Leveraging IFC to Affect Clean Energy Market Development: A Corporate Journey
Russell SturmSustainable Energy Team LeaderInternational FinanceCorportation
What’s an “IFC”?
International Bank for Reconstruction and Development, 1945
International Finance Corporation, 1956
International Development Association, 1960
Multilateral Investment Guarantee Agency, 1988
IFC: Private Sector Investment Arm of theWorld Bank Group
IFC: Private Sector Investment Arm of theWorld Bank Group
IFC is owned by its 178 member countries, which collectively determine policies.
International Centre for Settlement of Investment
Disputes, 1966
IFC’s MissionIFC’s Mission
To promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives
IFC Financing in IFC Financing in FY06FY06
IFC CommitmentsFY06 Total: $8.3 billion
0
12
34
56
78
9
2002 2003 2004 2005 2006
U.S
.$ b
illio
ns Syndications
IFC's ownaccount*
*Includes loans, equity, guarantees, risk management products
Why focus on EnergyWhy focus on Energy Efficiency?Efficiency?
Source: EIA, International Energy Outlook, 2001 and 2006.
EE offers cost effective way to meet growing demand and support sustainable economic development
•US$ 1 mm investment in new capacity yields 1 MW new power, OR…•3-5 MW reduction in power consumption
How much are you emitting?
China/Russia emit much more CO2 to achieve the same GDP output
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Japan USA China Russia
kg/$2000
Source:
“Key World Energy Statistics, 2006 Edition”, International Energy Agency
Information is for 2004
Energy Efficiency:An opportunity lying in wait
Cost-effective investments with compelling social, environmental, and economic benefitsBarriers relate to nature of the underlying investments … and human nature
What does IFC bring to the table?
Leveraging IFC’s Comparative Advantage
Able to mobilize big chunks of moneyNetwork of investee companies– 45% of business done through financial intermediaries – Big global players– Substantial local players seeking to gain global stature
Convening power/ private sector market focusCommitment and drive to innovate and the expertise to do so – structuring/credit/risk mitigationA mission to support sustainable economic developmentMarket focus and private sector orientation
And… realistically speaking
Inability to efficiently invest directly in “small”transactions
Leveraging IFC to Transform Markets
Two Opportunities – Two Approaches1. Mobilizing commercial investment in EE
through financial markets2. Mobilizing market development for new
technology
Markets vary …and so do the needs and solutions
Market diagnostics are critical before intervening
CASE 1: Cultivating the money tree
With liquidity high in most markets – the problem isn’t a lack of capital availability
Matching IFC’s Strengths to the Market’s Needs
Small deal size
Lack of lending experience by FIs
Limited FI knowledge of EE sector
Unsophisticated vendors and developers
Work through IFC’s highly developed financial markets businessSupport with credit enhancement/other financial productsSupport with TA for financial product development/marketing; aggregate the market
Support with TA to prepare and standardize transactions
Barrier IFC Response
Playing to our comparative advantage
Financial Markets – leveraging interests and capacity of local Fis– Matching deal size to institutional capacity– Leveraging IFC’s reach and expertise
Supporting local FIs in developing sustainable energy lending businesses
IFCHousing Loans
ESCOs *
Municipals
SME/Corp.
CommercialBank
*ESCO – Energy Service Companies
Loan or Guarantee
TA
TA
On-lending
Wholesaling through FIs:Wholesaling through FIs:How do we work?How do we work?
