WHAT ARE SUSTAINABLE ENERGY TECHNOLOGIES (SETS)? · Energy Saved Up to 80% of electricity can be...

WHAT ARE SUSTAINABLE ENERGY TECHNOLOGIES (SETS)?

Consultation and Workshop for Financiers:

Financing Sustainable Energy in the Caribbean

CURRENT ELECTRICITY MIX BY TARGET COUNTRY

0%

20%

40%

60%

80%

100%

Antigua & Barbuda

The Bahamas

Dominica Grenada St. Kitts & Nevis

St. Lucia St. Vincent & the

Grenadines

Shar

e (

%)

of

Ele

ctri

city

De

rive

d b

y So

urc

e

Biomass

Hydropower

Oil

Source: REEGLE 2007-2011

THE CASE FOR SUSTAINABLE ENERGY TECHNOLOGIES

• Energy cost savings

• Protection against price shocks

• Fuel supply diversity

• Decentralized electricity generation

• Local employment

• Environmental protection

THE TARGET COUNTRIES HAVE ABUNDANT RENEWABLE ENERGY RESOURCES

IFOK Analysis 2012, Adapted from Nexant 2010, NREL 2012

OUR GUIDE FOCUSES ON RESIDENTIAL SETS

• Residential SETs are physically located at the host-site

• Typically generate electricity bill savings for residential

utility customers

• Residential SETs offer opportunities for financiers to

create new, community-focused financing programs

SETS RELEVANT FOR THE RESIDENTIAL CONTEXT

Solar Photovoltaic Electricity

Solar Hot Water Systems

Energy Efficient Appliances

THERE IS A HIGH POTENTIAL FOR SOLAR PV THAT IS UNDER-UTILIZED IN THE TARGET COUNTRIES

Energy Source Sun

Energy Displaced

Fuel oil or electricity purchased from the power grid

Requirements Access to sun; roof facing north or south; sturdy roof that can carry added weight of installation and will not leak

Generating Capacity

Small systems typically start at 100 W (to power 1-2 light bulbs) and a larger residential system have capacities of up to 3.5 kW (to power higher energy appliances such as televisions, refrigerators, and air conditioning units)

Payback time Varies; As low as 8 – 10 years

Cost Per Unit Varies depending on installation size, quality, manufacturer, installation costs; US$3,000 - US$12,000 for entire system

Useful Life 20 – 30 years

• All target countries have a

high potential for solar PV

• Each target country has a

greater resource potential

than is being currently

utilized

MANY CONSUMERS IN THE TARGET COUNTRIES ARE FAMILIAR WITH SHWS

• SHWS are becoming more

common in the Caribbean

Successful deployment in Barbados, Grenada, St. Lucia

• SHWS costs are decreasing

due to demand increases

and high penetration levels

Energy Source Sun

Energy Displaced

Fuel oil or electricity purchased from the power grid

Requirements Access to sun; roof facing north or south; sturdy roof that can carry added weight of installation and will not leak

Generating Capacity

A solar hot water system has the capacity to supply an entire household with hot water, approx 200 liters

Payback time Varies; As low as 3 – 10 years

Cost Per Unit Varies depending on installation size, quality, manufacturer, installation costs; $ 1,000 – $3,000 per system installed

Useful Life 15-40 years (depending on maintenance)

MANY DOMESTIC APPLIANCES CURRENTLY SOLD AND USED IN THE TARGET COUNTRIES ARE NOT ENERGY-EFFICIENT

• Labeling systems and other

information mechanisms Voluntary labels being

introduced at national level Mandatory standards and

labels at regional level needed Control mechanisms need to

be established Information campaigns and

access to consumer information are essential

Focus Refrigerators, TVs, Air Conditioners, Lighting, Washing machines, Fans

Energy Saved Up to 80% of electricity can be saved by substituting existing appliances through best available technologies.

Requirements Efficient appliances need to be offered on the market; consumers need to be aware of options and energy consumption.

Barriers Consumers see energy-efficiency as minor important criterion for purchasing decision; operational long-term costs not taken into account. Information often incomplete or misleading.

