financial assessment of public building and …...affordable and adaptable public buildings through...

D2.4

Financial assessment of Public Building and District

retrofitting

Issued by DAPP

Date: 17-03-2014

Version: V1

Deliverable number D- 2.4

Task number: Task 2.4

Status: Final

Dissemination level: PU

PROJECT FUNDED BY THE EUROPEAN

COMMUNITY IN THE 7TH

FRAMEWORK

PROGRAMME

Affordable and Adaptable

Public Buildings through

Energy Efficient Retrofitting.

Grant Agreement no.: 609060

Affordable and Adaptable Public Buildings

through Energy Efficient Retrofitting

D2.4

A2PBEER GA nº.: 609060

D2.4 Financial assessment of Public Building and District retrofitting

1

Authors

Marco Morando as representative of DAPP project team D’Appolonia

Daniel Holm IVL

Disclaimer

The information in this document is provided as is and no guarantee or warranty is given that the

information is fit for any particular purpose. The user thereof uses the information at its sole risk and

liability.

The document reflects only the author’s views and the Community is not liable for any use that may be

made of the information contained therein.

Document history

V Date Organisation Author Description

1.0 11/12/2013 D’Appolonia Marco Morando Initial version

2.0 18/02/2014 D’Appolonia Marco Morando Draft

3.0 28/02/2014 Abud Ida Kiss Comments

4.0 03/03/2014 Tecnalia Eneritz Barreiro Comments

5.0 14/03/2014 D’Appolonia Marco Morando Final



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SUMMARY

This report covers Work package 2 Task 2.4. Its main purpose is to provide a clear methodology to

assess public building retrofitting projects concerning their financial profitability.

The first analysed topic (Section 3) focuses on the main involved stakeholders and typical financial

options to be adopted. The main involved stakeholders may be: local authority, engineering firms,

lenders/investors and Energy Service Companies (ESCOs). Typical financial options include, for instance,

budgetary funds, debt financing, project financing, leasing and other financial instruments (grants,

subsidies, loans, public private partnership, etc.).

The following Section 4 describes the background activities behind the financial analysis: the technical

and economic inputs to the financial model are presented. Technical inputs include physical savings

(energy and water) achievable by the Project Scenario with respect to the Baseline Scenario.

The Baseline Scenario refers to the existing building situation: retrofitting is implemented starting from

this condition to achieve an improved level, in terms of energy/water efficiency and internal comfort,

which is represented by the Project Scenario.

Technical inputs are obtained through a calculation performed by a dedicated building modelling

software which assesses the building performance in terms of energy/water consumption in the two

Scenarios.

Economic inputs refer to both Scenarios and are represented by the investment cost of equipment,

operation and maintenance costs, costs for removal and disposal of equipment when its lifetime comes

to an end and equipment residual value.

Section 5 is the core part of this document: the adopted financial model is presented in terms of

assumptions, key elements and outcomes: a set of financial indicators useful for assessing the

investment viability is presented. Such indicators are the Investment Global Cost (a sum of all the costs

associates to the Project implementation) and the typical indicators of financial analysis, such as Net

Present Value, Internal Rate of Return, Pay-Back Period and Benefits over Cost Ratio.

In Section 6 the operational manual for the correct utilisation of a software (“Financial Analysis

Tool.xls”) for performing the investment financial analysis is presented. Such a software was conceived

to carry out the financial analysis according to the model described in the previous section: it provides

the calculation of all the financial parameters described before so that it is possible to evaluate the

investment profitability thorough the preferred indicators. In addition, such a tool consents performing

a sensitivity analysis to the most significant independent variables conditioning the Project profitability.

In Section 7 the application of this methodology to three pilot projects on public building retrofitting is

described in order to clearly depict the potentials of such analysis and to show practical application of

the tool.



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3

ABREVIATIONS AND ACRONYMS

A2PBEER Affordable and Adaptable Public Buildings through Energy Efficient Retrofitting

BAT Best Available Techniques

BCR Benefits over Cost Ratio

BPIE Building Performance Institute Europe

C0 Cash flow at year 0

Ca,t Annual Project cost at the generic year t

Capex Capital expenditure

Cdisp,b Baseline equipment disposal cost

Cdisp,p Project equipment disposal cost

Cg(τ) Investment Global Cost

CI Initial investment cost

Ci,b Baseline equipment installation cost

Ci,p Project equipment installation cost

CO&M,b Baseline equipment O&M cost

CO&M,p Project equipment O&M cost

Cp Project capex

Cpur Equipment purchase cost

Cpur,b Baseline equipment purchase cost

Cpur,p Baseline equipment purchase cost

Crem,b Baseline equipment removing cost

Crem,p Project equipment removing cost

Crep,b Baseline equipment replacement cost

Crep,p Project equipment replacement cost



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Ct Net cash flow at year t

Ct,b Baseline equipment transportation cost

Ct,p Project equipment transportation cost

D Depreciation

DCF Discounted Cash Flow

DPB Discounted Pay-Back Period

E Energy price

e Price escalation net of inflation

EnBMS Energy Building Management System

EPC Energy Performance Contracting

Es Energy selling revenues

ESCO Energy Service Company

EU European Union

EUR Euro

GFA Guarantee Facility Agreement

HVAC Heating Ventilation and Air Conditioning

i Inflation rate

IEA International Energy Agency

IRR Internal Rate of Return

j Generic retrofit investement (out of N investments)

LFI Local Financial Institution

MWh Mega watt hours

N Number of considered retrofit investments

NPV Net Present Value

O&M Operation and Maintenance



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PB Pay-Back Period

PPP Public Private Partnership

r Discount rate

Rd,t Discount factor for the year t based on the discounr rate r

Re Electricity saving revenues

rnet Real discount rate (net of inflation)

