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Energy Efficiency financing & evaluation criteria


Outline: …


Existing EE Related Funds & Incentives In Malaysia

Financing Options To Implement EE Projects

EE Project Evaluation

Examples Of EE Solutions & Technologies


What’s Next?

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  • 1. Fortnightly Technical Talk For Project Management ENERGY EFFICIENCY PROJECTS : FINANCING & EVALUATION CRITERIA By Zaini Abdul Wahab Director of Operation CNS GROUP 14th June 2012 Menara SME Bank
  • 2. Outline 1. Existing EE Related Funds & Incentives In Malaysia 2. Financing Options To Implement EE Projects 3. EE Project Evaluation 4. Examples Of EE Solutions & Technologies 5. Conclusions 6. What’s Next?
  • 4. Green Technology Fund Scheme(GTFS)  Initial RM1.5 billion fund shared by government and banks to improve the supply and utilization of green technologies in Malaysia  2% subsidized interest rate of the total interest/profit rate  Any technology that suitable for the identified project criteria provided it is a proven technology FEATURES PRODUCER OF GREEN TECHNOLOGY USER OF GREEN TECHNOLOGY Financing size Maximum: RM50 million per company Maximum: RM10 million per company Financing tenure Up to 15 years Up to 10 years Eligibility criteria Legally registered Malaysian owned companies (at least 51%) in all economic sectors Legally registered Malaysian -owned companies (at least 70%) in all economic sector
  • 5. EPP9: Chiller Replacement Program • Eligible for private business entities registered in Malaysia • Comfort cooling for offices and commercial buildings only • Must purchase a new eligible EE chiller or replace an existing chiller due to lifespan (more than 10years) and inefficient existing chiller within the specified period No. State/Region 1 2 3 Peninsular Sabah Sarawak Total Total Targeted Quantity in 2011* (Refrigerant Ton,RT) 50,400 10,800 10,800 72,000 Percentage (%) 70 15 15 100
  • 6. Fiscal Incentives For EE & RE Projects  Introduced by the government to promote EE & RE  Companies implementing EE measures in their premises (…2015) • Investment Tax Allowance • Accelerated capital allowance • import duty exemption • sales tax exemption  GBI Certified Buildings(…2014)  Implementing Agencies: • • MIDA – Business & Other Services Division(Application) Energy Commission(Technical assessment)
  • 7. Green Buildings Owners Of Buildings Awarded With The GBI Certificate Tax exemption equivalent to 100% of the additional capital expenditure incurred to obtain the GBI Certificate Buyers Of Buildings And Residential Properties Awarded With The GBI Certificates Bought From Real Property Developers  Stamp duty exemption on instrument of transfer of ownership of such building.  Amount of stamp duty exemption is on the additional cost incurred and is given only once to the first owner of the building 7
  • 8. How is the progress of the funds and incentives?
  • 10. Considering EE Financing?  It is worth asking why the public or private sector would consider financing EE investments over other options  Financing programs are almost always more complex to operate than the most common alternative—rebate programs  Financing programs require a long-term commitment of financial and human resources to collect principal and interest  In most cases they also require a credit evaluation process that is not necessary for a straight forward
  • 11. Why Use Financing for Energy Efficiency? 1. Financing expands the amount of capital available to invest by attracting new sources of capital for EE &RE projects.  Financing energy efficiency investments gives a return on capital to investors that is unavailable in rebate or grant programs 2. Financing expands the number of players that can support EE or RE  Utilities and some government entities operate rebate programs because they have access to capital that does not require a return;  Financing programs allow lending institutions, ranging from banks to consumer credit companies and others, to administer loan programs and bring their own capital to those loan programs. 3. Financing means “skin in the game” for customer/borrowers.  Financing implies that customer/borrowers must pay back the money that they have borrowed to install EE measures.  This ―skin in the game may encourage them to operate and maintain equipment better than if simply given it to them. 4. Financing programs extend the life of limited government funds  A rebate or grant program-funding with no return.  A financing program that generates a return of both the capital invested as well as a return on that capital through a revolving fund can finance new investments in EE&RE many times over. 5. Financing programs can complement rebate or grant programs  For further long term saving for existing and future equipment/facilities