Payback time Varies; often lower than 1 year; no linear ratio between energy-efficiency and appliance price.

Supporting incentives

Some countries offer fiscal incentives (VAT reduction; import duty exemption); Legally binding commitment for EE information necessary.

CARIBBEAN HOUSEHOLDS ARE WELL EQUIPPED WITH (OFTEN INEFFICIENT) APPLIANCES

Source: GIZ/OECS, ECELP Survey 2012

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Refrigerator or fridge/

freezer combi

Freezer Fan (mobile) Washing machine (Top

loader)

TV (Colour CRT)

TV (LCD/ Plasma)

Stereo music system

Major Electrical Household Appliances in SLU, GND, A&B

SLU

GND

A&B

CONSUMERS CAN CHOOSE APPLIANCES WITH A VARYING DEGREE OF ENERGY EFFICIENCY

Category

Potential Energy Savings of best available

technologies vs. low-efficient products

Air Conditioning Units 70%

Lighting 70% - 80%

Washing Machines 30%

Refrigerator/freezers >50%

Televisions 80%

Source: TopTen EU/Spain

ENERGY-EFFICIENT APPLIANCES ARE WIDELY AVAILABLE BUT LIFE-TIME COST CALCULATION NOT COMMON

• Consumers in all of the target countries could benefit from

energy-efficient appliances Since they consume less electricity to operate, they result in lower

electricity costs for the consumer (not always visible due to increasing fuel surcharge rates)

• National benefits in terms of lower fuel imports and reduced

environmental impacts

• However, purchasing of energy-efficient appliances could

require more up-front investments Consumers may require additional financing that will repay through

energy/operational cost savings

CARIBBEAN HOUSEHOLDS VERY OFTEN USE HIRE PURCHASE CONTRACTS

Source: GIZ/OECS, ECELP Survey 2012, data from SLU

25% 34%

43% 31%

23%

40%

47% 27% 46%

31%

15%

1%

5%

2%

Fridge/ freezer combi

Freezer Fan mobile Washing machine

TV (Color CRT) TV (LCD/Plasma)

How was the appliance purchased?

Cash Hire Purchase Loan

ENERGY EFFICIENCY IN THE BUILDING SECTOR

Focus Insulation of roofs and walls, shading of windows, double glazing, use of natural air-flow and daylight, use of energy-efficient construction material

Energy Saved Varies from case to case. Under optimal conditions up to 100% possible. In other cases (exit situation with no use of AC) improvement of inner room comfort.

Requirements Construction material and components need to be available.

Barriers No legal requirements or financial incentives for energy-efficient building. Even professionals have limited know-how and experience. Most material has to be imported at higher costs.

Payback time Depends on individual cases, but many low-investment measures possible with payback periods of less than 10 years.

Supporting incentives

Almost none so far as energy-efficient building has not been seen as a priority in the past. Some initiatives have supported energy audits in specific sectors (e.g. for hotels and guest-houses)

• Building codes difficult to

implement with insufficient

administrative enforcement

capacity

• Financial and fiscal incentives

could stimulate the market

• Knowledge base improvement

and advisory services are

essential

BARRIERS TO SUSTAINABLE ENERGY FINANCING IN THE CARIBBEAN REGION

Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

www.mc-group.com

AGENDA

• The case for SET investments

• Regulatory framework

• Financial incentives available in target countries

• Barriers for the consumers

• Barriers for the financiers

SET INVESTMENTS: WIN-WIN FOR FINANCIERS AND CONSUMERS

• SETs generate energy savings that produce long-term savings or an income stream

• This improves free cash flow for the consumer and enables them to more easily

service debt

$2,633 $3,164 $3,723 $4,310 $4,927

$13,331 $14,013 $14,730 $15,484 $16,276

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Yearly electrical bill without investing Yearly electrical bill after investing + loan payments Yearly net savings

