ENERGY PERFORMANCE CONTRACTING &

FINANCING OPTIONS FOR IMPLEMENTATION

Seminar on Energy Efficiency Initiatives for Government Buildings

By

Zaini Abdul Wahab

MAESCO

19th December 2012 Putra World Trade Centre

Kuala Lumpur

Outline

1. Introduction to MAESCO

2. What is EPC?

3. EE & EPC potentials

4. EPC Process For Building Facilities Owner

5. Options For EPC Project Financing

6. What’s Next?

7. The Conclusions

Introduction To Malaysia Association Of Energy

Service Companies

What is ESCO?

An Energy Service Company(ESCO) Develop and implement turn key, comprehensive energy efficiency

projects. ESCOs offer performance-based contracts (i.e., contracts that tie the

compensation of the ESCO to the energy savings generated by the project) as a significant part of their business

To gain accreditation, ESCOs must demonstrate the technical and

managerial competence to design and implement projects involving multiple technologies such as: Lighting Motors and Drives HVAC Systems Control Systems Building Envelope Improvements …at building facilities

What is Energy Services?

Scope of Energy Services

ESCOs must also demonstrate the ability to provide the full range of services required for a comprehensive energy efficiency project covering: Energy Audit Consultancy Design of energy efficient systems Implementation Project Financing Implementation and Project Management Construction management Energy performance monitoring and verification

performance Testing and commissioning Operation and maintenance

Background of MAESCO

The Malaysian Industrial Energy Efficiency Improvement Project (MIEEIP) components includes ESCO Development Programs and ESCO participation in EE Technology Demonstration Projects

Industrial was chosen as the sector in which the greatest commercial and environmental impact could be achieved

MAESCO was registered with the Malaysian Registrar of Society in September 2000

Incorporated in conjunction with the launching of the MIEEIP by a Government’s implementation agency, PTM (Energy Centre of Malaysia) which is now known as Malaysia Green Technology Corporation(Green Tech Malaysia)

MAESCO’s Constitutional Objectives

1. To develop recognized ESCO Business models in collaboration with Government and Private Sector

2. To actively promote the activity of energy cost reduction and efficiency standards in the industrial, commercial and public sector

3. To oversee the well being of its members

4. To facilitate and do all things necessary towards developing successful energy related projects

5. To introduce related products and services for the industry

6. To foster healthy co-existence amongst members through ethical professional practices

7. Ensure quality & reliable of services by members

Organizational Structure

President Ar. Zulkifli Zahari

Vice President, Policies & Int. Liaison

Ir. Ong Ching Loon

Honorary Secretary / Webmaster & Historian

Dharamarajah

Honorary Advisor / Internal Auditor

Ir. Dr. KS Kannan

Business Development Ahmad Zaky

Training Iskandar Majidi

Internal Auditor Kevin Yap

Publicity & Promotions

Ir. Kumarason S Kandiah

Government Liaison

Zaini Abdul Wahab

Green Technology

Dr. Dixon Chai

Treasurer & Finance Tuan Hj. Mohd Noor Harun

Asst. Honorary Secretary & Membership and Practice

Koay Keong Tay

General Admin Anuar b. Mat Saad

Admin / Secretariat Afiza Mohd Sa’ad

Accountant Mohd Izzuddin

Salahudin

Membership

Categories

Energy Performance Contracting (EPC)

Non Energy Performance Contracting (EPC)

Affiliate

Associate

International

Consist of

Energy Performance Contractors (EPC)

Energy Auditors

Energy Management Trainers

Energy Efficient Equipment Manufacturers/Suppliers

Energy Consultants

Energy Management Systems/Technologies

Total Facilities Management

60 Registered Members

Key Activities & Involvement In EE Industry Development

Energy Management Training Courses for Energy Managers

Preparatory Workshop for Registered Electrical Energy Manager (REEM) Application

Rental of Equipment for energy audit and M&V

Awareness and promotional programs

Visits And Dialogues With Government and Key Stakeholders

Industrial Energy Efficiency For Malaysian Manufacturing Sector (IEEMMS) :UNIDO-SMECORP

Green and Renewable Energy Institute(GREENi) with UTeM, Melaka

WHAT IS ENERGY PERFORMANCE CONTRACTING

( EPC)?

