Energy Efficiency financing & evaluation criteria
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ENERGY EFFICIENCY PROJECTS : FINANCING &
EVALUATION CRITERIA
Fortnightly Technical Talk For Project Management
By
Zaini Abdul Wahab
Director of Operation
CNS GROUP
14th June 2012
Menara SME Bank
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Outline
1. Existing EE Related Funds & Incentives In Malaysia
2. Financing Options To Implement EE Projects
3. EE Project Evaluation
4. Examples Of EE Solutions & Technologies
5. Conclusions
6. What’s Next?
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EXISTING EE RELATED FUNDS & INCENTIVES IN MALAYSIA
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Green Technology Fund Scheme(GTFS)
Initial RM1.5 billion fund shared by government and banks to improve the
supply and utilization of green technologies in Malaysia
2% subsidized interest rate of the total interest/profit rate
Any technology that suitable for the identified project criteria provided it is a
proven technology
FEATURES PRODUCER OF GREEN
TECHNOLOGY
USER OF GREEN
TECHNOLOGY
Financing size Maximum: RM50 million per
company
Maximum: RM10 million
per company
Financing tenure Up to 15 years Up to 10 years
Eligibility criteria
Legally registered Malaysian -
owned companies (at least 51%)
in all economic sectors
Legally registered
Malaysian -owned
companies (at least 70%)
in all economic sector
www.gtfs.my
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EPP9: Chiller Replacement Program
• Eligible for private business entities registered in Malaysia
• Comfort cooling for offices and commercial buildings only
• Must purchase a new eligible EE chiller or replace an existing
chiller due to lifespan (more than 10years) and inefficient existing
chiller within the specified period
No. State/Region Total Targeted Quantity
in 2011* (Refrigerant
Ton,RT)
Percentage
(%)
1 Peninsular 50,400 70
2 Sabah 10,800 15
3 Sarawak 10,800 15
Total 72,000 100
www.saveenergy.gov.my
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Fiscal Incentives For EE & RE Projects
Introduced by the government to promote EE & RE
Companies implementing EE measures in their premises (…2015)
• Investment Tax Allowance
• Accelerated capital allowance
• import duty exemption
• sales tax exemption
GBI Certified Buildings(…2014)
Implementing Agencies: • MIDA – Business & Other Services
Division(Application)
• Energy Commission(Technical assessment)
www.kettha.gov.my
www.st.gov.my
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Green Buildings
Owners Of Buildings Awarded With The GBI Certificate
Tax exemption equivalent to 100% of the additional capital expenditure incurred to obtain the GBI Certificate
Buyers Of Buildings And Residential Properties Awarded With The GBI Certificates Bought From Real Property Developers
Stamp duty exemption on instrument of transfer of ownership of such building.
Amount of stamp duty exemption is on the additional cost incurred and is given only once to the first owner of the building
7
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How is the progress of the funds and incentives?
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FINANCING OPTIONS TO IMPLEMENT EE PROJECTS
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Considering EE Financing?
It is worth asking why the public or private sector would
consider financing EE investments over other options
Financing programs are almost always more complex to
operate than the most common alternative—rebate
programs
Financing programs require a long-term commitment of
financial and human resources to collect principal and
interest
In most cases they also require a credit evaluation
process that is not necessary for a straight forward
rebate program
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Why Use Financing for Energy Efficiency?
1. Financing expands the amount of capital available to invest by attracting new sources of capital for EE &RE projects.
Financing energy efficiency investments gives a return on capital to investors that is unavailable in rebate or grant programs
2. Financing expands the number of players that can support EE or RE
Utilities and some government entities operate rebate programs because they have access to capital that does not require a return;
Financing programs allow lending institutions, ranging from banks to consumer credit companies and others, to administer loan programs and bring their own capital to those loan programs.
3. Financing means “skin in the game” for customer/borrowers.
Financing implies that customer/borrowers must pay back the money that they have borrowed to install EE measures.
This ―skin in the game may encourage them to operate and maintain equipment better than if simply given it to them.
4. Financing programs extend the life of limited government funds
A rebate or grant program-funding with no return.
A financing program that generates a return of both the capital invested as well as a return on that capital through a revolving fund can finance new investments in EE&RE many times over.
