WHAT ARE SUSTAINABLE ENERGY TECHNOLOGIES (SETS)? Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

Transcription

1 WHAT ARE SUSTAINABLE ENERGY TECHNOLOGIES (SETS)? Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

2 Share (%) of Electricity Derived by Source CURRENT ELECTRICITY MIX BY TARGET COUNTRY 100% 80% 60% 40% Biomass Hydropower Oil 20% 0% Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Source: REEGLE

3 THE CASE FOR SUSTAINABLE ENERGY TECHNOLOGIES Energy cost savings Protection against price shocks Fuel supply diversity Decentralized electricity generation Local employment Environmental protection

4 THE TARGET COUNTRIES HAVE ABUNDANT RENEWABLE ENERGY RESOURCES IFOK Analysis 2012, Adapted from Nexant 2010, NREL 2012

5 OUR GUIDE FOCUSES ON RESIDENTIAL SETS Residential SETs are physically located at the host-site Typically generate electricity bill savings for residential utility customers Residential SETs offer opportunities for financiers to create new, community-focused financing programs

6 SETS RELEVANT FOR THE RESIDENTIAL CONTEXT Solar Photovoltaic Electricity Solar Hot Water Systems Energy Efficient Appliances

7 THERE IS A HIGH POTENTIAL FOR SOLAR PV THAT IS UNDER-UTILIZED IN THE TARGET COUNTRIES Energy Source Sun All target countries have a high potential for solar PV Each target country has a greater resource potential than is being currently utilized Energy Fuel oil or electricity purchased from the Displaced power grid Requirements Access to sun; roof facing north or south; sturdy roof that can carry added weight of installation and will not leak Generating Capacity Payback time Cost Per Unit Useful Life Small systems typically start at 100 W (to power 1-2 light bulbs) and a larger residential system have capacities of up to 3.5 kw (to power higher energy appliances such as televisions, refrigerators, and air conditioning units) Varies; As low as 8 10 years Varies depending on installation size, quality, manufacturer, installation costs; US$3,000 - US$12,000 for entire system years

8 MANY CONSUMERS IN THE TARGET COUNTRIES ARE FAMILIAR WITH SHWS SHWS are becoming more common in the Caribbean Successful deployment in Barbados, Grenada, St. Lucia SHWS costs are decreasing due to demand increases and high penetration levels Energy Source Energy Displaced Requirements Generating Capacity Payback time Cost Per Unit Useful Life Sun Fuel oil or electricity purchased from the power grid Access to sun; roof facing north or south; sturdy roof that can carry added weight of installation and will not leak A solar hot water system has the capacity to supply an entire household with hot water, approx 200 liters Varies; As low as 3 10 years Varies depending on installation size, quality, manufacturer, installation costs; $ 1,000 $3,000 per system installed years (depending on maintenance)

9 MANY DOMESTIC APPLIANCES CURRENTLY SOLD AND USED IN THE TARGET COUNTRIES ARE NOT ENERGY-EFFICIENT Labeling systems and other information mechanisms Voluntary labels being introduced at national level Mandatory standards and labels at regional level needed Control mechanisms need to be established Information campaigns and access to consumer information are essential Focus Energy Saved Requirements Barriers Payback time Supporting incentives Refrigerators, TVs, Air Conditioners, Lighting, Washing machines, Fans Up to 80% of electricity can be saved by substituting existing appliances through best available technologies. Efficient appliances need to be offered on the market; consumers need to be aware of options and energy consumption. Consumers see energy-efficiency as minor important criterion for purchasing decision; operational long-term costs not taken into account. Information often incomplete or misleading. Varies; often lower than 1 year; no linear ratio between energy-efficiency and appliance price. Some countries offer fiscal incentives (VAT reduction; import duty exemption); Legally binding commitment for EE information necessary.

