1. Industrial Development Corporation
28 May 2013
Developing a vibrant ESCO market
Honey Mamabolo
Industry Specialist: Green Industries
IFC – INTERNATIONAL ESCO FINANCE CONFERENCE

2. CONTENT ESCO MARKET STUDY OVERVIEW MARKET BARRIERS AND ENABLERS
OBJECTIVES
TIMELIN
RESEARCH METHODOLOGY
ESCO DEFINITION AND OPERATING MODELS
MARKET BARRIERS AND ENABLERS
IDC IMPACTS- INNOVATIVE FUNDING INSTRUMENTS
CONCLUSION

3. OBJECTIVES IDC motivation Study objectives:
In conducting the study, the IDC sought to enhance its position in effectively addressing market related barriers in the energy efficiency and renewable energy sectors.
To develop financial instruments that support ESCOs and enhance investments in energy efficiency .
Study objectives:
To perform a review of international best practice in ESCO market development as a benchmark for the assessment of the situation in South Africa
To undertake a detailed analysis of the South African ESCO market based on structured interviews and questionnaires.
To identify and analyse existing and/or perceived technical, financial, social and regulatory barriers in the market
To investigate plausible support measures to overcome these barriers based on international expertise and experience.

4. TIMELINE
IDC and KfW partnered under the framework of South African-German financial co-operation - December 2010
R 500 Million Green Energy Efficiency Fund (GEEF) launched– October 2011
Key challenges - Slow development of ESCO market in South Africa
IDC engaged PWC to conduct ESCO market in South Africa – November 2011
Abridged Market Study published–September 2012

5. RESEARCH METHODOLOGY Scope :10 countries covered
US, Canada, UK, Germany, Italy- fully matured ESCO industry
Brazil, India, China, Japan and Australia- market transformation and developing
Survey Size and Range: 30 responses from 146 questionnaires covering ESCOs , Financial Institutions and End users
Focus Areas
Inception and history of development
Present size and scope
Key barriers and enabling factors
Future growth potential
Key lessons
Categorization and Grouping of barriers
The various barriers identified and discussed were grouped in seven different characteristics critical t in the literature may o the development of any emerging industry.
Awareness, information and understanding
Trust and Sceptisms
National policies, legislation,
regulation and incentives
Administrative hurdles and high transaction costs
Finance and Resourcing
Monitoring and verification
External factors like energy prices, financial crisis, economic downturn etc.

6. DEFINITION
ESCOs have been classified in several ways in the literature depending on their origin, target customers and type of services, etc. ESCO markets in the developing countries generally adopt the following classification
Vendor ESCOs are equipment manufacturers and generally do not operate in the utility driven DSM industry and tend to focus on large industrial clients.
Utility ESCOs bid to serve as providers for utility funded DSM programs and are paid based on electricity savings.
Contractor ESCOs typically work with contractors in green field construction projects by installing more energy efficient equipment than what might have been provided otherwise.
Engineering ESCOs perform design and other services but are seldom involved in performance contracts. 
Transitioning to:
Energy Performance Contract ESCOS : enters into a shared savings or guaranteed savings energy performance contract. The ESCO is willing to take financial, technical and other risks with the ESCO’s payment directly linked to the amount of energy saved (in physical or monetary terms).

7. OPERATING MODEL-ESCO vs END USER FINANCING

8. BARRIERS TO MARKET Awareness, Information and Understanding
Trust and Skepticism
Financing and Resourcing
Lack of customer awareness-a common definition of what an ESCO is. As a result of this potential customers are not in a position to assess the benefits of the ESCO’s offerings.
Limited understanding of energy efficiency opportunities and also the energy savings estimated in the feasibility reports often prepared by third party agencies;
High pre-investment development and transaction costs- Cost of audits often not included as part of financing
Limited understanding of ESCO services within banks and other Financial Institutions - including concept of energy performance contracting
Aversion to outsource energy management tasks and allowing an outsider (the ESCO) to intervene in common practices and/or change equipment that the users are used to.
Perception of high credit risks-Conventional financial institutions tend to view ESCO’s and energy efficiency projects as “business as usual” finance applications, and do not apply credit assessment criteria specifically designed for the ESCO industry. `
Information failure on energy usage, baseline data ,benchmarking data and energy audit reports
Lack of accreditation within ESCO Market
Lack of collateral-In asset-based lending the bank requires a collateral and energy efficiency projects usually lack high value collaterals.

