Energy Efficiency Financing for the Commercial and Institutional Building Sector

Transcription

1 Energy Efficiency Financing for the Commercial and Institutional Building Sector Dec. 5, 2013 Alex J Hill Philippe Dunsky Marina Malkova DUNSKY ENERGY CONSULTING (514) info@dunsky.ca

2 OUTLINE / INTRODUCTION 1. Welcome & Introductions: Julia Langer, CEO, Toronto Atmospheric Fund (10 min) 2. Overview of EE financing challenges and opportunities. Alex J Hill, Dunsky Energy Consulting (30 min) Why do EE Financing? What tools exist, and by what criteria do we assess them? 3. Break-out groups Brainstorm re: favoured financing strategies (45 minutes) 4. Report back and discussion (20 minutes) 5. Next Steps ideas and interests for implementation (30 minutes) [ slide #2 ]

3 OBJECTIVES AND GOALS Explore Canada s EE financing needs within a group of key industry players (investors, building owners, building managers, policy makers, and others) Deepen our understanding of the market Key opportunities by sectors and segments Identify barriers (find market gaps) Identify a short-list of innovative, high-impact EE financing approaches Set wheels in motion to craft, demonstrate and de-risk high-potential opportunity(ies) [ slide #3 ]

4 LESSONS LEARNED REVISISTED Remember: THIS CAN BE DONE, BUT IT AIN T EASY FIVE TAKE-AWAYS TO INCREASE OUR CHANCES: 1. Why Know do your we audience need new EE Financing options? 2. Sell Hard 3. Keep it Simple 4. Be Attractive 5. Sensible Evaluations [ slide #4 ]

5 WHY DO EE FINANCING? Contributes to Environmental and Energy Management Challenges Climate Change, DSM programs Significant Untapped Market Need to expand depth and breadth of market Larger investments Longer payback periods / affordable capital More comprehensive projects Natural fit with deferred maintenance can yield significant non-energy benefits [ slide #5 ]

6 C&I IS ACTUALLY THREE SECTORS MUSH Sector Office/Retail MURBs Current Practice: Low hanging fruit measures, often as part of overall maintenance projects. Can tolerate paybacks over 10yrs Missed Opportunities: Deeper savings measures (envelope, ongoing commissioningbenchmarking, GSHP etc) Key Challenge: Debt loads are limited and contracting procedures do not typically favour deeper savings measures Current Practice: Varies by facility, with a strong focus on lighting and HVAC measures including cooling Missed Opportunities: Envelope can be simple in retail, deeper energy management approaches in offices (commissioning) Key Challenge: Split incentive under commercial leases, building owners have 3-5 yr hurdle rates for payback Current Practice: Lighting and HVAC measures with immediate paybacks Missed Opportunities: Envelope, commissioning, plug load equipment, and measures with significant NEBs Key Challenges: building owners have 3-5 yr hurdle rates for payback, heavy emphasis on Natural Gas heating. [ slide #6 ]

7 BARRIERS TO EE FINANCING FOR BUILDING OWNERS Owners often asked to carry 100% of the performance risk Not aware of EE financing available, and how it can meet their needs A leap needed to get beyond the equity-based assessment of EE projects (SPP < 5yrs) Many have no debt room left (or believe they don t) Time uncertainty Split incentives Project complexity Large upfront costs Long payback time Performance Risk Aversion [ slide #7 ]

8 COMMERCIAL SECTOR ACCESS TO CAPITAL Large Commercial Typically have strong relationship with financial institution(s) with customized financing May have portfolio of properties combinations of ownership and commercial leases Small and Medium Enterprises (SME) Represent nearly half of Canada s GDP but have greater difficulty accessing financing Public Sector borrowers can access long term debt at low rates Province-dependent criteria for borrowing rules and EE financing 1% 19% Sources of funding for SMEs broken down by product (2007) 7% 28% 3% 0 42% Loans Operating lines of credit Leases Equity Government Trade credit SMEs only accessed 65% of available (offered) financing in 2008 [ slide #8 ]

9 ENERGY EFFICIENCY FINANCING PROVIDERS FRONT-LINE LENDERS: provide mortgages, debt/credit, finance leasing programs Utilities/Governments (municipalities): can provide capital, billing mechanism for the customer, and savings verification ESCOs: help organize customer s financing as part of the energy service package Focused largely on the MUSH market ESA/MESA Project developers: own and finance equipment until the end of contract Equipment Vendors: can finance equipment (leases) [ slide #9 ]

