World Bank Group Support to Demand-Side Energy Efficiency
An Urgent Need to Scale Demand-Side Energy Efficiency
Improving energy efficiency—using less energy to do the same amount of work—has both supply-side and demand-side aspects. Improvements in energy efficiency are reductions in the energy required to maintain or improve energy services to households, businesses, and communities. Supply-side energy efficiency approaches target energy generation via grid infrastructure, utilities, and power producers. Demand-side energy efficiency (DSEE) focuses on the energy use of industries, commercial entities, and households.
This evaluation focuses on the World Bank Group’s approaches to DSEE and opportunities to scale them up. It focuses on DSEE for four reasons. First, scaling up DSEE can substantially reduce energy demand, avoiding greenhouse gas (GHG) emissions. More than 40 percent of the reduction in GHG emissions over the next 20 years could come from energy efficiency (IEA 2020a). Second, DSEE interventions face policy, institutional, market, and behavioral barriers that the Bank Group can help address. Third, the Bank Group has committed—in the World Bank Group Climate Change Action Plan 2021–25 (World Bank 2021b)—to scaling up DSEE. Fourth, other recent Independent Evaluation Group evaluations, including evaluations of Bank Group support for energy access and renewable energy, have covered supply-side issues (World Bank 2015, 2020).
Investments at scale are needed to realize the untapped potential of energy efficiency. The rate of improvement in global energy efficiency (the rate at which global gross domestic product per unit of energy used increases) needs to nearly double to meet the Sustainable Development Goal (SDG) 7 (energy access) target. Moreover, it needs to increase by more than 2.7 times to achieve the ambitions of the Paris Agreement. In addition, meeting SDG 7, SDG 13 (climate action), and the ambitions of the Paris Agreement—and reaping the other economic and social benefits associated with energy efficiency—requires closing a $500 billion annual gap in global investments.
Furthermore, recent crises—the COVID-19 pandemic and the energy crisis—have highlighted the importance of DSEE and the urgency of scaling it up. These two crises have exacerbated Bank Group clients’ systemic energy challenges, especially in Europe and Central Asia. The COVID-19 pandemic highlighted the potential for DSEE to improve air quality (by reducing emissions, which can contribute to pulmonary diseases), create jobs, increase incomes, and improve productivity during economically damaging lockdowns. As a result of the energy crisis caused by the Russian Federation’s invasion of Ukraine, European ambitions for energy security hinge on policy measures to maximize the use of DSEE measures in both industrial and residential settings (including in relation to heating and cooling of buildings).
Addressing climate goals—including SDG 13 and the Paris Agreement—requires scaling up DSEE interventions vertically and horizontally. Scaling up DSEE refers to influencing or increasing clients’ DSEE activities, inputs, or investments across or within sectors. Vertical scaling targets multi-asset owners within a sector, whereas horizontal scaling targets entire multisectoral supply chains.
The evaluation was conducted at the global, country, and intervention levels. It used a combination of methods: literature review, portfolio sampling, benchmarking, key informant interviews, country case studies, econometric analysis, surveys of best practices, and analysis of existing surveys. This evaluation is part of the climate change and environmental sustainability theme in the Independent Evaluation Group’s work program.
A Mixed Record of Demand-Side Energy Efficiency Success across the World Bank Group
The World Bank’s investment project financing (IPF) and the investment services of the International Finance Corporation (IFC) have been the main instruments supporting DSEE; the Multilateral Investment Guarantee Agency (MIGA) supported DSEE through guarantees. During the evaluation period, between 2011 and 2020, World Bank IPF and IFC investment services delivered 62 percent of the DSEE projects and 70 percent of the total DSEE financing volume ($19.4 billion over 354 interventions). In this period, MIGA issued 11 guarantees across three countries under eight projects, for $1.4 billion in DSEE support, primarily for public infrastructure (hospitals).
Two global, advisory-oriented programs supported Bank Group interventions in DSEE. The World Bank Energy Sector Management Assistance Program (ESMAP) and the IFC Green Buildings Market Transformation Program helped address market, institutional, and information barriers in client countries by piloting new DSEE approaches and crowding in investment.
