Financing ESCO Projects

1. Financing ESCO Projects June 1, 2005

2. Wholesale Banking Retail Banking Bank • Corporate Finance • Project Finance • Commercial Banking • Investment Banking • Accounts • Deposits & Bonds • Credit Cards • Mortgages & Loans • Depository Internet Technology Banking • B2B • Consumer finance portals • Web Trade • Development • Commercialization • Collaboration • Capability Building

3. Technology Finance Group (TG) Set up to • Encourage technology development and commercialization • Promote business driven research Emerged as • Centre of Excellence in the Indian financial sector in technology financing Assistance to • about 300 companies and 50 Technology Institutions

4. Focus Areas • Promote Technology Development • R & D projects • Institutional capacity building • Technology commercialization • Promote Sustainable Development • Energy conservation • Environmental management

5. ICICI Bank in Technology Development • Experience of over two decades in implementation of projects for bilateral/ multilateral agencies • Strong network with companies, government agencies, R&D institutions and NGO’s • In-house technical expertise • Diverse portfolio of financial instruments One stop solution provider for technology financing

6. ICICI initiatives - energy efficiency • Various programmes handled since 1985 • World Bank line of credit for cement industry • ADB funded energy efficiency studies in 6 industrial sectors

7. Energy Initiatives • Coal Washery • Waste heat recovery – copper smelter • Demand side management • Biomass cogeneration • Lithium ion batteries • Electric Vehicles

8. ICICI initiatives - energy efficiency • Currently executing 3 programmes focusing on energy efficiency • Energy Conservation & Commercialisation (ECO) • Greenhouse Gas Pollution Prevention (GEP) • Trade in Environmental Services & Technologies (TEST)

9. Energy Conservation and Commercialization (ECO) Programme Objectives • Leveraging private sector investment • Promoting market oriented solutions • Demonstrate energy efficiency in corporates, ESCO’S and through utilities implementing power distribution improvements and demand side management projects. • Assist stakeholders in developing, implementing and operating energy efficiency projects • Assist in policy development and reform issues at the central and state levels that would help create a supportive market environment

10. ECO Loan Fund • US $ 5 million • Funding for 50% of the cost of project • Different funding mechanisms envisaged • Structuring suitable financial instruments

11. ECO Proposed funding for…. • Non-sugar cogeneration • ESCO projects • Energy efficiency projects • DSM projects Project should be…. • Demonstrative • Innovative • Replicable • Promoting an energy efficient technology

12. Financing mechanisms • Concessional loans for innovative projects • Conditional loans for projects introducing new concepts and have a higher perceived risk • Line of credit to ESCO’s for several small projects • Individual ESCO project financing : (a) guaranteed savings (b) shared savings

13. ESCO - Financing • On the strength of the Balance Sheet of sponsor : sponsor agrees to take credit risk on the strength of the guarantee provided by ESCO • On the strength of the balance sheet of ESCO (ESCO takes credit risk)

14. Guaranteed Savings • ESCO guarantees minimum savings that cover repayment obligations of sponsor • Shortfall in savings to the extent of repayment of obligations met by ESCO • Excess savings over and above the repayment obligations are shared in a predetermined ratio

15. Shared Savings • ESCO implements the Project on Build Operate and Own (BOO) basis and arranges for entire finance • A pre-determined portion of savings is shared with the end user/ sponsor

16. ESCO Projects Funded/ Being Considered • Nasik Municipal Corporation • Agni Energy Services (P) Ltd. • Thermax EPS / Morarjee Gokuldas • Indian Institute of Technology, Kanpur • Chemical manufacture • Administrative / Government buildings

17. ECO : Municipal ESCO • Energy saving potential assessed jointly with NMC • Baseline established jointly by NMC & ESCO • Energy Services Agreement for implementation of the project entered into between SCPL and NMC. • Estimated annual savings of Rs 6.0 million on a capital investment of Rs 9.0 million • Current power bills - Rs 27.5 million per annum for area allotted to SCPL • Savings to be shared for five years • Project implemented in 2004 • Payback period ~1.5 years

