Catalyzing Markets Through Innovative Financing and Competitive Procurement for Energy Efficiency

1
Catalyzing Markets Through Innovative Financing
and Competitive Procurement for Energy Efficiency

• By
• G C Datta Roy
• DSCL Energy Services
• Presented at Interactive Session on
• Moving Market for Energy Efficiency
• Ogranised by
• Consultancy Development Center
• New Delhi, March 15, 2004

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Presentation structure

• Defining the EE market
• Market players competitive elements
• Moving the market-key issues
• Project structuring, risk risk mitigation
• Innovating financing mechanisms
• Competitive bidding tendering process
• Moving forward

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Energy Efficiency Consulting Market
Utility DSM
Consultancy
Energy audit
EE consulting market
EPC
Performance contract
TA
Leasing
Matured
Infant
Basic driver-Investment in energy efficiency
4
EE Investment potential

• Number of studies carried out under the auspices
  of ADB, WB and USAID and other bilateral agencies
  and MOP, GOI
• On the supply side savings opportunity identified
  by MOP at 25000 MW-estimated investment potential
  of Rs 30,000 to 40,000 Crs.
• Considering 30,000 MW connected load for the
  agricultural sector 20 savings
  potential-another Rs 9000 to 10000 Crs
• On demand side, latest study carried out under an
  ADB project, potential is estimated at Rs 14,000
  Crs in the selected industrial and commercial
  sectors

DSCL ESCO was involved in this study. Highlights
shared in the following few slides
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Methodology
Energy Efficiency Investment Market
Illustrative Companies
Investments (Generic Energy Efficiency)
Investments (Process Energy Efficiency)
Industry Aggregates Analysis
Activity Data Source Processing
Output
Energy Audit Reports MoP Awards CII Awards
Prowess
ADB TA 2193 CBIP Reports
Prowess

• Typical savings achieved in the individual
  representative companies in the industry
  sub-sector
• Corresponding investments
• Average RoIs
• Average energy savings as a of energy bills
• Extrapolation for industry energy savings and
  investments

• Company financials analysis and rating
• Company energy performance analysis and rating
• Overall ranking of companies in industry
  sub-sectors

• Typical savings achieved in the individual
  representative companies in the industry
  sub-sector
• Corresponding investments
• Average RoIs
• Average energy savings as a of energy bills
• Extrapolation for industry energy savings and
  investments

• Market characterization for Market and Financial
  Attractiveness
• Data Extraction for different industries from
  Prowess
• Rating and ranking of industries based on the
  selected parameters

ESCO Investment Market Size at the initial stage
(simpler projects w/o process energy efficiency)
Typical companies profile in the industry
sub-sector with ranking
ESCO Investment Market Size with process
efficiency improvements
Market Segments
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Segmentation Prioritization
H M L
ü
ü
Market Attractiveness
ü
ü
L M H
Financial Attractiveness
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Projects Segmentation
Sector Projects with Investment of Projects with Investment of Projects with Investment of
Sector 0 10 mn RS 10 50 mn Rs 50 mn Rs above
Paper 78.00 106.98 80.00
Cotton blended yarn 35.49 13.40 -
Finished steel 12.72 16.40 60.50
Synthetic yarn 18.81 13.40 -
Glass glassware - 48.00 -
Ceramic tiles 9.05 - -
Cement 147.74 270.50 -
Nitrogenous fertilisers 5.10 45.60 58.04
Refinery - 61.40 -
Caustic soda 29.59 41.09 -
Sugar 39.00 46.40 70.00
Petro Chemicals 2.60 120.75 269.05
Drugs Pharmaceuticals 1.07 - -
Other Organic Chemicals 5.90 - -
Other Fertilisers 5.10 45.60 58.04
Automobile 34.25 - -
Overall 424.42 829.52 595.63
Overall 22.95 44.85 32.20
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Illustrative Companies Paper Industry
H M L
L M H
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Summary of Results Industrial Sector

• Energy Efficiency Investment Market
• Generic Energy Efficiency Investments - 42 bn
  Rs
• Process Specific Energy Efficiency Investments -
  79 bn Rs
• Return on Investment Industry wise average
• Generic Energy Efficiency - 25 to 300
• Process Specific Energy Efficiency - 22 to 174
• Projects Segments for Generic Energy Efficiency
  Investments
• Less than 10 mn Rs Investments - 23
• 10 mn Rs to 50 mn Rs Investments - 45
• More than 50 mn Rs Investments - 32

Investment in Energy Savings Generic EE Project
1.23 Rs Crs/MW Process EE Project 2.05 Rs
Crs/MW
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Immediate Market Potential
Market Type Investment Potential (Billion Rs) Energy Savings (mn kWh) Energy Savings (MW)
Industrial 121.00 49056 7000
Generic Energy Efficiency Process Energy Efficiency 42.00 79.00 23827 25229 3400 3600
Commercial 5.69 739 247
Government Owned Offices Hospitals 3.40 0.85 345 210 160 34
Private Owned Hotels 1.44 184 53
Municipal 13.00 3700 1688
Total 140.00 bn Rs 53495 mn kWh 8935 MW
Energy Efficiency Investment 1.52 Rs Crs/MW
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EE Consulting market

