Energy Finance Overview Joel Freehling

1. Energy Finance Overview • Joel Freehling South Africa Energy Efficiency Workshop Johannesburg, South Africa May 24, 2012

2. Speaking Agenda • Introduction • Key Issues in Energy Efficiency Finance • Developing Opportunities in South Africa • Successful Financing Models in Energy Efficiency

3. My Background • More than 10 years experience designing financial products to support efficiency and alternative energy • Co-Chair one of the largest energy efficiency finance conferences in the US • Currently oversee several utility led efficiency programs • Financial Manager for US$100MM annual incentive program (goal is reduction of ~750MM kWh per yr) • Serve on Loan Committee for US$5MM loan fund that supports efficiency for industrial facilities • Direct project on large multi-tenant office buildings (reduction goal of ~8MM kWh per yr)

4. Conditions Correlated with Growth of the Energy Efficiency Marketplace • Energy prices trending upwards • Enabling policies from government • Utility programs and incentives • Energy efficiency initiatives • New regulations that support energy efficiency http://www.ecee.org/pubs/financing.pdf, see page 8-9

5. Favorable Conditions Exist in South Africafor Market Expansion • Utility incentives and support • Strong government support and leadership • Growing sophistication of market players • Appropriate price signals • Existing training and certification platform • Significant donor interest • Large and diverse SME marketplace

6. Developing an Energy Efficiency Marketplace Opportunities exist to grow the efficiency marketplace to scale with a focused program: • A variety of issues keep the market from operating efficiently • Lack of financing is only one piece – although a critical one • Integrated program design is needed

7. Key Elements of an Integrated Approach • Increasing demand for energy efficiency products • Energy efficiency is not top of mind for most SMEs • Identifying the efficiency opportunities • Finding the right technologies/applications • Managing performance risks • Ensuring projected pay-backs are realized • Keeping transaction costs manageable • Many energy investments are low cost • Developing the value proposition for financial institutions • Alignment with existing strategies and goals

8. Demand Generation The Bad News: • Across the globe, energy efficiency does not rank as a high priority for SMEs The Good News: • When energy costs are rising and there is strong support from utilities and the government, the EE marketplace develops • Most SMEs recognize they will save money by investing in efficiency • When the process is made easy and upfront costs kept to a minimum, SMEs will participate Proper program design is critical

9. Keys to Successful SME Engagement • Keep the process simple • Limit upfront costs • Focus on opportunities with short pay-backs • Work through qualified contractor base • Use influence of utilities to “sell” efficiency • Ensure positive cash flow to make it a “no-lose” proposition

10. Efficiency Opportunity Identification Standard: Typically focused on retail trade/real estate • Common technologies (lighting, refrigeration, drives) • Audit not required – can go straight to bid process • Less risk that projected savings won’t be achieved • Smaller size Custom: More common in manufacturing • Often involves process improvements (steam, pressure & water efficiencies) • Often involves unique configurations of technologies • Requires upfront audit and rigorous analysis on back end • More risk of savings not materializing • Larger size

11. Managing Risks that Savings Will Not Materialize • One of the most complex issues for energy finance – end users and financial institutions are equally skeptical that savings will be achieved • Performance risks come from multiple sources: • Inaccurate upfront analysis • Normal variations among and across products • Contractor/installation issues • Price changes • User issues • Hours of operation changes • Reduced production

12. Overcoming Performance Issues • Pre-certify contractors and energy auditors • Pre-identify specific technologies and uses • Spot-checking workmanship • Leverage Eskom’s M&V processes • Explore performance guarantees • Leverage product and contractor warranties • Third parties (In US, insurance companies entering field) The marketplace must be organized to deliver a quality product (typically, NGOs or utilities play this role)

13. Managing Transaction Costs • Since the most cost effective technologies are inexpensive to implement, projects often are low cost • Keeping transaction costs manageable is critical • Aggregation becomes important, especially to get financial institutions interested • Build into existing projects • Market to existing clientele • Focus on customers with multiple locations • Provide financing to ESCOs (such as using POF financing)

14. Value Proposition for Financial Institutions Deepen relationship with existing customers • Promote Eskom rebates and cost effective opportunities • Encourage EE to projects requesting financing • Market to specific customer segments, such as corporate clients, to help them achieve sustainability goals Acquire new customers • Rebranding/re-purposing existing product • Purchase Order Finance Product • New products focused on specific segments • Make use of credit guarantee programs Promote brand in new ways • Sustainability can lead to ancillary business

15. Existing Financing Models • Growing set of financing strategies across the globe • Variety of parties, roles and configurations • Important to match financing program to local conditions and institutions • Innovation is a fundamental aspect of energy finance

16. The Parties involved in Energy Finance Government Utilities Donors Enabling environment Incentives Financing Incentives Financing Contractor certification Technical Assistance Marketing Support M&V Loan Capital Credit Guarantees Technical Asst Contractors/ ESCOs Financial Institutions Insurance Cos Installation Performance Guarantees Financing Marketing Support Performance Guarantees http://aceee.org/white-paper/energy-efficiency-finance-101

17. Financing Models - Conventional Donor Community Loans/Guarantees Financial Institutions Utilities Incentives M&V Loans End User Contractors Installation

18. Financing Models - ESCO Donor Loans/Guarantees (DCA Product) Loan Repayment (Purchase Order Financing) Financial Institutions Utilities Incentives M&V Loans End User Contractors Installation Performance Guarantees Performance guarantees Insurance Co.

19. Appropriate Models for Serving SMEs • Conventional and ESCO models already exist and can be tailored for the efficiency marketplace • By lending against the Eskom rebates and using guarantees, such as through the USAID DCA facility, risks can be reduced appreciably • Key is developing a system to deliver loans at necessary scale to interest commercial banks

20. Opportunities for Financial Institutions • Educate customers about efficiency opportunities, such as by having Eskom and ESCOs present about incentives and paybacks from specific technologies • Explore mechanisms to use existing loan products, such as Purchase Order Financing, to help promote ESCO expansion and development • Segment marketplace to find specific technologies that are easily scalable, such outdoor LED lighting • Engage franchises about working with their franchisees on implementing specific technologies

21. Next Steps for Market Development • Partners to engage in the marketplace to test models for reaching the SME market at scale • Explore how to expand use of existing bank products such as purchase order financing (POF) and credit guarantee schemes such as the USAID DCA program • Look at developing new solutions for gaps in the marketplace where loan sizes are small and delivery models inefficient • Public and Private sector engagement to facilitate successful pilot programs that can be scaled up and replicated effectively

22. THANK YOU And Questions?