Financing of Energy Efficiency Initiatives

50 + Years of Manufacturing Excellence! Since 195950 + Years of Manufacturing Excellence! Since 1959

Financing of Energy EfficiencyInitiatives

By

Jeff M Murage-RTAP Coordinator

25th April 2013

50 + Years of Manufacturing Excellence! Since 1959

Energy Efficiency

• Is Particularly linked to initiatives aimed at energy cost reduction in general.

• It could take the dimension of renewable energy and often both concepts are two faces of one coin.


Energy Efficiency Financing

• EE financing is a relatively New realm in Kenya with a close linkage to process improvement.

• Energy efficiency is defined as

– Relativity in how effectively energy is /can be used For example how long an appliance can be ran with a given amount of energy

– For electricity Generation it refers to the conversation losses.


Energy Costs will continue to escalate What Are our Options ??


EE Financing Options

• Project Financing & ESCO Model

• Balance sheet Financing

• Demand side management Financing

• RTAP model.


Balance Sheet Financing

• Typically most preferred by the banks.

• Often not appropriate for start ups and good projects that lack financial history though with excellent technical and financial outlooks.

• Esco’s who may be technology providers may not have sizeable BS’s to access Debt on this Platform.


Demand side Management financing

• Utility would seek to take initiative to extend financial rebates to customers in a bid to stimulate EE (EE light Bulbs).

• Utility would then recover the investment on an agreed period and terms (on billing for instance )

• Often this model is State subsidized


Project Financing

• Financing “off Balance sheet Financing”

• Future Anticipated revenues are considered to be the “security” (PPA for IPP’s)

• Guarantee Mechanisms are often packaged together with project finance. This is not always available.

• Risk minimization is critical.

• Performance Guarantees are critical.


Financing Energy Efficient projects through the ESCO Model .

• Use of ESCO’s (Energy Service Companies)

– An energy services company (ESCO) is defined as a company engaged in developing, installing and financing comprehensive, performance-based projects centered on improving :

– the energy efficiency of facilities owned or operated by commercial, industrial, institutional,

– and other types of customers


Why ESCO’s in the Kenyan Market

• Business model Fundamentals of a an ESCO or BOOT contractor

• Operation of an intellectual capital and not of a physical capital

• A suggestion box does not make a living, it is the implementation and capture of

energy cost reduction that can grow the business

• Intellectual property is difficult to protect: the knowledge gained during the

contract may result in an early interruption of the contract (we can do it by

ourselves).

• Negotiation time span (before signing the contract) between 3 and 9 months

• Project development

• Factoring the priorities of the industry (e.g., increase production, mitigate

environmental impact)

• Planning energy efficiency actions to maximize margin and ensure positive cash

flow (first optimization actions then actions with investments starting with the

shortest pay-back actions)

• Tailoring Monitoring and verification protocol that defines the scope of the project

and the energy baseline


Important lessons of the ESCO of BOOT

business model to share with Kenya

• Project financing

• Combining technical and financial expertise in bankable feasibility reports

• Educating (beyond awareness) lenders to put in place the right processes to

respond to the market and develop the market

• Risk management and security

• Creating security structure (for performance, payment, cash flow, risk

management)

• Internal capacity building to operate an ESCO business

• Manpower development & retention

• Organisation structure and systems

• Development of hardware and informaton software

• Standardisation and quality control processes

• Productivity and cost management

• Remaining updated with technology development


Insertion of ESCO value chain in Industry

value chain

Sale

Operation &

maintenance

Production

management

Raw

material

procurement

Procurement

of energy

and services

Metering &

invoicing

Operation &

maintenance

& on site

utility

generation

Supply

contract for

energy and

services

Monitoring

and

verification

Consulting

and

diagnostic

Project

development

Business plan

Licensing and

Permitting

Project

financeEngineering

Procurement

Commission

ning

Finance

Cash-flow

Project

management

Monitoring

and

verification

Asset

management

& insurance

Industry value chain

Energy and service procurement value chain

Asset management and investment value chain


The various types of energy efficiency

contracts under ESA (energy service Agreements)

• Performance Based Contracts:

– 1. Guaranteed Savings / Energy performance Guarantee

– 2. Shared Savings.

– 3. Third Party financing



contracts• Guaranteed Savings

• Industrial Owner makes periodic fixed debt service payments to a third party financial institution (“Lender/ Bank”) in the amount required to repay the ESCO’s turnkey project price plus the Lender’s financing costs.

• ESCO guarantees the Host that the project’s realized savings will equal all project payments, including debt service to the Lender plus any downstream fees to the ESCO for its ongoing M & V and operational and maintenance services.

• If the realized savings are < of project payments made by the Host, the ESCO will pay the difference between the realized savings and the project payments. If the realized savings > the project payments, the Host and the ESCO may share in the excess depending on the risk taken and the extent of services provided by the ESCO.

