JANUARY 2025 2025/137 A KNOWLEDGE NOTE SERIES FOR THE ENERGY & EXTRACTIVES GLOBAL PRACTICE Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector The bottom line. Scaling up energy efficiency is critical to the energy transition—and the public sector is a good place to start. Programs in public buildings, in particular, can introduce new models and thus help shape markets. Given the limits of public financing against huge investment needs, countries must unlock commercial financing. The first steps are to adopt international best practices and select financing mechanisms suited to local policy and regulatory frameworks, public agency characteristics, implementation barriers, and the maturity of financial markets. Scaling up energy efficiency is critical to the energy transi- What role can the public sector play tion—and the public sector is a good place to start. Programs in leading the development of energy in public buildings, in particular, can introduce new models efficiency markets? and thus help shape markets. Given the limits of public Public buildings and facilities, together a major financing against huge investment needs, countries must energy consumer with high visibility, can spur market unlock commercial financing. The first steps are to adopt development and investments international best practices and select financing mecha- nisms suited to local policy and regulatory frameworks, pub- In many nations, the public sector1 is the largest energy lic agency characteristics, implementation barriers, and the consumer. Public buildings account for about 5.2 percent of maturity of financial markets. national energy consumption in Ireland (Sustainable Energy Authority of Ireland 2023), 5.9 percent in Brazil (Statista n.d.), 7.4 percent in South Africa (Statista n.d.), and 10 percent in Kenya (Kenya Power and Lighting Company 2021). 1 For the purposes of this Live Wire, the public sector is defined as facilities owned and operated by the government, such as universities and schools, Dilip Limaye is a senior energy efficiency hospitals and clinics, government administrative buildings, and museums, consultant at the World Bank. as well as public lighting. It does not include state-owned enterprises or public utilities. Authors Jas Singh is a lead energy specialist with the Energy and Extractives Global Knowledge (IEEGK) unit. Selena Jihyun Lee is an energy specialist with IEEGK. 2 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Table 1. Energy savings in public buildings “In more mature financial markets … the and facilities, realized through World Bank injection of excessive public financing directly projects into the market could actually undermine Energy savings market activities and displace commercial Country Type of building (%) financing.” Türkiye Administrative buildings 42.9 Hospitals 42.7 Schools (including university) 56.1 What hinders the scale-up of energy Kosovo Administrative buildings 61.0 efficiency in the public sector? Schools (including kindergarten) 34.0 Limited public budgets have not allowed for the high Street lighting 51.0 up-front investments required for energy efficiency Public centers (cultural and medical) 34.0 projects, while commercial financing faces multiple India Street lighting 55.0 obstacles Mexico Street lighting 44.7 Despite tremendous opportunity, improvements in efficiency Hospitals 28.3 have been minimal to date in most low- and middle-income countries. Efforts to further energy efficiency in the public Source: World Bank project reports. sector face many policy and regulatory, institutional, market, and financing barriers. Fortunately, a growing number of But in most low- and middle-income countries, a lack of global best practices and examples have existed for some up-front capital to invest in energy-efficient equipment and time (World Bank 2018). The major barriers and solutions are adequate maintenance and repairs leaves public buildings listed in table 2. and facilities using far more energy than needed. This is avoidable. Available energy-efficient products and technol- The key challenge now is to implement programs at scale ogies can help generate large savings with payback periods within limited fiscal spaces. For example, it is estimated that that range from as short as a few months (e.g., replacing renovation of the stock of public buildings in Türkiye (around fluorescent lamps with light-emitting diodes) to 5–10 years 500,000 buildings) would cost about $8.8 billion (Stantec (for insulation and efficient heating and cooling technol- 2023). One answer is to attract commercial financing. A first ogies) (table 1). Key technologies and measures include step in doing so is to strategically deploy the limited public rooftop solar PV panels, heat pumps, and smart meters and financing that is available to spur commercial capital invest- appliances. ments. Doing this will require some changes. And a wide range of new policies and legislative and regulatory changes have already been introduced in countries to create the “Despite tremendous opportunity, needed enabling environment. improvements in efficiency have been A growing portfolio of World Bank projects has been designed minimal to date in most low- and middle- to overcome barriers to commercial financing. Table 3 pres- ents a sample of completed and ongoing Bank projects that income countries.” have been designed to increase the public sector’s energy efficiency. It also describes some of the elements used to promote sustainable and commercial financing. Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector 3 Table 2. Barriers to commercial financing for public sector energy efficiency Barriers Solutions Policy and regulatory • Restrictions on public borrowing • Allow public borrowing for investments designed to lower future • Restrictive one-year budget cycle costs, including energy efficiency • Line-item budgeting, limiting the use of operating cost savings • Shift to muti-year budgeting, use ESAs to pay for capital upgrades • Transition to performance-based budgeting, make allowances • Budgetary savings may result in lower future budgetary for cost savings to repay investments provisions, limiting the ability to repay debt Institutional • Restrictions on signing multiyear contracts and assuming debt • Shift to muti-year budgeting, use ESAs, make allowances for obligations multi-year contracting within budgetary ceilings • Aversion to trying new approaches, taking risks • Provide standard templates and approaches for commercial • Limited experience or capacity to undertake ESCO financing modalities, reward public officials for reducing energy procurement, negotiate with commercial lenders use • Lack of financial discipline (bookkeeping, timely payments) • Build capacities to ensure strong financial management • Low (baseline) service levels • Establish national norms for heating and cooling service levels • Need for parallel investments not focused on energy efficiency • Provide parallel grants for measures not focused on efficiency, (e.g., structural improvements, seismic safety) and improve service levels to meet norms Financing • Lack of borrowing and repayment history • Use public financing schemes to demonstrate repayment • Reliance on state budget transfers/no financial autonomy histories and timely payments • High interest rates • Allow public borrowing for investments designed to lower future • Lack of collateral, risk of late/nonpayment costs, use ESAs • High transaction costs relative to typical commercial financing • Develop nondebt options such as ESAs, energy service projects company contracts, leases • Require competitive borrowings to lower costs • Set up escrow accounts, guarantees, ESAs and other mechanisms to reduce lender risks • Aggregate projects to increase transaction size • Develop loan agreements and templates to streamline financial evaluation and risk assessment Note: ESA = energy service agreement. 4 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Table 3. Some World Bank projects to raise energy efficiency in the public sector and attract commercial financing Country Project name Project size ($ millions) Implementation (type of instrument; (breakdown of EE Detailed component and market-enabling activities, period sector) component only) plus results of completed projects India Partial Risk Sharing $133 Partial credit guarantees to ESCO-implemented February 2015– Facility for Energy CTF: $25; GEF: $18; subprojects, including those in the public sector, thereby March 2025 Efficiency borrower: $90 lowering investment risks for commercial lenders. (guarantee; energy) Türkiye Energy Efficiency in $200 Loan to renovate central government buildings, pilot ESCO November 2019– Public Buildings I IBRD: $150; CTF: $50 contracts, and develop a national program with suitable December 2025 (investment; energy) financing mechanisms. Bosnia and Energy Efficiency $64 Loan to renovate public buildings and support for Herzegovina (investment; energy) IDA: $32; IBRD: $32 developing and piloting sustainable financing mechanisms. March 2014– Results included lifetime energy savings of 1,335 GWh, February 2024 934,316 beneficiaries, creation of an EE revolving fund with KM 4.75 million initial capital, piloting of performance- based contracts. An additional $2.6 million was investment from reflows from sustainable financing schemes. Mexico Energy Efficiency in $156 Financing of municipal EE projects in buildings, SL, and March 2016– Public Facilities Project IBRD: $100; borrower: water pumping using ESAs and utility repayment schemes. October 2023 (investment; energy) $56 Results included 20 municipal SL investments (127,987 LEDs), 1.7 million beneficiaries, the renovation of 17 hospitals, lifetime energy savings of 715,002 megawatt- hours resulting in 314,624 tCO2e greenhouse gas emissions saved, 100 percent repayment rate under 36 ESAs. India Energy Efficiency $1,348 Program helped scale up energy savings in the residential May 2018– Scale-Up Program IBRD: $220; borrower: and public sectors through bulk purchasing via public ESCO September 2023 (Program for Results $548; private: $200; (Energy Efficiency Services Limited). Guarantee supported with guarantee; other: $380 access to commercial financing. energy) Results included support to 1,600 municipalities and towns to install 10.7 million LED SLs, lifetime energy savings of 329,346 GWh, resulting in 267.1m tCO2 emissions avoided, and 539 million beneficiaries. Guarantee was ultimately not used. Source: Original compilation based on World Bank operational documents. Note: CTF = Clean Technology Fund; ESA = energy service agreement; EE = energy efficiency; ESCO = energy service company; GEF = Global Environment Facility; GWh = gigawatt-hour; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; KM =convertible marka; LED = light-emitting diode; SL = street lighting; tCO2e = tons of carbon dioxide equivalent; TF = Trust Fund. Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector 5 What types of financing mechanisms can be Figure 1 illustrates how financing mechanisms may change used to leverage commercial financing? in the progression from public to market financing. Innovative financing approaches, along with stronger A growing portfolio of World Bank projects has been designed regulations, can help scale up commercial financing for to overcome barriers to commercial financing. Table 3 pres- energy efficiency in the public sector ents a sample of completed and ongoing Bank projects that Energy efficiency projects have conventionally been financed have been designed to increase the public sector’s energy and implemented by public agencies through government efficiency. It also describes some of the elements used to grants or loans, typically with financing from the World Bank promote sustainable and commercial financing. and other international financial institutions (IFIs) and donors. Examples include EU Cohesion Funds for the renovation of How do you know which mechanism will work public buildings in many EU Member States (e.g., Croatia, best at any given time? Romania) and World Bank loans in several countries in the Available mechanisms fall into two broad groups, but Europe and Central Asia region. While all these programs, context is everything which involved purely public financing, generated the desired levels of energy savings in public facilities, in most cases, the The most suitable mechanisms reflect the local legislative investment activity ceased once funds were exhausted and and regulatory environment, the maturity of financial mar- project units were dissolved. Given that investment needs kets, public agencies’ capacity, and the status of the energy remain high, many countries are now developing sustainable services market. There must be a clear plan to move to more financing mechanisms and institutions and exploring ways commercial financing mechanisms over time. to better leverage commercial financing. The available mechanisms fall into two broad groups. The The World Bank, other IFIs, and governments have used a first consists of those that utilize public financing to catalyze wide range of financing mechanisms and financial instru- commercial financing. In such cases, public funds may be ments to facilitate a shift from grants and budget financing used to demonstrate energy and cost savings and the man- toward commercial financing. A financial instrument is a ageability of risks. Revolving repayments can encourage specific financial product or tool used to raise or allocate schemes to blend public and commercial financing sources funds for project implementation, often while mitigating over time. Government agencies, energy efficiency or other suboptimal investment situations and closing investment specialized funds, public or super energy service companies gaps. Within a financing mechanism or approach to structure (ESCOs), and development banks can administer the public energy efficiency project financing, specific financial instru- funds using a variety of financial instruments. ments can be deployed to facilitate commercial financing. A financial instrument is a specific financial product or tool The second group of mechanisms includes financial instru- used to raise or allocate funds for project implementation. ments that directly leverage commercial financing. These It seeks to facilitate investment, mitigate suboptimal invest- engage commercial financing institutions in undertaking ment situations, or close investment gaps. efficiency investments and allow public agencies the option to apply directly to banks or commercial service providers to Within a financing mechanism or approach to structure support the implementation of relevant measures. energy efficiency project financing, specific financial instru- ments can be deployed to facilitate commercial financing. Group 1: Mechanisms that utilize public financing to A financial instrument is a specific financial product or tool catalyze commercial financing used to raise or allocate funds for project implementation. The World Bank and other IFIs have financed, sometimes It seeks to facilitate investment, mitigate suboptimal invest- with co-financing from national governments, energy effi- ment situations, or close investment gaps. ciency projects in the public sector when (1) public entities 6 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Figure 1. Moving from public to commercial financing Note: ESA = energy service agreement; BOT = build-own-transfer; BOOT = build-own-operate-transfer; DBFOT = design-build-finance-operate-transfer. a. “Financing mechanism” refers to the overall system, strategy, and approach adopted to structure, deploy, and manage financing. It defines the source of funds and the criteria and requirements for accessing them, the method for disbursing funds to the project or beneficiaries, and the approach for recouping the investment (if the mechanism is intended to be sustainable). It also determines how risks and returns are managed. A financing mechanism may include a combination of financial instruments. Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector 7 were unable or unwilling to borrow from commercial sources, Public or super ESCO. A public or super ESCO, capitalized by (2) commercial financiers were unwilling to finance the the government, functions as an ESCO for the public sector investments or unable to price the risks, and/or (3) there market while also supporting the capacity development was inadequate credible data about the returns and risks. and project development activities of existing private sector In such cases, public funds were used to demonstrate the ESCOs. With its size and credibility as a public institution, a energy and cost savings and low risks and payback periods super ESCO has the capacity both to support the growth of of investments. Such pilot or demonstration investments a nation’s private, domestic ESCOs and to finance energy provided valuable guidance on how to overcome the con- efficiency projects, thus overcoming the barriers faced by tracting and payment risk issues faced by private investors. smaller ESCOs. However, demonstrations alone have consistently proven insufficient to sustain market activities and investments, Credit line with development bank. With this mechanism, so efforts have been made to use public financing in more public funds are utilized to offer financing through local sustainable ways, using public funds in a revolving scheme banks or financial institutions. Financing may be provided to allow for more sustainable financing and eventual com- on market terms and conditions or concessional terms (lower mercial financing. interest rate, longer tenor) depending on the cost of the funds to the development bank and target markets. Financing mechanisms under Group 1 are described below. Group 2: Mechanisms with financial instruments that Energy efficiency revolving funds (EERFs). EERFs provide directly leverage commercial financing financing to public agencies to cover the preparation and In more mature financial markets—where (1) public sector investment costs of projects. Some of the resulting energy lending is practicable, (2) public agencies and municipalities cost savings are then used to repay the EERF until the original have more discretionary budgets and credit ratings, and (3) investment is recovered. The repayments can then be used commercial financing for energy efficiency is more devel- to finance additional projects, thereby allowing the capital oped—commercial financing mechanisms can be used to to revolve and creating a sustainable financing mechanism. facilitate the direct participation of commercial banks and Such schemes can use debt financing, energy savings (or financial institutions. In these cases, the injection of exces- budget) capture, energy service agreements, or forfaiting. sive public financing directly into the market could actually undermine market activities and displace commercial financing. However, judiciously designed mechanisms can In Montenegro, 18 energy efficiency projects in public boost market activities and crowd in commercial financing buildings are being financed using budget capture, over time. with over $600,000 placed in an energy savings cap- ture account to date. In Bulgaria, the Bulgarian ESCO Sample mechanisms under Group 2 are described below. Fund (BEF) was established by Enemona, a local ESCO, which received a loan of €7 million from the European Credit line with commercial banks. This type of financing Bank for Reconstruction and Development to buy mechanism makes funds available to participating local receivables (forfaiting) under contracts with public commercial banks and financial institutions to provide debt sector clients (e.g., kindergartens, schools, hospitals, financing for energy efficiency projects. Credit lines, which municipal buildings). may be established by governments or IFIs, increase the funding available for participating institutions. These lines are often provided under preferential terms (lower interest rates, longer tenors). The participating institution then blends these with its own funds to offer financing at market-based or preferential terms. 