ENERGY EFFICIENCY PROJECTS : FINANCING &

EVALUATION CRITERIA

Fortnightly Technical Talk For Project Management

By

Zaini Abdul Wahab

Director of Operation

CNS GROUP

14th June 2012

Menara SME Bank

Outline

1. Existing EE Related Funds & Incentives In Malaysia

2. Financing Options To Implement EE Projects

3. EE Project Evaluation

4. Examples Of EE Solutions & Technologies

5. Conclusions

6. What’s Next?

EXISTING EE RELATED FUNDS & INCENTIVES IN MALAYSIA

Green Technology Fund Scheme(GTFS)

Initial RM1.5 billion fund shared by government and banks to improve the

supply and utilization of green technologies in Malaysia

2% subsidized interest rate of the total interest/profit rate

Any technology that suitable for the identified project criteria provided it is a

proven technology

FEATURES PRODUCER OF GREEN

TECHNOLOGY

USER OF GREEN

TECHNOLOGY

Financing size Maximum: RM50 million per

company

Maximum: RM10 million

per company

Financing tenure Up to 15 years Up to 10 years

Eligibility criteria

Legally registered Malaysian -

owned companies (at least 51%)

in all economic sectors

Legally registered

Malaysian -owned

companies (at least 70%)

in all economic sector

www.gtfs.my

EPP9: Chiller Replacement Program

• Eligible for private business entities registered in Malaysia

• Comfort cooling for offices and commercial buildings only

• Must purchase a new eligible EE chiller or replace an existing

chiller due to lifespan (more than 10years) and inefficient existing

chiller within the specified period

No. State/Region Total Targeted Quantity

in 2011* (Refrigerant

Ton,RT)

Percentage

(%)

1 Peninsular 50,400 70

2 Sabah 10,800 15

3 Sarawak 10,800 15

Total 72,000 100

www.saveenergy.gov.my

Fiscal Incentives For EE & RE Projects

Introduced by the government to promote EE & RE

Companies implementing EE measures in their premises (…2015)

• Investment Tax Allowance

• Accelerated capital allowance

• import duty exemption

• sales tax exemption

GBI Certified Buildings(…2014)

Implementing Agencies: • MIDA – Business & Other Services

Division(Application)

• Energy Commission(Technical assessment)

www.kettha.gov.my

www.st.gov.my

Green Buildings

Owners Of Buildings Awarded With The GBI Certificate

Tax exemption equivalent to 100% of the additional capital expenditure incurred to obtain the GBI Certificate

Buyers Of Buildings And Residential Properties Awarded With The GBI Certificates Bought From Real Property Developers

Stamp duty exemption on instrument of transfer of ownership of such building.

Amount of stamp duty exemption is on the additional cost incurred and is given only once to the first owner of the building

7

How is the progress of the funds and incentives?

FINANCING OPTIONS TO IMPLEMENT EE PROJECTS

Considering EE Financing?

It is worth asking why the public or private sector would

consider financing EE investments over other options

Financing programs are almost always more complex to

operate than the most common alternative—rebate

programs

Financing programs require a long-term commitment of

financial and human resources to collect principal and

interest

In most cases they also require a credit evaluation

process that is not necessary for a straight forward

rebate program

Why Use Financing for Energy Efficiency?

1. Financing expands the amount of capital available to invest by attracting new sources of capital for EE &RE projects.

Financing energy efficiency investments gives a return on capital to investors that is unavailable in rebate or grant programs

2. Financing expands the number of players that can support EE or RE

Utilities and some government entities operate rebate programs because they have access to capital that does not require a return;

Financing programs allow lending institutions, ranging from banks to consumer credit companies and others, to administer loan programs and bring their own capital to those loan programs.

3. Financing means “skin in the game” for customer/borrowers.

Financing implies that customer/borrowers must pay back the money that they have borrowed to install EE measures.

This ―skin in the game may encourage them to operate and maintain equipment better than if simply given it to them.

4. Financing programs extend the life of limited government funds

A rebate or grant program-funding with no return.

A financing program that generates a return of both the capital invested as well as a return on that capital through a revolving fund can finance new investments in EE&RE many times over.

