Day 1 - Presentations v1.2

Financing for EE and RETechnology-Based Projects in Industry Day 1 UNIDO Ivan Gerginov February 2018 1

EE/RE Training - Program Introduction 2

Content of the Training Introduction Pakistani Energy Sector, Policies, Trends and Incentive Programs Impacts of Energy Sector Trends on Pakistani Businesses The Value Proposition of EE/RE, Pakistan EE/RE Technologies. Most Popular EE/RE Projects in Industry International Best Practices in Lending to EE/RE Projects Pause Financing of EE/RE Projects in Pakistan Developing Bankable Proposals/Technical, Financial and Contractual Risk Assessment and Mitigation Q&A Discussion Lunch Case Studies of EE/RE Projects in Pakistan. Tools for EE/RE Project Technical and Financial Evaluation. RETScreen Clean Energy Management Software Practice EE/RE Project Case Studies to Develop in RETScreen Q&A Discussion 3

Climate Change Impact 4

Climate Change Impact • Ranks 7th in the Global Climate Risk Index 2017 5

Climate Change Impact • Agriculture and livestock - 80% of the major crops are grown on 23mha. 1/3 of the land (6.5mha) has been degraded. • Energy – reduced availability of water threatens hydropower generation and thermal power plant cooling. Energy infrastructure is vulnerable to floods, storms, hurricanes and sea-level rise. • Karachi – 17 mln people, the port accounts for 42% of GDP, generates ½ of tax revenues, priciest real estate. Risks of flooding, drought, extreme heat events, sea level rise, 6

Climate Change Impact 7

Why does this matter to the Business • Climate Resilience Investments • Agriculture • crop genotypes and livestock breeds with greater tolerance to climatic stress. • Implementing best management practices for climate resilience • Industry • Investments in EE/RE to mitigate energy availability and volatility • Investments in clean technologies • Tourism • climate change risk considerations into coastal development and land use planning • climate change considerations into existing loan products to the tourism sector 8

Pakistan Energy Sector 9

The Sector (2015)• Primary energy production 70.94Mtoe• Primary energy supply 93.91Mtoe  22.29Mtoe imports• Total final energy consumption is 77.66 all imports are effectively losses in generationand distribution.• Energy supply is growing by 7% pa• Energy demand is growing by 10% pa. 10

Issues in the Energy Sector • Lack of Integrated Energy Planning & Demand Forecasting, seriously worsening the gap between energy supply and demand; • Circular Debt, amount of cash shortfall within the Central Power Purchasing Agency (CPPA) that it is unable to pay to the power supply companies; • Imbalanced Energy Mix with heavy reliance on gas and oil (72% imported); • Non-utilization of vast indigenous resources of Thar Coal and Hydro Electriv potential; • Lack of effective project structuring, planning and implementation of identified and viable projects; • Transmission/distribution losses/thefts; • Inadequate revenue collection by DISCOs. 11

Pakistan Vision 2025 • Eliminate current electricity supply-demand gap by 2018, and cater to growing future demand by addition of 25,000 MW by 2025 • Optimize energy generation mix between oil, gas, hydro, coal, nuclear, solar, wind and biomass – with reference to its indigenousness, economic feasibility, scalability, risk assessment and environmental impact • Tap Pakistan’s huge potential for alternative energy • Focus on demand management and conservation to ensure prioritization in allocation, elimination of wasteful use, incentives to use more energy efficient equipment and appliances and achieve better balance between peak and off-peak hours • Introduce institutional reform and strengthen regulatory frameworks to improve transparency and efficiency. 12

Impact on the Industry and Financial Sector • The INDUSTRY cannot wait for the problems in the energy sector to be resolved, but needs to act now to remain on the market (especially export markets). • Implement energy conservation and demand management programs and projects; • Adopt alternative sources of energy including hydro, solar, wind, coal and agriculture biomass/biodiesel; • The FINANCING SECTOR must support the industry and finance the implementation of such projects and programs, or NPLs will begin to increase in the coming years and financeable companies will fewer, ultimately back-firing to the health of the financial sector itself. 13

Value Proposition of EE/RE 14

WHY EE? • Energy Efficiency can apply “Proven” & cost effective technologies to supply the World’s projected electricity growth for Next 20 Years! • EE is the “Cleanest” and “Cheapest” Energy; • Don’t generate EE = “0” GHG Emissions. To the contrary – it reduces GHG emission footprint of the company (regulatory compliance) • Costs less than 50% of Generated Power • Recover capital investment through savings in existing on-going operating costs (i.e. overall budget does not change • Low-risk “proven” technologies • Increased global competitiveness (due to optimized costs) • Reduced exposure to volatility of energy prices. • RE is the second best solution, adding most value, when bundled with EE or when installed after EE has already been implemented. 15

