Financial alternatives for Energy Efficiency Título ... · Innovative financial alternatives 25 Energy Efficiency Green Revolving Fund Two criteria for a green revolving fund: The

Título PresentaciónFecha: Thursday, November 9, 2017

Financial alternatives for Energy Efficiency

• Energy Efficiency is not a main concern for owners. There are other priorities for using own resources and debt capacity1.

• Many projects require small investments.2.

• High Transaction costs. Both (i) to make it attractive to customers and (ii) to generate comfort in private capital. Energy audit, due diligence and structuring finance are the main. 3.

• EE projects do not generate new cash, they just generate savings.4.

• No individual provider will finance 100% of financing requirements.5.

• Equity gap. There are current market limitations to get all the equity needed by these projects6.

• Financial risks are the main risks around EE Project to be considered by private investors7.• Energy Efficiency projects involve technical aspects unknown for Private Investor and financial

institutions.8.

• The owners do not even feel comfortable and confident with the potential results of energy efficiency projects, even less with any financial commitments linked to financial instruments

9.

• Lack of leaderships, references and Business Cases10.2

Barriers on Energy Efficiency

3

Barreras en eficiencia energética y energías renovables

Barreras de demanda

Barreras de oferta

De comportamiento

•No es preocupación principal

•Toma de decisiones a nivel organizacional

•Falte de liderazgo, referencias y casos de éxito

•Incentivos divididos entre propietario y arrendatario

•Confianza en los proyectos y sus resultados

Legales

•Falta de una legislación en determinados casos que obligue o motive la ejecución de medidas

Financieras

•Otras prioridades para el uso de recursos propios y capacidad de deuda

•Percepción de retornos en el caso del Capital

Legales

•Regulación estable y consistente que aporte confianza a los inversores

•Escasa posibilidad de comparar proyectos y resultados entre países en la UE

Financieras

•Determinados proyectos presentan retornos no atractivos

•Práctica irrelevancia de la financiación alternativa a la bancaria

•Proyectos de pequeña cuantía en ocasiones

•Altos costes de transacción

•Los proyectos no general nueva caja, mejora la caja mediante el ahorro.

• Dificultades para que uno solo proveedor financiero financie el 100% de la inversión

•Equity gap

• Consideración y aprobación del riesgo de crédito

•Aspectos técnicos desconocidos por los inversores

De comportamiento

• Dificultad para aceptar roles y responsabilidades diversos por parte de las empresas

Financing Alternatives

Corporate

funding

Ne

ed

s P

rofile

Project or asset

funding

Capital Needs +-

Bank Debt

Structured finance, project finance.

Taylor made.

Alternative

Markets

Securitization

+ -Level of standardization of funding

Equity, Mezzanine and

Debt Funds

Gu

ara

nte

eC

orp

ora

te

gu

ara

nte

eG

ua

ran

tee

of th

e

Pro

ject o

r asse

t

Financial and Operational Lease

Note: this is a chart to provide a general idea regarding the financing of companies. There are particularities or peculiarities

difficult to convey clearly into a 2D chart

Capital Markets (share and bond

issues)

Business Angels &

Venture Capital

Specific Investment

Vehicles (e.g.: ESCO

vehicles

Public Funding

Crowd funding

Financing concepts

We all mention concepts as alternatives, mechanisms and financial instruments as

almost synonymous, but it may be established a differentiations.

A financial alternative is a way to raise funds for a project, which involves legal

and economic conditions. For example: Bank debt,Preferred shares, junior debt,

quasi-capital, etc. A financing alternative typically does not reach 100% of

funding needs, and must be supplemented with other funding alternatives.

A financial instrument involves several financing alternatives, private and/or

public, developed through a more or less complex structure involving different

legal, risk and cost considerations for each of the integrated alternatives. The

structure is assumed to be complete (meet all investment needs), effective

(achieve the intended result) and efficient (do so at a reasonable weighted

average cost based on market conditions and risks).

A financial mechanism may have nuances of appreciation. Its generic

appreciation is to constitute a development that facilitates the final effectiveness.