Rw Water saving revenues

τ Calculation period

t Generic year over the calculation period

TPF Third Party Financing

VAT Value Added Tax

Vf,τ Residual value of retrofit investment at the end of calculation period

Vl Equipment residual value at the lifetime end

Vb Baseline equipment residual value

Vp Project equipment residual value

yr year



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TABLE OF CONTENTS

1- INTRODUCTION ................................................................................................................................. 10

2- FINANCIAL SUPPORT AND PUBLIC FINANCIAL RESOURCES .............................................................. 13

2.1- PUBLIC PROCUREMENT ................................................................................................................. 13

2.1.1. Brief overview of rules and principles for Public Procurement ...................................... 13

2.2- INTERACTION BETWEEN THE DIFFERENT STAKEHOLDERS INVOLVED IN THE PROJECT ................................. 14

2.3- FINANCING OPTIONS FOR ENERGY EFFICIENCY ................................................................................... 16

2.3.1. Budgetary funds .............................................................................................................. 17

2.3.2. Debt financing ................................................................................................................. 18

2.3.3. Equity financing ............................................................................................................... 19

2.3.4. Mezzanine financing ....................................................................................................... 19

2.3.5. Project financing ............................................................................................................. 20

2.3.6. Leasing ............................................................................................................................. 20

2.3.7. Loans, subsidies, tax deduction, VAT reduction, etc. ..................................................... 21

2.3.8. Public Private Partnership ............................................................................................... 25

2.4- MAIN OUTCOMES ....................................................................................................................... 31

3- TECHNICAL AND ECONOMICAL INPUT TO THE FINANCIAL ANALYSIS .............................................. 31

3.1- BUILDING MODELLING AND ACHIEVABLE SAVING ............................................................................. 32

3.2- CAPEX, O&M, ADDITIONAL COSTS AND RESIDUAL VALUE .................................................................. 33

4- INVESTMENT VIABILITY ASSESSMENT ............................................................................................... 36

4.1- INVESTMENT FINANCIAL MODEL ..................................................................................................... 36

4.1.1. Financial assumptions ..................................................................................................... 36



D2.4



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4.1.2. Components of the Investment Cash Flow ..................................................................... 38

4.1.3. Financial Model Outputs ................................................................................................. 41

4.2- INVESTMENT VALIDATION FROM PROJECT CASH FLOW ...................................................................... 45

4.3- SENSITIVITY AND RISK ANALYSIS ..................................................................................................... 48

5- GENERAL METHODOLOGICAL APPROACH FOR PUBLIC BUILDING FINANCIAL PLAN_OPERATING

MANUAL OF THE “FINANCIAL ANALYSIS TOOL.XLS” ......................................................................... 49

5.1- “GENERAL INPUT DATASHEET” ...................................................................................................... 50

5.2- “CASH FLOW” SHEETS .................................................................................................................. 53

5.3- “SENSITIVITY” SHEET ................................................................................................................... 58

5.4- “INVESTMENT PACKAGE SUMMARY” SHEET ..................................................................................... 63

5.5- “SCENARIOS” SHEET .................................................................................................................... 63

6- FINANCIAL ASSESSMENT APPLIED TO REAL CASES: A2PBEER REAL PILOTS ..................................... 64

6.1- SPANISH PILOT ............................................................................................................................ 64

6.1.1. Involved Stakeholders, interactions and adopted financing option ............................... 64

6.1.2. Financial Analysis Tool application.................................................................................. 64

6.2- TURKISH PILOT ............................................................................................................................ 67

6.2.1. Involved Stakeholders, interactions and adopted financing option ............................... 67

6.2.2. Financial Analysis Tool application.................................................................................. 67

7- CONCLUSIONS ................................................................................................................................... 71

8- BIBLIOGRAPHY .................................................................................................................................. 72



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LIST OF TABLES

Table 1. Example of cash flow 43

Table 2. Example of discounted cash flow 44

Table 3. Comparison between two alternative investments cash flows 46

Table 4. Spanish Pilot Project – Summary of the Financial Analysis Toll input data 65

Table 5. Spanish Pilot Project – Summary of the investments financial analysis 66

Table 6. Turkish Pilot Project – Summary of the Financial Analysis Toll input data 68

Table 7. Turkish Pilot Project – Summary of the investments financial analysis 70

LIST OF FIGURES

Figure 1. Task 2.5 operational steps 11

Figure 2. General supply chain configuration for large scale public energy efficient retrofitting projects.

Based on Genovese A. et al. (2013). 16

Figure 3. Example of Debt Financing 18

Figure 4. Example of Equity Financing 19

Figure 5. Example of Mezzanine Financing 20

Figure 6. Example Project financing based on JRC(2010). 20

Figure 7. Example Leasing. 21

Figure 8. Financial instruments in Europe (BPIE). Source: Maijo et al. 2012. 21

Figure 9. Number of financial instruments in place in 2011 by country. 24

Figure 10. Different type of instruments in Europe 24

Figure 11. Dedicated Credit Line based on IEA, 2011 27

Figure 12. Risk-sharing facility described briefly. Based on IEA, 2011. 28

Figure 13. Shared Savings Model based on IEA, 2011/ Limaye, 2009 29

Figure 14. Guaranteed Savings Model, based on IEA, 2011/Limaye, 2009 30

Figure 15. Energy Supply Contracting Model, based on IEA, 2011/Limaye, 2009 30

Figure 16. NPV – Discount Rate Curve Related to Alternative Investments 47

Figure 17. Example of the Variation of NPV against the Variation of Some Independent Variables 49