• At 10 of the investment, the market size is Rs
  1400 Crs. excluding TA Leasing segments
• Present market (Guestimation as accurate data not
  available)
• Energy audit (Rs 10 to 15 Crs)
• Performance contract (Rs 3 to 5 Crs)
• Engineering consultancy (Rs 20 to 30 Crs)
• TA consulting (Rs 25 to 50 Crs)

It is TA Engg consulting, which are keeping the
consulting business active. Main market yet to
move.
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Moving the market-Important issues

• Market players and competition drivers (MPCD)
• Business priorities
• Risk perception mitigation
• Financing

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MPCD-TA market

• Market players
• Mostly international energy consulting firms
  (Nexant, PA consulting, LBG group. IIEC, IRG,
  CRA, Sofreco, Econoler etc)
• Indian firms mostly as sub-contractors
• Competition drivers
• Fairly established (Technical financial-two
  stage evaluation)
• Donor agency requirement
• CV dominated

Shifting emphasis from reports to project
implementation would catalyse development of the
investment market
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MPCD-Consultancy

• Market players
• Management consultants (Mckinsey, IBM consulting,
  Ernst Young, BCG, Deloitte Touche etc)
• Energy auditors
• ESCOs
• Competition drivers
• Customer value perception
• Some kind of performance linked delivery system
  slowly emerging

Key challenge is creating the right value
perception
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MPCD-EPC

• Market players
• Engineering consulting firms (TCE, Dalal etc)
• ESCOs (DSCL, Saket, 3EC, Sri Shakti etc)
• Equipment vendors (Asian Electronic, Tata
  Honeywell, Carrier Aircon, Philips etc)
• Competition drivers
• Packaging (Mature in the cogen market not in EE
  market)
• Price performance
• Risk reward sharing

Expected development on two fronts-vendors
forming consortium ESCOs enhancing their
capacity to make EPC bid
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MPCD-Energy audit

• Market players
• Large players (NPC, CII, TERI, MK Raju, 3EC,
  Mitcon, CPRI, Intesco, DSCL ESCO, TCE, Kirloskar
  consulting, Dalal etc)
• Smaller players-Large numbers spread over the
  country
• More than 100 companies have applied for BEE
  accreditation
• Competition drivers
• Primarily cost
• Limited on quality perception

The business process is standardised,
deliverables differ widely creating confusion in
the market place-Savings discovery could be one
of the competitive element. Some kinds of
grading system while accrediting may become
necessary.
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MPCD-DSM

• Market players
• Commercially practically non-existent
• Bilateral agencies mainly through TA consulting
• Competition drivers-Not there
• Major issues
• Segments requiring maximum intervention are
  unattractive (financial market)
• Disincentive for utilities to intervene in the
  industrial and commercial sector
• Perception on efforts to yield ratio

Development would be closely linked to regulatory
intervention
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MPCD-Performance contract

• Market players
• Mainly ESCOs (DSCL ESCO, Saket, 3EC, Intesco,
  TEPS etc)
• Equipment vendors (Asian Electronic, Tata
  Honeywell etc)
• Competition drivers (Yet to emerge)
• Risk perception sharing of risks
• Project savings and return on investment
• Shared savings
• Project financing
• Project structuring
• Contract structuring

Many initiatives are required for developing the
value perception, building the ESCO industry
creating a truly competitive environment
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Moving the Market - Key Issue
Clarity in defining competitive elements
Project structuring Risk identification and
mitigation plan Project financing Structuring
of bid and contract documents Capacity
building-(Hosts, Lenders, Service providers,
Policy makers Regulators)

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Competitive Elements - As Is
Elements Audit Consulting PC
Deliverables Not clear Not clear Clear
Price Clear Clear Not clear
Value perception Low Low to medium Not clear
Quality Not clear Not clear Clear
Risk perception Low Low High
Internal competition Low Medium High
Developing clarity on the competitive elements
essential for market development
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Project Structuring

• Technical
• Constraint analysis
• Information sharing-how much and at what stage
• Project scoping
• Prioritisation
• Financial
• Single vs bundled
• Hard soft cost
• Debt/equity
• Preparation of project reports (PFR, FR, DPR)

Linking of the savings from individual projects
as per the agreed PMV methodology to the energy
accounting system can become an important issue
particularly in case of retrofit isolation PMV
methodology
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Risks Mitigation
Risk Mitigation Responsibility
Technology performance Performance bank guarantee/Insurance ESCO/Equipment vendor
Cost over run Sensitivity analysis/PBG ESCO
Energy price variation Sensitivity analysis/project structuring Host
Change in usage/load Sensitivity analysis/Project structuring/PMV design Host
Regulatory Sensitivity analysis/project structuring Host
Cash flow Risk analysis/Securitisation/CG/PCG Host/ESCO/Others
Critical issues are energy performance and cash
flow security
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Project financing