8 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Risk-sharing facilities. These provide partial coverage of the Public-private partnerships (PPPs). A PPP is an agreement risk involved in extending loans to public entities. Each facility between the government and one or more private partners represents a bilateral loss-sharing agreement and generally (that may include operators, investors, and financiers) to includes a subordinated recovery guarantee; it may also deliver certain services, generally under a long-term contract. include a “first loss reserve” to cover 50–100 percent of the In the case of energy efficiency projects, the private partners initial losses up to a specified amount. A partial risk-sharing can deliver services and financing for commensurate fees to facility can help public agencies by providing them with align with public energy savings goals. The effectiveness of access to commercial finance, reducing the cost of capital, the alignment depends on the equitable allocation of risks. expanding the loan tenor or grace periods to match project PPPs can leverage substantial capital expenditures from cash flows, and building commercial lenders’ capacity to to a private partner to implement projects. There are many price and finance energy efficiency projects. forms of PPPs, with the structure depending on the alloca- tion of the technical and financial risks. PPP types include chauffage, ESCO contracting, and so-called BOT (build- In India, a partial risk-sharing facility issued 79 guaran- own-transfer), BOOT (build-own-operate-transfer), and tees, of which 20 were for public sector projects totaling DBFO (design-build-finance-operate) schemes. $33.5 million (replacement of inefficient streetlighting with light-emitting diodes and installation of efficient pumps in a municipal water utility). In Croatia, a PPP was used for the renovation of the Varazdin County Palace. Under a 20-year agreement, Meteor-Privatno Partnerstvo invested €1.2 million and was granted exclusive building rights for the improve- Blended financing. This mechanism combines public and ment and use of the building for the contract period, private capital to offer more affordable financing for energy with a fixed payment of €13,880 per month. efficiency projects. It combines grants with financial instru- ments such as loans, guarantees, and concessional interest rates to mobilize private sector investments when financing What can we take away from these costs are high, or payback periods long. experiences? Management contracts with performance-based pay- Improving the energy efficiency of public buildings is ments. Performance-based management contracts provide important, given their high energy use, large efficiency incentives to the private sector to invest in the management potential, and importance in influencing local markets and operation of a public facility with payments made to Public sector energy efficiency programs need to be sustain- them based on specified performance-improvement levels. able, scalable, and designed so as to attract commercial Such contracts have been utilized for the management and financing. This calls for the strategic deployment of public operation of water supply and sanitation utilities and for funds, including those provided by the World Bank and street lighting projects. other IFIs. The use of public funds to draw in commercial financing takes two forms: (1) via financing, as a catalyst to Supplier financing. Supplier financing, including supplier demonstrate savings and repayment schemes, usually on credit and equipment leasing, has been instrumental in a revolving basis, and (2) via programs that seek to directly promoting the adoption of energy-efficient equipment by engage commercial financing institutions. Selecting the right reducing or eliminating up-front costs and offering a non- financing mechanism for the job depends on country-spe- debt financing option. Manufacturers and suppliers of ener- cific policies and regulatory frameworks, public agency gy-efficient equipment have provided financing to industrial characteristics, implementation barriers, and the maturity of and commercial clients in many countries. Supplier financing financial markets. is also being used in the public sector in countries where the risk of nonpayment is minimal. Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector 9 Public finance has generally been effective in demonstrating clear exit strategy to encourage commercial financial insti- the large potential cost savings and manageable repayment tutions to step in. Regulatory and institutional development risks of energy efficiency projects, as shown by Bank oper- need to be conducted in parallel to ensure a smooth transi- ations in several countries. Most such schemes have been tion to commercial financing. in markets where public sector entities were not deemed creditworthy, the market was underdeveloped, or payback Payback periods may be long—due, for example, to low periods were high. They offer evidence to the private sector baseline service levels and the need for parallel structural of potential business opportunities and provide local data and safety improvements—in which case longer-term financ- on efficiency potential, financial savings, and repayment ing can help. However, financing should not be undermined performance, thereby encouraging investments from private by issues unrelated to energy efficiency performance. Where sources. possible, parallel grants to cover investments beyond energy efficiency could help demonstrate the potential for sustain- able commercial financing. “Public sector energy efficiency programs Develop innovative and