  • 12. Key Challenges in EE Financing  Still “ high risk”- banks still using the same guidelines for all industries and sectors  Risk management and credit enhancement is critical. Default rates for efficiency programs have been low in many countries(Thailand, USA) • results of careful underwriting in a small number of programs and the fact that EE measures actually reduce borrowers’ day to day expenses, thus making loan repayments affordable  However, it is unlikely that EE lending has a long or strong enough credit history to attract a large amount of outside capital and investors without additional credit enhancements (loan loss reserves and guarantees, for instance) to secure payment
  • 13. Classification of EE Financing Barriers Source:
  • 14. Key Risk Assessment Factors For EE in Asean  Risk aversion to finance new technologies-EE projects have yet to show sustainable commercial potentials  Applicant(mainly SMEs) have low capital compare to amount of loans requested  Risk assessment-base on performance & track records rather than potential of the technology  Applicants have yet to secure long-term contracts from reputable clients  In Malaysian GTFS: 60% guarantee by the government considered low compare to risks involved-Suggested 80% Source: Green Prospects Asia, June 2012
  • 15. Options for EE Private Funding Internal Sources: Companies’ Internal Budget External Sources  Local and international commercial banks  International banks  International organizations • GEF, UNDP Fund for EE projects  -With guarantee from the government Distribution Mechanism  With low interest loan for approved applicants  Approved/endorsed by the competent body appointed by the government
  • 16. Option 1: Dedicated Credit Line Structure Source:
  • 17. Examples of Dedicated Credit Line Programs Source:
  • 18. Option 2: Risk Sharing Facilities Objectives providing access to finance from commercial Local Financial Institutions(LFIs) reducing the cost of capital by reducing the risk faced by the lender; expanding the loan tenor or grace period to match project cash flows; and helping create a long-term sustainable market for financing of EE projects.
  • 19. Risk Sharing Facilities Structure Source:
  • 20. Examples Risk Sharing Programs Source:
  • 21. Examples Of EE Fund
  • 22. Revolving Fund: Thailand
  • 23. ESCO Fund: Thailand
  • 24. What is Energy Services?
  • 25. What is ESCO?  An Energy Service Company  Capable of providing a turnkey service for the implementation of building EE or energy management projects  Providing comprehensive energy services including financing, and its delivery by one supplier that makes energy performance contracts (EPCs) covering : • • • • • • • • energy analysis and audits, energy management, project design and implementation, maintenance and operation, monitoring and evaluation of savings, property/facility management, energy and/or equipment supply, provision of service (space heating/cooling, lighting, etc.).  Once the expenses have been fully recovered or the contract expires (whichever occurs first), the building owner/client retains future savings from lower energy bills.
  • 26. Barriers to ESCOs in Developing Countries  Most independent ESCOs have a small capital base • • have difficulties accessing project funding from commercial financial institutions (FIs) recycling capital is needed through bond issuances.  New Concept among FIs • • project financing for ESCO projects is not commonly accepted by FIs in developing countries ESCO model is new in developing countries  Smaller compare to other investment • EE projects are generally small relative to other investment projects being considered by the FIs have a relatively large proportion of “soft costs” that cannot be easily collaterised.  Immaturity of the EE market in developing countries • • • • costs of project development are relatively high most small ESCOs find it difficult to finance project development costs limited experience with successful ESCO projects ESCO s have not yet developed good credibility with energy users  Lack of expertise among FIs • • • FI’s staff typically has limited knowledge and understanding of EE projects and the EPC concept FIs perceive EE projects (incorrectly) as inherently more risky than other investments. The combination of high project developments costs, limited access to long-term and low-cost project financing, high equity requirements for project financing
  • 27. Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation  Senior Management team members  Technical Team Members • Registered Professional/Certified by recognized bodies  Technical support personnel • Qualifications, employment term  Basic energy audit equipment  Experiences in EE projects • Scope of works  Track records in EE related projects/works  Registration/membership with authorized/industry bodies such as MoF, SEDA Malaysia & MAESCO • For accountability and verification of qualified with the minimum requirements
  • 28. What is Energy Performance Contracting(EPC) in EE?  EPC concept for energy saving measure implementation is through direct investments by ESCO with “Zero Cost” concept to the owner or the management of building or industrial facilities  The returns from the investments will be used to pay back the ESCO only from the actual energy savings achieved from the implementation of energy conservation measures by ESCO based on shared- saving contract with conditions agreed by both parties.