From To
48% of production assets installed over 20 years ago
End user inefficiency
Russia…
Building business forPartner Banks
The Ceska Sporitelna Story•Competition squeezing margins for leading bank
•Developed FINancing Energy Saving Applications (FINESA) product
•US$ 20 million in RE/EE loans in 36 months
Current project pipeline US$ 58 million,
•Market Forces In Play
Playing to our comparativeadvantage
Financial Markets – leveraging interests and capacity of local Fis– Matching deal size to institutional capacity– Leveraging IFC’s reach and expertise
$500 million annual investment target in 3 years
Supporting local FIs in developing sustainable energy lending businesses
Sustained, Concrete Impact = Moving markets
IFC continues to evolve its FI support and push the market
Hungary – the pilot continues to push the frontier– Leverage of GEF money now greater than 100X– Robust blockhouse renovation industry established
Moving into more frontier markets with facilities– Russia, China, Philippines
Spinning off financial and TA products bank by bankLearning and refinement of delivery model– Includes user-pays for TA– Multiple marketing channels, including vendor networks, FIs,
Utility partnerships
Program Achievements
CEEF Guarantees 1997- 2007 (as of 26 January 2007)
130,583 34,217931,184 154,528 128,702
1,541,6093,650,567
5,842,677
15,267,034
6,367,950
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Year
Gua
rant
ee in
US
$
CummulativePer Year
CEEF Housing Portfolio
$448,863
$52,142,159
$1,243,157
$5,357,553
$0
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
2003 2004 2005 2006
Individual Guarantees Portfolio Guarantees
3 deals 18 deals 35 deals
254deals
Szemünk Fénye Structure
OTP OTP BANKBANK
ESCO ESCO CaminusCaminus
Risk Sharing Risk Sharing FacilityFacility
SubSub--Sovereign Project PackagesSovereign Project Packages
Credit Credit LineLine
SubSub--contractorscontractors
Equipment Equipment SuppliersSuppliers
Project ImplementationProject Implementation
Services Services feesfees
IFC $122.5 mOTP Bank Risk Sharing
Suppliers/Contractors
ESCO
Municipality
US$250 mnFinancing
Project Implementation
US$125mn
Project Impacts
Lower Energy cost – municipalfiscal balances
Reduced gas import dependence
New GE factory (supplier)providing FDI and jobs
AND
Improved Health, Safety & Learning Conditions for Children!!
Scaling up – better leverage of funds
GEF $2.5m
>100 x 1 leverage of GEF funds
Program Achievements
>200 supported transactions;majority housing renovation projects$250 million investment under the scope of the Szemünk Fénye Program in the upcoming 5 years>25 transactions in EE for SME and RES sectorsUS$34 millions guarantees resulted in the $88 mil. EE and RE loans, total CAPEX US$154 millionsAvoided GHG emmisions 140 th./yearLargest housing renovation portfolio in IFC historyFirst ESCo forfaiting trasaction guaranteed in EUSecond mortgage product introduced for Baltic countriesFirst wind power project at IFC ever (2MW)Largest European ESCO projects supported (OTP)Dedicated financial product and even EE and RE projects department in the CS bankLargest CEE PV solar plant (0,69 MW)
1
2
3
1
42
3
1
23 9
56
78
10
4
5
4 3
2
1
# Power Generation
Electricity DSM#Substitution of
Coal/Oil with NG# Biodiesel #Waste Energy Recovery for Steam Production
# Boiler EE Renovation# #Industry Process
UpgradingDistrict Heating & Cooling#
1
2
3
1
3 42
8 5
7
6
9
1011
12
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4 56
7 8
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CHUEE Deal Map
Haizi Coking Plant Coking Gas Recovery for Power Generation:
$2 million loan to Shengdong Machinery Company Limited
20 units of gas-fired power generators
Emission reduction of more than 30,000 tons of CO2 per year
1st Project
Source: CHUEE
$150
$10
$1,590
-
200
400
600
800
1,000
1,200
1,400
1,600
Target Actual Pipeline
CHUEE Loans ($ Million)
Source: CHUEE
6,000
1,237
36,536
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Target Actual Pipeline
Emission of GHGs (000 tons)
CHUEE II: The future is NOW
Dynamism and scale far beyond our experience elsewhereTruly transforming, not just riding, capital marketsOpportunity (and need) for multi-multilateral collaboration and engagement of Equator banks
The scaling challenge - CHUEE
0200400600800
1000120014001600
CHUEE TargetCHUEE Actual CHUEEPipeline
IFC ChinaCommitments
2006Volume USD
Must develop strategic partnerships with global players•Equator Banks and Global FIs, •IFIs, •Foundations, •EU, •Governments
So… what would it take?
Some dedicated funding – but not a massive new dedicated investment fund; Specialized funding to cover:
Soft costs/transaction costs– Engineering assessments/audits, project definition, project
identification, marketing ideas to clientsCredit enhancement and other financial products beyond institutional comfort zone
– eg, Mezzanine financing for RE projectsAbove all else – far greater cooperation and
leverage of the current players!
What if ….?
