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Financing Options for Water and
Energy Efficiency Projects
                      Hotel Hilton Hanoi Opera
                             9th of March 2010
                                By: Sudha Setty
Financing an Energy Efficiency Project in
Water Supply
• Energy Services
  ▫ Energy Performance Contracts -- Energy Service
    Company (ESCO) financing
     Guaranteed Savings
     Shared Savings
• Turnkey
  ▫ Municipality borrows from private financial institutions
    or development banks (i.e. ADB, World Bank)
  ▫ Municipality self financing (O&M funds)
What is an ESCO?
• Definition
  An ESCO is a business that develops, installs,
  maintains, and finances interventions designed
  to improve the overall efficiency and operational
  costs for a utility over an agreed period of time.
• The cost of the services provided by the ESCO
  are included in the project cost and repaid
  through the generated savings.
Do You Need an ESCO?
 • Make a self evaluation of your strengths and weaknesses

Strength/Weakness              If you answer YES              If you answer NO

Do you need help in                                        Consider contracting out
getting internal buy-in   Consider an ESCO                 the needed services.
into the project?
Do you need help in       Consider an ESCO. By             Consider contracting out
identifying and           deciding early to use one,       only the necessary
Implementing              you may reduce project           services. Use in-house
projects?                 implementation costs and         staff where possible.
                          speed up project installation.

Do you lack available                                      Use in-house staff where
                          Consider an ESCO with the
and/or experienced                                         possible and consider
                          expertise to ensure timely
staff to install and                                       contracting out needed
                          project implementation.
manage the project?                                        services.
Do You Need an ESCO?

Strength/Weakness           If you answer YES             If you answer NO

Do you lack available   Consider an ESCO since it      Use your staff with or
and experienced staff   provides these and other       without supervision by
to maintain the         services. You can also         external energy
equipment?              contract with a maintenance    consultants
                        firm.
                        Consider an ESCO to
                        provide financing or to        Use your funds or secure
Do you lack project     assist you in securing it.     outside funds from
financing?              ESCOs typically secure         municipal leasing
                        financing from third parties   companies, banks,
                        such as municipal leasing      states, etc.
                        companies, banks, states.
Energy Performance Contracting
• Energy Performance Contract
  ▫ A performance-based procurement method and financial
    mechanism
  ▫ Agreement with an ESCO that will identify, evaluate and
    implement energy saving opportunities. Improvements will be
    paid for through utility bills savings.
  ▫ An arrangement where the exact benefits are only known
    afterwards.
  ▫ Can recognize two types of savings:
      Energy Cost Savings
      Energy-Related Cost Savings
Energy Performance Contracting
• Two main types of contracts (combinations and variations
  exist)
  ▫ Shared Savings
      Financial risk lies with the ESCO, savings are shared between
      ESCO and water utility for a negotiated period of time
      Municipality will receive a certain percentage of the savings but
      ESCO does not guarantee the magnitude of those savings
  ▫ Guaranteed Savings
      ESCO guarantees that savings will be sufficient to cover
      investment cost, if not the ESCO will pay the difference
      External financing is brought in by the municipality or ESCO
      Excess savings can be shared between the municipality and
      ESCO
Why Use Performance Contracting?
• Excessive energy costs
  ▫ Strong potential for significant savings
• Limited access to capital resources
  ▫ Lengthy project funding cycles
  ▫ Competition with other capital and service needs
• Inadequate, old, or faulty equipment
  ▫ Frequent repairs required/growing backlog of deferred
    maintenance
  ▫ Underfunded maintenance budget/high costs
• Limited staff resources/expertise
  ▫ Limited staff to bid and manage all phases of project
  ▫ Untrained, high turnover, excessive overtime
Energy Performance Contracts
- Benefits
 •   More budget available for core business
 •   Decreased repairs and lower maintenance costs
 •   Improved operational efficiency – reduced energy costs
 •   Performance guarantees/persistent long-term energy
     savings
 •   Financing can be made available
 •   ESCOs package all services in single contract / single
     source of accountability
 •   Technical & operational training opportunities
 •   Local subcontractors are utilized, benefiting the
     businesses in the local community
Performance Contracting Under Guaranteed
Savings Mechanism
• Actual saving will fluctuate, but should always be greater
  than the guaranteed amount

