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Energy Efficiency Financing and Off Balance Sheet Treatment

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Presentation given to IFC ESCO Access to Finance Conference, Johannesburg, 28 May 2013

Presentation given to IFC ESCO Access to Finance Conference, Johannesburg, 28 May 2013

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    Energy Efficiency Financing and Off Balance Sheet Treatment Energy Efficiency Financing and Off Balance Sheet Treatment Presentation Transcript

    • Energy Efficiency Finance andOff Balance Sheet treatmentSteven FawkesInternational ESCO Finance ConferenceJohannesburg29th May 2013
    • Agenda• The background• Review of EE financing structures• Implications
    • “the job of accounting is tokeep capitalism honest”Sir David TweedieChairman of IASB2001 to 2011
    • The Times They Are a-Changing• Harmonisation of IASB and FASB (US GAAP)– “all major economies” converging on IFRS “in thenear future”• Changes in balance sheet treatment around:– “balance sheet window dressing”– leasing
    • If it looks like a duck…….“What’s more, the companies providing the financing are more oftenthan not banks or subsidiaries of banks. If this financing were in theform of a loan to purchase an asset, then it would be recorded. Call it alease and miraculously it does not show up in your books. In mybook, if it looks like a duck, swims like a duck, and quacks like aduck, then it probably is a duck. So is the case with debt – leasing orotherwise.”“Companies tend to love off-balance sheet financing, as it masks thetrue extent of their leverage and many of those that make extensiveuse of leasing for this purpose are not happy.”Hans Hoogervorst, Chairman, IASB, November 2012
    • Leasing harmonisation2006– IASB and FSAB initiated project to improve financial reporting ofleases under IFRS and US GAAP16 May 2013– IASB and FSAB released revised “Exposure Draft” on leasing– IASB and FSAB versions almost identical13 September 2013– Comments on “Exposure Draft” due2016/17– Changes likely to come into effect
    • Agenda• The background• Review of EE financing structures• Implications
    • Energy Performance Contract (EPC)ESCO PropertyownerInvestorsEnergyprovidersContractors EquipmentvendorsConstructionmanagersArchitects &EngineersEfficiency Supplier CommunityEnergyconsultantsReturns toinvestorsProject capitalEnergyDeveloper FeeEnergy servicesDevelop &OperateSupply andbuildEnergypaymentESCO contractFunding AgreementConstruction AgreementsSupply andbuild© Day 1 Energy January 2012
    • Energy Services Agreement (ESA)PropertyownerInvestorsEnergyprovidersContractors EquipmentvendorsConstructionmanagersArchitects &EngineersEfficiency Supplier CommunityTransactionvehicleEnergyconsultantsDeveloper FeeReturns toinvestorsProject capitalRealisedsavingsEnergy servicesEnergyDevelop &OperateSupply andbuildShare ofsavings© Day 1 Energy January 2012ESCOSupply andbuildFunding AgreementESA contractESCO contractConstruction Agreements
    • Managed Energy Services Agreement (MESA)PropertyownerInvestorsEnergyprovidersContractors EquipmentvendorsConstructionmanagersArchitects &EngineersEfficiency Supplier CommunityTransactionvehicleEnergyconsultantsDeveloper FeeReturns toinvestorsProject capitalRealisedsavingsEnergy servicesEnergyDevelop &OperateLock boxEnergy paymentHistoricalenergy spendEnergypayment© Day 1 Energy January 2012ESCOSupply andbuildMESA contractFunding AgreementESCO contractConstruction Agreements
    • Other Emerging Structures (US)• Property Assessed Clean Energy (PACE)• On Bill Repayment (OBR)
    • Source: Wilson Sonsini Goodrich & Rosati
    • ESA and off balance sheet“There are lingering questions around on vs. off balancesheet treatment of ESA structures as FASB and IASBaccounting standards converge.”“ESA is, in our opinion, the retrofit finance structure thatallows the commercial and institutional market to mostefficiently evolve and scale on its own, enhanced by, butnot requiring, external influences such as legislation andsubsidy.”Source: Deutsche Bank & Rockefeller Foundation
    • Agenda• The background• Review of EE financing structures• Implications
    • Implications for EE financing• Historically ESCos have used operational leases as a tool to get workof the balance sheet of the client• Operating leases will likely no longer be able to be used for off-balance sheet financing.• Final rules related to leases have not yet been released, but theaccounting of leases as on-balance sheet appears highly likely.• There is also a lack of clarity as to whether emerging financingstrategies, such as PACE, on-bill repayment, and energy serviceagreements (ESAs) will be treated as on- or off-balance sheet.• Stakeholder consultations reveal that PACE and on-bill repaymentare likely to be considered on- balance sheet, whereas there maybe ways to structure ESAs so that they remain off-balance sheet.Source: Meister Consultants
    • The future• ESA and MESA structures have best chance ofbeing off balance sheet• Require CAREFUL structuring – critical issues:– Services orientated not equipment– Customer control over assets• Public sector requires guidance– Different sub-sectors have different approaches• Opportunity for new structures and businessmodels
    • ContactSteve Fawkessfawkes@dayoneenergy.com+44 77 0223 1995www.onlyelevenpercent.com@DrSteveFawkes© Steven Fawkes 201320