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Page 1 July 2014 Capacity Building of Banks/FIs For EE Project Financing Capacity Building of Banks and Financial Institutions for Energy Efficiency Project.

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Presentation on theme: "Page 1 July 2014 Capacity Building of Banks/FIs For EE Project Financing Capacity Building of Banks and Financial Institutions for Energy Efficiency Project."— Presentation transcript:

1 Page 1 July 2014 Capacity Building of Banks/FIs For EE Project Financing Capacity Building of Banks and Financial Institutions for Energy Efficiency Project Financing Module 4 Project Appraisal (PACE-D) Partnership to Advance Clean Energy-Deployment (PACE-D) Technical Assistance Program September 2014

2 Page 2 July 2014 Capacity Building of Banks/FIs For EE Project Financing Introduction Project Appraisal Loan Security Considerations Developing Financial Products Risk Assessment and Mitigation Establishing an Energy Efficiency Business Unit Presentation Outline

3 Page 3 July 2014 Capacity Building of Banks/FIs For EE Project Financing Strengthening technical competencies - Feasibility, knowledge gaps, credibility Evolving technical appraisal techniques for EE Projects – Minimum technical safeguards to ensure servicing of debt Adopting the cash flow approach for financing - Departing from asset- based financing models Adapting financing mechanisms to EE business models - Different business situations and business strategy Leveraging existing customer relationships – Incorporating EE financing in corporate lending Devising sound Payment and Security Structures - Financial mechanisms for improving credit rating Standardizing Energy Services Agreements - Overcoming contracting problems, evolving Contract Template for EE Project Increasing EE Project Lending – Key Considerations

4 Page 4 July 2014 Capacity Building of Banks/FIs For EE Project Financing Who is the borrower – project host or ESCO? What is the structure of payment obligation?  Fixed, pre-established  Variable, performance-based If performance-based, what is the method for measuring/calculating performance/savings?  Measurement & verification procedures  Changes to the “Baseline”  Energy price risks  Other factors influencing savings What are the major risks? Considerations in Project Appraisal

5 Page 5 July 2014 Capacity Building of Banks/FIs For EE Project Financing Promoter appraisal Technical appraisal Economic and financial appraisal Environmental and legal appraisal ESCO appraisal Risk identification, assessment and mitigation General Framework - Project Appraisal

6 Page 6 July 2014 Capacity Building of Banks/FIs For EE Project Financing Banks have their own unique appraisal schemes Sample checklist of required information will be provided in Guidelines Topics included:  General information on the organization  Financial and operational details  Promoter background  Management and organizational set-up Promoter Appraisal

7 Page 7 July 2014 Capacity Building of Banks/FIs For EE Project Financing Key questions  Are the technologies/products proven?  Who has developed the savings estimates?  Are the savings estimates realistic?  Are there any factors that may impact the savings? Technical appraisal should include:  Evaluation of the products and technologies  Assessment of savings calculation procedures  Consideration of risks and uncertainties in the savings estimates and project implementation plan Technical Appraisal

8 Page 8 July 2014 Capacity Building of Banks/FIs For EE Project Financing Includes assessment of:  Project development costs  Project capital costs  Operating and maintenance costs  Energy cost savings  Other cost savings  Escalation factors  Financial structure  Promoter or ESCO equity investment  Sharing of savings between host & ESCO Economic and Financial Appraisal

9 Page 9 July 2014 Capacity Building of Banks/FIs For EE Project Financing Procedures for appraisal similar to other investment projects Environmental:  Assessment of possible environmental impacts  Determination of need for permits/clearances  Obtaining needed permits/clearances Legal:  Statutory approvals  Legal documentation Environmental and Legal Appraisal

10 Page 10 July 2014 Capacity Building of Banks/FIs For EE Project Financing Basic ESCO Assessment  Firm structure and organizational information  Qualifications and experience; BEE accreditation  Financial and operational information  Past track record with performance contracting Client references  Project completion on time  Project costs – estimated vs. actual  Guaranteed vs. achieved savings  Client satisfaction ESCO Appraisal

