Highlights

The World Bank Group has not fully tapped four opportunities to create horizontal scaling opportunities to improve its alignment with Sustainable Development Goals 7 and 13 and the Paris Agreement goals:

Including and tracking in its demand-side energy efficiency (DSEE) interventions indirect greenhouse gas emissions and socioeconomic development outcomes

Addressing embodied carbon in all DSEE market segments that require building materials and facilitating backward linkages with other sectors related to construction, such as transport and manufacturing

Introducing in its DSEE interventions digital innovations that can increase end-user awareness of the importance of energy efficiency, improve end-user adoption, and reduce information asymmetry among energy service providers and users

Promoting innovative financial solutions to support DSEE scaling, such as via blended finance, venture capital investments, and capital market solutions

The Approach Paper for this evaluation was approved with the agreement that the evaluation team would identify forward-looking ways to scale energy efficiency interventions that are not based only on the Bank Group’s experience. At the time of the Approach Paper meeting, the evaluation team was authorized to identify DSEE best practices that were not just based on Bank Group work. The evaluation team did so by comparing Bank Group work at the country and intervention levels with global innovations in energy efficiency using software-aided content analysis of (i) external reports on DSEE public sector innovations, (ii) private sector DSEE innovations, (iii) regional and Practice Group strategy documents, (iv) innovative examples within the Bank Group, and (v) staff and client interviews.

The analysis identified four main untapped opportunities to scale DSEE. Although the success factors described in the Factors of Success in Scaling section in chapter 2 provide guidelines for succeeding at typical DSEE engagements, the evaluation also identified the following four untapped opportunities for the Bank Group to approach DSEE differently and scale 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.

Indirect Greenhouse Gas Emissions and Socioeconomic Outcomes

Indirect Greenhouse Gas Emissions

The Bank Group has an opportunity to improve its alignment with SDG 13 and the Paris Agreement objectives by tracking and aiming to reduce indirect GHG emissions. The 38 percent of Bank Group DSEE interventions that measure GHG emissions mostly measure direct emissions, not indirect emissions, limiting the Bank Group’s alignment with the Paris Agreement objectives and SDG 13. 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 interventions and measure it throughout the life of projects. The Greenhouse Gas Protocol (the world’s most widely used GHG accounting standards)1 classifies the GHGs that a public or private organization emits directly (for example, by running its factories and vehicles) as scope 1 emissions (figure 4.1). It classifies the GHGs that an organization emits indirectly as scope 2 or scope 3 emissions. Scope 2 emissions are indirect emissions from the generation of purchased energy (for example, when a firm buys electricity for heating and cooling buildings). Scope 3 emissions are all indirect emissions not included in scope 2 that occur in a firm’s supply chain. Scope 3 emissions include, for example, emissions resulting from suppliers manufacturing inputs and customers using outputs. Of sampled Bank Group interventions that measure GHG emissions, 40 percent of the World Bank’s interventions and 92 percent of those by IFC measure only direct (scope 1) emissions. Few cover scope 2 emissions, and none tackle scope 3 emissions. Indirect emissions, and particularly scope 3 emissions, are often responsible for an organization’s biggest GHG impacts (Carbon Trust 2019).

Designing interventions that tackle direct and indirect emissions—especially scope 3 emissions—and facilitating clients’ measurement of them open up opportunities for horizontal scaling. At the country and regional levels, the Bank Group could scale development outcomes horizontally across entire supply chains (for example, hospitality, retail, manufacturing, construction, and shipping) if the DSEE interventions were designed to tackle both direct and indirect emissions. This would entail using carbon pricing for all Bank Group interventions,2 tracking implementation of national and subnational carbon-crediting mechanisms based on the interventions (World Bank 2020), and tracking the three types of scope emissions. Adopting internal carbon pricing would have four benefits. First, it would allow the Bank Group to facilitate client-level measurement of projects’ current GHG emissions versus GHG emissions estimates in the future and track them better. Second, it would more broadly signal to clients the need to effectively measure direct and indirect emissions and the implicit carbon price. Third, it would create incentives to develop multisectoral approaches to DSEE (for example, energy-transport, or energy–macrofiscal and trade; box 4.1). Finally, it would facilitate a holistic view of DSEE outcomes to address commitments to Paris Agreement alignment, SDG 13, and SDG 7. In this regard, implementing shadow carbon pricing pilots and mainstreaming this requirement in Bank Group lending and IFC investment projects are steps in the right direction.