9. OTHER BARRIERS CONTINUED
National policies, legislation, regulations and incentives
There are a number of national policies, legislation and incentives within the South African Industry, however many stakeholders do not know or understand these policies, regulations or incentives.
External factors
There two main external factors are the relatively low energy prices that make energy efficiency projects and the payback on energy efficiency savings more difficult than in other markets globally.
Project approval times
The time taken to approve project funding means that ESCO’s loose project opportunities as clients sometimes decide that they no longer require the ESCO’s services.
Industry Associations
Only a quarter of the ESCOs registered on the Eskom database are registered with an ESCO association so it does not represent the best interest of all ESCOs and the fact that two exist further reduces the bargaining power of the industry and increases the risk of public mistrust

10. MARKET ENABLERS No. Initiative Countries Examples 1
Innovative risk sharing and transfer mechanisms
USA, Canada, China, Brazil, Germany, India
Brazil’s government guarantee scheme for loans to EE projects. Which shares 80% of the credit risk of the lo
an with commercial banks. 2
Demonstration of pilot projects/savings/EPC
USA, Canada, India, China, Italy
In India the government provides grants finance Energy Audits and Feasibility studies as well as pilot projects. 3
Demand Aggregation/Project Bundling
USA, Canada, India, China, Japan, Germany, Italy, Australia, UK, Brazil
The Berlin Energy Agency in Germany has successfully pooled over a 1000 public buildings and more than 500 private properties. 4
EE focused pubic procurement laws and mandatory EE targets
Italy, Germany and UK
Italian white certificate scheme: energy efficiency targets and trading scheme

11. ENABLERS IDENTIFIED BY SOUTH AFRICAN ESCOS
Financial
Greater access to working capital
Bridging loans from Financial Institutions
Risk Guarantees from Government and or Eskom – Credit risk guarantees
Publicised well documented financial models
Product transparency
Training of FI staff in evaluating ESCO projects
Technical assistance
The high cost of the energy audit to be covered by Eskom / FI / government
Cheap finance
Off-balance sheet funding
Regulatory
New Tax incentives
Carbon Taxes
New building regulations to be monitored and for digressers to be penalised
NERSA approving higher electricity prices
Regulation changes allowing Municipalities to more easily involved in EE projects
Higher incentives for Energy savings
Greater penalties – enforced
Sustainability and triple bottom line reporting

12. ENABLERS IDENTIFIED BY ESCOS
Others
Accreditation of ESCO’s to improve confidence in the industry
M&V accreditation system
Attach a cost to energy audits so that only serious clients acquire ESCO services
Standardisation of EPC and tender documents to reduce transaction costs and create greater trust in the ESCO industry
Greater communication about the profitability of EE investments
More training and workshops to ESCO’s to improve technical skills – particularly in smaller ESCOs
Greater social awareness – Changing the mindset of South Africans that electricity is cheap

13. GROWTH DRIVERS IDENTIFIED BY SA ESCOS
92% of ESCOs indicated that high energy prices are a key driver for market growth
While 67% of ESCOs indicated that access to finance at competitive rates and terms would enable energy efficiency investments

14. POLICY AND REGULATORY ENABLERS:
2008
National Energy Efficiency Strategy for South Africa 2005
(NEES), Revised Targets energy intensity reduction of 12% by 2015
2009
2010
2011
2012
2013/14
Energy White Paper of 1998
1 million SWH Target by (revised to 2016)
Integrated resource plan (IRP) 2010
Building Regulations & Building Code (SANS XA:2011) with SANS 204
NGP
Green Accord
Industrial Policy Action Plan (IPAP2) 2012/2013 – 2014/15
Green Industries a key sector
Income Tax Act – Regulations on tax allowances for Energy Efficiency Savings (Section 12I and 12L)
Carbon Taxes-at R120 per ton effective from 1 January 2015
National devl plan
Government Objectives
>>>
Energy Efficiency Projects through the various ESKOM EEDSM programmes >>>
1 million Solar Water Heater Government Target
Announcement by Minister of Energy 23 June 2009
DSM 3 yr target:
To save another 1074MW

15. POLICY AND REGULATORY ENABLERS Industry example: SWH Rollout
2009
2010
2011
2012
2013/14
1 million Solar Water Heater Government Target
Announcement by Minister of Energy 23 June 2009
Lack of rollout due to uncertainty of rebates
Beginning 2010 not many installations then Eskom increased the Rebates
SASSA started developing mass rollout of LPSWH
Mass rollout of LPSWH as a result of IDC client “SASSA” and other ESCos offering free systems to RDP houses.(24000 SWH per month)
From last quarter 2011 to end 2012 restriction of LPSWH remained in place with the largest allocation per ESCO being limited to 1200 units per month.
Factors affecting the market and the SWH rollouts
Contract route of rolling out LPSWH based on the budget of R4.7 bn that was announced by the minister of finance in the 2012 budget speech.
Restrictions placed on the LPSWH rollouts due to EEDSM objectives not being met.
IDC facilitated increased in local content to current levels of ca 80% through industry facilitation and investments
SWH Installation tragectory in light of policy support >>>
IDC impact
IDC Clients