Figure 18. Example of “General Input Datasheet” 51

Figure 19. Baseline Data Input 54

Figure 20. Project Data Input 55

Figure 21. Resources Saving Data Input 55

Figure 22. Energy Selling Data Input 56

Figure 23. Example of Cash Flow Table (partial view) 57

Figure 24. Financial Analysis Results 58

Figure 25. Cash Flow Chart 58

Figure 26. Sensitivity Sheet: Reference Case NPV 59



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Figure 27. Sensitivity Sheet: Variation of the Discount Rate 59

Figure 28. Sensitivity Sheet: NPV Variation after 10% Discount Rate Increase 60

Figure 29. Sensitivity Sheet: NPV Sensitivity to Discount Rate Variation 60

Figure 30. Sensitivity Sheet: Diagram showing NPV Sensitivity to Discount Rate Variation 61

Figure 31. Location of “Goal Seek” function in MS Excel 61

Figure 32. Tentative value for Project Capex Ceiling 62

Figure 33. Procedure for the calculation of the Capex Ceiling Level using Goal Seek function 62

Figure 34. Calculation of the Capex Ceiling Level 63

Figure 35. Investments financial results summary table 63

Figure 36. Tables for setting the sensitivity variation step 63

Figure 37. Spanish Pilot Project – NPV sensitivity 67

Figure 38. Turkish Pilot Project – NPV sensitivity 70



D2.4



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1- Introduction

The European Commission is asking to European public sector to lead efforts for energy efficiency by

transforming its building stock.

Efforts to retrofit public buildings to make them more energy-efficient have many different drivers,

including a sense of social responsibility to reduce carbon footprints, and, above all, the desire to reduce

energy consumption costs.

There are different financing options which can be adopted when a retrofitting projects is to be

implemented, such as debt financing, project financing and Public Private Partnership. Nevertheless,

financial institutions are generally hesitant when investing in energy efficiency projects, mainly due to

the uncertainty associated with the return of the investment and, consequently, to the high risk related

to the investment.

When identifying a potential retrofitting investment plan, in addition to evaluate the technical feasibility

of the considered investments, a fundamental step is therefore the evaluation of the associated

financial profitability. The assessment of the investment cost, of the necessary operation and

maintenance costs as well as of the revenues associated to the physical saving is therefore crucial for

the validation of the identified investment plan.

The aim of this document is the provision of a simplified methodology for evaluating the profitability of

a set of retrofit investments, starting from the input received by the technical feasibility assessment till

the project validation, at single building level or at district level.

In addition, the possible financing schemes which could be adopted for a public building retrofitting, as

well as the potential stakeholders and their related interactions, are described.

This document covers the Task 2.4 of the Work Package 2.

Task 2.4 represents an input to the step “Interventions Packages”, as described in Task 2.5, and

illustrated by the steps diagram shown below.



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REQUIREMENTS,

STANDARDS

(stakeholders, legal,

etc.)

Define the differences

between the

measurements of

characteristics and

requirements and

standards (possibly

including net zero energy

standards) both at district

and building scale.

RELEVANT TECHNICAL

RETROFITTING GAPS

(e.g. systems,

system elements)

TECHNICAL

INTERVENTION

POSSIBILITIES

TECHNICAL SYNERGIES

This task also considers an

investment anaylsis

/financial feasibility study

for the featured

intervention scenarios.

INTERVENTION

PACKAGES

SWOT analysis of the

possible intervention

packages according to

results of T2.2

Aspects:

• financial (financial

feasibility study,

investment return

analysis)

• technical and non

technical constraints

• legal opportunities and

threats

SWOT

Input: based on the

characteristics defined at

Task 2.1

Input: Task 2.3

retrofitting targets,

regulations

Other input: Task2.2

sub-chapter what (scale

of intervention) and

when (conditions under

the technology works

fine), Task 2.2 defined

technology grouping

Other input: Task 2.1

sub-chapter 6.- relevant

characteristics and their

influence on energy

efficiency; Task 2.2 sub-

chapter: where

(compatibility issues)

and why (expected

energy saving); Task 2.3

synergies defined at

best practice examples

Other input: Task 2.2

defined technolgy

grouping; Task 2.4

financing models

Input:

-Task 2.1 chapter 7.-

constraints

-Task 2.2 defined

technology features

-Task 2.4 chapter 4-6.

P

O

S

S

I

B

L

E

S

O

L

U

T

I

O

N

S

Output:questionaire sheet

for data collection, main

characteristics of district

and building scale should

be examinedOutput: list of system

elements and systems not

achieving the requirements

, standards and the energy

efficiency targets of the

intervention

Output: collection of

requirements possibly

affecting the retrofitting

Feedback from investment analysis

Feedback from investment return analysis

Output: list of relevant

systems, system

elements can be

retrofitted at the given

district, in the given

buildings.

Output: retrofitting

scenarios (intervention

areas and technologies

prosperously effecting

each other)

Output: energy efficiency

potential of system

elements and their parallel

use; synergies of

intervention at district

scale, building scale

BUILDING/DISTICT

CHARACTERISTICS

Output: best possible

solutions regarding

technical and non technical

aspects

Figure 1. Task 2.5 operational steps

Necessary inputs to this task are the output of the “Technical Synergies” step and, in particular, the

energy efficiency potential of system elements and the scale of the retrofitting plan (building or district

level). In addition, also economical parameters related to the investments equipment planned to be

installed, as well as those related to the equipment currently in operation in the building, are required,

together with information on the stakeholders involved in the retrofitting project.

The outputs are represented by a set of financial indicators, which are useful tools for the evaluation of

the investments profitability, and by indications on which could be the preferred financing scheme to be

adopted. Such results represent some of the inputs required by the next step of Task 2.5, i.e. “SWOT”

step.