10 LESSONS LEARNED REVISISTED Remember: THIS CAN BE DONE, BUT IT AIN T EASY FIVE TAKE-AWAYS TO INCREASE OUR CHANCES: 2. What are the EE Financing options? 1. By Know what your criteria audience do we assess them? 2. Sell Hard 3. Keep it Simple 4. Be Attractive 5. Sensible Evaluations [ slide #10 ]

11 EE FINANCING PRODUCTS FI: Financial institutions (large banks and credit unions) SF : Specialized Financer ESCO: Energy Service Company ESA : Energy Service Agreement Debt/Credit Capital and Operating leases ESA/MESA operating lease Municipal lease Property assessed financing On-bill repayment Customer's front-line lender FI, ESCO SF, Vendor Source of capital Rebates, tax credits and incentives recipient Project administrator Broad portfolio of FIs. Other FIs for ESCOs Customer Customer, ESCO FI, SF. Leases can be securitized (pooled). Customer Customer, SF, Vendor Technology provider Vendor, ESCO Vendor, ESCO Project developer FI, Investors. Leases can be securitized (pooled). Project developer Project developer ESCO, Project developer FI FI Utility FI, Municipal bonds Public funds, Municipal bonds. PACE loans can be pooled. Utility or FI, Investors, Development funds Lender Customer Customer Municipality Customer Customer Vendor Vendor Vendor, Utility [ slide #11 ]

12 CAPITAL AND OPERATING LEASES Leasing is fixed term, no cash down financing of an asset Capital lease Operating lease Operating leases allow the asset to remain off the leasee's balance sheet and are typically short term* Ownership Lease term Leasee at end of lease Approaches asset life Leaser Short Capital leases allow the lessee to own the asset at the lease s end and must last for at least 75% of the asset s life Leases usually issued by specialized lenders who have a deep knowledge of the equipment s value and risks Lease value Accounting Approaches asset value ON balance sheet Less than asset value (no $1 sale at the end) OFF balance sheet [ slide #12 ]

13 MUNICIPAL LEASE / ESPC Municipal Lease Specialised product for public facilities Energy Saving Performance Contracting (ESPC) ESCO provides design build EE project and provides energy savings guarantees Municipal Lease ESPC/ECO Strengths Off balance sheet Fixed payments Tax-free payment to lender Can cover large projects Performance guarantees shift risk to ESCO Long track record of effective projects Rigorous monitoring and savings verification Comprehensive of soft-costs Weaknesses Limited coverage of soft-costs Complex transactions and negotiations Debt appears on borrower s balance sheet Limited projects with deeper energy savings [ slide #13 ]

14 ENERGY SERVICE AGREEMENTS ESA, MESA Energy service contracts (ESA) are a form of third party financing known as Power Purchase Agreements Payments are tied to bill savings, lessening the risk for the property owner Payments stop when equipment is paid for or when the contract term expires Strengths Off balance sheet options Transferred performance risk Operations handled by ESA provider PRE-CONTRACT Developer establishes an energy baseline, dimensions, finances and installs equipment CONTRACT PHASE Developer owns and operates the equipment Property owner pays the developer for the energy savings CONTRACT END Property owner may purchase the equipment from the developer at the end of the contract [ slide #14 ]

15 Repayment PROPERTY ASSESSED FINANCING AND ON-BILL REPAYMENT Municipality/utility arranges the repayment of loans through existing property assessment or energy billing mechanisms Capital can originate from private or public sources Long term, no cash down, offbalance sheet financing possible Can be limited in scope if public funds are engaged Can be limited in size depending on source of funds and municipal/utility regulations Municipal/Utility admin and financing Municipal admin, private financing M M financing LIC or utility bill [ slide #15 ]

16 ON BALANCE SHEET OFF BALANCE SHEET WHICH EE FINANCING MODELS HAVE THE GREATEST POTENTIAL? OFF Balance Sheet Energy Service Agreement (ESA Operating Lease) Operating lease Municipal Lease Utility on-bill repayment 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ON Balance Sheet Property assessed financing (PACE) Energy service performance contracting (ESPC) Debt/Credit Capital Lease High Medium Low [ slide #16 ]

