Bringing energy efficiency to industrial sector: World Bank advocates establishing credit line

ISLAMABAD: The World Bank has proposed establishment of an energy efficiency credit line through one or more commercial banks to provide industrial firms with access to affordable financing for near-term investments aimed at bringing energy efficiency to Pakistan’s industrial sector.

The World Bank, in consultation with the National Energy Efficiency & Conservation Authority (NEECA), is implementing two substantial technical assistance activities relating to the scoping and implementation of energy efficiency & conservation (EE&C) measures in Pakistan which are Industrial Energy Efficiency & Decarbonization Study and Buildings Energy Efficiency Study.

The first study, for which an internal World Bank peer review has just been initiated is based on the draft final report shared by the consultant team in parallel to the internal review.

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This detailed and rigorous study was carried out to identify sector-specific solutions available to support EE&D across five subsectors, ie, textile, steel, cement, paper & pulp, and fertilizers. At least 500 boilers can be replaced at a cost of approximately 100 million USD, to reduce the equivalent carbon emissions by 1 million tons per year, which is 1.5% of the total industrial emission of Pakistan.

The World Bank has sought feedback from key government counterparts to ensure that the report has strong buy-in, reflects the reality on the ground and provides recommendations that are practical and actionable by the relevant agencies.

The team is having an ongoing internal discussion on the issue of credit line, which is one of the recommendations in the report.

There is reluctance to finance pure credit line operations in Pakistan due to the current health of the commercial banking sector, their incentive structure (which prioritizes government lending over project finance), and the leverage possible through such an operation. It is likely that this recommendation will need to be made more nuanced, and perhaps expanded to include guarantee funds or other instruments.

The other issue the team is aware of is that the recommendation to focus on replacement of boilers may not be fully aligned with the Paris Agreement on Climate Change, which will shortly become a corporate World Bank Group commitment.

The team has discussed this with the consultants and may look to include a recommendation to focus on five technologies that would likely fulfil the Paris Agreement criteria, as follows: (i) biomass boilers; ii) multi fuel boilers (capable of running on natural gas. biomass, biogas. or hydrogen); (iii) hydrogen-ready boilers; iv) concentrated solar thermal boilers; and (v) heat pump boilers.

Pakistan is heavily dependent on imported fossil fuels, exposing the country to unnecessarily high prices, energy insecurity, and current account deficits. Pakistan’s industrial sector has the highest share of national energy use which, combined with heavy reliance on coal, makes a disproportionate contribution to the country’s energy sector challenges, while also contributing to air pollution and the release of greenhouse gas (GHG) emissions.

Industry accounts for almost 37% of Pakistan’s final energy consumption, 19% of gross domestic product (GDP), and 19% of annual GHG emissions.

There is significant potential for Pakistan’s industrial sector to improve energy intensity, save costs, reduce exposure to international fossil fuel market volatility, and enhance the competitiveness of the economy overall. Cost-effective measures include improving process and energy efficiencies, increasing the use of alternate cleaner fuels, and reducing waste along product lifecycles.

These are considered together as energy efficiency and decarbonization (EE&D) measures in this study, with the dual objective of reducing unnecessary energy consumption in the near-term and contributing to the decarbonization of the economy over the longer term.

Adopting these measures would help to mitigate today’s energy crisis and help ensure that Pakistani industry does not get left behind in the energy transition that is underway globally. EE&D measures may benefit individual firms financially through reduced energy consumption, improved process efficiency, enhanced competitiveness, and the potential creation of Voluntary Emission Reduction Certificates for sale on global carbon markets.

The study says that there is a critical lack of awareness and understanding of the potential for industrial EE&D measures in Pakistan.

There are several EE&D measures that have very quick payback times, deploying off-the-shelf- technologies available in Pakistan. These include high-efficiency boilers, high-efficiency motors, efficient compressors, control drives for motor-driven systems, and waste heat recovery (WHR) options.

Similarly replacing inefficient motors across industries in Pakistan has the potential to substantially reduce the industrial electrical consumption in Pakistan. There are also a number of potential EE&D solutions that are available in Pakistan but that need further feasibility studies and piloting to fully understand costs and implementation challenges.

According to the study, ideally utilizing concessional sources of finance, a low-interest credit line would allow the bank(s) to on-lend to firms and fill the gap left by the absence of refinancing schemes previously offered by the State Bank of Pakistan.

There are a number of successful examples internationally, but a key success factor is the existence of a strong pipeline of projects and appropriate training for the loan-authorizing staff.

Given the limited understanding of decarbonization options across government, the banking sector, and industry, a credit line would need to be supported by strong technical assistance and a capacity-building program, to be implemented in parallel. Particularly important would be the development, by NEECA, of eligibility criteria for the target technologies, lists of suppliers, and minimum energy performance standards to drive the entire market.

To ensure financing for such efforts remains available over the longer term, Pakistan needs to establish and scale up a market for energy service companies (ESCOs).For emerging or longer term EE&D measures this study recommends a selective piloting program that aims to work with leading firms to part-finance the incremental cost of the new technology through externally-provided grant funding or highly-concessional lending.

The World Bank has also claimed that a wider range of sector-specific decarbonization technologies was also identified during the study. Although these generally do not have the same potential to go to scale as the technologies with cross-sectoral applicability mentioned above, the report does discuss and list them for reference.

Copyright Business Recorder, 2023