• Advantages

• Make liable the energy service company and plays in its area of speciality Plus

no obligation of ESCO to Lender.

• Disadvantages

• Part of the payment services (up to all) is linked to the evidence of reached

performance (risk sharing)

• More risky if the performance guarantee is measured continuously and not

during the commissioning period under predetermined conditions



contracts

Shared savings

• The commitment is to pay the service contractor an agreed fraction of

the metered energy savings. Payments are flexible depending on the

level of energy efficiency performance (savings and level of activity of

the company. The contract period is also flexible to achieve fair

compensation (equivalent to debt rescheduling). For the industry, it is a

guarantee of positive cash flow. Similar shared savings contracts are

practiced in oil production ("production sharing contracts").

• Advantages

• Incentive to exceed the guaranteed objectives by an effect of results sharing

• Disadvantages

• Fear of windfall profit if the savings become very important

• Lack of transparency when the skill is asymmetric

• Diverted if used as the sole means of payment for services

• Higher charge as the ESCO has more risk to take up (project performance risk

and credit risk to Lender



contracts

• Third-party finance

• The industry is contacting a third party that mobilizes resources

(funding, technical and financial skills, ...) to act on the energy assets of

the industry (equipment, staff) to reduce the cost of energy. The third

party supports not only funding, but also the responsibility for the

completion of the operation. It combines the business model of the bank

and the service company (engineering, operations, maintenance, ...)

• Advantages

• Preferred model for public entities whose cash flow is stable and

guaranteed by the state, but who do not have access to debt finance as

a result of their statute or complexity / slow decision-making process

• Disadvantages

• A third party finance arrangement will always be more expensive than

direct funding unless there are tax incentives


Energy Efficiency Investment

is Funded by the Energy Savings

• The system of performance

contract has helped in tackling

many of the implementation

barriers.

• The system covers the entire

project cycle-audit to savings

verification

• Uses business analytical tool

more extensively-able to draw

top management attention

• Most importantly fee gets

linked to savings-commitment

to implementation.

CASH

FLOW

ESCO

PAYMENT

NEW

ENERGY

BILL

OLD

ENERGY

BILL

KshSAVINGS}


Example of finance structuring

(annual cash flows)

Industry -

budget and

operation

account

Energy

budget lineESCO

Account

EE Service

Company

EE saving 30%

100 100

Energy

supplier

704

Gross Margin

brute ESCO

6 Investment

over 5 years = 75

20

Principal

Interest

15

5

10

10

Share of

savings


RTAP Model

• €30 million (worth $40 million) long term and

concessional financing is being made available

by the “Agence Française de Développement” (AFD) to Kenya

• In Kenya, the Line of credit has been signed with

two partner banks CfC Stanbic and Co-op Bank

• In Tanzania and Uganda, the lines of credit are

still in discussion with candidate partner banks

and are not available yet


RTAP Model to date.

RTAP Pipeline &

Technology Total MW

Energy

GWh/yr

CO2

abatement

t/yr

Investment

(US$million)

Debt finance

(US$ million) No of sites by when

Pipeline Kenya

RE business model 122 754 579645 330 194 47 2014

Hydro 86 546 419097 252 161 35 2014

Biomass 0 1 353 0 0 1 2014

Wind 0 0 0 0 0 0 2014

Geothermal 5 33 28528 19 7 1 2014

Biogas 20 155 115033 25 12 4 2014

Solar PV 11 19 16635 33 14 6 2014

EE business model 24 110 114800 54 45 27 2013

Cogeneration 3 16 9796 6 5 3 2013

Fuel cost abat. 9 48 17557 6 5 5 2013

Electricity cost abat. 12 45 87199 38 32 16 2013

Other Energy Efficiency 0 1 248 3 2 3 2013

Total Kenya 146 864 694446 383 239 74 2014


What About the challenge To financiers / Banks?

• Financial Institution (Banks) need to see EE financing as a new area of Business.

– Could they take the step of Faith with the EE entrepreneurs??

– It takes the efforts of all S/holders to progress this

• EE entrepreneurs need to take more initiative in working towards developing the EE financing models in Kenya.

• EQUITY ---Still a challenge. Proper Equity funds need to be structured to match EE and RE project finance requirements.


We Can do It as they did also

• 1994-95 - 3 formed with support from USAID

• Presently 10 to 15 are operating, though information on

projects and performance are not publicly available

• Projects are mostly being carried out under guaranteed

savings scheme without financial commitment on the

part of the ESCO’s

• In Sri lanka the ESCO business model is a growing partnership between the financiers (lenders) and the ESCO’s

• In Kenya Only one active Energy (in My limited Interaction) is working on a a “shared savings model”


Finally

• Jeff M Murage

• [email protected] or [email protected]

• +254735818626

mailto:[email protected]

mailto:[email protected]

Financing of Energy Efficiency Initiatives

Environment

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