11 Loan Security Considerations

12 Page 12 July 2014 Capacity Building of Banks/FIs For EE Project Financing Most EE equipment has low collateral value  Equipment typically 60-65% total project cost  Equipment generally uneconomic to remove & use elsewhere  Finance security needs to be based mainly on end-user credit, not equipment asset value Positive Credit Features of EE Projects  Equipment represents “essential use”, increases willingness to pay  EE projects reduce operating costs, increase ability to pay  EE projects generate savings and improve bottom line EE Project Equipment as Collateral

13 Page 13 July 2014 Capacity Building of Banks/FIs For EE Project Financing First security interest in project/equipment Full faith & credit obligation of end-user  Preferred drawing right on end-user account  Assignment of key end-user revenue stream Real estate Mortgage where project is installed Vendor Recourse  equipment repurchase or remarketing commitment  direct guarantee, cash reserves Additional collateral from end-user/borrower Loan Security – End-User as Borrower

14 Page 14 July 2014 Capacity Building of Banks/FIs For EE Project Financing First security interest in project/equipment Assignment of Energy Services Agreement (ESA) Must examine end-user credit Structure ESA to include fixed payment for debt service Escrow of end-user payments (TRA account) Recourse to ESCO & ESCO parent company Cross-default provisions for project portfolio Cash Reserves for debt service, repairs, etc. Loan Security - ESCO as Borrower

15 Page 15 July 2014 Capacity Building of Banks/FIs For EE Project Financing Are they well-capitalized? Do they have parental company support or private equity/external investors on board? Do they have well-defined cash inflow sources? What is their financial capacity to meet time delays and cost overruns? Is the financial plan adequate to address both project and working capital needs? How can the lender minimize recourse to non-project assets & personal guarantees? Reviewing Financial Capacity of Borrowers

16 Page 16 July 2014 Capacity Building of Banks/FIs For EE Project Financing Earmark, securitize or escrow cash inflows to service debt Ensure suitable tri-partite contractual protection for performance and payments through ESAs Structure cash collaterals (e.g. deposits) or over-collateralize (e.g. escrow more than needed for servicing) Follow best practices from equivalent bank asset products (e.g. rental securitization, power projects) Take protection from partial risk guarantee facilities such as BEE’s PRGFEE Devising Payment and Security Structures

17 Page 17 July 2014 Capacity Building of Banks/FIs For EE Project Financing Structuring contracts to protect interests of borrowers & lenders against payment defaults Adhering to specific protocols vs. standard contract template Ensuring clear-cut measurement and verification (M&V) and payment procedures Mitigate causes for disputes & litigation Protecting lenders interests directly in the ESA itself Identifying and assigning risks Standardizing Energy Services Agreements

18 Risk Assessment and Mitigation

19 Page 19 July 2014 Capacity Building of Banks/FIs For EE Project Financing Project Risks

20 Page 20 July 2014 Capacity Building of Banks/FIs For EE Project Financing Confirm that the products, equipment and/or technologies are well established and proven; review benchmarks Review and assess prior experience of the implementing organizations with the technologies, equipment and products being proposed Verify credentials of the energy auditors Assure that project meets the appropriate design standards specifications Obtain client references, where appropriate, for similar project implementations Use of contractors that guarantee their performance and offer fixed prices Assessing and Mitigating Technical Risk

21 Page 21 July 2014 Capacity Building of Banks/FIs For EE Project Financing Assess creditworthiness of both the host and the ESCO Examine the ESA and assure that it has adequate assurance for cash flows that will be used to repay the loan Establish payment security mechanism such as escrow account or TRA Develop customized financial products Implement schemes to adequately collateralize project assets Assessing and Mitigating Financial Risk

22 Page 22 July 2014 Capacity Building of Banks/FIs For EE Project Financing Verify experience of project management and construction management organizations and individuals Assure that sufficient time has been allocated for permits and licenses Verify ESCO’s track record in implementing projects on time Use lump-sum contracts with penalty clauses for failure to meet committed deadlines Assessing and Mitigating Construction Risk

