Capacity Building of Banks and Financial Institutions for Energy Efficiency Project Financing

1. Capacity Building of Banks and Financial Institutions for Energy Efficiency Project Financing Module 3Business Models for Energy Efficiency Project Implementation Partnership to Advance Clean Energy-Deployment (PACE-D)Technical Assistance Program

2. Presentation Outline • Summary of Implementation Models • Overview of Performance Contracting • Performance Contracting Business Models • Illustrative ESCO Project • Structure of Energy Services Agreements • International Perspectives • Experience in India • Proposed BEE Funds • Partial Risk Guarantee Fund • Venture Capital Fund

3. Summary of Implementation Models • Simple models • Corporate Lending (balance sheet based) • Energy Audit Model • Performance Contracting Models • Shared Savings Model • Guaranteed Savings Model • Deemed Savings Model • Energy Supply Contracting

4. Energy Audit Model • Many EE Projects are implemented by the Project Hosts themselves based on recommendations by energy auditors (individual or firm) for retrofit or change of energy-using equipment in existing facilities. • BEE has implemented a program for certification of energy auditors.  • Financial commitments are made by the Project Hosts and the energy auditor is confined to being a technical advisor. • Some audit models also include a “success fee” for the auditor based upon achievement of energy cost savings. • For the Project Host and the Lender, the EE Project is a normal capital expenditure eligible for funding under regular lending programs.

5. Overview of Performance Contracting for Energy Efficiency

6. Energy Services Business Models Energy Services Business Models Shared Savings Outsourced Energy Management Guaranteed Savings Deemed Energy Savings

7. Energy Savings Performance Contracts Performance contracts are generally implemented by energy services providers, commonly known as ESCOs

8. ESCO Services

9. Additional ESCO Services

10. Key Features of ESPCs

11. Energy Services Value Chain

12. Examples of Energy Services

13. Shared Savings Model • Energy Services Agreement (ESA) between ESCO and host facility • Financing Agreement (FA) between ESCO and financial institution (FI) • ESA specifies: • ESCO finances project – generally no investment by host • ESCO receives share of actual measured cost savings • Savings share to ESCO and term of agreement are agreed upon • FA specifies: • ESCO equity investment, FI debt financing • Interest rate and term of loan • ESCO makes loan repayments from its share of savings

14. Shared Savings Model Payment Security Mechanism Escrow or TRA account

15. Guaranteed Savings Model • Energy Services Agreement (ESA) between ESCO and host facility • Financing Agreement (FA) between financial institution and host facility • ESA specifies: • ESCO implements project and guarantees cost savings, host pays ESCO • If savings are lower than guarantee, ESCO pays the difference; if higher, ESCO may get a “bonus” payment • M&V protocol and terms of payment to ESCO are agreed upon • FA specifies: • Host equity investment, FI debt financing • Interest rate and term of loan • Host makes loan repayments from savings

16. Guaranteed Savings Model Payment Security Mechanism Escrow or TRA account

17. Deemed Energy Savings Model • Energy Services Agreement (ESA) between ESCO and host facility with a fixed price for services provided. • Financing Agreement (FA) between ESCO and financial institution (Similar to Shared Savings Model). • Agreement between ESCO and government or utility under which ESCO receives payments based on deemed savings. • ESA specifies: • Services provided by ESCO • Fixed payment by host facility for ESCO services • FA specifies: • ESCO equity investment, FI debt investment • Interest rate and term of loan • ESCO makes loan repayments from host and utility/government payments

18. Deemed Energy Savings Model

19. Outsourced Energy Management Model • Also known as Energy Supply Contracting • Agreement between ESCO and host facility under which ESCO takes over operation and maintenance of the energy-using equipment in host facility • ESCO sells the output (e.g., steam, heating/cooling, lighting) to the host facility customer at an agreed price (generally fixed over a long period of time) • ESCO invests in all equipment upgrades, repairs, etc. to improve energy efficiency • Ownership typically remains with the host facility (however, in some cases, ESCO may assume ownership of equipment).

20. Outsourced Energy Management Model

21. Illustrative Example of ESCO Project

22. Project Economics

23. Project Economics

24. Guaranteed Savings Results

25. Shared Savings Results

26. Indicative Structure of ESA • Energy Savings • Billing and Payment • Transfer of Financed Assets • Force Majeure, Events of Default & Termination • Dispute Resolution • Insurance • Other Clauses in the ESA • Technical Matters Recitals Definitions Covenants Term Scope of Work Facilities Construction Operation and Maintenance Financing and Ownership of Assets

27. International Perspectives

28. International Experience - USA

29. ESCO Projects in the U.S. • ESCO projects have been a big success in US Govt. • Key contributors to success: • strong legislative and executive backing • umbrella contracts/simplified procurement • dedicated support organization/project facilitation

30. IFC/GEF – Risk Guarantee Program

31. Structure of CEEF Program

32. CEEF Results • Provided risk guarantees to large number of projects - $49.5 million in guarantees - Default rate was < 0.5% • Demonstrated low risk & high return of EE projects and induced banks to substantially increase loan portfolio • High leveraging of IFC/GEF funds achieved – Total project investment in excess of $200 million • Bank lending without PRG exceeded with PRG – In Hungary, while the projects with guarantees involved about $20 million in investments , while the non-guaranteed lending was over $200 million • Also a large $250 million ESCO contract was signed by a consortium that included OTP Bank • Bank lending activity continued after end of IFC program

33. Experience in India

34. Thank youDilip R. LimayeFinance Team LeaderUSAID PACE-D Technical Assistance Programdlimaye@srcglobal.comwww.pace-d.com