Workshop on State Energy Conservation Funds New Delhi 6 September 2010

1. Energy Efficiency Funds – International Best Practices and Implications for Fund Design in India Dilip R. LimayeECO-Asia Clean Development and Climate Program Workshop on State Energy Conservation Funds New Delhi6 September 2010

2. Presentation Outline • Presentation Objectives • Why Energy Efficiency Funds? • Overview of International EE Funds • Characteristics of EE Funds • Funding Sources • Fund Management • Project Financing Mechanisms • Illustrative Examples of EE Funds • Lessons Learned • Examples of Financing Schemes from the Kerala SECF

3. Presentation Objectives

4. Presentation Objectives • Review and assess international experience in establishing energy efficiency or energy conservation funds (EE Funds) • Define the key characteristics of EE Funds • Provide international examples of successful implementation of EE Funds • Identify lessons learned and implications for establishing SECFs in India • Provide illustrative examples of financing schemes form the Kerala SECF

5. Why Energy Efficiency Funds?

6. EE Options are the Most Cost-effective Clean Energy Options

7. Rationale for EC Funds Despite attractive economics and environmental and fiscal benefits, EE project implementation is far short of potential. Financing barriers are a major reason • Barriers to internal financing • Limited availability of internal budgets for EE, particularly in the public sector • Low priority for EE projects in internal funds allocation • Barriers to commercial financing • Small project size • Lack of knowledge, awareness and experience • Risk perceptions • High project development costs • Requirement for collateral or balance sheet financing • Monitoring and measurement of energy savings • EE Funds can overcome many of these barriers

8. India’s EC Act Requires Establishing State Energy Conservation Funds The Energy Conservation Act specifies • The State Government shall constitute a fund to be called the State Energy Conservation Fund for the purposes of promotion of efficient use of energy and its conservation within the state. • To the fund shall be credited all grants and loans that may be made by the state government or, Central Government or any other organisation or individual for the purposes of this act. • The fund shall be applied for meeting the expenses incurred for implementing the provisions of this act. • The fund …..shall be administered by such persons or any authority and in such manner as may be specified in the rules made by the state government.

9. Summary of International Best Practices

10. U.S. Energy Efficiency Funds • State level initiatives • Energy Efficiency (EE) financing now provided by most states • EE Funds established by • Regulators using electricity tariff mechanism • State energy agencies using taxes or general revenues • State bonds • Petroleum taxes • Fund size is typically 1 to 2 % of electricity sales revenues

11. $ Million < 1 (23) 1 - 10 (2) 11 - 50 (13) 51 - 100 (7) > 100 (5) U.S. Energy Efficiency Funds by State 257 101 148 125 790 • 30 states have utility sector energy efficiency programs • Total energy utility DSM/EE spending >$2.2Billion (2006)

12. Total EE Funding by U.S. State

13. International DSM/EE Funds • New South Wales – Sustainable Energy Fund • New Zealand – Sustainable Management Fund • Thailand - Energy Conservation Fund (ENCON) and ESCO Fund • Romania Energy Efficiency Fund (FREE) • Czech Republic Energy Savings Fund • IFC – Hungarian EE Fund and CEEF Fund • Brazil – Energy Efficiency Charge • Sri Lanka – Energy Conservation Fund • Korea – Korea Energy Management Fund

14. Characteristics of EE Funds

15. Potential Funding Sources • Wide range of funding sources employed in EE Funds: • Allocation from government budget • Government bonds • Special taxes • General tax revenues • Fees from certification • Donor funds • Funds from public and private financial institutions • The most common as well as most reliable and sustainable funding scheme is a levy or cess on electricity tariffs

16. Fund Management and Administration • Electric utilities • Government agencies • Municipalities • Third Parties: • Statutory Authorities • Public-Private partnerships • Independent Entity (with a Board of Directors comprised of Stakeholders) • Financial institutions • Non-Government Organizations (NGOs)

17. Evaluation and Oversight Evaluation Needs to be done formally and regularly Must be at arm’s length from implementers Requires specialized technical capacity Must be scaleable to match program delivery Oversight and Results Monitoring Usually a regulator or other government agency Should be transparent, independent and objective Technical capacity or resources needed here as well