5. Financing programs can complement rebate or grant programs

For further long term saving for existing and future equipment/facilities

Key Challenges in EE Financing

Still “ high risk”- banks still using the same guidelines for all industries and sectors

Risk management and credit enhancement is critical. Default rates for efficiency programs have been low in many countries(Thailand, USA) • results of careful underwriting in a small number of programs

and the fact that EE measures actually reduce borrowers’ day to day expenses, thus making loan repayments affordable

However, it is unlikely that EE lending has a long or strong enough credit history to attract a large amount of outside capital and investors without additional credit enhancements (loan loss reserves and guarantees, for instance) to secure payment

Classification of EE Financing Barriers

Source: www.iea.org

Key Risk Assessment Factors For EE in Asean

Risk aversion to finance new technologies-EE projects have yet to show sustainable commercial potentials

Applicant(mainly SMEs) have low capital compare to amount of loans requested

Risk assessment-base on performance & track records rather than potential of the technology

Applicants have yet to secure long-term contracts from reputable clients

In Malaysian GTFS: 60% guarantee by the government considered low compare to risks involved-Suggested 80%

Source: Green Prospects Asia, June 2012

Options for EE Private Funding

Fund for EE projects -With guarantee from the

government

Distribution Mechanism

External Sources Local and international

commercial banks

International banks

International organizations

• GEF, UNDP

With low interest loan for approved applicants

Approved/endorsed by the competent body appointed by the government

Internal Sources: Companies’ Internal Budget

Option 1: Dedicated Credit Line Structure

Source: www.iea.org

Examples of Dedicated Credit Line Programs

Source: www.iea.org

Option 2: Risk Sharing Facilities

Objectives providing access to finance from commercial

Local Financial Institutions(LFIs)

reducing the cost of capital by reducing the risk faced by the lender;

expanding the loan tenor or grace period to match project cash flows; and

helping create a long-term sustainable market for financing of EE projects.

Risk Sharing Facilities Structure

Source: www.iea.org

Examples Risk Sharing Programs

Source: www.iea.org

Examples Of EE Fund

Revolving Fund: Thailand

ESCO Fund: Thailand

What is Energy Services?

What is ESCO?

An Energy Service Company

Capable of providing a turnkey service for the implementation of building EE or energy management projects

Providing comprehensive energy services including financing, and its delivery by one supplier that makes energy performance contracts (EPCs) covering :

• energy analysis and audits, • energy management, • project design and implementation, • maintenance and operation, • monitoring and evaluation of savings, • property/facility management, • energy and/or equipment supply, • provision of service (space heating/cooling, lighting, etc.).

Once the expenses have been fully recovered or the contract expires (whichever occurs first), the building owner/client retains future savings from lower energy bills.

Barriers to ESCOs in Developing Countries

Most independent ESCOs have a small capital base • have difficulties accessing project funding from commercial financial institutions (FIs)

• recycling capital is needed through bond issuances.

New Concept among FIs • project financing for ESCO projects is not commonly accepted by FIs in developing countries

• ESCO model is new in developing countries

Smaller compare to other investment • EE projects are generally small relative to other investment projects being considered by the FIs

have a relatively large proportion of “soft costs” that cannot be easily collaterised.

Immaturity of the EE market in developing countries • costs of project development are relatively high

• most small ESCOs find it difficult to finance project development costs

• limited experience with successful ESCO projects

• ESCO s have not yet developed good credibility with energy users

Lack of expertise among FIs • FI’s staff typically has limited knowledge and understanding of EE projects and the EPC concept

• FIs perceive EE projects (incorrectly) as inherently more risky than other investments.

• The combination of high project developments costs, limited access to long-term and low-cost project financing, high equity requirements for project financing

Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation

Senior Management team members Technical Team Members

• Registered Professional/Certified by recognized bodies

Technical support personnel

• Qualifications, employment term

Basic energy audit equipment

Experiences in EE projects

• Scope of works

Track records in EE related projects/works

Registration/membership with authorized/industry bodies such as MoF, SEDA Malaysia & MAESCO

• For accountability and verification of qualified with the minimum requirements

What is Energy Performance Contracting(EPC) in EE?

EPC concept for energy saving measure implementation is through direct investments by ESCO with “Zero Cost” concept to the owner or the management of building or industrial facilities

The returns from the investments will be used to pay back the ESCO only from the actual energy savings achieved from the implementation of energy conservation measures by ESCO based on shared- saving contract with conditions agreed by both parties.

