INDUSTRIAL ENERGY EFFICIENCY FINANCING: THE EBRD EXPERIENCE JOSU - - PowerPoint PPT Presentation

INDUSTRIAL ENERGY EFFICIENCY FINANCING: THE EBRD EXPERIENCE

PRESENTATION PREPARED FOR FIRST MEETING ENERGY EFFICIENCY CAMPUS TORINO, 17 OCTOBER 2013

JOSUÉ TANAKA MANAGING DIRECTOR ENERGY EFFICIENCY AND CLIMATE CHANGE

• EBRD overview
• Rationale for EBRD energy efficiency focus
• SEI: EBRD energy efficiency strategy
• EBRD industrial energy efficiency activity
• ESCO: opportunities, challenges and action

PRESENTATION STRUCTURE

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INDUSTRIAL ENERGY EFFICIENCY FINANCING: THE EBRD EXPERIENCE

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EBRD OVERVIEW

INTRODUCTION

• International financial institution

promoting transition to market economies in 34 countries from central Europe to central Asia.

• In 2011, the Bank expanded its operations

to include Egypt, Jordan, Morocco and Tunisia (Southern and Eastern Mediterranean – SEMED region).

• Owned by 64 countries and two

inter-governmental institutions.

• Capital base of €30 billion*

Cumulative business volume of €81.7bn

Note: Unaudited as at 31 July 2013

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EBRD OVERVIEW

REGION OF OPERATIONS

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EBRD OVERVIEW

EBRD ACTIVITY

• AAA/Aaa rated multilateral

development bank.

• Invested over €81.7 billion

in more than 3,800 projects since 1991.

• 2013 YTD:
• €5.2 billion invested in

257 projects

• Private sector accounted for

79% share

• Debt 83%, Equity 11% and

Guarantee 6%

€ billion Note: Provisional data

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RATIONALE FOR ENERGY EFFICIENCY FOCUS

ENERGY INTENSITY

PPP $ per kg. of oil equivalent

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• Electricity consumption affected by

GDP, population growth, urbanisation.

• Electricity market tends to grow +4%
• n average above country growth

rates (and even higher in EBRD region)

• Domestic electricity tariffs in EBRD

region are rising to catch up with EU levels

RATIONALE FOR ENERGY EFFICIENCY FOCUS

ELECTRICITY DEMAND TRENDS

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SUSTAINABLE ENERGY INITIATIVE OVERVIEW

EBRD launched the Sustainable Energy Initiative (SEI) in 2006 as part of international initiative to scale-up financing for energy efficiency and renewable energy. From launch to end 2012, the following SEI results have been achieved:

• €12.5 billion of cumulative SEI EBRD financing
• Over 700 projects
• €61 billion total project value
• 57 million tons CO2 emissions reduction per year (equivalent to annual emissions of

Sweden)

• One quarter of EBRD annual investments in SEI

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SUSTAINABLE ENERGY INITIATIVE ACTIVITIES

The SEI is structured along activity areas which correspond to specific climate change mitigation

• actions. These include:
• Industrial energy efficiency investments in energy-intensive industrial processes such as steel

manufacturing, aluminium smelting, cement and glass production, as well as major transport investments, such as in railway operating companies.

• Sustainable Energy Financing Facilities (SEFFs) through local banks in countries of operations

to support industrial energy efficiency in small and medium-sized enterprises (SMEs), small- scale renewable energy and building energy efficiency projects.

• Power sector energy efficiency to improve the energy efficiency of transmission networks and

thermal power stations which generate the majority of energy in the region.

• Renewable energy project financing including technical cooperation to shape the institutional

and regulatory frameworks for renewable energy investment.

• Municipal infrastructure energy efficiency including upgrading and development of district

heating, public transport networks and water supply systems. SEI activities also include climate change adaptation, carbon market development and sustainable energy policy dialogue supporting transformational change.

