The Global Environment Facility Pacific Alliance For Sustainability (GEFPAS) “Low Carbon Islands” project executed by IUCN and implemented by UNEP in collaboration with the Nauru government aims to establish a low carbon fund (LCF) of approximately US$80,000 to promote renewable energy and energy efficiency in Nauru targeting private sector. After consultations with the main stakeholders of the project (Nauru Utility Corporation, Ministry of Environment, Ministry of Finance – Planning and Aid Division) and Bendigo Bank conducted by the independent consultant Marco Arena from the 1th to the 6th of June it was decided to develop a proposal that outlined the structure of fund to inform government implementation.
IUCN and the Nauru Utility Corporation (NUC) are the main parties of the Low Carbon Fund and thereinafter will be referred to as “Parties”. The paragraph below outlines a short description of the Parties and their role in the Fund.
- The Nauru Utility Corporation (NUC) Until 2005, the Nauru Phosphate Corporation provided all the island’s utility services. In 2005, the Nauru Utility Authority (NUA) was formed to separate the water and electricity utilities function from the Phosphate Corporation. It was later decided to corporatize NUA, and Nauru Utilities Corpo¬ration (NUC) was created and it currently manages and oversight all the energy supply in Nauru except for energy used by the refugee camp. Currently the general director of NUC is Mr. Abe Simpson.
- IUCN is the international organization that manages the execution of the Low Carbon Islands project in Niue, Tuvalu, and Nauru.
- Ministry of Finance – Aid Coordination Unit oversights and manage the international aid funds of Nauru.
Financial Partner of the initiative:
Bendigo Bank is the only bank operating in Nauru. It has opened in late May/early June 2015 and it currently offers only a limited range of services such as opening personal bank accounts, (for transaction and savings), ATM cards, business accounts, and make/receive payments to/from other banks in Nauru and Australia in AUD. It may in the future expand its services. The Bank will not be listed as one of the Parties, but its services will be used to run the operations of the bank.
Disbursement of funds
Once all parties agree about the features of the fund, a sub-grant agreement will be drafted and signed by the parties. This sub-grant agreement should specify among others, how the fund will function and reporting obligations among the different Parties.
Funds will be transferred periodically from IUCN to the Low Carbon Fund account of which NUC and Ministry of Finance will be signatories. NUC and MOF will operate the fund according to the guidelines detailed in the sub-grant agreement. Beneficiaries of the fund will be all those customers that meet the requirements outlined in next section.
Figure 1 outlines the relationships among the parties
The objective of the fund is to provide a sustainable incentive for the private sector (businesses and households) to switch towards energy efficient appliances. This is in line with the efforts of NUC to decrease the dependency of Nauru from fossil fuel through targeting energy demand instead of supply. The appliances targeted by the fund are washing machines, fridges, and freezers that according to the main retailers on the islands are the main appliances bought by households.
Customers A: Customers willing to buy an appliance directly without accessing a loan will be able to access the fund.
To ensure that the targeted appliances will effectively be more energy efficient, the project will rely on the joint labelling scheme promoted by Australia – Department of Industry and Science and New Zealand – Energy Efficiency and Conservation Authority (EECA) . The scheme uses a user-friendly star system to assign efficiency ratings to different appliances. 0 stars equates to a non-energy efficient appliance, while 6 stars corresponds to maximum efficiency. Only fridges and freezers that score 3.5 or more, and washing machines that score 4 or more stars will be eligible to apply to the fund. The selection of the thresholds has been selected based on three main characteristics of the Nauru and the Australian markets:
- From discussions conducted by the consultant during the mission in Nauru with NUC, most of the appliances currently in the country do not have an energy efficiency rating. Those rated do not score more 2 stars on average. Based on the analysis conducted by the consultant the average yearly difference in consumption between appliances rated 1-3 stars and appliances rated 3.5 or above is 226 KWh for refrigerators and 125 KWh for washing machines which can be considered a reasonable saving target given the project.
- From an analysis of the refrigerators sold in the Australian markets (at this link the database) 6% of the top rating models score 3,5 stars or higher, while washing machines 8% of the top rating models score 4 stars or higher. This selection of the star rating thresholds results in a good balance of energy efficient products on the market that are eligible for the incentive. 6% and 8% of market share allows customers and retailers to find easily eligible appliances and at the same time is not too wide that customers and retailers would have bought the appliance anyways regardless of the financial incentive provided by the fund.
- The preliminary CBA (See Annex III for more detail) conducted for the Low Carbon Fund in Nauru shows that given this selection of thresholds, the benefits of the project outweigh its costs by a 2.99 factor.
Figure 2 – Example of label present on appliances from in NZ and Australian markets
The financial incentives provided by the fund have been calculated measuring the mark-up price for energy efficient appliances on the Australian and Kiwi markets, and adjusted for Customer B given the average cost of interest on a loan for home appliances. Given the Nauru context, the initial mark-up has been increased of a 5% because the country might need a stronger incentive as the public has just started to be exposed to the issue of energy efficiency.
If the customer will satisfy the eligibility criteria, they can apply for a 30% discount on the appliance.
These incentives are considered to be high enough to provide a substantial incentive towards energy efficiency, but at the same time not to create a perverse incentive to purchase more appliance than the real need. The economics of the incentive scheme has been tested in a preliminary CBA. (For further detail See Annex III – LCI Nauru Cost Benefit Analysis results, for the complete CBA refer to the file “Low Carbon Islands.