For example, a "first losses" mechanism implies that a public "alternative"

assumes part of the first losses thus facilitating the entry of private capital. In this

sense, the mechanisms serve to cover the gap or market failure that implies the

non-existence of private investment in a sector.

Previous Financing Considerations

Equity

Subordinated debt

Senior debt

Security Tranches

for senior debt

(bank debt)

+

-

Cost

+

-

Flexibility

+

-

Knowledge of

technical

issues,

specialization,

management

Previous Financing Considerations

𝐼𝑅𝑅 𝐸𝑞𝑢𝑖𝑡𝑦 % = 𝐼𝑅𝑅 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 % + ൭𝐼𝑅𝑅 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 % − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 % ) ×𝐷𝑒𝑏𝑡

𝐸𝑞𝑢𝑖𝑡𝑦

Leverage effect

Previous Financing ConsiderationsC

ash F

low

: P

redic

tabili

ty&

Relia

bili

ty

Cash Flow: recurrence and periodicity +-

+

-

High restrictions to leverage

Need of flexible financing: Equity & quasi-capital

High Potential leverage

Need of financial professionastructurers and promoters in orden to manage and cover risks. Need of capital buffers

Initial restriction: credit risk approval

Innovative financial alternatives

Having financing alternatives facilitates overcome barriers

The financial solutions will depend on the profiles of the projects and the financial

situation and needs of the final recipients.

¡Need a set of solutions! Different solutions for different profiles

An energy efficiency profile is based on a Project and a final recipient of savings (orcustomer).

A Project involve a set of energy efficiency measures.

A public program of energy efficiency may involve several profiles; measures and targeted finalrecipient.

9

Financing EE & RE projectsEnergy Efficiency Profiles


An EE & RE profile is attractive to private capital when:

The Project is viable, involving financial and technical aspects.

Discounted Pay Back≤10 years in companies, and <=15 individuals and public institutions.

The final recipient is fully solvent. Easier to analyze in large projects.

A non attractive profile for private investor may have public interest. Then, ¡Needs toinvolve public aids!

10

Attractive of a profile to private capital


Profile -

• Small projects and small customers

Profile +

• Large projects

profiles can be differentiated according to the size of projects :

Large projects based on large customers. Sometimes there are large projects for smallcustomers (Packaged projects, generation and retail sales of renewable energies likeDistrict Heating or District Cooling, etc). This projects are qualified as “+”.

Small projects aimed at small customers. These projects are qualified as “-”.

11

Profiles + & -


Clearly viable projects aimed at fully solvent beneficiaries. ¡Need to build trust!, that´s all,with:

Reliable due technique.

Reliable savings.

Legal certainty.

Qualified technologists.

Easier financial instruments in profile 1 and exclusively based on private investors.

However, profile 1- will require prior work on the standardization of measures and

processes.

12

Profile 1

Innovative financial alternatives 13

Profile 2

Viable projects aimed at final recipients of doubtful solvency. Not only trust is needed:

With small projects and customers (profile -), need an easy but effective mechanism to approvecredit risk, like a model of scoring with good results of screening.

Carry out a financial instrument with public aids in order to mobilize private capital.Subordinated debt and, specially, mechanism of First Loss Pieces should be enough.

Establish an investment and services payment mechanism through bills considered of lowdefault level, such as On Tax Financing and On Bill Financing,


Profile 3

Non-viable projects aimed at solvent customers. It should:

guide of standardize measures.

Public incentives to some measures. Those with less attractive to private capital but of

public interest.


Profile 4

Non-viable projects aimed at non-solvent customers. All the initiatives in profiles 1, 2 and 3

are applicable to this profile.


Profiles charts

Profile 1 ±

Profile 2. ±

Profile 3 ±

Profile 4 ±

Solvency of the Final recipients

Project viability

+

+

-

-

Off Balance Sheet Financing

Selection process of financial alternatives for final recipient

Financing options based on

Equity + Debt with different

grades of seniorityYes

Do you have

available cash?

Are there more strategic uses

for your balance sheet than

energy efficiency?

Yes: temporarily

outsource of assets

property and risks

Do projects and size

justify growth?