10 CARIBBEAN HOUSEHOLDS ARE WELL EQUIPPED WITH (OFTEN INEFFICIENT) APPLIANCES 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Refrigerator or fridge/ freezer combi Major Electrical Household Appliances in SLU, GND, A&B Freezer Fan (mobile) Washing machine (Top loader) TV (Colour CRT) TV (LCD/ Plasma) Stereo music system SLU GND A&B Source: GIZ/OECS, ECELP Survey 2012

11 CONSUMERS CAN CHOOSE APPLIANCES WITH A VARYING DEGREE OF ENERGY EFFICIENCY Category Potential Energy Savings of best available technologies vs. lowefficient products Air Conditioning Units 70% Lighting 70% - 80% Washing Machines 30% Refrigerator/freezers >50% Televisions 80% Source: TopTen EU/Spain

12 ENERGY-EFFICIENT APPLIANCES ARE WIDELY AVAILABLE BUT LIFE-TIME COST CALCULATION NOT COMMON Consumers in all of the target countries could benefit from energy-efficient appliances Since they consume less electricity to operate, they result in lower electricity costs for the consumer (not always visible due to increasing fuel surcharge rates) National benefits in terms of lower fuel imports and reduced environmental impacts However, purchasing of energy-efficient appliances could require more up-front investments Consumers may require additional financing that will repay through energy/operational cost savings

13 CARIBBEAN HOUSEHOLDS VERY OFTEN USE HIRE PURCHASE CONTRACTS How was the appliance purchased? Cash Hire Purchase Loan 1% 5% 47% 27% 2% 46% 31% 15% 25% 34% 43% 31% 23% 40% Fridge/ freezer combi Freezer Fan mobile Washing machine TV (Color CRT) TV (LCD/Plasma) Source: GIZ/OECS, ECELP Survey 2012, data from SLU

14 ENERGY EFFICIENCY IN THE BUILDING SECTOR Building codes difficult to implement with insufficient administrative enforcement capacity Financial and fiscal incentives could stimulate the market Knowledge base improvement and advisory services are essential Focus Energy Saved Requirements Barriers Payback time Supporting incentives Insulation of roofs and walls, shading of windows, double glazing, use of natural airflow and daylight, use of energy-efficient construction material Varies from case to case. Under optimal conditions up to 100% possible. In other cases (exit situation with no use of AC) improvement of inner room comfort. Construction material and components need to be available. No legal requirements or financial incentives for energy-efficient building. Even professionals have limited know-how and experience. Most material has to be imported at higher costs. Depends on individual cases, but many lowinvestment measures possible with payback periods of less than 10 years. Almost none so far as energy-efficient building has not been seen as a priority in the past. Some initiatives have supported energy audits in specific sectors (e.g. for hotels and guesthouses)

15 BARRIERS TO SUSTAINABLE ENERGY FINANCING IN THE CARIBBEAN REGION Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

16 AGENDA The case for SET investments Regulatory framework Financial incentives available in target countries Barriers for the consumers Barriers for the financiers

17 SET INVESTMENTS: WIN-WIN FOR FINANCIERS AND CONSUMERS SETs generate energy savings that produce long-term savings or an income stream This improves free cash flow for the consumer and enables them to more easily service debt $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 Loan is paid off $13,331 $14,013 $14,730 $15,484 $16,276 $2,000 $2,633 $3,164 $3,723 $4,310 $4,927 $ Yearly electrical bill without investing Yearly electrical bill after investing + loan payments Yearly net savings

18 REGULATORY ENVIRONMENT IN TARGET COUNTRIES

19 REGULATORY ENVIRONMENT FOR SET INVESTMENTS DIFFERS FROM ONE TARGET COUNTRY TO OTHER Coun try Electric utility NEP approved SVG VINLEC Yes, February 2009 SLU LUCELEC Yes, June 2010 Feed-in permission Yes, voluntarily by VINLEC Yes, voluntarily by LUCELEC, ceiling: 3 MW GND GRENLEC no Yes, From 2011: 0.45 EC$/kWh BBD BL&P no Yes, based on RE rider for up to 1.6 MW or 200 systems Feed-in tariff Net-metering Observations no yes Up to 10 kw for individuals no yes Up to 10 kwp or based on special agreement 1.8 times the fuel surcharge, minimum Bd$/kWh DOM DOMLEC no Yes, by law PPA to be to be defined individually Yes till middle of 2011 with ceiling of 300 kwp Change fo GRENLECs policy in 2011 after arrival of 300 kwp-limit RE-Rider approved by Fair-Trade Commission ESA was amended in 2009, Independent Regulatory Commission in place

