Financing Options for Public and Residential Buildings. Scaling up EE in Buildings In the Western Balkans

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1 Financing Options for Public and Residential Buildings 1

2 Public Sector 2

3 Public Sector Energy Efficiency Potential Note : Includes schools and hospitals only COUNTRY Potential Energy Savings Investment Needed Average Payback GWH/year Million /year Million Years Albania Bosnia & Herzegovina Kosovo FYR Macedonia Montenegro* Serbia Total * = Estimated Source: Energy Community Study of Energy Efficiency in Buildings 3

4 Public Sector Financing Barriers Limited number of creditworthy municipalities Limited borrowing capacity of public agencies Restrictive budgeting rules Public Sector Financing Barriers Low tariffs Utility bills for heating not based on consumption High commercial bank interest rates Small project size: high project development and transaction costs Low existing comfort levels 4

5 Public EE financing ladder Select Public EE Financing Schemes Market Maturity Commercial Financing Advanced commercial or project financing (ESCOs) Vendor credit, leasing Public Financing Commercial financing, bonds Partial risk guarantees Credit line with commercial bank(s) Credit line with municipal (development) bank Public ESCOs EE revolving funds Utility (on-bill) financing MOF financing w/ budget capture Budget financing, grants w/ co-financing Grants 5 5

6 Limitations of Some Options Option Limitations Commerc ial ESCO financ ing Vendor financ ing or leasing Commerc ial financ ing, bonds Partial c redit guarantee Credit line with development or commercial bank Utility on- bill financ ing Budget financ ing with grants Utility on- bill financ ing Public proc urement and budgeting rules Very few existing ESCOs ESCOs have difficulty getting commercial financing Vendors may be reluctant to provide credit to public agencies Can serve only creditworthy public agencies No municipal credit rating systems in place Can serve only creditworthy public agencies Transaction costs very high relative to project size Needs banks willing to accept some risk with municipalities May only serve marginally creditworthy public entities Interest rates increased due to guarantee fee Can serve only creditworthy public agencies High commercial interest rates Limited ability to sec ure loans Requires strong regulations for utilty participation Some public agenc ies have utility arrears Requires c hanges in utility billing systems Limited number of projects can be implemented available financing sources beyond initial grants Not sustainable Requires strong regulations for utilty participation Some public agenc ies have utility arrears Requires c hanges in utility billing systems No 6

7 Public EE financing ladder Selecting Financing Options for Further Assessment Commercial Financing Public Financing Advanced commercial or project financing (ESCOs) Vendor credit, leasing Commercial financing, bonds Partial risk guarantees Credit line with commercial bank(s) Credit line with municipal (development) bank Public ESCOs EE revolving funds Utility (on-bill) financing MOF financing w/ budget capture Budget financing, grants w/ co-financing Grants 7

8 Financing Options for Further Assessment Budget Capture Energy Efficiency Fund Public ESCO 8

9 Budget Capture 9

10 Budget Capture Key Characteristics Funds provided by MOF to municipalities may include on-lending of IFI/donor funds Project management by PMU located in MOF Products/Services: Loans to creditworthy agencies (collateral, own contribution) Energy services to other agencies (non-creditworthy, without own budget) Support for project preparation/implementation/monitoring could be provided by PMU (or Energy Agency) Future budget outlays reduced due to energy savings No repayment risk to MOF Could become a revolving fund (at least for a limited time) 10

11 Case Study Municipal Services Improvement Project (Macedonia) Loan provided to MOF by World Bank On-lending by MOF to eligible municipalities and public sector entities for municipal services projects (including energy efficiency) Implemented by a PMU within MOF Eligible projects have to be revenue-generating or costreducing Municipalities repay loans through budgetary mechanism from the project revenues or cost savings Some municipalities lack capacity to do project design and procurement - PMU can provide some support with TA funds Results Disbursed $ 14.7 million 11

12 Energy Efficiency Fund 12

13 EE Fund - Characteristics Independent management by Fund Manager (company), overseen by Board of Directors Capitalized from IFI/donor funds or government budget Full service: Financing plus project preparation/ implementation/monitoring services Two windows: Loans to creditworthy municipalities, collateral/own contribution required (Model 1) Energy services to other entities (Model 2) Repayment from energy savings, allowing Fund to revolve Repayment risk with the Fund Fund Manager on performance contract Pricing of services depends on funding sources, condition of client 13

14 Case Study - EE Fund Bulgaria Energy Efficiency Fund BEEF (since 2006) Capitalized with US$15m grant funds (GEF, Austria, Bulgaria) plus private shareholders (e.g., Lukoil, Enemona) Overseen by non-political Board of Directors which includes government, private sector and NGOs Competitively selected fund manager, compensated on a performance-based contract Serves mostly SME industry, public and residential sectors, about 60% of projects in municipalities Provides loans to end users, portfolio loans to ESCOs, loan guarantees Operates on a fully commercial basis, including covering administration costs and defaults Results: Financed or guaranteed 160+ projects valued at over US$80 million 14 14