Bank Group DSEE interventions have gravitated toward middle-income countries (MICs) and industrialized lower-middle-income countries (LMICs). More than half of World Bank IPF and IFC investment services went to MICs and industrialized LMICs. Bank Group lending reached the industrial and commercial building market segments and public infrastructure (for example, public buildings, lighting), but it has not fully addressed all of the most energy-consuming and hardest-to-abate market segments. The industrial segment accounts for 38 percent of total global final energy use, followed by buildings and transport. Hard-to-abate manufacturing sectors—including cement, steel, glass, and chemicals—are therefore high priorities.
The World Bank’s DSEE projects were effective, but most did not scale, especially horizontally. World Bank projects mostly met their outcome objectives (95 percent of closed projects were rated moderately satisfactory or above), with similar success across IPF projects and development policy operations. However, most interventions were one-off pilots, and fewer than one-quarter of the World Bank DSEE interventions specifically aimed at scaling up. Some DSEE interventions—mostly in MICs and industrialized countries (China, India, Mexico, and Türkiye)—supported vertical but not horizontal scaling.
IFC investment projects had limited effectiveness, partly due to overambitious targets, although the pairing of IFC investment and advisory did lead to some scale-up. Based on an analysis of IFC self-evaluations and Independent Evaluation Group validation notes, IFC had varied success in achieving the two primary DSEE development outcomes of energy savings and GHG emissions reduction (62 percent for IFC advisory services; 37 percent for IFC investment services). Many investment projects attempted to demonstrate outcomes incommensurate with their design and scope. Examples include projects that, while supporting a single firm or intermediary, aimed at DSEE market creation (such as targeting new end-user segments to reduce GHG emissions and improve energy efficiency at scale) or system-level transformation (such as reducing energy use across entire supply chains). Yet, when paired with advisory services, cofinanciers, development partners, and intermediary support for global standards (such as the Excellence in Design for Greater Efficiencies [EDGE] standards and certification process), some investments scaled up both vertically and horizontally (for example, in South Africa and Colombia).
The World Bank Group Has Proven It Can Overcome Challenges to Scaling Demand-Side Energy Efficiency
The Bank Group faces three main challenges in scaling up DSEE at the country level. First, demand for Bank Group DSEE support from LMICs was limited by volatile client priorities and the need for countries to address supply-side concerns (such as increasing generation, access, and distribution). Disincentives to addressing DSEE include surplus power supply (for example, in Ghana and Indonesia), surplus fossil energy sources for electrification, and (at the consumer level) below-cost energy prices (also in Ghana and Indonesia). Second, the Bank Group has been unable to articulate tangible DSEE benefits to clients, partly because in many countries it has lacked the opportunity to demonstrate DSEE’s potential benefits for society and the economy (such as health improvements and job creation). Third, the Bank Group has not sufficiently leveraged global programs (such as ESMAP and the Green Buildings Market Transformation Program) and its convening power. An external evaluation of ESMAP (ICF 2020), for example, concluded that the program had supported World Bank energy efficiency loans but had not yet developed a global reach or reputation.
Yet, the Bank Group succeeded in helping clients scale up under certain circumstances. Successful scale-up was possible when (i) countries had robust policy environments for energy efficiency; (ii) clients received strong advisory and analytical work; (iii) the Bank Group targeted relevant clients, such as state-owned enterprises (SOEs); (iv) the interventions used de-risking instruments; and (v) clients benefited from cumulative Bank Group engagements.
A robust policy environment for energy efficiency in the client country was a common factor in all successful cases. Committed MICs had more success with DSEE than other countries did. However, an optimum policy environment was not a prerequisite for success. Bank Group support to improve the policy environment in parallel with DSEE investments—rather than the traditional sequence of financing after policy reforms—sometimes led to successful scaling in LMICs. Whether provided in advance or in parallel, Bank Group advisory and analytical support enhanced the policy environment to facilitate successful DSEE scale-up in various industrialized countries (for example, China, India, Türkiye, and Vietnam). ESMAP, a global knowledge convener on energy, drove the World Bank’s advisory services and analytics projects for DSEE measures, accelerating investments in DSEE. Likewise, through the Green Buildings Market Transformation Program, IFC advisory services demonstrated scale-up of client commitments and early development outcomes in green buildings across several Regions.