18. Project Financing Mechanisms • Grants • Loans • Interest Buy-Downs • Subsidies • Equity Funds • Loan guarantees • Credit guarantees • Supplier credits

19. Criteria for Project Selection • Technically feasible. • Cost-effective from a societal perspective • Environmentally and socially beneficial • Financially sound • Acceptable level of risk • Replicable • Contributes to developing sustainable EE markets • Properly prepared and documented

20. Illustrative Examples of EE Funds

21. Best Practice Examples California New York State Energy Research and Development Authority (NYSERDA) Efficiency Vermont Thailand ENCON & ESCO Funds

22. California • CPUC has established utility based programs implemented by major privately-owned utilities (PG&E, SCE, SDG&E) • Funding of EE programs from the electricity tariff • Wide range of programs offered

23. California’s 12,000 MW Energy Savings • 64 GW system serving 35 million people • Regulated utilities are EE/DSM lead agencies • State Policy Preference for EE/DSM and renewable energy • Removal of disincentives to utility EE/DSM + Incentives to management/shareholders • Tariff surcharge collecting about 1 cents/kWh usage • EE + RE spending: $1.3 billion/year • Average cost: 3 cents/kWh

24. EE Funding in New York Establishment of the New York State Energy Research and Development Agency (NYSERDA) NYSERDA is a statutory public benefit corporation originally established (1975) to conduct energy R&D Following electricity sector restructuring in the mid-1990’s, regulators asked NYSERDA to take over public benefits programs previously administered by utilities Funds collected by utilities through tariff surchgarge and handed over to NYSERDA NYSERDA administers a wide range of EE programs

25. NYSERDA Program Structure Adv. Board NYPSC Governance/ Oversight MOU NYSERDA SBC FUND Utilities Program Administration $ Program Implementation Unsolicited Proposals Competitive Solicitations • Program Impacts: • Savings of 3,100 GWh/yr • Peak Demand reduction 1,200 MW • Customers Saving $570 million/yr • Environmental Benefits - 2 million tons/yr of GHG • Economic Development Impact – 4,700 jobs

26. The “Energy Efficiency Utility” in Vermont Efficiency Vermont is an independent, non-profit organization selected by competitive bid Efficiency Vermont operates an EE Fund under contract to the Vermont Public Service Board with funding provided by a system benefits charge Compensation based on performance 2007 Reductions:45 MW, 261 GWh @ cost of < 2 c/kWh

27. Thailand ENCON and ESCO Funds ENCON Fund • Revolving fund for EE – Partnership between Govt. and Banks to stimulate commercial investments in EE • Loans up to 100% of project costs • Total funding of $165 million in 3 Phases (2002-2010) ESCO Fund • Created to support ESCO activities in Clean Energy • Targets smaller projects than the ENCON Fund • Funding mechanisms include project equity investments, venture capital for ESCOs, leasing, credit guarantees and carbon finance • Total funding of 500 million baht (about $16 milion)

28. Lessons Learned

29. Best Practices - Lessons Learned EE funds have been very successfully used in a number of US states as well as in many other countries The most common, reliable and sustainable source of funding is a tariff levy established by the regulator and collected by the utility via the customer’s bill The fund created from such a levy may be administered by utilities or by other Fund Managers such as: Existing government agency Specialized statutory agency Public-Private Partnership NGOs Financial institutions Key issues How to select the best implementation model? How to most efficiently and effectively use the funds? How to incentivize the Fund management organization?