• Financial instruments
• Financial intermediaries
• Innovations required for product development as
  well as development of intermediaries

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Innovating financial instruments
Particulars As is Required to be
Products Project lending Project/retail lending
Security Multi-tired/structured/balance sheet Project/Non-recourse/Other creative options
Appraisal Project-high cost of transaction Program based for retail/Project for others
Need of the hour is to develop a retail financing
model with low cost appraisal methodology.
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Innovating financial intermediaries
Products Intermediaries Intermediaries
Products As is Required to be
Project lending Fis/Universal banks Commercial banks
Project equity Project hosts ESCOs/VCs/ Others
Retail lending None Commercial banks/ESCOs/ NBFCs
Challenge is how to attract/empower the proposed
new entrants
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Recent initiatives

• ADB EE PPTA Project-Several ideas developed
  shared with different stakeholders-under
  development. Some pilots are expected to be tried
  in the recently announced GOI bid for building EE
  projects
• WB-UNF 3 country project-Program for enabling
  attracting commercial banks under development
  (IREDA)
• WB-GEF project for SME clusters (IREDA)
• USAID-ECO project (NEXANT, IIEC, ICICI Bank)
• SBI Uptech program
• BEE agenda on innovative financing-action yet to
  be initiated

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Public Sector Window
Letter of Comfort
ADB
GOI
Risk Sharing
Follow on Loan
fees
Repayment
EE Projects (Large) ESCO
Loan
EA
PSM
Repayment
Guarantee Mechanism (fully funded)
Risk Sharing
Gtee Agreement
Fees
Lender 1 Lender 2 Lender n
Loan
E E Projects(Small) Borrower 1 Borrower n
PSM
Repayment
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Private Sector Window
ADB
Risk Sharing
Partial Credit Gtee
Fees
EE Projects (Large) ESCO
Loan
EA
PSM
Repayment
Guarantee Mechanism (unfunded)
Risk Sharing
Gtee Agreement
Fees
Lender 1 Lender 2 Lender n
E E Projects(Small) Borrower 1 Borrower n
Loan
PSM
Repayment
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Industrial Pvt Commercial Segment Small
Projects (Total project cost lt Rs 10 Million)

• Program based lending with project approval
  criterion established by the EA in consultation
  with the ADB and lenders. The lender will get
  recourse to the PCG arrangement discussed earlier
• Highest Common Factor of Risk perception will be
  the guiding principle
• Construct a multiple level funnelling
  arrangements
• Typical Funnelling Package
• For each Short-listed project
• Limits on maximum Debt Equity Ratio and Repayment
  period
• Debt component capped at hard costs

Industry evaluation
Host evaluation
Regulatory and Credit Risk
ESCO Evaluation
Credit Risk
Project Selection
Implementation Risk
Short-listed project
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Industrial Pvt Commercial Segment Small
Projects (Total project cost lt Rs 10 Million)

• Project Structure
• - Lending to Host

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Industrial Pvt Commercial Segment Small
Projects (Total project cost lt Rs 10 Million)

• Payment security mechanism- Lending to Host

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Industrial Pvt Commercial Segment Large
Projects (Total project cost gt Rs 10 Million)

• Payment security mechanism- Lending to ESCO

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Structuring of bid contract documents

• Clarity on performance specification
• Bid evaluation selection criteria
• Performance measurement verification system
• Performance security mechanism
• Payment security mechanism
• Dispute resolution mechanism
• Other general terms conditions

Many of the above referred issues have been
extensively debated and terms threshed out for
the Government building EE projects. However, in
the recently announced bid document, the most
important element of payment security, which was
agreed to in the committee deliberation has been
omitted.
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Moving forward-Need for Capacity building
Stakeholder Need priority Who could help
Hosts Importance of EE Risk evaluation Performance contracting Consulting cos BLAs/MLAs/BEE
Lenders Understanding of the market Innovation ?/BEE
Service providers Product development Resource building Associations/CDC/BLAs/MLAS
Policy makers Understanding of EE on macro-economy Institutional development ?/BEE/MLAs/BLAs/Associations
Regulators Impact of EE on tariff Institutional development ?/BEE
Immediate needs are-on contracting process for
both project hosts ESCOs Market understanding
for lenders and on development of institutional
statutory framework for policy makers.
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Summarising

• EE market is big but dormant
• Development of the EE investment market
  consulting market are like Siamese twins-only
  issue who makes things move
• Competition is a great tool for market
  development-it is necessary to develop good
  quality competitive consulting products
• Good products with financial packaging could
  provide the break through
• Quite a few exciting developments in the last
  couple of years-though disjointed
• Consulting fraternity could get together and
  provide the joining thread