Jacquelin LigotJacquelin Ligot

Director, Energy Efficiency and Climate Change Director, Energy Efficiency and Climate Change

Amsterdam Amsterdam Sustainable EnergySustainable Energy Forum Forum

25 April 200625 April 2006

EBRD’s Approach to Financing EBRD’s Approach to Financing Energy Efficiency in Transition Energy Efficiency in Transition CountriesCountries

What is EBRD?What is EBRD?

An Investment Bank with Public Shareholders:– AAA-rated international financial institution founded in 1991

– owned by 62 countries (including all countries of operation), the EU and EIB

Mandate: facilitate the transition of 27 CEE and CIS countries to market economies

Capital base of €20 billion and Portfolio of €15 billion to date:

– Largest single private investor in the region, but can also finance public sector projects

– 75% debt / 25% equity

A strong presence: 32 Offices in 27 CountriesA strong presence: 32 Offices in 27 Countries

A wide palette of financing instrumentsA wide palette of financing instruments

Loans

Equity, including combination of loan and equity

Guarantees, including credit enhancements (performance bonds etc.)

SME loans Equity funds Micro/small business

programmes Credit lines Trade Facilitation

Programme Co-financings

Direct Indirect

Setting the sceneSetting the scene 13% of global marketed energy consumption, and 13% of GHG

emissions Consumption has dropped during the first 10 years of transition but is

picking up rapidly, and is expected to grow much more rapidly than in W Europe (+45% for EIA by 2025)

Energy intensities have fallen steadily, and will continue to do so. While NMS will converge towards EU-15, CIS and SEE will remain significantly above

There has been a shift away from coal towards gas, and this will continue in particular in central Europe

GHG emissions are down by 36% since 1990 but are expected to increase by 40% till 2025 (EIA) although they would remain 10% below their 1990 level

Contrast between a small set of resource-rich countries (Russia, Kazakhstan, Turkmenistan, Azerbaijan) and a vast majority of net importers (all EU-8)

Primary energy consumptionPrimary energy consumption

60

80

100

120

140

160

180

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Indic

es w

ith Y

ear

2000=

100

CEB SEE CIS WEU

Energy intensitiesEnergy intensities

0

100

200

300

400

500

600

700

800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Energ

y in

tensity

, to

e p

er

$ m

illio

n P

PP

CEB SEE CIS WEU

Projections of energy intensitiesProjections of energy intensities

0

100

200

300

400

500

600

700

2002 2010 2020

Energ

y in

tensity

, to

e p

er

$ m

illio

n P

PP

WEU CEB & SEE Russia Other CIS

EE; Challenges and BarriersEE; Challenges and Barriers

Subsidised energy prices, mostly in CIS Inappropriate tariff structures (e.g. DH billing based

on norms; cost-plus tariff methodologies) Lack of awareness, etc. Lack of adequate legal/regulatory framework for

ESCOs Reluctance to prioritise investment to improve

efficiency EE opportunities everywhere but small projects Banking system lacks interest or skills

Energy Efficiency: EBRD’s Strategy Energy Efficiency: EBRD’s Strategy

Top priority of the Bank Dedicated Energy Efficiency and Climate Change (EECC) team Reorganisation to further mainstream EE in Bank operations:

– The EECC team now operates together with the corporate planning function directly reporting to the First Vice President Banking.

– A new Climate Change Advisory Board has been created to guide and sustain the implementation of the climate change objectives of the Bank across the organisation

Target of €1 billion in demand-side EE and RE over period 2006-2010

EBRD is currently preparing a Climate Change Initiative as its contribution to the IFI “Investment Framework” called for by the G8 at Gleneagles in 2005

Energy Efficiency: EBRD’s ApproachEnergy Efficiency: EBRD’s Approach

• Systematically pursue EE opportunities in all, but mostly industrial, projects

• Make energy supply systems more efficient

• Support providers of EE services, e.g. ESCOs

• Reach out to small projects through wholesale financing instruments: equity funds or local financial intermediaries, e.g. credit lines

• Use Carbon Finance as a co-financing source

Industrial Projects: ApproachIndustrial Projects: Approach

Screen all projects at concept review stage or earlier and identify those with EE potential – ratings are given to projects (E0, E1, E2)

Provide free energy audits funded by donors (TC), mostly in E2s– E.g. Tacis €0.5 million for Russia

Structure an “add-on” to direct debt or equity financing – enhances company cash flow

Energy Management training modules where appropriate

Next Step: develop benchmarking, in particular for E1s

Industrial Projects: ResultsIndustrial Projects: Results

Since 2002, the Bank has financed over 35 projects with Bank-funded energy efficiency components of circa to €340 million

Most of these projects involve clients in energy-intensive industries, such as steel (Istil in Ukraine, Air Liquide-Severstal in Russia, Mittal in Ukraine, Macedonia and Bosnia and Herzegovina), chemicals (Uralkaly and Togliatiazott in Russia), aluminium (Alcoa in Russia), pulp and paper (PFS and Svilosa in Bulgaria), cement (Central Asia Cement in Kazakhstan)

