GoSafe with ESI as a complement to the implementation of the International Energy Efficiency Finance Protocol (IEEFP)
The Efficiency Valuation Organisation (EVO) is a non-profit association aimed at promoting and developing the use of standards that quantify and manage the benefits and risks associated with commercial transactions related to energy efficiency, renewable energy and water efficiency.
With an objective aligned with the philosophy of GoSafe with ESI, EVO seeks to develop a society that is committed to energy efficiency and renewable energy, and in which the guarantee of savings and accuracy in the verification of projects are effective tools in our commitment to energy efficiency and sustainability.
In GoSafe with ESI we share EVO’s concern to facilitate communication between financial institutions (which evaluate energy efficiency projects) and the energy experts who define and design them.
International Energy Efficiency Finance Protocol (IEEFP)
In recent years, the global movement towards a low-carbon economy raised the profile of energy efficiency as one of the key tools of the energy transition.
Through the International Energy Efficiency Finance Protocol (IEEFP), EVO seeks to educate credit, risk and lending officers of local banks and other financial institutions around the world on the peculiarities, benefits and risks of energy efficiency projects (EEP) and on the critical elements of structuring EEP loans to minimise risks and make their financing commercially attractive.
The first step in achieving this objective is to get financial institutions interested in EEP financing by making them aware of their potential new business and profit potential. The second step is to build confidence among lenders that financing EEPs is neither complicated nor risky.
At GoSafe with ESI, we create synergies with EVO in improving loan officers’ knowledge by training them on how EEP savings can be used to repay loans, especially when they are secured (and thus improve borrowers’ creditworthiness). In turn, EVO’s tools facilitate how to assess and mitigate the risks of EEP delivering the estimated savings; how to structure a project-based loan that can minimise risk and provide an attractive return on investment; and how the measurement and verification of energy savings can be reliably carried out.
Energy Efficient Technologies
IEEFP offers some insights into the key aspects and savings of technologies such as high efficiency lighting systems, building automation systems, building envelope and fenestration, chillers, boilers, variable sEEPd drives, heat recovery systems and motors.
At GoSafe with ESI we work on the 9 most common energy efficiency technologies and share tips and recommendations on 7 of these 9 technologies in our “Guide to 7 technologies to save money and energy in your business”.
The risk factor for savings in these types of installations is variable due to the varying characteristics of each installation and technology and also the level of accuracy of the savings estimates and how they are measured.
In general, the lowest risk corresponds to the most proven technologies with the most easily quantifiable savings. The technologies to which GoSafe with ESI is applied belong to this low risk group and for them energy savings insurance will always act as a good complement to the projects, further reducing the perceived risk in technologies that are already satisfactorily proven in the market and thus contributing to improve their financing conditions.
Investment audit and financial analysis
The most important aspect for a successful implementation of an EEP according to expectations is that it is based on a properly prepared audit. This is a detailed energy audit that contains all the critical assumptions, measurements and calculations that support the savings and costs.
This is a very important and key element for the correct definition of the EEP.
Measurement and Verification (M&V)
M&V is the metric of an EEIP and is therefore essential for documenting the savings achieved and verifying the return on investment resulting from an energy efficiency investment.
A key component of adherence to the IEEFP is the development of a clear and transparent project-specific M&V Plan that describes the various measurements and data to be collected, the analysis methods employed and the verification activities undertaken to assess the performance of a facility. In this regard, the GoSafe with ESI model proposes simplified measurement protocols based on IPMVP standards.
With regard to the main financing options available to investors for financing EEPs, the investor’s own funds, loans, leases, hire purchase agreements, fee-for-service and energy service contracts are the main financing options available to investors.
Credit risk and performance risk
The main contractual terms will vary depending on the structure of the project. The most complex EEP contracts are those containing performance-based services and conditions.
As discussed above, in many cases EEPs will use well known, off-the-shelf, preventive technologies that do not involve technology development risks. Therefore, in these cases the financing of a EEP will address two main risks: credit risk and performance risk (related to the performance of the EEP).
Credit risk relates to the failure of a borrower to repay a loan or lease. Performance risk refers to project-related problems that could reduce savings below the debt service level. It usually occurs when the repayment of part or all of the financier’s repayment depends on the achievement of the savings.
In this sense, the GoSafe with ESI model works by mitigating both risks; on the one hand, the existence of the savings insurance mitigates the credit risk and protects the borrower from defaulting on the financing and, on the other hand, underwrites the savings guarantee provided by the provider, thus also mitigating the performance risk. It may also be possible to have financial institutions as beneficiaries of the insurance.
Performance-based ESCO models
Energy service companies develop, finance, commission, operate and maintain ESPs by regulating payments for their services in performance contracts. This is a unique business model that bundles multiple technologies with all the services needed to deliver energy efficiency projects on a pay-as-you-save basis.