  S                                           Actual
  a                                           Estimated
  v                                           Guaranteed
  i
  n
  g 1     2    3    4 5 6 7 8          9   10
  s                 Contract Year
Payback Mechanism Under Guaranteed
Savings
            Payment for services
   ESCO                            Water Utility
            Guaranteed savings




                                                 Loan Payment
                                     Financing
                                     Financial
                                    Institution
Payback Mechanism Under Shared Savings

                              Payment for services
        ESCO                                         Water Utility
                               Share of savings
               Loan Payment
   Financing




   Financial
  Institution
Energy Performance Contracts
- Restrictions
• Higher Costs
  ▫ Water utility has to pay for the risk transferred to the ESCO
• Implemented efficiency measures may be restricted to
  the most profitable and less risky for the ESCO
  ▫ By performing only the cheapest options with the shortest
    paybacks other worthy options may be left untouched. This
    may constrain the ability to perform energy upgrades on
    systems with longer payback periods.
• Risk of losing skills and control
• Complex contracts
• Additional cost due to M&V
Energy Performance Contracts
- Implementation Challenges in India
• Lack of knowledge and awareness about energy
  performance contract implementation among
  stakeholders
  ▫ Long project development time
• Availability of financing options
• Payment guarantee mechanisms to ESCOs
• Disputes over quantifying savings resulting from
  the projects and distrust between the project
  parties
Case Study: Tamil Nadu 2007-09
- Background
• One of the most urbanized
  states in India
• Hub for several industrial
  activities
• Suffers from severe energy and
  water shortages
• Many inhabitants of the state
  only enjoy running water for a
  few hours a day
Objective
• Create confidence in the use of performance
contracts in public sector among all stakeholders by
ensuring the success of the Tamil Nadu Municipal
Energy Efficiency Program
Tamil Nadu 2007-2009
- Addressing Financing Issues
           Issues                         Solutions

• Availability of Finance to   • TNUIFSL / TNUDF willing to
  ESCOs                          finance ESCOs

• Payment Guarantee            • Setting up of TRA Account
  Mechanism to ESCOs             with electricity bill payment
                                 escrowed
• ESCO projects in India
  often falter/fail due to     • Using The International
  disputes over quantifying      Performance Measurement
  energy savings resulting       and Verification Protocol
  from the project               (IPMVP)
Tamil Nadu Project Payback Mechanism –
Shared Savings
               Loan
 Financial
                          ESCO                   EEM   Municipality
Institution   Repayment




                            Share of savings




                                                                  Share of savings
                                                        Savings
                                               TRA (ESCROW)
Tamil Nadu 2007-2009
- Highlights
• Partnership with Tamil Nadu Urban   • Bid Evaluation process
  Infrastructure Financial Services         EOI – 13 responses
  Limited (TNUIFSL), CMA, ULBs              RFP issued to 8
• Implementing energy efficiency            RFP – 6
  projects in 29 municipalities in          LOI issued to 2 ESCOs
  water pumping and street lighting   • IGA reports in discussion
• 2 Energy Service Companies          • EPC between ESCOs will be
  implementing the project              signed soon


                                         Estimated Cost savings


                                            US $ 800,000/year
Seeking Financing for Energy Efficiency
 Projects
A project appraisal normally includes (IREDA, 2007):
• Promoter appraisal
  ▫ The utilities’ background, credit worthiness, track record with past dealings with
    banks, etc.
• Technical appraisal
  ▫ Realistic projected energy savings
  ▫ Which technology will be used, fit with current processes?
• Financial appraisal
  ▫ Review the estimated cost of the project, proposed means of financing,
    financial and cash flow projections, viability parameters and sensitivity analysis.
• Environmental appraisal
  ▫ Environmental impact such as pollution levels pre- and post-installation
• Legal appraisal
  ▫ All necessary legal documentation completed
Clean Development Mechanism and Voluntary Market
Energy Efficiency & Carbon Credits
Clean Development Mechanism


