1. 1. Introduction

    The Global Environment Facility Pacific Alliance For Sustainability (GEFPAS) “Low Carbon Islands” project executed by IUCN and implemented by UNEP in collaboration with the Tuvalu government aims to establish a Low Carbon Fund (LCF) of approximately US$80,000 to promote renewable energy and energy efficiency technology in the project countries targeting private sector engagement. After consultations with the main stakeholders of the project (Tuvalu Electricity Corporation, Tuvalu Energy Office, Development Bank of Tuvalu and Solid Waste Agency of Tuvalu) conducted by the independent consultant Marco Arena from the 21th to the 28th of May, 2015, it was decided to develop a proposal that outlined the structure of the Low Carbon Fund to be submitted for approval to the Development Bank of Tuvalu, the Tuvalu Electricity Corporation, and IUCN.
    This document describes the fund and its functioning in seven different sections: 1) Contracting Parties, 2) Functioning, 3) Operation Costs and Risks, 4) Reporting, 5) Termination, 6) Sustainability of the fund, and 7) Communication strategy. The annexes include the LCF – Application Form Template, LCF Quarterly Report Template and the LCF – Cost-benefit Analysis.

    2. Contracting Parties

    IUCN, Development Bank of Tuvalu, and Tuvalu Electricity Corporation 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.

    1. The Development Bank of Tuvalu provides development loans to private citizens and business. Owned by the Government of Tuvalu, it was established in 1993 and operates in Australian dollars. It is managed by Manraoi Vaaia.
    2. The Tuvalu Electricity Corporation (TEC) is a 100% government-owned commercial utility charged with providing a cost-effective and reliable electricity supply to all of the islands of Tuvalu. It is managed by Mafalu Lotolua.
    3.  International Union for Conservation of Nature (IUCN) is the international organization that manages the execution of the Low Carbon Islands project in Niue, Tuvalu, and Nauru.

    3. Functioning

    Disbursement of funds

    Once all parties agree upon the features of the fund, a sub-grant agreement will be drafted and signed by the parties. This sub-grant agreement should specify, among other details, how the fund will function and reporting obligations among the different Parties.
    Funds will be transferred from IUCN to the Tuvalu Development Bank to 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 the next section.

    Figure 1 outlines the relationships among the parties

    Fund Functioning

    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 Government and the TEC office to decrease the dependency of Tuvalu on fossil fuel through targeting energy demand and supply. The appliances targeted by the fund are washing machines, fridges, freezers, solar water pumps and T5 and T8 fluorescent tubes that according to recent Tuvalu Energy Survey data, make up most of the energy demand in the country. Two main types of customers will be able to access the fund:
    • Customers A: Customers willing to buy an appliance directly without accessing a loan,
    • Customers B: Customers willing to buy an appliance accessing a loan with DBT.
    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 stars and washing machines that score 4 or more stars will be eligible to apply to the fund. The thresholds have been selected based on three main characteristics of the Tuvalu and the Australian markets:

    1. From a short assessment conducted by the consultant during the mission in Tuvalu, most of the appliances currently in the country do not have an energy efficiency rating. Those rated do not score more than 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 goals.
    2. From an analysis of the refrigerators sold in the Australian markets[1] (database available at this link) 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.
    3.  The preliminary CBA (See Annex III for more detail) conducted for the Low Carbon Fund in Tuvalu shows that given this selection of thresholds, the benefits of the project outweigh its costs by a 3.34 factor.


    Figure 2 – Example of label present on appliances from in NZ and Australian markets 

    For solar water pumps there are no international standards. The decision of whether one of these systems is applicable to receive support under the fund will be conducted case-by-case by the managers of the DBT and the TEC office based on criteria of effectiveness in reducing CO2 emissions and sustainability of the systems.
    Fluorescent tubes eligible for the scheme are model T5 and T8 with measures of 4 and 2 feet.
    The financial incentives provided by the fund have been calculated measuring the mark-up price for energy efficient appliances on the Kiwi market and adjusted for Customer B given the average cost of interest on a loan for home appliances.
    If Customers A will satisfy the eligibility criteria, they can apply for a 25% discount on the appliance.
    If Customers B will satisfy the eligibility criteria, they can apply to a 3% rate loan and a 10% 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 appliances than the real need. The economics of the incentive scheme have been tested in a preliminary CBA.