Targeting multi-asset infrastructure owners such as SOEs, using de-risking instruments, and supporting cumulative engagements have led to successful DSEE scale-up. SOEs and national development banks remain central actors in the energy sectors of client countries. Scaling by targeting SOEs and national development banks has proven successful in MICs and industrialized clients because they own or operate multiple infrastructure assets that need DSEE improvements. De-risking mechanisms (such as risk-sharing facilities) and guarantee instruments can promote DSEE approaches and encourage onlending through local financial institutions. Similarly, repeat engagements in targeted end-user segments have led to DSEE scale-up, as in Türkiye and Vietnam.
More Coherence Needed to Close the Gaps
Coherent approaches lead to DSEE scale-up. Coherence refers to the extent to which Bank Group DSEE interventions support or undermine each other and the interventions of Bank Group partners in reaching SDG 13, SDG 7, and Paris Agreement alignment goals. Coherence can be assessed internally (among the Bank Group institutions) and externally (between the Bank Group and other actors). Coherence includes coordination, complementary activities, and alignment with standards. Only by working consistently in alignment within the Bank Group and with external partners can the Bank Group scale DSEE support sufficiently to close the gaps in investment and development outcomes.
A minority of World Bank energy efficiency interventions had both supply-side energy efficiency and DSEE elements. The World Bank has used various approaches (such as smart metering and time-of-use pricing) to balance supply and demand while promoting energy efficiency. However, only 25 percent of World Bank supply-side energy efficiency projects had DSEE elements.
World Bank DSEE interventions were limited across the energy, water, agriculture, and transport sectors. The Energy and Extractives Global Practice (GP) has made the most contributions toward DSEE. The Transport GP was responsible for only 6 percent of World Bank DSEE commitments ($0.8 billion in four projects over 10 years), and the Water GP was responsible for only 5 percent. Transport interventions especially need to incorporate energy efficiency because the transport sector is responsible for approximately 27 percent of total energy-related GHG emissions, and energy efficiency in transport offers enormous unexploited potential for mitigation.
IFC’s approach to DSEE has been well coordinated across diverse sectors (industry groups and business lines). IFC has mainstreamed DSEE investment projects across three industry groups—Financial Institutions Group; Infrastructure and Natural Resources; and Manufacturing, Agribusiness, and Services—and across all its business lines.
IFC’s internal coherence has led to horizontal scaling. IFC has helped client governments address climate change and energy shortages at scale by bringing together complementary blended finance programs in various sectors and countries. Examples include Colombia and Türkiye. IFC’s Partnership for Cleaner Textile program is a good example of organizing for coherence across water and energy efficiency.
Coordination units are critical to bringing internal coherence to DSEE work. The unwinding of the World Bank’s DSEE community of practice and the DSEE-focused global solutions group in recent years has limited collaboration across World Bank GPs to support horizontal scaling. Conversely, the IFC Climate team has been essential in enabling IFC’s coherence in DSEE across sectors.
Multilateral development banks, including the Bank Group, do not have a coherent approach to DSEE. They do not consistently link DSEE interventions to the primary DSEE development outcomes of saving energy and reducing GHG emissions or other socioeconomic benefits. Most do not have a unified approach to advancing DSEE standards or communicating the benefits of DSEE to stakeholders.
The World Bank has been externally coherent with cofinanciers but less so on advisory services. The World Bank has been externally coherent onlending with cofinanciers (the Global Environment Facility and the Clean Technology Fund) but less coherent on advisory support to clients and knowledge diffusion goals with client governments and partners. The external coherence of the World Bank Energy and Extractives GP and ESMAP in Vietnam is a best practice.
