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

1

2

4 56

7 8

3

910

1112

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59

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60

61

62

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

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004

Mar

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006

Mob

ile T

elep

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Infla

tion

Adj

uste

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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