A number of financing strategies can help ensure the sustainable, long-term growth of energy efficiency programs.

Policies and programs that attract broad investment are critical components of successful energy efficiency objectives. It is important to understand the enabling market conditions that stimulate public and private finance for energy efficiency as well as the barriers that can make investing in efficiency less attractive. While energy efficiency investments are relatively low-risk and require less capital than investing in energy supply infrastructure (a study from McKinsey & Company suggests that developing countries can halve their spending by investing in energy efficiency over electricity generation and distribution), several aspects of energy efficiency investing can deter traditional investors.

The most prevalent barrier to increased energy efficiency financing opportunities is the relatively high transactional cost associated with a large number of small investments. For example, a commercial building retrofit might yield significant aggregate energy and monetary savings over a relatively short period. However, this type of investment is much less attractive to traditional private sector financiers who prefer a few large investments over many small investments.

Energy efficiency enhancements are also typically harder to secure or collateralize based on their physical assets. Larger energy supply infrastructure projects typically have inherent asset value that give lenders clear recourse if the borrower defaults, such that the lender is assured that the assets will generate enough revenue to cover lender payments regardless of who owns them. By contrast, efficiency investments are typically integrated into real estate property or have limited salvage value, limiting lender recourse to the assets. Consequently, lenders must underwrite a loan based on the borrower’s creditworthiness and not the project’s inherent value. Without such clear lines of asset recourse and project valuation, efficiency investments face challenges in competing for conventional investment capital.

Despite these challenges, a number of proven approaches can help attract financing for energy efficiency. Identifying which options are best for a given country will depend on a number of local conditions related to the legislative and regulatory environment and market maturity, including:

• Supportive Policies and Agreements
  • Do policies create dedicated energy efficiency funding (directly or indirectly)?
  • Has the country signed international agreements that can be leveraged for funding?
  • Which government agency is responsible for energy efficiency programs?
• Barriers to Financing
  • To what extent do potential financiers understand the benefits of energy efficiency? Does supplemental training need to take place?
  • Are energy service companies capable of competently performing feasibility assessments and evaluating expected energy savings?
• Private Sector Financing Opportunities
  • Are secondary market mechanisms to facilitate strategies such as loan pooling and on-bill financing available?
  • Is there a body of creditworthy project implementers? Is credit enhancement necessary?
  • Are there legal and financial frameworks for credit enhancements?

Learn more about supportive policies and agreements.