Loan is

paid off

REGULATORY ENVIRONMENT IN TARGET COUNTRIES

REGULATORY ENVIRONMENT FOR SET INVESTMENTS DIFFERS FROM ONE TARGET COUNTRY TO OTHER

Coun

try

Electric

utility

NEP

approved

Feed-in

permission

Feed-in tariff Net-metering Observations

SVG VINLEC Yes,

February

2009

Yes, voluntarily

by VINLEC

no yes Up to 10 kW for

individuals

SLU LUCELEC Yes, June

2010

Yes, voluntarily

by LUCELEC,

ceiling: 3 MW

no yes Up to 10 kWp or based

on special agreement

GND GRENLEC no Yes, From 2011:

0.45 EC$/kWh

Yes till middle of

2011 with ceiling

of 300 kWp

Change fo GRENLECs

policy in 2011 after

arrival of 300 kWp-limit

BBD BL&P no Yes, based on

“RE rider” for

up to 1.6 MW

or 200 systems

1.8 times the

fuel surcharge,

minimum 0.315

Bd$/kWh

“RE-Rider” approved

by Fair-Trade

Commission

DOM DOMLEC no Yes, by law PPA to be to be

defined

individually

ESA was amended in

2009, Independent

Regulatory

Commission in place

Grants Rebates VAT Reduction Capital Subsidies Import Duty Waiver

Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines





The country has implemented the financial incentive The country is drafting the financial incentive The country has no financial incentive

FINANCIAL INCENTIVES STILL NEED FURTHER DEVELOPMENT

THERE ARE TWO MAIN BARRIERS THAT PREVENT SETS INVESTMENT

• General awareness

• Upfront investment cost

• Consumer creditworthiness

• Loan terms

Consumer Barriers

• Equipment and installer quality

• Transaction costs

• Financing tools

Financier Barriers

THE FOUR MAIN BARRIERS THAT CONSUMERS FACE

Consumer Barriers

General Awareness

Upfront Investment

Costs

Consumer Creditworth

iness

Loan Terms

CONSUMERS NEED MORE INFORMATION BEFORE INVESTING IN SETS

General Awareness

• The typical consumer…

Spends a large proportion of their paycheck on energy costs.

Is unfamiliar with relevant technologies for their home.

Is unaware of the possible positive benefits of investing in SETs.

• Many questions regarding the costs and benefits as well as regarding...

