Thai ESCO Association ESCO Business Model - Unece

Thai ESCO Association & ESCO Business Model Inter-regional Workshop on Energy Efficiency Investment Projects Pipeline Session 7: Experience of Financial Institutions with Energy Financing Instrument At UNCC : April 24th ,2014 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Speaker Mr. Arthit Vechakij President of Thai ESCO Association Thailand, Thai ESCO Association was established at the end of 2012 to play a central role to conduct projects. Commendation system for excellent ESCO projects is performed by government, and in Thailand, Ministry of Energy has being doing this. The role of nucleus organizations of ESCO promotion is greatly important. Thai ESCO Association 475 Siripinyo Building, 12th Fl, SriAyudhya Rd, Thanon Phyathai, Rajthevee, Bangkok 10400 Tel: 02- 2013466-7 Fax: 02- 2013465 2 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Content 1. Thai ESCO Association 2. ESCO Business Model 3 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thailand Energy Policy at a Glance Energy Efficiency Plan: 20 Yrs. (2011 – 2030) Key Strategic Issues 1 Employ integrated compulsory measures through laws, regulations and standards, together with promotion through various incentives 2 Employ energy measures which create widespread effects on awareness, behavior change, decisionmaking of entrepreneurs & market transformation 3 Promote public-private partnership for supporting and implementing energy conservative measures 4 Distribute promotion activities to various public and private organizations which possess resources and experiences readiness 5 Employ professional and ESCO, as vital mechanisms, in terms of consultation & implementation of EE projects requiring high technology 6 Increase self-reliance on energy technology to foster technology accessibility, together with promoting high EE products, manufacturers & businesses 4 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thai ESCO Association Thai ESCO Association Background Background & ESCO Definition Thailand, Thai ESCO Association was established at the end of 2012 to play a central role to conduct projects. Commendation system for excellent ESCO projects is performed by government, and in Thailand, Ministry of Energy has being doing this. The role of nucleus organizations of ESCO promotion is greatly important. Energy Price/ Energy Expenses Financing Support ESCO Definition “ An energy service company (acronym: ESCO or ESCo) is a commercial business providing a broad range of comprehensive energy solutions including designs and implementation of energy savings projects, energy conservation, energy infrastructure outsourcing, power generation and energy supply, arrange financing for projects and risk management for which performance contract and measurement and verification is a core part to ensure that the project technical performance is fully guaranteed during the contract period” Government Policies & Regulations Business Owner 1. Proper Business Situations? 2. Business Policies to save his business & to save the world? RE/EE Technology Suppliers/Ma nufacturers 5 In House / Outsource/ Consultant/ Suppliers / ESCO Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thai ESCO Association Why focus on ESCO promotion? A number of economies believe that promoting ESCO industry leads to promote energy conservation. This is due to the fact that ESCO has the following features. It guarantees the energy savings. It makes a reliable proposal which is based on energy audit. It can sustain the energy-saving performance over a long period of time by providing M&V It makes a financial arrangement, and sometime it provides funding. Although energy services have been traditionally provided by the supply side, ESCO represents the interests of customers by providing a service from the demand side. By performing M&V, ESCO can not only verify whether the effect of energy saving achieves the guaranteed level, but can also detect a failure and deterioration of implemented equipment or management, and the workarounds applied to each found trouble will lead to a long-lasting energy saving effect. 6 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thai ESCO Association Overview Role and Responsibility To be a source of investment information in the Energy Saving and Renewable Energy project under the service of Thailand ESCO. Publication of information about technology development in energy saving and renewable energy, including guideline for suitable application. Ensure that the entrepreneurs will receive optimum benefits from using ESCO service in running the Energy Saving and Renewable Energy project. Find the opportunity to broadcast and publish about the benefits received from investment in the Energy Saving and Renewable Energy project, including achievement of the Energy Saving and Renewable Energy project under ESCO service. Monitor and follow up for movements of energy management business, both internationally and domestically, to facilitate in running business of industrial trading, financial, economic, or public security. Support “Qualified ESCO certification plan”. Stimulate good governance in business operation for industrial ESCO. Support in sufficient service for the market, both internationally and domestically. Take part in issuance of law, regulations, and provisions which affect on the energy policy. 7 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thai ESCO current status 1. Not all ESCO are currently members of the association. Needs to harmonize the approach. 2. Very low demand in the market. Low demand from government sector as there is still issue with regulation/procedures. The private sector is still low because private sector has low understanding of ESCO business. Low understanding on EPGC. 3. Difficulty for customer to identify qualified ESCO. Lack of confidence from market actors. 4. Current ESCO fund manager do not fully comprehend the risk/benefit of EPGC offering. Not qualified to take calculated risk and go beyond financial institution business as usual loan evaluation. 8 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Thai ESCO Association Thai ESCO Association Background ESCO: RE/EE Barriers Remover Common barriers that prohibit many companies to invest in Energy Efficiency Project can be categorized in three categories; Financial Barriers, Technical Barriers, and Management Barriers Unfamiliar to Energy Efficiency Technologies Lack of confidence in the unfamiliar technology Lack of manpower to develop the project Bad experience from the previous project ( NonQualify Consultant/EPC) A short list of technology owners domestically. Imported technologies are more difficult to do O&M. Costly after-sale services. ESCO & Equity Fund Financial Barriers Accessibility to financial resources Limited Credit line Concern on Liquidity Financial source was reserved and/or delegated to other projects which are direct to core business Financial Institutes (FI) have realize in all risks of energy saving project , so ESCO help FI to assess project risks before loan granting. ESCO ESCO & Equity Fund Technical Barriers Management Barriers 9 Lack of time and focus to initiate/ oversee the project Company policy not to invest in non-core business project Unable to acquire professional service from qualified consultant due to lack of budget Lack of internal capability to manage an Energy Saving Projects Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO : RE/EE Special Market 1. Responsibility and provide guarantee on overall project success. 2. Audit/Measurement and Verification (M&V)/Baseline are mandatory requirement. 3. Operation and Maintenance (O&M) and M&V report after commercial operation date (COD) are critical factors which are normally ignored by all Stakeholders of non ESCO’s project (especially government project). 10 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Basic Model Energy Savings Performance Turn-key basis Implementing Energy Efficiency Projects Contracting (ESPC) Offered by Energy Service Companies (ESCOs) or other energy service providers (ESPs) 11 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Range of ESCO Business Services Additional ESCO Services Engineering Design Providing or Arranging Financing Construction ESCO Services Operations and Maintenance Installation Training Cost savings Commissioning Measurement & Verification 12 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Shared Savings Outsourced Energy Management Guaranteed Savings 13 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Shared Saving Model Financial Institution Repayment from Portion of Savings Share Loan ESCO finances project No customer investment needed ESCO borrows funds from FI ESCO and customer defined share savings over contract period Useful when customer does not want to invest own funds Project Development, Financing, and Implementation ESCO Customer Payment Based on Savings Share according to ESPC 14 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Guarantee Saving Model Financial Institution Arrange Financing Repayment with Funds According to ESPC Loan Customer finances project ESCO provides performance guarantees Customer pays ESCO upon satisfying performance Guarantees (one-time or over contract period) Useful when customer can invest/borrow funds at lower cost Payment for Services According to ESPC ESCO Customer Project Development and Implementation Savings Guarantee 15 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