18. Street Light Controller (SLC) • Microprocessor based unit with a real time clock • Three modes of operation (Start , Run & Dim) • Voltage correction in Start mode as per lamp manufacturer specifications to enhance life of bulb • Microprocessor changes mode to Run mode where voltage is changed to acceptable lux level • At programmed time DIM mode takes over automatically to reduce illumination at an agreed value • On/Off and sunrise/sunset timings for 52 weeks can be programmed

19. SLC (Contd..) • The actual lux level varies due to variation in the voltage levels • The red graph shows the approx lux level, whereas green graph shows the acceptable lux level • Light level available during peak traffic hours is less than during low traffic hours. • Large potential to save energy between 12 pm to 6 am

20. Proposal • Installation of 400 street light controllers covering 12000 street lights at various lighting stations to improve street lighting efficiency • Improvement in the existing electrical distribution network for • Reduction in cable losses • Power factor optimization

21. Business Models Lender Repays Loan Lends ESCO Shared Savings Owns,operates,maintains & shares savings with user User

22. Lender Project 1 Line Of Credit Project 2 ESCO Project 3 Project 4 Project 5 ESCO: Line of Credit

23. ESCO –Specific Issues • Performance Guarantees - users want ESCO to indemnify them if promised energy savings do not materialise • Performance Risks - Is the ESCO capable of generating the assured energy savings? • Contractual Risks : no assurance that users will honour their payment obligations • Structure : Most structures presented are not bankable proposals • Models : ESCO Business calls for project specific approaches to business modeling

24. Project Structuring Issues that guide the structuring of the business model • Who invests in the assets? • Are there minimum performance and payment obligations? • Are payment obligations structured to ensure irrevocable payments to ESCO? • Is there recourse to ESCO’s parent if it defaults in obligations to user and Lenders? • What is the integrity of baseline data and measurement/ verification ? There cannot be one common business model, but common safeguards can be built in

25. Bankability of ESCO Projects • Innovative financial solutions required to shift credit risk from ESCO to project • Strong financial structure • Earmark cash flows • Limit scope for payment delays and restrictions • Use innovative financial mechanisms - escrow, securitisation, cash collateral, guarantees, etc. • Minimizing Performance Risk • Determine baseline data with precision • Create suitable M & V protocols • Ensure minimum fulfillment of payment obligations to Lenders

26. Contractual Issues ESCO business is contract-driven. Requires clarity of purpose and resolution of contentious issues to ensure that lenders realise their monies. • Is the scope of services and baselines defined precisely? • Are Measurement & Verification protocols clear-cut and unbiased? • Have areas of possible dispute been addressed? • Are there minimum/ guaranteed performance standards? • Is financial structure strong enough to ensure recovery of loans within contract period? • Is security structure adequate to provide suitable collateral and late payment risk?

27. Need to Standardise Contracts • Lenders have to address their concerns by insisting on minimum safeguards in ESCO contracts with end users. • Guide the ESCO • Assist conceive and finalise business model • Chart course of action • Help them negotiate with end users • Enhances credibility of ESCO with lenders • Standardise risk mitigation techniques • Address project concerns from Lenders point of view • Establish strong payment and security mechanisms • Use standard documentation • Easy customisation of solutions for different ESCO situations • Aid to project appraisal and saves time • Contracts to be standardised by an agency who have actually helped achieve financial closure of at least a few projects

28. Tender Document (MCs) • MC’s to ensure technical specifications of the product are well defined in the document • Electronic Regional Test Lab, Kolkata in process of standardising norms for technical specification for street lighting products. • Technical specifications to include • Electronic protection circuits • Back up provisions in design of the system being installed • Programme being incorporated must have facility to start lamps at rated voltage; this reduces maintenance costs • Power control mechanism to use gradual change technique instead of step change technique • M & V process to be well defined in document and preferably to be done by agencies like CPRI, ERDA or other government organisations

29. Proposed Approach for MC’s • MC’s could follow a two stage bidding process to ensure substandard equipment is not installed on their premises • Technical bid to allow all those bidding to install and demonstrate savings on a pilot scale entirely at their cost for a fixed period at different locations • Organisations like NPC, ERDA, or other reputed agencies to measure and verify/ validate technical bids • ESCO’s who qualify in technical bid only to be allowed to enter the commercial bidding process • Select the ESCO who satisfies the above and has a proven track record of delivering the savings required

30. Thank you