The Covenant of Mayors: Energy efficiency and Local Authorities, www.jrc.ec.europa.eu

The Covenant of Mayors:
Energy efficiency and Local Authorities,
How to finance it?
Paolo Bertoldi
European Commission – Joint Research Centre
www.jrc.ec.europa.eu
Serving society
Stimulating innovation
Supporting legislation
What is the CoM?
Voluntary initiative launched by DG ENERGY in 2008 to
support local authorities in the sustainable energy
development and the fight against climate change
Mayors commit to go beyond EU energy and climate
objectives
at least 20% CO2 reduction
in their respective territories by 2020
Define a Baseline Emission Inventory (BEI)
Prepare a Sustainable Energy Action Plan (SEAP)
Implement their Action Plan and report periodically on
progress
Involve citizens and other stakeholders
Adapt city structures and allocate sufficient resources
Encourage other cities to join
2
What we would like to see in signatories’
territories in 2020
Lower CO2 emissions per capita (tCO2 per capita/year) –
possibly for each key Covenant sector
Higher energy efficiency in buildings (kWh/m2 year)
Higher efficiency in transport (kWh/p km)
Increased production of electricity and heat
from renewable sources (MWh/year)
Increased share of energy consumed in the territory
coming from Local Energy production (%)
Economic savings and local reinvestments
Better opportunities for local jobs
What is a SEAP?
Its nature is threefold
Political document: it shows how CoM signatories want to reach their
target: detailed measures and medium-long term strategies.
Technical document: it starts from the results of the baseline
emission inventory to identify the most appropriate actions
Communication tool: a clear and structured document addressed to
citizens and stakeholders
Example: SEAP of Genova
The Covenant stepby-step
The adhesion to the CoM initiates a process
within the local authority
An unprecedented
growth
Some figures from the initiative
5342 Signatories
141 Coordinators
89 Supporters
An unprecedented
growth
SEAPs over time (EU and beyond)
No. of SEAPs per population range
As of 1st April 2014
SEAPs
Inhabitants
3534
>145.7 million
Most of the SEAPs come from municipalities
<10,000 inhabitants
Data from Baseline
Emission Inventories
Breakdown of energy consumption and
GHG emissions by sector
Final energy consumption
GHG emissions
Some common measures
• 5586 measures in public lighting in
3203 SEAPs (87% of SEAPs include at
least one measure in public lighting)
• 3645 measures in schools in 1598
SEAPs (44% of SEAPs include at least
on measure in schools)
Many LAs ask us how to finance these EE
measure?
Background
• The most frequently cited reason for local authorities not
engaging in energy efficiency projects is a perceived "lack of
capital".
• Even cash starved local authorities can take advantage of
different financing methodologies to get the work done from
pre-feasibility analysis to monitoring and verification of
energy savings.
• It is a matter of knowing whereto look for the capital and how
to structure the form that the capital will take in the
transaction that will best suit the energy efficiency
investment.
The issues
What are project risks and how to analyse and manage them?
How to present information to the financial institutions ?
How to improve the (perceived) financial feasibility of projects?
How to utilise limited amounts of own source (funds) (leveraged by
third party funds)?
How to access EU funds, and different types of finance ?
What are typical issues in preparing and implementing projects,
how others succeeded to handle those ?
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Cause of Financing Barriers
• Problem not caused by a lack of available funding capacity in
many/most local markets.
• Caused by an inability of EEPs to access existing funds due to
a “disconnect” between traditional Asset-based lending to
corporations versus Cash Flow-based project financing to EEPs.
• Solution to problem difficult because energy efficiency markets
are not developed enough to motivate local banks to invest in
setting up an EEP lending infrastructure.
• Difficulties for LAs to prepare bankable EE projects.
“Difficulty” of Financing EEPs
Local Financing Institutions (LFIs) typically:
• Are accustomed to providing “asset-based” lending at 70%-80% of the
market value of assets being financed, or other collateral.
• Do not recognize the Cash Flow generated by EEPs as a new asset to
be valued in the financing structure (credit enhancement).