• The greenhouse gas emission reductions
  generated in energy efficiency projects can be
  traded through the carbon market, and the
  revenue can contribute to the project’s cash flow
International Carbon Markets
• International trade in GHG reductions is a large and rapidly
  growing market
• Is motivated by
  ▫   The Kyoto Protocol
  ▫   Regional programs
  ▫   Voluntary initiatives
  ▫   Governments
  ▫   Private companies
  ▫   Individuals
that have collectively committed billions of dollars to buy
  emission reductions
• Carbon markets have resulted in new capital flows that are
  supporting sustainable energy and other climate protection
  activities.
Carbon Trading Outline

                             Emission Reduction => ER
      Project Host                                              Investor

   • Implement project                                  Emission Reduction Buyer
  activities that create
                                                      •Mandatory obligations
emission reductions (ERs)
                                                       - Emission reduction
    -Energy Efficiency
                                                       commitments (Kyoto
       -Renewable                                   Protocol Annex I Countries)
   -Reforestation, etc.
                                                         •Voluntary Commitments
• Sell ERs to help finance                                   -Companies and
   the project activities                                       Individuals


                             Investment and Technology
Basics of Carbon Credits
• Carbon trading terms
  ▫ 1 CER = 1 metric ton of CO2 equivalent GHG
    reduction.
  ▫ 1 T Co2 ≈1000 Kwh ≈ 1 Mwh
  ▫ In Indian projects 1 Kwh ≈ 0.84-0.89 Kg of CO2
  ▫ Approximate trading value = @ 15 to 20 USD
    /CER
• Approved Methodologies available at
  www.unfccc.int
  ▫ AM 020 – Large scale municipal EE projects
    (above 60 Gwh )
  ▫ AMS II. C – Small scale projects
Carbon Credits under Clean Development
Mechanism
• Developed countries (Annex I countries of Kyoto
  Protocol) committed to reduce their CO2
  emissions
• Developing countries (Non Annex I countries)
  can take up projects which generate reduction in
  greenhouse gases
• This reduction in GHG can be sold to Annex I
  countries to meet their commitment
• Normally larger scale projects
CDM Project - Process

• Feasibility studies                   Project Design

• Project Idea Note and PDD
                                      National Approval
• PDD => Validation report
                                    Validation/ Registration
• Monitoring protocol and quality
  assurance protocol
                                          Monitoring
• Monitoring Report, Verification
  Report and Certification Report
                                          Verification
• Request for Issuance =>
  Certificate of Emission              Project Issuance
  Reduction
Parties Involved in CDM stages
       Design            • Project Participants

      Validation         • Designated Operational Entity (DOE)

                         • Designated National Authority (DNA) of host
      Approval             and Annex I country

     Registration        • CDM Executive Board

   Implementation        • Project Participants

Monitoring & Reporting   • Project Participants

     Verification        • Designated Operational Entity (DOE)

                         • Designated Operational Entity (DOE)
     Certification       • CDM Executive Board
Voluntary Market
• Companies, individuals, and events buy
  emission reductions to reduce their carbon
  footprint
 ▫ not subject to mandatory limitations that wish to
   offset GHG emissions
• The voluntary market has been very small
  compared to the regulatory market, but is now
  growing
• Expectations that voluntary market will become
  quite substantial
Voluntary Market, Buyers and Sellers
• Buyers include:
  ▫ Companies that buy offsets for their own operations
  ▫ Companies that buy offsets on behalf of their customers, such as airlines
    & travel agents, automobile & petroleum companies
  ▫ Events such as G8 Summits, World Cup football/soccer
  ▫ Individuals
• Sellers include:
  ▫ Retailers and wholesalers who buy and resell offsets
  ▫ Project developers who develop GHG reducing activities
• Market intermediaries include:
  ▫ Brokers who connect developers and resellers with institutional ER
    buyers
  ▫ Consultants who help clients select ER suppliers and prepare offsets
    portfolios
Voluntary Market Standards
• Various standards, certification processes, and
  emissions registry services do exist but:
  ▫ no universally accepted standard
  ▫ unregulated
• Some standards are now widely recognized and
  accepted as a designation of credibility:
  ▫ Voluntary Gold Standard
  ▫ GHG Protocol for Project Accounting
  ▫ Climate, Community and Biodiversity Project Design
    Standards
Voluntary Market Advantages and Disadvantages
         Advantages                   Disadvantages