Figure 4.1. Emissions along the Supply Chain

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Figure 4.1. Emissions along the Supply Chain

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Sources: Independent Evaluation Group; World Resources Institute and World Business Council for Sustainable Development 2011.

Socioeconomic Outcomes of Demand-Side Energy Efficiency Interventions

The Bank Group could scale DSEE by targeting and measuring development benefits beyond energy savings and GHG emissions. The Bank Group broadly recognizes that DSEE improvements are among the most cost-effective means of saving energy and reducing GHG emissions. Although Bank Group DSEE interventions reviewed during the evaluation period did not track energy savings and direct emissions reductions as much as they could have (as discussed in chapter 2), they nevertheless prioritized these two primary DSEE development outcomes over socioeconomic and other benefits (figure 4.2). Some interventions aimed at market creation, institutional strengthening, and capacity building. However, fewer than 30 percent of sampled Bank Group DSEE projects in the evaluation period measured socioeconomic benefits. For example, only 24 percent of sampled projects differentiated between men and women in terms of achieving or benefiting from energy efficiency outcomes. According to Bank Group surveys, women are more deliberate and conscious of emissions and energy use than men are, and, if appropriately targeted, they can maximize the benefits of DSEE for themselves, their families, and the environment. Only 15 percent of the sampled Bank Group DSEE interventions measured job creation. Retrofitting buildings and greening public infrastructure tend to create net new jobs because the energy industry has a lower job intensity than the construction industry, and the effects extend over time as energy savings reduce utility bills for years, redirecting spending away from energy to other sectors with higher job intensities. Moreover, only 2 percent of sampled projects measured health or well-being, although lowering emissions and air pollution (some arising during combustion) is key to improve respiratory health. Including these outcomes in Bank Group operation design and measuring them throughout implementation would support scaling by demonstrating the total value of DSEE interventions to clients and partners.

Figure 4.2. Various Demand-Side Energy Efficiency Outcomes as a Percentage of the World Bank Group Demand-Side Energy Efficiency Portfolio

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Figure 4.2. Various Demand-Side Energy Efficiency Outcomes as a Percentage of the World Bank Group Demand-Side Energy Efficiency Portfolio

Source: Independent Evaluation Group.

Embodied Carbon for the Building Industry

Embodied carbon—that is, all emissions associated with the development and use of construction material—needs to be tackled and measured. Embodied carbon refers to the GHG emissions associated with the manufacturing, transportation, installation, maintenance, and disposal of construction materials (Carbon Leadership Forum3). In other words, embodied carbon corresponds to scope 3 emissions for buildings. Embodied carbon can be calculated as a metric or indicator relating to global warming potential and expressed in CO2-equivalent units. Embodied carbon stands in contrast to operational carbon, which refers to emissions generated by fuel consumption for heating, cooling, lighting, and powering machines and other devices over the course of a building’s lifetime (scope 1 and scope 2 emissions). Total carbon is the sum of embodied carbon and operational carbon. To reach net zero emissions, the total carbon emissions of a building must be addressed, not merely carbon emissions during the building’s lifetime.

Addressing embodied carbon is urgently needed to meet climate targets. Operational carbon currently accounts for 28 percent of global GHG emissions. Though embodied carbon accounts for only 11 percent currently, embodied and operational carbon emission levels will be the same by 2050 because of the projected increase in construction (SPOT UL 2020). Emissions reduced now are more critical than emissions reduced later because of the carbon lock-in principle.4 Hence, reducing embodied carbon is as important as—or more important than—reducing operational carbon. Additionally, many of the most impactful decisions related to embodied carbon happen in the early stages of a building project (and, by association, a Bank Group DSEE intervention). Addressing embodied carbon is particularly important for reaching SDG 13 and Paris Agreement climate targets, because these emissions will likely be “front-loaded”—accrued before end users have an opportunity to save energy—in both greenfield construction and brownfield upgrades over the next 10 years, unlike annual operational carbon or ongoing emissions. For greenfield projects with long construction periods, design choices made today will lock in emissions for a building that may not open for another 5 to 10 years. The Bank Group cannot afford to fully address operational carbon before addressing embodied carbon but must do so in parallel.