5. Financing programs can complement rebate or grant programs
For further long term saving for existing and future equipment/facilities
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Key Challenges in EE Financing
Still “ high risk”- banks still using the same guidelines for all industries and sectors
Risk management and credit enhancement is critical. Default rates for efficiency programs have been low in many countries(Thailand, USA) • results of careful underwriting in a small number of programs
and the fact that EE measures actually reduce borrowers’ day to day expenses, thus making loan repayments affordable
However, it is unlikely that EE lending has a long or strong enough credit history to attract a large amount of outside capital and investors without additional credit enhancements (loan loss reserves and guarantees, for instance) to secure payment
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Classification of EE Financing Barriers
Source: www.iea.org
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Key Risk Assessment Factors For EE in Asean
Risk aversion to finance new technologies-EE projects have yet to show sustainable commercial potentials
Applicant(mainly SMEs) have low capital compare to amount of loans requested
Risk assessment-base on performance & track records rather than potential of the technology
Applicants have yet to secure long-term contracts from reputable clients
In Malaysian GTFS: 60% guarantee by the government considered low compare to risks involved-Suggested 80%
Source: Green Prospects Asia, June 2012
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Options for EE Private Funding
Fund for EE projects -With guarantee from the
government
Distribution Mechanism
External Sources Local and international
commercial banks
International banks
International organizations
• GEF, UNDP
With low interest loan for approved applicants
Approved/endorsed by the competent body appointed by the government
Internal Sources: Companies’ Internal Budget
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Option 1: Dedicated Credit Line Structure
Source: www.iea.org
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Examples of Dedicated Credit Line Programs
Source: www.iea.org
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Option 2: Risk Sharing Facilities
Objectives providing access to finance from commercial
Local Financial Institutions(LFIs)
reducing the cost of capital by reducing the risk faced by the lender;
expanding the loan tenor or grace period to match project cash flows; and
helping create a long-term sustainable market for financing of EE projects.
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Risk Sharing Facilities Structure
Source: www.iea.org
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Examples Risk Sharing Programs
Source: www.iea.org
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Examples Of EE Fund
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Revolving Fund: Thailand
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ESCO Fund: Thailand
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What is Energy Services?
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What is ESCO?
An Energy Service Company
Capable of providing a turnkey service for the implementation of building EE or energy management projects
Providing comprehensive energy services including financing, and its delivery by one supplier that makes energy performance contracts (EPCs) covering :
• energy analysis and audits, • energy management, • project design and implementation, • maintenance and operation, • monitoring and evaluation of savings, • property/facility management, • energy and/or equipment supply, • provision of service (space heating/cooling, lighting, etc.).
Once the expenses have been fully recovered or the contract expires (whichever occurs first), the building owner/client retains future savings from lower energy bills.
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Barriers to ESCOs in Developing Countries
Most independent ESCOs have a small capital base • have difficulties accessing project funding from commercial financial institutions (FIs)
• recycling capital is needed through bond issuances.
New Concept among FIs • project financing for ESCO projects is not commonly accepted by FIs in developing countries
• ESCO model is new in developing countries
Smaller compare to other investment • EE projects are generally small relative to other investment projects being considered by the FIs
have a relatively large proportion of “soft costs” that cannot be easily collaterised.
Immaturity of the EE market in developing countries • costs of project development are relatively high
• most small ESCOs find it difficult to finance project development costs
• limited experience with successful ESCO projects
• ESCO s have not yet developed good credibility with energy users
Lack of expertise among FIs • FI’s staff typically has limited knowledge and understanding of EE projects and the EPC concept
• FIs perceive EE projects (incorrectly) as inherently more risky than other investments.
• The combination of high project developments costs, limited access to long-term and low-cost project financing, high equity requirements for project financing
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Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation
Senior Management team members Technical Team Members
• Registered Professional/Certified by recognized bodies
Technical support personnel
• Qualifications, employment term
Basic energy audit equipment
Experiences in EE projects
• Scope of works
Track records in EE related projects/works
Registration/membership with authorized/industry bodies such as MoF, SEDA Malaysia & MAESCO
• For accountability and verification of qualified with the minimum requirements
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What is Energy Performance Contracting(EPC) in EE?