Looking with more detail to the methodology described in Task 2.4, the main objectives of the present

document are:

• introducing the main stakeholders involved in public buildings retrofitting as well as the

potential financial options which could be adopted, such as budgetary funding, debt financing,

equity financing, project financing, leasing, loans, public private partnership, etc;

• identifying the necessary technical and economic input data related to the retrofit investment

which are required for the forthcoming financial analysis: energy and water savings achievable

thanks to the investment implementation, investment costs and operation and maintenance

costs, technical lifetime of the equipment as well as techno-economical data related to the

existing equipment (operation and maintenance cost, original investment cost, lifetime, aging,

etc.);



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• presenting a financial model to be used for the evaluation of the investment profitability;

• providing the operational manual of a dedicated tool (“Financial Analysis Tool.xls”), based on

this financial model, which can be used to evaluate the investment profitability;

• describing the testing of this methodology on pilot projects on the retrofitting of public

buildings.



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2- Financial support and public financial resources

This section gives an overview of public procurement within the European Union. It describes different

financial options for energy efficiency projects in the public sector such as traditional financing and

Public Private Partnership (PPP). Energy Performance Contracting is a form of PPP and is described more

detailed.

2.1- PUBLIC PROCUREMENT

There are several financing models and instruments that can be used when performing an energy

efficient renovation on public buildings. Procurements within the public sector must follow the common

rules for public procurement in the EU. A brief overview of the rules and principles for public

procurement is given below.

In the European Union there are harmonized fundamental rules for public procurement. The rules have

been incorporated into national legislation and the directives apply to public works contracts which

have a value (excluding VAT) estimated to be no less than the pre-established thresholds (the thresholds

are recalculated by the Commission every two years) (EC, 2014). The current threshold value for public

works contract is EUR 5,000,000. If the public works contract exceeds the threshold, EU fundamental

rules for public procurement must be followed.

Through this harmonization, companies in the EU can submit bids in all countries where the value of the

contract exceeds the thresholds. For contracts below the thresholds, the national procurement rules

apply which, however, follow the EU legislation of general principles. For a foreign company it can be

demanding to know the national procurement rules that can differ between countries.

Public procurement is of great importance for the functioning of the European Union's global economy.

European public authorities spend about 18% (EC, 2014) of GDP on the purchase of works, goods and

services. The current collection of directives on public procurement, Directives 2004/17/EC and

2004/18/EC is the end product of a long process that began in 1971 with the adoption of Directive

71/355/EGG. By ensuring a transparent process that does not discriminate, these directives aim mainly

at ensuring that economic operators can take advantage of the fundamental rights in the competition

for public procurement in full.

2.1.1. Brief overview of rules and principles for Public Procurement

In the sections below a brief overview regarding important rules and principles for Public Procurement

are given. In practice there are several rules and principles that need to be considered.

Contract award criteria

The criteria used by the contracting authorities in awarding their public contracts are:



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• Either the lowest price only, or

• Where the contract is awarded to the most economically advantageous tender, various criteria

linked to the subject-matter of the contract in question (quality, price, technical merit, aesthetic

and functional characteristics, environmental characteristics, etc.).

The contracting authority should specify the relative weighting it gives to each of the criteria.

Rules on publication and transparency

Contracts above the thresholds of the directive are subject to obligations regarding information and

transparency throughout the procedure. This requirement means that contracting authorities must

publish notices in the same format as the Commission's standard form.

Technical specifications

The technical specifications define the characteristics required of a material, a product or a service to be

suitable for the proposed use. They should be included in the contract documentation (contract notices,

contract documents and supporting documents) and may not be unjustified obstacles to competition.

The technical requirements can include environmental performance, design, conformity assessment,

performance characteristics, safety, measurement, quality assurance and production methods, given

that they relate to the subject of the contract. The award of public works contracts shall also include

testing and inspection rules, conditions of contract shall be adopted, as well as construction techniques.

When drawing up technical specifications, a contracting entity shall refer to national standards

transposing European standards, European technical approvals and international standards. It can also

determine performance and functional requirements, particularly in the environmental domain.

For all procurement there are a number of principles that the contracting authority must follow:

• Companies domiciled in another EU country must not be discriminated;

• They must not mention any specific brand or patent when they describe the desirable

characteristics of the goods and services they want to buy;

• They cannot refuse to accept supporting documents (authorizations, qualifications, etc.) that

another EU country issued, as long as they provide the same guarantees;

• They must disclose information about the contract to all interested firms; regardless of the EU

country they are located in.

2.2- INTERACTION BETWEEN THE DIFFERENT STAKEHOLDERS INVOLVED IN THE PROJECT

In a retrofitting project there are several stakeholders involved, from building owners to the companies

performing the work. In this section the key stakeholders will be presented and how they interact. In

general the key stakeholders are the same for public energy efficiency projects regardless of it is a small

project (single building) or a district scale project including several buildings. For large scale projects the

procurement procedure gets more complex. This favours large contractors acting on a national market.

One of the benefits with large scale projects is that savings from economically beneficial actions may be



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used to pay less beneficial actions. However there are often barriers for implementing energy efficiency

projects irrespective of size. The barriers can be legislative, structural or market related. In Germany and

Austria strategies for combining projects have been developed which have been helpful to overcome

the barriers of financing energy saving projects. By targeting public institutions for large scale retrofit

programmes, the market has grown and new partnerships like Public-private partnership has been

encouraged (Marino A., et al, 2011). This means that new players are entering the market and new

interactions occur, for example Energy Performance Contracting that will be described later in this

section.

