Capacity Building of Banks and Financial Institutions
for Energy Efficiency Project Financing
Module 4
Project Appraisal
Partnership to Advance Clean Energy-Deployment (PACE-D)
Technical Assistance Program
September 2014
Capacity Building of Banks/FIs
For EE Project Financing
Page 1
July 2014
Presentation Outline
• Introduction
• Project Appraisal
• Loan Security Considerations
• Developing Financial Products
• Risk Assessment and Mitigation
• Establishing an Energy Efficiency Business Unit
Capacity Building of Banks/FIs
For EE Project Financing
Page 2
July 2014
Increasing EE Project Lending – Key Considerations
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Strengthening technical competencies - Feasibility, knowledge gaps,
credibility
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Evolving technical appraisal techniques for EE Projects – Minimum
technical safeguards to ensure servicing of debt
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Adopting the cash flow approach for financing - Departing from assetbased financing models
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Adapting financing mechanisms to EE business models - Different
business situations and business strategy
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Leveraging existing customer relationships – Incorporating EE financing in
corporate lending
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Devising sound Payment and Security Structures - Financial mechanisms
for improving credit rating
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Standardizing Energy Services Agreements - Overcoming contracting
problems, evolving Contract Template for EE Project
Capacity Building of Banks/FIs
For EE Project Financing
Page 3
July 2014
Considerations in Project Appraisal
• Who is the borrower – project host or ESCO?
• What is the structure of payment obligation?
 Fixed, pre-established
 Variable, performance-based
• If performance-based, what is the method for measuring/calculating
performance/savings?
 Measurement & verification procedures
 Changes to the “Baseline”
 Energy price risks
 Other factors influencing savings
• What are the major risks?
Capacity Building of Banks/FIs
For EE Project Financing
Page 4
July 2014
General Framework - Project Appraisal
• Promoter appraisal
• Technical appraisal
• Economic and financial appraisal
• Environmental and legal appraisal
• ESCO appraisal
• Risk identification, assessment and mitigation
Capacity Building of Banks/FIs
For EE Project Financing
Page 5
July 2014
Promoter Appraisal
• Banks have their own unique appraisal schemes
• Sample checklist of required information will be provided in Guidelines
• Topics included:
 General information on the organization
 Financial and operational details
 Promoter background
 Management and organizational set-up
Capacity Building of Banks/FIs
For EE Project Financing
Page 6
July 2014
Technical Appraisal
• Key questions
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 Are the technologies/products proven?
 Who has developed the savings estimates?
 Are the savings estimates realistic?
 Are there any factors that may impact the savings?
Technical appraisal should include:
 Evaluation of the products and technologies
 Assessment of savings calculation procedures
 Consideration of risks and uncertainties in the savings estimates
and project implementation plan
Capacity Building of Banks/FIs
For EE Project Financing
Page 7
July 2014
Economic and Financial Appraisal
• Includes assessment of:
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Project development costs
Project capital costs
Operating and maintenance costs
Energy cost savings
Other cost savings
Escalation factors
Financial structure
Promoter or ESCO equity investment
Sharing of savings between host & ESCO
Capacity Building of Banks/FIs
For EE Project Financing
Page 8
July 2014
Environmental and Legal Appraisal
• Procedures for appraisal similar to other investment projects
• Environmental:
 Assessment of possible environmental impacts
 Determination of need for permits/clearances
 Obtaining needed permits/clearances
• Legal:
 Statutory approvals
 Legal documentation
Capacity Building of Banks/FIs
For EE Project Financing
Page 9
July 2014
ESCO Appraisal
• Basic ESCO Assessment
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 Firm structure and organizational information
 Qualifications and experience; BEE accreditation
 Financial and operational information
 Past track record with performance contracting
Client references
 Project completion on time
 Project costs – estimated vs. actual
 Guaranteed vs. achieved savings
 Client satisfaction
Capacity Building of Banks/FIs
For EE Project Financing
Page 10
July 2014
Loan Security
Considerations
EE Project Equipment as Collateral
• Most EE equipment has low collateral value
 Equipment typically 60-65% total project cost
 Equipment generally uneconomic to remove & use elsewhere
 Finance security needs to be based mainly on end-user credit, not
equipment asset value
• Positive Credit Features of EE Projects
 Equipment represents “essential use”, increases willingness to pay
 EE projects reduce operating costs, increase ability to pay
 EE projects generate savings and improve bottom line
Capacity Building of Banks/FIs
For EE Project Financing
Page 12
July 2014
Loan Security – End-User as Borrower
• First security interest in project/equipment
• Full faith & credit obligation of end-user
 Preferred drawing right on end-user account
 Assignment of key end-user revenue stream
• Real estate Mortgage where project is installed
• Vendor Recourse
 equipment repurchase or remarketing commitment
 direct guarantee, cash reserves
• Additional collateral from end-user/borrower
Capacity Building of Banks/FIs
For EE Project Financing
Page 13
July 2014
Loan Security - ESCO as Borrower
• First security interest in project/equipment
• Assignment of Energy Services Agreement (ESA)
• Must examine end-user credit
• Structure ESA to include fixed payment for debt service
• Escrow of end-user payments (TRA account)
• Recourse to ESCO & ESCO parent company
• Cross-default provisions for project portfolio
• Cash Reserves for debt service, repairs, etc.