EPC concept for energy saving measure implementation is through direct investments by ESCO with “Zero Cost” concept to the owner or the management of building or industrial facilities
The returns from the investments will be used to pay back the ESCO only from the actual energy savings achieved from the implementation of energy conservation measures by ESCO based on shared- saving contract with conditions agreed by both parties.
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Benefits of EPC : Banks/Financial Institutions
EPC provides needed comfort to investors • Assures adequate cash flow
• Provides necessary third party engineering calculations to justify the viability of technology being applied
• Provides cost estimates that will be guaranteed by design & build contract provided by ESCO
• Provides certainty that the money goes for the stated purpose and not, say, diverted to cover operating costs
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Benefits of EPC: Facilities Owner
Finance energy: saving
improvements with no upfront capital
Invest savings achieved into other
projects
ESCO to identify Energy Saving
Measures (ESMs) to replace / modify
existing inefficient systems or/and
equipment
ESCO guarantee Energy savings
and recover its investment including
interest & other costs out of
generated actual energy savings -
the remuneration of ESCOs is directly
tied to the energy savings achieved
Energy saving is shared between
ESCO and the building owner/client as
per agreed terms and payment
schedule with a single-source
responsibility
ESCO supplies, installs, maintains
and retain an on-going operational role
in measuring and verifying the savings
for each ESM over the
financing/contractual terms.
Use future energy ,cut operating cost,
be more competitive and improved
comfort/productivity from upgraded
system
Positive environmental impacts &
reduced environmental footprint
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OPTIONS FOR EE FUNDING
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Options To Implement Energy Saving Measures
• Management
Directives
• Implementation of EMS - to ensure sustainability of energy cost reduction initiatives
MEASURES With LOW/
NO COST
Minimal Cost Savings
• Priorities of budget - core business/operations
• Investment risks
• Limited human resources & expertise
MEASURES WITH HIGH
COST
Significant Cost Savings
Expert assistance &
investment from ESCO
In-house initiatives
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Financing Options for EPC
In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client
1. GUARANTEED SAVINGS Model
• The loan goes on the client’s balance sheet
2. SHARED SAVINGS Model
• The loan goes on ESCO’s balance sheet
3. Through a Special Purpose Vehicle(SPV) created specially for the purpose
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Guaranteed Savings Model
FACILITIES OWNER
ESCO BANK
Project Design& Implementation
Project Fees Loan
Repayment
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How Guaranteed Savings Model Works?
Facilities owner 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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Shared Savings Model
FACILITIES OWNER ESCO BANK
Project Design& Implementation
Loan
Repayment
EE PROJECT
Energy saving share
Financing
Energy saving share
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Shared Saving Mechanism
time
(year)
Energy Bills
During contract period
Lower Energy Bill
After Contract period
Energy bill saved
Before Contract Period
Energy bill before energy saving
measures implementation
Payment to ESCO
Savings for the owner
Baseline
Lower Energy Bill
Savings for the owner
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How Shared Savings Model Works?
Facilities owner does not take loan (will not appear on balance sheet)
ESCO finances project: takes performance & credit risk
Customer pays higher %
Main advantage: Independent of Facilities owner ’s borrowing capacity
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Through a SPV
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Common Elements of EPC Project Development
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Potential Areas for EPC Projects
Energy Conservation Renewable & Alternative Energy Sources
Heating , Ventilation, Cooling & Air Conditioning
Operational, & equipment controls Heating equipment Chillers, AHUs, fans, pumps
Compressed Air System
Lighting Systems Buildings(interior & exterior) Public(Street lights) Operational controls Types of lamp technologies
Maximum Demand Controls
Utilization of Feed-in Tariff(FiT) offered by SEDA Malaysia
(www.seda.gov.my)
Solar Photo Voltaic(PV)
Building Integrated PV System
PV Power Plant
Biomass & Biogas Power Plant
Waste-to-energy systems
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EVALUATION OF ENERGY SAVING PROJECTS
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Basic Key Criteria
Pro
po
sed
Pro
ject
Technical Viability
Financial Viability
Sustainability Plan
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Technical Viability
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Type Of Project And General Information
Modification/improvement or Introduction/replacement for higher efficiency technologies
