sustainable energy finance the opportunities in pakistan dr. riccardo ambrosini senior sef...

SUSTAINABLE ENERGY FINANCETHE OPPORTUNITIES IN PAKISTAN

Dr. Riccardo Ambrosini

Senior SEF Specialist, IFC

Karachi, November 27th 2014

IFC global experience tailored to Pakistani context 2

SEF Market Opportunities in Pakistan 5

How can IFC help Pakistani Fis in Maximizing SEF Market Potential 14

Annexes 21

2

SEF Market Opportunities in Pakistan

These are some typical examples of SEF investments financed by Banks, Leasing Companies, MFIs around the world...

3

Sector Potential Borrower Energy Efficient / Renewable Energy Equipment

Typical Banking Segment Interface

Agriculture Farmers, Cooperatives, Supply chains

Biomass/biogas digesters, Drip irrigation systems, efficient and/or solar/biogas powered pumps, Efficient agro-machineries, storage facilities

MF and Retail for Farmers, SME and Corporate depending on company size. Leasing

Residential/ Retail

Builders, home owners, home owner associations, individual households

Solar water heaters, wall/roof insulation, Water-saving shower heads, Solar lighting, CFL, improved cook stoves, water purifiers, efficient refrigerators, efficient HVAC units, double glazing

Mainly MF and Retail for households, SME and Corporate depending on size. Real estate leasing

Commercial Housing complexes operators, maintenance companies; Housing developers, Property Operators

Heating and ventilation equipment, Control and metering systems, Electricity peak-load control systems, Air-conditioners, Heat pumps, solar water heaters

Corporate and SME. Leasing for major equipment

Municipal Municipalities, district heating companies, street lighting operators, public buildings operators

Boilers for district heating as well as for public/municipal buildings, Heat exchangers, pipes for infrastructure projects, Cogeneration units, Complex EE projects

Mainly SME and Corporate, Public Finance

Industrial Industrial companies, SMEs and MSMEs

Energy efficient production lines, Waste heat recovery devices, Heating systems upgrades, Efficient boilers and heaters, Fuel switching (from coal to gas or biomass), Electricity peak-load control systems, Cogeneration units

SME and Corporate. Leasing for major equipment

Renewable generation

Project developers, Corporates/SMEs

Wastes to energy (wood waste etc.), production of fuel, biogas, biodiesel, solar (PV and thermal), hydro and wind power, geothermal

Corporate and SME lending on captive generation. Project Finance for grid attached RE plants. Specialized insurance product for solar PV

The main objective of IFC’s market study was to review the opportunities for Sustainable Energy Finance in Pakistan given the needs of national economy

Unfortunately for the local economy, in Pakistan high energy prices are coupled with high energy intensity. Additionally, there is an increasing supply-demand gap, estimated to be around 5,000 MW, high transmission and distribution losses, low levels of grid penetration, etc...

This market review of SEF opportunities has been conducted by IFC in the following economic sectors of Pakistan: Industrial

Residential

Agribusiness

Given the market drivers pushing towards a more sustainable use of Energy, it is of little surprise that this market review indicates: Relatively low payback periods / high IRRs for

EE/RE investments

Positive cash flows for potential customers of FIs

4




Annexes 21

5


Pakistan’s Energy Supply and Demand

Total primary energy supply for year 2011-12 was 2,710,000 TJ (or 64.72 MTOE)

More than 99 % of use through conventional energy sources

Heavy reliance on expensive sources of energy, as 80 % from petroleum products

12.5 % from large hydro and nuclear power

6.6 % from coal

Less than 1 % through micro/mini renewable energy (RE) sources

Pakistan's total energy savings potential: 418,807 TJ (11.16 MTOE)

In FY 2011-12, this amounted to 17.25% of primary energy use!!!