EE Business Case Development • EE projects are effectively cost-cutting solutions. • The project’s benefits depend as much on the installed assets, (and their O&M), as it depends on the behavior of involved staff. • 1-3 – Technical • 4-5, 8 – Management • 6-7 – Technical • After Implementation – O&M + Management 16

Cost Components of a Project • Energy audit • Legal and financial set-up • Engineering design • Construction: equipment & installation, subcontractors, overhead and profit, on-site cost, and management • Financing • Contingencies • Project management • Measurement and verification 17

Pakistan EE/RE Technologies• Industrial activities in general have to be identified from the energy demandperspective. 1. Renewable Energy. 1. Efficient Lighting Technology. Process 2. Cogeneration and Tri- 2. Automation and Controls. Efficiency and Generation. 3. Drives and VSD.Fuel Specific Energy 3. Supply Side Efficient 4. Boilers and Steam Systems. Technologies. 5. Efficient Cooling Systems. Industrial Index 4. Waste to Energy and Final Product Recovery Systems. Process Investment Investment • ElectromotiveElectricity Power. Low Low High • Thermal Energy Low High Low (Cooling/Heating).Alternative Fuel Wastes USD/Ton CO2 AvoidedSavings USD/Ton CO2 Avoided Savings Low High Low High Payback Payback Period Period Low High Low High High High 18

Pakistan EE/RE TechnologiesTechnology Industry Category Technology RemarksLighting Retrofit All Industrial Categories. Application for High Efficacy Lamps and Light EmittingSystems Diode (LED) technology. High reduction in GHG can be achieved.High Efficient All Industrial Categories. The application of Variable Speed Drives in order to matchMotors and Variable the actual loading of the electrical motors. High reduction inSpeed Drives (VSD) GHG can be achieved.Energy Management Pharmaceutical, Spinning, Application to control, monitor and operate the HVACSystems (EMS) and Weaving, Food, Steel. systems, to manage the electricity demand for productionDemand Side utilities and processes.Process Control All Industrial Categories. The application of PLC or microprocessor based system toSystem control, monitor, and operate the production processes in order to improve the quality, productivity, specific energy consumption. 19

Pakistan EE/RE TechnologiesTechnology Industry Category Technology RemarksWaste Heat Recovery Cement, Glass, Bricks, The application of recuperators, checkers, heat exchangers,systems Dyeing, Tanning, economizers to recover the waste heat in a form of useful heat to any Pharmaceutical, Fertilizer, thermal application. This application can be implemented in furnaces, Petrochemical, Paper, Food. boilers, tunnel kilns, and dryers.Combustion Control and Cement, Glass, Bricks, The application of PLC or microprocessor based system to control andTune Up Programs Dyeing, Tanning, monitor the combustion systems in boilers, furnaces, kilns, and dryers. Pharmaceutical, Fertilizer, Petrochemical, Paper, Food.Steam Generation and Bricks, Dyeing, Tanning, The application of periodical boiler tune up, condensate return,Network Systems Pharmaceutical, Fertilizer, inspection for steam traps, flash tank, and boiler feed water treatment. Petrochemical, Paper, Food. 20

Pakistan EE/RE TechnologiesTechnology Industry Category Technology RemarksCogeneration / Tri- Dyeing, Tanning, The application is to generate both electricity and thermal demand forgeneration systems Pharmaceutical, Fertilizer, industrial processes either heating and/or cooling. Petrochemical, Paper, Food.Solar Dyeing, Tanning, The application of water heating systems by solar energy using the Pharmaceutical, Fertilizer, solar collectors or concentrators dependent on the temperature level Petrochemical, Paper, Food. application.Biomass Dyeing, Tanning, The application of burning the agricultural waste in boilers or furnaces Pharmaceutical, Fertilizer, as a substitute for the fossil fuels. Petrochemical, Paper, Food.Cooling Load Pharmaceutical, Spinning and The application of water cooled systems either the absorption or vaporGeneration systems Weaving, Plastic Piping, Food compression technologies. This application is for the replacement of and Beverage, Painting the air cooled vapor compression technology. Processes. 21

International Best Practices in EE/RE 22

Barriers to EE Finance Uptake • Misaligned financial incentives • Maintenance vs procurement department • Energy managers vs financial directors • No standardization, benchmarking • Business case development • Measurement & verification • Access to corporate financing • Lack of necessary confidence to invest • Complexity of financing, available financing products do not reflect the EE fundamentals 23

What is Best Practice Financing • Adequate to market demand • Captures market investment drivers • Makes use of existing legal framework • Bridges gaps between supply and demand of financing. • Favors simplicity • Recognizes and manages all stakeholders. • Perfect is the enemy of the good 24