sustainable financing mecha- need to be sustainable, scalable, and nisms. In relatively developed markets, where public entities are creditworthy and investments in energy efficiency are designed so as to attract commercial more common, or where public entities have independent financing.” revenue streams (e.g., universities, hospitals), it is possible to set up ways for commercial financial institutions to partici- pate directly in projects. Blended financing, guarantees, and The development of robust project pipelines poses a chal- other mechanisms that combine public and private funds lenge, and aggressive marketing is typically essential. Such can help reduce the risks perceived by private investors until efforts must be supported by regulatory reforms (to drive the market can be sustained on its own. demand), incentives (where necessary), access to data (on building stocks, energy use), and capacity building. Early Where sustainable public financing schemes have operated investments need to be carefully structured, documented, successfully (under Group 1 in table 4), plans to engage com- and widely broadcast to build market awareness and inter- mercial financiers directly (Group 2) could be developed. This est. Initiatives also need to develop energy services markets, process may involve using energy efficiency funds or super such as through simple performance-based approaches ESCOs as guarantees or as subordinated debt until such time that foster the creation of private entities such as ESCOs and as commercial lenders are more comfortable financing proj- facilitate their ability to access commercial financing. ects on their own. But so long as public financing is offered in parallel to commercial financing, it will be preferred; there Key steps toward these goals are described below. must a clear plan to phase down and transition away from public financial offerings. Learn from innovative financing models that have proved able to attract and benefit from commercial financing. In Address creditworthiness issues. Where public agencies’ less-developed markets, and for budget-dependent entities ability to provide collateral and make timely repayments is in such as schools and government buildings, public financing question, it is important to help public clients develop repay- models have successfully demonstrated the benefits (and ment histories and reduce perceived risks to lenders. After risks) of energy efficiency projects. However, care must be these are established, ways to draw in commercial financing taken to ensure the effective, efficient management of include credit enhancement using energy savings capture public funds, including through training for fund managers. accounts, escrow accounts, and risk-sharing guarantees. Governance structures must also be in place to ensure the proactive development of markets. Such funds also need a 10 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Table 4. Examples of financing options to leverage commercial financing Financing Existing market conditions mechanisms Advantages Limitations Group 1—Mechanisms that utilize public funds to catalyze commercial financing Bank perceptions of high risk in Energy Can be structured to address Likely to need new legislation or financing of public EE projects, lack Efficiency financing needs & evolving amendments to existing legislation to of public agency borrowing histories Revolving Fund capacity of public agencies establish the EERF Difficulties in contracting between (EERF) Can offer various financial Needs a professional, well-incentivized private service providers and public instruments (preferential loans, fund management team agencies ESAs, energy savings capture, forfaiting) Ability of public agencies to enter Facilitates rapid implementation May need additional capital infusion if into multiyear agreements and of public sector EE projects and repayment period is long retain energy cost savings reduces risk to public agencies Good public agency payment Super ESCO All of the above plus: Legislative changes will most likely be discipline required to establish the Super ESCO Willingness of government to Contributes to rapid development Need to create a new company with establish a new entity/SOE for EE of an energy services industry substantial technical and financing financing/market development and can offer a broader range of capacity and equity capital and to mobilize public financing to financial instruments including capitalize it performance-based contracts Experience of development bank in EE credit Can provide concessional Development bank needs to be providing financing for public sector line with financing (lower interest rate, interested and willing to finance EE projects development longer tenor) for public agencies projects Reluctance of government to bank Development bank has Need to enhance capacity of establish a new organizational unit experience in debt financing for development bank for technical and or company public agencies financial appraisal of EE projects Group 2—Mechanisms that directly leverage commercial financing Well-developed banking sector, EE credit Leveraging of private funds from Public