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Financial tools and guidelines
Companies
who have introduced an energy management system might come to the conclusion
that it is necessary to invest in new technologies. These investments may come
from own resources, but sometimes it is necessary to apply for a loan from a
bank. Both situations require an approach of their own:
·
Provide
arguments for the energy manager towards the company management when needing
financial sources for investments in energy efficiency.
·
Prepare
a project plan for a financial institution in case external financing is needed
There are
two types of energy efficiency investments:
·
Investing
in energy use monitoring and afterwards optimizing energy flows and production
processes – investments in metering equipment and time of energy manager.
Investment costs are usually low and have a low payback period.
·
Investment
in new technology (new boiler or CHP unit, heat recovery system etc.) this
usually requires a significant investment budget as well as time from the
energy manager to learn to operate the new equipment. Investments costs are,
however, the highest and most important item and often require external
financing (bank loan). In some countries, subsidy schemes may exist for certain
investments in energy efficient equipment (link to national subsidy schemes).
Types of financing
The major
types of financing are:
·
Project
owners own resources; financial
institutions will often require that the project owner covers at least 15-20%
of the project costs.
·
Supplier-based:
the supplier may provide credits for the purchase of necessary equipment. This
may also be in the form of leasing
·
Local
loans: coming from national/local banks
·
Foreign
loans: these generally include loans from financial institutions such as the
EBRD, or international commercial banks
Both in case
the investment is paid from the companies own financial resources as well as in
the case a bank loan is provided, the energy manager has to convince the
company management of the need of this investment.
Justification of
investment
Even if the
company has enough resources available for investments in energy efficiency,
the company management may not be convinced that this is a priority. They may
have other plans with these resources, believing that there will be a larger
return on investments if the money is spend on other purposes. Therefore, most
investment ideas need to be justified to the company management. Following
arguments may therefore be useful:
·
When
proposing a new piece of equipment, the life-cycle
costs may be an important argument. E.g. new, more efficient, steam boilers
may be more expensive but use far less fuel over their (economic) lifetime.
This means that the total costs over their lifetime (investment + maintenance +
fuel) is lower than of a boiler that is just cheaper in purchase.
·
When
new equipment is purchased replacing still functioning older equipment, it is
important to determine the simple (or discounted) payback time or internal Rate of Return. Then a decision can be
made if the investment is acceptable or not.
Other, more
general arguments towards company management are the following:
·
Energy
efficiency reduces environmental impacts (CO2 and other emissions that may be
bound by certain emission limits).
·
Translate
energy efficiency impacts into revenue equivalents (“reduced fuel consumption
means a new source of capital”). With increasing energy prices, as experienced
during the past few years, this revenue will also increase (other items
remaining the same.
·
Energy
use is easy to measure and is possible to relate to production efficiency
·
Energy
efficiency means less fuel per unit of production ΰ thereby contributing to business
goals like increase of profit
·
Energy
efficiency investments (in combination with an energy management system)
usually leads to more predictable energy consumption volumes ΰ making it possible to contract more
precisely the amount of energy to be purchased. This is another way to save
substantial amounts of money.
Economic analysis
When there
is agreement regarding the investment intention, the energy manager (in
cooperation with the management) should carry out an economic analysis, taking
into account:
·
The
project’s main components; costs, maintenance and operational costs
·
Calculate
the expected savings from each component
·
Assess
the duration of implementation of each component; i.e. the time needed to install
the components or equipment and whether this limits the production process for
a certain time.
·
Provide
all inputs needed for the financial analysis; amortization and replacement of
assets, operating and maintenance costs, changes in company structure/ownership,
forecast of energy prices etc.
When
external financing is required, this financial analysis is usually more
extensive.
Financing energy
efficiency projects through external financing
For some
investments external financing is needed. This can be done by applying for a
grant, each scheme having specific application criteria (link to national
subsidy schemes) or through commercial financing.
What is needed to apply for commercial
financing?
When
applying for a bank loan, the company has to hand over a number of documents.
First of all the basic company details and secondly, also information about the
solvability of the applicant have to be handed over.
Apart from
that most banks require a business plan and/or a financial plan. It depends on
the type of financial institution how detailed this information has to be. The
most extensive information usually has to be provided when applying for a loan
at international financing institutions. These are usually of less relevance to
SMEs because of their limited project size.
The criteria
from banks like the EBRD (European Bank for Reconstruction and Development -
information from SAVE-project BEEP (Bankable Energy Efficiency Projects) – give
some useful guidelines, however.
Some general
recommendations can be given for drafting a business plan or financial plan.
Per country or even per financial institution, these guidelines may differ.
Business plan – main issues
1.
Project
summary – the investment initiative is described briefly, along with the size
of the investment, the underlying economic assumptions, as well as the expected
time schedule for implementation.
2.
Nature
of the project – this includes a thorough technical description of the
investment project.
3.
Benefits
– here the project is described in words and figures, the most important being
energy savings and environmental improvements. Larger investments may also have
additional benefits, like increase of company turnover and increasing
employment.
4.
Project
costs and timetable – here assumptions of investment costs are given as well as
the timetable for installments
5.
A
financial plan – demonstrating the viability of the project.
Financial plan
A financial
plan must demonstrate that the project is economically viable, and also show
what assumptions were made during its preparation. These assumptions must be
credible and verifiable. A financial plan must include:
1.
Proposed
conditions (technical, financial, etc.) for investments;
2.
the
financing structure; the amount to be invested by the project owner, the need
for loans and, if applicable equity;
3.
a
detailed overview if assumptions made, e.g. fuel costs (now and in the near
future), development of market and expenses, expected energy savings, the
impact of inflation;
4.
A
projected future income statement, balance sheet and cash flow, at least during
the financing period; these can be provided in appendices to the business plan.
The
financial plan should describe the most significant risks of the project (the
development of prices of individual types of fuel, meeting emission limits,
technical failure of energy efficiency measures due to improper installation
etc.). Furthermore, it should describe the means for managing and minimizing
these risks. However, it is necessary to carefully weigh the manner in which risks
are presented in the plan. The goal here is to make it clear to the lender or
the investor that the project developer is well aware of the risks of the
project, is prepared to face them, and is capable of estimating their impact on
the economic aspects of the project, and minimizing them.
At a large
number of SMEs a significant energy savings potential is available. In many
cases this fact is also known within companies but either lack of time does not
permit capturing these potential savings or scarce financial resources need to
be used for other purposes. Then, in the case of SMEs, it might not be easy to
receive bank loans at preferential interest rates. In this case energy
contracting may provide a solution. More detailed information can be found under:
Outsourcing
of energy supply and energy efficiency activities – energy contracting