Financing vs Market Maturity 25

The Scope of the Instrument100% grant Current Situationfinancing • 30-35% Grants• Quebec - $350- • 2:1 leverage 400 million every year Desired Starting point of New Instrument Possible Instruments • 5:1 leverage • Risk-sharing • Revolving • Subsidized interest rate • Risk Insurance Products Worlds Best Practices • Performance Insurance •10:1 leverage Products •Revolving • Re-focusing of programs • Promotion of EE leasing 0% Government Financing 26

Banker’s Approach to EE Financing Theoretical Market Potential • Market baseline. • Best efficiency achievable with available technology. • Total investments required. Feasible Market Potential • Investment potential, with paybacks in line with the expectation of the energy users? • Total investments required. Market Potential of • Size of the market of clients with high Aware Customers awareness. Bankable Market • Total potential investments of aware market Potential stakeholders. • “Bankable\" market potential, as defined by the financial sector. • Total investment that can be absorbed by this market.Mainstreaming Green Finance 27 27

Banker’s Approach to EE Financing• The market assessment has narrowed down priority market sectors with high potential.• Additional assessment cuts across technologies, to identify “financing sweet spots” suiting the bank’s business model. Energy Conservation Measure Manufacturing Food & Textile Trade and Pulp & of Machinery Beverage Manufacturin Hotels Services PaperCogeneration and EquipmentBoilers, Chillers, Compressors X g X XCooling Tower X X X X XLighting X X XPumps X X XX XEfficient Furnaces X X XX X XEnergy Management System X X XX XHeat Pumps X X XX XInsulation XWaste Heat Recovery System X X XX X X X XX X XX XXMainstreaming Green Finance 28 28

Approach to RE FInancing 29

Multiple Financing StructuresIFI Investors Government of Donor Investors Seed Financial Turkey Inves tors Leveraged Donor Long-term Budget Funds Reimbursable Funds Funds Loans Concessional “FACILITY” Support Integrated EE Specialized Support for ESCOs (EVDs) IFI Financial Supported Mechanism Turkish ESCOs Programs Concessional Direct Support Blended Support Funds Programs by Public organizations Blended Funds LFIs Energy Performance Contracts Blended Funds Direct Support Blended Funds Leveraged with LFI funds EE Projects in Direct Support Borrowers Industry 30

Lending Product - BULGARIA 31

Lending Products - Turkey Industrial Energy Efficiency $600Millions $500 $400 $300 $200 $100 Residential and Building Energy Efficiency $0 Fuel switch Heat recovery Heating system HVAC Insulation Lighting Windows Co- and trigeneration Efficient Equipment $362,482 $89,917,109 $15,976,502 $32,738,161 $25,563,506 $12,652,617 $809,081 Total $23,235,232 $564,545,342 32

Lending Products - Turkey Small scale non-conventional RE 33

Lending Products - Turkey 34

Financing of EE/RE Projects in Pakistan 35

Financing EE in Pakistan • Build the framework of a typical investment loan in industry. • Tenors • Interest rates • Repayment schedules • Collaterals • Covenants • Other 36

Developing Bankable ProposalsTechnical, Financial and Contractual RiskAssessment and Mitigation 37

Identification of EE Projects – Bottom/UP fromTechnical Staff• Analysis of energy bills for 1 to 3 years Identification• List of end uses (e.g: lighting, motor Saving Calculation drives, air compression, etc.) Cost Evaluation• List and characteristics of energy Economical Analysis consuming equipment (power)• Evaluation of operating hours of equipment• Calculation of energy consumption per equipment• Summary by end uses for power and energy usage• Verification that calculations match the average of annual energy bills 38

Energy Savings Calculation• Output of saving evaluation:• Calculation of the percent savings potential with power and energy impact• Assessment of financial savings (with End Use Min. Max. average tariff per kWh) Saving Saving %%• Energy saving evaluation can be refined at Air 20 55each stage of the analysis compressio 45 35• Identification : Gross evaluation for n 25 25prioritization – Find what is important Motor drive 10 Lighting 15• Preliminary : More precise - For Thermal 10justification of a detailed study Air 10• Detailed : For investment decision conditioning 39

EE Price Quotation • Identify the cost of each component • Material (main components) • Work (for installation) • Engineering and project management • Preparation for budget quotation of major required equipment : • Technical description of EE measure • For each measure, identification of equipment to be quoted • Synthesis of requirements for the manufacturers 40

Costs-Benefits Analysis • Summarize for each EE measure: • Annual energy savings • Annual monetary savings (with average tariff of energy) • Price quotation of major components • Summary of material and installation evaluation • Cost of implementation with engineering and overhead • Present these results to the management. They will be important input for the management decision. 41

Decision Process - Management Energy Operational Financial Efficiency Analysis AnalysisOpportunities EnergyEfficiencyFinancingCompetition Strategic for Funds Analysis 42