• Are not familiar with the intricacies of financing EEPs - creating a
perceived high-risk lending profile for EEPs.
• Do not have the internal capacity to properly evaluate EEP
risks/benefits nor to structure their financing in market-acceptable
ways.
• Are unwilling to invest the time and resources needed to develop
lending infrastructure due to relatively small size of each EEP.
• Experience market conditions that preclude commercially-viable
financing to EEPs (high interest rates and short repayment terms).
Why is access difficult ?
• Lending from Local Financial Institutions (“LFIs”)
traditional business
- Corporate Lending – generally Asset based
- Energy investment risks not understood –
- Risks perceived too high
- Interest Rates too high
- Repayment Term too Short
•
Lending from International “IFIs” not applicable:
- Size of Projects too small
- Due diligence too cumbersome
- Require hard currency repayment
- EEP not
Capital Structure
Debt Financing
On-balance-sheet
Bank loan
Equity Financing
Off-balance-sheet
ESCO
Leasing
Security behind the loan
Collateral
Guarantees
Insurance
Internal sources
In-kind
Cash
contribution
External sources
Investor
Revenue
EU
funding
Carbon
finance
Third Party Financing
• The easiest way for LAs to undertake EE projects is to
allow someone else to provide the capital and to take the
financial risk. With these alternative methods of financing,
one can expect a higher cost to reflect the fact that the
debt resides on someone else's balance sheet.
• Nonetheless, as it should become clear, the interest rate is
only one factor among many that should be considered in
determining the suitability of a project financing vehicle.
Off balance sheet financing:
•
•
•
•
Operational leasing – Rental in which the period of contract is
less than the life of the equipment and the lessor pays all
maintenance and servicing costs.
ESCO – Energy Service Company taking charge of (i) project
identification, (ii) engineering, design, and permitting, (iii)
construction, (iv) operation and maintenance, (v) administration
of billing, (vi) and organization of financing for the above.
Forfeiting - In case of forfeiting the supplier forgoes its accounts
receivable to the benefit of the bank or financial institute, which in
return does assume all associated risks, and passes up its right of
reclaims. Forfeiting is used for medium and long term outstanding
receivables or annuities.
Public Private Partnership

BOO(T) - Build, Own, Operate and Transfer of infrastructure
projects, promoted and financed by the private sector,
whereby the promoter builds, owns and operates the project
and only after a specified number of years does it transfers it
the ownership back to the public sector.

Concession - An understanding between a company and the
host government that specifies the rules under which the
company can provide service locally.
Energy Service Companies
Energy Service Companies (ESCOs) offer the same
services of Energy Service Provider Companies
(ESPCs). However, ESCOs differ from ESPCs in the
following ways:
• ESCOs
guarantee
the
energy
savings
(a
performance guarantee can revolve around the actual
flow of energy savings from a project, or can stipulate
that the energy savings will be sufficient to repay
monthly debt service costs).
• The remuneration of ESCOs is directly tied to the
energy savings achieved;
• ESCOs can finance, or assist in arranging financing for
the operation of an energy system by providing a
savings guarantee.
• Retains an on-going operational role in M&V over
Financing is a Key Issue
• ESCO is a Service Company not a Bank;
• Some ESCOs cannot invest their working capital to develop &
implement Energy Efficiency Projects unless “reliable” and
“commercially viable” long-term Project Financing
is
available.
Shared savings
Guaranteed Energy Savings
Energy Efficiency in public buildings (Province of Milano, Italy)
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Creating Bankable Projects
• Bankable projects are a clearly documented economically
viable projects.
• The key components are properly assessed and the plan to
effectively manage is clearly presented. Each component
carries a risk factor, and each risk factor carries a price tag.
• ESCOs know how to assess the components: e.g. customer
pre-qualification, audit quality, equipment selection and
installation, and savings verification, and how to package
them into a project that can be financed.
“Deep retrofits" versus "cream skimming"
•
Often LAs opt for short paybacks on EEPs yielding rates of return from
20%-30% a year with paybacks to coincide with terms of office, and it
may allow the project manager to boast a "high" return on investment.
