Financing Mechanism for Strong ESCO Industry in Korea

KDB CapitalRepublic of KoreaHyungchul Shin

International financing for local GHG mitigation projects [1]

Characteristics No legal and administrative barrier

of foreign investment to finance ESCO projects in Korea

Interest rate depends on company risk

Costs incur in getting the investment done Costs include legal fees and other due

diligence costs

International financing for local GHG mitigation projects [2]

Interest rate of foreign fund Calculation equation Interest rate = LIBOR + risk premium + α risk premium = country risk + business risk + company risk

In Korea, only few ESCOs would be satisfied with company risk

International financing for local GHG mitigation projects [3]

Indirect financing Korean ESCOs prefer indirect

financing to direct financing Most Korean ESCOs cannot directly

introduce foreign fund due to their high company risk (high debt ratio)

Small and medium sized ESCOs can use indirect financing scheme to finance their project

International financing for local GHG mitigation projects [4]

Direct financing model vs. indirect financing model

Direct financing model

Indirect financing model

process

Foreign investor directly finance a local ESCO project

A domestic bank raises fund for potential carbon projects from foreign investors

International financing for local GHG mitigation projects [5]

Comparison continue

Direct financing model

Indirect financing model

Interest rate

LIBOR + risk premium

LIBOR + risk premium + interest rate of domestic bank

International financing for local GHG mitigation projects [6]

Comparison continue

Direct financing model

Indirect financing model

Size of project

Relatively big ESCO projects(at least more than 10million US$/project)

All kinds of ESCO projects (including small and medium sized ESCO projects)

International financing for local GHG mitigation projects [7]

Comparison continue

Direct financing

model

Indirect financing

model

Risk related to currency exchange

For long-term loan, there are few measures to cover risk of hedge(short-term loan can cover this risk)

A domestic bank deals the risks related to exchange rate(ESCOs exposes relatively low risk to this)

International financing for local GHG mitigation projects [8]

Comparison continue

Direct financing model

Indirect financing model

Time required

At least 2months are required for fund negotiation between an ESCO and an foreign investor

Within 2months(refer to next figure)

International financing for local GHG mitigation projects [9]

Mechanism of indirect financing for ESCO projects

SPC (local bank)SPC (local bank)

ESCOsESCOs

Energy end usersEnergy end users

International fundInternational fundex) ESCO fund, climate change fund etc

CO2 creditand/or profit

money

Prepare a package ofESCO projects forInternational investors

CO2 creditand/or profit

International financing for local GHG mitigation projects [10]

Summaries of indirect financing mechanism ESCOs sell the payment stream to a SPC A SPC raises fund for local ESCO projects

or potential carbon offset projects from foreign investor

- This SPC is designated as a special bank of international carbon offset projects

(ex : Foreign investors get the CO2 credit and/or profit of projects prior to SPC)

International financing for local GHG mitigation projects [11]

Summaries continue

After the SPC secures a certain amount of money, it provides fund to ESCO projects that create CO2 credits instead of international investors

International financing for local GHG mitigation projects [12]

Next step for the development A potential project for this proposed

mechanism will be developed through the circulation among ESCOs in Korea

CTP Korea will partner a Korean ESCO with large international ESCOs

After the application, CTP Korea improve the mechanism based on the result of the project

Thank you