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SUSTAINABLE ENERGY FINANCE THE OPPORTUNITIES IN PAKISTAN Dr. Riccardo Ambrosini Senior SEF Specialist, IFC Karachi, November 27 th 2014.

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Presentation on theme: "SUSTAINABLE ENERGY FINANCE THE OPPORTUNITIES IN PAKISTAN Dr. Riccardo Ambrosini Senior SEF Specialist, IFC Karachi, November 27 th 2014."— Presentation transcript:

1 SUSTAINABLE ENERGY FINANCE THE OPPORTUNITIES IN PAKISTAN Dr. Riccardo Ambrosini Senior SEF Specialist, IFC Karachi, November 27 th 2014

2 IFC global experience tailored to Pakistani context2 SEF Market Opportunities in Pakistan5 How can IFC help Pakistani Fis in Maximizing SEF Market Potential14 Annexes21 2 SEF Market Opportunities in Pakistan

3 These are some typical examples of SEF investments financed by Banks, Leasing Companies, MFIs around the world... 3 SectorPotential BorrowerEnergy Efficient / Renewable Energy Equipment Typical Banking Segment Interface AgricultureFarmers, 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 CommercialHousing 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 MunicipalMunicipalities, 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 IndustrialIndustrial 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

4 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

5 IFC global experience tailored to Pakistani context2 SEF Market Opportunities in Pakistan5 How can IFC help Pakistani Fis in Maximizing SEF Market Potential14 Annexes21 5 SEF Market Opportunities in Pakistan

6 Pakistan’s Energy Supply and Demand  Total primary energy supply for year was 2,710,000 TJ (or 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 , this amounted to 17.25% of primary energy use!!!  Installed power generation capacity: 22,797 MW  Insufficient considered increasing population and industrial requirement 6

7 Identified Investment Potential in Energy Efficiency (“EE”) & Renewable Energy (“RE”) in Major Sectors in Pakistan 7 Sector type Sub- Sector Potential InvestmentMain Equipment for investment EE (M PKR) RE (M PKR) EERE Industrial Textile173,000133,500 Compressors, 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”) Sugar105,00016,700 Co-generation, heat recovery, transfer equip., motors, general process, process control, steam system, VFDs Biomass, PV Leather1,15012,000 Compressors, heat recovery, heat transfer, motors, power factor, main process control, steam systems PV, SWH Paper7,8001,400 Compressors, heat recovery, motors, power factor, main process, process control, VFD Biomass, SWH Cement30,60033,000 Co-generation, meters, motors, power factor, main process, process control, VFDs Wind power, concentrated solar power Fertilizer5,80010,800Heat recovery, heat transfer, main processPV Other sectors 80,80052,000Diverse process and ancillary equipmentVarious technologies Non- industrial Agriculture168,000647,600 Tubewell replacements, trickle irrigation systems (drip and sprinklers mainly) Direct combustion of biomass, biogas, solar water pumping Residential111,000166,000Lighting, fans, air conditioning units, refrigerator replacement Biomass from municipal waste and animal manure, SWH Total Investment Potential 683,1501,073,000

8 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

9 Renewable Energy Potential in the Pakistani Industry Investment 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 Sector \ TechPhotovoltaic SWH (Solar Water Heater) Wind Energy Cement Leather Paper Sugar Textile Processing Textile Spinning Fertilizer Others

10 Investment Potential for EE & RE Equipment in the Agricultural Sector 10 Intervention Saving 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 pumps5 % Proper maintenance of pumping system5 % Installation of Variable Speed Drive (“VSD”) 5 % Crops Average annual Energy Requirement, (kWh / hectare) Potential Sector Investme nt (M PKR) Conventi onal Irrigation Trickle Irrigation Savings Widely Spaced Crops suitable for Drip Irrigation 1,6671, ,000 Closely Spaced Crops suitable for Drip Irrigation 3,1482, Crops suitable for Sprinkler Irrigation ,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

11 IFC global experience tailored to Pakistani context2 SEF Market Opportunities in Pakistan5 How can IFC help Pakistani FIs in Maximizing SEF Market Potential14 Annexes21 11 SEF Market Opportunities in Pakistan

12 Banks in Pakistan are already lending in most of the major economic sectors where SEF lending is relevant 12 Sectors Loans USD Million NPLs USD Million NPL Ratio Insurance9-0.1% Sugar1, % Production/Transmission of Energy5, % Financial1, % Chemical & Pharmaceuticals1, % Agribusiness3, % Individuals4, % Shoes & Leather Garments % Automobile/Transportation % Electronics % Cement % Textile7,3002, % Others19,4872, % Totals / Average47,2326, % Sector-wise Bank Advances & NPLs as of June 30, 2014

13 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

14 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

15 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

16 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

17 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

18 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

19 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

20 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

21 IFC global experience tailored to Pakistani context2 SEF Market Opportunities in Pakistan5 How can IFC help Pakistani Fis in Maximizing SEF Market Potential14 Annexes21 21 SEF Market Opportunities in Pakistan

22 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

23 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

24 Module 1: Assessment of FI’s SEF potential within the Pakistani context 24 Broad market context Economy Growth, inflation, trends Energy Market Energy – mix, grid, power quality and reliability, policy plans and priorities Demand side - Energy prices and outlook. Subsidies. Supply side – RE tariffs: feed-in tariffs, hydropower, biomass, biogas etc. Activities of IFIs and donors: climate related EE/RE projects, work with FIs Sustainable energy market Market Segments Micro Residential EE Green Mortgages Rural/off grid SMEs Corporate segment Municipal/public ESCOs SEF Sectors Energy and resource efficiency RE - potential, investments and drivers Green buildings - potential, investments and drivers Service and Technology Providers Energy auditors and consultants EE equipment suppliers RE equipment suppliers Financial market Financial Aggregators Financial Products

25 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

26 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

27 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

28 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

29 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

30 IFC global experience tailored to Pakistani context2 SEF Market Opportunities in Pakistan5 How can IFC help Pakistani Fis in Maximizing SEF Market Potential14 Annexes21 30 SEF Market Opportunities in Pakistan

31 EMENA SEF program: Over $ 400m portfolio, over $50m annual energy savings 31 TCB Bank USD 18 million 2011 LOCKO-Bank USD 20 million 2010 Credit Bank of Moscow USD 20 million 2010 Center-Invest Bank USD 10 million 2010 USD 4 million 2008 NBD Bank USD 8 million 2008 MDM Bank USD 50 million 2008 USD 35 million 2007 URSA Bank USD 53 million 2008 IFC Credit line + Advisory RUSSIA IFC Advisory SME Bank 2011 Prime Finance Bank 2009 Agropromcredit Bank 2009 Tatfondbank 2007 IFC Credit line + Advisory EMENA Ukraine Erste Bank 2010 Belarus MTBank USD 10 million 2011 Armenia AmeriaBank USD 15 million 2010 Jordan Tamweelcom USD 3 million 2011 Lebanon Banque Libano- Francaise 2012 Jordan Ejara Leasing 2013 Lebanon Fransabank 2014

32 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: million tons CO2e Annual energy saved: >44.2 million MWh

33 33 Philippines SEF Program  Started in FY08  As of end 2013: 3 partner banks Total loan amount: > $ 257 million Total investment: $ million Annual energy saved: 82,526 MWh Annual RE generated: 345,250 MWh Annual GHG reduction: 703,743 tСО 2

34 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

35 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


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