The stakeholders can be divided into two groups, suppliers and demanders. The supply group primarily

consists of energy efficiency companies, consultancies and banks offering loans and credits for energy

efficiency projects. The demand group consists of companies and public institutions having the

possibility to implement energy efficiency projects in their facilities. For energy efficiency projects in

public buildings several actors may be involved:

• Local municipality owning the buildings either directly or through a public institution;

• Engineering firms and consultants providing different services related to retrofitting and

renewable energy sources such as energy efficiency consulting, project development,

implementation and management, energy audits and building certifications;

• Lenders and investors (banks and fund) providing capital for investments in energy efficiency

projects;

• Energy service companies (ESCOs) providing energy services. Energy Performance contracting

projects is one example of energy services; in these projects the energy savings are guaranteed;

• Public energy suppliers or distribution utility provide the users with energy. In general these

companies generate, transmit and distribute energy and energy efficiency is not their core

business;

• Technology providers are a key stakeholder since they offer energy efficient technologies to the

projects;

• Civil sector plays a role when it comes to using the buildings and in that way influencing the

result of the energy efficiency project.

National and Local authorities fund and promote energy efficiency retrofitting projects. For public

projects there are often a public institution owning the buildings. Since the procurement procedure is

complex this task is often outsourced to a consulting agency. Public retrofitting projects are often

considered as large scale projects and the main contractor/ ESCO appointed is often a regional or

national actor.

The local authority has two roles in energy efficiency retrofitting projects, as a major customer of these

services and as an actor that can support the energy efficiency retrofitting supply chain. Genovese A. et

al. (2013) has identified a distinctive supply chain configuration for large scale publicly funded energy

efficient retrofitting projects. This configuration involves multiple stakeholders such as Local Authority,



D2.4



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public institution, procurement consultancy firms, main contractor and sub-contractors. The public-

private partnership plays a central role in this configuration.

Figure 2. General supply chain configuration for large scale public energy efficient retrofitting

projects. Based on Genovese A. et al. (2013).

European market for energy efficiency retrofitting services differ but common barriers has been

identified; lack of information about the opportunities that energy efficiency offers; public procurement

rules that prevent massive engagement in energy efficient projects; “low” price of electricity;

burdensome administrative procedure that only allows large projects to be carried out; limited

understanding of energy efficiency and performance contracting among financial institutions (Vine,

2005).

In a British study (Genovese A., et al., 2013) the interviewed firms claims that the prospects for energy

efficiency retrofitting services sector depend on publicly funded schemes which are the main drivers for

energy efficiency retrofitting. This experience is similar in other EU countries. This implies that the

public sector should have a greater engagement in these types of projects and programmes in order to

be successful in achieving energy efficient buildings.

In the following section different financing options will be described where the above mentioned actors

are involved.

2.3- FINANCING OPTIONS FOR ENERGY EFFICIENCY

There is a large potential for energy efficiency projects globally. IEA (2011) summarises four broad

categories of barriers for the implementation of energy efficiency that have been identified in recent

studies: policy and regulatory barriers, barriers related to energy end users, barriers related to providers

of energy using equipment and energy services and financing barriers. IEA (2011) underlines that even

when the first three barriers have been overcome the financing barriers may still be there. Financial

institutions are generally reluctant to invest in energy efficiency projects due to lack of knowledge and

perception of high risk regarding energy efficiency projects. However there are examples of financial



D2.4



17

institutions that primarily work with financial solutions for energy efficiency projects such as CDC Climat

that is a subsidiary of Caisse des Dépôts. Another example is the Estonian financing institution KredEx

offering loans for projects aimed at energy efficiency. Energy efficiency projects have different

characteristics compared to traditional investment projects: the return of the investment is ensured

through energy savings (non-expenses) and not through an increase in revenues (Bullier & Milin, 2013).

For the public sector the rules of public budgeting may be a financial barrier for energy efficiency

investments (JRC, 2010). Energy efficiency projects will often give large upfront costs during one annual

budget but the savings will be generated during several years. If the local authorities have an investment

budget and a separate operating budget, it may hinder investments in energy efficiency projects

because the initial costs will be taken from the investment budget but the savings will not be visible in

that budget but will be credited to the operational budget.

The most common financing options for energy efficiency projects are presented within this section;

budgetary funds, debt financing and energy performance contracts (JRC, 2010).

2.3.1. Budgetary funds

If the local authorities have an available investment budget it can be used to finance energy efficiency

projects. The local authorities can hire an engineering firm or an ESCO for the energy efficiency project.

Structural funds play a key role in the improvement of energy efficiency in buildings. The public sector

can invest in energy efficiency by using European Structural and Investment Funds (ESI), financial tools

set up to implement the EU Cohesion Policy (ManagEnergy, 2014). The EU Cohesion Policy contributes

to the EU 2020 objectives. The ESI comprise the European Regional Development Fund (ERDF), the

European Social Fund (ESF), the Cohesion Fund (CF), the European Agricultural Fund for Rural

Development (EAFRD), and the European Maritime and Fisheries Fund (EMFF).

The aim is that the ESI funds will serve as leverage for private funding. One way to achieve this is by

encouraging the use of financial instruments to bridge the energy efficiency gap.

A new programming period for the ESI funds will go on from 2014 to 2020. According to (ManagEnergy,

2014) there is an ongoing discussion about the size of the ESI funds, but approximately € 322 billion may

be allocated to the ERDF, ESF and CF during 2014-2020. The member states will be able to receive

financial support from the ESI funds to their Operational programs. The level of support has not been

finalized yet but less developed regions will receive greater levels of support to their Operational

programs.

Structural funds can be used to create revolving financing instruments for energy efficiency (JRC, 2010).