• Lower transaction costs     • Relatively small
  than CDM
                              • Lack of transparency
• Less rigorous procedures
  and standards, suited for   • No formalized procedures,
  smaller scale projects        making it less user and
                                investor friendly
• Innovative
                              • Lower price than CDM
• Flexible                      project
For More Information:
              Alliance to Save Energy- India
          10/5, Rhenius Street, Richmond Town
                 Bangalore – 560025, India
                   Tel: + 91-80-22112072

              Email : pkumar@ase.org
           www.ase.org or www.watergy.org

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7: Financing Options for Water and Energy Efficiency Projects

  • 1. Financing Options for Water and Energy Efficiency Projects Hotel Hilton Hanoi Opera 9th of March 2010 By: Sudha Setty
  • 2. Financing an Energy Efficiency Project in Water Supply • Energy Services ▫ Energy Performance Contracts -- Energy Service Company (ESCO) financing Guaranteed Savings Shared Savings • Turnkey ▫ Municipality borrows from private financial institutions or development banks (i.e. ADB, World Bank) ▫ Municipality self financing (O&M funds)
  • 3. What is an ESCO? • Definition An ESCO is a business that develops, installs, maintains, and finances interventions designed to improve the overall efficiency and operational costs for a utility over an agreed period of time. • The cost of the services provided by the ESCO are included in the project cost and repaid through the generated savings.
  • 4. Do You Need an ESCO? • Make a self evaluation of your strengths and weaknesses Strength/Weakness If you answer YES If you answer NO Do you need help in Consider contracting out getting internal buy-in Consider an ESCO the needed services. into the project? Do you need help in Consider an ESCO. By Consider contracting out identifying and deciding early to use one, only the necessary Implementing you may reduce project services. Use in-house projects? implementation costs and staff where possible. speed up project installation. Do you lack available Use in-house staff where Consider an ESCO with the and/or experienced possible and consider expertise to ensure timely staff to install and contracting out needed project implementation. manage the project? services.
  • 5. Do You Need an ESCO? Strength/Weakness If you answer YES If you answer NO Do you lack available Consider an ESCO since it Use your staff with or and experienced staff provides these and other without supervision by to maintain the services. You can also external energy equipment? contract with a maintenance consultants firm. Consider an ESCO to provide financing or to Use your funds or secure Do you lack project assist you in securing it. outside funds from financing? ESCOs typically secure municipal leasing financing from third parties companies, banks, such as municipal leasing states, etc. companies, banks, states.
  • 6. Energy Performance Contracting • Energy Performance Contract ▫ A performance-based procurement method and financial mechanism ▫ Agreement with an ESCO that will identify, evaluate and implement energy saving opportunities. Improvements will be paid for through utility bills savings. ▫ An arrangement where the exact benefits are only known afterwards. ▫ Can recognize two types of savings: Energy Cost Savings Energy-Related Cost Savings
  • 7. Energy Performance Contracting • Two main types of contracts (combinations and variations exist) ▫ Shared Savings Financial risk lies with the ESCO, savings are shared between ESCO and water utility for a negotiated period of time Municipality will receive a certain percentage of the savings but ESCO does not guarantee the magnitude of those savings ▫ Guaranteed Savings ESCO guarantees that savings will be sufficient to cover investment cost, if not the ESCO will pay the difference External financing is brought in by the municipality or ESCO Excess savings can be shared between the municipality and ESCO
  • 8. Why Use Performance Contracting? • Excessive energy costs ▫ Strong potential for significant savings • Limited access to capital resources ▫ Lengthy project funding cycles ▫ Competition with other capital and service needs • Inadequate, old, or faulty equipment ▫ Frequent repairs required/growing backlog of deferred maintenance ▫ Underfunded maintenance budget/high costs • Limited staff resources/expertise ▫ Limited staff to bid and manage all phases of project ▫ Untrained, high turnover, excessive overtime
