Financing energy efficiency

It is well known that most energy efficiency measures are cost-effective in meeting energy policy and climate objectives but initial costs are often a barrier for consumers. When an energy company experiences major initial costs, for example in building a thermal power plant, banks will usually provide the necessary financing.  It is much different for consumers.

If energy savings are to significantly contribute to energy policy and climate change goals, ways will have to be found to unlock the necessary financing.  A previous EiD post (January 2012) explained an innovative approach in the UK.  The proposed Energy Efficiency Directive is also proposing that energy companies to help finance energy efficiency investments in households.

The International Energy Agency (IEA) contributes to the discussion with a recent report that provides detailed guidance on how governments can partner with the private sector to finance energy efficiency measures for the household and other sectors. The IEA encourages governments to support private investment in energy efficiency measures through collaboration with private financial institutions to develop public-private partnerships (PPPs) and other frameworks that facilitate energy efficiency financing. This new report outlines the essential steps in implementing PPPs in financing energy efficiency measures in all sectors.

The IEA report, Policy Pathways: Joint public-private approaches for energy efficiency finance, is designed 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.

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.

Further information on the report is available on the IEA website. And EiD will be following developments in financing energy efficiency.