Installed power generation capacity: 22,797 MW

Insufficient considered increasing population and industrial requirement

6

Identified Investment Potential in Energy Efficiency (“EE”) & Renewable Energy (“RE”) in Major Sectors in Pakistan

7

Sector type

Sub-Sector

Potential Investment Main Equipment for investment

EE (M PKR)

RE(M PKR)

EE RE

Industrial

Textile 173,000 133,500Compressors, heat recovery, heat transfer equip., lights, meters, motors, power factor correction equip., main process, process control, steam system, variable frequency drives (“VFDs”)

Solar water heaters (“SWH”), wind power, photovoltaics (“PV”)

Sugar 105,000 16,700Co-generation, heat recovery, transfer equip., motors, general process, process control, steam system, VFDs

Biomass, PV

Leather 1,150 12,000Compressors, heat recovery, heat transfer, motors, power factor, main process control, steam systems

PV, SWH

Paper 7,800 1,400Compressors, heat recovery, motors, power factor, main process, process control, VFD

Biomass, SWH

Cement 30,600 33,000Co-generation, meters, motors, power factor, main process, process control, VFDs

Wind power, concentrated solar power

Fertilizer 5,800 10,800 Heat recovery, heat transfer, main process PV

Other sectors

80,800 52,000 Diverse process and ancillary equipment Various technologies

Non-industrial

Agriculture 168,000 647,600Tubewell replacements, trickle irrigation systems (drip and sprinklers mainly)

Direct combustion of biomass, biogas, solar water pumping

Residential 111,000 166,000 Lighting, fans, air conditioning units, refrigerator replacementBiomass from municipal waste and animal manure, SWH

Total Investment Potential 683,150 1,073,000

Industrial EE Market Potential in Pakistan

The overall investment potential for these energy efficiency measures in the industrial sector is about PKR 400 billion, with typical 3 to 5 years payback periods

8

Co-generation31%

Compressor3%

Heat recovery20%Heat transfer

5%

Lights 1%

Meters2%

Motors7%

Power Factor0%

Process5%

Process Control4%

Steam system1%

VFD2%

Combined Tech-nology investment for other sectors

20%

Renewable Energy Potential in the Pakistani IndustryInvestment Matrix – Sector vs. Technology

The industrial sector in Pakistan has long been suffering owing to unavailability of energy (load shedding for gas and electricity): Part of this energy deficiency could be met by Renewable Energy (“RE”)

Potential for private sector involvement: about USD 2.0 billion for 800 MW of installed capacity

9

Cement13%

Leather5%Paper

1%

Sugar6%

Textile Processing

12%Textile Spinning

39%

Fertilizer4%

Others20%

Total RE Industrial Investment (by Sector) Sector \ Tech Photovoltaic

SWH (Solar Water Heater)

Wind Energy

Cement Leather Paper Sugar Textile Processing

Textile Spinning Fertilizer Others

Investment Potential for EE & RE Equipment in the Agricultural Sector

10

InterventionSaving

Potential

Potential Sector Investment

(M PKR)

Use of mechanical seal pumps instead of gland-packed pumps

1-2 %

10,000

Use of energy efficient electric pumps, motors and diesel engines

20 %

Installation of properly sized pumps 5 %

Proper maintenance of pumping system 5 %

Installation of Variable Speed Drive (“VSD”)

5 %

Crops

Average annual Energy Requirement, (kWh / hectare) Potential

Sector Investme

nt (M PKR)

Conventional

Irrigation

TrickleIrrigation Savings

Widely Spaced Crops suitable for Drip Irrigation

1,667 1,389 27858,000

Closely Spaced Crops suitable for Drip Irrigation 3,148 2,778 370

Crops suitable for Sprinkler Irrigation 926 810 116 100,000

The major water-saving potential exists in the Agri sector, as irrigation accounts for ~93% of total water consumption in Pakistan today

Drip irrigation could potentially increase farmers’ water efficiency by 40-70%, at the same time improving yields by 30% or more

Sprinkler irrigation is suitable in all types of soil except heavy clay and water, saving up to 30-50%

Considering that in most locations water is not paid, the financial benefits of water efficiency exercises are fuel saved on pumping and increased yields



How can IFC help Pakistani FIs in Maximizing SEF Market Potential 14

Annexes 21

11


Banks in Pakistan are already lending in most of the major economic sectors where SEF lending is relevant