Financial Evaluation of EE Project• Evaluation for each EE measure - Using the various financial indicators• Simple and Discounted Payback• Life Cycle Cost Simple Payback Net Present Value Internal Rate of• Saving to Investment Ratio (NPV) Return (IRR)• Net Saving• Internal Rate of Return Meaning # of years to recoup Total value of Interest yield of additional costs from project in today’s project during its annual net savings dollars lifetime Indicate Quickness of return Profitability Profitability s Criterion Payback < n years NPV ≥ 0 IRR > hurdle rate Comment • Common but • Standard measure • Assumes savings misleading of can • Ignores debt financing, profitability be reinvested at IRR long-term cash flows • User must specify • When IRR = & discount discount rate discount rate rate, NPV = 0 • Use when cash flow (i.e., hurdle rate = discount rate) is tight 43

Pitfalls of Comparisons with IRR and NPV• Examples: • Project 1: Furnace Base Case (BC) or Furnace Proposed Case (PC) • Project 2: Windows BC or Windows PC • Project 3: Lighting BC or Lighting PC• But only one project can be done (e.g., due to funding), can we just compare the NPVs or IRRs between projects? 44

Pitfalls of Comparisons with IRR and NPV• Pitfall 1: Different Lifetimes: Say furnaces last 25 years, windows 15 years & lighting 10 years • If project will be repeated at end of lifetime, can’t use NPV • If project won’t be repeated, can’t use IRR • Doesn’t account for reinvestment proceeds beyond shorter project lifetime• For repeating projects, use IRR or compare Annual Life Cycle Savings • NPV of project converted to an annuity using the discount rate (equal annual payments over life of project)• Pitfall 2:• Assume Project 1 and Project 2 have same lifetime • Project 1: IRR is 50%, investment of $1,000 • Project 2: IRR is 12%, investment of $100,000• To compare IRR, investment must be same 45

Pitfalls of Comparisons with IRR and NPV• Pitfall 3: FluxYmeaornlyétCaiaresshaFnlnouwesls $80,000• Assume Project 1, Project 2 and Project 3 8 9 10 $25,000 have same lifetime (10 years) and same $20,000 initial investment ($20,000) $15,000 • Project 1: IRR of 40% $10,000 • Project 2: IRR of 20% $5,000 $0 • Project 3: IRR of 15% $-5,000 0 1 2 3 4 5 6 7• Do you always prefer the project with the highest IRR? $-10,000 • What if revenues are strong at beginning $-15,000 of Project 1, constant for Project 2 and lumped at the end of Project 3; and if $-20,000 revenues must be reinvested at 9% $-25,000 return? Project 1: IRR of 40% NPV of $9,100 at a 9% discount rate NPV of $10,500 NPV of $13,800 Project 2: IRR of 20% at a 9% discount rate Project 3: IRR of 15% at a 9% discount rate 46

Pitfalls of Comparisons with IRR and NPV• Pitfall 4: Assume Project 1 and Project 2 have same lifetime, same initial investment and revenues stem from fuel savings, which are relatively constant from one year to the next • Project 1: IRR of 15% • Project 2: IRR of 12% What if Project 1 saves natural gas (volatile) and Project 2 saves electricity (regulated)?• Summary • NPV and IRR require projects to have same lifetime • When comparing the IRR of mutually exclusive projects, the investment amount must be the same • When IRR is much higher than rate at which revenues can be reinvested may be misleading if majority of returns earned early in project. • Riskier projects require higher discount/hurdle rates 47

Financial Evaluation – Management Perspective • View the EE Project as a Stand-Alone Company – with Revenues, Expenses, Assets, Debts • Revenues = estimated share of savings payments • Expenses = Equipment, Maintenance, Measurement & Verification (M&V), Or cost of raw materials to produce “goods” such as chilled water • Assess the Lenders’ perspective: • Debt service coverage • Comparison of net revenues (net income) with project loan payments • Debt service coverage ratio (DSCR): • Revenues PKR 2,400,000 / month • Lease payment PKR 1,950,000 / month • DSCR = 1.23 • DSCR good when > 1.1 48

Financial Evaluation – Management Perspective • Comparison will be made with other projects • Tools of comparison: • Net Present Value (NPV) • Internal Rate of Return (IRR) • High chances of success if: • NPV and IRR are higher than other projects indicators 49

Converting the Project to a “Bankable” Format• Bankable means everyone along he chain agrees that the project is viable and financeable and is willing to do their part to make it happen • Technical staff - How to Convince Factory Managers? • Elaborate a “selling document” for managers, • Include Description of measures, Savings, Investment, Simple payback • Include recapitulation table of EE measures with overall payback time of the project • Focus on attractive measures to be financed or on critical investments • Highlight advantages for the company (operation and productivity, quality improvement reduction of waste, maintenance, human resources, cost reduction (PRK / ton of product, etc.) • Meeting future extension and development 50