Thai Financial Institutions Open A New Era for Energy Efficiency Financing in Thailand
Implementing energy efficiency (EE) measures is a proven way to lower energy production costs, ensure energy security, and reduce a company's carbon footprint. Corporate managers have often overlooked the 'Invisible income' generated through EE due to the perception of high perceived financial risks and high transaction costs for implementation.
Thailand's Department of Alternative Energy Development and Efficiency (DEDE), within the Ministry of Energy, has encouraged investments into EE measures for the past 20 years, starting with its "Standard Measures" program and the Energy Efficiency Revolving Fund (EERF) program, both of which initiated in the early 2000s. In the EERF, the government has provided companies access to low-interest loans for EE and renewable energy (RE) projects, through six rounds of implementation, from 2003-2019. The EERF provides a low-cost source of funding (0% - 0.5% interest rate) to private Thai banks, who can then on-lend these funds to companies at a lower-than-market interest rate—not higher than 4%. The EERF targets owners of private buildings and factories interested in installing EE technologies.
This year, in the aftermath of the COVID-19 pandemic, the clean energy sector is recovering along with the rest of the Thai economy. Currently, four private Thai banks offer financing programs for EE projects targeted at small and medium-sized enterprises (SMEs). These include:
1. EXIM Bank: Kill Bill by Biz Transformation
The Export-Import Bank of Thailand (EXIM Bank), in partnership with the Electricity Generating Authority of Thailand (EGAT), manages the EGAT Cooling Innovation Fund (EGAT CIF), which supports EE and greenhouse gas reduction projects for the cooling sector. The EGAT CIF is the collaboration program between EGAT and Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ), which GIZ provides technical assistance to the program. The EGAT CIF provides a 20% subsidy for investments in the replacement of cooling equipment systems. Additional support for the cooling investments can be accessed from a loan fund set up by EXIM called the 'EXIM Kill Bill by Biz Transformation' program.
EGAT provides knowledge information about alternative refrigerants, including natural refrigerants, which have high efficiency, low energy consumption, and a low ozone depletion potential (ODP) and low global warming potential (GWP). Through this program, EXIM Bank provides financial services to companies interested in replacing chillers, commercial refrigerators, and other EE technologies. EXIM Bank offers a low-interest rate, starting with 2% per annum, and a loan period of up to 7 years.
EXIM Bank also offers 'Solar Orchestra' low-interest rate loan programs for businesses that are interested in solar rooftop investment.
2. UOB: U-Energy
UOB launched an EE financing platform called 'U-Energy' across Southeast Asia, including Singapore, Malaysia, Indonesia, and Thailand. The U-Energy platform provides a suite of entire financial services, which allow homeowners and commercial buildings to access financing and a list of qualified energy service companies (ESCOs). The projects under U-Energy can be implemented by direct purchase (guaranteed agreement) or energy-as-a-service (shared-savings) agreements. Technologies eligible for the U-Energy platform include lighting, chillers, air conditioners, energy management systems, facades, and elevator systems.
UOB also provides a 'U-Solar' program, in which businesses interested in installing solar rooftops can apply for a loan fund and work with listed solar installer companies.
3. Kasikorn Bank (KBank): K-Energy Saving Guarantee Program
Kasikorn Bank (KBank) is the leader in Thailand in providing financial products for EE and RE through the 'K-Energy Saving Guarantee Program' loan program, which helps businesses to implement energy-saving projects with guaranteed energy savings contracts by registered ESCOs.
KBank offers a maximum loan or leasing amount of 100%, which can cover equipment costs, consultation fees, and energy management measures. The program is targeted at business owners whose energy cost (fuel, electricity) is more than THB 500,000 ($ 13,430) per month.
4. Siam Commercial Bank (SCB): SME Go Green
SCB launches its 'SME Go Green' program, with a total credit line of over THB 2 billion ($ 54 million), to offer a long-term loan or working capital loan for clean energy and environmental management that help companies reduce energy consumption. Special incentives from the cooperating government agencies are included with this funding scheme, including a tax deduction for corporate income tax of up to 8 years, listing as a Green Manufacturer for government procurement tenders, and worldwide green product certification for import-export privileges.
