Financial Analysis for Successful IES Project Implementation

1. Financial Analysis for Successful IES Project Implementation U.S. Environmental Protection Agency Presented by: Vaqar Zakaria Hagler Bailly Pakistan

2. Outline Background Funding Organizations and Mechanisms Tools for Project Financial Analysis Why focus on Financing? Financial barriers are often cited as a key reason more IES related projects are not implemented.

3. IES identifies policies & programs that reduce air pollutants and GHG Costs and benefits of specific emissions reductions options have been modeled (for some countries) EPA is interested in enhancing prospects for implementing IES projects by increasing awareness of financial considerations early and throughout the IES process To improve prospects, a focus is placed on identification of barriers to implementation, and dissemination of information: Potential funders and their information requirements for projects Critical elements of successful proposals Analytical tools that can assist in analyzing projects Background

4. Multilateral and bilateral institutions Private foundations Local development banks Private investors Funding Organizations & Mechanisms

5. Formed by two or more governments Policies dictated by member countries Types of Support Grant A sum of money given to an entity without any intent of financial return. Soft loan Provided to an entity with concessionary terms. Soft loans generally do not require collateral. Commercial investment Debt or equity that is expected to be repaid with a positive return on the investment. Commercial investments generally require collateral. Multilateral and Bilateral Institutions

6. Derive capital from family, individual, or corporation In U.S., tax laws stipulate foundations must donate at least 5% of its endowment annually, primarily to nonprofits. Background information on individual foundations can be found at the Foundation Center: www.fdncenter.org. Types of Support Operating support Awarded to nonprofits to cover general operating costs. Program support Money for a specific initiative. Generally single-year grants. Program related investments Recoverable payments such as loans, loan guarantees, or equity investments. Private Foundations

7. Set up by an individual government to target underserved communities or sectors. Often focused on one sector or activity. Generally provide some type of nonfinancial service. Types of Support Grant Building capacity or markets. Sometimes done through an affiliate. Soft loan Intermediate step. Commercial investment Aimed at overcoming a barrier to that particular sector. Local Development Banks

8. Working capital Short term (<1 year). Used to finance ongoing activities or inventories. Long-term debt Generally greater than three years with set payment schedule. Collateral required in commercial loans. Equity Ownership share in a company. Activity must be private sector. Private Equity Funds Fixed time frame (generally 10 years) May have more than one “closing” Have clear requirements Risk limits Target returns Sector Investment stage Private Investors: Financial Instruments

9. Typical Funding Process Continue with other Funding Sources Research and Cultivate Funders Determine type of funding needed (grant, loan, equity) Letter of Inquiry No Invitation to submit proposal? Gather/Develop Materials Yes Grant: Mission Similar programs Budget Monitoring Loan or Equity: Business Plan Market Study Feasibility Analysis Projections Write Application for Specific Funder Additional Information Needed? Yes No Accepted? Receive Loan and Initiate Project Monitor and Report Negotiate Terms No Yes Develop Additional Material Continue with other Funding Sources

10. Project focus on policies and practices: Upgrading technology base in the country for improvement of vehicular fuel efficiency and reduction of emissions Awareness in vehicle owners and service providers Development of policies for modal shifts Establishment of a revolving loan fund for energy conservation investments in road transport sector Environmental focus of the $7 million GEF grant is climate change and criteria air pollution. Example: Fuel Efficiency in Road Transport Sector (FERTS), Pakistan

11. Fund set up and administered by ENERCON, the National Energy Conservation Centre Initial contribution of $ 3 million from GEF grant Management by a Board of Directors drawn from the public and private sectors Additional contributions expected from the private sector financial institutions and bilateral donors Interest rates maintained to provide incentives to borrowers, and to cover operating costs Lending risk to be covered by participating financial institutions FERTS Project: Setting up of Energy Conservation Fund (ECF)

12. Good fit with GEF program goals (innovative financing strategies to reduce climate change) Local buy-in (Government and private sector) Sustainability (fund will continue after the GEF project ends ) Replicable (lessons can be transferred to other GEF-targeted countries) Administrative and management support provided by project sponsor (in this case, ENERCON) Identified and addressed project risks FERTS Project: Key Factors in Securing Resources for ECF

13. Why use financial analysis Tools? To evaluate environmental benefits of potential energy efficiency (EE), renewable energy (RE), or transportation projects Emissions avoided, polluting technologies avoided To evaluate profitability, net present value (NPV), or rate of return (IRR) of RE and EE projects Cash flow analysis Real and levelized cost of energy Tools for Project Financial Analysis

14. RETScreen International Spreadsheet based renewable energy project analysis software, evaluates cash flow, energy production, and GHG emissions. Downloadable at: http://www.retscreen.net/ang/menu.php RET Finance Cash flow analysis tool. http://analysis.nrel.gov/retfinance/ EM (Environmental Manual for Power Development) Database of plant and emission control costs, analyzes tradeoff between economic and environmental costs. www.oeko.de/service/em Proform Spreadsheet model assesses RE and EE environment and financial impacts. http://poet.lbl.gov/Proform/ E2/Finance Financial model evaluates project profitability www.tellus.org/general/software.html Examples of Available Analysis Tools

15. Inputs : Site location and renewable resource conditions Equipment specifications Equipment cost modifications (beyond defaults) Avoided cost of energy (if applicable) Financing type (debt, equity, mix) Interest rate, discount rate, project life, income tax rate Incentives, grants Example Tool: RETScreen

16. Outputs Annual energy production (MW, MWh) Estimated energy production by month, wind speed, etc. Life-cycle costs (initial costs, annual Operating and Maintenance, and Periodic costs) GHG emission reductions Annual financial savings or income Cash flow analysis over project lifetime Financial indicators: Internal Rate of Return, Return on Investment (ROI), Cost of energy production, Net Present Value of project, Benefit-Cost ratio, amount of debt payments and debt service coverage Example Tool: RETScreen

17. All models are widely used around the world and produce output considered credible. All models provide useful evaluations, both financial and environmental, of renewable energy and energy efficiency projects, and some do transport projects. All models are available in free downloads. Summary of Financial Analysis Tools

18. There are dollars (and other currencies) available Various financial instruments are available to fit the needs of specific projects Align project with goals of appropriate funders Get local buy-in early in the process Raising money is a time consuming process In Summary: Key Elements toSuccessful Project Finance

19. Jack Fitzgerald U.S. EPA, Global Programs Division +1.202.343.9336 Fitzgerald.Jack@epamail.epa.gov For More Information: Contact