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Risk management for energy efficiency projects in developing countries

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This paper addresses risk management fundamentals for energy efficiency (EE) projects in developing countries. The starting point is that there are many profitable EE projects in nearly every industrial enterprise that are simply not implemented. Four problems are often identified as the culprits for failing to harvest such projects: 1) lack of a rational and feasible approach to finance these projects; 2) lack of a rational internal management approach in the enterprise to package these projects in such a manner that they can be identified and implemented while the “plant is running”; 3) the high perceived risk of these projects; and 4) the fact that management is often simply unaware of the existence of EE projects of value. This paper is primarily focused on the third of these failure factors, risk, but touches also on the fourth factor since reducing project risk is predicated on understanding and measurement of EE benefits. It begins with a simple framework that emphasises two dimensions of the organizational and contractual environment of EE projects: energy intensity for the focal company initiating an EE project, and the level of organizational and contractual complexity. The paper discusses best practices for EE project risk management with illustrative case studies. Thereafter, behavioral and other impediments to effective risk management are described, together with methods for overcoming these impediments. The paper then considers the role and risks of carbon offsets as a possible source of co-financing EE projects, as well as the role of Energy Service Companies (ESCOs) in identifying and managing profitable EE projects. It concludes with recommendations for companies as well as international organizations like UNIDO attempting to promote EE in industry in emerging economies.

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