Both the World Bank and IFC have been coherent with global building standards. The World Bank’s ESMAP and the Carbon Finance Unit have promoted global building standards and the benefits of enforcement since 2008 via advisory and knowledge work. IFC is coherent with global DSEE standards, with a singular focus on green buildings by using its EDGE certification and standards process to advance DSEE priorities across market segments.
MIGA applies a coherent approach to green building standards in its projects. MIGA DSEE clients (from industrialized countries) have been well positioned to embrace either the Leadership in Energy and Environmental Design or EDGE global standards for buildings, the latter being a standard advocated by IFC. In a hospitality-cluster project, IFC and MIGA are partnering across some of the subprojects (individual hotels). MIGA and IFC are further supporting the client’s adoption of the EDGE certification standard.
Untapped Opportunities to Scale Demand-Side Energy Efficiency
The Bank Group has not fully tapped four opportunities to improve its Paris Agreement alignment, SDG 13, and SDG 7 contributions and facilitate DSEE scale-up at the country level. Although the success factors described earlier provide guidelines for succeeding with typical DSEE engagements, the evaluation identified the following untapped opportunities for the Bank Group to scale DSEE exponentially: (i) measuring indirect emissions and socioeconomic outcomes in DSEE interventions’ results frameworks, (ii) adopting an embodied carbon approach in project scoping and design, (iii) incorporating digital innovations into project designs, and (iv) integrating financial innovations into project designs.
The Bank Group can improve its alignment with the Paris Agreement goals by aiming to reduce indirect GHG emissions, opening opportunities for DSEE horizontal scale-up, and broadening socioeconomic outcomes. Most Bank Group project interventions do not tackle indirect emissions (that is, emissions that are a consequence of an organization’s activities but occur at sources owned or controlled by another entity) or the related energy efficiency measures. Tackling indirect emissions can significantly boost the Bank Group’s alignment with the Paris Agreement objectives and SDG 13. The magnitude of the emissions problem related to climate change requires addressing both direct and indirect emissions, as indirect emissions are often responsible for an organization’s biggest GHG impacts. Thus, one way to strengthen the link between DSEE interventions and climate objectives would be to include the client’s full scope of emissions in the design of new Bank Group DSEE interventions and help clients measure emissions throughout the life of a project. The shadow carbon-pricing pilots in World Bank lending and IFC investment projects are a step in the right direction.
In the building market segment, embodied carbon (that is, all emissions associated with the development and use of construction materials) needs to be tackled. Embodied carbon refers to all GHG emissions related to deforestation, manufacturing, transportation, installation, maintenance, and disposal of construction materials. Embodied carbon stands in contrast to operational carbon, which refers to emissions over the course of a building’s lifetime. Reaching net zero emissions requires minimizing end users’ total carbon (embodied and operational carbon) emissions and removing any residual emissions. Bank Group approaches targeting total carbon in buildings can facilitate DSEE scale-up across supply chains because various subsectors of the economy supply construction materials to the building industry.
Digital and financial innovations embedded in DSEE approaches can increase end-user awareness and improve DSEE adoption at scale. Optimized use of digital solutions (such as blockchain, smart sensors, and digital energy management systems) in DSEE approaches has improved end-user awareness to change energy consumption behaviors and increased adoption of DSEE measures in developed countries. For example, Opower’s cloud-based software for the utility industry uses artificial intelligence and behavioral science to guide users in reducing energy consumption, which results in cost savings. Similarly, optimal use of blended finance, performance guarantees, and capital market solutions have led to DSEE scale-up in developed and developing countries. In the Arab Republic of Egypt, for example, a credit risk guarantee mechanism for DSEE supported by a 2005 World Bank and Global Environment Facility project attracted private capital and led to a scale-up of DSEE investment.
Conclusions and Recommendations
DSEE is important for global sustainability, and the Bank Group has committed to it. The World Bank made two overarching corporate commitments for which DSEE is critical: (i) to achieve Paris Agreement alignment by 2023 (World Bank) or 2025 (IFC and MIGA), and (ii) to contribute to the achievement of SDG targets, which the Bank Group has internalized in its overarching poverty alleviation and shared prosperity goals.