Capacity Building of Banks/FIs
For EE Project Financing
Page 14
July 2014
Reviewing Financial Capacity of Borrowers
• Are they well-capitalized?
• Do they have parental company support or private equity/external
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investors on board?
Do they have well-defined cash inflow sources?
What is their financial capacity to meet time delays and cost overruns?
Is the financial plan adequate to address both project and working
capital needs?
How can the lender minimize recourse to non-project assets &
personal guarantees?
Capacity Building of Banks/FIs
For EE Project Financing
Page 15
July 2014
Devising Payment and Security Structures
• Earmark, securitize or escrow cash inflows to service debt
• Ensure suitable tri-partite contractual protection for performance and
payments through ESAs
• Structure cash collaterals (e.g. deposits) or over-collateralize (e.g.
escrow more than needed for servicing)
• Follow best practices from equivalent bank asset products (e.g. rental
securitization, power projects)
• Take protection from partial risk guarantee facilities such as BEE’s
PRGFEE
Capacity Building of Banks/FIs
For EE Project Financing
Page 16
July 2014
Standardizing Energy Services Agreements
• Structuring contracts to protect interests of borrowers & lenders
against payment defaults
• Adhering to specific protocols vs. standard contract template
• Ensuring clear-cut measurement and verification (M&V) and payment
procedures
• Mitigate causes for disputes & litigation
• Protecting lenders interests directly in the ESA itself
• Identifying and assigning risks
Capacity Building of Banks/FIs
For EE Project Financing
Page 17
July 2014
Risk Assessment and
Mitigation
Project Risks
Capacity Building of Banks/FIs
For EE Project Financing
Page 19
July 2014
Assessing and Mitigating Technical Risk
• Confirm that the products, equipment and/or technologies are well
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established and proven; review benchmarks
Review and assess prior experience of the implementing organizations
with the technologies, equipment and products being proposed
Verify credentials of the energy auditors
Assure that project meets the appropriate design standards
specifications
Obtain client references, where appropriate, for similar project
implementations
Use of contractors that guarantee their performance and offer fixed
prices
Capacity Building of Banks/FIs
For EE Project Financing
Page 20
July 2014
Assessing and Mitigating Financial Risk
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Assess creditworthiness of both the host and the ESCO
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Establish payment security mechanism such as escrow account
or TRA
Examine the ESA and assure that it has adequate assurance for
cash flows that will be used to repay the loan
• Develop customized financial products
• Implement schemes to adequately collateralize project assets
Capacity Building of Banks/FIs
For EE Project Financing
Page 21
July 2014
Assessing and Mitigating Construction Risk
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Verify experience of project management and construction
management organizations and individuals
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Assure that sufficient time has been allocated for permits and
licenses
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Verify ESCO’s track record in implementing projects on time
Use lump-sum contracts with penalty clauses for failure to meet
committed deadlines
Capacity Building of Banks/FIs
For EE Project Financing
Page 22
July 2014
Assessing and Mitigating Performance Risk
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Assure that ESA contains performance guarantees (given by
both the ESCO and the equipment suppliers) are measurable
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Review structure of performance guarantees
Assure that an adequate M&V plan is in place
Confirm that a baseline has been established for M&V
Use third party M&V agent
Capacity Building of Banks/FIs
For EE Project Financing
Page 23
July 2014
Establishing an Energy
Efficiency Business Unit
Functions of an EE Business Unit
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Identify the target market characteristics
Define typical project characteristics
Develop innovative financial products for the market
