Engaging the BanksIn Providing End-User Financing To the Solar Water Heating Sector

United Nations Environment Programme, DTIE Program Manager, Myriem TOUHAMI

myriem.touhami@unep.org

UNEP-DTIE and the Energy BranchUNEP

Division of Technology,Industry and Economics

(DTIE)

EnergyInternational

EnvironmentalTechnology

Centre

Chemicals Economicsand Trade

SustainableConsumption& Production

Ozone Action

Transport Policy Unit

Mission: To help overcome market barriers and increase investment flows to renewable energy and energy efficiency technologies

Finance Unit

Technology Transfer Unit

Policy Unit

• Overcome market barriers

• Increase investment flows

to renewable energy

and energy efficiency

technologies

Within our Energy branch programme, UNEP helps to:

• UNEP is not a bank but we work to support the banking sector and other financial players in creating tailored clean energy finance mechanism.

• For sectors already commercialized on a “cash and carry” basis, UNEP has been implemented credit enhancement programmes that help local banks build dedicated loan portfolios.

End-User Finance Programmes

EE lighting Morocco

GSWH Algeria

PROSOL I Residential Tunisia

PROSOL Hotels Tunisia

PROSOL Industrial Tunisia GSWH

Lebanon

EGYSOL Hotels Egypt

PV Solar India

Green Mortgage for

SWH - Mexico

GSWH Chili

SWH Montenegro

SWH Albania

SWH Macedonia

Key Implementation StageSWH: Solar Water Heating Projects

GSWH: Global Solar Water Heating Programme Completed

PROSOL: Programme Solaire - Solar Water Heating Programme in Tunisia

EE Lighting: Energy Efficiency Lighting Programme in Morocco Operating

EGYSOL: Egyptian Solar Water Heating Programme

PV Solar Loan Programme India In Development

PV Solar project; Photovoltaic solar project in Tunisia

FACET: Financing Access to Clean Energy Technologies (3 countries Asia)

ISLP: Indonesian Solar Loan Programme

GVC: Green Village Credit China

GSWH India

Financing Access to

Clean Energy Technologies

Asia

PV Solar Tunisia

Green Villages

China

Solar Loan Programs Indonesia

Indian Solar Loan Programme- Consumer Finance- domestic PV systems- Canara and Syndicate

Banks provided training and interest softening incentive

- 2,017 bank branches- 49,560 homes

financed

SWH Residential South Africa

PROSOL (Prog. Solaire) : A success Story in Tunisisia

PROSOL goal is to upscale the Market for Residential Solar Water Heaters, with the aim reach a significant decrease of CO2 emissions at the household level.

PROSOL helps local banks build loan portfolios in RE area by implementing a framework that tackle all the market barriers

Initial SituationWhy isn’t solar energy used for water heating in sunny Tunisia?

High solar resource Strong institutions National priority:

Energy conservation

Favourable conditions Capital intensive, no

financing Current option (LPG )heavily

subsidised

Challenges

1. Help banks to begin financing Solar Water Heaters2. Address perverse subsidy

UNEP Strategy

Develop sustainable SWH market; displace LPG use. Improve energy security and reduce CO2

Goal

Market Analysis- Barriers to investment for stakeholders in 2004 – Beginning of PROSOL I Development

Tunisian Government

- Budget constraint for public resource - No previous pilot project that removed market barriers in a sustainable way- Fossil fuel (LPG) subsidies distorted the economics of SWH

Households

Commercial banks

- Lack of confidence in the technology (previous bad experience)

- High Upfront cost barrier - Not aware of the economic benefits

-Risk aversion - Lack of local bank expertise to tailor RE loans - Bad perception of the market profitability

Main Features of the Programme

1. Mechanism to facilitate consumers access to credit repayments made through electricity bills interest rates initially softened interest subsidy phased out after 18 months

2. Subsidy equalized between SWH and LPG 20% subsidy on SWH capital cost to enhance

competiveness of SWH vis a vis the existing gas subsidy (underwritten for a trial period by Italy)

After successful trial made permanent: legislation mandating a 20% capital cost subsidy for SWH in residential sector

Buy CHEAP and Pay SLOWLYA loan mechanism over a 5-year term with repayment via the STEG bill

Monthly payment = Energy savings

Discounted Interest Rates:Initial average bank consumer loans: 12 – 13%

With STEG’s involvement, 2 banks (Amen Bank & UBCI) and lowered the interest rates by 5-6 points because the risk of nonpayment is low (less than 1%, Prosol I)

UNEP further softened interest rates down to 0%, full benefit passed on to the customer.