  • 9. Energy Performance Contracts - Benefits • More budget available for core business • Decreased repairs and lower maintenance costs • Improved operational efficiency – reduced energy costs • Performance guarantees/persistent long-term energy savings • Financing can be made available • ESCOs package all services in single contract / single source of accountability • Technical & operational training opportunities • Local subcontractors are utilized, benefiting the businesses in the local community
  • 10. Performance Contracting Under Guaranteed Savings Mechanism • Actual saving will fluctuate, but should always be greater than the guaranteed amount S Actual a Estimated v Guaranteed i n g 1 2 3 4 5 6 7 8 9 10 s Contract Year
  • 11. Payback Mechanism Under Guaranteed Savings Payment for services ESCO Water Utility Guaranteed savings Loan Payment Financing Financial Institution
  • 12. Payback Mechanism Under Shared Savings Payment for services ESCO Water Utility Share of savings Loan Payment Financing Financial Institution
  • 13. Energy Performance Contracts - Restrictions • Higher Costs ▫ Water utility has to pay for the risk transferred to the ESCO • Implemented efficiency measures may be restricted to the most profitable and less risky for the ESCO ▫ By performing only the cheapest options with the shortest paybacks other worthy options may be left untouched. This may constrain the ability to perform energy upgrades on systems with longer payback periods. • Risk of losing skills and control • Complex contracts • Additional cost due to M&V
  • 14. Energy Performance Contracts - Implementation Challenges in India • Lack of knowledge and awareness about energy performance contract implementation among stakeholders ▫ Long project development time • Availability of financing options • Payment guarantee mechanisms to ESCOs • Disputes over quantifying savings resulting from the projects and distrust between the project parties
  • 15. Case Study: Tamil Nadu 2007-09 - Background • One of the most urbanized states in India • Hub for several industrial activities • Suffers from severe energy and water shortages • Many inhabitants of the state only enjoy running water for a few hours a day Objective • Create confidence in the use of performance contracts in public sector among all stakeholders by ensuring the success of the Tamil Nadu Municipal Energy Efficiency Program
  • 16. Tamil Nadu 2007-2009 - Addressing Financing Issues Issues Solutions • Availability of Finance to • TNUIFSL / TNUDF willing to ESCOs finance ESCOs • Payment Guarantee • Setting up of TRA Account Mechanism to ESCOs with electricity bill payment escrowed • ESCO projects in India often falter/fail due to • Using The International disputes over quantifying Performance Measurement energy savings resulting and Verification Protocol from the project (IPMVP)
  • 17. Tamil Nadu Project Payback Mechanism – Shared Savings Loan Financial ESCO EEM Municipality Institution Repayment Share of savings Share of savings Savings TRA (ESCROW)
  • 18. Tamil Nadu 2007-2009 - Highlights • Partnership with Tamil Nadu Urban • Bid Evaluation process Infrastructure Financial Services EOI – 13 responses Limited (TNUIFSL), CMA, ULBs RFP issued to 8 • Implementing energy efficiency RFP – 6 projects in 29 municipalities in LOI issued to 2 ESCOs water pumping and street lighting • IGA reports in discussion • 2 Energy Service Companies • EPC between ESCOs will be implementing the project signed soon Estimated Cost savings US $ 800,000/year
  • 19. Seeking Financing for Energy Efficiency Projects A project appraisal normally includes (IREDA, 2007): • Promoter appraisal ▫ The utilities’ background, credit worthiness, track record with past dealings with banks, etc. • Technical appraisal ▫ Realistic projected energy savings ▫ Which technology will be used, fit with current processes? • Financial appraisal ▫ Review the estimated cost of the project, proposed means of financing, financial and cash flow projections, viability parameters and sensitivity analysis. • Environmental appraisal ▫ Environmental impact such as pollution levels pre- and post-installation • Legal appraisal ▫ All necessary legal documentation completed
  • 20. Clean Development Mechanism and Voluntary Market
  • 21. Energy Efficiency & Carbon Credits Clean Development Mechanism • The greenhouse gas emission reductions generated in energy efficiency projects can be traded through the carbon market, and the revenue can contribute to the project’s cash flow