The embodied carbon approach addresses the backward linkages to buildings and related DSEE efforts concentrated in retrofits and energy end users. As shown by the embodied carbon emissions over a building’s life cycle, the building industry influences most major sectors of global GHG emissions, including transport, manufacturing, and forestry management (figure 4.3).

Figure 4.3. Temporal View of a Typical Life Cycle for Buildings

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Figure 4.3. Temporal View of a Typical Life Cycle for Buildings

Source: Winters-Downey 2021.

Note: CO2 = carbon dioxide; GHG = greenhouse gas.

An embodied carbon approach uses an ex ante method to minimize GHG emissions before a building is constructed. The Bank Group has been focused on operational carbon issues in the context of DSEE. The typical Bank Group approach focuses on ex post techniques (such as replacing light bulbs or installing smart meters) to reduce direct (scope 1) GHG emissions after a building has been constructed. The more ambitious embodied carbon approach focuses on designing buildings from the start to minimize their total GHG emissions to reduce indirect (scopes 2 and 3) GHG emissions throughout the buildings’ life cycle.

The embodied carbon approach also addresses industry emissions that are hard to abate. Construction generates emissions that are hard to abate because several of its essential inputs (for example, cement, steel, aluminum, and glass) are manufactured in industrial processes that require high temperatures, which clean energy cannot yet reliably provide. Furthermore, many of the inputs to construction must be delivered by heavy-duty transport (such as shipping, trucking, and aviation), which also produces emissions that are hard to abate. Processing-related emissions from construction and fuel transformation processes release CO2 and other pollutants directly into the air. For example, approximately 60 percent of emissions from cement production are process emissions that cannot be reduced through fuel switching alone. Therefore, addressing industrial emissions tied to the construction industry is vital if the world is to meet SDG 13 and the Paris Agreement objective of limiting global warming to well below 2 degrees Celsius by 2050 (Hobley 2020).

Embodied carbon approaches can help address health and related socioeconomic outcomes. Building materials have a direct impact on community health because their supply chains rely on manufacturing facilities and power plants that release heavy metals, toxic chemicals, and particulate matter into nearby communities’ water, air, and food sources, causing short- and long-term health problems. Therefore, addressing embodied carbon approaches for buildings can reduce impacts on communities in two ways: (i) by mitigating the global impacts of climate change (as it relates to the Bank Group’s Paris Agreement alignment and Climate Change Action Plan) and (ii) by decreasing the local environmental and health impacts from industrial pollution (as it relates to SDG 7 contributions and related SDGs).5

Digital Innovations

Digitalization is multiplying the opportunities for scaling energy efficiency. Digitalization offers the potential to increase energy efficiency through technologies that gather and analyze data and then use the information to make changes to the physical environment to optimize energy efficiency. Technologies such as sensors and smart meters collect data on energy use and conditions affecting energy use (such as weather; figure 4.4). Data are processed into useful information through data analysis technologies such as artificial intelligence algorithms. Finally, the processed information is sent to devices that can effect physical changes to optimize energy use. Some devices require human action to optimize energy use. For example, a smartphone app can suggest an energy-efficient route to work, but the commuter must act on that advice. Other devices (such as switches in a large building’s cooling system or robots on a production line) are capable of optimizing energy efficiency more autonomously.

Figure 4.4. Digitalization of Demand-Side Energy Efficiency Systems

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Figure 4.4. Digitalization of Demand-Side Energy Efficiency Systems

Source: International Energy Agency 2020a.

Digital technologies are applicable in all energy end-use sectors. Increasingly, residential and commercial buildings are equipped with smart appliances and intelligent energy management systems. The connectivity benefits of digitalization allow digital technologies to increase both DSEE and the efficiency of the entire energy system more broadly. Digitalization could provide opportunities to optimize energy use in all energy-consuming sectors and address the lack of information that leads to unsound decision-making at the end-user level. For example, at the building level, smart lights can optimize consumption based on requirements and usage patterns. Energy use during the construction of buildings could also be significantly reduced by applying digital tools and technologies and providing more accurate and timely information across the supply chain. This is known as real-time construction management, which brings together all on-site information on one platform, improving productivity and reducing costs. Similarly, at the industry level, digital technologies could change the way industries produce, process, and deliver products. Industry is responsible for approximately 38 percent of global final energy consumption and 24 percent of total CO2 emissions, and it is estimated that optimization enabled by digitalization could help achieve energy savings of at least 10 to 20 percent (United Nations Environment Programme).6 This would be in addition to energy savings that could be achieved if the building itself were to be digitalized.