The weight of the global priorities and the limited scale-up on DSEE to date leave the Bank Group with the need to fully reorient its DSEE approaches and outcome aspirations from an energy savings focus to a broader decarbonization focus. With this necessary pivot of DSEE approaches toward global priorities as the backdrop, this evaluation proposes four near-term actions that the Bank Group should take.
Recommendation 1 (Bank Group). Intensify DSEE support to MICs for decarbonization and wider socioeconomic benefits. By supporting MICs in scaling up DSEE, the Bank Group would make the most difference in closing GHG emissions gaps while also contributing to economic and social development outcomes. Intensifying scale-up in MICs requires an increased focus by the World Bank on multisectoral and horizontal scale-up approaches in project design. Similarly, this recommendation entails an increased role in MICs for IFC and MIGA—including through IFC upstream interventions and MIGA business development approaches—in countries that are ready for the greening of public assets and assets of SOEs (for example, China, India), subject to client demand.
Recommendation 2 (World Bank and IFC). Develop energy efficiency sector-specific approaches in a select group of LMICs that seek productivity gains alongside or via DSEE, even if energy efficiency policy reforms are in early stages. Bank Group DSEE efforts in countries with a policy environment that is not conducive to energy efficiency reforms or low energy use or emissions per capita, or that have inefficient capital allocation mechanisms to energy generation (for example, fossil subsidies), are unlikely to lead to meaningful outcomes. Select LMICs, however, that are making deliberate efforts to increase firms’ productivity while also achieving DSEE are promising scale-up targets for the World Bank and IFC, especially if they focus their DSEE interventions on energy-intensive sectors or subsectors, such as the industrial market segment in Uzbekistan or the commercial construction market segment in Indonesia. Parallel technical assistance and IFC upstream and advisory services can help target new client types and cumulative investments, subject to client demand.
Recommendation 3 (World Bank and IFC). Expand DSEE approaches by incorporating the reduction of indirect emissions (scope 3), including embodied and operational carbon, in DSEE project design. The current approach of designing for direct (scope 1) emissions is necessary but not sufficient for the pivot to decarbonization and for steering greater financing flows toward DSEE as part of the multilateral development banks’ Paris Agreement alignment approach. This recommendation entails incorporating scope 3 (and in some cases scope 2) risks for these emissions ex ante (that is, at the time of project design discussions, during post-client mandate activities, and when crafting loan agreements). This recommendation implies, for example, focusing on horizontal scaling through longer-term, repeat engagement, and multisector approaches (similar to what the Bank Group has achieved in India and Mexico) that cut across upstream and downstream activities. In this regard, IFC’s recent advisory services initiative Partnership for Cleaner Textile is promising.
Recommendation 4 (World Bank and IFC). Exploit untapped DSEE opportunities and help clients leapfrog by exploring cross–Practice Group (World Bank) and cross–industry group (IFC) approaches. This would entail integrating DSEE with untapped opportunities, such as digital and financial instrument innovations, that could support leapfrogging efforts in some cases. Examples include convening and supporting existing IFC clients (for example, firms operating in retail supply chains, top GHG-emitting firms, and firms owning and operating data centers) to incorporate digital solutions, such as intelligent monitoring and artificial intelligence–based energy optimization within their building portfolios; leveraging supply-side energy efficiency activities (for example, combining electricity utility upgrades with innovative guarantee mechanisms to promote DSEE); using multistakeholder approaches to invest in local technology start-ups (as done with Negawatt in Ghana); designing behavioral policy interventions (China); and communicating successful pilot cases. This recommendation would entail exploring integrated approaches, for example, among the Energy and Extractives; Digital Development; Macroeconomics, Trade, and Investment; and Finance, Competitiveness, and Innovation GPs, as well as among IFC’s Infrastructure and Natural Resources; Manufacturing, Agribusiness, and Services; and Disruptive Technologies and Funds industry groups.