20 Grants Rebates VAT Reduction Capital Subsidies Import Duty Waiver Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines FINANCIAL INCENTIVES STILL NEED FURTHER Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines DEVELOPMENT Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines Antigua & Barbuda The Bahamas Dominica Grenada St. Kitts & Nevis St. Lucia St. Vincent & the Grenadines The country has implemented the financial incentive The country is drafting the financial incentive The country has no financial incentive

21 THERE ARE TWO MAIN BARRIERS THAT PREVENT SETS INVESTMENT Consumer Barriers General awareness Upfront investment cost Consumer creditworthiness Loan terms Financier Barriers Equipment and installer quality Transaction costs Financing tools

22 THE FOUR MAIN BARRIERS THAT CONSUMERS FACE General Awareness Loan Terms Consumer Barriers Upfront Investment Costs Consumer Creditworth iness

23 CONSUMERS NEED MORE INFORMATION BEFORE INVESTING IN SETS The typical consumer Spends a large proportion of their paycheck on energy costs. Is unfamiliar with relevant technologies for their home. Is unaware of the possible positive benefits of investing in SETs. Many questions regarding the costs and benefits as well as regarding... General Awareness

24 MANY CONSUMERS NEED FINANCING TO AFFORD SETS SETs typically cost more than their conventional product counterparts Costs are prohibitively high for many consumers Can take months / years for investment recovery and to generate savings Benefits Costs Upfront Investment Cost

25 SOME CONSUMERS MAY LACK THE CREDITWORTHINESS TO ACCESS FINANCE Consumers and project developers may lack the necessary creditworthiness and collateral to access financing Our research indicates financiers may require high collateralization for SET financing This can be cash or property Consumer Creditworthiness

26 EVEN CREDITWORTHY CONSUMERS MAY FIND THE LOAN TERMS PROHIBITIVE The loan tenors and the interest rates typically available for SET financing can make SETs cost-prohibitive Consumer loan tenors are months, but SET lifetimes are usually years Our research indicates that many consumers currently investing in SETs have higher incomes and are able to afford the technology without the need for financing Loan Terms

27 THE THREE MAIN BARRIERS THAT FINANCIERS FACE Transaction Costs Financier Barriers Equipment and Installer Quality Financing Tools

28 UNCERTAINTY ABOUT EQUIPMENT QUALITY INCREASES RISK TO THE FINANCIER Revenue stream can become nonexistent due to a faulty product Determine which product is EE Lack of standards and labels poses challenges for financiers Understanding and trusting labels Equipment Quality Some technology is non-suitable for the region Assess reliability and calculate payback

29 Installer Quality UNQUALIFIED INSTALLERS INCREASE THE RISK FOR Poor installation can ruin equipment, thus SET will not provide savings Without savings, consumers lack additional cash flow to service debt Lack of national and regional vetting, warranties and FINANCIERS certifications perpetuates cycle

30 FINANCIERS FACE A CHICKEN AND EGG SCENARIO High transaction costs make lending for consumer level SETs unattractive High customer acquisition costs Small portfolio size Transaction Cost No market growth without development of financial products

31 HIGH CUSTOMER ACQUISITION COSTS Lack of customer awareness and demand Consumer level RE and SET is typically small Credit unions and local banks tend to provide smaller value loans, unlike larger banks in the region Transaction Cost 160% 140% 120% 100% 80% 60% 40% 20% 0% Credit Union Penetration Rate in the Region Source: World Council of Credit Unions, 2012

