d) How do I finance an EPC?

Drafting a Business Plan

Once the scope of the project has been defined it is necessary to secure financing for the project. The International Finance Corporation's Manual for the Development of Municipal Energy Efficiency Projects in India (2008), suggests that the EE project team should check that the proposal contains the following information.
  • Keep the presentation to investors simple and have all required documentation ready, including supporting documents that verify the financial analysis.
  • Make the timeline achievable
  • Choose responsible and experienced project partners.
  • Ensure that the evaluation, measurement and arrangements and plan are clearly defined.
  • Include performance and investment guarantee provision in the contract with the implementing agent (ESCO)
  • Ensure that procurement plans are in place and address price fluctuations.
  • Always be aware of what the risks are and allocate them when feasible to the appropriate parties. Propose mitigating measures that lower these risks which make the project more viable for financing.
  • Consider probability of delays in delivery, technology failures, and default by the parties. Estimate, within margins, the impact on the financial viability of the project.
  • Ensure that an operation and maintenance plan is in place including personnel that are trained to operate and maintain the investments.
  • Utilize known technologies in early projects.
  • Plan for cost over-runs by establishing a contingency fund.



For examples and guidelines to prepare business plans refer to


Advantages and Disadvantages of Different Funding Options

There are a number of different options available for financing an Energy Performance Contract. The type of financing selected depends on the type of project being considered and the specific financial requirements of the municipality. The table below is a summary of the advantages and disadvantages of these different options. 

Financial Instrument

Advantages

Disadvantages

Internal budget

·         Void taking on debt and associated interest expense

·         Not need to dedicate resources to securing external finance

·         Maximise savings from EE project as it does not need to wait for external funding

·         Intensive competition for funding

·         Opportunity costs of losing cash for core priorities

Debt irrespective of source

·         Relatively cheap to use, provided a municipality has a strong balance sheet

·         Market is very well developed and many options exist, from  soft loans (i.e. development finance institution) to corporate commercial debt

·         May require voter approval and/ or limited by government debt capacity

·         Timeline from applying for funds to receiving them can be long

·         Loan underwriting depends on the credit rating of the borrower

·         Costs to process loan is high and therefore institutions R and value of their base loan product is relatively large

Grants

·         Risk free finance that can be used to fund the risky phase of a EE project, such as pilot study

·         Application process is complicated and time consuming

·         Need strong networks to know when tenders are released

·         Very competitive application process as funds are limited

Public sector loans and rebates

·         After grants, they are the easiest loans to qualify for

·         Specialised funds targeted to finance EE measures and therefore application process is more focused

·         End-to-end application process is lengthy paper intensive, and turnaround times are slow 

Innovative debt financing

·         Reduces the Rand value of up-front capital to initiate project  

·         Reduces the cost to develop a project

·         Provides off balance sheet solution therefore no additional debt

·         Market not developed due to legislative bottlenecks

·         Need a financial team that has a sophisticated understanding of risk-return profile of financial instruments

Asset based finance

·         Use energy savings to pay-off cost of technology over the duration of the project

·         Combined with other soft lending options

ESCO Performance Based Contracts

·         Makes it easier and cheaper to secure a loan as guaranteed savings are used to service loan repayments

·         Allows public entities to tap into the expert skills of ESCO in other areas

·         Potential for monitoring and verification disputes

·         Negotiations can be long and complex

·         Part of energy savings shared with ESCO