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SUSTAINABLE ENERGY INITIATIVE

COMPOSITION 2006-2012

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Business area Financing volume (in € million) Industrial energy efficiency 3,156 SEFFs 2,158 Cleaner energy production 3,373 Renewable energy 2,109 Municipal infrastructure energy efficiency 1,646 Total 12,500 SEI business volume (2006 – 2013 Q3)

SUSTAINABLE ENERGY INITIATIVE

CUMULATIVE INVESTMENT BY ACTIVITY

Central Europe and the Baltic

2006 – 2013: €2.2 billion

Russia

2006 – 2013: €2.6 billion

South and Eastern Mediterranean

2012 – 2013 : €0.1billion

South-Eastern Europe

2006 – 2013: € 2.5 billion

Turkey

2008 – 2013: €1.4 billion

Central Asia

2006 – 2013: €0.7 billion

Eastern Europe and the Caucasus

2006 – 2013: €2.5 billion

• Total signed SEI finance from 2006 to

date: €12.5 billion

• Total estimated GHG emissions

reductions 57 million tonnes CO2e /year

SUSTAINABLE ENERGY INITIATIVE

CUMULATIVE INVESTMENT BY REGION

Cross-regional

2006 – 2013: €0.5 billion

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Behavioural and technology-related

• Historic focus on top-line growth strategies (acquisition, expansion), not cost saving
• Poor energy management culture with no strategic focus on EE
• Lack of project implementation capacity (e.g. technical managers focused on operations

and maintenance and not EE opportunities)

• Little penetration of BAT EE technologies and practices in EBRD COOs (knowledge /

experience gaps) Financing

• Long-term commercial loans not readily available, other financing priorities (not EE)
• Gap between financial decision-makers and technical staff
• EE financed out of residual maintenance budgets, no strategic borrowing for EE

Policy

• limited policy support (incentives and penalties, awareness)
• energy tariffs not reflective of externalities (e.g. cost of CO2 emissions)

RESULT: profitable EE opportunities not identified or not implemented

INDUSTRIAL ENERGY EFFICIENCY

BARRIERS TO ACTION

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POLICY DIALOGUE PROJECTS AND INVESTMENTS TECHNICAL ASSISTANCE

Projects across SEI areas Working with governments to support development

• f a strong institutional

and regulatory framework that incentivises sustainable energy Technical Assistance to

• vercome barriers:

market analysis, energy audits, training awareness raising, grant co-financing to provide appropriate incentives and address affordability constraints

INDUSTRIAL ENERGY EFFICIENCY

SEI BUSINESS MODEL

INDUSTRIAL ENERGY EFFICIENCY

SEI PRODUCTS

EBRD energy efficiency product offering includes:

• Promotion of best practices on energy efficiency in energy intensive and other sectors
• Financing for EE projects: dedicated EE loans or EE as a component within broader

investment programs

• Financing to corporates, dedicated financing facilities via partner commercial banks,

financing of third-party intermediaries ( ESCOs)

• Array of financing instruments and tenors
• Technical support to clients on energy efficiency
• Policy support to governments to help address barriers and stimulate private

investment in EE

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INDUSTRIAL ENERGY EFFICIENCY

TECHNICAL SUPPORT

• Dedicated EBRD technical experts to support project assessment and preparation
• Additional technical resource and expertise via external consultants hired by EBRD

and financed from EBRD’s technical cooperation funds:

• Investment grade energy audits to identify energy and resource saving

projects and develop priority investment plans

• Detailed feasibility studies in the area of process and energy systems
• ptimisation, resource efficiency
• Assistance in project implementation (procurement, etc.)
• Evaluation of energy management system, support to further improvement

and certification under ISO 50001, training to personnel

• Link technical to financial decision maker by bridging gap between financial

decision makers and technical staff (objective estimation of potential, investment plan)

• Increase the volume and accelerate the pace of EE investments through long-term

financing arranged by EBRD

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CASE 1: INDUSTRIAL ENERGY EFFICIENCY

Svilosa, Bulgaria

Client: Pulp and Paper mill

• EBRD finance: € 18 m Loan (2005) for the restructuring and expansion of Svilosa Pulp &

Paper mill

• Use of proceeds: € 14 m used for EE modernisation of equipment and processes:
• heat recovery
• replacement of compressed air units
• frequency controllers on electric motors
• back-pressure steam turbine to recover wasted heat and produce electricity, etc.
• Efficiency and cost benefits: energy costs reduction of € 5 m per annum; productivity

improvements

• IRR range: 11% - 137% (avg. 31%). Payback of all investments: ~ 3 years
• Environmental benefits: CO2 emissions reduction (750 ktonnes CO2e), reduced water and

heat losses

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CASE 2: INDUSTRIAL ENERGY EFFICIENCY