12

Sectors LoansUSD Million

NPLsUSD Million NPL Ratio

Insurance 9 - 0.1%Sugar 1,675 53 3.2%Production/Transmission of Energy 5,666 313 5.5%Financial 1,273 83 6.6%Chemical & Pharmaceuticals 1,890 129 6.8%Agribusiness 3,955 403 10.2%Individuals 4,070 498 12.2%Shoes & Leather Garments 218 31 14.1%Automobile/Transportation 633 110 17.4%Electronics 619 125 20.2%Cement 437 94 21.4%Textile 7,300 2,050 28.1%Others 19,487 2,141 11.0%Totals / Average 47,232 6,031 12.8%

Sector-wise Bank Advances & NPLs as of June 30, 2014

The Pakistani SEF Paradox

There is an urgent need for capital investment in EE and RE, among various sectors of the Pakistani economy, with an overall investment potential of about 1.75 trillion PKR: Agriculture 46%

Industrial 38%

Residential and commercial 16%

There is liquidity available with FIs to invest in power generation and EE projects.

However, demand and supply are not converging into substantial levels of energy related financing portfolios for the banks…

WHY?

13

Feedback from the Industry

Challenges: Lack of awareness, and lack of

skilled workforce High investment/capital expenditure Perceived high payback period (in

case of solar energy PV projects) Non tested technology (in Pakistan) Absence of government policies and

incentives, no preferential treatment Illegal and refurbished market Political instability of country

Initiatives: Shift towards coal power generation Exhausted/depleted tires for

extracting furnace oil through combustion

Third party energy and / or environmental audits

Large industrial setups having sound financial base are ready to invest in energy efficiency and later in renewable energy projects

Key performance indicators (KPI) for efficient use of energy still being developed

14

Feedback from Industry Associations

Challenges:

The associations are tackling energy shortages issues and environmental obligations with limited technical capacity

The emergency preparedness is dealt by individual industry and not at the associations’ level diluting the overall effectiveness

Lack of mandate for utilities distribution & bill collection

Initiatives:

Plans for combined power plants and wastewater treatment plants at industrial estate level

Awareness raising campaigns

Partnered with international donors for energy / environmental projects

Some have established technical cells

15

Feedback from non-Industrial Consumers

Challenges: Very high cost of alternative arrangements Limited capacity of alternative arrangement Rising cost of diesel operated tube wells 40,000 off-grid villages where taking the national grid would not be cost effective Lack of access to finance and incentives from government (i.e. on import duties)

Initiatives: Few tubewells utilizing solar panels Biogas plants for domestic fuelling needs have met with increasing success during

the past 5 years General switch over to energy efficient equipment

16

Feedback from Banks and other FIs

Challenges

No skills for technical details of any energy related financing application

Serious lack of demonstrated successful alternate energy technologies

Unavailability of performance guarantees and/or after-sale service from vendors

Low levels of technology sales and support networks throughout the country

Secondary market for energy equipment is not developed

Slow arbitration of banking disputes

Collaterals for SMEs are generally difficult for them

Initiatives On an opportunistic basis, without detailed knowledge of SEF concepts and

benefits

17

Feedback from Equipment Vendors

Challenges: Lack of awareness in clients No criteria for assessing existing equipment Reluctance in major investments Limited promotion of equipment and services Lack of coordination with FIs

18

Feedback from Government Institutions

Challenges Lack of coordination for mandates of different ministries and line departments Absence of regulations Low level of awareness WAPDA infrastructure does not support feed-in tariff for small projects Current pricing of gas is hampering RE Energy inefficiency is widespread, hence its cost can be generally passed through the value chain,

resulting in low levels of major investments in the industrial sector Corrupt practices including electricity theft Low emphasis on EE within environmental approval mechanisms of projects (EIA/IEE)

Initiatives: RE & EE products exempted for ST and customs duty. Revival of Motor Vehicle Tune Up centers program by ENERCON New sector wise guidelines for preparation of IEE and EIA by MOCC. WAPDA is executing CFL (compact fluorescent lamp) project AEDB is facilitating investors for on-grid RE projects MOCC negotiating with the World Bank and ADB to fund the CDM documentation and preparation

charges for new projects on Success Rate Model

19

Regulatory: SBP to encourage increasing SEF transactions in portfolio of commercial banks, for example through

directives related to FIs‘ portfolio structuring

Encourage use of ADR mechanisms to resolve disputes

Market Development: RE has been widely developed worldwide. However local technical expertise needs to be developed,

initially leveraging on partnerships of FIs with equipment vendors

A secondary market for industrial equipment already exists in Pakistan, however asset managers, vendors, etc. need to be made aware of the business opportunities for EE. For RE, a secondary market is already in place in Western Countries, this could offer some opportunities