MANY CONSUMERS NEED FINANCING TO AFFORD SETS

Benefits Costs • SETs typically cost more

than their conventional

product counterparts

• Costs are prohibitively

high for many consumers

Can take months / years for investment recovery and to generate savings

Upfront Investment

Cost

SOME CONSUMERS MAY LACK THE CREDITWORTHINESS TO ACCESS FINANCE

• Consumers and project developers may lack the

necessary creditworthiness and collateral to access

financing

• Our research indicates financiers may require high

collateralization for SET financing

This can be cash or property

Consumer Credit-

worthiness

EVEN CREDITWORTHY CONSUMERS MAY FIND THE LOAN TERMS PROHIBITIVE

• The loan tenors and the interest rates typically available

for SET financing can make SETs cost-prohibitive

Consumer loan tenors are 12-36 months, but SET lifetimes are usually 25-30 years

• Our research indicates that many consumers currently

investing in SETs have higher incomes and are able to

afford the technology without the need for financing

Loan Terms

Financier Barriers

Transaction Costs

Financing Tools

Equipment and

Installer Quality

THE THREE MAIN BARRIERS THAT FINANCIERS FACE

UNCERTAINTY ABOUT EQUIPMENT QUALITY INCREASES RISK TO THE FINANCIER

Determine which product

is EE

Assess reliability and

calculate payback

Lack of standards and labels poses

challenges for financiers

Understanding and trusting

labels

Revenue stream can become non-existent due to a faulty product

Some technology is non-suitable for

the region Equipment Quality

UNQUALIFIED INSTALLERS INCREASE THE RISK FOR FINANCIERS

• Poor installation can ruin

equipment, thus SET will not

provide savings

• Without savings, consumers

lack additional cash flow to

service debt

• Lack of national and regional

vetting, warranties and

certifications perpetuates cycle Installer Quality

FINANCIERS FACE A ‘CHICKEN AND EGG’ SCENARIO

• High transaction costs make

lending for consumer level

SETs unattractive

High customer acquisition costs

Small portfolio size

• No market growth without

development of financial

products

Transaction Cost

HIGH CUSTOMER ACQUISITION COSTS

• Lack of customer awareness

and demand

• Consumer level RE and SET

is typically small

• Credit unions and local

banks tend to provide

smaller value loans, unlike

larger banks in the region

0%

20%

40%

60%

80%

100%

120%

140%

160%

Credit Union Penetration Rate in the Region

Source: World Council of Credit Unions, 2012

Transaction Cost

SMALL PORTFOLIO SIZE DOES NOT DRAW ENOUGH ATTENTION AND RESOURCES

• Sustainable energy is a small

portion of FI’s portfolios

• Other portfolios are much

larger (e.g. auto loans) and

receive more attention

• No incentive to create

products for small demand

Transaction Cost

LACK OF FINANCING TOOLS TO CREATE CONSUMER SCALE RE AND EE RELATED LOAN PRODUCTS

• Limited availability of practical tools and resources to

create products

FIs with no experience in RE related lending usually charge higher interests

• Main areas where support is needed are:

Risk evaluation

Payback calculation

Financing Tools

DISCUSSION OF BARRIERS UNIQUE TO THE CARIBBEAN

THE FINANCING LANDSCAPE IN THE CARIBBEAN REGION


FINANCIAL INSTITUTIONS

Credit Unions Commercial

Banks Development

Banks

• 41% average penetration rate

• $5,000 average loan size

• Typical loans: home mortgages, auto loans, small equipment, etc.

• 3 intl. commercial banks & many local commercial banks

• Typical loans: Commercial entities and higher income. Micro businesses and households (region dependant).

• International, regional and national

• Typical loans: Financing windows or lines of credit. Portion may be dedicated to RE/EE lending at subsidized rates.

CONSUMER CREDITWORTHINESS EVALUATION CRITERIA

Ability to pay

• Present and projected disposable income available for debt service

Willingness to pay

• Even though able to pay, consumer may prioritize other payments

• More difficult to predict late or defaulted payments

Collateral available

• Can be cash, property or the asset itself

• Incentivizes customer to repay, or financier claims the collateral

Down payment

• Upfront payment

• Helps evaluate ability to pay and set favorable loan terms

AVERAGE LOAN TERMS FOR SET IN TARGET COUNTRIES Loan Type Credit Unions Local Banks Commercial Banks Development Banks

Tenor

Consumer

(Personal or

equipment loan)

Up to 5 yrs (avg.

3 yrs)

24-36 months1 5-6 yrs

Commercial 10-15 yrs 15 yrs 12-15 yrs

Mortgage 25-30 yrs 25 yrs 25 yrs

Collateral

Consumer 10% cash,

sometimes

accept asset as

security

Cash or property secured. Can use

equity in property for 100%

financing. 50% down payment if

equipment itself is the security, as

low as 25% if secured with other

collateral

Commercial, real

estate, retail

Bill of sale on piece

of equipment

Commercial Cash 10% -20%

Mortgage 80% cash or

property

Property

Interest

Rate

Consumer 12% 9% - 10.5% 11% - 15% Fixed interest rate

Commercial 9% - 13% 9%

Mortgage 8% - 10% 7% - 8% 7-8%

Origination

Fees

Consumer

Commercial

Mortgage

Recovery2

Rate

Consumer

Commercial

Mortgage

KEY TAKEAWAYS FROM LOAN TERMS

• Bank rates are more competitive, but loans have specific requirements (e.g.

collateral)

• Less competitive loan terms when offered as personal or equipment loans vs.

mortgages

• Mortgages and refinancing may not always be feasible for consumers

• Shorter loan tenors for equipment loans can distort payback for customer on SETs

• Absence of second hand markets for SETs creates adverse collateral requirements

VALUATION OF SET LENDING IN THE PORTFOLIO

SET loan in FI’s

portfolio

Current risk

perception

Target profit

margin

Target default

rate

Loan term

• SET financing is a formalized product line in some institutions

• Loan promotions can hedge risk by partnering with other stakeholders

GROUP DISCUSSION OF THE FINANCING LANDSCAPE

AVERAGE LOAN TERMS FOR SET IN TARGET COUNTRIES Loan Type Credit Unions Local Banks Commercial Banks Development Banks

Tenor

Consumer

(Personal or

equipment loan)

Up to 5 yrs (avg.