23 Page 23 July 2014 Capacity Building of Banks/FIs For EE Project Financing Assure that ESA contains performance guarantees (given by both the ESCO and the equipment suppliers) are measurable Review structure of performance guarantees Assure that an adequate M&V plan is in place Confirm that a baseline has been established for M&V Use third party M&V agent Assessing and Mitigating Performance Risk

24 Establishing an Energy Efficiency Business Unit

25 Page 25 July 2014 Capacity Building of Banks/FIs For EE Project Financing Identify the target market characteristics Define typical project characteristics Develop innovative financial products for the market Facilitate the development of a pipeline of attractive projects with creditworthy customers Design and implement a plan for marketing, project investment preparation, & market aggregation Develop project appraisal guidelines and procedures Organize and provide technical assistance to loan officers Functions of an EE Business Unit

26 Page 26 July 2014 Capacity Building of Banks/FIs For EE Project Financing Technical characteristics Project economics Typical size of individual projects Typical credit characteristics of end-users & borrower(s) Credit structure of financings Credit enhancement strategies Collateral/asset value of EE equipment Projects risks and plan for assessment, allocation & management/mitigation Financial structuring Defining Project Characteristics

27 Page 27 July 2014 Capacity Building of Banks/FIs For EE Project Financing Based on target market characteristics  credit characteristics  typical deal size & attractive economics  Ability to assemble acceptable security package Define loan offer(s)  term, pricing  required security structure, with guarantee  economic parameters: e.g., size, % own funds  documentation requirements Prepare marketing plan, identify/do initial deals, train branch staff network Developing Financial Products

28 Page 28 July 2014 Capacity Building of Banks/FIs For EE Project Financing Waste heat recovery and cogeneration Lighting, cooling and controls for buildings (particularly hotels, hospitals and shopping malls) Motors, pumps etc. in industrial facilities Streetlighting Municipal pumping Off-grid renewable energy projects Fuel substitution in industry Chauffage or outsourced energy management Customizing Financial Products to EE Projects

29 Page 29 July 2014 Capacity Building of Banks/FIs For EE Project Financing Establish relationships with qualified ESCOs and equipment vendors Assess capabilities and experience  services/products offered; business methods  target end-user market & customer profile  reference projects & current pipeline  financing needs, capital demand estimate Select initial companies & projects to prepare for investment: provide finance structuring assistance Structure multi-project finance facilities to reduce transaction costs Working with Energy Service Providers

30 Page 30 July 2014 Capacity Building of Banks/FIs For EE Project Financing Establish relationship with equipment vendor or manufacturer  Vendor offers deal pipeline to lender/lessor  Financing can be marketed at point of equipment sale  Standard origination documents, end-user credit screening & analysis processes & criteria  Vendor can help process loan/lease transaction & absorb some transaction costs  Simplifies transaction from customer perspective Vendor may act as lessor & match primary lease with assignment or sale/lease back with bank Vendor Finance Programs

31 Page 31 July 2014 Capacity Building of Banks/FIs For EE Project Financing Credit facility for financing current and future projects Revolving credit line based on signed contracts with customers Drawdown conditions based on expected project costs and cash flows Specification of project economic parameters such as project size, debt/equity ratio, debt service coverage, sharing of savings, etc. Security could be combination of ESCO balance sheet, parent organization, and project cash flows Establishing Credit Line with ESCOs

32 Page 32 July 2014 Capacity Building of Banks/FIs For EE Project Financing Master Loan Terms  Standard origination procedures  Lender evaluates and approves end-user credit  Standard sub-loan documentation  Recourse to ESCO & to ESCO parent (if applicable)  Construction finance; disbursement procedures  Pricing, fees Security Requirements  Assignment of project assets, contract rights, revenues  Project flow of funds; escrow account; priority of pmts  Debt service reserve considerations  Other recourse & collateral; end-user credit standards  Cross default provisions between projects Establishing Credit Line with ESCOs

33 Thank you Dilip R. Limaye Finance Team Leader USAID PACE-D Technical Assistance Program


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