Dollars to $ense. Energy Efficiency Financing Mini-Workshop. February 11, 2014 The International Centre

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2 Dollars to $ense Energy Efficiency Financing Mini-Workshop February 11, 2014 The International Centre

3 Workshop Learning Objectives To increase awareness and skill in obtaining financing for energy efficiency projects by: Analyzing the ways energy efficiency projects create financial value Building and presenting a winning business case Assessing alternative ( non-routine ) financing mechanisms 3

4 Energy Efficiency Project Financing Energy Efficiency Project Internal Funds Available? Y 1. Routine Financing N Do Nothing? 2. Non-Routine Financing 4

5 1. Routine Financing A: Understand your capital process, decision-makers and decision criteria B: Analyze the financial value of your Energy Efficiency Project C: Prepare & Present your Energy Efficiency Project Business Case 5

6 A: Understand I. Type of project A: Understand your capital process, decision-makers and decision criteria II. Value created III. Decision process IV. Decision points V. Decision makers VI. Decision criteria 6

7 I: Type of Project Development of Project Is the Project Discretionary? N Fund Project Y Project Evaluated via Corporate filters, then Competes for Capital 7

8 II: Value Created What kind of value does an energy efficiency project create? Energy benefits Non-energy benefits Energy Input System Efficiency Work Output 8

9 II: Value Created (cont d) Direct and indirect energy savings Comfort, productivity and safety increased Reduced O&M costs Environmental impact reduction Increased reliability 9

10 2,500,000 II: Value Created (cont d) Annual Operating Cost 2,000,000 1,500,000 1,000, ,000 Do nothing operating cost Avoided Cost from EE project Energy & non-energy savings Operating cost after energy efficiency project Years 10

11 III: Decision Process Operational Analysis Financial Analysis Energy Efficiency Opportunity Energy Efficiency Funding Capital Competition Strategic Analysis 11

12 IV: Decision Points Corporate Filters Operational Analysis - Feasibility analysis - Operational impact & value - Savings, benefits & costs Financial Analysis - Cash flow - Capital expense - Benefits stream - Return (IRR,NPV) Strategic Analysis - Business case - Strategic fit - Financial value - Stakeholder Issues Discretionary Projects Capital Competition Failed Projects 12

13 V: Decision Makers & VI: Decision Criteria Speaking the Language of Decision Makers Decision Points Operational Who What are the top 2 questions that decision makers need answered to determine value? Financial Strategic 13

14 B: Analyze B: Analyze the financial value of your Energy Efficiency Project I. Define Financial Terms II. Apply Financial Analysis 14

15 Financial Terms: Example Project 1 costs $100 and produces electricity savings of $30 per year. Project 2 costs $100 and produces natural gas savings of $25 per year. Questions: 1. What are the simple paybacks of Projects 1 and 2? 2. Which Project is a better investment? 15

16 I. Financial Terms Simple Payback Discounted Payback Net Cash Flow Present Value - time value of money Hurdle Rate Weighted Cost of Capital (WCC) Net Present Value (NPV) Internal Rate of Return (IRR) Balance Sheet 16

17 Cash Flow $10,000 $8,000 $6,000 $4,000 $2,000 $0 ($2,000) ($4,000) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Flows ($6,000) ($8,000) ($10,000) 17

18 Net Present Value (NPV) $10,000 $8,000 Cash Flows $6,000 $4,000 $2,000 $0 Present Value (Discounted cash flows) ($2,000) ($4,000) ($6,000) ($8,000) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Net Present Value (Aggregate of cash flows discounted to present value) ($10,000) 18

19 Energy & Financial Assessment Tool Use RETScreen v4. for: Complex situations Large amount of data Greater accuracy Offered by NRCan at 19

20 C: Prepare and Present C: Prepare & Present your Energy Efficiency Project Business Case I. Design Business Case II. Prepare and Present Elevator Speech (a brief and convincing summary of the Business Case) 20

21 I. Design Business Case Current situation Proposed modifications Energy and non-energy benefits Financial summary Risks Implementation plan 21

22 Delivering an Effective Elevator Speech Know your audience Grab their attention early Start with key positive points Be logical stay on topic Use appropriate data End with a follow-up statement 22

23 Non-Routine Financing Energy Efficiency Project Internal Funds Available? Y 1. Routine Financing N Do Nothing? 2. Non-Routine Financing Energy Performance Contracting (EPC) Leasing Special Purpose Vehicles 23

24 Energy Performance Contracting (EPC) EPC is a mechanism where energy savings are the basis for repayment of project costs. I. Guaranteed Performance II. Shared Savings 24

25 What is an Energy Performance Contract (EPC)? From a contractual point of view, an EPC is a services agreement. The contract clearly outlines the terms and conditions under which either the Company/Organization or their ESCO will make payments on the basis of measured and verified energy savings. 25

26 Advantages of EPC Overcome barriers to accessing internal capital Move forward on energy efficiency projects that fail to meet strict internal hurdle rates Eliminate negative impact on cash flow since project cost fully repaid from future energy cost savings Assign performance risk to third party Supplement in-house technical resources and focus attention on energy efficiency opportunities Fund deferred maintenance Show action on reducing GHG emissions 26

27 Disadvantages of EPC Additional costs - legal, M&V, risk premium Additional tasks - management of contract and M&V process May limit control of own operation ESCO may cherry pick projects to reduce risk May not comply with in-house procurement policies In-house staff may resent outsourcing their functions 27

28 I. Guaranteed Performance Third Party (ESCO or other) Develops, designs and builds, and guarantees energy savings from the EE Project Pays fees for services COMPANY or ORGANIZATION Funds Loaned $ Monthly Payments $ Lender

29 II. Shared Savings Third-Party (ESCO) Develops, designs, funds, builds the EE project Shares realized energy savings over a fixed term COMPANY or ORGANIZATION Funds Borrowed $ Monthly Payments $ Lender to ESCO

30 Why Finance With a Third Party? Cost Effective Hurdle Rates Project IRR Shared Saving EPC s Co./Org. Hurdle Rate ESCO Hurdle Rate Customer s Cost Effective Investment Level ESCO's Cost Effective Investment Level ESCO's Incremental Investment Project Investment 30

31 Savings Measurement International Performance Measurement & Verification Protocol evo-world.org/ ASHRAE Guideline , Measurement of Energy and Demand Savings 31

32 Dollars to $ense Energy Management Workshops Energy Management Planning Spot the Energy Savings Opportunities Energy Monitoring Energy Management Information Systems Recommissioning for Buildings oee.nrcan.gc.ca/workshops 32

33 Directory of Energy Efficiency Programs in Canada oee.nrcan.gc.ca/corporate/statistics/neud/dpa/ policy_e/programs.cfm 33

34 Thanks! George Holland