FoundationsFinancial Products
Strategic Guidance
Programme design and
Management
Financial products
Regional BD and portfolio teams
Project ImplementationTeamProject Implementation
TeamProject ImplementationTeams
Information
Senior Operations Manager
Regional BD and portfolio teams
Project ImplementationTeamProject Implementation
TeamProject ImplementationTeams
Information
Senior Operations Manager
Regional BD and portfolio teams
Project ImplementationTeamProject Implementation
TeamProject ImplementationTeams
Information
Senior Operations Manager
Regional BD and portfolio teams
Project ImplementationTeamProject Implementation
TeamProject ImplementationTeams
Information
Senior Operations Manager
IFIsFinancial Products
Private EquityFinancial Products
Equator BanksFinancial Products
Knowledge ManagementStrategic advice
information sharingCadre of EE Finance Experts
The Market Force What lies beneath the ice?
Fostering Market Acceleration…
$15 million project funded by the Global Environment Facility (GEF), implemented by the International Finance Corporation (IFC)
ELI’s goal: accelerate the development of local markets for energy-efficient lighting.
ELI countries: Argentina, the Czech Republic, Hungary, Latvia, Peru, Philippines, South Africa
A model to build on
The IFC/GEF Efficient Lighting Initiative: Successful Market Acceleration Model
– ELI sought long-term and sustained impact on markets through:
Increasing consumer knowledge and demand, Improved accessibility of capital, Increasing sales volume, and product availability
Enhancing Competition / Producing downward pressure on prices.
How did ELI work?
Five main ELI tools:– education and marketing, – utility partnerships, – financial transaction support, – bulk purchases, – Limited and highly targeted one-time subsidies
Each ELI country program used a combination of those tools, adapted to meet local market barriers and opportunities.
Giving Consumers the Power of Information
Spotlight on ResultsCFL prices fall (ex: prices in Argentina fall from $20 to $3 per unit, despite economic crisis)
CFL sales increase (ex: sales increase by 21 times over life of program in Peru)
Sales of incandescent lamps decrease (South Africa, Peru)
New EE lighting businesses are founded and sustained (ex: South Africa or Peru, local manufacture of luminaires; lighting-based ESCOs founded in the Philippines, Latvia…)
Sustainable Market Impacts
Driving REAL Market Transformationin South Africa
Impact of ELI on Sales of CFLs and Incandescent Lamps, South Africa
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
1997 1998 1999 2000 2001
CFLs
Sal
es (U
nits
)
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
Inca
ndes
cent
Lam
ps S
ales
(Uni
ts)
Sales of CFLs Sales of Incandescent Lamps
Responding to opportunity: Leveraging new policies and initiatives in S. Africa
Improving People’s Lives in South Africa:CFLs enable increased access to modern
energy services
Where’s the POWER, Harriett?
Reality…
1.6 billion people live in the dark
A closer look into lightingEnd-users hurt by inefficient product
Fuel-based lighting often most expensive energy item in household – up to 50% of energy expenses, as much as 33% of household income
– Limits small-scale productive activities
– Indoor pollution leads to serious health problems
– Safety/fire issues epidemic– Limits educational access
The Moment At Hand:
Leveraging Technology to Transform a Market … and People’s Lives
New Rays of Light Emerge
1. Technology– Performance, cost– Packaged as single light systems
2. Lessons of experience in the market– Business models for the bottom of the pyramid
Package products at price point to match market– Solar home system business models demonstrated, but limited
impact– IFC’s experience in market development
3. Substantial international political focus – Energy access– Climate change
Tanzania: shoe seller - flame [left]; 1-watt white LED [right]
Photos: Evan Mills ©
A closer look into lightingLEDs open new opportunities
IFC ASKED…
Are those 1.6 billion lacking access to modern energy services a market?
If so, can global and local private companies be engaged to develop this market commercially?
Does a market, commercial solution that increases access to modern energy services serve our development objectives?
Is There an Opportunity for a
Large-Scale Commercial Solution
To Increase Access to Modern Energy
Services?
Lot’s of people… lot’s of needBut is it a market?