15 Public ESCO 15

16 Public ESCO Structure and Characteristics Government (Owner of Public ESCO) Initial Funding Donor Agencies Tech. Assistance Public ESCO (Corporation) Pmts for Services 100% Financing Payments from Savings Private ESCOs Services Public Sector Projects 16

17 Case Study Public ESCO Armenia Renewable Resources and Energy Efficiency Fund (R2E2 Fund) Received IDA credit of about US$10m for urban heating program which revolves Overseen by Board of Directors which includes government, private sector and academia Serves only public sector e.g., municipal street lighting, schools, hospitals, administration buildings Provides loans to municipalities and hospitals, energy service agreements (ESAs) to schools Operates on a fully commercial basis Uses simplified ESCO contracts to shift some risks to private construction firms Results: Signed 16 loans/esas valued at US$2.1 million 17 17

18 Comparison of the Options 18

19 Risks and Risk Management Type of Risk Budget Capture EE Fund Public ESCO Repayment Risk None Assumed by Fund Assumed by Public ESCO Technical Risk Assumed by equipment and/or service providers Performance Risk Partially assumed by service providers Partially assumed by service providers Assumed by service providers and Public ESCO 19

20 Private Sector Involvement Characteristic Budget Capture EE Fund Public ESCO Procurement of Private Sector Services By Client with support from PMU By Client for Loan Agreements By Fund for ESAs By Public ESCO For Loan Agreements and ESAs Type of Contract for Services Conventional contracts Partially performancebased contracts Performancebased contracts 20

21 Sustainability Budget Capture Repayments through budget capture Sustainability depends on government decisions EE Fund Established as a Revolving Fund Fund Manager responsible for assuring repayments and recycling of funds Helps development of EE service delivery capacity Sustainability due to revolving nature of fund Public ESCO Public ESCO responsible for assuring repayments Develops EE service delivery capacity by engaging and training private ESCOs Can engage financial institutions and leverage private financing to provide sustainable platform 21

22 Residential Sector 22

23 Residential Energy Efficiency Potential COUNTRY Potential Energy Savings Investment Needed Average Payback GWH/year Million /year Million Years Albania Bosnia & Herzegovina 1, Kosovo FYR Macedonia Montenegro Serbia 2, , Total 6, , Source: Energy Community Study of Energy Efficiency in Buildings 23

24 Residential Sector Financing Barriers Small project size high transaction costs Perception of high risk Low tariffs Residential Sector Financing Barriers Decision-making process and credit of HOAs Utility bills for heating not based on consumption High interest rates High hurdle (discount) rates 24

25 Financing Options for Residential Sector Commercial Bank Financing Partial Credit Guarantees Energy Efficiency Funds Utility Energy Efficiency Programs 25

26 Commercial Bank Financing 26

27 Bank Financing using Credit Lines - Rationale Create interest on the part of commercial banks in financing EE projects Enhance technical capacity of banks to scale up EE lending Can leverage parallel financing from the participating banks for EE financing Can increase loan tenors, standardize appraisal methods Strengthen the participating bank s capacity to identify and manage project risks Support transition towards market-based scaling up of EE Assist the participating banks in exploring business opportunities in other low carbon lending and carbon financing businesses. 27

28 Commercial Financing of Residential EE Public Agency Lender (Bank/FI) Residential Customer Donor Agency Or Government Bank/ Financial Institution Customer A Customer B Customer C Provides Funds at Low Interest & long tenor May add Funds, Lends at concessional Or Market Rates Obtain Financing For EE 28

29 Case Study - Poland Thermo-Modernization Program Established in 1998 to improve EE of existing buildings and to promote the use of renewable energy & co-generation in local heating systems Managed by the state-owned Bank Gospodarstwa Krajowego (BGK) Channels funds through 16 participating banks, which provide loans for EE investments on commercial terms Provides a 20% subsidy (loan forgiveness) for EE loans in residential, non-commercial, and public buildings (passed on through banks) Eligible borrower-include homeowners, cooperatives, HOAs and commercial enterprises (plus also public agencies) Program Results 24,130 loans 92% in multi-family buildings Total Loans US$2.3 billion Grants US$ 450 million Energy Savings 3,636 GWh Planned Budget US$61 million/year 29

30 Partial Credit Guarantees 30

31 Partial Credit Guarantees Key Characteristics Designed to address the risk perception of banks and financial institutions Government or donor agency provides a partial guarantee covering loan loss from default Participating banks sign agreements specifying loan targets and conditions Banks conduct due diligence and process loans In case of loan default the guarantee covers a portion of the loss Program may also include a first loss reserve covering the first X% of the loan loss Substantial technical assistance provided to banks, project hosts, and project developers (including ESCOs) 31

32 Case Study IFC CEEF Program in Hungary Commercializing Energy Efficiency Finance (CEEF) Program implemented by IFC in cooperation with GEF IFC/ GEF GFA* Participating Banks Loans Project Developers IFC/GEF provided risk guarantee of 50% of the loss due to loan defaults Program effective in Hungary, Czech Republic, Slovakia, Lithuania, etc. Demonstrated low risk & high return of EE projects Increased bank financing of EE projects Many projects in Hungary in blockhouses Results Provided $49.5 million in partial risk guarantees (PRG) Default rate < 0.5% High leveraging of IFC/GEF funds achieved Investment > $200 M 32