PROSOL- What it does

A Quick and Simplified Procedure• Customer contacts the SWH supplier

– A list of eligible suppliers is given by our main partner to the project, the National Agency for Energy Conservation (ANME)

• Customer fills out the application form at the SWH supplier office, presents his latest STEG bill and ID

• The installation is immediate once the application form and engagement form are signed

PROSOL Results

1985-96 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

10000

20000

30000

40000

50000

60000

70000

80000

90000

SWH Market Growth in Tunisia (m2 installed)

other projects

PROSOL II

PROSOL I

435,350 m2=

145,100 systems

112 million USDworth of local bank

loans

CO2 emission reductions in 2005-2010 was 135,000 tCO2,

Financial and Economic Analysis

PROSOL Residential in Tunisia has been selected by the

Climate Policy Initiative (CPI) as a San Giorgio Group

case study. CPI carried out a detailed analysis

considering PROSOL a successful example that provides

an insight into how a developing country can align

domestic and international support to level the playing

field between low carbon technologies and heavily

subsidized fossil fuel based alternatives

Financial and Economic AnalysisInvestments – Who pays for what• investment in the overall Program during 2005-2011

has been estimated at approximately US$ 248 million

• The Public Sector provided 18%;

• 82% was provided by Private Capital (end-users and banks)

1 US$ of public resources

Mobilized

5 US$ of private capital

37%

45%

18%

Financial and Economic AnalysisBenefits for the Tunisian Government

• 101 million US$ savings achievable in 20 years (2005-2025), of which 15.2 million US$ were achieved in the period 2005-2010.

• 21.8 million US$ of public resources are paid back in less than 3 years, thus full offsetting the Government’s (GoT) initial investment

Public finance returns under the BAU scenario and fossil fuel “phasing out” scenario

Financial and Economic Analysis

Benefits for the Tunisian Government

The second phase of PROSOL Residential has been registered as a Programmatic CDM with a an estimated annual emission reductions of 7,200 tCO2. Associated revenues range between 350,000-700,000 US$ and will be reinvested to sustain the Programme itself.

2005 - 2010 2005 - 2025Fuel Savings (in tons of oil equivalent)

47,000 251,000

CO2 emission reductions (in tCO2)

135,000 715,000

Savings (in million USD)

15.2 101

Financial and Economic Analysis

Local Economic and social DevelopmentPROSOL Residential has stimulated the development of the domestic solar thermal industrial cluster, with local actors playing a primary role.

• The industry turnover 2005-2010 has been estimated of about 120.2 million US$, of which 106.8 million US$ associated to manufacture and 13.4 million US$ associated with installers.

• Local stakeholder’s analysis suggest that PROSOL contributed to create 3,000 new direct jobs and up to 7,000 indirect

Before PROSOL (2002)

During PROSOL (2006)

After PROSOL (2010)

0

200

400

600

800

1000

1200

1400

100283

1200

Number of qualified installers

Before PROSOL (2002)

During PROSOL (2006)

After PROSOL (2010)

0

10

20

30

40

50

60

8 10

50

Number of sale companies

Installers X 12 Companies X 6

Financial and Economic Analysis

The end-user perspective

PROSOL offers the possibility for households to use energy bill savings to cover investment costs in an acceptable period of time, with affordable (and/or no) upfront investment costs.

• overall reductions in households’ energy bills to approximately US$ 605 -1,325 over the expected SWH’s life-cycle.

• The different incentive measures introduced by PROSOL significantly lowered SWH system costs for residential consumers: SWHs’ Levelized Cost of Energy (LCOE) decreased indeed from USD 9.7 cents/kWh to USD 7.3 cents/ kWh (around 25% less).

• Local stakeholders today believe that PROSOL had a tangible cultural effect on households, inducing changes in their investment behavior

Risk Analysis and Response Strategiesunder PROSOL II

• SWH failure risks: thanks to mitigation measures – accreditation scheme for suppliers, certification of equipments, training, on-site spots checks, guarantees – default rates observed in 2005-2010 corresponded to only 1%.

