Financing Mechanism for Rehabilitation of Heating Facilities

1. ESCO’s Role in Financing Heat Supply Improvement Projects Financing Mechanism for Rehabilitation of Heating Facilities Alexander Novoseltsev Ukraine Association of Energy Engineers President of the Ukrainian Chapter E-mail: anovos@mail.i.com.ua International Conference Heating Sector Institutional Reform in the Former Soviet Union Baku, Azerbaijan, October 21, 2005

2. Energy Service Company(ESCO) this is an answer to questions: • What is the best way to use money? • How to convert a business-idea into business-plan? • How to attract investors for its realization? • How to reach the best results against the least cost? ESCO is the answer to main question: How to realize “turn key” project?

3. Where to Seek For, and How to Attract Funds Needed?

4. Institutional Structure of ESCO Financing Mechanism State and Local Budgets Heating Companies Investors Design Engineering, Procurement, Erection, Commissioning, etc. Contract, Pledge Request for Money Transfer Credit Return Sponsors ESCO + Local Energy Conservation Fund Contract, Pledge ESPC Contracts Payments for Equipment & Services 1 1 2 … 2 … m n Equipment & Services Suppliers Collective & Individuals Consumers

5. Advantages for Energy Service Companies Involvement • The ESCO invests in the project and then ensures adequate performance to accomplish profitability of the project; • The ESCO negotiates with the Heating company (HC) the terms and conditions of project implementation that the parties agree in an Energy Saving Performance Contract; • ESCO gathers technical data on the project that consequently allows it to achieve a certain level of energy savings.

6. Conditions for Energy Service Companies Involvement: • ESCO guarantee that energy savings will exceed the cost of the investments needed to achieve those savings (plus the ESCO’s profit for return on its investment); • Heating companies pay for the equipment and the ESCO’s services by giving up the money saved from the reduction of energy consumption; • Heating companies must usually also provide some collateral or other guarantee of the fulfilment of its contractual obligations.

7. ESCO’s Project :Stages and Performers State and Local Authorities Collective & Individual Consumers Initial Proposal Energy Resources Suppliers Subcontractors Initiation (~30%) Definition (~15%) Project Co-ordination ESCO (Project Manager) Heating Companies Procurement Implementation Suppliers of Equipment and Services Local Subcontractors Monitoring Project Completion

8. What are the Profitable Energy Saving Projects? Payment for Equipment & Services Taxes and Duties Invested Money Saved Money Pilot Energy Saving Project Attracted Partners and Funds Local Energy Saving Fund M&V Credits Repayment New Energy Saving Projects Revolving Mechanism … 1 2 n New elements

9. Social and Commercial Aspects of Heating Services Aspect 1: Social aspects Aspect 2: Environment aspects Aspect 3: Improvement of creditworthy Involvement of the local and state authorities to solving social, environment and commercial issues related to heating companies modernization Separation of social aspects of business Heating Company (HC) Activities Separation of commercial aspects of business Mutually beneficial collective and individual consumers cooperation

10. Improvement of HC’s Creditworthy Raising local and national budget funds. Guarantees from the local and/or the state authorities Stage Two: Implementation of large investment projects BEGINNING Investment of HC own funds and involvement of sponsors Stage One: Implementation of small EE pilot projects Final Stage: Large-scale implementation of EE projects Development of models for raising and repaying investment funds Trying out a “revolving” mechanism Involvement of strategic investors to HC restructuring

11. Payments for Energy Resources Before and After EE Projects Implementation Payments to Energy Resources Suppliers Before EE Projects Gross Return Payments to Energy Resources Suppliers After EE Projects

12. Ukrainian ESPC Pilot Projects Implementation Experience in Heating Sector Planned Sources of Fund 1 2 3 4

13. Ukrainian ESPC Pilot Projects Implementation Experience in Heating Sector Real Attracted Funds 1 2 3 4

14. HC’s Working Actions to Attain Funding in Pilot Projects: 1.Summarize the available experience in the self-repayment (SR) energy efficiency and energy conservation improvement (EE) projects implementation; 2.Develop a model business plan for attracting potential investors and sponsors; 3.Work out a multilateral financing model (the so called “project financing pie”) and support its viability by contracts; 4.Involve, on a competitive bidding basis, energy service companies (ESCO) to implement the pilot projects; 5.Form Energy Saving Performance Contracting (ESPC) contracts between the selected ESCO and heating companies (HC); 6.Carry out, with participation of the ESCO and HC experts, energy investment grade audits, and provide for the SR EE projects being implemented on a turnkey basis; 7.Render technical assistance to the selected ESCO and HC in implementing a Monitoring, Measuring and Verification (M&V) plan; 8.Establish a special HC’s energy conservation account to collect, on a monthly or quarterly basis, funds generated through the SR EE efforts, and agree with the relevant national and local government bodies upon the norms and rules to regulate the funds; 9.Introduce a procedure for the SR EE-projects-generated profit reinvestment into the further ongoing SR EE projects (using the so called “revolver” mechanism of the SR EE projects implementation); 10.Disseminate positive experience of the SR EE projects implementation among other heating companies.