27 detailed energy audits have been conducted resulting in 16 projects signed by the Bank (with an other 6 projects on-going)

Taxonomy of Industrial Energy Efficiency Taxonomy of Industrial Energy Efficiency InvestmentsInvestments…energy savings

Energy Savings per sector 2003-2005 (total 600,000 toe/year)

12%

64%

9%8%

3%2%

2%

0%

0%

Building Material

Chemical

Food Processing

Glass

Manufacturing

Non-ferrous metal

Pulp&Paper

Steel

Other

Example: Svilosa (Bulgaria) - 2005Example: Svilosa (Bulgaria) - 2005

• EUR 18 mln Loan, for restructuring and expansion of Pulp and Paper

mill

• EUR 14 mln to be used for modernisation of equipment and

processes including a new 6 MW back-pressure steam turbine to

recover wasted heat

• Benefits: energy costs reduction (annual savings estimated at EUR 5

mln); productivity improvements

• IRR range: 11% - 137%; average: 31%. Payback ~ 3 years

• Environmental benefits: CO2 emission reduction (>100 kton/year),

reduced water and heat losses

Svilosa; Energy Audit resultsSvilosa; Energy Audit results

Measure Description Annual Savings

[€]

Investment Cost [€]

IRR [%]

Payback [Years]

Reconstruction of SRB, replacement of cyclone evaporator with a new super concentrator for black liquor

1,717,545 6,615,000 25% 3.9

Implementation of dry debarking unit 129,710 190,000 68% 1.5

Upgrading of washing unit and replacement of condensers with plate heat exchangers in evaporating systems for black liquor

602,760 1,468,750 41% 2.4

Installation of frequency control drives on electric motors 33,631 41,420 81% 1.2

Installation of back pressure steam turbine to utilize steam generated by SRB 1,228,610 3,500,000 35% 2.9

Blow down heat recovery system for SRB 54,760 40,000 137% 0.7

Replacement of the old refrigeration units with new absorption units and optimization of water cooling system

170,111 800,000 20% 4.7

Replacement of old piston air compressors with new units and optimization of compressed air supply system

15,274 110,000 11% 7.2

Shift of production from pulp blocks to pulp sheets 821,464 2,300,000 35% 2.8

CONSOLIDATA 4,773,866 15,065,170 31% 3.2

District heating modernisationDistrict heating modernisation

DH is a distinctive feature of countries in Transition: 65%-70% share of heat market in Ukraine-Russia. Over-sized, derelict, inefficient systems with scope for efficiency saving ranging between 35% and 50% relative to best practice

The Bank has financed 11 district heating projects since 2001 with a total Bank investment of €265 million

The majority of these projects involve municipally-owned district heating companies.

Projects focused on infrastructure upgrading, including introduction of modern technology (individual compact heating substation, pre-insulated pipes, frequency controlled pumps)

as well as the improvement of overall operational efficiency and commercialisation of the municipal district heating companies through introduction of new tariffs (typically a phased move to full cost recovery), reform of subsidies and improvement of organisational structures

District Heating Modernisation: ExamplesDistrict Heating Modernisation: Examples

Sofia (Bulgaria - 2002)

– Toplofikacia Sofia is largest gas consumer in Bulgaria (30%!)

– €30 million loan to municipal company

– Sovereign guarantee

– Transition: move to cost recovery tariffs; private management contract

Surgut (Russia - 2002)

– Senior loan to City

– €27 million equiv. in Rubles (1st municipal loan in Rubles!)

– Secured by City’s revenues without sovereign guarantee

– tariff reform and the introduction of service contracts

Poznan DH + Cogeneration Privatisation Poznan DH + Cogeneration Privatisation (Poland) 2003-2004(Poland) 2003-2004

DH company and CHP plant of Poznan were privatised consecutively by City and Polish Treasury resp. following competitive tender

CHP plant supplies heat to Poznan DH network, and electricity with 2 off-takers (National grid operator PSE and local Disco ENEA)

Buyer was Dalkia Int’al via its Polish subsidiary, Dalkia Polska

EBRD invested alongside Dalkia for a total of €50 m (equity) over the two operations

Exit via put option to Dalkia Int’al at fair market value or earlier via trade sale or listing of Dalkia Polska

ESCOs: Energy Alliance (Ukraine) 2004ESCOs: Energy Alliance (Ukraine) 2004

First privately-owned Ukrainian ESCO; Start-up company; Sponsor is Western NIS Enterprise Fund

Focus on leasing small (1-3 MW) co-generation and electricity generation engines to industrial clients

$10 mln EBRD loan; $5 mln syndicated to RZB Lease payments calculated based on current grid heat

and electricity prices minus a discount 1st Project with KOEP, a large Ukrainian edible oil

extraction plant in Kirovograd oblast; constr. of a 4 MW co-generation station fuelled by sunflower seed peels (natural by-product of the client)