EPC Definition

“A single procurement contract for engineering, construction, installation, start-up, measurement, verification, operation and maintenance that specifies performance energy saving improvements in buildings/facilities that will result in sufficient avoidance energy cost and enhanced recovery from utility systems to pay for the cost of equipment, materials, labour, subcontracts, fees, insurance, bonds, permits, debt service, and all cost associated with the implementation of the contract scope over the life of the contract.”

In simple terms, EPC is a project approach that utilizes the energy savings and revenue gains to pay for the project cost.

- Land-of-Sky Regional Council, USA

Why EPC? : Building Owner

Energy cost savings & improvements with NO UPFRONT CAPITAL - invest savings achieved into other projects

ESCO to identify Energy Saving Measures (ESMs) to replace / modify existing inefficient systems or/and equipment

The remuneration of ESCOs is directly tied to the energy savings achieved

Energy cost saving is shared between ESCO and the building owner with payment schedule with a single-source responsibility

ESCO supplies, install, maintain and retain on-going operational roles in energy performance measurement for each ESM over the financing/contractual terms.

Use future energy ,cut operating cost, be more competitive and improved comfort/productivity

Positive environmental impacts & reduced environmental footprint

EE & EPC POTENTIALS

Overall Rankings in Asean EE Market

16

Biggest Electricity Users For Government Buildings (Sep 2009-Oct 2010)

Hospitals 20%

Universities29%

Ministries 19%

Others (States,

Agencies) 32%

Building Nos Total Consumption

(kWh/year) Total Bill (RM/year)

Hospitals 22 367,587,657 130,640,653 Universities 25 543,961,738 193,324,002 Ministries 25 360,592,831 128,154,692 Others States & Agencies

56 603,464,085 214,471,136

128 1,875,606,311 666,590,483

Estimated Total TNB Bill for government buildings (Sep 2010-Aug 2011)

Total Consumption (kWh/year)

Total Bill (RM/year)

7,896,508,329 2,726,767,394

10% saving ± RM270 millions /year

Potential Areas for EPC Projects Energy Conservation at buildings

facilities Renewable & Alternative

Energy Sources Air Conditioning, Refrigeration & Ventilation Systems

Chillers, AHUs, fans, pumps Operational, & equipment controls System optimization

Lighting Systems Buildings(interior & exterior),public

lighting Operational controls Types of lamp technologies

Demand Controls

Internal electricity distribution

system

Utilization of Feed-in Tariff(FiT) for RE sources

Solar Photo Voltaic(PV) Building Integrated PV System

PV Power Plant

Biomass & Biogas Power Plant

Waste-to-energy systems

Successful EPC Project(1): Private Commercial Shopping Complex

Areas of Implementation: 1) Transformers 2) Cooling System – Chillers, Cooling Towers, AHUs, CHW & CDW Pumps 3) Lighting System – Internal, External & Parking 4) Demand Controls

Total Actual Saving Achieved

= RM 1,495,000/year

Successful EPC Project(2): Private Industrial Warehouse

Application Areas: - Fluorescent Lamps - High bay Lighting - HID

Total Annual Actual Saving Achieved

= 42.2%

= 3,283,200 kWh,

= RM 920,000

EPC Potential: Pilot Project for Public Lighting -Comparison Before & After Implementation

(Before) Conventional HID 250W (After) LED 150W

Options To Implement Energy Saving Measures

• Management

Directives

• Implementation of EnMS- to ensure sustainability of energy cost reduction initiatives

MEASURES With LOW/

NO COST

Minimal Cost Savings

• Priorities of budget - core business/operations

• Investment risks

• Limited human resources & expertise

MEASURES WITH HIGH

COST

Significant Cost Savings

Expert assistance &

investment from ESCOs through

EPC model

In-house initiatives

EPC PROCESS FOR BUILDING FACILITIES OWNER

EPC Process Flow & Key Elements

Appoint ESCO

Sign EPC Contract

1.DEVELOP NEED BASIS

2. DEFINE PROJECT

3. ESCO PREQUALIFICATIONS

4. REQUEST FOR PROPOSAL

RFP Steps 1. PREPARATION OF PROPOSAL BASIS AND PROCEDURES

Review ESCO Prequalification Document

Formal Communications of Intent

RFP Document

2. ISSUANCE OF RFP

3. SITE VISIT AND SHARING BASIC INFORMATION

4. PREPARATION OF SELECTION CRITERIA

RFP Document

To gain important evaluation information about the proposers covering: Owner’s Preliminary