US$ 26,490
US$ 5,110
US$ 1,400
US$ 430
966 Million
329 Million
2.4 Billion
Global Population
2.5 BillionLow Income
Lower Middle Income
Upper Middle Income
HighIncome US$ 25 Trillion
US$ 1.7 Trillion
US$ 3.4 Trillion
Total Income
US$ 1 Trillion
GNI/per capita
Note: Based on the “The Fortune at the Bottom of the Pyramid”, C.K. Prahalad andWorld Bank Development Indicators, 2004
Mostly Developed
Mostly Undeveloped
Mobilizing the global lighting industry
A closer look into lighting:Fuel-based lighting is ALREADY a very large market
Electric LightingFuel-Based Lighting
Fuel-based lighting accounts for 17% of global lighting market – a US$ 38 billion/year demand ($17 billion in Africa)
It is a commercial, functioning market– established value-chain– collection systems– spare parts, repairs services, etc
Source: Evan Mills, International Association of Energy Efficient Lighting and Lawrence Berkeley National Laboratory
$38 Billion
$185 Billion
Global Annual Spending on Lighting
Global Lighting firms competing in saturated markets
Currently focused in mature markets
Competing for shares of static market
An Industry Motivated to Find New, High Growth AreasAn Industry Motivated to Find New, High Growth Areas
A segmented $17 billion Africa market for fuel-based lighting
Productive uses drive the market
– Night fishermen (e.g.,Lake Victoria)Lake Victoria: $600 mill/yr; 2 million people supported.
– Kiosks– Night markets– Household (reading/task lighting)– Walking (motive uses)– Household (general illumination)
…and important lessons are emerging.
Poor, even poorest of the poor, can be a “profitable market”
Need to “price” service or product to meet income constraint
Success requires “brand new” business models, often created locally –organic solutions
Different needs of the poor can be met by large scale, commercial solutions– promoting higher quality of life and overall development
The key is to stay out of the way of the entrepreneurial genius of the market.
A Highly Successful Analogy: Mobile Telephone Sales In Kenya
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,00019
98
2000
2002
2004
2006
Landline CustomersMobile Telephone Customers
Num
ber o
f Tel
epho
ne C
usto
mer
s Mobile telephone use in Kenya has
skyrocketed to nearly 6,000,000 customers since introduction of
the technology in 1997…
Annua
l Grow
th
Rate =
84%
Source: CCK, 2006 and Jacobson, 2004
Price Trend for MobileTelephone Handsets
*Prices are for a Nokia 3310 Handset
Inflation Adjusted Retail Price for a Basic Mobile Telephone Handset* in Kenya (2000-2006)
Sou
rce:
Jac
obso
n, 2
006
$0
$100
$200
$300
$400
$500
Dec
/1/2
000
Mar
/25/
2002
Jul/1
7/20
03
Nov
/7/2
004
Mar
/1/2
006
Mob
ile T
elep
hone
Pric
e(2
006
Infla
tion
Adj
uste
d $U
S)
Embedded LED technology enabled this technology advance
Mobile Telephone Markets in Africa:Experiences and Lessons from Kenya
MOBILE PHONES
Blinding growth in 5 yearsNew service mrkt. emerged without any established market (not a substitute)Required massive infrastructure establishment (capital costs)
Mature technology with established developed country market
LED LIGHTING
Organic niche industry
Potential to replace inferior service in established $38 billion market
Infrastructure mostly in place to support modern lighting
Rapidly developing technology with established niche developed country markets
Mobile Telephone Charging by Off-GridCustomers – LED synergy
How do off-grid users keep their phones
charged?