Location and types of energy supplied and tariff/rates applied (fuel, electricity)
Plant/equipment energy consumption per year
Existing plant/equipment energy efficiency performance
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Energy Efficiency Information
Technology description and operational principles to improve efficiency
Schematic drawings/diagrams
Function of each equipment contributing to improve efficiency
Comparison of energy performance data (conventional /existing and the proposed)
Equipment information:
• Name, brand, model and
rated capacity
• Energy performance data
and testing standard used
• Energy performance test
reports
• Producer/manufacturer
• Product applications
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Energy Saving Potentials
Types of energy to be saved (fuel, electricity)
Method and data used in potential energy saving calculations
Estimated energy savings in energy units and currency
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Measurement And Verification Of Results
Energy saving measurement for verification • baseline data/performance indicator
• measuring type and point
Require energy metering
“The long term success of energy management projects is often hampered by the inability of the project partners to agree on an accurate, successful M&V plan.….. M&V protocol discusses procedures that, when implemented, help buyers, sellers and financiers of energy projects to agree on an M&V plan and quantify savings from energy conservation measure (ECM) projects.” - (IPMVP, Volume I, March 2002)
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Energy Saving Measurement & Verification
Baselines for saving calculations & measurements at agreed operating conditions before implementation
Baselines for saving calculations & measurements - mutually agreed for any significant energy using operational change
Energy bills
Periodical Data logging
• Permanent- with sub- metering or
• Portable meter - scheduled visits
Savings Verification • Joint scheduled data
logging & measurements
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Factors should be considered while drafting a new ESCO M&V to reduce dispute in EPC Contract
Commitment From Client
Factors Affecting Savings Performance
Valuating Savings Uncertainty
Minimum Operating Conditions
Energy Prices
Verification By A Third Party
Baseline Adjustments (Non-routine)
Balancing Uncertainty And Cost
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Economic Viability
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Financial Analysis
Results often becomes the key parameter for the management acceptance
Smaller projects will normally be funded from internal sources.
Larger projects with external funding may require consideration of : • Amount of investment. • Amount and period of loan. • Current and expected future inflation rates. • Asset of borrower. • Lender’s judgment of the risk involved, etc.
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Criteria Used
Use company financial evaluation criteria • Simple payback period for low cost projects
• Rate of return considers the benefits after the project has paid back.
• Net present value gives the real cost benefits of a project.
• Internal rate of return offers the most comprehensive comparator
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Life Cycle Cost Analysis
Consider the total life span of the equipment
Life-Cycle Cost = Purchasing Cost
+ Operation (Energy + Water)
+ Maintenance And Repairs
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Life Cycle Cost Indication: Electric Motors
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Sustainability Plan
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Implementation Plan
Resources • Trained people involved in the implementation of the project
(internal personnel/external)
• Efficient operation & maintenance budget
Work Plan • Steps to be taken to implement the project and the targeted
duration for completion
Energy Management Plan • Equipment/System
• Plant
• Organizational (Adoption of Sustainable Energy Management System /ISO 50001:2011)
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Options & Risks for Implementation Energy Saving Projects
Component
Shared Saving/
Energy Performance
Contracting(EPC)
Conventional Energy
Conservation
Renewable
Energy
Technical Expertise ESCO ESCO ESCO
Implementation/
Installation
ESCO ESCO ESCO
Funding Source ESCO ESCO Owner
Sharing of returns
ratio
At agreed ratio &
conditions
At agreed ratio &
conditions
100% to
Owner
Technical &
Investment Risks
ESCO ESCO Owner
Performance
Maintenance &
monitoring
ESCO ESCO Owner
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EXAMPLES OF EE SOLUTIONS & TECHNOLOGIES
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Computer -Aided Energy Resource Management System(CERMS)
• Data acquisition • Data Monitoring • Data Analysis
• CONTROLS FOR ENERGY EFFICIENT
OPERATIONS: AC systems, Lighting
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Energy Efficient Solutions
Integrated Cogeneration System
• Waste Heat Management
• Steam Management System
• Process Reengineering & Improvement
