Energy efficiency strategy, standards and investment

Energy efficiency financing

The IDB does not appear to apply an overarching “energy efficiency first” principle across operations. The Energy Sector Framework[2] refers to energy efficiency and demand response as having “immense potential” to increase system-wide efficiency. However, it stops short of articulating any principle or guidance for prioritising energy efficiency options in cases where these are less costly or more valuable than supply side alternatives.

Transport

The IDB’s Transport Sector Framework Document includes clear reference to the need for the fundamental principle of “Avoid–Shift–Improve” to govern investment in the transportation system in Latin American and the Caribbean (LAC). Although this approach is not always strictly adhered to, it is actively intended to be used as a guiding principle across transport sector operations.[3] As per the transport sector guidance of the IDB Group’s Paris Alignment Implementation Approach (PAIA), transport sector projects which involve capacity expansion through road infrastructure or airports must undertake an Avoid–Shift–Improve (also referred to as “Avoid–Change–Improve”) analysis. While representing a strong, best practice approach to screening transport sector projects, this requirement does not appear to be extended to rail, maritime transport projects, or other urban transport projects.

The IDB also states there is a general approach to prioritisation in place regarding which transport projects are financed, applied to most transport subsectors (apart from urban transport which is treated differently.) The prioritisation can differ depending on the county specifics but generally follows the following order:

1. Institutional strengthening (training personnel, sectoral studies, regional integration planning and final project design).
2. Rehabilitation or maintenance of existing transport infrastructure, focusing on prolonging the useful life and service efficiency of infrastructure and equipment.
3. Construction of new infrastructure or purchasing new equipment.

For urban transport the IDB states that “in general, the Bank will encourage mass transportation systems to provide better and more facilities to users, rationalize services, encourage the saving of fuel, and minimize pollution”.

Buildings

Energy efficiency requirements for building sector projects financed by the IDB Group are provided by the dedicated building sector note of the PAIA. The IDB Group accepts national certification systems recognised by the World Green Building Council, as well as international efficiency standards such as EDGE and Energy Star to identify universally aligned projects that do not require further detailed assessment.

The IDB Group consequently aims for a minimum of EDGE (or equivalent) efficiency level in new and renovated buildings. Where this is not considered technically or financially feasible to achieve, the analysis supporting this conclusion must be disclosed as part of the Paris alignment assessment included in the annex of a given operation.  This is highly welcome, however, these projects can still be financed.

In terms of actively contributing to the improvement of energy efficiency standards across its region of operation, the IDB has notably launched the ENERFLIX platform to train Brazilian municipalities to develop energy efficiency and distributed management projects. 

Financial intermediaries

As part of the application of its transaction-based PAIA approach for financial institutions (FIs), the IDB screens FI pipelines for material GHG-intensive investments and has eligibility requirements in place according to the specific sectoral guidance notes of the PAIA. As per the counterparty-based PAIA approach with FIs, the Bank also works with FIs to improve procedures and capacities, including those related to efficiency standards. However, the IDB does not appear to require all financial intermediaries to follow energy efficiency standards.[4] In this respect, the IDB follows the MDB methodology for Paris alignment for financial intermediaries and has chosen not to set a bank-specific policy.

The IDB has developed innovative instruments to support energy efficiency. For example, the Energy Savings Insurance (ESI) programme developed in 2020 provides insurance for projected energy savings in SMEs using local insurers and international reinsurers. In Colombia, this programme has been implemented through a commercial bank and in Mexico through a public trust. Another notable initiative developed by the Bank is Electrokit, a power utility toolkit to strengthen the practices of electricity distribution companies and align these with international benchmarks and best practice. A dedicated subarea of this initiative is focused on climate change mitigation, involving reviewing the mitigation measures that distribution companies introduce, with a focus on energy efficiency.

Recommendations: 

• The IDB should explicitly commit to and adopt an “energy efficiency first” principle across operations.
• The IDB should formalise the adoption of the “Avoid–Shift–Improve” principle as a fundamental pillar of its transport sector policy. In practice, this would mean verifying that any proposed transport sector projects consistently apply this principle. This could be achieved by extending the requirement of the PAIA transport sector note for an Avoid–Shift–Improve analysis for capacity expansion through road infrastructure and airports, to apply to all transport sector projects. Similarly, if the decision is made to deviate from this principle, clear rationale should be provided in each instance to justify this (as is the case already for this subset of transport sector projects).
• The IDB Group should explicitly integrate the minimum requirement of EDGE (and/or equivalent) criteria as part of the specific assessment criteria for activities not considered universally aligned in the building sector note of the PAIA. In instances where this is demonstrably not immediately technically or financially feasible, the IDB Group should develop (jointly with the project developers) a feasible forward pathway to improving energy efficiency in line with these requirements over time (in line with the “climate transition gaps” approach in the PAIA).
• The same energy efficiency standards used by the IDB should be applied to financial intermediaries, in line with best practice among other MDBs. The IDB should begin by replicating the practice of other institutions such as the International Finance Corporation (IFC), which has thresholds in place for intermediary climate subprojects to qualify as energy efficiency, as a step towards more comprehensive requirements on financial intermediary financing of institutions such as those of the European Investment Bank (EIB).

[1] With exceptions for when a lack of financial and technical feasibility is demonstrated. Discussions with the IDB Group suggest that such an exception was not encountered on the public sector side during 2023 and through to early 2024 when the PAIA sector note was published.

[2] According to IDB officials, the IDB is preparing a new energy sector framework document. This will be reviewed by E3G as soon as it is available, with any relevant updates reflected in this section.

[3] As per information received directly from the IDB. This detail on practical implementation is not included in published documents.

[4] E3G understands that IDB Invest applies a 20% reduction as a covenant within the contracts with clients when using blended finance resources for performance-based loans on energy efficiency but there is no documented source for this.