17 ON AND OFF BALANCE SHEET OPTIONS ON balance sheet: Debt, Capital Lease, ESPC Affects lending ratios (debt/equity) Compete with other capital projects eg. Deferred maintenance is taking all the debt room in MUSH Interest expenses and depreciation on income statement (tax deductions) Property owner can access rebates, incentives, tax credits etc. OFF balance sheet: Operating Lease*, Energy Services Agreement, Property Assessed, On-Bill Repayment Asset on lenders balance sheet (for deductions etc) Property owner pays rent for equipment/project Property owner may still access rebates and incentives [ slide #17 ]

18 NON- SPECIFIC MODEL-SPECIFIC WHAT MATTERS MOST (CRITERIA)? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% OFF Balance Sheet ON Balance Sheet Long-term fixed rates No upfront cost to building owner Financing transferrable with change of Off-balance sheet financing (Non-debt) Prolonged financing period (10+yrs) Credit risk backstopped by loan-loss reserve Repayments based on energy savings Combined finance and technology provider Preferential tax treatment Standardized project selection and rating Energy savings guarantee/insurance Post-retrofit energy savings verification Securitization of loans for sale in secondary Essential Desirable Neutral Not desirable [ slide #18 ]

19 INNOVATIVE FINANCE TOOLS (FLEXIBLE CRITERIA) Savings Guarantees: typically offered by ESCOs and ESA/MESA providers Savings Insurance: can be held by ESCO or by building owner Aggregation Mechanisms: used to securitize EE financed assets and access further funds (including warehousing) Clean Energy Finance Authorities (i.e. CEFIA): can be created to leverage private and public funds Credit Enhancement: by third party (government or utility) Loan Loss Reserves: backstop EE loans, allowing longer terms and lower rates Rate Buy-down: absorbs a portion of the borrowing costs Standardized selection and QA/QC: Examples: IPMVP, ASHREA Audits, IPC [ slide #19 ]

20 EE FINANCING RISK MANAGMENT Performance Risk Savings Guarantees Savings Insurance Investor Confidence Protocols Third-party verification Asset Risk Credit Risk Benchmarking Asset Labeling Disclosure On-Bill Repayment Commercial PACE Shorter Terms [ slide #20 ]

21 APPLYING THE CRITERIA TO EE FINANCING MODELS [ slide #21 ]

22 LESSONS LEARNED REVISISTED Remember: THIS CAN BE DONE, BUT IT AIN T EASY FIVE TAKE-AWAYS TO INCREASE OUR CHANCES: How Know do your we audience move forward? 2. Sell Hard 3. Keep it Simple 4. Be Attractive 5. Sensible Evaluations [ slide #22 ]

23 EE FINANCING PROGRAMS MUST... Respond to a clear market segment recognizing specific challenges faced More GAP ANALYSIS needed Go beyond simply offering more financing, to addressing key barriers Bring together the major players Investors/Lenders Utilities and Governments (multiple levels) ESCO, Vendors, ESA Providers Building owners and managers EE Borrower EE FINANCING Capital markets [ slide #23 ]

24 MEETING THE NEEDS OF PROPERTY OWNERS Offer clear and accessible value Meets the hurdle rates (debt/non-debt) Easily understood front end (fair treatment of risk) Cash-flow positive (makes them money, or public priorities) Comfort and trust with EE project Clearly defined projects with technical guidance / encourage them to think of EE financing Quality control and standard assessment practices Fair treatment of performance risk Savings verification [ slide #24 ]

25 MEETING THE NEEDS OF LENDERS Overcome lack of risk knowledge Credit enhancement Generate data/knowledge Allocate risks appropriately Performance risk assessed and minimized (QA/QC) Asset risk bourn by property owner Credit risk taken by lender (adequate recourse) Opportunities for resale/aggregation BUT: Don t compromise on key conditions for building owners (meet those or there is no demand) [ slide #25 ]

26 LESSONS LEARNED REVISISTED Remember: THIS CAN BE DONE, BUT IT AIN T EASY FIVE TAKE-AWAYS TO INCREASE OUR CHANCES: BREAK-OUT Know your audience GROUPS 2. Sell Hard 3. Keep it Simple 4. Be Attractive 5. Sensible Evaluations [ slide #26 ]