Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond

Citation

Bhattacharyya, S.C. (2009), "Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond", International Journal of Energy Sector Management, Vol. 3 No. 1, pp. 93-95. https://doi.org/10.1108/17506220910947872

The book under review disseminates the experience of a multi‐year UNEP‐World Bank funded project, known as the Three Country Energy Efficiency Project supplemented by additional information drawn from other similar experiences. Although energy efficiency improvement projects are often ranked as the cheapest options for managing energy demand and hence the most attractive options for controlling the environmental and climate change problems, such projects remain unimplemented in many countries, especially in developing countries due to market failures and market barriers. This book focuses on the financing of such projects through the development of appropriate organisational arrangements and appropriate financial products. The book distinguishes between two types of energy improvement projects – one that is part of an overall modernisation and restructuring process and the other that just focuses on energy saving as its primary objective. The book focuses on the second type of projects, where projects tend to be small compared to the core activities of financial institutions and the transaction costs tend to be high due to limited replication possibilities. Lack of interest and competence of financial institutions in energy efficiency projects is another problem. The purpose of the book is to showcase how these problems have been addressed in various countries to take energy efficiency projects forward.

It provides a rich description of different experiences in funding energy efficiency projects drawn from a diverse set of business and economic environment. The message is clear: it requires strong, initial government support in developing an effective financing mechanism for promoting energy efficiency projects. However, there is no standard template that fits all and each country has to experiment with alternative options to find out the most effective option. Such solutions have to be compatible with the local institutional environment (a term which the authors use in the sense of institutional economics following the influence of Douglas North), which in turn requires a good understanding of the local institutional environment related to energy efficiency projects and its financing. This book blends the concepts of institutional economics with conventional financing, which makes this work an important addition to the literature.

The book is organised in two parts: the first part provides a synthesis of the lessons while the second part includes 13 stylised case studies covering a wide range of project experience in energy efficiency financing. The first part is structured around eight chapters. It starts with introductory topics in the first three chapters and covers issues such as the importance of and opportunities for energy efficiency improvements and barriers to energy efficiency projects. The book becomes more serious from Chapter 4 where the authors introduce the essential elements of and alternative models for energy efficiency investment delivery mechanism. Subsequent three chapters elaborate on the three requisites identified in Chapter 4, namely identification and assessment of the projects, delivery of financing and incentives for making the institutional arrangement function. Chapter 8 summarises the lessons from the Three Country Project and provides some advice based on the past experience.

The second part is devoted to case studies on various energy efficiency project financing mechanisms in various countries around the world. These included successful as well as not‐so‐successful cases that highlighted the strengths and weaknesses of alternative mechanisms. The cases included examples from the USA and Canada alongside examples from developing and transition economies. These case studies highlight:

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  Three alternative finance delivery mechanisms – loan financing and loan guarantee mechanisms, energy service companies and utility demand‐side management programmes.

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  Importance of institutional arrangements for energy efficiency financing, especially those related to weak contracting arrangements and transaction costs due to dispersed nature of energy efficiency projects.

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  Importance of capacity building both in technical and financial areas in most cases, and the need for close cooperation between various skill sets for a successful delivery mechanism.

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  The critical role played by incentive structures and risk management options so that the “probability of getting paid” is maximised.

The strength of the book lies in its integrated approach towards energy efficiency project financing. It covers the entire gamut of such projects – market selection and outreach, project development, finance delivery mechanisms, incentives and capacity building. It also draws on the rich experiences of the case studies to explain various points. Inclusion of the institutional aspects has also made the book different from other works.

However, the book has a number of limitations as well. First, it lacks adequate referencing of previous works in the area. Although the focus of the work is somewhat different, the book should have acknowledged and cited previous works in the area. Second, even though the authors have used the experience from the case studies in various chapters, they failed to extract the full benefits of the case studies. A comparative assessment of the experiences and lessons for others would have been helpful. Third, despite incorporation of an institutional perspective, the analysis remains shallow. The authors do not really explain or analyse the contractual arrangements, organisational set‐ups, and policy and regulatory interventions involved in various delivery mechanisms. Fourth, although the book follows an integrated approach, the framework has not been really implemented through a case study or an example. This could have helped clarify the ideas more clearly. Finally, the case studies do not follow a standard template or framework. While this is mainly because of the nature and scope of the cases, lack of a standard framework makes comparison difficult.

Despite such deficiencies the book nonetheless provides food for thoughts and is a welcome addition to the growing catalogue of studies on energy efficiency projects. The book will surely be useful to those involved in promoting energy efficiency. This will be a useful resource for practitioners. Researchers and students working on energy efficiency projects and project financing will also find it highly relevant.