Scope of Work and Project Definition

Communicating owner Requirements and Expectations in the RFP

Sharing Energy Service Agreement Format in RFP

Proposal Response

RFP Outline Introduction

Overview

Scope of Work

Administrative Information • General Contract Terms

and Conditions

• Insurance and Licensing Agreements

• ESCO Response Format

• Evaluation Criteria

• Technical Profile of the facilities

5. EVALUATE PROPOSAL

Appointment of ESCO

Proposal Evaluation Method

Steps

1. Initial screening

2. Scoring

3. Reference interviews

4. Oral presentation with given outline and Q&A

Criteria

Prequalification rating/minimum requirements

Project team qualification

Experiences in relevant project

Technical approach

Management plan

Credit worthiness

Full range of capabilities

Financial benefits

Cost competetiveness

Example: Evaluation of ESCO

6. ENERGY AUDIT & ENERGY SERVICES AGREEMENT

Appointment of ESCO

7. NEGOTIATE PERFORMANCE CONTRACT TERMS

• Sharing amount (%) • Duration of contract • Baseline, M&V method • Detailed terms & conditions

Sign EPC Contract & Implement Project

8. MONITOR, MEASURE & VERIFY PERFORMANCE

To calculate the ACTUAL savings achieved!

Factors should be considered to reduce dispute in EPC Contract Commitment from the client Factors affecting savings performance Valuating savings uncertainty Minimum operating conditions Energy prices/tariff rates Verification by A third party Baseline modification/review(non-routine) Balancing uncertainty and costs

Options For Energy Baseline & Savings Calculation

Method Advantages Disadvantages

Utility billing history Low cost •Effects of weather , occupancy, other changes may mask savings •May be unreliable unless savings are significant compared to normal bill variation

Data already available

Independent data

Represent all effects of ESMs

Account for interactive effects

System/Equipment sub-metering

Isolate effects of ESMs •Higher cost •Misses interactive effects

Very accurate for lighting measures

Results are more predictable(low risk)

Baseline: Baseline year from electricity bill data (kWh) (k

Wh

)

Example: Energy saving calculated by the difference between a baseline year and a subsequent year from electricity bill

(kW

h)

Baseline : Building Monthly Load Profile (kW) from sub-metering

40

Baseline : Building monthly electricity consumption profile(kWh) from sub-metering

41

Baseline : Building monthly load profile(kW) for AHU from sub-metering

42

Baseline : Monthly electricity consumption profile(kWh) for AHU from sub-metering

43

Example: Savings calculated based on actual measurement from sub-meters

Modifying/Reviewing Baseline

To establish standards for “Materials” changes which may reasonable expected to change energy consumption trend in the facility Occupied square footage, operating hours Facility’s energy equipment/operating parameters

other than the ESCO equipment

Energy equipment, other than ESCO equipment, that malfunctions, or is repaired, or replaced in a manner that increases or decreases energy consumption;

Other actions taken by the facility owner that may reduce or increase energy use; and,

Discovery of an error in the original baseline, in which case the change would be retroactive

Trust , good relationship & effective

communication between ESCO & building owner is crucial to identify the needs to modify/review

baseline!

OPTIONS FOR EPC PROJECT FINANCING

Key imperative for financing

Certainty: • Revenue certainty and ring fencing • Precedence

Clarity:

• Project size and feasibility study • Procurement framework

Commitment:

• Counter party • Institutional arrangement

Source: KPMG

Financing Options for EPC

In all above, ESCO provides a guarantee of the project’s technical performance and satisfaction of contracted specifications with the client

1. GUARANTEED SAVINGS Model

• The loan goes on the client’s balance sheet

2. SHARED SAVINGS Model

• The loan goes on ESCO’s balance sheet

3. Through a Special Purpose Vehicle(SPV) created specially for the purpose

Guaranteed Savings Model

FACILITIES OWNER

ESCO BANK

Project Design& Implementation

Project Fees Loan

Repayment

Shared-Savings Model

FACILITIES OWNER ESCO BANK

Project Design& Implementation

Loan

Repayment

EE PROJECT

Energy saving share (90%-70%)

Financing

Energy saving share

(10%-30%)

How the Model Works?

