Financing Energy Efficiency Projects 1 Financing Energy Efficiency Projects Energizing Cleaner Production Management Course

Financing Energy Efficiency Projects 2 Session Agenda: The finance barrier Four financial mechanisms Conclusions Roles of policy makers, industry and financial sector

Financing Energy Efficiency Projects 3 But first… In what step(s) of the methodology is financing a barrier to EE?

Financing Energy Efficiency Projects 4 Why financing is a barrier for EE in industry 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

Financing Energy Efficiency Projects 5 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??

Financing Energy Efficiency Projects 6 Four types of financial mechanisms Tax policyTaxes Tax incentives Subsidies Lending programs Bank loans Soft loans / revolving funds Guarantee funds Energy efficiency “Bank windows” ESCOsGuaranteed savings Shared savings Pay from savings Other

Financing Energy Efficiency Projects 7 Financial mechanisms: Tax 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

Financing Energy Efficiency Projects 8 Financial mechanisms: Tax 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

Financing Energy Efficiency Projects 9 Financial mechanisms: Subsidies 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

Financing Energy Efficiency Projects 10 Four types of financial mechanisms Tax policyTaxes Tax incentives Subsidies Lending programs Bank loans Soft loans / revolving funds Guarantee funds Energy efficiency “Bank windows” ESCOsGuaranteed savings Shared savings Pay from savings Other

Financing Energy Efficiency Projects 11 Financial mechanisms: Lending 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

Financing Energy Efficiency Projects 12 Financial mechanisms: Lending programs: soft loans / revolving 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

Financing Energy Efficiency Projects 13 Financial mechanisms: Lending 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

Financing Energy Efficiency Projects 14 Financial mechanisms: 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

Financing Energy Efficiency Projects 15 Four types of financial mechanisms Tax policyTaxes Tax incentives Subsidies Lending programs Bank loans Soft loans / revolving funds Guarantee funds Energy efficiency “Bank windows” ESCOsGuaranteed savings Shared savings Pay from savings Other

Financing Energy Efficiency Projects 16 Financial mechanisms: ESCOs: what is an ESCO? Energy Services Company (ESCO) Private company providing EE services –Service providers (auditors / building contractors) –Suppliers (e.g. equipment) –Utilities

Financing Energy Efficiency Projects 17 Financial mechanisms: 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

Financing Energy Efficiency Projects 18 Financial mechanisms: 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

Financing Energy Efficiency Projects 19 Financial mechanisms: 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

Financing Energy Efficiency Projects 20 Financial mechanisms: 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

Financing Energy Efficiency Projects 21 Financial mechanisms: ESCOs: End-use outsourcing How it works: ESCO operates & maintains equipment or systems Output (steam, compressed air) sold to customer

Financing Energy Efficiency Projects 22 Financial mechanisms: ESCOs: equipment supplier credit & equipment 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

Financing Energy Efficiency Projects 23 Financial mechanisms: ESCOs: technical consultant How it works: ESCO conducts audit, implements ESCO receives performance-based fee –Fixed –Penalties for lower or bonuses for higher savings

Financing Energy Efficiency Projects 24 Financial mechanisms: Barriers 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

Financing Energy Efficiency Projects 25 Financial mechanisms in 9 Asian countries reviewed

Financing Energy Efficiency Projects 26 Conclusions 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

Financing Energy Efficiency Projects 27 Three conditions for EE financing to work 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

Financing Energy Efficiency Projects 28 Recommendations: Industry & 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

Financing Energy Efficiency Projects 29 Recommendations: Policy makers Evaluate where policy interventions are most needed Develop: –EE policies –Industry programs –Financial sector programs

Financing Energy Efficiency Projects 30 Financing Energy Efficiency Projects Thank you for your attention!

Financing Energy Efficiency Projects 31 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 Acknowledgements