3 yrs)

24-36 months1 5-6 yrs

Commercial 10-15 yrs 15 yrs 12-15 yrs

Mortgage 25-30 yrs 25 yrs 25 yrs

Collateral

Consumer 10% cash,

sometimes

accept asset as

security

Cash or property secured. Can use

equity in property for 100%

financing. 50% down payment if

equipment itself is the security, as

low as 25% if secured with other

collateral

Commercial, real

estate, retail

Bill of sale on piece

of equipment

Commercial Cash 10% -20%

Mortgage 80% cash or

property

Property

Interest

Rate

Consumer 12% 9% - 10.5% 11% - 15% Fixed interest rate

Commercial 9% - 13% 9%

Mortgage 8% - 10% 7% - 8% 7-8%

Origination

Fees

Consumer

Commercial

Mortgage

Recovery2

Rate

Consumer

Commercial

Mortgage

$2,633 $3,164 $3,723 $4,310 $4,927

$13,331 $14,013 $14,730 $15,484 $16,276

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Yearly electrical bill without investing

Yearly electrical bill after investing + loan payments

Yearly net savings

Loan is paid

off

SET PRODUCT OFFERING


SUSTAINABLE ENERGY MORTGAGE PRODUCT OFFERING

Objective:

To offer competitively priced mortgages for RE/EE investments compared to those offered for traditional home mortgages

Needs addressed:

RE/EE has higher upfront cost but can yield savings over long run, if mortgage is adjusted for SET

Opportunities:

Increase mortgage size

Expand customer base

Expand product line offering

Market differentiation

Risks:

Time investment to evaluate installers

Time investment to evaluate eligible RE/EE products

Technologies may underperform

Mortgage Product Offering

• Work with experts (e.g. universities, consultants, government) to

determine qualifying sustainable energy technologies for a new

build or a home improvement (product type and required funds). – Develop a list of possible products offered by several installers or – Form a partnership with a single installer who sells/installs qualified

products

• Determine baseline rates for SET mortgage terms that are slightly

shorter than the baseline for standard home mortgages. – The SET terms would be adjusted depending on customer

creditworthiness.

• Determine terms if the home is sold or owner defaults on loan.

• Promote offering in partnership with approved installers or

associated partners

POSSIBLE STEPS FOR FINANCIERS

ON-BILL FINANCING MODEL

Objective:

To expand the lending market for energy improvements to residential rental units

Needs addressed:

Split incentive problem solved by tying an EE loan to the unit’s gas or electric meter. Monthly charge is less than the monthly savings. Financier expands lending base

by partnering with utility.

Opportunities:




Reduce administrative costs

Risks:

Less control due to partnership with utility

SETs may underperform, leaving borrower with less disposable income

On-Bill Financing

Model


• Engage the local utility to determine the political and logistical feasibility

of instituting an on-bill financing program

• Identify energy improvements that are eligible for an on-bill financing

loan. – Explore a partnership with a vendor that can offer audits for interested customers.

• Determine loan interest rates and terms based on the credit rating and

utility payment history for eligible customers. Provide interest rates are

favorable enough to provide a reasonable return on investment for the

customer

• Agree to terms of partnership with utility

• Determine administrative costs and implement necessary fees

• Promote offering in partnership with utility to the utility customers

PROPERTY ASSESSED CLEAN ENERGY (PACE) MODEL

Objective:

To implement a mechanism for institutions to offer low interest loans for residential energy improvements without the higher administrative costs and risks associated with a traditional loan program

Needs addressed:

Traditional loans are riskier and carry higher interest. PACE integrates repayment mechanism into the property tax bill.

Opportunities:




Reduce investment risk

Scale up

Risks:

Less control of administration due to partnership with local government


PACE Model


• Engage the local government to determine the political and

logistical feasibility of instituting a PACE program

• Identify energy improvements that are eligible for a PACE loan.

