million in debt and equity.
• Financing instruments include direct loans, credit lines and equity investments in privately-run energy service companies ("ESCO's").
• Investments are made alongside well-known western operators such as Honeywell and Vivendi.
• In total, these investments have led to savings of around 700,000 toe per year, avoiding 2.7 million tons of CO₂ emissions annually.

EBRD's ENERGY EFFICIENCY PROJECTS

• In our experience, energy efficiency investments result in reduced emissions and thus are almost always climate friendly.
• Many investments do not require subsidies to be profitable. For example, returns from performance contracts range from 20% - 40%.
• The market is large (estimates reach Euro 50 billion of commercially viable projects).

 

To Achieve EU Membership,
CEE Countries Must Invest In Energy Efficiency

Major Sources Of Inefficiency Are Found In District Heating,
Electric Utilities, And Manufacturing

District heating

• District heating (DH) provides up to 70% of heat needs in large cities in the region.
• Outdated boilers have low energy efficiency and cause pollution
• Antiquated equipment and a lack of metering and control systems result in high transmission losses.
• Poor insulation and lack of individual control, metering and billing systems result in high utilisation losses.

Example: District Heating Efficiency in Poland Vs. The EU

Major Sources Of Inefficiency Are Found In District Heating,
Electric Utilities, And Manufacturing

Electric utilities

Despite restructuring, central and eastern European electric utilities have significant areas of inefficiency:

• Inefficient, coal-based generation (Poland and Hungary)
  
• Fragmented distribution networks (Poland)
  
• High network losses due to inefficient transmission (Poland and Hungary)

Major Sources Of Inefficiency Are Found In District Heating,
Electric Utilities, And Manufacturing

Manufacturing

• Industry accounts for one third of eastern Europe's total final consumption of energy.
• Large potential efficiency gains exist, especially in energy-intensive industries such as paper, steel and food processing.

PROVEN SOLUTIONS EXIST TO REDUCE ENERGY INEFFICIENCY

RAPID CHANGE IN THE REGION IS ENABLING THE IMPLEMENTATION OF THESE SOLUTIONS

• Central and Eastern European countries are implementing energy rationalisation measures prior to joining the EU.
  
  
  • Eliminating subsidised pricing and rebalancing tariffs
  • Privatising utilities
  • Implementing new regulatory frameworks
  
  

RAPID CHANGE IN THE REGION IS ENABLING THE IMPLEMENTATION OF THESE SOLUTIONS

• ESCOs and utility privatisations are introducing project management expertise to the region.
  
  
• Financing for energy efficiency is increasingly available.
  
  
  • Equipment leasing
  • Bank financing
  • Third party financing of energy performance contracts
  • Dedicated equity funds
  
  

MOBILISATION OF CAPITAL

• The Bank has developing an equity fund which will allow investors to participate in energy efficiency projects.
• The Bank chose an experienced Fund manager, FondElec Corp, Spring 1999.
• EBRD board approval, October 1999.
• First closing achieved (EUR 61 million), December 1999.

THE DEXIA-FondElec ENERGY EFFICIENCY AND EMISSIONS REDUCTION FUND, L.P.

The Fund is attractive to investors in that it will offer investors:

• Attractive commercial returns; and
• Potentially, carbon credits resulting from project-based flexible mechanisms.

THE DEXIA-FondElec ENERGY EFFICIENCY AND EMISSIONS REDUCTION FUND, L.P.

• Target Size: Up to EUR 150 Million; initial closing at EUR 60 Million
• Target pre-tax IRR: 25% gross, approximately 20% net
• Target initial closing date: December 1999
• Primary focus: Central and Eastern Europe (EU accession countries)
  
  

THE DEXIA-FondElec ENERGY EFFICIENCY AND EMISSIONS REDUCTION FUND, L.P.

• Founding Investors in the Fund include:
  • European Bank for Reconstruction and Development
    
  • DEXIA Group
    
    
• Other Investors to date are:
  • Marubeni Corporation
    
  • Kansai Electric Power Co.
    
  • Mitsui & Co.
    

THE DEXIA-FondElec ENERGY EFFICIENCY AND EMISSIONS REDUCTION FUND, L.P.

• Actual appeal to new Investors:
  • Learning about ESCOs
    
  • Learning experience for getting direct emissions credits.
    
  • Attractive equity returns (estimated 20 - 25%)
    

INVESTMENT STRATEGY

• Equity investments of ECU 2 - 10 million.
• Invest within 4 years.
• Concentrate on Central and Eastern European Countries, especially EU Accession Countries.
• Possible expansion to CIS market.
  
  

INVESTMENT STRATEGY
(Continued)

• The Fund will achieve capital appreciation by investing in energy efficiency projects in Central and Eastern Europe.
  
  
• The Fund will target energy efficiency investment opportunities in the following areas:
  
  
  • District heating
    
  • Large building retrofits
    
  • Public lighting
    
  • Manufacturing processes
    
  • Electric distribution and transmission
    
  • Small- and medium-sized co-generation plants
    
  • Renewable energy projects
    

INVESTMENT STRATEGY
(Continued)

• The Fund will invest alongside investors with experience in the sector, some of whom may also be investors in the Fund.