Benefits of EPC : Banks/Financial Institutions

EPC provides needed comfort to investors • Assures adequate cash flow

• Provides necessary third party engineering calculations to justify the viability of technology being applied

• Provides cost estimates that will be guaranteed by design & build contract provided by ESCO

• Provides certainty that the money goes for the stated purpose and not, say, diverted to cover operating costs

Benefits of EPC: Facilities Owner

Finance energy: saving

improvements with no upfront capital

Invest savings achieved into other

projects

ESCO to identify Energy Saving

Measures (ESMs) to replace / modify

existing inefficient systems or/and

equipment

ESCO guarantee Energy savings

and recover its investment including

interest & other costs out of

generated actual energy savings -

the remuneration of ESCOs is directly

tied to the energy savings achieved

Energy saving is shared between

ESCO and the building owner/client as

per agreed terms and payment

schedule with a single-source

responsibility

ESCO supplies, installs, maintains

and retain an on-going operational role

in measuring and verifying the savings

for each ESM over the

financing/contractual terms.

Use future energy ,cut operating cost,

be more competitive and improved

comfort/productivity from upgraded

system

Positive environmental impacts &

reduced environmental footprint

OPTIONS FOR EE FUNDING

Options To Implement Energy Saving Measures

• Management

Directives

• Implementation of EMS - to ensure sustainability of energy cost reduction initiatives

MEASURES With LOW/

NO COST

Minimal Cost Savings

• Priorities of budget - core business/operations

• Investment risks

• Limited human resources & expertise

MEASURES WITH HIGH

COST

Significant Cost Savings

Expert assistance &

investment from ESCO

In-house initiatives

Financing Options for EPC

In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client

1. GUARANTEED SAVINGS Model

• The loan goes on the client’s balance sheet

2. SHARED SAVINGS Model

• The loan goes on ESCO’s balance sheet

3. Through a Special Purpose Vehicle(SPV) created specially for the purpose

Guaranteed Savings Model

FACILITIES OWNER

ESCO BANK

Project Design& Implementation

Project Fees Loan

Repayment

How Guaranteed Savings Model Works?

Facilities owner takes out “normal” loan (will appear on balance sheet)

ESCO guarantees loan can be repaid with savings

ESCO pays difference if minimum savings not met

Main advantage: ESCO can undertake more projects

Shared Savings Model

FACILITIES OWNER ESCO BANK

Project Design& Implementation

Loan

Repayment

EE PROJECT

Energy saving share

Financing

Energy saving share

Shared Saving Mechanism

time

(year)

Energy Bills

During contract period

Lower Energy Bill

After Contract period

Energy bill saved

Before Contract Period

Energy bill before energy saving

measures implementation

Payment to ESCO

Savings for the owner

Baseline

Lower Energy Bill

Savings for the owner

How Shared Savings Model Works?

Facilities owner does not take loan (will not appear on balance sheet)

ESCO finances project: takes performance & credit risk

Customer pays higher %

Main advantage: Independent of Facilities owner ’s borrowing capacity

Through a SPV

Common Elements of EPC Project Development

Potential Areas for EPC Projects

Energy Conservation Renewable & Alternative Energy Sources

Heating , Ventilation, Cooling & Air Conditioning

Operational, & equipment controls Heating equipment Chillers, AHUs, fans, pumps

Compressed Air System

Lighting Systems Buildings(interior & exterior) Public(Street lights) Operational controls Types of lamp technologies

Maximum Demand Controls

Utilization of Feed-in Tariff(FiT) offered by SEDA Malaysia

(www.seda.gov.my)

Solar Photo Voltaic(PV)

Building Integrated PV System

PV Power Plant

Biomass & Biogas Power Plant

Waste-to-energy systems

EVALUATION OF ENERGY SAVING PROJECTS

Basic Key Criteria

Pro

po

sed

Pro

ject

Technical Viability

Financial Viability

Sustainability Plan

Technical Viability

Type Of Project And General Information

Modification/improvement or Introduction/replacement for higher efficiency technologies

Location and types of energy supplied and tariff/rates applied (fuel, electricity)