Digital transformation of the energy system can bridge many gaps at the system level while catalyzing new opportunities through a deeper transformation of how the devices, systems, and participants connect and communicate. Some key benefits are better connectivity, trust, and transparency: digitalization of the energy system can provide better connectivity with customers, suppliers, and other partners to achieve better DSEE outcomes. Digitalization can significantly improve trust among these various participants and enable an open, transparent, competitive, more resilient, and nondiscriminatory energy market, resulting in many benefits for the economy and society. Open data across the system can also enable better decision-making for businesses and policy makers and spark innovations and inventions. Another key benefit of digitalizing DSEE is improving supply chain management: digital technology solutions can unlock significant value for industry participants across the entire energy supply chain. The supply chain of variable renewable energy technologies needs to be robust to leverage its full potential, and big data, machine learning, and advanced data analytics allow various renewable energy sources to be managed with maximum flexibility and optimization. Digitalization can streamline various processes across the entire energy supply chain and significantly improve speed and cost while providing improved visibility and real-time insights into the processes.

Digital solutions can increase DSEE awareness, improve adoption, and reduce information asymmetry between energy service providers and users. Digitalization of energy systems has successfully increased DSEE awareness and adoption in developed countries, UMICs, and LMICs. For example, Opower’s cloud-based software for the utility industry provides end users with more information about their energy efficiency using artificial intelligence and behavioral science. Opower’s rate coaching service uses weekly customized email tips to guide users through time-of-use pricing plans to reduce both their costs and their consumption. Billing improvements include personalized context such as benchmarking a customer’s relative level of energy efficiency—relative to both similar homes and a target zone—in a simple, graphical way.

Blockchain is another powerful tool for energy efficiency innovations. Blockchain is a secure online ledger that records all transactions through a peer-to-peer network. It is used in the energy system because of its incorruptibility, its ability to eliminate intermediaries, and its potential to reduce costs even for very small transactions that otherwise would not be economically viable. The Brooklyn microgrid is a leading example of a blockchain-based market that allows residents with solar panels to sell excess energy to their neighbors in peer-to-peer transactions, helping to manage end-user demand on the main grid (Mengelkamp et al. 2018). Another potential application of blockchain would empower end users to directly monetize their energy efficiency (Khatoon et al. 2019). The system would require each user to achieve a certain level of energy savings (as is already required in several EU countries). Users who exceeded the required energy savings would be able to use a blockchain-based system to sell their surplus energy savings to users unable to meet the energy savings requirement, allowing the buyers to avoid paying hefty fines. The potential for directly monetizing energy efficiency would motivate users to increase their efficiency. In both cases, blockchain-based automated trading is an efficient way of delivering price signals to consumers about the cost of energy and the corresponding monetary value of energy efficiency, which stimulates efficient consumption and reduces costs.

Despite all these benefits, the Bank Group’s DSEE approaches have not yet embraced digitalization opportunities. The World Bank has acknowledged in energy sector work the need to incorporate digital components in energy efficiency interventions (IEA et al. 2022). However, it has not yet done so.

Financial Innovations

The Bank Group has a comprehensive tool kit of financial instruments, including blended finance, that is underused for DSEE. Both the World Bank and IFC have significant experience, in many cases with successful development outcomes, in creating DSEE blended financing facilities. The core objectives of such facilities have been to attract private capital to scale DSEE investments, in turn making the facilities self-sustaining and creating a DSEE market—that is, an ecosystem of energy efficiency–related products and services created by a set of interventions that reduce energy use and improve firm and household productivity in the client countries. These facilities, however, have been deployed toward DSEE approaches in only a few countries.

