BY ALISON DECKER AND MAYA GAINER
Alison Decker is a first-year student in the International Development Program and an editor of SAIS Perspectives. Before coming to SAIS, she worked as a communications consultant with the World Food Programme, focusing on digital content to cover the Ebola crisis.
Maya Gainer is a first-year student in the International Development program and an editor of SAIS Perspectives. She previously worked as a researcher at Princeton University's Innovations for Successful Societies program, which took her to six continents to study governance and service delivery.
Madeleine Varkay, an international advisor to the Asia Pacific Financial Forum, visited SAIS as part of the International Development Roundtable Series to discuss how upgrading regulatory frameworks can enable long-term investments in infrastructure and industries such as clean energy. She also draws upon her experience as former principal private sector development specialist with the Asian Development Bank.
SAIS Perspectives caught up with her after her presentation to discuss the conditions that foster investment in energy-efficient infrastructure. If countries upgrade their existing infrastructure they can reap substantial rewards, but doing so requires careful planning, including evaluation of the potential savings and costs.
Perspectives: What factors help you to determine if a country is ready to begin developing more efficient energy infrastructure?
MV: It depends on several things, including how old their manufacturing equipment is, and what the costs are of replacing it. Ultimately, energy efficient equipment should help them meet a market demand. Thus, the decision is all about working backward based on product market demand.
We look at the country’s ability to generate consistent energy supply, and in a fast growing economy, the frequency of brownouts due to irregular/insufficient energy supply. In addition, we consider the energy supply mix (oil, coal, gas, hydro) and the costs of production as well as any existing energy subsidies that may distort the industrial and consumer markets.
What can countries do in these situations—where it is clear that increased investment in the energy sector is warranted to meet fast growth in demand ? Investing in alternative energy sources, such as renewable, where there are investment costs and returns, is one option. But we need to think it through. To what extent would the new technologies enable them to store energy, and would that increased energy be available to the grid?
Another factor to consider is the potential for generating more efficient use of existing energy - in other words, invest in energy efficiency. To do so will require a dedicated cadre of professional engineers who can undertake investment grade audits that capture the value of the energy saved through upgraded equipment. Investment grade audits review efficiency of equipment along the manufacturing or industrial plant, and identify the greatest sources of energy loss. A plant manager has to be willing to upgrade equipment, with the agreement of the company’s CFO. The company’s bank needs to be able to read the IGA and provide a loan that will be equivalent to the energy saved by the new equipment.
Perspectives: Is there a way to include small and medium enterprises rather than large-scale infrastructure in efficiency initiatives?
MV: It really depends on the source of financing. We took a look at a number of SMEs and funded them; but we also had a grant to facilitate this. The first thing, frankly, is to have grant financing that would enable an investment-grade audit for SMEs, especially similar classes of SMEs such as furniture producers, electronic component manufacturing, those supplying an international supply chain, or any cluster of firms that fall within a particular sector.
An investment-grade audit (IGA) for a group of firms falling within a specific sector enables consistency in financial due diligence. As a banker, your understanding of an IGA i.e. the energy profile of a given manufacturing process, will improve and therefore, so will your ability to value the underlying savings of a given energy efficiency project in a given production sector/ category of SMEs. This will improve the systematic financial, risk and legal assessment of a project and thus, facilitate lending on the basis of the underlying energy savings. It may also lead to the eventual bundling of these projects.
However, an individual SME that requires the financial outlay of a full IGA, will likely represent a very high financial transaction cost, unless the IGA is fully subsidized by a grant. The benefits of grant financing of an IGA, need to be measured against the developmental impact of the IGA across a group of SMEs within a given sector or sub-sector. The leveraging of grant financing is important to support market awareness and to create a pipeline of projects for financing: the IGA is the basis upon which bankers appraise the project loan; it provides an assurance to financiers of the energy savings that will fund repayment of the equipment /project financed.
Perspectives: What makes energy-efficient financing attractive to governments and stakeholders?
MV: Energy efficiency is virtual energy - it does not require a significant fiscal outlay in a new power plant. Given its abstract concept however, the implementation of energy efficiency requires supporting regulations and market awareness. At the municipal level and at the micro level, the enterprise level, that’s where you need to convince people energy efficiency is important – “the savings in energy costs over the next 5 years will repay the investment in new equipment”. Furthermore, once the equipment has been repaid, the firm will continue to reap the benefit of energy savings over the life cycle of the equipment, which can vary from 10 - 15 years. Everybody gains - the enterprise, the community and government which has saved fiscal space.
LEDs and light bulbs are low-hanging fruit which have been adopted by every major corporate institution, bank, and hotel chain. Increasingly, municipalities are also adopting energy efficiency in their street lighting programs. These measures are all beneficial. In a fast growing economy, significant energy savings are found at the manufacturing and industry level, based on energy intensity. We are looking at manufacturing plants or industrial plants that are intensive energy users, and produce a high value product, to support the case for making an investment. Investment in energy efficiency will depend on the market demand for that given product and the energy constraints of the given enterprise.
It’s all about looking at their bottom line, and that’s what investment should be predicated on. If you have too many competing government grant programs, you’re distorting the market. And that does not achieve buy-in.
Madeleine’s work on financing of energy-efficient projects and technical expertise in the field helps SAIS students understand the mechanisms that the energy sector requires, and we are excited we could share her helpful words of experience.
To learn about other events in the International Development Roundtable Series, click here.
PHOTO CREDIT: Carl Berger via Creative Commons