32 SMALL PORTFOLIO SIZE DOES NOT DRAW ENOUGH ATTENTION AND RESOURCES Sustainable energy is a small portion of FI s portfolios Other portfolios are much larger (e.g. auto loans) and receive more attention No incentive to create products for small demand Transaction Cost

33 LACK OF FINANCING TOOLS TO CREATE CONSUMER SCALE RE AND EE RELATED LOAN PRODUCTS Limited availability of practical tools and resources to create products FIs with no experience in RE related lending usually charge higher interests Main areas where support is needed are: Risk evaluation Payback calculation Financing Tools

34 DISCUSSION OF BARRIERS UNIQUE TO THE CARIBBEAN

35 THE FINANCING LANDSCAPE IN THE CARIBBEAN REGION Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

36 FINANCIAL INSTITUTIONS Credit Unions Commercial Banks Development Banks 41% average penetration rate $5,000 average loan size Typical loans: home mortgages, auto loans, small equipment, etc. 3 intl. commercial banks & many local commercial banks Typical loans: Commercial entities and higher income. Micro businesses and households (region dependant). International, regional and national Typical loans: Financing windows or lines of credit. Portion may be dedicated to RE/EE lending at subsidized rates.

37 CONSUMER CREDITWORTHINESS EVALUATION CRITERIA Ability to pay Willingness to pay Collateral available Down payment Present and projected disposable income available for debt service Even though able to pay, consumer may prioritize other payments More difficult to predict late or defaulted payments Can be cash, property or the asset itself Incentivizes customer to repay, or financier claims the collateral Upfront payment Helps evaluate ability to pay and set favorable loan terms

38 Tenor Collateral AVERAGE LOAN TERMS FOR SET IN TARGET COUNTRIES Loan Type Credit Unions Local Banks Commercial Banks Development Banks Consumer Up to 5 yrs (avg months yrs (Personal or 3 yrs) equipment loan) Commercial yrs 15 yrs yrs Mortgage yrs 25 yrs 25 yrs Consumer 10% cash, Cash or property secured. Can use Commercial, real Bill of sale on piece sometimes equity in property for 100% estate, retail of equipment accept asset as financing. 50% down payment if security equipment itself is the security, as low as 25% if secured with other collateral Interest Rate Origination Fees Recovery 2 Rate Commercial Cash 10% -20% Mortgage 80% cash or Property property Consumer 12% 9% % 11% - 15% Fixed interest rate Commercial 9% - 13% 9% Mortgage 8% - 10% 7% - 8% 7-8% Consumer Commercial Mortgage Consumer Commercial Mortgage

39 KEY TAKEAWAYS FROM LOAN TERMS Bank rates are more competitive, but loans have specific requirements (e.g. collateral) Less competitive loan terms when offered as personal or equipment loans vs. mortgages Mortgages and refinancing may not always be feasible for consumers Shorter loan tenors for equipment loans can distort payback for customer on SETs Absence of second hand markets for SETs creates adverse collateral requirements

40 VALUATION OF SET LENDING IN THE PORTFOLIO Target profit margin Target default rate Current risk perception SET loan in FI s portfolio Loan term SET financing is a formalized product line in some institutions Loan promotions can hedge risk by partnering with other stakeholders

41 GROUP DISCUSSION OF THE FINANCING LANDSCAPE

42 Tenor Collateral AVERAGE LOAN TERMS FOR SET IN TARGET COUNTRIES Loan Type Credit Unions Local Banks Commercial Banks Development Banks Consumer Up to 5 yrs (avg months yrs (Personal or 3 yrs) equipment loan) Commercial yrs 15 yrs yrs Mortgage yrs 25 yrs 25 yrs Consumer 10% cash, Cash or property secured. Can use Commercial, real Bill of sale on piece sometimes equity in property for 100% estate, retail of equipment accept asset as financing. 50% down payment if security equipment itself is the security, as low as 25% if secured with other collateral Interest Rate Origination Fees Recovery 2 Rate Commercial Cash 10% -20% Mortgage 80% cash or Property property Consumer 12% 9% % 11% - 15% Fixed interest rate Commercial 9% - 13% 9% Mortgage 8% - 10% 7% - 8% 7-8% Consumer Commercial Mortgage Consumer Commercial Mortgage

