Opportunities and Challenges to ESCO Model in Vietnam

1. Opportunities and Challenges to ESCO Model in Vietnam • Nguyen Dang Anh Thi • January 14, 2013

2. Table of Contents

3. Energy Service Company (ESCO) Business Model • What is an ESCO? • ESCO is an organization that offers a broad range of energy-saving solutions, including energyaudits, design and implementation of energy conservation measures, operation and management of introduced facilities, and procurement of project funds. • The basic concept of ESCO is that the client does not have to incur any upfront capital investment and is only responsible for the payment for the investment made or arranged by the ESCO. • Two key remunerationmodels of ESCO contracts: shared savings and guaranteed savings Energy Consumption or utility cost Guaranteed Client’s financial gain E Client’s financial gain ESCO’s fee Repayment Interest Capital investment Energy Consumption or utility cost Energy Consumption or utility cost During ESCO project Before ESCO project After ESCO project

4. Energy Service Company (ESCO) Business Model Shared Savings Financial Model Source: IFC energy service company market analysis (2011)

5. Energy Service Company (ESCO) Business Model Guaranteed Savings Financial Model Source: IFC energy service company market analysis (2011)

6. Status of ESCO in Vietnam • Overview • The ESCO market in Vietnam is still in its infancy and unlikely to develop without sustained government support. • There are about 15 “so-called” ESCOs operating in Vietnam. These are generally small in size and weak in asset base. • Data on level of ESCO activities is limited • Majority of ESCOs in Vietnam remain incapable in terms of finance and technology, therefore they only offer simple services and haven't fully met market demand • Most of ESCOs can not access to financing due to limited financing capacity and weak balance sheet.

7. Legal Framework • The Law No. 50/2010/QH12on Energy Efficiency and Conservation took effect in 2011; • Decree No. 21/2011/NĐ-CP of the Government provides guidance on the implementation of the Law on Energy Efficiency and Conservation; • Decision No. 1427/QĐ-TTg dated 2nd Oct. 2012 approving the National Target program for Energy Efficiency and Conservation in period 2012-2015; • Decision No. 1393/QĐ-TTg dated 25th Sep. 2012 approving the National Green Growth Strategy; • The Law No. 59/2005/QH11 on Investment; and its guidance documents; • The Law No. 60/2005/QH11 on Enterprises; and its guidance documents; • The Law No. 14/2008/QH12 on Corporate Income Tax; • The Law No. 45/2005/QH11  on Import Tax and Export Tax.

8. Market Opportunity for ESCO Development in Vietnam • Huge market potential • Power consumption is forecast to increase from 81TWh in 2010 to 451TWh in 2030 while supply is shortage. • More than 1,200 key energy-consumption facilities using over 1,000 TOE per year • The total investment needed for EE projects during 2011-2015 is US$ 847m • Fuel shortage after 2015 • Vietnam has started to import steam coal and oil products over the last 5 years • Although oil is currently its largest source of export revenue, Vietnam is projected to become a net importer by 2015 Source: Reexcapitalasia, October 2010

9. Market Opportunity for ESCO Development in Vietnam (Cont.) • Current efforts of the Government and international organizations to create electricity market based on competitiveness • Removal of fuel subsidies • Power sector reform based on competitive market • Interest of stakeholders in energy efficiency market • Campaign on EE launched in Nov 2012 under which Vietnamese firms having EE projects will have an opportunity to borrow capital from various financial institutions such as: • IFC at $100 million • Danish embassy at $30 million • Asian Development Bank at $100 million • World Bank at $70-$100 million, and • Japan International Cooperation Agency at $50 million

10. Energy Efficiency in Industrial Sector Source: Reexcapitalasia, October 2010

11. Energy Efficiency in Commercial Sector Source: Reexcapitalasia, October 2010

12. Major Challenges for ESCO Development in Vietnam • Difficulty accessing financing • Scarce capital and immature banking sector • ESCOs are not aware of how to access financing • Unawareness of existing grants, loans, credit facilities offered by a large number of international financial support mechanism. • Unclear system for accessing domestic source of capital • ESCOs and their clients are unknown or not considered creditworthy • Lenders is lack of familiarity with EE financing • Lenders is lack of confidence in return of EE projects • High administrative and transaction costs • related to technical challenges, time-consuming contract negotiation, lack of a legal and institutional framework and complicated government procurement rules

13. Major Challenges for ESCO Development in Vietnam • Governmental supports in terms of policies and measures are not sufficient: • No tax incentives • Lack of an effective overarching and comprehensive EE policy framework • Insufficient financial support and assistance • Electricity price subsidies negatively effect energy investment • EE is not yet regarded as top business priority by many companies • Users are not fully aware of EE and not confident that equipments deployed can achieve projected savings • Challenges of the EPC business model: • Low profit margin due to electricity price subsidy • The uncertainties associated with remuneration based on guaranteeing savings • Risks associated with clients who do not fulfill their end of the contract • The costs associated with preparing complicated bids that may not be successful

14. Case Study 1: Thailand’s Energy Efficiency Revolving Fund (EERF) • EERF • Founded in 2003 • Total budgeted size: US$235mil Credit lines of US$ 2.5-10 mil/bank Repayment within 10 years Interest (0.5%/year) • 13 banks Repayment + Interest (max. 4%/year) max amount ~ US$1.6m/project Loan term: max. 7 years • EE/RE Developers Resulted • Projects financed: 294 • Total investment: UD$519 mil • Financial saving: US$177 mil/year • Energy savings: 320 ktoe/year • CO2 reduction: 1 mil ton annually Source: Center for Clean Air Policy, 2012

15. Case Study 2: Thailand’s ESCO Fund ESCO Fund (US$32.6 mil) • Phase 1: 2008-2010 • Phase 2: 2011-2012 • Non-profit foundation • Equity investment: (10-50% of project, max US$1.6 mil, 5-7 years investment) • ESCO venture capital: (max US$1.6 mil, 5-7 years investment) • Equity leasing: (up to 100% of project cost, max US$0.3 mil, payback <5years, interest rate 4%) • Technical Assistance: (up to US$3250/project) • Credit guarantee facility: (up to US$0.3 mil/project, < 5 years, 1.75% guarantor fee) • Carbon credit trading • EE/RE Developers Resulted • Projects financed: 39 • Total investment: UD$166 mil • Financial saving: US$30 mil/year • Energy savings: 23.97 ktoe/year Source: Center for Clean Air Policy, 2012

16. Recommendations for ESCO Development • Having a focal agency to coordinate all EE programs funded by local and international organizations. • Developing financial support mechanisms: Dedicated debt agencies, development funds or grants, loan guarantees… Thailand’s EE Revolving Fund and ESCO Fund could be suitable models to learn. • Building legal framework for ESCO business • Capacity building: ESCOs, bankers, end-users, governmental agencies.

17. KEY ESCO PLAYERS • APPENDIX

18. Key ESCO Players

19. Key ESCO Players

20. Key ESCO Players

21. Key ESCO Players Further info: ndanhthi@yahoo.com