Jacquelin Ligot

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EBRDs Approach to Financing Energy Efficiency in
Transition Countries

• Jacquelin Ligot
• Director, Energy Efficiency and Climate Change
• Amsterdam Sustainable Energy Forum
• 25 April 2006

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What is EBRD?

• An Investment Bank with Public Shareholders
• AAA-rated international financial institution
  founded in 1991
• owned by 62 countries (including all countries of
  operation), the EU and EIB
• Mandate facilitate the transition of 27 CEE and
  CIS countries to market economies
• Capital base of 20 billion and Portfolio of 15
  billion to date
• Largest single private investor in the region,
  but can also finance public sector projects
• 75 debt / 25 equity

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A strong presence 32 Offices in 27 Countries
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A wide palette of financing instruments
Direct
Indirect

• Loans
• Equity, including combination of loan and equity
• Guarantees, including credit enhancements
  (performance bonds etc.)

• SME loans
• Equity funds
• Micro/small business programmes
• Credit lines
• Trade Facilitation Programme
• Co-financings

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Setting the scene

• 13 of global marketed energy consumption, and
  13 of GHG emissions
• Consumption has dropped during the first 10 years
  of transition but is picking up rapidly, and is
  expected to grow much more rapidly than in W
  Europe (45 for EIA by 2025)
• Energy intensities have fallen steadily, and will
  continue to do so. While NMS will converge
  towards EU-15, CIS and SEE will remain
  significantly above
• There has been a shift away from coal towards
  gas, and this will continue in particular in
  central Europe
• GHG emissions are down by 36 since 1990 but are
  expected to increase by 40 till 2025 (EIA)
  although they would remain 10 below their 1990
  level
• Contrast between a small set of resource-rich
  countries (Russia, Kazakhstan, Turkmenistan,
  Azerbaijan) and a vast majority of net importers
  (all EU-8)

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Primary energy consumption
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Energy intensities
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Projections of energy intensities
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EE Challenges and Barriers

• Subsidised energy prices, mostly in CIS
• Inappropriate tariff structures (e.g. DH billing
  based on norms cost-plus tariff methodologies)
• Lack of awareness, etc.
• Lack of adequate legal/regulatory framework for
  ESCOs
• Reluctance to prioritise investment to improve
  efficiency
• EE opportunities everywhere but small projects
• Banking system lacks interest or skills

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Energy Efficiency EBRDs Strategy

• Top priority of the Bank
• Dedicated Energy Efficiency and Climate Change
  (EECC) team
• Reorganisation to further mainstream EE in Bank
  operations
• The EECC team now operates together with the
  corporate planning function directly reporting to
  the First Vice President Banking.
• A new Climate Change Advisory Board has been
  created to guide and sustain the implementation
  of the climate change objectives of the Bank
  across the organisation
• Target of 1 billion in demand-side EE and RE
  over period 2006-2010
• EBRD is currently preparing a Climate Change
  Initiative as its contribution to the IFI
  Investment Framework called for by the G8 at
  Gleneagles in 2005

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Energy Efficiency EBRDs Approach

• Systematically pursue EE opportunities in all,
  but mostly industrial, projects
• Make energy supply systems more efficient
• Support providers of EE services, e.g. ESCOs
• Reach out to small projects through wholesale
  financing instruments equity funds or local
  financial intermediaries, e.g. credit lines
• Use Carbon Finance as a co-financing source

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Industrial Projects Approach

• Screen all projects at concept review stage or
  earlier and identify those with EE potential
  ratings are given to projects (E0, E1, E2)
• Provide free energy audits funded by donors (TC),
  mostly in E2s
• E.g. Tacis 0.5 million for Russia
• Structure an add-on to direct debt or equity
  financing enhances company cash flow
• Energy Management training modules where
  appropriate
• Next Step develop benchmarking, in particular
  for E1s

