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Unlocking Commercial Financing for Clean Energy in East Asia Clean Energy for Financing Unlocking Commercial Public Disclosure Authorized Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Energy and Mining Wang, Stern, Limaye, Mostert, and Zhang Limaye, Stern, Wang, Unlocking Commercial Financing Public Disclosure Authorized for Clean Energy in East Asia Xiaodong Wang, Richard Stern, Dilip Limaye, Wolfgang Mostert, and Yabei Zhang Public Disclosure Authorized Unlocking Commercial Financing for Clean Energy in East Asia DIRECTIONS IN DEVELOPMENT Energy and Mining Unlocking Commercial Financing for Clean Energy in East Asia Xiaodong Wang, Richard Stern, Dilip Limaye, Wolfgang Mostert, and Yabei Zhang © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 16 15 14 13 This work is a product of the staff of The World Bank with external contributions. 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Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. ISBN: 978-1-4648-0020-7 e-ISBN: 978-1-4648-0021-4 DOI (print): 10.1596/978-1-4648-0020-7 Cover photos: © Dana Smillie / World Bank. Some rights reserved. Cover design: Naylor Design Library of Congress Cataloging-in-Publication Data in progress. Unlocking Commercial Financing for Clean Energy in East Asia • http://dx.doi.org/10.1596/978-1-4648-0020-7 Contents Foreword xv Acknowledgments xvii About the Authors xix Abbreviations xxiii PART 1 Overview 1 Chapter 1 The Role of the Government: Act Now on Domestic Policy and Financing 3 Global and Regional Context: Governments Are Taking Action, but Mobilizing Substantial Financing Is the Major Hurdle 3 Study Objective and Audience: When to Use Which Financing Instrument 7 Study Scope: Energy Efficiency and Renewable Energy Face Distinct Barriers and Require Different Policy and Financing Instruments 8 Bibliography 10 Chapter 2 Conducive Policies: Driver for Catalyzing Commercial Investment in Clean Energy 11 Energy Efficiency Policy Instruments: Overcoming Market Failures and Barriers 11 Renewable Energy Policy Instruments: Bridging the Cost Gap 12 Bibliography 15 Chapter 3 Financing Instruments: Tailored to Market Barriers, Segments, and Local Context 17 Tailored to Overcome Market Barriers: Mitigating Risks and Bridging the Cost Gap 17 Tailored to Meet the Needs of Market Segments: Increasing Access to Financing for SMEs 19 Unlocking Commercial Financing for Clean Energy in East Asia • http://dx.doi.org/10.1596/978-1-4648-0020-7 v vi Contents Tailored to Suit the Local Context: Fitting into the Regulatory Environment and Maturity of the Financial Market 22 Energy Efficiency and Renewable Energy Financing Instruments: How They Work, What Works, and When to Use Them 23 Bibliography 34 Chapter 4 Unlocking Commercial Financing for Clean Energy: Lessons Learned and Ways Forward 35 Effective Clean Energy Policies Are the Driver for Catalyzing Investment in Clean Energy 35 Public Financing Instruments Must Be Tailored to Overcome Market Barriers, Meet the Needs of Targeted Segments, and Suit the Local Context 36 Public Financing Mechanisms Should Be Designed to Maximize Private Financial Flows 38 Technical Assistance Is Critical and Has a High Payoff 40 Generating Sufficient Deal Flows Has Been a Major Challenge 41 Effective Governance and Management of Publicly Funded Programs Are Critical to Success 41 SMEs Remain the Toughest Market Segment to Finance 42 Targeted Subsidies Can Play a Catalytic Role 44 MDBs Have Been Pioneers in Innovative Clean Energy Financing Mechanisms, and National Development Banks Have the Potential to Play a Significant Role 44 Bibliography 46 PART 2 Financing Energy Efficiency 