  • 29. Benefits of EPC : Banks/Financial Institutions  EPC provides needed comfort to investors • Assures adequate cash flow • Provides necessary third party engineering calculations to justify the viability of technology being applied • Provides cost estimates that will be guaranteed by design & build contract provided by ESCO • Provides certainty that the money goes for the stated purpose and not, say, diverted to cover operating costs
  • 30. Benefits of EPC: Facilities Owner  Finance energy: saving improvements with no upfront capital  Invest savings achieved into other projects  Energy saving is shared between ESCO and the building owner/client as per agreed terms and payment schedule with a single-source responsibility  ESCO to identify Energy Saving Measures (ESMs) to replace / modify existing inefficient systems or/and equipment  ESCO supplies, installs, maintains and retain an on-going operational role in measuring and verifying the savings for each ESM over the financing/contractual terms.  ESCO guarantee Energy savings and recover its investment including interest & other costs out of generated actual energy savings the remuneration of ESCOs is directly tied to the energy savings achieved  Use future energy ,cut operating cost, be more competitive and improved comfort/productivity from upgraded system  Positive environmental impacts & reduced environmental footprint
  • 32. Options To Implement Energy Saving Measures MEASURES With LOW/ NO COST Minimal Cost Savings MEASURES WITH HIGH COST Significant Cost Savings • Management Directives • Implementation of EMS - to ensure sustainability of energy cost reduction initiatives • Priorities of budget core business/operations • Investment risks • Limited human resources & expertise In-house initiatives Expert assistance & investment from ESCO
  • 33. Financing Options for EPC 1. GUARANTEED SAVINGS Model 2. SHARED SAVINGS Model • The loan goes on the client’s balance sheet • The loan goes on ESCO’s balance sheet 3. Through a Special Purpose Vehicle(SPV) created specially for the purpose  In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client
  • 34. Guaranteed Savings Model Project Fees Loan FACILITIES OWNER BANK Repayment ESCO Project Design& Implementation
  • 35. How Guaranteed Savings Model Works?  Facilities owner takes out “normal” loan (will appear on balance sheet)  ESCO guarantees loan can be repaid with savings  ESCO pays difference if minimum savings not met Main advantage: ESCO can undertake more projects
  • 36. Shared Savings Model EE PROJECT Energy saving share Energy saving share Financing Loan BANK FACILITIES OWNER ESCO Repayment Project Design& Implementation
  • 37. Shared Saving Mechanism Energy Bills Baseline Savings for the owner Energy bill before energy saving measures implementation Before Contract Period Payment to ESCO Lower Energy Bill During contract period Savings for the owner Energy bill saved Lower Energy Bill After Contract period time (year)
  • 38. How Shared Savings Model Works?  Facilities owner does not take loan (will not appear on balance sheet)  ESCO finances project: takes performance & credit risk  Customer pays higher % Main advantage: Independent of Facilities owner ’s borrowing capacity
  • 39. Through a SPV
  • 40. Common Elements of EPC Project Development
  • 41. Potential Areas for EPC Projects Energy Conservation  Heating , Ventilation, Cooling & Air Conditioning  Operational, & equipment controls  Heating equipment  Chillers, AHUs, fans, pumps Renewable & Alternative Energy Sources  Utilization of Feed-in Tariff(FiT) offered by SEDA Malaysia  (  Compressed Air System  Lighting Systems     Buildings(interior & exterior) Public(Street lights) Operational controls Types of lamp technologies  Maximum Demand Controls  Solar Photo Voltaic(PV)  Building Integrated PV System  PV Power Plant  Biomass & Biogas Power Plant  Waste-to-energy systems
  • 43. Proposed Project Basic Key Criteria Technical Viability Financial Viability Sustainability Plan
  • 44. Technical Viability
  • 45. Type Of Project And General Information Modification/improvement or Introduction/replacement for higher efficiency technologies Location and types of energy supplied and tariff/rates applied (fuel, electricity) Plant/equipment energy consumption per year Existing plant/equipment energy efficiency performance
