Module 3 June 2015 Page 1

Training Programme for Scheduled Commercial Banks

(SCBs) on Energy Efficiency Financing in India June 2015

Module 3: Business Models for Energy Efficiency

Project Implementation

The presentation has been prepared in association with USAID PACE-D TA Program

Module 3 June 2015 Page 2

• 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 For Energy Efficiency

Venture Capital Fund For Energy Efficiency

Presentation Outline

Module 3 June 2015 Page 3

• 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

Summary of Implementation Models

Module 3 June 2015 Page 4

• 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.

Energy Audit Model

Module 3 June 2015 Page 5

Overview of Performance Contracting for Energy Efficiency

Module 3 June 2015 Page 6

Energy Services Business Models

Guaranteed

Savings

Shared Savings

Outsourced Energy

Management

Energy Services Business Models

Deemed Energy Savings

Module 3 June 2015 Page 7

Energy Savings Performance Contracts (ESPCs)

Performance contracts are generally implemented by

energy services companies, commonly known as

ESCOs

Module 3 June 2015 Page 8

ESCO Services

Module 3 June 2015 Page 9

Additional ESCO Services

Module 3 June 2015 Page 10

Key Features of ESPCs

Module 3 June 2015 Page 11

Energy Services Value Chain

Module 3 June 2015 Page 12

Examples of Energy Services

Module 3 June 2015 Page 13

• Energy Savings Performance Contracts ESPC) between ESCO and

host facility

• Financing Agreement (FA) between ESCO and financial institution (FI)

• ESPC 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

Shared Savings Model

Module 3 June 2015 Page 14

Shared Savings Model

Payment Security Mechanism

Escrow or Trust and Retention

Account (TRA)

Module 3 June 2015 Page 15

• ESPC between ESCO and host facility

• Financing Agreement (FA) between financial institution and host

facility

• ESPC 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

Guaranteed Savings Model

Module 3 June 2015 Page 16

Guaranteed Savings Model

Payment Security Mechanism

Escrow or TRA account

Module 3 June 2015 Page 17

• ESPC 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.

• ESPC 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

Deemed Energy Savings Model

Module 3 June 2015 Page 18

Deemed Energy Savings Model

Module 3 June 2015 Page 19

• 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).

Outsourced Energy Management Model

Module 3 June 2015 Page 20

Outsourced Energy Management Model

Module 3 June 2015 Page 21

No. Description Cost Savings Payback Lifetime

1 Lighting 1 30.0 25.0 1.2 6

2 Lighting 2 40.0 20.0 2.0 10

3 Air conditioning 250.0 75.0 3.3 15

4 Pumps 50.0 20.0 2.5 15

5 VFD on Motors 140.0 45.0 3.1 20

6 Load Management 60.0 30.0 2.0 10

570.0 215.0 2.7 -

150.0

720.0 215.0 3.3

Total

SUMMARY OF EE MEASURES

Project Development Costs

Total Including Proj. Dev.

Illustrative Example of ESCO Project

Module 3 June 2015 Page 22

No. Description Cost Savings Payback

A All 720.0 215.0 3.3

B Exclude A/C 470.0 140.0 3.4

C Exclude A/C and VFD 330.0 95.0 3.5

D Lighting Only 220.0 45.0 4.9

ECONOMICS INCL. PROJECT DEVELOPMENT COSTS

Project Economics

Module 3 June 2015 Page 23

Project Economics

Package

No. Description Cost 1 2 3 ….. 15

A All -720.0 215.0 215.0 215.0 ….. 140.0

B Exclude A/C -470.0 140.0 140.0 140.0 ….. 65.0

C Exclude A/C and VFD -330.0 95.0 95.0 95.0 ….. 20.0

D Lighting Only -220.0 45.0 45.0 45.0 ….. 0.0

No. Package Cost NPV IRR

A All 720.0 $552.52 28%

B Exclude A/C 470.0 $319.65 27%

C Exclude A/C and VFD 330.0 $170.99 25%

D Lighting Only 220.0 ($3.76) 11%

CASH FLOWS

ECONOMIC PARAMETERS

Module 3 June 2015 Page 24

ESCO arranges Bank Financing, Customer puts up required equity

Case Description Cost 1 2 3 ….. 15

A 100 % Equity Financing -720.0 215.0 215.0 215.0 ….. 140.0

B 30% Equity, 70% Debt, 7 year term -216.0 97.5 97.5 97.5 ….. 140.0

C 30% Equity, 70% Debt, 5 year term -216.0 68.2 68.2 68.2 ….. 140.0

D 40% Equity, 60% Debt, 7 year term -288.0 114.3 114.3 114.3 ….. 140.0

No. Package Cost NPV IRR

A 100 % Equity Financing 720.0 552.52 28%

B 30% Equity, 70% Debt, 7 year term 216.0 523.61 47%

C 30% Equity, 70% Debt, 5 year term 216.0 530.01 41%

D 40% Equity, 60% Debt, 7 year term 288.0 527.74 41%

CASH FLOWS

Guaranteed Savings Results

Module 3 June 2015 Page 25

ESCO finances project; Customer agrees to shared savings; Customer puts up zero equity