Plant/equipment energy consumption per year

Existing plant/equipment energy efficiency performance

Energy Efficiency Information

Technology description and operational principles to improve efficiency

Schematic drawings/diagrams

Function of each equipment contributing to improve efficiency

Comparison of energy performance data (conventional /existing and the proposed)

Equipment information:

• Name, brand, model and

rated capacity

• Energy performance data

and testing standard used

• Energy performance test

reports

• Producer/manufacturer

• Product applications

Energy Saving Potentials

Types of energy to be saved (fuel, electricity)

Method and data used in potential energy saving calculations

Estimated energy savings in energy units and currency

Measurement And Verification Of Results

Energy saving measurement for verification • baseline data/performance indicator

• measuring type and point

Require energy metering

“The long term success of energy management projects is often hampered by the inability of the project partners to agree on an accurate, successful M&V plan.….. M&V protocol discusses procedures that, when implemented, help buyers, sellers and financiers of energy projects to agree on an M&V plan and quantify savings from energy conservation measure (ECM) projects.” - (IPMVP, Volume I, March 2002)

Energy Saving Measurement & Verification

Baselines for saving calculations & measurements at agreed operating conditions before implementation

Baselines for saving calculations & measurements - mutually agreed for any significant energy using operational change

Energy bills

Periodical Data logging

• Permanent- with sub- metering or

• Portable meter - scheduled visits

Savings Verification • Joint scheduled data

logging & measurements

Factors should be considered while drafting a new ESCO M&V to reduce dispute in EPC Contract

Commitment From Client

Factors Affecting Savings Performance

Valuating Savings Uncertainty

Minimum Operating Conditions

Energy Prices

Verification By A Third Party

Baseline Adjustments (Non-routine)

Balancing Uncertainty And Cost

Economic Viability

Financial Analysis

Results often becomes the key parameter for the management acceptance

Smaller projects will normally be funded from internal sources.

Larger projects with external funding may require consideration of : • Amount of investment. • Amount and period of loan. • Current and expected future inflation rates. • Asset of borrower. • Lender’s judgment of the risk involved, etc.

Criteria Used

Use company financial evaluation criteria • Simple payback period for low cost projects

• Rate of return considers the benefits after the project has paid back.

• Net present value gives the real cost benefits of a project.

• Internal rate of return offers the most comprehensive comparator

Life Cycle Cost Analysis

Consider the total life span of the equipment

Life-Cycle Cost = Purchasing Cost

+ Operation (Energy + Water)

+ Maintenance And Repairs

Life Cycle Cost Indication: Electric Motors

Sustainability Plan

Implementation Plan

Resources • Trained people involved in the implementation of the project

(internal personnel/external)

• Efficient operation & maintenance budget

Work Plan • Steps to be taken to implement the project and the targeted

duration for completion

Energy Management Plan • Equipment/System

• Plant

• Organizational (Adoption of Sustainable Energy Management System /ISO 50001:2011)

Options & Risks for Implementation Energy Saving Projects

Component

Shared Saving/

Energy Performance

Contracting(EPC)

Conventional Energy

Conservation

Renewable

Energy

Technical Expertise ESCO ESCO ESCO

Implementation/

Installation

ESCO ESCO ESCO

Funding Source ESCO ESCO Owner

Sharing of returns

ratio

At agreed ratio &

conditions

At agreed ratio &

conditions

100% to

Owner

Technical &

Investment Risks

ESCO ESCO Owner

Performance

Maintenance &

monitoring

ESCO ESCO Owner

EXAMPLES OF EE SOLUTIONS & TECHNOLOGIES

Computer -Aided Energy Resource Management System(CERMS)

• Data acquisition • Data Monitoring • Data Analysis

• CONTROLS FOR ENERGY EFFICIENT

OPERATIONS: AC systems, Lighting

Energy Efficient Solutions

Integrated Cogeneration System

• Waste Heat Management

• Steam Management System

• Process Reengineering & Improvement

Vesta Energy Saving Micro Ballast High Performance Fluorescent Lamp HPT8-

28W

Lighting Solutions

Case Study 1: Public Library

1. Vesta T8-28W Micro Ballast – 542 sets

2. Vesta HP T8-28 W FL – 1,354 tubes

Qty Installed: Total 1 Lamp 2 Lamps 3 Lamps 4 Lamps Location (Sets) (Sets) (Sets) (Sets) (Sets) Ground FLR 171 0 145 4 22 Level 1 124 0 120 4 0 Level 2 64 0 8 56 0 Level 3 61 0 8 53 0 Level 4 61 0 8 53 0 Level 5 61 0 5 56 0 TOTAL 542 0 294 226 22