A revolving fund is an appropriate tool when a lack of liquidity in the finance sector is a major constraint

for private financing to energy efficiency projects. One example of where structural funds have been

used to create a revolving fund is the JESSICA model (JRC, 2010). In 2009 the Jessica Holding Fund was



D2.4



18

created in Lithuania. A combination of funding from ERDF and national match funding was used. The

Jessica Holding Fund is managed by European Investment Bank. The Jessica Holding fund provides

means to intermediary Lithuanian banks that provide preferential loans to energy efficiency projects in

multifamily apartments.

2.3.2. Debt financing

When the local authorities does not have the necessary budgetary funds, debt financing may be an

option. Debt financing refers to investors lending a certain amount of money to a borrower for a fixed

period of time in exchange of repayment plus interest (IEA, 2010). Debt financing is the most common

financing option for energy efficiency projects. The borrower can either be the energy end user (local

authority) or an Energy Service Company (ESCO ), see Figure 3. For Energy Performance Contracting

projects both these alternatives can be used, see also the section on Energy Performance Contracting

below. The local authority may also take a loan and hire an engineering firm directly to undertake an

Energy Efficiency project.

Lenders will need information about the borrower’s economic situation before making the loan (IEA,

2010). When commercial loans are taken the lenders will earn money through the interest paid by the

borrower. The interest is proportional to the perceived risk of the project. A traditional loan will be

reported on the borrower’s balance sheet as a liability and is often referred to as “on balance sheet”

financing (JRC, 2010).

Energy efficiency projects are associated with some uncertainties regarding predicted future saving and

is therefore sometimes considered as high risk projects according to IEA (2010).

Figure 3. Example of Debt Financing



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2.3.3. Equity financing

Equity financing refers to when an investor lends capital to a borrower in exchange for a stake in their

project (IEA, 2010). The investors will do this if they have a profitable exit strategy, e.g. they will be able

to sell their share at an initial public offering. At an initial public offering shares of the stock in a

company are sold to the general public. This is also called stock market launch. Equity financing might

be an alternative for emerging ESCO s as a way to expand their business (JRC, 2010), see Figure 4Figure

4. Example of Equity Financing

Figure 4. Example of Equity Financing

2.3.4. Mezzanine financing

Debt and equity financing are combined in mezzanine financing (IEA, 2010). The fact that mezzanine

financing can be structured either as debt or equity financing makes mezzanine financing more flexible

than equity financing. IEA (2010) underlines that there can be some problems related to exit strategies

for mezzanine financing concerning energy efficiency projects. This alternative is not relevant for the

local authorities to access funding for energy efficiency projects but may be a way for an ESCO to access

funding, see Figure 5.



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Figure 5. Example of Mezzanine Financing

2.3.5. Project financing

Project financing is off- balance sheet financing; it is related to cash flows for a project and is not based

on the lenders credit worthiness (IEA, 2010; JRC, 2010). Typically project financing is a combination of

debt and equity financing. The financing is secured by all of the projects assets and all of the projects

contracts that will be producing revenues. Project financing occurs for large projects and are usually

long term contracts. Combined Heat and Power Plants are often financed through project financing, see

Figure 6. According to IEA (2010) this type of financial option could be interesting for energy efficiency

projects, but the small size of energy efficiency projects is a hindrance to this.

Figure 6. Example Project financing based on JRC(2010).

2.3.6. Leasing

Leasing is a way to obtain the right to use an asset instead of buying it (JRC, 2010), see Figure 7. Two

types of leasing contracts exists; operational and capital leasing. Operational leasing is cancellable and is

used for short term contracts compared to the lifetime of the equipment being leased. The lessee pays a

rent for the equipment to the lessor. Operational leasing can be a way to outsource industrial

equipment that produces no direct added value to a company. At the end of an operational leasing

contract the equipment is still owned by the lessor. Capital leasing is used for long term contracts and is

generally non-cancellable. At the end of a capital leasing contract the ownership is typically transferred

to the lessee. Capital leasing can be used for energy efficiency equipment, JRC (2010) mentions CHP

equipment. Capital leasing is included on the lessee’s balance sheet whereas operational leasing is not.



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Figure 7. Example Leasing.

2.3.7. Loans, subsidies, tax deduction, VAT reduction, etc.

A great variety of financial instruments are available throughout Europe to support the improvement of

the energy performance of buildings. The ways they are used vary from country to country, depending

on the political context.

Figure 8. Financial instruments in Europe (BPIE). Source: Maijo et al. 2012.

The financial instruments can, according to the Buildings Performance Institute Europe (BPIE) (Maijo J et

al. 2012) be divided into two broad categories:

• Conventional financial instruments

• Innovative financial instruments

The conventional financial instruments that have been used for more than 30 years include: grants and

subsidies, loans, tax incentives, and levies. There are funds (from international financial institutions) that

often provide financing, such as loans or grants.



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The innovative instruments according to BPIE include Energy Performance Contracting (often known as

Third Party Financing) and Energy Supplier Obligations (often known as White Certificates).

Grants and subsidies are generally applied when governments consider that the market will not provide

the optimal level of energy efficient investments because of access to capital (BPIE, 2010). This means

that grants or subsidies will fill a financial gap that makes it possible for the property owner to invest in

more expensive equipment with better energy performance.

Definition of financial instruments (Energy Charter Secretariat, 2001)

Subsidies allow prices to be kept low. They may be provided, for example, to manufacturers of energy

efficient equipment such as compact fluorescent light bulbs.

Subsidies are normally provided by local and national governments.

Grants are targeted at households, industrial or other energy consumers to pay for part or all of the cost

of introducing energy efficient processes – such as enhanced building insulation.