•
All profitable EE options should be considered, i.e. also those yielding a
rate of return greater than the interest rate of the investment capital.
This approach will translate into greater savings over the long term.
•
If a LA continues to do incremental work by upgrading the lighting, but
fails to do other system upgrades, it loses the opportunity to "crosssubsidize" the lighting savings with more capital intensive work like
boilers, HVAC, controls, and building envelopes, which may carry a
longer payback term.
•
Quick paybacks on investments, means too often organisations do not
think of "life-cycle costing" when it comes to procurement policy. Why
would LAs look only for a 2 or 3 year energy retrofit project on an
existing building that is 15 years old when the building's life cycle will be
25-50 years?
Energy Audit Quality
•
A standard energy audit with its “snap shot” of current conditions in not
good enough for performance contracting. When an ESCO takes the
risks on future savings, these assumptions must be tested through an
careful risk assessment procedure.
•
Only an investment grade audit that adds specific risk appraisals to the
standard nameplate/run calculations will meet performance contracting
needs. An investment grade audit (IGA) goes beyond these
engineering skills and requires the art of assessing people; the level of
commitment of management to the project, the extent to which the
occupants are informed and supportive as well as the O”&M staff’s
abilities, manpower depth and attitude.
•
The ESCO that consistently delivers a quality IGA, which in turn
accurately predicts potential savings, builds a track record that
financiers find acceptable. A good IGA is at the heart of the
bankable project. When the total project plan is wrapped around a
quality IGA and delivered by an ESCO, who can back its predictions with
a solid history of successful projects, financiers can accept it.
Savings Verification
• When the contract is on the level of savings achieved, all
parties should be comfortable with how the achieved savings
are verified and attributed to the work performed by the
ESCO. The ESCO and owner should jointly decide on the level
of verification and attribution necessary. It id basically a case
of cost vs. accuracy, and it is possible to reach the point of
diminishing returns rather quickly. With the verification
burden becoming so great that a measure is no longer
economically viable.
• The financier wants some sense that the projects benefits are
measurable and they are measured through accepted
protocols. Too often verification procedures are basically
passive, a negative drain on the cash flow, and the investors
are not interested in funding a gold plated M&V approach that
offers little or no return on investment.
Example of financial support
Alicante Provincial Energy Saving Plan, ES
 “Provincial Energy Saving Plan” aimed at supporting
municipalities in delivering their Covenant of Mayors
commitments.
 Financing of investments that help reduce municipal energy bills
 Only municipalities which have signed the Covenant of
Mayors and developed their Emission Inventories and
Sustainable Energy Action Plans are eligible for such aid.
 €3 million for the 2014-2015 earmarked
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EU Funding: ELENA & MLEI PDA
ELENA (European Local ENergy Assistance)
 Province of Barcelona, Spain
 Province of Milan, Italy
 Province of Modena, Italy
 Province of Chieti, Italy
 Provinces of Padova and Rovigo, Italy
MLEI PDA
 Province of Teramo : street lighting
 Limburg : ESCO development
 Huelva, Torino, Marche…
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Conclusions
From the CoM to Smart Cities
The CoM is a “platform” for sustainable energy and climate
policy at local level: it encompasses the fundamental
governance challenges and provides a methodological and
scientific framework for action.
The CoM is the living laboratory of energy/climate policy at local
level including financing: smart solutions are already planned
in several SEAPs
The Smart Cities initiative could help the CoM signatories to
better devise, implement and integrate the most advanced low
carbon solutions, allowing them to set more ambitious
objectives.
Covenant is a basis for systemic, integrated sustainable
energy evolution, while Smart cities can be a part of the
solution to help this evolution materialize.
Thank you!
Paolo Bertoldi
+39 0332 78 9299
Paolo.BERTOLDI@ec.europa.eu
Joint Research Centre (JRC)
IET - Institute for Energy and Transport
Petten - The Netherlands & Ispra - Italy
http://iet.jrc.ec.europa.eu/
http://www.jrc.ec.europa.eu