ESCO Business Model Outsource Energy Management Build/Own/Operate (BOO) or Build/Own/Operate/ Transfer (BOOT) Sale of Energy Services (lighting, chilled water, etc.) ESCO Customer outsources energy management for entire facility ESCO invests in equipment/efficiency Customer signs long-term contract for payments at fixed price Useful when expert help is needed for efficient energy management Customer Payments for Energy Services under long-term contract ESCO assumes costs for all equipment investment, upgrades, etc. Customer pays a fixed price with a ling-term contract 16 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only

Business Case Example: Thailand ESCO Pilot Project Bangkok Produce Merchandising Public Co., Ltd. (SET: BKP) Location : Saraburi Cogeneration Power Plant 4.5 MW, 12 TPH, Gas Turbine Generator (GTG) (Fuel: Natural Gas) Gas Turbine Generator (GTG) Cogeneration Power Plant Project Investment Cost 183 MB Energy Cost Savings 47 MB/Year Payback Period 4.95 Year IRR 20% BKP Cogeneration, the one-and-only Thailand ESCO Pilot Project since 1999, has been supported by World Bank, Thai Government , EGAT, and private co-operations as to drive ESCO business in Thailand. Located: Saraburi, Thailand Operation and Maintenance Phase 17 Thai ESCO Association All Rights Reserved Strictly confidential – For discussion purposes only