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Financing Energy Financing Energy Efficiency ProjectsEfficiency Projects

Energizing Cleaner ProductionEnergizing Cleaner Production

Management Course Management Course

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Session Agenda:Session Agenda:

The finance barrier

Four financial mechanisms

Conclusions

Roles of policy makers, industry and financial sector

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• task 1a: Meeting with top management• task 1b: Form a Team and inform staff• task 1c: Pre-assessment to collect general information• task 1d: Select focus areas• task 1e: Prepare assessment proposal for top management approval

Step 1: Planning and Organization

• task 2a: Staff meeting and training• task 2b: Prepare focus area flow charts• task 2c: Walkthrough of focus areas• task 2d: Quantify inputs and outputs and costs to establish a baseline• task 2e: Quantify losses through a material and energy balance

Step 2: Assessment

• task 3a: Determine causes of losses• task 3b: Identify possible options• task 3c: Screen options for feasibility analysis

Step 3: Identification of Options

• task 4a: Technical, economic and environmental evaluation of options• task 4b: Rank feasible options for implementation• task 4c: Prepare implementation and monitoring proposal for top

management approval

• task 5a: Implement options and monitor results• task 5b: Evaluation meeting with top management

Step 5: Implementation and Monitoring of Options

• task 6a: Prepare proposal to continue with energy efficiency for top management approval

Step 6: Continuous Improvement

Step 4: Feasibility Analysis of Options

• task 1a: Meeting with top management• task 1b: Form a Team and inform staff• task 1c: Pre-assessment to collect general information• task 1d: Select focus areas• task 1e: Prepare assessment proposal for top management approval

Step 1: Planning and Organization

• task 2a: Staff meeting and training• task 2b: Prepare focus area flow charts• task 2c: Walkthrough of focus areas• task 2d: Quantify inputs and outputs and costs to establish a baseline• task 2e: Quantify losses through a material and energy balance

Step 2: Assessment

• task 3a: Determine causes of losses• task 3b: Identify possible options• task 3c: Screen options for feasibility analysis

Step 3: Identification of Options

• task 4a: Technical, economic and environmental evaluation of options• task 4b: Rank feasible options for implementation• task 4c: Prepare implementation and monitoring proposal for top

management approval

• task 5a: Implement options and monitor results• task 5b: Evaluation meeting with top management

Step 5: Implementation and Monitoring of Options

• task 6a: Prepare proposal to continue with energy efficiency for top management approval

Step 6: Continuous Improvement

Step 4: Feasibility Analysis of Options

But first…But first…In what step(s) In what step(s) of the of the methodology methodology is financing a is financing a barrier to EE?barrier to EE?

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Why financing is a barrier for EE in Why financing is a barrier for EE in industryindustry

1. The Government does not give financial incentives to become energy efficient

2. Management is concerned about the investment costs of energy efficiency measures

3. It is difficult to obtain financing for energy efficiency projects

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What are the (possible) causes?What are the (possible) causes?

• Companies:– Money available but not readily– Lack of money for high cost options

• Government:– Fuel subsidies– Lack of government financial incentives

• Finance sector– Lack of financial mechanisms

But are financial mechanisms not available or just not known??

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Four types of financial mechanismsFour types of financial mechanisms

Tax policy • Taxes• Tax incentives

Subsidies • Subsidies

Lending programs

• Bank loans• Soft loans / revolving funds• Guarantee funds• Energy efficiency “Bank windows”

ESCOs • Guaranteed savings• Shared savings• Pay from savings• Other

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Financial mechanisms:Financial mechanisms:

Tax policies - TaxesTax policies - Taxes

• Objective:– Raise government revenue– Reduce fuel consumption

• Types:– Taxes on fuels– Taxes on emissions

• Advantages / disadvantages:- Impact on poor; public opposition; indirect

impact

+ Revenue; user pays

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Tax policies – Tax incentivesTax policies – Tax incentives

• Objective:– Reward energy efficiency

• Types:– Accelerated depreciation– Taxes deductions– Tax credits– Tax reductions

• Advantages / disadvantages:- Free riders; polluter does not pay; public funds+ Rewarding good behavior; public support;

direct link to investment in EE technologies

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SubsidiesSubsidies

• Objective:– Reward energy efficiency

• Types:– Fixed payment for an eligible investment– % of total value of the investment– Amount linked to the amount energy / costs

saved• Advantages / disadvantages

- Free riders; polluter does not pay; public funds; high operating and transaction costs

+ Rewarding good behavior; public support; direct link to investment in EE technologies

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Lending programs



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Lending programs: bank loansLending programs: bank loans

• Traditional loans• Barriers because banks

– Lack understanding of the value of EE projects– Favor investments in expanding production– EE projects considered “high risk”– EE projects can have long payback periods– Collateral requirements– EE projects are too small– Loans for EE have higher transactions costs– Lack trust in consultant information in loan applications – Prefer to loan to applicants with established banking

relationships– Businesses lack the capability to develop strong loan

applications

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Lending programs: soft loans / Lending programs: soft loans / revolving fundsrevolving funds