Egypt, China, and India are successful examples of the Bank Group’s blended finance support to DSEE that can be replicated in other MICs. In Egypt, a credit risk guarantee mechanism for DSEE supported by a 2005 World Bank–GEF project attracted private capital and led to a scale-up of DSEE investment. The IFC-GEF China Utility-Based Energy Efficiency Finance Program created an environment for commercial banks, private companies, and government agencies to jointly design sustainable financing models for energy efficiency and renewable energy. The program provides marketing, engineering, project development, and financing services to commercial, industrial, and multihousehold residential energy users. The World Bank used China’s Utility-Based Energy Efficiency Finance Program approach in India, where it supported DSEE by deploying several instruments, including a Program-for-Results project, an International Bank for Reconstruction and Development partial risk guarantee blended with private capital and technical assistance in part funded by ESMAP. The World Bank’s interventions supported a range of different types of contract agreements for ESCOs with different risk and responsibility sharing options and auditing and procurement standards. The program, which is still ongoing, is promising in terms of DSEE financing scale-up, including through mobilization plans to crowd in domestic investors and commercial financiers supporting it via ESCOs. Untapped opportunities exist to implement similar approaches in several more countries.

The use of early-stage grant and venture capital investments can contribute to DSEE development. In 2020, IFC and the UK government’s International Climate Finance jointly launched TechEmerge, a matchmaking program that helps innovative technology start-ups build commercial relationships with end-user firms. For example, TechEmerge’s Sustainable Cooling Innovation program in Latin America offers a pool of $1.5 million in grant funding to support pilot implementation of cooling solutions. The DSEE start-ups were competitively selected by TechEmerge and its expert panel of independent advisers and then matched with top end-use companies in Colombia and Mexico to support DSEE approaches. Like blended finance, early-stage venture investment for DSEE is underused and can be significantly expanded across supply chains (for example, for building materials and manufacturing technologies).

Innovative financial solutions to support DSEE scale-up also exist outside of the Bank Group (for example, via capital market solutions). The Bank for International Settlements Innovation Hub Centre Hong Kong SAR and the Hong Kong Monetary Authority joined forces with the technology industry on Project Genesis to build a prototype digital infrastructure that enables energy transition investments, improves transparency on the use of proceeds, and thereby helps meet regional and global environmental and sustainability goals. As the first energy transition project, Genesis will explore the tokenization of green bonds enabling investment in small denominations toward DSEE, combined with real-time tracking of environmental outputs and outcomes. Such models could be facilitated through joint DSEE approaches from the World Bank’s Energy and Extractives, and Finance, Competitiveness, and Innovation GPs.

Performance guarantees to finance deep retrofitting are an untapped opportunity for scaling DSEE and facilitating leapfrogging. The government of the Netherlands created the Energiesprong program in 2010 to increase the energy efficiency of new and existing buildings. In contrast with shallow retrofits, such as installing heat pumps or basic isolated hardware upgrades, Energiesprong introduces a systemwide retrofit that increases energy savings by more than 50 percent, reduces maintenance costs, and introduces attractive designs with upgraded features, which increase the value of the buildings for the end users. Prefabricated insulating panels are fastened to a building’s exterior. The panels are manufactured based on digital scans of the building rather than drawings and specifications and can be installed in less than a week. A key feature of the Energiesprong program is its financing through a 30-year performance guarantee: renovations and new buildings are funded by future savings in energy, maintenance, and repair costs over those 30 years. In housing associations, tenants pay into an energy service plan the same amount they used to pay directly to their energy supplier. The housing association uses this income stream to partly fund the renovation, and the performance of the retrofit is guaranteed by the service company. Adoption of such innovations can help select client countries (for example, LMICs) to achieve leapfrogging without following the development trajectory of UMICs and highly industrialized countries.

Performance guarantees to finance deep retrofitting require legislative changes but have significant potential for DSEE scale-up. Typically, local or municipal legislation needs to be amended to allow monthly energy bills to be converted into monthly energy service fees for housing associations. These legislative changes entice suppliers to invest in the manufacturing of the components needed for such house makeovers, meeting mass customization and industrialization objectives in addition to the adoption of DSEE quality and cost and pricing standards for residential buildings. More than 5,000 homes in the Netherlands have been retrofitted with Energiesprong since 2010. In 2018, the first 10 homes were retrofitted in the United Kingdom as part of its Energiesprong pilot program. Energiesprong has also been introduced in France, Canada, and California and New York in the United States and piloted in Rwanda (a case study country) and South Africa.