  • 46. Energy Efficiency Information  Technology description and operational principles to improve efficiency  Schematic drawings/diagrams  Function of each equipment contributing to improve efficiency  Comparison of energy performance data (conventional /existing and the proposed)  Equipment information: • Name, brand, model and rated capacity • Energy performance data and testing standard used • Energy performance test reports • Producer/manufacturer • Product applications
  • 47. Energy Saving Potentials  Types of energy to be saved (fuel, electricity)  Method and data used in potential energy saving calculations  Estimated energy savings in energy units and currency
  • 48. Measurement And Verification Of Results  Energy saving measurement for verification • baseline data/performance indicator • measuring type and point  Require energy metering “The long term success of energy management projects is often hampered by the inability of the project partners to agree on an accurate, successful M&V plan.….. M&V protocol discusses procedures that, when implemented, help buyers, sellers and financiers of energy projects to agree on an M&V plan and quantify savings from energy conservation measure (ECM) projects.” - (IPMVP, Volume I, March 2002)
  • 49. Energy Saving Measurement & Verification Baselines for saving calculations & measurements at agreed operating conditions before implementation  Energy bills  Periodical Data logging • Permanent- with submetering or • Portable meter scheduled visits  Savings Verification • Joint scheduled data logging & measurements Baselines for saving calculations & measurements mutually agreed for any significant energy using operational change
  • 50. Factors should be considered while drafting a new ESCO M&V to reduce dispute in EPC Contract  Commitment From Client  Factors Affecting Savings Performance  Valuating Savings Uncertainty  Minimum Operating Conditions  Energy Prices  Verification By A Third Party  Baseline Adjustments (Non-routine)  Balancing Uncertainty And Cost
  • 51. Economic Viability
  • 52. Financial Analysis  Results often becomes the key parameter for the management acceptance  Smaller projects will normally be funded from internal sources.  Larger projects with external funding may require consideration of : • • • • • Amount of investment. Amount and period of loan. Current and expected future inflation rates. Asset of borrower. Lender’s judgment of the risk involved, etc.
  • 53. Criteria Used Use company financial evaluation criteria • Simple payback period for low cost projects • Rate of return considers the benefits after the project has paid back. • Net present value gives the real cost benefits of a project. • Internal rate of return offers the most comprehensive comparator
  • 54. Life Cycle Cost Analysis Consider the total life span of the equipment Life-Cycle Cost = Purchasing Cost + Operation (Energy + Water) + Maintenance And Repairs
  • 55. Life Cycle Cost Indication: Electric Motors
  • 56. Sustainability Plan
  • 57. Implementation Plan  Resources • Trained people involved in the implementation of the project (internal personnel/external) • Efficient operation & maintenance budget  Work Plan • Steps to be taken to implement the project and the targeted duration for completion  Energy Management Plan • Equipment/System • Plant • Organizational (Adoption of Sustainable Energy Management System /ISO 50001:2011)
  • 58. Options & Risks for Implementation Energy Saving Projects Shared Saving/ Energy Performance Contracting(EPC) Component Energy Conservation Renewable Energy Conventional Technical Expertise ESCO ESCO ESCO Implementation/ Installation ESCO ESCO ESCO Funding Source ESCO ESCO Owner Sharing of returns ratio At agreed ratio & conditions At agreed ratio & conditions 100% to Owner Technical & Investment Risks ESCO ESCO Owner Performance Maintenance & monitoring ESCO ESCO Owner
  • 60. Computer -Aided Energy Resource Management System(CERMS) • Data acquisition • Data Monitoring • Data Analysis • CONTROLS FOR ENERGY EFFICIENT OPERATIONS: AC systems, Lighting
  • 61. Energy Efficient Solutions Integrated Cogeneration System • Waste Heat Management • Steam Management System • Process Reengineering & Improvement
  • 62. Lighting Solutions High Performance Fluorescent Lamp HPT8Vesta Energy Saving Micro Ballast 28W