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Industrial Projects Results

• Since 2002, the Bank has financed over 35
  projects with Bank-funded energy efficiency
  components of circa to 340 million
• Most of these projects involve clients in
  energy-intensive industries, such as steel (Istil
  in Ukraine, Air Liquide-Severstal in Russia,
  Mittal in Ukraine, Macedonia and Bosnia and
  Herzegovina), chemicals (Uralkaly and
  Togliatiazott in Russia), aluminium (Alcoa in
  Russia), pulp and paper (PFS and Svilosa in
  Bulgaria), cement (Central Asia Cement in
  Kazakhstan)
• 27 detailed energy audits have been conducted
  resulting in 16 projects signed by the Bank (with
  an other 6 projects on-going)

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Taxonomy of Industrial Energy Efficiency
Investments

• energy savings

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Example Svilosa (Bulgaria) - 2005

• EUR 18 mln Loan, for restructuring and expansion
  of Pulp and Paper mill
• EUR 14 mln to be used for modernisation of
  equipment and processes including a new 6 MW
  back-pressure steam turbine to recover wasted
  heat
• Benefits energy costs reduction (annual savings
  estimated at EUR 5 mln) productivity
  improvements
• IRR range 11 - 137 average 31. Payback 3
  years
• Environmental benefits CO2 emission reduction
  (gt100 kton/year), reduced water and heat losses

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Svilosa Energy Audit results
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District heating modernisation

• DH is a distinctive feature of countries in
  Transition 65-70 share of heat market in
  Ukraine-Russia. Over-sized, derelict,
  inefficient systems with scope for efficiency
  saving ranging between 35 and 50 relative to
  best practice
• The Bank has financed 11 district heating
  projects since 2001 with a total Bank investment
  of 265 million
• The majority of these projects involve
  municipally-owned district heating companies.
• Projects focused on infrastructure upgrading,
  including introduction of modern technology
  (individual compact heating substation,
  pre-insulated pipes, frequency controlled pumps)
• as well as the improvement of overall operational
  efficiency and commercialisation of the municipal
  district heating companies through introduction
  of new tariffs (typically a phased move to full
  cost recovery), reform of subsidies and
  improvement of organisational structures

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District Heating Modernisation Examples

• Surgut (Russia - 2002)
• Senior loan to City
• 27 million equiv. in Rubles (1st municipal loan
  in Rubles!)
• Secured by Citys revenues without sovereign
  guarantee
• tariff reform and the introduction of service
  contracts

• Sofia (Bulgaria - 2002)
• Toplofikacia Sofia is largest gas consumer in
  Bulgaria (30!)
• 30 million loan to municipal company
• Sovereign guarantee
• Transition move to cost recovery tariffs
  private management contract

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Poznan DH Cogeneration Privatisation (Poland)
2003-2004

• DH company and CHP plant of Poznan were
  privatised consecutively by City and Polish
  Treasury resp. following competitive tender
• CHP plant supplies heat to Poznan DH network, and
  electricity with 2 off-takers (National grid
  operator PSE and local Disco ENEA)
• Buyer was Dalkia Intal via its Polish
  subsidiary, Dalkia Polska
• EBRD invested alongside Dalkia for a total of 50
  m (equity) over the two operations
• Exit via put option to Dalkia Intal at fair
  market value or earlier via trade sale or listing
  of Dalkia Polska

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ESCOs Energy Alliance (Ukraine) 2004

• First privately-owned Ukrainian ESCO Start-up
  company Sponsor is Western NIS Enterprise Fund
• Focus on leasing small (1-3 MW) co-generation and
  electricity generation engines to industrial
  clients
• 10 mln EBRD loan 5 mln syndicated to RZB
• Lease payments calculated based on current grid
  heat and electricity prices minus a discount
• 1st Project with KOEP, a large Ukrainian edible
  oil extraction plant in Kirovograd oblast
  constr. of a 4 MW co-generation station fuelled
  by sunflower seed peels (natural by-product of
  the client)

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UkrEsco (Ukraine) a Public ESCO

• State-owned ESCO created in 1998 through an
  initiative between Ukraine, EBRD and the EU
• EBRD extended a 30 million loan to UkrEsco,
  secured by a sovereign guarantee
• UkrEsco targets industrial commercial clients
• Not true energy performance contracting payment
  to ESCO akin to a loan is due regardless of
  actual savings
• Follow on loan of 20 m to be signed in Q4 2005
  conditionality includes privatisation of UkrEsco