  • 22. International Carbon Markets • International trade in GHG reductions is a large and rapidly growing market • Is motivated by ▫ The Kyoto Protocol ▫ Regional programs ▫ Voluntary initiatives ▫ Governments ▫ Private companies ▫ Individuals that have collectively committed billions of dollars to buy emission reductions • Carbon markets have resulted in new capital flows that are supporting sustainable energy and other climate protection activities.
  • 23. Carbon Trading Outline Emission Reduction => ER Project Host Investor • Implement project Emission Reduction Buyer activities that create •Mandatory obligations emission reductions (ERs) - Emission reduction -Energy Efficiency commitments (Kyoto -Renewable Protocol Annex I Countries) -Reforestation, etc. •Voluntary Commitments • Sell ERs to help finance -Companies and the project activities Individuals Investment and Technology
  • 24. Basics of Carbon Credits • Carbon trading terms ▫ 1 CER = 1 metric ton of CO2 equivalent GHG reduction. ▫ 1 T Co2 ≈1000 Kwh ≈ 1 Mwh ▫ In Indian projects 1 Kwh ≈ 0.84-0.89 Kg of CO2 ▫ Approximate trading value = @ 15 to 20 USD /CER • Approved Methodologies available at www.unfccc.int ▫ AM 020 – Large scale municipal EE projects (above 60 Gwh ) ▫ AMS II. C – Small scale projects
  • 25. Carbon Credits under Clean Development Mechanism • Developed countries (Annex I countries of Kyoto Protocol) committed to reduce their CO2 emissions • Developing countries (Non Annex I countries) can take up projects which generate reduction in greenhouse gases • This reduction in GHG can be sold to Annex I countries to meet their commitment • Normally larger scale projects
  • 26. CDM Project - Process • Feasibility studies Project Design • Project Idea Note and PDD National Approval • PDD => Validation report Validation/ Registration • Monitoring protocol and quality assurance protocol Monitoring • Monitoring Report, Verification Report and Certification Report Verification • Request for Issuance => Certificate of Emission Project Issuance Reduction
  • 27. Parties Involved in CDM stages Design • Project Participants Validation • Designated Operational Entity (DOE) • Designated National Authority (DNA) of host Approval and Annex I country Registration • CDM Executive Board Implementation • Project Participants Monitoring & Reporting • Project Participants Verification • Designated Operational Entity (DOE) • Designated Operational Entity (DOE) Certification • CDM Executive Board
  • 28. Voluntary Market • Companies, individuals, and events buy emission reductions to reduce their carbon footprint ▫ not subject to mandatory limitations that wish to offset GHG emissions • The voluntary market has been very small compared to the regulatory market, but is now growing • Expectations that voluntary market will become quite substantial
  • 29. Voluntary Market, Buyers and Sellers • Buyers include: ▫ Companies that buy offsets for their own operations ▫ Companies that buy offsets on behalf of their customers, such as airlines & travel agents, automobile & petroleum companies ▫ Events such as G8 Summits, World Cup football/soccer ▫ Individuals • Sellers include: ▫ Retailers and wholesalers who buy and resell offsets ▫ Project developers who develop GHG reducing activities • Market intermediaries include: ▫ Brokers who connect developers and resellers with institutional ER buyers ▫ Consultants who help clients select ER suppliers and prepare offsets portfolios
  • 30. Voluntary Market Standards • Various standards, certification processes, and emissions registry services do exist but: ▫ no universally accepted standard ▫ unregulated • Some standards are now widely recognized and accepted as a designation of credibility: ▫ Voluntary Gold Standard ▫ GHG Protocol for Project Accounting ▫ Climate, Community and Biodiversity Project Design Standards
  • 31. Voluntary Market Advantages and Disadvantages Advantages Disadvantages • Lower transaction costs • Relatively small than CDM • Lack of transparency • Less rigorous procedures and standards, suited for • No formalized procedures, smaller scale projects making it less user and investor friendly • Innovative • Lower price than CDM • Flexible project
  • 32. For More Information: Alliance to Save Energy- India 10/5, Rhenius Street, Richmond Town Bangalore – 560025, India Tel: + 91-80-22112072 Email : pkumar@ase.org www.ase.org or www.watergy.org