agencies need to have willingness of banks to consider an line with banks borrowing capability and willingness to EE line of business commercial assume debt Limited liquidity in banking sector, banks Efficient processing of loan May need TA and capacity building of access to longer-term loans applications banks re EE technologies & business models Sufficient and sustainable market Potential for scaling up May need to provide credit demand to develop a large pipeline enhancement since public agencies of projects may not provide suitable collateral (continued) Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector 11 Table 4. Continued Financing Existing market conditions mechanisms Advantages Limitations All of the above plus Partial Can address the risk perception Requires establishment of a guarantee Risk-Sharing of banks fund Need to address bank perception of Program Increase banks’ interest and Limited success in some World Bank high risk activities in debt financing for EE projects projects Need for partial grants or interest Blended Helps scale up financing as Some complexities in design rate buy-down to address long financing grants are reduced. and administration, can create payback measures; high cost of dependency on low-cost financing capital Banks unwilling to consider an EE Performance-based grants can May need a guarantee facility to line of business without further assure energy and cost savings stimulate debt financing market development Need to access private sector Management Clear incentives for improvements Complex contracts and negotiation expertise and willingness to assume contracts with in operational efficiency process operational control and risks performance- Government willingness to based Financial and operational risks Need for aligning private and public outsource operations to private payments are transferred to the private sector objectives and risk-sharing service provider sector Equipment suppliers willing to Supplier No capital required from public Total cost over the life of the lease provide supplier financing or leasing financing agencies contract may exceed equipment cost options, creditworthy public clients Commercial banks willing to provide Payments to suppliers can be Complexity of contract structures financing to suppliers structured to be lower than cost savings Well-established contract structures Supplier may assume operation Commitment to a long-term contract for simple equipment replacement, and maintenance responsibilities may limit ability to upgrade/replace ability to resell equipment for equipment nonperforming leases Existence of an energy services Performance ESCOs can provide or arrange Contract structures can be complex industry with sufficient active contracting financing from banks ESCOs, strong M&V protocols with ESCOs Legislation supporting contracts ESCOs provide guarantee of Needs formal M&V for assuring that between ESCOs and public performance the guarantees have been met agencies, public agencies have good payment discipline Notes: EE = energy efficiency; EERF = Energy Efficiency Revolving Fund; ESCO = energy service company; M&V = measurement and verification; TA= technical assistance. 12 Mobilizing Commercial Financing to Scale Up Energy Efficiency in the Public Sector Facilitate and encourage mechanisms that leverage Build capabilities. As more experience in energy efficiency commercial financing. Financing mechanisms that help projects is gained, training and capacity-building programs to mobilize commercial financing should be encouraged. It are needed to improve the skills and capabilities of public is important to pilot performance-based contracts imple- sector decision-makers, facility managers, and engineers. mented by ESCOs, risk-sharing programs (e.g., India), blended Periodic training also needs to be provided to others with financing, and PPPs; evaluate them; refine the processes; roles in implementation, such as energy auditors, designers, develop templates; and offer training to public officers on how to use them. Credit lines may encourage commercial construction firms, ESCOs, financial institutions, and mea- banks and financial institutions to invest. Choose the mech- surement and verification professionals. They can learn from anisms that best align with the interests of service providers early projects, improve over time, and better appreciate the and public entities, consistent with local regulatory and mar- business opportunities opened up by improved efficiency. ket conditions. Public agencies need to understand the importance of energy efficiency, navigate the project cycle, and be trained in proper operations and maintenance to ensure that proj- “The development of robust project pipelines ect benefits are realized and sustained over time. must be supported by regulatory reforms, We are grateful to the Energy Sector Management Assistance incentives, access to data, and capacity Program for supporting the development of this Live Wire, and building.” to Ani Balabanyan, Aditya Lukas, and Tamara Babayan for their guidance. This brief builds on Live Wire 2018/94 (World Bank 2018). 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