16. FINANCIAL ENABLERS: IDC PARTICIPATION IN FINANCING ESCOS
Performance Contracting (5MW+)
(Custom or Hybrid Solution iro Technology
R/kWh
Payment during and on completiion
ESCO Model (1MW+)
(Custom or Hybrid Solution iro Technology)
Progress payments made
Standard Offer {50kW – 5MW)
(Limited to category of technology – per published list)
Payments in line with Published R/kWh
Payment terms 70(Yr0):10 (Yr1):10(Yr2):10(Yr3) (Implementation and then on each anniversary)
Standard Product {0kW – 250kW)
Set rate per product installed
Payment post implementation
IDC Funded Clients
3 ESCOS
IDC impact
IDC Funded Clients
None thus far
IDC Funded Clients
3 ESCO Led Projects )
ESCO implementing at large alloys company
New Opportunities:
- Residential Mass Roll out
- Rooftop PV
IDC Funded Clients
1 ESCO

17. FINANCIAL ENABLERS: IDC PARTICIPATION IN FINANCING ESCOS
The project has resulted in more than 70,000 LPSWH being installed nationally to the impoverished communities for free.
The innovative funding model was facilitated through the CER revenue, A Rebate for Energy Efficiency and the bridging finance facility from the IDC. Ref: Diagram
work
ESCO
IDC
(Industrial Development Corporation)
Carbon Credit
Off -
Taker
Carbon
Developers
ESKOM
REBATE PAID
Municipality
Households
(Beneficiaries)
Equipment
Suppliers
ERPA
Prepayment G
uarantee
MOU Signed
(Guaranteed By the
IDC)
Net P
repayment A
fter
Costs
Free Direct
Low Pressure
Solar Water
Heater
Cession Of Rebate and
Cession of the Carbon
Credits
Funding of the
working capital
requirement

18. FINANCIAL ENABLERS: IDC PARTICIPATION IN FINANCING ESCOS
MARKET SITUATION
RESPONSE
HIGHLIGHTS/IMPACT
Late
2010
IDC and KFW sign loan agreement for €48M and €2. 1M Technical Assistance and Capacity Building Grant
8MW cogen SACC plant-45GWh/yr and 46ktCO2
Constrained electricity supply and high prices
mass rollout of 310GWh
/34MW showerheads
Access to finance barrier to EE/RE investments
2011
Market Launch of the R500M Green Energy Efficiency Fund(GEEF)- 10% of FUND committed at launch
Aggressive marketing with Industry Associations & Partnership with Eskom
-increased demand for ESCO services
-High cost of small scale RE development
2012
60% of committed funding to ESCOS
ESCO Market Study published-access to finance barrier to entry
R400 million credit line established to finance PPA based 1MW- 10 MW and greenfields EE
IDC impact
Industrial Energy Efficiency
2013
27 FREE Walk through audits and 4 investment grade audits
17 companies financed at R174 million ( ca 35% of GEEF)
69% of funds committed to SMEs

19. GEEF: Developmental and Environmental Impacts
Energy saved
CO2 Tons
Equivalent
Avoided
386,930/year
383,445/year

20. R174m 17 Future Future Focus INDUSTRIAL ENERGY EFFICIECY
Amount committed
circa: 35% of R500m 17
Number of
Deals approved
INDUSTRIAL ENERGY EFFICIECY
AND SELF USE RE
SWH
Energy Performance Contracts
Cogeneration
Waste to Energy
Variable Speed Drives
Roof Top PV
Programme supported by the German Cooperation and Development Ministry

21. Addressing high cost of small scale RE development and need for Green Fields EE
Capital Source
French Development Bank (AFD)
Targeted Projects
Greenfields Energy Efficiency ( linked to manufacturing expansions or new plants)
Small Scale Renewable Energy sold under PPA ( both REIPP and B2B)
Refurbishment of RE plants
Project Size
ZAR 1 – 100 million
Pricing
Fixed rate of 10% or
Prime less 1%
Loan Term
Up to 12 years, there-after normal risk rate applies

22. Conclusion Pro-active approach to develop Green Industries
Renewable energy
Energy efficiency
Fuel based green energy & Emission and pollution management
Bio fuels
As well as localisation opportunities
Focus on early phase project development;
Develop specific funding interventions;
Support and development of an emerging industry at various levels;
Value chain approach with an objective to develop a long term sustainable industry.

23. Prospects Thank you Industrial Development Corporation
19 Fredman Drive, Sandown
PO Box , Sandton, 2146
South Africa
Telephone
Facsimile