43 $20,000 $18,000 $16,000 $14,000 Loan is paid off $12,000 $10,000 $8,000 $6,000 $13,331 $14,013 $14,730 $15,484 $16,276 $4,000 $2,000 $2,633 $3,164 $3,723 $4,310 $4,927 $ Yearly electrical bill without investing Yearly electrical bill after investing + loan payments Yearly net savings

44 SET PRODUCT OFFERING Consultation and Workshop for Financiers: Financing Sustainable Energy in the Caribbean

45 SUSTAINABLE ENERGY MORTGAGE PRODUCT OFFERING Objective: To offer competitively priced mortgages for RE/EE investments compared to those offered for traditional home mortgages Needs addressed: RE/EE has higher upfront cost but can yield savings over long run, if mortgage is adjusted for SET Opportunities: Increase mortgage size Expand customer base Expand product line offering Market differentiation Mortgage Product Offering Risks: Time investment to evaluate installers Time investment to evaluate eligible RE/EE products Technologies may underperform

46 POSSIBLE STEPS FOR FINANCIERS Work with experts (e.g. universities, consultants, government) to determine qualifying sustainable energy technologies for a new build or a home improvement (product type and required funds). Develop a list of possible products offered by several installers or Form a partnership with a single installer who sells/installs qualified products Determine baseline rates for SET mortgage terms that are slightly shorter than the baseline for standard home mortgages. The SET terms would be adjusted depending on customer creditworthiness. Determine terms if the home is sold or owner defaults on loan. Promote offering in partnership with approved installers or associated partners

47 ON-BILL FINANCING MODEL Objective: To expand the lending market for energy improvements to residential rental units Opportunities: Expand customer base Expand product line offering Market differentiation Reduce administrative costs On-Bill Financing Model Needs addressed: Split incentive problem solved by tying an EE loan to the unit s gas or electric meter. Monthly charge is less than the monthly savings. Financier expands lending base by partnering with utility. Risks: Less control due to partnership with utility SETs may underperform, leaving borrower with less disposable income

48 POSSIBLE STEPS FOR FINANCIERS Engage the local utility to determine the political and logistical feasibility of instituting an on-bill financing program Identify energy improvements that are eligible for an on-bill financing loan. Explore a partnership with a vendor that can offer audits for interested customers. Determine loan interest rates and terms based on the credit rating and utility payment history for eligible customers. Provide interest rates are favorable enough to provide a reasonable return on investment for the customer Agree to terms of partnership with utility Determine administrative costs and implement necessary fees Promote offering in partnership with utility to the utility customers

49 PROPERTY ASSESSED CLEAN ENERGY (PACE) MODEL Objective: To implement a mechanism for institutions to offer low interest loans for residential energy improvements without the higher administrative costs and risks associated with a traditional loan program Needs addressed: Traditional loans are riskier and carry higher interest. PACE integrates repayment mechanism into the property tax bill. PACE Model Opportunities: Expand customer base Expand product line offering Market differentiation Reduce investment risk Scale up Risks: Less control of administration due to partnership with local government SETs may underperform, leaving borrower with less disposable income

50 POSSIBLE STEPS FOR FINANCIERS Engage the local government to determine the political and logistical feasibility of instituting a PACE program Identify energy improvements that are eligible for a PACE loan. Explore a partnership with a vendor that can offer audits for interested customers. Determine loan interest rates and terms based on the credit rating and tax payment history for eligible customers. Ensure that the interest rates are favourable enough to provide a reasonable return on investment for the customer Determine administrative costs and implement necessary fees Promote offering in partnership with local government