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City of Lódz (Poland) ESCO for public sector
facilities

• Bank initiated and supported project development
  with TC funds for preliminary assessment
  preparation of tender
• Scope Circa 420 municipal buildings (mostly
  schools and kindergarten) largest single ESCO
  contract in the region
• ESCO to be selected through intal tender.
  Initial tender void because only one bidder.
  City still to decide whether to re-start tender
• EBRD could provide loan or payment guarantee to
  ESCO on a limited recourse basis or buy
  receivables (forfeiting) or share risk with
  forfeiting bank

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Bulgaria Credit Line 1 Industrial EE and
Renewable Energy - 2004

• 50mln EBRD credit line framework with Bulgarian
  banks for on-lending to private sector for
  industrial energy efficiency and small renewable
  energy projects.
• 10mln grant from Kozloduy International
  Decommissioning Support Fund for
• Cash incentives to local banks and sub-borrowers
  (80)
• and a technical assistance package project
  preparation and project validation (20)
• 6 loans signed in 2004 for the full 50 mln
  amount
• 22 projects already approved

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Bulgaria EE and RE Credit Line Results so far

• 38 sub-loans approved by PBs for an amount of
  loans of 22 million 19 completed
• Estimated emission reductions on current
  portfolio 267,000 tonnes CO2 / year
• Estimated benefit in power generation equivalents
  on current portfolio is 92 MWe about 37k grant
  for each MWe saved or added from a renewable
  source
• 141 sub-projects in pipeline representing more
  financing than remaining evenly split between
  industrial energy efficiency and small renewables

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Bulgaria Credit Line 2 Residential Sector - 2005

• 50 mln EBRD Credit Line Framework with Bulgarian
  banks for on-lending to individuals for EE
  investments in residential sector
• 35 of Bulgarias energy saving potential, owing
  to poor insulation of dwellings and overuse of
  electricity
• i) insulation ii) biomass efficient
  heaters/boilers, iii) solar water heaters, iv)
  efficient gas boilers
• Average rebate of 20 of the investment cost
• Potential borrowers 250,000 households - budget
  sized for circa 30,000 Sub-loans
• 10 mln grant from Kozloduy Decommissioning Fund
• Preparation/ Marketing/Verification 0.7
  million
• Incentives to sub-borrowers and Participating
  Banks and 9.3 million
• To date, Loan agreements have been signed with 4
  Bulgarian banks for a total of 30.1 million
  RZB, DSK, Postbank and UBB

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EBRDs role in the Carbon Market

• Project financing based on Carbon Credit sales
• Intermediary purchasing carbon credits for the
  account of buyers
• Netherlands JI Carbon Fund JI Fund (2003)
• Multilateral Carbon Credit Fund 2006
• Mobilise TC for project preparation
• e.g. CDM project preparation facility in ETC
  region

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Carbon Finance a project example

• Paper Factory Stambolijski pulp paper mill in
  Bulgaria
• EBRD was a shareholder
• Investment of up to 12 mln in waste (bark)
  boiler EE measures
• energy costs reduction (annual savings estimated
  at 3.6 mln)
• 600,000 tons of CO2 reduction 2006 2012
• Buyer of carbon credits (ERUs) is EBRD for the
  account of the Netherlands
• 50 advance payment

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Characteristics of EBRDs approach

• Public or private clients
• Flexible and diverse instruments stand-alone
  debt or equity indirect via equity funds or
  credit lines
• Risk appetite limited recourse to parent
  company start-ups high ratio of debt to equity
  high of project costs
• Ability to mobilise and use grant funding
• Catalyst for commercial co-financing
• Ability to engage host Governments
• Not below 10m in project costs if below equity
  fund or credit line, or DIF/DLF (ETC countries)
  are best suited
• Can provide carbon finance, and lend against
  carbon cash flow
• Market-related pricing reflecting risk

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