Grants or subsidies may be financed directly through the state or local authority budget or

hypothecated taxes (also known as ear-marked tax).

Loan schemes to encourage energy efficient practices can be introduced with subsidized interest rates

or credit risk support. Subsidies provided by the local authority or state budget to banks offering low

interest rates are a fiscal policy.

Value Added Tax (VAT) normally affects the final consumer but not the producer. Differential VAT rates

can be used to influence the choice of energy efficient technology by householders.

In some countries, investments for energy improvements can be deducted from income tax or have a

reduced VAT rate. For example the German government has associated this tool with a certain level of

energy efficiency that must be reached through the investment.

Levies on consumption or production may be used to create a fund (e.g. a levy on electricity sales to

fund renewable energy schemes).

Less common, and thus considered innovative, include Energy Supply Obligations (also commonly

known as White Certificates) or Energy Performance Contracting (EPC). These instruments have existed

for more than 20 years but are still considered as innovative. An important distinction between

conventional and innovative instruments is that the latter are traditionally relying on private financing

(and not government budgets): Energy performance Contracting can be financed either through

financing from the ESCO or from the client which may be a local authority.



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Third Party Financing (TPF) and Energy Performance Contracting (EPC) are terms used to cover a wide

variety of contracting and financing techniques for energy efficiency and renewable energy projects

(Energy Charter Secretariat, 2003).

Energy Efficiency Obligation (White Certificate) is, at its simplest, a requirement on a group of market

actors in one or more sectors of the energy industry in a given territory to achieve a specified energy

saving target (Staniaszek and Lees, 2012).

Within the European Union countries as Great Britain, Italy, France, and Denmark have introduced

systems for White Certificates.

Several of these financial instruments can be used when performing a building renovation. Buildings

Performance Institute Europe (BPIE) has reviewed (Maio J, 2012) which financial instruments that are

being used in the 27 EU countries. The country-by-country study performed by BPIE has identified more

than one hundred programs on-going during 2011 in the European Union as can be seen in figures

below. Fiscal incentives for the energy efficiency in buildings include several measures to lower the

taxes paid by consumers investing in the energy efficiency of buildings. Reduced VAT, tax credit and tax

reduction (individual, corporate and on properties) are all tax related instruments.

Grants and subsidies are the most commonly used instrument (26 of 27 countries). Grants and subsidies

are often combined with preferential loans or tax reduction. Only a few countries use tax credits.



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Figure 9. Number of financial instruments in place in 2011 by country1.

Figure 10. Different type of instruments in Europe2

In the country-by-country study performed by BPIE they conclude that:

• All 27 Member States have on-going programs to support the energy performance of buildings,

in the form of conventional or innovative funding or through the help of external funding;

• Most of the financial instruments have targeted existing buildings, mainly in the residential

sector. There are considerably fewer instruments for commercial buildings;

• Grants and subsidies are used more than other financial instruments. They are followed by

preferential loans. Fiscal instruments (e.g. tax reduction) are widely used but not to the extent

of financial instruments such as grants;

• Few financial instruments target deep renovation or low energy buildings;

• Non-government instruments such as Energy Performance Contracting and Energy Efficiency

Obligations (White Certificates) have important roles to play because they can mobilize private

funding;

1 On the x-axis 26 EU countries with financial instruments are presented. On the y-axis the numbers of

financial instruments are given. The different colours are representing different financial instruments.

For example Germany (DE) has 4 different grants/ subsidies and 3 different preferential loans and a total

of 7 financial instruments. Source: Maijo J, 2012

2 The figure shows the use of financial instruments as a percentage of the total amount of programmes for the 26

EU countries. Source: Maijo J, 2012



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• Europe-wide and international funding streams (EU Structural Funds, European Investment Bank

and the like) are increasingly important and can play an even greater role in the future;

• There is some concern that some Member States are almost entirely dependent on such funding

for their national programs.

2.3.8. Public Private Partnership

Public Private Partnership (PPP) implies that public and private sectors work in partnership to deliver a

project. PPP is most commonly used for public infrastructure projects such as roads, railways, airports,

schools, and hospitals (EPEC, 2012). The PPP mechanisms that use public policies, regulations or

financing to leverage private-sector financing can also be used for energy efficiency projects.

In UK and North America PPPs have been used for more than 30 years. They use Energy Performance

Contracts (EPCs) and the private partners in these arrangements are known as Energy Service

Companies (ESCOs). ESCOs can also be set up by public entities.

PPPs generally share the following features (EPEC, 2012):

• A long-term contract between a public contracting authority and a private sector company

based on the procurement of services;

• The transfer of certain project risks to the private sector;

• A focus on the specification of project outputs rather than project inputs;

• The application of private financing in most instances;

• Payments to the private sector for delivering services to the public sector.

The introduction of PPPs in the European Union has been driven by Euro convergence criteria which

prohibit a debt greater than 60% of national gross domestic product (GDP). Several countries, such as

the United Kingdom, France, Italy, Portugal and Sweden, have established the legal framework for the

implementation of a PPP, both nationally and in the context of cross-border projects (IEA, 2011).

Public Private Partnerships make it possible to increase the market for energy efficiency project through

cooperation between public and private actors. Many factors influence the structure of a PPP. IEA

(2011) mentions the country context, legislative conditions, the infrastructure for energy delivery

services and the maturity of the financial markets as important factors.

The International Energy Agency has divided PPP into three mechanisms for energy efficiency financing

(IEA, 2011):

Dedicated Credit Lines: credit lines established by a public entity (such as a government agency and/or

donor organization) to enable financing of energy efficiency projects by a private-sector organization

(bank or financial institution).