No

Yes

No

Can you achieve

your energy

efficiency goals

and meet your

internal

investment

requirements?

Financing options with EPC

contract (turn key)

Operational Lease or Financing

options off-balance sheet with

performance contracts: ESCO

model

No

Financing Options based on

performance contracts

No

Financing options off-balance

sheet based on specific

investment vehicles or forfaiting

or securitizationDo projects and size

justify growth?

No

Yes

Yes

Do you have access to tax

exempt financing?TAX EXEMPT BONDYes

No

Do you have balance sheet

constraints?

Yes

No

Credit enhancement and credit risk valuation on energy performancecontract

Do you want to

maintain

control of your

utility bill?

Are you willing to

change your power

Company?

No

Yes

ESA Contract (Energy Services

Agreement) Including energy

management and sail of electric

power

ESA Contract (Energy Services

Agreement) without sail of

electric power

No

MESA Contract (Managed

Energy Services Agreement)

Do you agree

to pay the

investments

via your power

bill?

On Bill Financing

No

Yes

Do you agree to

pay the

investments via an

annual

assessment on

your property tax

bill?

Yes

On Tax FinancingYes

No

Yes

Three solutions for buildings retrofits

FinancialInstrument Nord

pas de Calais

• Aimed at companies orinvestmentvehicles

• Targets: Energy efficiency, renewables, circular economy, sustainabletransport and inteligent networks

Green RevolvingFund

• Aimed at Universities, publicbodies and othernon-profitinstitutions

• Targets: Sustainableinvestments in their facilities, including buildingretrofits

Eurp Pace

• Aimed at any real state property, including publicbodies, industrial and services

• Targets: Buildingretrofits

Combination of ESIF and EFSI support on the example of Région Les Hauts de

France

CAP 3ème Révolution Industrielle

CAP TRI has been developed on a State

aid compliant basis

The technical support grant

element is an aid which falls

within the de minimis limits.


France


According to EIB’s Credit Risk Policy Guidelines, the provision of a mezzanine loan in theCAP TRI Investment Platform would not have occurred, or not to the same extent, withoutthe EU guarantee under EFSI, because:

It is both a financial instrument and an Investment Platform aiming to finance energyefficiency projects with a high risk profile.

The investments made by the Investment Platform are expected to be in the formof equity or mezzanine debt products, which are inherently riskier than standardsenior loans and the final counterparts are expected to be sub-investment grade.

The equity or mezzanine invested by the platform Facilitates the entry of private co-investors and bank debt.

The type of financing provided by the EIB is a mezzanine loan with veryadvantageous characteristics for the financial instrument. These advantages arethen passed on to the final recipients in terms of increased access to finance andbetter conditions.


France


Main Characteristics:

Funding through Ordinary shares, Preference shares or Convertible bonds with the goal toGrowth Capital, positioning with minority interest

7 years horizon

Investment Tickets > 1 M € y < 5 M €. and up to 10 M € in co-investment with other existingfunds of manager.

Technical assistance of 2,5 M. € (Technical, environmental or economic studies)


France


Main sectors of interest:

Renewables energies

Intelligent and alternative mobility (éco-transport, multimodal transport, logistics car-poolingplatform…)

Energy management (Connected buildings, passive buildings, energy storage, meters for

consumption control…)

Energy efficiency (Charging stations for electric vehicles, energy retrofitting of buildings, 3Dprinting…)

The circular economy (valorization of recycled materials and waste, eco-construction ...)

Sharing economy and the economy of functionality (self-service bike, rental car sharing...)


France



Energy Efficiency Green Revolving Fund

Two criteria for a green revolving fund:

The fund must finance measures that reduce resource use (e.g., energy,

water, waste) or mitigate greenhouse gas emissions (e.g. renewable

energy).

The fund must revolve so that at least some of the savings generated by

reducing operating expenses are required to be repaid to the fund, thus

providing capital for future projects.

Identify energywaste

Finance EficencyProject with Green

Revolving Fund

Repay Loan form energy

savings, reinvest new

monetarysavings


Energy Efficiency Green Revolving Fund

GRF:Investment Committee

integrates technical, financial, legal experts, etc from the University

Owner (University)

SMEs sector (ESCO, Technologists, etc)

Development and installation of the project.