Market Barriers are Stifling Lighting Market
Lack of successful business model to deliver the “ right product ” through the “right value chain ” atthe “right price ”
• High first cost and affordability• Lack of consumer financing• Product quality varies substantially
High Transaction Costs to Understand Market • Perceived as complex market • Perceive as market difficult to penetrate
Main BarriersTo Market Development
Findings from Private Sector and GEF Projects
Lack of necessary institutional underpinnings to support market development
• Quality of product delivered varies substantially• Uncertain technological track record• Lack of Business Skills and Financing
Lack of understanding of alternative value chains or delivery systems
• I nability to obtain replacement parts (lamps) locally and in a timely manner
Lack of understanding of end-user needs and product requirements to compete against fuel - based lighting
• End - user needs not understood by supplier• Systems lack required functionality
Lack of successful business model to deliver the “ right product ” through the “right value chain ” atthe “right price ”
• High first cost and affordability• Lack of consumer financing• Product quality varies substantially
High Transaction Costs to Understand Market • Lighting companies perceive rural, developing country consumers as complex market and difficult to penetrate
Main BarriersTo Market Development
Findings from Private Sector and GEF Projects
Lack of necessary institutional underpinnings to support market development
• Quality of product delivered varies substantially• Uncertain technological track record• Lack of Business Skills and Financing
Lack of understanding of alternative value chains or delivery systems
• I nability to obtain replacement parts (lamps) locally and in a timely manner
Lack of understanding of end-user needs and product requirements to compete against fuel - based lighting
• End - user needs not understood by supplier• Systems lack required functionality
Lack of successful business model to deliver the “ right product ” through the “right value chain ” atthe “right price ”
• High first cost and affordability• Lack of consumer financing• Product quality varies substantially
High Transaction Costs to Understand Market • Perceived as complex market • Perceive as market difficult to penetrate
Main BarriersTo Market Development
Findings from Private Sector and GEF Projects
Lack of necessary institutional underpinnings to support market development
• Quality of product delivered varies substantially• Uncertain technological track record• Lack of Business Skills and Financing
Lack of understanding of alternative value chains or delivery systems
• I nability to obtain replacement parts (lamps) locally and in a timely manner
Lack of understanding of end-user needs and product requirements to compete against fuel - based lighting
• End - user needs not understood by supplier• Systems lack required functionality
Lack of successful business model to deliver the “ right product ” through the “right value chain ” atthe “right price ”
• High first cost and affordability• Lack of consumer financing• Product quality varies substantially
High Transaction Costs to Understand Market • Lighting companies perceive rural, developing country consumers as complex market and difficult to penetrate
Main BarriersTo Market Development
Findings from Private Sector and GEF Projects
Lack of necessary institutional underpinnings to support market development• Uncertain technological track record
• Lack of Business Skills and Financing
Lack of understanding of alternative value chains or delivery systems
• I nability to obtain replacement parts (lamps) locally and in a timely manner
Lack of understanding of end-user needs and product requirements to compete against fuel - based lighting
• End - user needs not understood by supplier• Systems lack required functionality
Industry Consultation
How Does IFC SupportMarket Entry?
Responding to Industry Request and Suggestions, the Project will:
Reduce Transaction Costs of Market Entry– Market Assessment– Testing and Certifying Products– Identifying Distribution Channels– Assessing Regulatory Environment
Reduce Risk of Market Entry– Regulatory Risks – Market Risks– Financial Risks
Project Phases
Phase 1: Form Private Sector Consortium
Phase 2: Understand Consumer Behavior
Phase 3: Identify and Profile Distribution Channels
Phase 4: Support Individual Company’s Strategies
Phase 5: Build Institutions to Support Market Development
Key Elements
Key Goal: Support Successful Market Entry of LED Firms in the African Market for Off-Grid Lighting
A Partnership Between IFC and LED Companies– Over 130 companies expressed interest in participating– Over 60 stakeholders (NGOs, research centers, universities, etc)
Starts in Kenya and Ghana
Planned expansion to at least 6-10 other African countries
The WBG Response: Step 1 –IFC’s Ghana-Kenya Pilot Project
Pilot Project: IFC/GEF “Lighting the Bottom of the Pyramid”
– Started with 3 year IFC engagement with industry to determine whether an intervention is needed
– GEF funding of $5.4 million for a 4 year pilot project focused on Ghana and Kenya
– $3.5 European Commission Commitment/ $.5million from Luxembourg
Driven by Industry – from start to finish– Not picking winners, just supporting the foundation of the market, catalyzing
competition, mobilizing investment– Responds to industry guidance to IFC to fill gaps in the market – builds on
IFC comparative advantage
The WBG Response Part 2
Goal: Rapid scale-up of access to clean, reliable and affordable lighting & basic energy services for 250 million people across Africa by 2030
Lighting Africa – Joint World Bank/IFC Initiative
The Moment at Hand
The Stakes are highThe market dynamics are powerfulTechnology offers opportunitiesCompetition … in its placeNeed discipline to ensure institutional comparative advantage
The stakes are too high to work at cross-purposes