Financial: Energy financing can be tailored to energy conservation/efficiency and RE generation projects

EE products are specific to defined industrial sectors, hence are suitable for FIs that are used to work within these business areas. Here a financial product matching technical requirement is most competitive

Banks in Pakistan are not generally aware of the benefits (for the banks, their client and society) of implementing EE measures or developing RE projects, hence training of banks on simple SEF methodologies should be one of the top priorities

Consultation with market players indicates the following as positive steps to be taken in order to develop SEF in Pakistan

20




Annexes 21

21


IFC’s Value Proposition

IFC works with banks in the following areas• Strategy development• Seminars, awareness raising for the sector-> informed clients• ESCO development-> business management, deal generation• Facilitate interaction between potential clients and FIs (i.e. textiles, poultry, zones) -> awareness,

access to audits • Identify key aggregators and sectors for financing• Periodic mining of bank’s portfolio• Work on public policy related to EE/RE scale up• Publications, marketing and communication materials• Customized training for bank staff• Specialized products for the niche market• Share different calculation tools

The Bank/Leasing Co/MFI:• Direct Sales• Advertising• Specialized team to drive this effort

22

Main Areas of Intervention for IFC’s SEF Advisory

23

IFC consistently delivers – all around the world – structured SEF products and build FIs’ capacity to independently manage a broader service offering to meet their client needs for financing of RE projects, EE measures and clean technology upgrades

Market Strategy

Scoping (Target clients, Target

products)*

Key Players

Champion

Product Developm

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Product Policy

Marketing

Training FI’s Staff

Pipeline Developm

ent

Transaction Support via Tools and Resources

Meeting with Clients

Provide Links with vendors, suppliers

ResultMeasureme

nt

Calculator

Examples of success

1

2

3 4 5

Module 1: Assessment of FI’s SEF potential within the Pakistani context

24

Broad market context

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Residential Energy Efficiency Offering

As Residential EE transactions are normally small in size, they are normally best suited for the Retail and Microfinance segments Due to high replicability of these transactions, the first option is usually the production of financial

products with marketing/information material available in branch, although the marketing channels can vary considerably depending on local context

Use of aggregators – ESCOs/consultants, equipment suppliers, Municipalities, larger retail chains – with different partnership models available

Typical EE measures to include solar water heaters, efficient lighting/heating/cooling equipment, domestic equipment, wall/roof insulation, double glazing and smaller solar PV installations

EE Credit Lines in the SME/Corporate Segments

Typical equipment financed by Banks in the MENA region include: Energy efficient production lines

Waste heat recovery devices

Heating/cooling systems upgrades

Efficient boilers and heaters

Electricity peak-load control systems

Cogeneration units

These opportunities are present in all industrial and commercial sectors of MENA’s economy

These are familiar sectors for Commercial Banks already, best fitting Corporate, SME, Leasing and Islamic Banking operations

http://www.madek.ua/PhotoGallery/Graphics/Photo017.jpg

RE Financing

Main renewable energy equipment to be financed: Solar water heaters (“SWHs”) Biogas/Landfill gas (cogeneration) units Solar photovoltaic (“PV”) units Concentrated solar power (“CSP”) plants Wind farms Hydro power plants

Best fitting SME, Corporate and Leasing operations, depending on type and size of projects

Sustainable Energy Finance for Rural Banking

Borrowers in the Rural sector include farmers, cooperatives, supply chains operators

Potential projects include installation / replacement of the following equipment:

Biomass/biogas digesters

Irrigation systems

Efficient and/or solar/biogas powered pumping

Efficient agro-machineries

Cold storage facilities

Rural (off-grid) power solutions

Financial products cutting through Microfinance, SME, Corporate, Rural and Islamic Banking operations

