One of the key barriers to energy efficiency is access to funding. This presentation will walk you through the various options available and how one can access them.

1. Financing of Energy Efficiency
Initiatives
By
Jeff M Murage-RTAP Coordinator
25th April 2013
50 + Years of Manufacturing Excellence! Since 1959

2. Energy Efficiency
• Is Particularly linked to initiatives aimed at
energy cost reduction in general.
• It could take the dimension of renewable
energy and often both concepts are two faces
of one coin.
50 + Years of Manufacturing Excellence! Since 1959

3. Energy Efficiency Financing
• EE financing is a relatively New realm in Kenya
with a close linkage to process improvement.
• Energy efficiency is defined as
– Relativity in how effectively energy is /can be used
For example how long an appliance can be ran
with a given amount of energy
– For electricity Generation it refers to the
conversation losses.
50 + Years of Manufacturing Excellence! Since 1959

4. Energy Costs will continue to
escalate What Are our Options ??
50 + Years of Manufacturing Excellence! Since 1959

5. EE Financing Options
• Project Financing & ESCO Model
• Balance sheet Financing
• Demand side management Financing
• RTAP model.
50 + Years of Manufacturing Excellence! Since 1959

6. Balance Sheet Financing
• Typically most preferred by the banks.
• Often not appropriate for start ups and good
projects that lack financial history though with
excellent technical and financial outlooks.
• Esco’s who may be technology providers may
not have sizeable BS’s to access Debt on this
Platform.
50 + Years of Manufacturing Excellence! Since 1959

7. Demand side Management
financing
• Utility would seek to take initiative to extend
financial rebates to customers in a bid to
stimulate EE (EE light Bulbs).
• Utility would then recover the investment on
an agreed period and terms (on billing for
instance )
• Often this model is State subsidized
50 + Years of Manufacturing Excellence! Since 1959

8. Project Financing
• Financing “off Balance sheet Financing”
• Future Anticipated revenues are considered to
be the “security” (PPA for IPP’s)
• Guarantee Mechanisms are often packaged
together with project finance. This is not
always available.
• Risk minimization is critical.
• Performance Guarantees are critical.
50 + Years of Manufacturing Excellence! Since 1959

9. Financing Energy Efficient projects
through the ESCO Model .
• Use of ESCO’s (Energy Service Companies)
– An energy services company (ESCO) is defined as a
company engaged in developing, installing and
financing comprehensive, performance-based
projects centered on improving :
– the energy efficiency of facilities owned or
operated by commercial, industrial, institutional,
– and other types of customers
50 + Years of Manufacturing Excellence! Since 1959

10. Why ESCO’s in the Kenyan Market
• Business model Fundamentals of a an ESCO or BOOT contractor
• Operation of an intellectual capital and not of a physical capital
• A suggestion box does not make a living, it is the implementation and capture of
energy cost reduction that can grow the business
• Intellectual property is difficult to protect: the knowledge gained during the
contract may result in an early interruption of the contract (we can do it by
ourselves).
• Negotiation time span (before signing the contract) between 3 and 9 months
• Project development
• Factoring the priorities of the industry (e.g., increase production, mitigate
environmental impact)
• Planning energy efficiency actions to maximize margin and ensure positive cash
flow (first optimization actions then actions with investments starting with the
shortest pay-back actions)
• Tailoring Monitoring and verification protocol that defines the scope of the project
and the energy baseline
50 + Years of Manufacturing Excellence! Since 1959

11. Important lessons of the ESCO of BOOT
business model to share with Kenya
• Project financing
• Combining technical and financial expertise in bankable feasibility reports
• Educating (beyond awareness) lenders to put in place the right processes to
respond to the market and develop the market
• Risk management and security
• Creating security structure (for performance, payment, cash flow, risk
management)
• Internal capacity building to operate an ESCO business
• Manpower development & retention
• Organisation structure and systems
• Development of hardware and informaton software
• Standardisation and quality control processes
• Productivity and cost management
• Remaining updated with technology development
50 + Years of Manufacturing Excellence! Since 1959

12. Insertion of ESCO value chain in Industry
value chain
Sale
Operation &
maintenance
Production
management
Industry value chain
Raw
material
procurement
Procurement
of energy
and services
Operation &
maintenance
& on site
utility
generation
Energy and service procurement value chain
Metering &
invoicing
Supply
contract for
energy and
services
Monitoring
and
verification
Asset management and investment value chain
Consulting
and
diagnostic
Project
development
Business plan
Licensing and
Permitting
Project
finance
Engineering
Procurement
Commission
ning
Finance
Cash-flow
Project
management
Asset
management
& insurance
Monitoring
and
verification
50 + Years of Manufacturing Excellence! Since 1959

13. The various types of energy efficiency
contracts under ESA (energy service
Agreements)
• Performance Based Contracts:
– 1. Guaranteed Savings / Energy performance
Guarantee
– 2. Shared Savings.
– 3. Third Party financing
50 + Years of Manufacturing Excellence! Since 1959

14. The various types of energy efficiency
contracts
• Guaranteed Savings
• Industrial Owner makes periodic fixed debt service payments to a third party financial
institution (“Lender/ Bank”) in the amount required to repay the ESCO’s turnkey project
price plus the Lender’s financing costs.
• ESCO guarantees the Host that the project’s realized savings will equal all project
payments, including debt service to the Lender plus any downstream fees to the ESCO
for its ongoing M & V and operational and maintenance services.
• If the realized savings are < of project payments made by the Host, the ESCO will pay the
difference between the realized savings and the project payments. If the realized savings
> the project payments, the Host and the ESCO may share in the excess depending on
the risk taken and the extent of services provided by the ESCO.
• Advantages
• Make liable the energy service company and plays in its area of speciality Plus
no obligation of ESCO to Lender.
• Disadvantages
• Part of the payment services (up to all) is linked to the evidence of reached
performance (risk sharing)
• More risky if the performance guarantee is measured continuously and not
during the commissioning period under predetermined conditions
50 + Years of Manufacturing Excellence! Since 1959

