Kenneth Langer, Ph.D. Global Environmental Investment Group Washington, D.C Insurance Mechanism To Facilitate Financing of Energy Efficiency Projects in China Energy & The Environment: Engineering Sustainable Growth Third WEC Gold Metal Colloquium May 17, 2001

The Opportunity  Chinese industry offers some of country’s best opportunities for energy efficiency projects  Short payback period, quick installation  Projects could –make significant reductions in greenhouse (GHG) gases, and regional/local emissions –increase productivity, make companies more competitive in global economy

The Problem  Many SOE’s not creditworthy, highly leveraged  Private companies small, young -- no credit history  Difficult to get credit guarantees, which are also asset-based  Banks not familiar with EE projects, don’t know how to quantify risks, get back  Few leasing companies operating

The Result To date, few EE projects financed by lending institutions, ESCOs, EMCs, or leasing companies

Possible Solution  Create a financial mechanism that can enhance the credit of the borrower,  Bypass traditional credit requirements or…  Combines both strategies

Assumption Economically sound EE projects should be able to secure loans on a partially limited-recourse or cash flow basis. Here the performance contract and M&V contract could serve as components of project’s security package

Probably not…also need  insurance backstop guarantee  New payment channels with safeguards Is That Enough Security?

Proposed Loan Structure Loan Components Security Package InternalExternal 50% (corporate loan) Corporate balance sheet 50% (off-balance sheet) Performance contract M&V contract Insurance Improved Payment channel

Some kind of grant funding that would serve as “first-loss” equity to mitigate insurers risk Public-Private Partnership How To Attract Insurance Companies?

Example of Fund Structure Total at Risk: $100 million Revenue Annual Premium Earned Interest from the Grant Expenses Claims (first loss) Claims

Guarantee Structure: Example 1 Using Export Credits US Ex-Im Bank CDB (insurance policyholder) Collateral Annual insurance premium 50% debt repayment guarantee EE project Insurance company 50% debt repayment guarantee Repayment Direct loan NEW

Guarantee Structure: Example 2 Using Domestic Loans Domestic Bank (policyholder) EE project Insurance company 50% debt repayment guarantee Repayment Direct loan NEW Annual insurance premium Collateral loan guarantee 50%

Difference Between IPP & EE Projects Bank Utility Project = Power Plant Host Company EE project IPP PROJECT IPP is a single purpose entity: easy to repossess EE PROJECT EE is part of larger business: difficult to “attach” revenue from energy savings in case of nonpayment Breach of power purchase agreement $ $

Possible Solution  Use intermediary to assure payment to various stakeholders  Example, use utility as intermediary  Benefit to utility: –service fee –sells saved electricity to new customers –reduces need to build new power plants

Utility as Intermediary ( percentages are illustrative only) ProjectUtility EMC Insurance company Bank/Leasing company Historic electricity payment 35% savings 40% savings 15% savings (guaranteed) 25% savings (15% pass-through) Utility collects historic payment, retains reduced amount

Distribution of Savings Over Time End pay back period End of Performance contract End of project 3 yrs 5 yrs15 yrs Savings Distribution of Savings Historic payments Payments after project

Product Supports China ’ s Economic Reforms  Interest rates are fixed by PBOC  No incentive for banks to assume risk  As interest rates are deregulated, banks will adopt new lending procedures  Will assume more risk in return for risk premiums (higher interest rates)  Insurance companies and banks will find right “balance” in sharing risk