NLMK, RUSSIA

Project signed in 2010 The program will result in a 15% reduction of energy demand by 2015

• Client: NLMK – one of the leading Russian integrated steel-

making companies

• EBRD finance: €125 m. long term loan to co-finance part of

NLMK’s EE improvement programme with a cost of €490 m

• Funds partially used to finance 150 MW combined heat and

power plant using waste gas from blast furnaces

• Project Impact: Estimated energy savings 10,800 GWh per

year, CO2 reduction of 1,500 ktonnes CO2e per year

• Additionally, Global Environmental Facility funded the

assignment that supported NLMK in the implementation of the first ISO 50001-certified energy management system in Russia.

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ESCO EE SOLUTION

OPPORTUNITIES

• Turn-key: no direct costs for client, minimal management involvement and fast

implementation.

• Off-balance sheet, budget-neutral: all expenses, including initial CAPEX, borne by

ESCO and paid over the term of EnPC out of realised savings.

• Optimal solution: ESCO provides immediate access to best technical solution not

promoting specific vendors or technologies (procurement based on life time value of savings, not cost of equipment).

• Savings guaranteed: ESCO guarantees a minimal level of savings given the agreed

minimal level of production and energy consumption of client

• Contractual structure : sharing of savings between client and ESCOs incentivises ESCO

to maximise efficiency from the technical solution as well as optimal operation of the asset.

ESCO EE SOLUTION

MACRO CHALLENGES

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• Lack of supporting policies (e.g. requirement for large companies to scale up EE

projects implementation incl. based on EnPC)

• Lack of experienced ESCO customers (municipalities or companies lack experience

dealing with EnPC and procuring ESCO services)

• Lack of developed regulatory framework to enable EnPC in public and municipal

sectors

• set long-term tariffs (return on asset-based) for water / heat utilities
• multi-annual contracting/budgeting/fixing of baseline energy consumption for

schools, hospitals and street-lighting

• EnPC-specific criteria in public procurement guidelines (e.g. selection based on life

time savings vs. minimal price)

• enforcement practices to alleviate legal risks of EnPC contracts
• Few strong ESCOs able to attract external financing
• Lack of banks experienced in EnPC lending or dedicated financial instruments (e.g. for

refinancing / factoring of pools of small EnPCs and allowing emerging ESCOs to attract financing)

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ESCO EE SOLUTION

MICRO CHALLENGES

• Quality of ESCO as a borrower (assets, turnover – many start-ups)
• Risk participation of ESCO (often not prepared to co-finance project, seeking

100% external financing against contract)

• Ability to service debt (track record needed to prove ability to achieve target

energy and financial savings)

• Need for diversified EnPC portfolio as basis for effective financing
• Collateral value of industrial EnPC contract is low (“future payments” cannot be

pledged, low collateral value of equipment in case of ESCO non-performance) – need for additional guarantees from ESCO/shareholders Strong ESCO market players with proven business model have the most potential to attract financing (at initial phase of ESCO market development)

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• 2007, 2012: Bulgaria| €7 million and follow-on €10 million loan to Bulgarian ESCO Fund
• 2008 on-going: Russia|US$9,2 million GEF grant to fund public sector ESCO market

development programme

• 2011: Romania| €10 million loan to local ESCO
• 2011 on-going: Ukraine| ESCO project with city of Dnipropetrovsk under development

(€20 million)

• 2011 on-going: Poland| developing with Polish Energy Agency creation of dedicated

ESCO financing mechanism

• 2012 onwards: Western Balkans| €6 million technical assistance programme for ESCO

market development

• 2013 on-going: Bulgaria, Romania| launch of ESCO market development programmes

ESCO EE SOLUTION

EBRD FINANCING AND ESCO MARKET DEVELOPMENT

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ESCO EE SOLUTION

EBRD RUSSIA ESCO MARKET DEVELOPMENT WORK

• EBRD 5-year Technical Assistance program worth USD 9.2 million (funded by the Global

Environment Facility, GEF) to support development of ESCO market in the public sector in Russia.