30. Size of the Fund • Annual electricity sales – KSEB • 12,239 Million Units • Rs. 4,741 Crores • US States and other international organizations have established EC Funds at the level of 0.5 to 2.0 % of electricity sales revenues • Levy of 0.5 to 2.0% in Kerala: % of Sales Amount in Rs. Crores 0.5% 23.7 1.0% 47.4 1.5% 71.1 2.0% 94.8 • Initial funding of Rs. 2 crores (plus matching by BEE) • Increase in future years to 1 to 2% of electricity revenues

31. EE Funds vs. Solar Subsidies • Many states are offering substantial subsidies to solar project developers (e.g. Rs. 15 per unit in Gujarat) • Rs. 50 crores would get 20 MW or 33.3 million units (GWH) of solar production annually • Typical cost of EE is Rs. 1.50 per unit (based on experience in California, New York and Vermont) • Therefore, Rs. 50 crores would get 333 GWH of energy savings or 10 times the contribution from solar • And, note that EE funds generally do not pay the entire cost of EE investments but only a portion of the cost to catalyze and stimulate commercial investments.

32. Examples of Proposed Financing Schemes from the Kerala SECF

33. Rationale for KSECF? • Facilitate increased implementation of Energy Efficiency (EE) projects by energy users • Engage commercial financial institutions to participate in EE project financing • Facilitate ESCO industry development and participation in EE project implementation • Demonstrate leadership in EE through implementation of EE projects in public buildings • Alleviate the power shortage and related impacts on the state economy • Meet the mandated requirements of the EC Act, 2001

34. Objectives and Scope of KSECF • Support the financing of specific EE projects using a variety of financing options • Contribute to the development of the EE market in Kerala by financing projects with private sector implementation through energy service delivery organizations (such as ESCOs). • Develop and demonstrate model financial transactions • Develop typical financing agreements that can be used by the private sector. • Build the capacity of local financial institutions in EE project transactions to increase their knowledge, interest and capability for financing such projects • Leverage commercial funds and create a sustainable market for EE project financing

35. Development of Financing Schemes • Review of international best practice • Discussion with EMC • Consultative Meeting with State government officials • Consultative Meeting with local and national financial institutions • Initial definition of financing schemes consistent with the size of the KSECF

36. Proposed Financing Schemes • Energy Audit Subsidy Scheme • Interest Buy-Down Scheme for Commercial and Industrial Customers • Energy Efficient Appliance Financing for Domestic Customers • Energy Efficiency Grant Scheme for Public Sector Projects • Performance Contracting Scheme • Partial Credit Guarantee Scheme

37. Energy Audit Subsidy Purpose • Help identify and assess of energy efficiency measures (EEMs) and provide the facility owner and/or manager an overview of the economic benefits of the EEMs. Summary • KSECF will offer a subsidy for energy audits to encourage and promote the conducting of energy audits for industrial, commercial and institutional facilities in Kerala

38. Description of Energy Audit Subsidy

39. Interest Buy-Down Scheme Purpose • Help reduce the financing cost and improve project economics. Summary • KSECF shall work with participating financial institutions (FIs) to implement this scheme and negotiate the terms of the scheme including the interest reduction.

40. Description of IBD Scheme

41. Energy Efficient Appliance Financing Purpose • Provide zero interest financing and manufacturer rebates for four and five star rated refrigerators and air conditioners. Summary • KSECF shall work with participating appliance manufacturers and financial institutions (FIs) to implement this scheme

42. Description of EEAF Scheme

43. Grants for Public Sector Projects Purpose • Facilitate implementation of projects in the public sector (low-income housing, public schools/hospitals, govt. buildings, etc.) Summary • KSECF will offer grants for energy efficiency projects in the public sector to encourage and promote project implementation in cases where the project has a high social value and the project sponsor is not able to obtain funding.

44. Description of Grant Scheme

45. Performance Contracting Scheme Purpose • Facilitate the implementation of public sector projects by ESCOs Summary • KSECF will provide assistance to public agencies in Kerala by developing rules and procedures to adopt the performance contracting process for implementing energy efficiency projects in public agencies.

46. Description of Performance Contracting

47. Partial Credit Guarantee Scheme Purpose • Leverage commercial financing of EE projects by providing partial credit guarantees to reduce FI risk. Summary • KSECF will provide credit guarantees to participating financial institutions using a model similar to the Credit Guarantee Fund for Small & Medium Industries

48. Description of PCG Scheme

49. Thank youContacts:Dilip Limaye - dlimaye@attglobal.netK.V. Rajeshwari - rajeshwari@cleanenergyasia.net