ESCO or engineers design, install and are responsible of the maintenance during the

contract period

Advanced energy service contract.

GRF provides 100% of the cost of the project.

University’ payments are based on savings. Part of the savings can be directed to the research in sustainable fields.

Efficiency Services Performance Contract.

GRF executes a Turn Key contract to cover all project installation and

maintenance services




Energy Efficiency Green Revolving Fund. (GRF)

There are several key advantages that revolving funds hold over traditional non-revolvingexpenditures. Revolving funds:

Demonstrate the business case for sustainability. GRF tracks the savings into future projectscreating a measurable return on investment (ROI)

Engage and educate the community. GRF can bring diverse stakeholders together to makedecisions about investments and build a sustainability strategy

Convey reputational benefits. It is a unified, purposeful investment vehicle that generates morepositive press than conventional top-down investments.

Catalyze a culture shift. A GRF provides constant focus on the idea that you want continuousimprovement until you get to a carbon footprint of zero.

Create a programmatic approach. A GRF creates a formalized program of sustainability investmentsrather than a series of one-off projects

Leverage savings into opportunity. Way for organizations to capitalize on the savings of theprojects in order to promote sustainability in general.

Track performance. You cannot manage what you do not measure

Seize new fundraising opportunities



Assumptions

Equity 20%, Subordinated debt 20%, Senior debt 60%

Interest on senior debt 5%, maturity 5 years

Equity return 15%

Revolving Free Cash Flow after Equity Return (no return expected on subordinated debt)

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

45,00

1 2 3 4 5 6 7 8 9 10

Annual Reinvestments (10 years)

InitialInvestment

100

AccumulatedInvestments in 10 years

146,44



Assumptions

Equity 20%, Subordinated debt 20%, Senior debt 60%

Interest on senior debt 5%, maturity 5 years

Equity return 15%

Revolving Free Cash Flow after Equity Return (no return expected on subordinated debt)

InitialInvestment

100

AccumulatedInvestments in 25 years

1.868,12

0,00

50,00

100,00

150,00

200,00

250,00

300,00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Annual Reinvestments (25 years)

BEI Inestment Platform. Integration of financial solutions

What is an BEI investment platform?

It can be conceptualized as one wishes (organization, structure, etc.), but in the definition it should be

included that "it implies one or several financial solutions (financial instruments or single financial

alternatives) aimed at different profiles, which include in a structured way different financing

alternatives, private and public, in which Public institutions play a decisive role in attracting private

capital, developing for it several financial mechanisms (first losses, subordination, etc.) that achieve

both the attraction of private capital and the satisfaction of needs of the final beneficiary ".

This definition can be broken down for better understanding, and completed by commenting that the

existence of different instruments (not just one) is justified by the fact that each profile (project set and final

beneficiary) needs a different instrument to answer, integrate different alternatives and mechanisms.

The advantages of the investment platform are (or could and should be):

“Wide-angle" effect, possibility to cover the different profiles of the very different final beneficiaries (citizens, SMEs and

public institutions).

Moore's law effect (expresses that approximately every two years the number of transistors in a microprocessor

doubles), exponential growth by:

Achieve the attraction of private capital for the various instruments, obtaining two issues relevant to them:

adequate risk / return ratio and an effective flow deal (project capture).

Achieve the attraction of the final beneficiary of the measures

Working from the demand side (buy side or demand side) is to work from the side of need, and therefore approach it. To

work the "buy side" you must involve:

Business organizations and chambers of commerce. Especially important are sectoral associations in the case of

SMEs that can collaborate in the elaboration of a more defined operational proposal, and in the communication

and final dissemination to associated companies.

Public institutions, granting comfort to the final beneficiaries and commitment of execution and operative

BEI Inestment Platform. Integration of financial solutions

Título PresentaciónFecha: Thursday, November 9, 2017

Thanks for your attention

Documents

Financial alternatives for Energy Efficiency Título ... · Innovative financial alternatives 25 Energy Efficiency Green Revolving Fund Two criteria for a green revolving fund: The