• Debt default risk: this risk was mitigated by a double-level loan guarantee scheme:

a) Third-party loan debt collector – the state-owned utility (STEG) collects loan repayments through electricity bill and may suspend electricity supply in case of payment default

b) Third-party loan guarantor – suppliers initially (PROSOL I) and then STEG (PROSOL II)

• Risk Allocation: There is an overall evidence of a balanced risk allocation under which risks are allocated to the stakeholder more suited to bear them

PROSOL Key Success Factors

• The engagement and strong commitment of national public Authorities evident in the credible and stable support that bolstered investors’ confidence

• The involvement of the State utility STEG as a debt enforcer, which enhanced domestic financial institutions trust and resulted in lowered financing costs for residential end-user purchasers;

• an appealing financial scheme using soft interest rates and longer repayment terms;

• the implementation of pervasive and focused awareness raising, communication and capacity building activities; and

• a stakeholder-tailored approach that involved all relevant actors in the development of the SWH market from national authorities to financial institutions, suppliers, installers and end-users .

20

• Objectif: réduire de 200 MW la puissance appelée durant Hpointes.

• Hypothèses: –5 millions de lampes à incandescence

de 100 W remplacées par des LBC de 20W.

Effacement à la pointe de plus de 214 MW, et économie d’énergie de 300GWh/an (production nette).

Lampes Basses Consommations (LBCs) : Exemple au Maroc: INARA

Analyse de la situation marketing

La demande: les ménages

– Caractéristiques de la demande :

• 4,4 millions de ménages électrifiés– 1,8 millions de ménages au niveau des

distributeurs (estimé)– 2,6 millions de ménages au niveau de l’ONE

• En moyenne 9,7 lampes/foyer *

• 35% des foyers ont au moins une LBC soit 2,9 millions de foyers électrifiés n’ayant pas de LBC*

* Données d’une enquête téléphonique menée entre mars et mai 2008 auprès de 1380 clients ( ONE et Distributeurs )

Analyse de la situation marketing

L’Offre:Les produits concurrents– Les lampes à incandescence:

• 29 Millions/an (Philips 75% de part de marché)• 95% en baïonnette• 50% en 100W• Prix entre 4 et 5 DH

– Les LBC non conformes: contrefaçon, lampes de mauvais qualité sans économie d’énergie• Sont vendues à un prix allant de 5 à 20 DH• Sont distribuées en grande quantité

Nouvelle centrale Vs Efficacité EnergétiqueComparaison:

• Option1: Construction d’une centrale à groupe diesel de 200MW

Investissement de l’ordre de 180 millions d’euros, soit près de 2 milliards de DH.

• Option2: Achat et distribution de LBC: (option avec implication maximale de l’ONE)

– Sur la base d’un coût d’achat et de distribution équivalent au prix de vente chez le détaillant 25DH.

Investissement de l’ordre de 133 millions de DH.

INVESTISSEMENT(millions de DH)

Durée de vie

Projet « centrale » 2 000 20 ansProjet

LBC3 ans 133 3 ansRapporté à 20 ans 690* 20 ans

* Taux d’actualisation de 8% et projet renouvelé tous les trois ans

Mécanisme de Financement

1. Par appel d’offre, l’ONE achète les LBC (1er lot de 5 million de lampes en 2008) Reduction des prix (bulk purchase) Qualité assurée

2. Vente et installation par des agents (INSTELECs)Une commission de 2.50 MAD (29 US cents) par

lampe installée pour les foyers avec abonnement Création d’emplois (micro-entreprises)

3. Clients remboursent 1 MAD (11,76 US cents) par lampe pendant 24 mois via leur facture d’éléctricité

4. L’ONE offre le service après vente et une guarantie de 2 ans pour les lampes 

INARA - Resultats

Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-100

100,000

200,000

300,000

400,000

500,000

600,000

INARA : Installations mensuelles des LBC

Conclusions

No standard bank engagement strategy

End-user finance initiatives must employ a variety of approaches and tools: – Institutional support from local governments– Multi-stakeholder approach (government, banks,

suppliers, installers, state utility)– Technical support for setting up dedicated loan

instrument– Targeted capacity building, training, communication

and dissemination to specific financial incentives

Integrating carbon reduction benefits