This program is designed especially for SMEs that have an annual income of about THB 75 - 500 million ($ 2 – 13 million) and run businesses with a continuous profit for more than four years. The loan amount is up to 100% of the investment cost, and the interest rate is below the market rate. The loan term is up to 7 years, with a grace period of up to 1 year (payment without principal that helps to reduce the amount of repayment in the time period of installation).
As Thai banks are encouraging more investment in clean energy, several driving factors are pushing private financial institutions to take the lead on EE financing. First and foremost, the Bank of Thailand (BOT) supports banks in having an environmental, social, and governance (ESG) framework in their company governance. This effort started in the Bangkok Sustainable Banking Forum 2019, where BOT convened Thai banks and encouraged their commitment to draw a Roadmap of Responsible Lending by implementing ESG frameworks for approving green loans. In addition, at this forum, BOT also launched a set of sustainable banking guidelines for banks to apply in their operations. This is one of the drivers pushing Thai financial institutions to provide special loan funds for clean energy investment.
DEDE has worked with Thai banks for nearly 20 years to provide EE loan funds through its 'Energy Efficiency Revolving Fund' program. The program was implemented in six phases from 2003 to 2019. Banks have been provided with capacity-building to deal with EE projects and ESCO companies. Banks now have enough capacity to understand specific characteristics of EE projects, and they can design suitable financial services to deal with technical and financial risks. Total investment stimulated by the EERF was THB 24,349 million ($ 654 million), including the EERF allocation of THB 10,114 million ($ 272 million) and co-financing by the participating companies of THB 14,235 million ($ 382 million).
Limitations of the Current EE Financing Programs in Thailand
Despite the apparent success of the EERF and some of the other EE initiatives mentioned above, Thai banks still need to prioritize the development of EE investment portfolios and mainstream EE lending into their business processes. Although information about available EE loan programs is publicly available, clients and provincial bank staff have limited access to the information and, therefore, less opportunity to apply for loan funds. This hinders the real potential of EE investment nationwide.
In particular, EE lending has been skewed toward larger companies. Eligible clients who can apply for loan funds are usually large companies and existing bank clients with high collateral capacities. The SME companies participating in the EE bank lending are mostly large SMEs with minimum annual revenues of THB 75 million ($ 2.01 million). Thus, most SMEs with much smaller annual revenues are not accessing these EE facilities.
Another barrier to EE financing is the perception of risk. EE projects are generally small investments and have high transaction costs. These projects are perceived to have technical risks in achieving the projected energy savings. These energy cost savings can also seem to finance managers as 'invisible income,' which makes them less tangible and appear riskier. CFOs and company managers are more likely to decide to invest their capital in improving production lines, buying raw materials, and purchasing electricity rather than investing in EE technologies.
Despite these challenges, many large Thai banks see the trend toward clean energy investment to meet net-zero climate targets. They indicate they want to invest in EE to maintain competitiveness in the growing clean energy marketplace. This increased investment will enable banks to gain more income from higher loan applications and reduce greenhouse gas emissions as commercial buildings and factories increase their energy security.
The Bank of Thailand can play an important leadership role by continuing to push banks to provide green financial products, enforce sustainable guidelines for implementation, and hold regular high-level meetings to keep stakeholders informed about providing financing in clean energy.
Beyond Thailand, there is a lot of activity in the Southeast Asia region on EE financing, which is not covered in this blog. One active donor is USAID, which works on EE financing through its USAID Southeast Asia's Smart Power Program (SPP). This program, implemented by Deloitte Consulting, LLP, in partnership with Asia Clean Energy Partners (ACE Partners), provides technical assistance on EE in Southeast Asia. SPP is currently working with partners in the region to support the bulk procurement of EE technologies, with an initial focus on cooling and lighting technologies. ACE Partners also supports the Southeast Asia Energy Transition Program (ETP) to assess and develop roadmaps for EE financing in Vietnam, Indonesia, and the Philippines.