• Working at federal level with Ministry of Economy and other stakeholders to improve the legal

framework for EnPC in the public sector.

• Support pilot cities (Omsk chosen as a first pilot) to prepare, launch, finance and implement EnPC

programs:

• development of a work plan for the programme, incl. energy audits, investment plan, financial

model and monitoring and verification of energy savings

• development of an EnPC, tender procedures and documentation and implementation plan
• training and awareness raising of staff of the municipality and potential participants in the

tender (ESCOs)

• support to putting in place the required legislation and procedures for the realisation of the

programme

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ESCO EE SOLUTION

CASE 1: FINANCING FOR “GUARANTEED SAVINGS” ENPC VIA PARTNER BANK, TURKEY

Project / Client:

• Carousel shopping mall, Istanbul. Built in 1995, 75,000 sq.m,

with no major refurbishment in 16 years.

• Energy audit revealed potential for savings minimum of 21%.
• Carousel chose to outsource implementation to an ESCO

(Johnson Controls, USA) based on “guaranteed savings” EnPC contract (vs. cheaper solution of regular contractors with no savings guarantee). Financing:

• Carousel borrowed $3.2 million from Turkish bank (Vakif

bank) participating in the EBRD energy efficiency credit line programme. Results:

• ESCO guaranteed electricity savings of 14% for 2 years under

EnPC with excess savings kept by Carousel. Potential savings are 50% higher than guaranteed (21% vs. 14%)

• Annual savings to Carousel: $510,000 and simple payback

period (without financing costs included): 6.3 years.

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ESCO EE SOLUTION

CASE 2: SUPPORT TO ESCO FOCUSED ON STREET-LIGHTING AND INDUSTRY, ROMANIA

Project / Client: EBRD loan (2011) to EnergoBit ESCO, Romania, subsidiary of Romanian engineering company Energobit Group. Loan used to finance EE projects implemented based on EnPC such as:

• modernization of municipal street-lighting in 4

towns (90% of loan volume)

• ptimization of energy supply for industrial

clients (biomass and gas co-generation units). EBRD Loan: €7 million for 10 years with grace period of 2 years

• Security: Parent company’s guarantee,

pledge of ESCO accounts, pledge of client’s payment stream

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Project / Client:

• EBRD loan (2012) to a private factoring company,

majority owned (89%) by engineering and construction company Enemona, buying receivables

• n long-term EnPCs signed by Enemona with public

buildings.

• Initial funds for factoring of parent company’s

EnPCs were raised via an IPO (2006) and a bond issue. EBRD Loan:

• €7 million (2008) and €10 million (2012)
• Tenor: 7 years in both cases
• Grace period: 2 years and 6 months respectively
• Collateral: parent company guarantee

Results:

• Savings up to 50%, 30+ contracts purchased
• Clients: 95% public buildings (schools and

kindergartens)

• Term of EnPC contracts: 3 to 7 years

ESCO EE SOLUTION

CASE 3: SUPPORTING FACTORING OF EnPC CONTRACTS IN PUBLIC BUILDINGS, BULGARIA

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ESCO EE SOLUTION

CASE 4: SUPPORTING FIRST MAJOR INDUSTRIAL ESCO IN RUSSIA

Project / Client:

• In 2012 EBRD provided a €20 million (in RUB) loan for 7

years to Fenice RUS to fund a pipeline of EE projects to be implemented under EnPC contracts with Russian industrial clients.

• Typical types of systems for EE upgrades: compressed

air, lighting, heat supply systems, electricity distribution, water treatment. About Fenice RUS:

• Fenice RUS is a subsidiary of EDF Fenice, an Italian

ESCO ultimately controlled by France's EDF Group. Fenice RUS is the first ESCO in the industrial sector in Russia.

• Fenice

RUS signed the first industrial EnPC (compressed air upgrades) in Russia in 2009 with automaker AvtoVAZ. In 2010, 2011 and 2012 it signed EnPC with AvtoVaz for heating system upgrades and electric systems upgrade. Total savings from all projects: €6.5 million p.a. EnPC signed in 2012 with Alstom-TMH locomotives producer.

AvtoVAZ’s compressor room before …and after