51 PAYROLL DEDUCTION SCHEME Objective: To implement a mechanism for FIs to offer finance for durable consumer goods. The authorizing lender deducts regular loan payments directly from the employee s payroll. Opportunities: Expand customer base Mitigate risks of default Reduce transaction costs Payroll Deduction Scheme Needs Addressed: Consumers don t have the financial capital to invest in SETs. A FI can mitigate the risks of default by integrating the repayment mechanism into the consumer s payroll. Risks: Less control due to partnership with other entity SETs may underperform, leaving borrower with less disposable income

52 POSSIBLE STEPS FOR FINANCIERS Engage the local organisations and companies to assess the feasibility of instituting an on-bill financing program The Financial Institution establishes a relationship with various employers The Financial Institution establishes an agreement with the employer to allow for loan payments to be deducted from payroll The Financial Institution utilizes the payroll deduction scheme with creditworthy consumers who have at least 1-2 yrs of employment tenure and a strong employment record

53 VENDOR FINANCE AGREEMENT Objective: To provide quality assurance to the FI and the consumer by offering a minimum warranty and regular service and maintenance agreement. Needs Addressed: Address equipment and installer quality issues. Under this structure, the vendor/installer assures the minimum warranty and regularly services the SET. Opportunities: Expand customer base Mitigate risks of default Increase willingness to pay Reduce transaction costs Vendor Finance Agreement Risks: Time investment to evaluate installers Time investment to evaluate eligible RE/EE products

54 POSSIBLE STEPS FOR FINANCIERS The Financial Institution solicits applications for local vendors to participate in a loan promotion The Financial Institution evaluates the applications (through internal knowledge or a hired consultant) to determine which vendors are credible The Financial Institution establishes an agreement with the vendor to offer consumers warranties and regular maintenance Such an agreement can also include buyback provisions

55 SECOND HAND MARKET Objective: To establish a re-sale market for repossessed SETs to enable FIs to recover some/all of their costs. Partner with companies that offer hire-purchase schemes. Needs Addressed: In the event of a consumer defaulting on a SET loan, FIs need a mechanism to recoup their costs. With a second hand market, the SET can be re-sold or refinanced. Second Hand Market Opportunities: Expand customer base Mitigate risks of default Recoup costs during defaults Reduce transaction costs Risks: Time and cost to establish market Costly diligence and valuation of second hand SET

56 POSSIBLE STEPS FOR FINANCIERS The Financial Institution establishes a relationship with a large retailer (such as Courts) to offer competitive financing to consumers Many large retailers already offer financing on SETs, so a partnership with an FI can help make SETs more affordable to consumers The Financial Institution establishes an agreement with the large retailer to offer financing for SETs The retailer agrees to re-possess and re-sell or buyback the SET in the event of default.

57 SOLARIZE Objective: To expand the market of residential solar loans by increasing the financial feasibility through group purchasing and by mitigating the customer inertia problem through community organizing. Needs Addressed: Residential solar is still a nascent market due to high upfront costs, unfamiliarity with the technology, and a complex decision process. Solarize Opportunities: Expand customer base Expand product line offering Market differentiation Overcome customer inertia problem Risks: Solar may not be financially feasible even with the discount Technical issues may prevent potential customers from installing solar

58 POSSIBLE STEPS FOR FINANCIERS Select a qualified installer through a Request for Proposal process Negotiate an installed price for a residential solar installation through the program. Some programs will offer a tiered pricing structure based on how many people sign up Set a sign up deadline for interested customers Engage the local community through a marketing campaign focusing on the limited time offer and financing options Once the deadline is reached, work with the installer to review the houses that have signed up to ensure that they are technically feasible for a solar installation Contract with the residents that have roofs feasible for solar

59 GROUP CASE STUDIES

60 THANK YOU! Presenters: Sean Flannery, Chief Operating Officer, Director of Investable Sustainability Christina Becker-Birck, Senior Consultant