Case Organization Cost 1 2 3 15

ESCO - 1 Project -216.0 97.5 97.5 97.5 140.0

Customer 0.0 43.0 43.0 43.0 140.0

ESCO -66.0 54.5 54.5 54.5 0.0

ESCO - 2 Project -288.0 114.3 114.3 114.3 140.0

Customer 0.0 53.8 53.8 53.8 140.0

ESCO -188.0 60.5 60.5 60.5 0.0

No. Organization Cost NPV IRR

ESCO - 1 Project 216.0 523.61 47%

Customer 0.0 502.59 N/A

ESCO 66.0 154.95 81%

ESCO - 2 Project 288.0 527.74 41%

Customer 0.0 407.65 N/A

ESCO 188.0 209.37 33%

CASH FLOWS

ESCO Equity 30%, ESCO Share of Savings 80%, Loan Term 7 years, ESA 7 years

ESCO Equity 40%, ESCO Share of Savings 75%, Loan Term 7 years, ESA 10 years

Shared Savings Results

Module 3 June 2015 Page 26

Indicative Structure of ESPC

• Recitals

• Definitions

• Covenants

• Term

• Scope of Work

• Facilities

• Construction

• Operation and Maintenance

• Financing and Ownership of

Assets

• Energy Savings

• Billing and Payment

• Transfer of Financed Assets

• Force Majeure, Events of

Default & Termination

• Dispute Resolution

• Insurance

• Other Clauses in the ESPC

• Technical Matters

Module 3 June 2015 Page 27

International Experience - USA

Module 3 June 2015 Page 28

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

Module 3 June 2015 Page 29

IFC/GEF – Risk Guarantee Program

Module 3 June 2015 Page 30

Structure of Commercializing Energy Efficiency Finance (CEEF) Program

Module 3 June 2015 Page 31

• 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

CEEF Results

Module 3 June 2015 Page 32

Experience in India

Module 3 June 2015 Page 33

Case Studies from India

Case Study 1: Application of Medium Voltage (MV) Variable Flow Drives (VFD) for

Convertor Induced Drift (ID) Fan of SMS-I at JSW Steel Limited

Case Study 2: A K Spintex, textile unit EE project funding under SBI Uptech

Module 3 June 2015 Page 34

• JSW Steel is India’s leading private sector steel producer and among

the world’s most illustrious steel companies.

• Yantra Harvest is leading Energy Saving solution provider in India

using Medium Voltage Drives.

• Yantra Harvest provided complete Turn-Key base solution on ESCO

basis to JSW steel.

• Energy Saving Guarantee was provided by Yantra Harvest @ 250 kW/

heat cycle per fan.

• Entire investment made by Yantra Harvest

• JSW was reaping benefits (energy savings and costs) without

investment.

…contd

Case Study 1:Application of Medium Voltage(MV) Variable Flow Drive (VFD)

for Convertor Induced Drift (ID) Fan of SMS-I at JSW Steel Limited

Module 3 June 2015 Page 35

Particulars Description

Total Investment by

Yantra Harvest

INR 245 Lakhs

Investor Category ESCO

Product / Industry sector Steel Manufacturing – Large Scale

Project Location Torangallu, Karnataka

Pay back period Less than 24 months

Repayment duration to

Yantra Harvest

36 months EMI

Savings in Rupees INR 5.167 Crore in 3 years

Energy Savings achieved

per heat cycle

300 kW/Heat cycle.

Cost and Energy Savings: Application of Medium Voltage(MV) Variable Flow

Drive (VFD) for Convertor Induced Drift (ID) Fan of SMS-I at JSW Steel Ltd.

…..contd

Module 3 June 2015 Page 36

• SBI Uptech has extended a typical project loan with liberalized lending

parameters- higher Debt Equity Ratio (DER) for the EE project, but the

project sponsors’ pre-project financial ratios satisfied conventional

bankability requirements.

• Given the fast payback and the attractive returns on investment, there

is adequate cushion against project construction and technical

performance risks because of the 5-year period of repayment.

• The investment in the EE project does not significantly alter the

financial risk profile of the Project Sponsor.

Case Study 2: A K Spintex, textile unit EE project funding under SBI Uptech

Module 3 June 2015 Page 37

Particulars Description

Type of funding Medium Term Project Loan, direct lending to Project Sponsor

Quantum and Term of loan US$ 141,000, 5 years, moratorium 6 months

Interest rate PLR

Debt/Equity Ratio 2:1

DSCR 2.29

IRR/Pay back period 57%, 8 months

Security Structure Hypothecation of project assets, second charge on all other assets,

personal guarantee of promoters/directors

Basis for project DPR, backed by Energy Audit Report submitted by energy consultant

Annual Savings US $ 217,000 per annum

Savings and Pay back – A K Spintex Textile Unit EE

Project

Module 3 June 2015 Page 38

Slide 34 and 35

Case studies from Yantra Harvest

Slide 36

http://www.docstoc.com/docs/61607558/Commercial-Financing-Alternative-Energy-Projects

User Reference

Module 3 June 2015 Page 39

Thank you Email Id: eefp@beenet.in

www.beeindia.in