Energy Efficiency – the new big business for Sri Lankan banks?

World Trade Center, Colombo, Sri Lanka

Sri Lanka has a very competitive banking sector. Despite its small economy, it counts 35 banks and nearly twice as many non-bank financial institutions. To set themselves apart from competitors, banks need to find a niche. Financing energy efficiency seems like a promising new way. | By Johannes Alexeew and Isabell Kleitsch.

The Hatton National Bank Ltd. (HNB) and DFCC Bank Ltd. are now attempting, as part of a project of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) in collaboration with adelphi, to position themselves in the area of energy efficiency financing within the Sri Lankan market.  In doing so, the banks not only seek to expand their credit portfolios, but also contribute to reducing global emissions and to the fight against climate change.

The two banks’ do their core business with industrial sector clients. In Sri Lanka, these are primarily small and medium-sized enterprises (SME) that have been severely impacted by rising energy prices in the last few years. SME’s investments in energy efficiency can thus prove to be an effective mechanism for saving costs and making businesses less vulnerable to fluctuations in energy prices. Additionally, the potential of energy efficiency measures for Sri Lankan SMEs is very great, given that inefficient appliances and machines are commonly used there. HNB and DFCC would like to use this market opportunity to provide targeted support for energy efficiency projects. To do so, however, the financial institutions must take further decisive steps in their day-to-day business practices.

From plan to action – a long and often bumpy road

Awareness of the potential for energy and cost savings among Sri Lankan SMEs has thus far not been very widespread. However, even bank employees there have hardly any knowledge of the topic and are often put off by the technical complexity of such projects. The process applied when assessing energy efficiency projects for their creditworthiness is the same standard procedure, in which the lending decision is based primarily on the enterprise’s balance sheet. The energy costs saved and the resulting reduced risk of default don’t enter into the bank’s calculations. This leads banks to underestimate or, in the worst case, ignore entirely the attractiveness and advantages of investments in energy efficiency.

Banks in Sri Lanka thus require new approaches and instruments for assessing their client’s energy efficiency and projects in order both to serve energy saving and climate action goals on the one hand, and to design cost-effective financing products on the other. In pursuit of these goals, a capacity development programme was specially developed for Sri Lanka with HNB and DFCC and carried out by GIZ and adelphi between 2016-2016. Through trainings and consulting services, the bankers learned about various instruments for carrying out technical and financial assessments on energy efficiency measure.

What they all have in common is to take account of the core of energy efficiency measures, i.e. that the loan is serviced via energy cost savings, meaning that the project in question, and not the enterprise, should be focused upon in the assessment. However, it is important to be certain that the technical measures will in reality lead to cost savings, and that these will be high enough to pay off the loan. After all, the banks want to continue to finance only truly creditworthy projects with calculable risks. A range of tools and strategies can help bank employees to come to terms with these challenges in the course of the lending process.  

One of the most promising tools is the so-called “flagging system”, which uses benchmarks to identify clients with high energy consumption and supports them in investing in energy efficiency measures. When enterprises use an especially large amount of energy, then their savings potential is usually also very high.

However, Sri Lankan banks have thus far failed to gather any data on their clients’ energy consumption, and the unfavourable sourcing situation makes it impossible to rely on external data. If the banks were to take the initiative themselves and set benchmarks for the energy consumption of their clients from various industries, they would also be contributing to fundamental improvements to the availability of reliable data in the country.

Greatest potential can be found in cooling systems, motors, and the deployment of capacitor banks

A further possibility for identifying energy efficiency projects is offered by cooperation with reliable energy auditors, for example from the Sri Lanka Energy Managers Association - SLEMA. These auditors cooperate directly with SMEs to systematically analyse energy saving potentials and recommend profitable investments. Most enterprises will have already decided in favour of the investments before hiring the auditors. DFCC and HNB would only have to convince potential clients of the advantages of their financial products; the often cumbersome technical assessment of the project is completed by the energy auditor.

But there are actually already a variety of solutions for the technical assessment that banks around the world can make use of without help from an external auditor to assess energy efficiency projects for their creditworthiness. These systems can help bank employees in making decisions without first having to build up complex technical know-how within the organisation. One example are positive lists that declare exact technologies from specific providers as worthy of support. The bank employees would only need to check if the energy efficiency project of their client is included on the list. If it is, there are no further obstructions to financing. In the best case, these lists are online and can be continually and centrally updated with the newest information and technologies.

But even without creating such time-consuming positive lists, the banks can already narrow down possible investments by focussing on specific sectors and technology. For example, the Sri Lankan industrial sector’s greatest energy efficiency potential can be found in cooling systems, motors, and in the deployment of capacitor banks. Investments in generating capacities via renewable energies can also be of interest to SMEs. The political conditions in Sri Lanka are favourable to this as they provide for incentive mechanisms like feed-in tariffs and net metering.

Whichever path the banks may choose to take, they are now familiar with a range of possibilities for dealing with the risks of financing energy efficiency projects in their daily business thanks to the capacity building programme. Hopefully, doing business with less energy will soon become even more attractive to the Sri Lankan financial sector

Seit vielen Jahren berät adelphi Entscheidungsträger aus Politik und Finanzsektor zu Energieeffizienz-Maßnahmen sowie der Ausrichtung von Kreditlinien zur Förderung von Energieeffizienz. Erfahren Sie mehr zu unseren Projekten in Entwicklungs- und Industrieländern auf der Themenseite.

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