Energy Performance Insurance

An EPI is an instrument that a service provider (equipment supplier/ESCO etc.) or end-

beneficiary can procure to hedge against underperformance of EE/RE installations

The insurance premium is priced based on the expected energy savings/energy

generation

If the guaranteed EE savings/RE generation are not met, the insurer compensates

the end beneficiary for the shortfall

With the technology risk mitigated, financial institutions “only” need to evaluate the

payment/credit risk of the client, which is their core business

An EPI is a good fit for both ESCO’s and vendor’s EE implementation needs:

Currently, ESCOs are using their own equity to absorb any EE implementation risk,

which is limited and finite. EPI will help to secure external debt and allow them to

upscale

Equipment vendors are looking to expand their offering to clients but are reluctant

to guarantee their sub-contractors. With an EPI, vendors can offer service as well as

performance contracts without taking on additional risks




Annexes 21

30


EMENA SEF program: Over $ 400m portfolio, over $50m annual energy savings

31

TCB Bank

USD 18 million2011

LOCKO-Bank

USD 20 million2010

Credit Bank of Moscow

USD 20 million2010

Center-Invest Bank

USD 10 million2010

USD 4 million2008

NBD Bank

USD 8 million2008

MDM Bank

USD 50 million2008

USD 35 million2007

URSA Bank

USD 53 million2008

IFC Credit line + Advisory

RU

SSIA

IFC Advisory

SME Bank

2011

Prime Finance Bank

2009

Agropromcredit Bank

2009

Tatfondbank

2007

IFC Credit line + Advisory

EMEN

A

Ukraine

Erste Bank

2010

Belarus

MTBank

USD 10 million2011

Armenia

AmeriaBank

USD 15 million2010

Jordan

Tamweelcom

USD 3 million2011

Lebanon

Banque Libano-Francaise

2012

Jordan

Ejara Leasing

2013

Lebanon

Fransabank

2014

China SEF Program

32

Started in FY 2007

As of 2013:• 3 partner banks • Total loan amount: > $ 783 million • Total investment: > $ 1.7 billion • Annual GHG emission reduction:

19.33 million tons CO2e • Annual energy saved: >44.2 million

MWh

3333

Philippines SEF Program

Started in FY08

As of end 2013:• 3 partner banks• Total loan amount: > $ 257 million• Total investment: $ 422.5 million• Annual energy saved: 82,526 MWh• Annual RE generated: 345,250 MWh

• Annual GHG reduction: 703,743 tСО2

Key Success Factors:SEF aligned with bank’s strategy

Russian commercial bank, pioneer of Sustainable Energy Finance:

Focus on industrial SMEs that are using old, energy inefficient production equipment and technologies

In 2005 the bank launched its Sustainable Banking Framework, integrating SEF in its business model

From $ 4 million in 2006 to $ 200 million in 2012

Portfolio growth and diversified sources of funding

• IFC assisted the bank in the development of SEF internal capacity to identify, assess and process SEF deals. The bank has demonstrated SEF portfolio growth from $ 4 million up to $ 200 million in 6 years.

• Proven SEF methodology, trained staff and solid track records helped the bank to attract several multinational investors to fund its SEF lending operations.

• The bank reports a two-digits profitability of its SEF operations and is considering to further develop its SEF operations.

• The bank’s leadership has been recognized by international community, including The Financial Times Sustainability Awards in 2007 and 2013

3434

Key Success Factors:Building SEF Portfolio with existing clients

Leading bank in the Middle East, an IFC client, launched SEF project in 2012

IFC advisory helped the bank to create internal capacity and build the pipeline:

Detailed analysis of the existing portfolio in order to identify SEF potential

Comprehensive training program for loan officers and branch managers

Transaction support: • Joint client site visits to identify

eligible projects• Supervision for energy audits• Sector industry guides for loan

officers

In two years the bank has achieved results as follows:

$ 110 million portfolio of SEF projects

$ 200 million of total project costs

Experience in different sectors from EE industrial equipment to RE solar PV, Green Buildings, Residential EE

High conversion rate from site visits and energy audits completed into financed transactions

35

sustainable energy finance the opportunities in pakistan dr. riccardo ambrosini senior sef...

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