Facilitate the development of a pipeline of attractive projects with
creditworthy customers
• Design and implement a plan for marketing, project investment
preparation, & market aggregation
• Develop project appraisal guidelines and procedures
• Organize and provide technical assistance to loan officers
Capacity Building of Banks/FIs
For EE Project Financing
Page 25
July 2014
Defining Project Characteristics
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Technical characteristics
Project economics
Typical size of individual projects
Typical credit characteristics of end-users & borrower(s)
Credit structure of financings
Credit enhancement strategies
Collateral/asset value of EE equipment
Projects risks and plan for assessment, allocation &
management/mitigation
• Financial structuring
Capacity Building of Banks/FIs
For EE Project Financing
Page 26
July 2014
Developing Financial Products
• Based on target market characteristics
 credit characteristics
 typical deal size & attractive economics
 Ability to assemble acceptable security package
• Define loan offer(s)
 term, pricing
 required security structure, with guarantee
 economic parameters: e.g., size, % own funds
 documentation requirements
• Prepare marketing plan, identify/do initial deals, train branch staff
network
Capacity Building of Banks/FIs
For EE Project Financing
Page 27
July 2014
Customizing Financial Products to EE Projects
• Waste heat recovery and cogeneration
• Lighting, cooling and controls for buildings (particularly hotels,
hospitals and shopping malls)
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Motors, pumps etc. in industrial facilities
Streetlighting
Municipal pumping
Off-grid renewable energy projects
Fuel substitution in industry
Chauffage or outsourced energy management
Capacity Building of Banks/FIs
For EE Project Financing
Page 28
July 2014
Working with Energy Service Providers
• Establish relationships with qualified ESCOs and equipment vendors
• Assess capabilities and experience
 services/products offered; business methods
 target end-user market & customer profile
 reference projects & current pipeline
 financing needs, capital demand estimate
• Select initial companies & projects to prepare for investment: provide
finance structuring assistance
• Structure multi-project finance facilities to reduce transaction costs
Capacity Building of Banks/FIs
For EE Project Financing
Page 29
July 2014
Vendor Finance Programs
• Establish relationship with equipment vendor or manufacturer
 Vendor offers deal pipeline to lender/lessor
 Financing can be marketed at point of equipment sale
 Standard origination documents, end-user credit screening &
analysis processes & criteria
 Vendor can help process loan/lease transaction & absorb some
transaction costs
 Simplifies transaction from customer perspective
• Vendor may act as lessor & match primary lease with assignment or
sale/lease back with bank
Capacity Building of Banks/FIs
For EE Project Financing
Page 30
July 2014
Establishing Credit Line with ESCOs
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Credit facility for financing current and future projects
Revolving credit line based on signed contracts with customers
Drawdown conditions based on expected project costs and cash flows
Specification of project economic parameters such as project size,
debt/equity ratio, debt service coverage, sharing of savings, etc.
• Security could be combination of ESCO balance sheet, parent
organization, and project cash flows
Capacity Building of Banks/FIs
For EE Project Financing
Page 31
July 2014
Establishing Credit Line with ESCOs
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Master Loan Terms
 Standard origination
procedures
 Lender evaluates and
approves end-user credit
 Standard sub-loan
documentation
 Recourse to ESCO & to
ESCO parent (if applicable)
 Construction finance;
disbursement procedures
 Pricing, fees
Capacity Building of Banks/FIs
For EE Project Financing
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Security Requirements
 Assignment of project
assets, contract rights,
revenues
 Project flow of funds; escrow
account; priority of pmts
 Debt service reserve
considerations
 Other recourse & collateral;
end-user credit standards
 Cross default provisions
between projects
Page 32
July 2014
Thank you
Dilip R. Limaye
Finance Team Leader
USAID PACE-D Technical Assistance Program
dlimaye@srcglobal.com
www.pace-d.com