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Vesta Energy Saving Micro Ballast High Performance Fluorescent Lamp HPT8-
28W
Lighting Solutions
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Case Study 1: Public Library
1. Vesta T8-28W Micro Ballast – 542 sets
2. Vesta HP T8-28 W FL – 1,354 tubes
Qty Installed: Total 1 Lamp 2 Lamps 3 Lamps 4 Lamps Location (Sets) (Sets) (Sets) (Sets) (Sets) Ground FLR 171 0 145 4 22 Level 1 124 0 120 4 0 Level 2 64 0 8 56 0 Level 3 61 0 8 53 0 Level 4 61 0 8 53 0 Level 5 61 0 5 56 0 TOTAL 542 0 294 226 22
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Power Consumption Analysis
Saving = 40%
(7.8 – 4.7)/7.8
Saving = 42.5%
(8.0 – 4.6)/8.0
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(Before) Conventional FL 36W (After) HP T8-28W
Comparison Before & After Implementation
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Case Study 2: Electronic Industry
Application Areas:
- Fluorescent Lamps
- High bay Lighting - HID
After Installation: 20,000 pcs x 26W/1000 = 520 kWh
Total annual power = 520 x 8,640 hrs = 4,492,800 kWh
Before Installation: 20,000 pcs x 45W/1000 = 900 kWh
Total annual power = 900 x 8640 hrs = 7,776,000 kWh Total annual Saving
= 42.2%
= 3,283,200 kWh,
= RM 920,000
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Case Study 3: Industrial Warehouse (Before) High bay light 400w (After) Vesta 4x28W High bay FL
Before: Origin high bay light fitting 400W x 192 set
Electrical Usage per fitting: 0.410kW
Consumption kW per hour: 192set x 0.41kW= 78.72kW
Consumption Monthly : 1889.28kWh x 30days= 56678.4kWh
Monthly usage : 56678.4 x RM0.28= RM 15,870
After : T8 High bay 4 x 28w fluorescent light x 114 sets
Electrical Usage per fitting: 0.112kW
Consumption kW per hour: 114set x 0.112kw= 12.768kW
Consumption Monthly : 306.43kWh x 30days= 9193kWh
Monthly usage : 9193.0 x RM0.28= RM 2,574
*SAVE 83%
*SAME BRIGHTNESS!!
* Longer Life Span
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Conclusions
Financing for EE is more complex than rebate or grant programs
Benefits of financing, including the potential for leverage and for low or no subsidization
• provide new opportunities for overcoming barriers to the adoption of EE measures.
Financing should be viewed as a complement to other strategies such as building energy codes, appliance EE standards, or utility rebate programs
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Conclusions..ctnd
A successful financing program should support, and
not be a barrier to, customer participation - financing should remain streamlined, easy-to-access, and quick.
Customers need to know that they will have access to financing, but they are not participating in a program simply because it offers good financial terms
….As they are striving for lower utility bills, an upgraded business property, and more comfortable working spaces.
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What’s Next?
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Proposed Capacity Building Program by the government through a competent/an authorized body for EE
Development of in-house capacity in technical & financial evaluation of EE&EC Projects in financial institutions
Development and acceptance of standard technical evaluation,
monitoring and performance verification criteria for EE&EC Projects With by technical experts from recognized professional/industrial bodies or association
Development of and acceptance of standard evaluation for funding and
risk assessment criteria for EE&EC Projects
Sharing of experiences in successful investments in EE projects through seminars/dialogues
• (results, payback period) from people in business communities who have experienced it • Criteria of viable EE projects • Competency of ESCOs
Promotion of incentives/tax exemptions for EE&EC investment for
companies
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Possible Actions Required for Financial Institutions
To specialize in green technologies such as EE • EE has wide range of technologies & applications with different
levels of difficulties in technology(implementation, reliability, ease of operation and durability
Due to… Insufficient proven domestic case studies by banks
• EE project require time and specific expertise to be assessed
EE funds started in other countries such as Thailand & USA
has developed in-house expertise for banks in evaluating EE projects
Source: Green Prospects Asia, June 2012
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Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation
Senior Management team members Technical Team Members
• Registered Professional/Certified by recognized bodies
Technical support personnel
Basic energy audit equipment
Experiences in EE projects
• Scope of works
Track records in EE related projects/works
Registration/membership with authorized/industry bodies such as MoF, SEDA
Malaysia & MAESCO • For accountability and verification of qualified with the minimum requirements
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Last Words
I hope today’s sessions will help you to
understand both the challenges to and
opportunities for using EE financing in a
productive manner
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Thank you for your time & attention.