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

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Presentation on theme: "Industrial Development Corporation 28 May 2013 Developing a vibrant ESCO market Honey Mamabolo Industry Specialist: Green Industries IFC – INTERNATIONAL."— Presentation transcript:

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

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

3 OBJECTIVES IDC motivation –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 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. RESEARCH METHODOLOGY Awareness, information and understanding Trust and Sceptisms National policies, legislation, regulation and incentives Administrative hurdles and high transaction costs Finance and ResourcingMonitoring 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 ESCOs 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 SkepticismFinancing 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 ESCOs 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 ESCOs 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 ESCOs loose project opportunities as clients sometimes decide that they no longer require the ESCOs 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 No.InitiativeCountriesExamples 1 Innovative risk sharing and transfer mechanisms USA, Canada, China, Brazil, Germany, India Brazils 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 MARKET ENABLERS

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 ESCOs 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 ESCOs 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 /14 1 million Solar Water Heater Government Target Announcement by Minister of Energy 23 June 2009 Government Objectives >>> Energy Efficiency Projects through the various ESKOM EEDSM programmes >>> Energy White Paper of million SWH Target by 2014 (revised to 2016) Integrated resource plan (IRP) 2010 Industrial Policy Action Plan (IPAP2) 2012/2013 – 2014/15 Green Industries a key sector Building Regulati ons & Building Code (SANS XA:2011) with SANS 204 NGP Green Accord Income Tax Act – Regulation s 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 DSM 3 yr target: To save another 1074MW DSM 3 yr target: To save another 1074MW

15 POLICY AND REGULATORY ENABLERS Industry example: SWH Rollout /14 Factors affecting the market and the SWH rollouts SWH Installation tragectory in light of policy support >>> 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. 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 impact IDC Clients IDC facilitated increased in local content to current levels of ca 80% through industry facilitation and investments

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) R/kWh 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) (Limited to category of technology – per published list) Set rate per product installed Payment post implementation IDC Funded Clients 3 ESCOS IDC Funded Clients None thus far IDC Funded Clients 3 ESCO Led Projects ) ESCO implementing at large alloys company IDC Funded Clients 1 ESCO IDC impact New Opportunities: - Residential Mass Roll out - Rooftop PV

17 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 ESCO IDC (Industrial Development Corporation) Carbon Credit Off-Taker Carbon Developers ESKOM REBATE PAID Municipality Households (Beneficiaries) Equipment Suppliers ERPA Prepayment Guarantee MOU Signed Prepayment (Guaranteed By the IDC) Net Prepayment AfterCosts Free Direct Low Pressure Solar Water Heater Cession Of Rebate and Cession of the Carbon Credits Funding of the working capital requirement work FINANCIAL ENABLERS: IDC PARTICIPATION IN FINANCING ESCOS

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

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

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

21 21 Addressing high cost of small scale RE development and need for Green Fields EE Capital SourceFrench 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 SizeZAR 1 – 100 million Pricing Fixed rate of 10% or Prime less 1% Loan TermUp 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 23 Prospects Thank you Industrial Development Corporation 19 Fredman Drive, Sandown PO Box , Sandton, 2146 South Africa Telephone Facsimile


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