The GoSafe with ESI model is different, as it applies to a standardised supply purchase agreement, which includes maintenance services but does not extend to operation services.
If you want to know more about the International Energy Efficiency Finance Protocol (IEEFP) that EVO proposes, we recommend you to access its website and download its information through this link.
Evaluation tools for the financing of Energy Efficiency Projects
The ultimate goal of the International Energy Efficiency Financing Protocol is to make it easier for credit, risk and loan officers of financial institutions to understand the complexities, benefits and unique risks of energy efficiency projects.
To this end, the protocol proposes a risk mitigation checklist that all parties involved in the development of an energy efficiency project should be familiar with, be it the investor itself or the provider of the energy efficiency solution. It provides the basis for a risk analysis that is appropriately structured around the particularities of energy efficiency and is intended to help the financial institution define the critical elements of structuring commercially attractive loans on a low-risk basis.
The aim of this document is to provide you with this complete risk mitigation checklist for an energy efficiency project, from the energy audit phase to the structuring of the loan application, so that it can be useful both for a better assessment of energy efficiency projects and for receiving better financing. We also understand this document as a summary of the most important points of this IEEFP protocol that we invite you to consult in its original source in the following link.
Project Risk Mitigation Checklist
- The Investment Audit has been completed and reviewed by a technically competent third party such as an EVO certified Validation company.
- The applicable technical aspects and associated risks are correctly articulated in appropriate and understandable language that can serve as a basis for any contract.
- The methodologies for the following concepts are clearly defined and can be correctly integrated into the contractual language:
- Baseline (energy consumption) and future adjustments
- Calculation of savings
- Payment of savings
- Measurement and Verification Protocol and its options
- Minimum values for energy price, use of the facilities, production levels and other operational factors
- Solvency of the loan applicant
- Savings estimates are in line with the total energy use values in the project.
- Savings estimates have been reviewed by independent, multi-level processes (this allows the estimated level of savings to be realistic)
- Contracts are “balanced” and risks are allocated to the party best able to assume or manage them.
- All necessary permits and licences have been obtained and all applicable regulations are complied with.
- The contractor’s experience is adequately referenced, demonstrated and documented.
- Budgets and schedules of all contractors, equipment suppliers, consultants and construction licensing authorities are aligned
- Construction progress is based on work completed
- Debt service levels needed are approximately 80%, or less, of the loan applicant’s estimated payment savings.
- Use of proven and applicable technologies
Investment Audit Checklist
- Energy prices used to estimate savings are based on actual historical costs, tariff structures and consumption levels.
- Equipment energy use has been corrected to baseline energy consumption data for all modes of operation of the facility.
- The operating modes and usage patterns of the different areas of the facility are clearly identified and taken into account.
- Risks related to achieving the expected savings for each Energy Saving Measure are identified, and mitigation/management costs are established.
- The cost basis for implementation is clearly documented
- Inputs and outputs of any modelling software are identified/specified by version number/type so that another expert can review and, if necessary, approve the work.
- It is clear why and how savings are to be achieved for each Energy Saving Measure.
- It is clear what specific retrofit or action is proposed for each Energy Saving Measure and what the benefits of adopting it will be.
- All economically feasible Energy Saving Measures have been addressed.
- The impact of the proposed Energy Saving Measures on the working environment or the level/quality of production has been assessed.
Guidelines and Checklist for loan applications
When submitting a loan application to a loan committee of a financial institution, it is recommended that the following issues are addressed:
Guidelines for the loan application
- If it is a comprehensive project covering an entire building, the typical total savings of the energy project is 25% of the energy expenditure.
- No simplifications or rules of thumb for typical savings values in industrial processes are being applied.
- The annual repayment of debt and equity should not exceed 75% of the expected annual savings (except for low-risk technologies such as lighting).
- Simple amortisation is not very realistic; it usually only takes into account the first year and ignores risk management costs and life cycle benefits.
Financial part of the project
- There is a calculation of savings per Energy Saving Measure and per type of energy source (i.e. electricity, gas, etc.).
- There is a Measurement and Verification Plan
- There is a construction schedule and timetable
- There is a cost breakdown for each Energy Saving Measure.
Project financing structure
It covers the following aspects:
- Description of the financing structure, own funds and debt
- Repayment terms and conditions
- Parties involved and their responsibilities
- Demonstrated solvency
- The impact of the project in terms of benefits, implications, etc.
- Contract responsibilities, terms and conditions
Information about the contractor/energy service company and each of the main subcontractors
- Financial status, years in business, etc.
- Experience with the scope of work and technologies
- Contract responsibilities, terms and conditions
Details of the loan application
- Amount of loan
- Repayment period
- Desired interest rates
- Credit risk assessment and mitigation strategies
- Guarantees, roles, collateral, etc.