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
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Energy Efficiency Financing and Off Balance Sheet Treatment
- 1. Energy Efficiency Finance and Off Balance Sheet treatment Steven Fawkes International ESCO Finance Conference Johannesburg 29th May 2013
- 2. Agenda • The background • Review of EE financing structures • Implications
- 3. “the job of accounting is to keep capitalism honest” Sir David Tweedie Chairman of IASB 2001 to 2011
- 5. The Times They Are a-Changing • Harmonisation of IASB and FASB (US GAAP) – “all major economies” converging on IFRS “in the near future” • Changes in balance sheet treatment around: – “balance sheet window dressing” – leasing
- 6. If it looks like a duck……. “What’s more, the companies providing the financing are more often than not banks or subsidiaries of banks. If this financing were in the form of a loan to purchase an asset, then it would be recorded. Call it a lease and miraculously it does not show up in your books. In my book, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. So is the case with debt – leasing or otherwise.” “Companies tend to love off-balance sheet financing, as it masks the true extent of their leverage and many of those that make extensive use of leasing for this purpose are not happy.” Hans Hoogervorst, Chairman, IASB, November 2012
- 7. Leasing harmonisation 2006 – IASB and FSAB initiated project to improve financial reporting of leases under IFRS and US GAAP 16 May 2013 – IASB and FSAB released revised “Exposure Draft” on leasing – IASB and FSAB versions almost identical 13 September 2013 – Comments on “Exposure Draft” due 2016/17 – Changes likely to come into effect
- 8. Agenda • The background • Review of EE financing structures • Implications
- 9. Energy Performance Contract (EPC) ESCO Property owner Investors Energy providers Contractors Equipment vendors Construction managers Architects & Engineers Efficiency Supplier Community Energy consultants Returns to investors Project capital Energy Developer Fee Energy services Develop & Operate Supply and build Energy payment ESCO contract Funding Agreement Construction Agreements Supply and build © Day 1 Energy January 2012
- 10. Energy Services Agreement (ESA) Property owner Investors Energy providers Contractors Equipment vendors Construction managers Architects & Engineers Efficiency Supplier Community Transaction vehicle Energy consultants Developer Fee Returns to investors Project capital Realised savings Energy services Energy Develop & Operate Supply and build Share of savings © Day 1 Energy January 2012 ESCO Supply and build Funding Agreement ESA contractESCO contract Construction Agreements
- 11. Managed Energy Services Agreement (MESA) Property owner Investors Energy providers Contractors Equipment vendors Construction managers Architects & Engineers Efficiency Supplier Community Transaction vehicle Energy consultants Developer Fee Returns to investors Project capital Realised savings Energy services Energy Develop & Operate Lock box Energy payment Historical energy spend Energy payment © Day 1 Energy January 2012 ESCO Supply and build MESA contract Funding Agreement ESCO contract Construction Agreements
- 12. Other Emerging Structures (US) • Property Assessed Clean Energy (PACE) • On Bill Repayment (OBR)
- 14. Source: Wilson Sonsini Goodrich & Rosati
- 16. ESA and off balance sheet “There are lingering questions around on vs. off balance sheet treatment of ESA structures as FASB and IASB accounting standards converge.” “ESA is, in our opinion, the retrofit finance structure that allows the commercial and institutional market to most efficiently evolve and scale on its own, enhanced by, but not requiring, external influences such as legislation and subsidy.” Source: Deutsche Bank & Rockefeller Foundation
- 17. Agenda • The background • Review of EE financing structures • Implications
- 18. Implications for EE financing • Historically ESCos have used operational leases as a tool to get work of 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 the accounting of leases as on-balance sheet appears highly likely. • There is also a lack of clarity as to whether emerging financing strategies, such as PACE, on-bill repayment, and energy service agreements (ESAs) will be treated as on- or off-balance sheet. • Stakeholder consultations reveal that PACE and on-bill repayment are likely to be considered on- balance sheet, whereas there may be ways to structure ESAs so that they remain off-balance sheet. Source: Meister Consultants
- 19. The future • ESA and MESA structures have best chance of being 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 business models
- 20. Contact Steve Fawkes sfawkes@dayoneenergy.com +44 77 0223 1995 www.onlyelevenpercent.com @DrSteveFawkes © Steven Fawkes 2013 20