Power Consumption Analysis

Saving = 40%

(7.8 – 4.7)/7.8

Saving = 42.5%

(8.0 – 4.6)/8.0

(Before) Conventional FL 36W (After) HP T8-28W

Comparison Before & After Implementation

Case Study 2: Electronic Industry

Application Areas:

- Fluorescent Lamps

- High bay Lighting - HID

After Installation: 20,000 pcs x 26W/1000 = 520 kWh

Total annual power = 520 x 8,640 hrs = 4,492,800 kWh

Before Installation: 20,000 pcs x 45W/1000 = 900 kWh

Total annual power = 900 x 8640 hrs = 7,776,000 kWh Total annual Saving

= 42.2%

= 3,283,200 kWh,

= RM 920,000

Case Study 3: Industrial Warehouse (Before) High bay light 400w (After) Vesta 4x28W High bay FL

Before: Origin high bay light fitting 400W x 192 set

Electrical Usage per fitting: 0.410kW

Consumption kW per hour: 192set x 0.41kW= 78.72kW

Consumption Monthly : 1889.28kWh x 30days= 56678.4kWh

Monthly usage : 56678.4 x RM0.28= RM 15,870

After : T8 High bay 4 x 28w fluorescent light x 114 sets

Electrical Usage per fitting: 0.112kW

Consumption kW per hour: 114set x 0.112kw= 12.768kW

Consumption Monthly : 306.43kWh x 30days= 9193kWh

Monthly usage : 9193.0 x RM0.28= RM 2,574

*SAVE 83%

*SAME BRIGHTNESS!!

* Longer Life Span

Conclusions

Financing for EE is more complex than rebate or grant programs

Benefits of financing, including the potential for leverage and for low or no subsidization

• provide new opportunities for overcoming barriers to the adoption of EE measures.

Financing should be viewed as a complement to other strategies such as building energy codes, appliance EE standards, or utility rebate programs

Conclusions..ctnd

A successful financing program should support, and

not be a barrier to, customer participation - financing should remain streamlined, easy-to-access, and quick.

Customers need to know that they will have access to financing, but they are not participating in a program simply because it offers good financial terms

….As they are striving for lower utility bills, an upgraded business property, and more comfortable working spaces.

What’s Next?

Proposed Capacity Building Program by the government through a competent/an authorized body for EE

Development of in-house capacity in technical & financial evaluation of EE&EC Projects in financial institutions

Development and acceptance of standard technical evaluation,

monitoring and performance verification criteria for EE&EC Projects With by technical experts from recognized professional/industrial bodies or association

Development of and acceptance of standard evaluation for funding and

risk assessment criteria for EE&EC Projects

Sharing of experiences in successful investments in EE projects through seminars/dialogues

• (results, payback period) from people in business communities who have experienced it • Criteria of viable EE projects • Competency of ESCOs

Promotion of incentives/tax exemptions for EE&EC investment for

companies

Possible Actions Required for Financial Institutions

To specialize in green technologies such as EE • EE has wide range of technologies & applications with different

levels of difficulties in technology(implementation, reliability, ease of operation and durability

Due to… Insufficient proven domestic case studies by banks

• EE project require time and specific expertise to be assessed

EE funds started in other countries such as Thailand & USA

has developed in-house expertise for banks in evaluating EE projects

Source: Green Prospects Asia, June 2012

Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation

Senior Management team members Technical Team Members

• Registered Professional/Certified by recognized bodies

Technical support personnel

Basic energy audit equipment

Experiences in EE projects

• Scope of works

Track records in EE related projects/works

Registration/membership with authorized/industry bodies such as MoF, SEDA

Malaysia & MAESCO • For accountability and verification of qualified with the minimum requirements

Last Words

I hope today’s sessions will help you to

understand both the challenges to and

opportunities for using EE financing in a

productive manner

Thank you for your time & attention.