Guaranteed Savings

Facilities owner takes out “normal” loan (will appear on balance sheet)

ESCO guarantees loan can be

repaid with savings

ESCO pays difference if minimum savings not met

Main advantage: ESCO can undertake more projects

Shared Savings

Facilities owner does not take loan (will not appear on balance sheet)

ESCO finances project: takes

performance & credit risk

Facilities owner pays higher % to ESCO

Main advantage: Independent of Facilities owner ’s borrowing capacity

Through a Special Purpose Vehicle(SPV)

Case Study: Financing building retrofit projects through EPC

Initial Owner Commitment

• Harmonization

Preliminary Assessment by ESCOs

• Scope of Work

• Project Savings/Pricing/Technologies

Selection of 1 ESCO

• Conformance

• Qualitative & Quantitative evaluation

Investment Grade Audit

• Detailed Energy Engineering

• Savings/price Guarantee

• Service Proposal

Final Contract Signed

• Project Implementation

• Loan Underwriting

Different Steps in Energy Performance Contracting

Source: KPMG research

Performance Contract

• Qualified Measures • Performance Guarantee • Walk-away Compensation

Energy Savings Financials: Savings used to pay for project and remaining to customer

Time (Years) Ener

gy &

Op

erat

ion

al c

ost

s

Baseline

Savings used to pay for project

Customer savings

Duration of Program

Reduced costs due to performance based solutions

Start of Program

Customer to retain all savings

Additional cost avoidance due to energy price increase

service

Performance Risk Business Risk

The ESCO scheme

Guaranteed Savings (GS) Structure

Performance Contracting Agreement

(energy savings guarantee)

Bank (lender / investor)

ESCO Client (building owner)

Financing Agreement (fixed-repayment schedule)

Financing Payment

Payment

Credit Risk

Example :ESCO Fund in Thailand

WHAT’S NEXT?

Proposed Support Programs by the government for EPC Implementation

To create a special revolving fund for EPC Projects with lower interest rates – to kick-off and develop the EPC market

Development of in-house capacity in technical & financial evaluation

of EE&EC Projects for Authorized agency financial institutions

Development and acceptance of standard technical evaluation,

monitoring and performance verification criteria for EE&EC Projects With by technical experts from recognized professional/industry bodies/ associations

Development of and acceptance of standard evaluation for funding

and risk assessment criteria for EE&EC Projects

Sharing of experiences in successful investments in EPC projects through seminars/dialogues

• (results, payback period) from people in business community who have experienced it • Criteria of viable EE projects • Competency of ESCOs

Proposed Actions Required for Financial Institutions

To specialize in green technologies such as EE EE has wide range of technologies & applications with different

levels of difficulties in technology(implementation, reliability, ease of operation and durability

Due to… Insufficient proven domestic case studies by banks

EE project require time and specific expertise to be assessed

EE funds started in other countries such as Thailand & USA

has developed in-house expertise for banks in evaluating EE projects

Source: Green Prospects Asia, June 2012

Expected Impacts From EPC Implementation

INTRODUCTION &

AWARENESS

IMPLEMENTATION & SUPPORT MEASURES

PERFORMANCE MONITORING,

MEASUREMENT & VERIFICATION

IMPROVED •Energy Efficiency •Competitiveness

/profits •Environmental

quality

REDUCED •Energy

consumption & costs

•CO2 emissions

CREATED •Business & job opportunities

•More experts/workers from EE industry •New source of economic growth & Direct Domestic

Investments

THE CONCLUSIONS

EPC The potentials in Malaysia is still relatively

“UNTAPPED”

Interested parties must have the same understanding & goals on how to make EPC works

ESCOs must have/develop competency & capability to ensure successful EPC projects implementation

More successful EPC projects are required to attract more attention of building owners & banks/investors

THE CONCLUSIONS

FINANCING FOR EE PROJECTS is more complex than rebate or grant programs

potential for leverage and for low/no energy subsidies

provide new opportunities for overcoming barriers to the adoption

of EE measures

should be viewed as a complement to other strategies such as building energy codes, appliance EE standards, or utility rebate programs

successful financing program should support, and not be a barrier to, customer participation - financing should remain streamlined, easy-to-access, and quick

THANK YOU FOR YOUR ATTENTION!

zaini@cnsgroup.com.my 019 2152700

www.maesco.org.my www.goingee.blogspot.com