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Energy Finance Overview Joel Freehling

Energy Finance Overview Joel Freehling. South Africa Energy Efficiency Workshop Johannesburg, South Africa May 24, 2012. Speaking Agenda. Introduction Key Issues in Energy Efficiency Finance Developing Opportunities in South Africa Successful Financing Models in Energy Efficiency.

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Energy Finance Overview Joel Freehling

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  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?

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