LOAN FINANCING, ESCOS, UTILITY DSM
Models for Energy Efficiency
Projects Financing

Two principles may be considered in the development of new
programs and major projects
 A careful diagnostic review of the local institutional environment
should be conducted at the outset, followed by development of
customized institutional approaches. Review shall comprise of
 The financial sector
 Local capabilities for technical assessment work
 The energy efficiency market and
 Role of government in energy efficiency arena (policy, regulation and
program development & implementation)
 End user should face commercial terms
 Financing and Technical assessment services to end users should be
provided on commercial terms as subsidies prove difficult to maintain
over the long term as the total market size exceeds the amount of
subsidy available
Basic Principles

Models of EE
Project
Financing
Lending through
local financial
institution
Energy Service
Companies
(ESCOs)
Energy Utility
Demand Side
Management
Models for EE Project Financing

 Commercial Banks
 Loan Guarantee Programs
 Use of Development Finance Institutions and Special Resolving
Funds
Lending through Local Financial
Institution

 Partnering with the financial intermediaries and catering to their
business approach and market driven strategies
 Identification of local financial intermediaries
 Design of energy efficiency lending program
 Dealing with incentives of banks to participate in EE lending
 Such as partial risk guarantee program
 Use of performance incentive
 Integration of institutional arrangement for technical assessment
work with the financial intermediation of the banks is essential
 The SME EE lending programs of India banks
 SBI, Canara Bank, The Bank of India, Union Bank, The Bank of Baroda
with little support from IREDA
Commercial Banks

 Designed to defray parts of the risks of loan repayment for
energy efficiency loans.
 If is particularly useful where local financial institutions attach
additional risk to business concept of energy efficiency because
they are unfamiliar with the concepts.
 May provide a useful platform for delivery of a broad package of
assistance to financial intermediaries, including technical
support for development of EE loan products.
 E.g. Hungary Energy Efficiency Co-financing program; China
ESCO Partial Loan Guarantee Program
Loan Guarantee Programs

 A number of countries have created special DFIs for financing
energy efficiency and alternative energy, for e.g. IREDA and
CECIC which are publicly owned
 Some countries may develop special energy efficiency loan
funds, as special legal entities governed by boards or
foundations representing both public and private sector, for e.g.
Romanian Energy Efficiency Fund (FREE) and Bulgarian Energy
Efficiency Fund
 Advantages of specialized entities or funds
 Concentrate attention to the specialized task of EE lending
 Ability of offer clients a one-stop shop
Use of Development Financial
Institutions and Special Revolving funds

 Includes company using energy performance contracting as part of
energy efficiency investment transactions.
 Technical assessment work is a key part of the work of all ESCOs.
 ESCO model are mainly differentiated on the basis of whether or
not ESCO provides any financing for the investment projects it
develops.
 Different models
 Full Service: Identifies, design, finances, oversees installation and
commissioning of project.
 Shared Savings: Receives compensation in the form of share of the
energy savings achieved over a defined period
 Guaranteed savings: Guarantees the energy savings to the client over
defined period
Energy Service Companies (ESCO)

 ESCOs that provides financing to clients may be viewed as a
partial energy efficiency investment financing mechanism.
 ESCOs that do not provide financing to the clients may best be
categorized as technical assessment and engineering services
entities.
 ESCO business model cater to private sector companies.
Continued…

Shared Saving Model

Guaranteed Saving Model

 It can be done by creation of mandatory regulation to pursue
DSM program
 Utility may align DSM program to reduce peak load requirement
with energy efficiency interest
 Occasionally, utilities also may be interested in EE measures
among certain customer categories where utilities are loosing
money on electricity sales under prevailing pricing structure
Energy Utility DSM

 Advantage
 Utility DSM is the use of what are usually well developed
 Financially strong utility institutions that have direct relation with
energy users for program delivery
 For e.g. In Sri Lanka utilities may even be able to use electricity bills
as the contractual mechanism to ensure repayment from customers
for EE investment
 Disadvantage
 Most utilities do not have natural incentives to promote true energy
conservation, which results in a loss of sales of their core product
 To use the DSM mechanism effectively, the utility incentives
issue must be properly addressed.
Advantages and Disadvantages of
DSM