– Explore a partnership with a vendor that can offer audits for interested customers.

• Determine loan interest rates and terms based on the credit rating

and tax payment history for eligible customers. Ensure that the

interest rates are favourable enough to provide a reasonable return

on investment for the customer

• Determine administrative costs and implement necessary fees

• Promote offering in partnership with local government

PAYROLL DEDUCTION SCHEME

Objective:

To implement a mechanism for FIs to offer finance for durable consumer goods. The authorizing lender deducts regular loan payments directly from the employee’s payroll.

Needs Addressed:

Consumers don’t have the financial capital to invest in SETs. A FI can mitigate the risks of default by integrating the repayment mechanism into the consumer’s payroll.

Opportunities:


Mitigate risks of default

Reduce transaction costs

Risks:

Less control due to partnership with other entity


Payroll Deduction

Scheme


• Engage the local organisations and companies to assess the

feasibility of instituting an on-bill financing program

– The Financial Institution establishes a relationship with various employers

• The Financial Institution establishes an agreement with the

employer to allow for loan payments to be deducted from

payroll

• The Financial Institution utilizes the payroll deduction scheme

with creditworthy consumers who have at least 1-2 yrs of

employment tenure and a strong employment record

VENDOR FINANCE AGREEMENT

Objective:

To provide quality assurance to the FI and the consumer by offering a minimum warranty and regular service and maintenance agreement.

Needs Addressed:

Address equipment and installer quality issues. Under this structure, the vendor/installer assures the minimum warranty and regularly services the SET.

Opportunities:



Increase willingness to pay


Risks:

Time investment to evaluate installers

Time investment to evaluate eligible RE/EE products

Vendor Finance

Agreement


• The Financial Institution solicits applications for local

vendors to participate in a loan promotion

• The Financial Institution evaluates the applications

(through internal knowledge or a hired consultant) to

determine which vendors are credible

• The Financial Institution establishes an agreement with

the vendor to offer consumers warranties and regular

maintenance – Such an agreement can also include buyback provisions

SECOND HAND MARKET

Objective:

To establish a re-sale market for repossessed SETs to enable FIs to recover some/all of their costs. Partner with companies that offer hire-purchase schemes .

Needs Addressed:

In the event of a consumer defaulting on a SET loan, FIs need a mechanism to recoup their costs. With a second hand market, the SET can be re-sold or re-financed.

Opportunities:



Recoup costs during defaults


Risks:

Time and cost to establish market

Costly diligence and valuation of second hand SET

Second Hand Market


• The Financial Institution establishes a relationship with a

large retailer (such as Courts) to offer competitive

financing to consumers – Many large retailers already offer financing on SETs, so a

partnership with an FI can help make SETs more affordable to consumers

• The Financial Institution establishes an agreement with

the large retailer to offer financing for SETs

• The retailer agrees to re-possess and re-sell or buyback

the SET in the event of default.

SOLARIZE

Objective:

To expand the market of residential solar loans by increasing the financial feasibility through group purchasing and by mitigating the customer inertia problem through community organizing.

Needs Addressed:

Residential solar is still a nascent market due to high upfront costs, unfamiliarity with the technology, and a complex decision process.

Opportunities:




Overcome customer inertia problem

Risks:

Solar may not be financially feasible even with the discount

Technical issues may prevent potential customers from installing solar

Solarize


• Select a qualified installer through a Request for Proposal process

• Negotiate an installed price for a residential solar installation

through the program. – Some programs will offer a tiered pricing structure based on how many

people sign up

• Set a sign up deadline for interested customers

• Engage the local community through a marketing campaign

focusing on the limited time offer and financing options

• Once the deadline is reached, work with the installer to review the

houses that have signed up to ensure that they are technically

feasible for a solar installation

• Contract with the residents that have roofs feasible for solar

GROUP CASE STUDIES

THANK YOU!

Presenters: Sean Flannery, Chief Operating Officer, Director of Investable Sustainability

Christina Becker-Birck, Senior Consultant

WHAT ARE SUSTAINABLE ENERGY TECHNOLOGIES (SETS)? · Energy Saved Up to 80% of electricity can be...

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