UkrEsco (Ukraine): a Public ESCOUkrEsco (Ukraine): a Public ESCO

State-owned ESCO created in 1998 through an initiative between Ukraine, EBRD and the EU

EBRD extended a $30 million loan to UkrEsco, secured by a sovereign guarantee

UkrEsco targets industrial & commercial clients

Not true energy performance contracting: payment to ESCO akin to a loan; is due regardless of actual savings

Follow on loan of $20 m to be signed in Q4 2005; conditionality includes privatisation of UkrEsco

City of City of ŁóŁódz (Poland): ESCO for dz (Poland): ESCO for public sector facilitiespublic sector facilities

Bank initiated and supported project development with TC funds for preliminary assessment & preparation of tender

Scope: Circa 420 municipal buildings (mostly schools and kindergarten); largest single ESCO contract in the region

ESCO to be selected through int’al tender. Initial tender void because only one bidder. City still to decide whether to re-start tender

EBRD could provide loan or payment guarantee to ESCO on a limited recourse basis; or buy receivables (forfeiting) or share risk with forfeiting bank

Bulgaria Credit Line #1: Industrial EE Bulgaria Credit Line #1: Industrial EE and Renewable Energy - 2004and Renewable Energy - 2004

€50mln EBRD credit line framework with Bulgarian banks for on-lending to private sector for industrial energy efficiency and small renewable energy projects.

€10mln grant from Kozloduy International Decommissioning Support Fund for:– Cash incentives to local banks and sub-borrowers (80%)

– and a technical assistance package: project preparation and project validation (20%)

6 loans signed in 2004 for the full €50 mln amount 22 projects already approved

Bulgaria EE and RE Credit Line – Bulgaria EE and RE Credit Line – Results so farResults so far

38 sub-loans approved by PBs for an amount of loans of € 22 million; 19 completed

Estimated emission reductions on current portfolio: 267,000 tonnes CO2 / year

Estimated benefit in power generation equivalents on current portfolio is 92 MWe; about €37k grant for each MWe saved or added from a renewable source

141 sub-projects in pipeline representing more financing than remaining; evenly split between industrial energy efficiency and small renewables

Bulgaria Credit Line #2: Residential Bulgaria Credit Line #2: Residential Sector - 2005Sector - 2005

€50 mln EBRD Credit Line Framework with Bulgarian banks for on-lending to individuals for EE investments in residential sector

35% of Bulgaria’s energy saving potential, owing to poor insulation of dwellings and overuse of electricity

i) insulation ii) biomass efficient heaters/boilers, iii) solar water heaters, iv) efficient gas boilers

Average rebate of 20% of the investment cost Potential borrowers 250,000 households - budget sized for circa

30,000 Sub-loans €10 mln grant from Kozloduy Decommissioning Fund

– Preparation/ Marketing/Verification: € 0.7 million

– Incentives to sub-borrowers and Participating Banks and : €9.3 million

To date, Loan agreements have been signed with 4 Bulgarian banks for a total of € 30.1 million – RZB, DSK, Postbank and UBB

EBRD’s role in the Carbon MarketEBRD’s role in the Carbon Market

Project financing based on Carbon Credit sales Intermediary purchasing carbon credits for the

account of buyers

– Netherlands JI Carbon Fund JI Fund (2003)

– Multilateral Carbon Credit Fund: 2006 Mobilise TC for project preparation:

– e.g. CDM project preparation facility in ETC region

Carbon Finance: a project exampleCarbon Finance: a project example

Paper Factory Stambolijski: pulp & paper mill in Bulgaria

EBRD was a shareholder Investment of up to €12 mln in waste (bark) boiler & EE

measures energy costs reduction (annual savings estimated at €3.6

mln) 600,000 tons of CO2 reduction 2006 – 2012 Buyer of carbon credits (ERUs) is EBRD for the account of

the Netherlands 50% advance payment

Characteristics of EBRD’s approachCharacteristics of EBRD’s approach

Public or private clients Flexible and diverse instruments: stand-alone debt or equity;

indirect via equity funds or credit lines Risk appetite: limited recourse to parent company; start-ups; high

ratio of debt to equity; high % of project costs Ability to mobilise and use grant funding Catalyst for commercial co-financing Ability to engage host Governments Not below €10m in project costs; if below: equity fund or credit

line, or DIF/DLF (ETC countries) are best suited Can provide carbon finance, and lend against carbon cash flow Market-related pricing reflecting risk

Contact usContact us

Jacquelin Ligot Director, Energy Efficiency Team

Peter Hobson Senior Banker, Energy Efficiency Team

EBRD HQ: One Exchange Square London EC2A 2JN - UK Email: Ligotj@ebrd.com

EBRD HQ: One Exchange Square London EC2A 2JN - UK Email: Hobsonp@ebrd.com

Tel: + 44 207 338 7022 Fax:+ 44 20 7 338 6942

www.ebrd.com

Tel: + 44 207 338 6737 Fax: + 44 20 7 338 6942 www.ebrd.com