• Objective: encourage EE investments through reduced borrowing costs

• Soft loans: loan with public funds at low interest rates

• Revolving fund: repaid loans used for re-lending to new projects

• Advantages / disadvantages+ Address many of bank loan barriers

- Does not address collateral availability; proposal development; SME access

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Lending programs: Guarantee fundsLending programs: Guarantee funds

• Objective: Encourage EE lending through subsidized credit risk of bank

• Advantages:– Alleviate barriers: collateral requirements, high

risk of new technologies, risk of long-term lending

– Build bank capacity in EE loans

• Work best:– Banking sector well developed and liquid– Risk of EE loans is main barrier– Sufficient demand for loan financing

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Lending programs: “Bank Windows”Lending programs: “Bank Windows”

• Objective: to help facilitate financing of EE projects

• Bank programs specialized in EE loans– Bank staff trained– Outreach program to customers

• Advantages:– Reduced transaction costs– Loans less risky for banks

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Lending programs



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ESCOs: what is an ESCO? ESCOs: what is an ESCO?

• Energy Services Company (ESCO)

• Private company providing EE services– Service providers (auditors / building

contractors)– Suppliers (e.g. equipment)– Utilities

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ESCOs: what is performance contracting ESCOs: what is performance contracting

• ESCO provides energy saving for a fee (link savings & payment)– EE audit– EE recommendations– Secure financing– Project implementation– Payment out of actual savings made

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ESCOs: guaranteed savings ESCOs: guaranteed savings

How it works:• Customer takes out “normal” loan

(will appear on balance sheet)

• ESCO guarantees loan can be repaid with savings

• ESCO pays difference if minimum savings not met

Main advantage: ESCO can undertake more projects

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ESCOs: shared savings ESCOs: shared savings

How it works:• Customer does not take loan (will not appear

on balance sheet)

• ESCO finances project: takes performance & credit risk

• Customer pays higher %

Main advantage: Independent of customer’s borrowing capacity

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ESCOs: pay from savings ESCOs: pay from savings

How it works:

• Subset of guaranteed savings

• If savings higher: repayment faster

• If savings lower: repayment slower

Main advantage: less risk for ESCO

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ESCOs: End-use outsourcing ESCOs: End-use outsourcing

How it works:

• ESCO operates & maintains equipment or systems

• Output (steam, compressed air) sold to customer

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ESCOs: equipment supplier credit & ESCOs: equipment supplier credit & equipment leasingequipment leasing

How it works:• Supplier designs and implements project

& measures performance• Equipment supplier credit:

– Customer owns equipment– Customer pays lump-sum or over time based

on energy savings

• Equipment leasing: – Supplier owns equipment until full repayment– Customer pays lease payments

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ESCOs: technical consultant ESCOs: technical consultant

How it works:

• ESCO conducts audit, implements

• ESCO receives performance-based fee– Fixed– Penalties for lower or bonuses for

higher savings

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Barriers to performance contractingBarriers to performance contracting

• Lack of legal and financial infrastructure to support performance contracts

• Limited ability of local ESCOs to obtain bank financing or raise equity capital

• Lack of bank experience with EE projects and/or performance contracts

• Lack of confidence in ESCO performance estimates

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Financial mechanisms in 9 Asian Financial mechanisms in 9 Asian countries reviewedcountries reviewed

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ConclusionsConclusions

• Limited financial mechanisms for EE in Asia

• Private sector financing of EE investments can be viable and profitable

• Private sector financing insufficient to encourage EE investments in all cases

• Financial mechanisms should not be viewed in isolation from other EE programs/policies

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Three conditions for EE financing to Three conditions for EE financing to workwork

• Government policy should encourage EE

• Industry must have know how and systems to plan EE projects and evaluate benefits

• Financial sector must be well developed and understand profit potential of EE in industry

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Recommendations:Recommendations:Industry & financial sectorIndustry & financial sector

• Industry to build the technical capabilities to develop feasibility studies

• Industry to establish financial / management systems to – appraise the potential EE cost savings– qualify for financing– Support implementing ESCO performance

contracts

• Financial sector should– recognize the opportunities available– Develop the products and programs to respond to

growing demand for EE financing

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Recommendations:Recommendations:Policy makersPolicy makers

• Evaluate where policy interventions are most needed

• Develop:– EE policies– Industry programs– Financial sector programs

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Financing Energy Financing Energy Efficiency ProjectsEfficiency Projects

Thank you for your attention! Thank you for your attention!

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This training session was prepared as part of the development and delivery of the course “Energizing Cleaner Production” funded by InWent, Internationale Weiterbildung und Entwicklung (Capacity Building International, Germany) and carried out by the United Nations Environment Programme (UNEP)

The session is based on the report “Improving Energy Efficiency in Industry in Asia – a review of financial mechanisms” from the “Energy Efficiency Guide for Industry in Asia” developed as part of the GERIAP project that was implemented by UNEP and funded by the Swedish International Development Cooperation Agency (Sida)

While reasonable efforts have been made to ensure that the contents of this publication are factually correct and properly referenced, UNEP does not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

The report and references are available on www.energyefficiencyasia.org

AcknowledgementsAcknowledgements

financing energy efficiency projects 1 financing energy efficiency projects energizing cleaner...

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