47 Chapter 5 Barriers to Energy Efficiency 49 Introduction 49 Role of Energy Efficiency in Mitigating Climate Change 49 Barriers to Scaling Up Energy Efficiency 49 Financing Barriers 52 Classification of Financing Barriers 54 Note 55 Bibliography 55 Chapter 6 Policy Instruments to Enhance Investments in Energy Efficiency 57 Introduction 57 Legislative Instruments 57 Unlocking Commercial Financing for Clean Energy in East Asia • http://dx.doi.org/10.1596/978-1-4648-0020-7 Contents vii Regulatory Instruments 59 Fiscal Instruments 60 Information, Education, and Communication 61 Voluntary Instruments 62 Addressing Barriers to Energy Efficiency 63 Conclusion 63 Notes 65 Bibliography 65 Chapter 7 Overview of Financing Mechanisms for Investments in Energy Efficiency 67 Introduction 67 Need for Financing Mechanisms 67 Public Sector Role versus Market Role 68 Financing Mechanisms 68 Moving from Public to Commercial Financing 70 Designing the Financing Mechanisms 72 Notes 74 Bibliography 74 Chapter 8 Financing Mechanisms for Energy Efficiency: Characteristics and Lessons Learned 75 Introduction 75 Dedicated Energy Efficiency Funds 75 Utility DSM Funds 80 Utility Consumer Financing of Energy Efficiency Programs 84 Dedicated Credit Lines for Energy Efficiency 87 Risk-Sharing Programs 93 Leveraging Commercial Financing through Performance Contracting 103 Equity Funds 113 Notes 117 Bibliography 118 PART 3 Financing Renewable Energy 121 Chapter 9 Barriers to Renewable Energy 123 Notes 125 Chapter 10 Government’s Role in Promoting Renewable Energy 127 Generic Framework for Renewable Energy 127 Optimization Criteria for Incremental Cost Support 128 Instruments for Leveraging Private Finance 129 Notes 132 Unlocking Commercial Financing for Clean Energy in East Asia • http://dx.doi.org/10.1596/978-1-4648-0020-7 viii Contents Chapter 11 Policy Instruments for Covering the Incremental Cost Gap for Renewable Energy 133 Finance Sources and Targets 133 Investment Subsidy 135 Investment Tax Credit versus Production Tax Credit 137 Feed-In Tariffs 138 Tenders for PPA Contracts or for Feed-In Premiums 147 Renewable Portfolio Standards 150 Comparison of the Mandated Market Policies for Offshore Wind Farms 152 Design and Implementation of Policies to Achieve Goals 155 North-South Sharing of Incremental Cost Finance 159 Conclusions and Recommendations 159 Notes 161 Bibliography 162 Chapter 12 Financing Mechanisms for Renewable Energy 163 Introduction 163 Private Sector Innovations in Renewable Energy Financing 163 Public Debt Finance Instruments 169 Public Equity Finance 178 Mezzanine Finance: Debt and Equity Support 182 Consumer Finance of Renewable Energy 183 Public Risk-Sharing Instruments 186 Public Renewable Energy Funds and Renewable Energy Finance Agencies 194 Notes 198 Bibliography 201 Chapter 13 Selection of Financing Instruments for Renewable Energy 203 Introduction 203 Tailoring the Instrument to the Type of Barrier 203 Publicly Backed Guarantees 204 Importance of Framework Conditions 205 Increasing Venture Capital 205 Notes 209 PART 4 Clean Energy Financing Case Studies 211 Chapter 14 Case Study: China Energy Efficiency Financing Project (CHEEF) 213 Introduction 213 Country Context 213 Barriers 214 Objectives 215 Unlocking Commercial Financing for Clean Energy in East Asia • http://dx.doi.org/10.1596/978-1-4648-0020-7 Contents ix Design 215 Implementation Results 216 Lessons Learned 217 Bibliography 218 Chapter 15 Case Study: Thailand Energy Conservation (ENCON) Fund 219 Introduction 219 Country Context 220 Barriers 220 Objectives 221 Design of the Energy Efficiency Revolving Fund 221 Design of the ESCO Fund 223 Implementation Results 223 Lessons Learned