15. The various types of energy efficiency
contracts
Shared savings
• The commitment is to pay the service contractor an agreed fraction of
the metered energy savings. Payments are flexible depending on the
level of energy efficiency performance (savings and level of activity of
the company. The contract period is also flexible to achieve fair
compensation (equivalent to debt rescheduling). For the industry, it is a
guarantee of positive cash flow. Similar shared savings contracts are
practiced in oil production ("production sharing contracts").
• Advantages
• Incentive to exceed the guaranteed objectives by an effect of results sharing
• Disadvantages
• Fear of windfall profit if the savings become very important
• Lack of transparency when the skill is asymmetric
• Diverted if used as the sole means of payment for services
• Higher charge as the ESCO has more risk to take up (project performance risk
and credit risk to Lender
50 + Years of Manufacturing Excellence! Since 1959

16. The various types of energy efficiency
contracts
• Third-party finance
• The industry is contacting a third party that mobilizes resources
(funding, technical and financial skills, ...) to act on the energy assets of
the industry (equipment, staff) to reduce the cost of energy. The third
party supports not only funding, but also the responsibility for the
completion of the operation. It combines the business model of the bank
and the service company (engineering, operations, maintenance, ...)
• Advantages
• Preferred model for public entities whose cash flow is stable and
guaranteed by the state, but who do not have access to debt finance as
a result of their statute or complexity / slow decision-making process
• Disadvantages
• A third party finance arrangement will always be more expensive than
direct funding unless there are tax incentives
50 + Years of Manufacturing Excellence! Since 1959

17. Energy Efficiency Investment
is Funded by the Energy Savings
• The system of performance
contract has helped in tackling
many of the implementation
barriers.
• The system covers the entire
project cycle-audit to savings
verification
Ksh
• Uses business analytical tool
more extensively-able to draw
top management attention
• Most importantly fee gets
linked to savings-commitment
to implementation.
}SAVINGS
CASH
FLOW
ESCO
PAYMENT
NEW
ENERGY
BILL
OLD
ENERGY
BILL
50 + Years of Manufacturing Excellence! Since 1959

18. Example of finance structuring
(annual cash flows)
Industry -
budget and
operation
account
Energy
budget line
ESCO
Account
100 100
4 70
Energy
supplier
EE Service
Company
EE saving 30%
20
10
Interest
Principal
5
15
10
6 Investment
Gross Margin
brute ESCO
over 5 years = 75
Share of
savings
50 + Years of Manufacturing Excellence! Since 1959

19. RTAP Model
• €30 million (worth $40 million) long term and
concessional financing is being made available
by the “Agence Française de Développement”
(AFD) to Kenya
• In Kenya, the Line of credit has been signed with
two partner banks CfC Stanbic and Co-op Bank
• In Tanzania and Uganda, the lines of credit are
still in discussion with candidate partner banks
and are not available yet
50 + Years of Manufacturing Excellence! Since 1959

20. RTAP Model to date.
RTAP Pipeline &
Technology Total MW
Energy
GWh/yr
CO2
abatement
t/yr
Investment
(US$million)
Debt finance
(US$ million) No of sites by when
Pipeline Kenya
RE business model 122 754 579645 330 194 47 2014
Hydro 86 546 419097 252 161 35 2014
Biomass 0 1 353 0 0 1 2014
Wind 0 0 0 0 0 0 2014
Geothermal 5 33 28528 19 7 1 2014
Biogas 20 155 115033 25 12 4 2014
Solar PV 11 19 16635 33 14 6 2014
EE business model 24 110 114800 54 45 27 2013
Cogeneration 3 16 9796 6 5 3 2013
Fuel cost abat. 9 48 17557 6 5 5 2013
Electricity cost abat. 12 45 87199 38 32 16 2013
Other Energy Efficiency 0 1 248 3 2 3 2013
Total Kenya 146 864 694446 383 239 74 2014
50 + Years of Manufacturing Excellence! Since 1959

21. What About the challenge To
financiers / Banks?
• Financial Institution (Banks) need to see EE financing as a new
area of Business.
– Could they take the step of Faith with the EE
entrepreneurs??
– It takes the efforts of all S/holders to progress this
• EE entrepreneurs need to take more initiative in working
towards developing the EE financing models in Kenya.
• EQUITY ---Still a challenge. Proper Equity funds need to be
structured to match EE and RE project finance requirements.
50 + Years of Manufacturing Excellence! Since 1959

22. We Can do It as they did also
• 1994-95 - 3 formed with support from USAID
• Presently 10 to 15 are operating, though information on
projects and performance are not publicly available
• Projects are mostly being carried out under guaranteed
savings scheme without financial commitment on the
part of the ESCO’s
• In Sri lanka the ESCO business model is a growing partnership
between the financiers (lenders) and the ESCO’s
• In Kenya Only one active Energy (in My limited Interaction) is
working on a a “shared savings model”
50 + Years of Manufacturing Excellence! Since 1959

23. Finally
• Jeff M Murage
• Jeff.muarge@kam.co.ke or muragej@gmail.com
• +254735818626
50 + Years of Manufacturing Excellence! Since 1959