33 Energy Efficiency Revolving Funds 33

34 EE Revolving Funds Key Characteristics Public funds created by national or state governments to finance energy efficiency projects In some developing countries, donor agencies have created energy efficiency revolving funds Sources of funding may include Regulatory initiatives to establish electricity tariff surcharge Government budget allocation State or national governments using new taxes National or state bonds Petroleum taxes Donor agency funds Fund size varies across countries (in US and some EU countries ~ 1 to 2 % of electricity sales revenues) Range of financing mechanisms for deploying the funds 34

35 Typical Structure of EE Revolving Fund Funding Sources Donor agencies/ifis Government budget allocations Tariff levy on electricity sales Petroleum taxes Revenue bonds Energy Efficiency Revolving Fund Customer A Customer B Customer C Financing Mechanisms: Rebates, Incentives, Grants Low-interest loans, Subsidies for energy audits. 35

36 Case Study Slovenia ECO Fund Slovenian Environmental Development Fund (Eco Fund) established in 1993 as a legal public entity to foster investments in environmental protection. In 2008, its functions were expanded to include EE investments. Financing mechanisms utilized include soft loans and grants, allocated based on public tenders announced each year. Target measures include: Energy efficient renovation of existing residential buildings Thermal insulation in both existing & new residential buildings Construction of low-energy and passive houses Solar heating systems Grant program (2011) provides 25% subsidy Results - 6,900 projects Euro 12.3 million - approved (covering heat pumps, thermal insulation, replacement of external building façade, and installation of biomass-based central heating 36

37 Utility Energy Efficiency Programs 37

38 Utility Energy Efficiency Programs U.S. experience demonstrated successful role of utilities in implementing residential EE programs EE obligations (EEOs) are regulatory imposed requirements on energy suppliers to meet defined EE targets Financed through a tariff mechanism EEOs may be combined with a trading scheme known as White Certificates EEOs have been implemented in Belgium, Denmark, France, Ireland, Italy, Netherland and the U.K. The EU Energy Efficiency Directive (2012) requires all member states to set up EEOs (target 1.5% of retail energy sales per year from 2014 to 2020) 38

39 Examples of EEO Programs Residential sector has been a major target of EEO programs Energy suppliers may: Directly implement EE measures in residential buildings Engage contractors to do the installation Purchase energy savings achieved by others Establish a fund that can be utilized for EE measure implementation Costs of programs are recovered by the suppliers through the tariff mechanism Formal measurement, reporting and verifications are required May allow trading of energy savings among obligated parties and sometimes also with non-obligated organizations 39

40 EEO Case Study - Italy Scheme EEOs with certificates Legal basis Legislative Decrees of march 1999 and May 2000 Obligated parties All electricity and natural gas suppliers Targets (cumulative) ENEL responsible for 86% of the target Incentives for exceeding and penalties for not meeting targets Cost recovery - common tariff surcharge 80% savings - residential sector M&V Deemed savings Deemed savings with some measurements Metering Most installed measures have been simple e.g. CFLs, low-flow showerheads Year Mtoe

41 Comparison of the Options 41

42 Comparison of Financing Options Option Countries Pros Cons Commercial Bank Lending Partial Credit Guarantees EE Revolving Funds Utility EE Obligations Austria, Belgium, Bulgaria, Czech Rep., Germany, Lithuania, Netherlands, Poland, Romania, Spain, U.K. Hungary, Lithuania, Czech Republic, Slovak Republic Bulgaria, Greece, Romania, Slovenia Belgium, Denmark, France, Ireland, Italy, Netherlands, U.K. Sustainable Builds off existing credit systems Allows for competition of financing Encourages commercial banks to finance EE projects Helps overcome risk perception of banks Can lead to sustainable commercial financing Can be sustainable Mandated to promote EE Can develop specialized products Centralized experience and lessons Can be done in sustainable manner Builds off of utility relationships and services Allows for simple collections (on-bill repayment) May only serve very wealthy creditworthy customers May involve high interest rates Banks may lack incentive to market aggressively Requires mature banking sector interested in EE financing May need substantial capacity building of banks May serve only creditworthy customers May distort market Could create monopoly May not operate efficiently Can be captured by political interests Utilities lack incentives to reduce energy sales Regulations may limit new utility services, billing Can create monopoly 42

43 Concluding Remarks Availability of financing is not an issue in the residential sector but the access to financing has been limited WBIF report shows 1.5 billion Euros available, but actual take-up has been very small Many EU countries have successful models - need to be adapted to local conditions Preconditions for financing - Creation of sufficient cash flow to pay from savings consumption-based billing cost reflective energy pricing customer ability to control energy use and costs Need to foster strong delivery mechanisms and enhance service delivery capabilities Financing programs need to be coupled with information and communications campaigns to sell EE benefits as well as co-benefits, such as improved comfort and health, urban renewal, increased home value, etc. 43