Industrial Development Corporation

28 May 2013

Developing a vibrant ESCO marketHoney MamaboloIndustry Specialist: Green IndustriesIFC – INTERNATIONAL ESCO FINANCE CONFERENCE

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

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.

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

Scope :10 countries covered

• US, Canada, UK, Germany, Italy- fully matured ESCO

industry• Brazil, India, China, Japan and Australia- market

transformation and developingSurvey 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 Resourcing

Monitoring and verification

External factors like energy prices, financial crisis,

economic downturn etc.

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).

OPERATING MODEL-ESCO vs END USER FINANCING

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.

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

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 loan 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

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

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

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

0%

20%

40%

60%

80%

100%

0.0

1.0

2.0

3.0

4.092%

67%3.5

2.8 2.9

2.32.4

3.0

Key Drivers to growth

No / Moderate Effect Significant/ Most Significant Effect Survey Average

0 =

No

Effec

t 4=

Mos

t sig

nific

ant e

ffec

t

POLICY AND REGULATORY ENABLERS:

2008

2008

National Energy Efficiency Strategy for South Africa 2005(NEES), Revised 2012

- Targets energy intensity reduction of 12% by 2015

2009

2010

2011

2012

2012

2013/14

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 1998

1 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 Regulations & Building Code (SANS 10400-XA:2011) with SANS 204

NGPGreen Accord

Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-130

500

1000

1500

2000

2500

3000

3500

4000Energy Efficiency Projects (MW Savings)

Eskom Verified Savings (MW)

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

DSM 3 yr target:To save another 1074MW

Jun-08 Oct-09 Feb-11 Jul-12 Nov-13 Apr-15 Aug-160

50000

100000

150000

200000

250000

300000

350000

SWH Installed

SWH Installed

POLICY AND REGULATORY ENABLERS Industry example: SWH Rollout

2009

2010

2011

2012

2013/14

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

impactIDC Clients

IDC facilitated increased in local content to current levels of ca 80% through industry facilitation and investments

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

• 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 After Costs

Free Direct Low Pressure Solar Water Heater

Cession Of Rebate and Cession of the Carbon Credits

Funding of the working capital

requirement

IDC @

work

FINANCIAL ENABLERS: IDC PARTICIPATION IN FINANCING ESCOS

Late2010

2011

2012

2013

• 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

HIGHLIGHTS/IMPACT

8MW cogen SACC plant-45GWh/yr and 46ktCO2

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

GEEF: Developmental and Environmental Impacts

CO2 TonsEquivalent

Avoided

383,445/year

Energy saved

386,930/year

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Future Focus

17Number of Deals approved

Programme supported by the German Cooperation and Development Ministry

Future R174mAmount committed

circa: 35% of R500m

SWH Energy Performance ContractsCogeneration Waste to Energy Variable Speed DrivesRoof Top PV

INDUSTRIAL ENERGY EFFICIECYAND SELF USE RE

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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% orPrime less 1%

Loan Term Up to 12 years, there-after normal risk rate applies

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.

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Prospects

Thank you

Industrial Development Corporation19 Fredman Drive, SandownPO Box 784055, Sandton, 2146South AfricaTelephone 011 269 3000Facsimile 011 269 2116E-mail callcentre@idc.co.za