  • 63. Case Study 1: Public Library 1. Vesta T8-28W Micro Ballast – 542 sets 2. Vesta HP T8-28 W FL – 1,354 tubes Qty Installed: Location Ground FLR Level 1 Level 2 Level 3 Level 4 Level 5 TOTAL Total (Sets) 171 124 64 61 61 61 542 1 Lamp (Sets) 0 0 0 0 0 0 0 2 Lamps (Sets) 145 120 8 8 8 5 294 3 Lamps (Sets) 4 4 56 53 53 56 226 4 Lamps (Sets) 22 0 0 0 0 0 22
  • 64. Power Consumption Analysis (7.8(8.0 – 4.6)/8.0 – 4.7)/7.8 Saving = Saving = 40%42.5%
  • 65. Comparison Before & After Implementation (Before) Conventional FL 36W (After) HP T8-28W
  • 66. Case Study 2: Electronic Industry Application Areas: - Fluorescent Lamps - High bay Lighting - HID Before Installation: 20,000 pcs x 45W/1000 = 900 kWh Total annual power = 900 x 8640 hrs = 7,776,000 kWh After Installation: 20,000 pcs x 26W/1000 = 520 kWh Total annual power = 520 x 8,640 hrs = 4,492,800 kWh Total annual Saving = 42.2% = 3,283,200 kWh, = RM 920,000
  • 67. Case Study 3: Industrial Warehouse (Before) High bay light 400w (After) Vesta 4x28W High bay FL *SAVE 83% *SAME BRIGHTNESS!! * Longer Life Span Before: Origin high bay light fitting 400W x 192 set Electrical Usage per fitting: 0.410kW After : T8 High bay 4 x 28w fluorescent light x 114 sets Electrical Usage per fitting: 0.112kW Consumption kW per hour: 192set x 0.41kW= 78.72kW Consumption kW per hour: 114set x 0.112kw= 12.768kW Consumption Monthly : 1889.28kWh x 30days= 56678.4kWh Consumption Monthly : 306.43kWh x 30days= 9193kWh Monthly usage : 56678.4 x RM0.28= RM 15,870 Monthly usage : 9193.0 x RM0.28= RM 2,574
  • 68. Conclusions  Financing for EE is more complex than rebate or grant programs  Benefits of financing, including the potential for leverage and for low or no subsidization • provide new opportunities for overcoming barriers to the adoption of EE measures.  Financing should be viewed as a complement to other strategies such as building energy codes, appliance EE standards, or utility rebate programs
  • 69. Conclusions..ctnd  A successful financing program should support, and not be a barrier to, customer participation - financing should remain streamlined, easy-to-access, and quick.  Customers need to know that they will have access to financing, but they are not participating in a program simply because it offers good financial terms ….As they are striving for lower utility bills, an upgraded business property, and more comfortable working spaces.
  • 70. What’s Next?
  • 71. Proposed Capacity Building Program by the government through a competent/an authorized body for EE  Development of in-house capacity in technical & financial evaluation of EE&EC Projects in financial institutions  Development and acceptance of standard technical evaluation, monitoring and performance verification criteria for EE&EC Projects  With by technical experts from recognized professional/industrial bodies or association  Development of and acceptance of standard evaluation for funding and risk assessment criteria for EE&EC Projects  Sharing of experiences in successful investments in EE projects through seminars/dialogues • • • (results, payback period) from people in business communities who have experienced it Criteria of viable EE projects Competency of ESCOs  Promotion of incentives/tax exemptions for EE&EC investment for companies
  • 72. Possible Actions Required for Financial Institutions  To specialize in green technologies such as EE • EE has wide range of technologies & applications with different levels of difficulties in technology(implementation, reliability, ease of operation and durability Due to…  Insufficient proven domestic case studies by banks • EE project require time and specific expertise to be assessed  EE funds started in other countries such as Thailand & USA has developed in-house expertise for banks in evaluating EE projects Source: Green Prospects Asia, June 2012
  • 73. Proposed Basic Criteria To Evaluate ESCO for EE Project Implementation  Senior Management team members  Technical Team Members • Registered Professional/Certified by recognized bodies  Technical support personnel  Basic energy audit equipment  Experiences in EE projects • Scope of works  Track records in EE related projects/works  Registration/membership with authorized/industry bodies such as MoF, SEDA Malaysia & MAESCO • For accountability and verification of qualified with the minimum requirements
  • 74. Last Words I hope today’s sessions will help you to understand both the challenges to and opportunities for using EE financing in a productive manner
  • 75. Thank you for your time & attention.