Risk-Sharing Facilities: partial risk or partial credit guarantee programs established by a public entity

(such as a government agency and/or donor organization) to reduce the risk of energy efficiency project



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financing to the private sector (by sharing the risk through a guarantee mechanism), thereby enabling

increased private sector lending to energy efficiency projects.

Energy Performance Contract (EPC): public-sector initiatives, in the form of legislation or regulation,

established by one or more government agencies to facilitate the implementation by energy service

companies (ESCOs) of performance-based contracts using private-sector financing.

Definitions of ESCO and EPC (Directive 2006/32/EC)

Energy service company (ESCO): a natural or legal person that delivers energy services and/or other

energy efficiency improvement measures in a user's facility or premises, and accepts some degree of

financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on

the achievement of energy efficiency improvements and on the meeting of the other agreed

performance criteria.

Energy performance contracting (EPC): a contractual arrangement between the beneficiary and the

provider (normally an ESCO) of an energy efficiency improvement measure, where investments in that

measure are paid for in relation to a contractually agreed level of energy efficiency improvement.

2.3.8.1. Dedicated Credit Line

Dedicated credit lines involve a greater degree of public-sector financing than Risk-sharing facilities

meaning that the government or donor agency provides funding to the private partners (local financial

institutions - LFIs). According to an IEA report (IEA, 2011) dedicated credit lines are most applicable

when the commercial financial market is less mature and LFIs are not undertaking much financing of

energy efficiency projects, due to lack of knowledge and understanding of the characteristics and

benefits of energy efficiency projects and/or limited liquidity.

The objective of the dedicated credit lines is to utilize government, international financial institutions

(IFIs) or donor agency funds to leverage an increase in lending by LFIs for energy efficiency projects. By

providing funds at a low-interest rate and allowing the LFI to on-lend them at a higher interest rate it

would increase the LFIs motivation of participating in financing energy efficiency projects. The

agreement between the public and private partners generally requires the LFI to co-finance the loans,

thereby leveraging and increasing the amount of financing available.

The Dedicated Credit Line is described briefly in figure below.



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Figure 11. Dedicated Credit Line based on IEA, 2011

According to the International Energy Agency (IEA, 2009) PPPs for energy efficiency most commonly

appear in the Dedicated Credit Lines mechanism in the form of preferential rate loans, wherein the

government subsidizes the private sector so that financial institutions can offer customers reduced rate

loans. For example, the German KfW3 is successful example of PPP. KfW has contributed to the

retrofitting of close to a million dwellings from 1996 to 2004, through the provision of preferential rate

loans.

2.3.8.2. Risk-Sharing Facilities

In the case of risk-sharing facilities, the public sector provides a lesser amount of financing, focusing

more on the risk guaranty provided. According to an IEA report (IEA, 2011) this characteristic makes risk-

sharing facilities suitable when the commercial financing market is somewhat more mature, and LFIs are

willing to consider financing energy efficiency but are concerned about the potential risks of such

projects. The risk guarantees provided by the public partner help overcome this high risk perception and

encourage the LFIs to undertake financing of energy efficiency projects. The risk-sharing facility often

has parallel technical assistance programs that inform and educate LFIs.

Under the risk-sharing facility, the public agency provides a partial guarantee that covers a portion of

the loss due to loan defaults. By sharing the risk, the public partner reduces the risk to the private-sector

LFI, thereby motivating the LFI to increase its lending to energy efficiency projects (Mostert, 2010).

3 KfW - Kreditanstalt für Wiederaufbau, a German government-owned development bank.



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By reducing the risk for the LFI when lending to energy efficiency projects the cost of capital for the

lender will be reduced.

In the basic structure of a risk-sharing program, a public agency (government or donor agency) signs a

Guarantee Facility Agreement (GFA) with participating LFIs to cover a portion of their potential losses.

Under the GFA, the public agency provides a partial guarantee, covering loan loss from default.

The percentage of the loss covered by the guarantee varies but a common guarantee is for a 50-50

sharing of losses between the LFI and the public agency, a so-called “pari passu”. Participating LFIs sign

agreements with project developers, specifying loan targets and conditions.

The risk-sharing facility can offer guarantee for both individual projects and project portfolios.

For individual projects the public agency appraises the eligibility for the loan applicant and the LFI

performs a due diligence before the borrower’s project is approved. The LFI has the responsibility for

project appraisal and due diligence, and, therefore, the public agency does not provide a 100%

guarantee to cover loan losses.

Figure 12. Risk-sharing facility described briefly. Based on IEA, 2011.

2.3.8.3. Energy Performance Contracting

Energy Performance Contracting (EPC) is a contractual agreement where the energy efficiency project is

financed by the guaranteed energy savings (IEA, 2011).

Energy Performance Contracting has proven to be an effective way of financing energy efficiency

projects (IEA, 2011). Germany is one of the largest and most mature markets for Energy Service

Companies globally (EBRD, 2013).The total revenues of ESCOs in Germany in 2008 were more than 2

billion Euros and more than 100,000 projects had been completed.

The market for EPC (ESCO market) differs across Europe due to several factors. The reasons why the

market is growing rather slow in most countries can either be legislative, structural or market related.



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The public procurement rules and evaluation criteria in the public tendering process is probably the

main barrier for ESCO project development in the public sector. In some European countries, for

example Spain, these barriers have been removed by implementing procedures that favour ESCOs. In

some countries like Sweden, Denmark and Romania the market growth has been strong from 2007 to

2010. Drivers for growth differ but in general it can be associated with improved efforts and tools to

enable the market. Legal framework and availability of grants for project financing have a positive effect

on the market (Marino A., et al, 2011).

In Energy Performance Contracting projects the client engages an ESCO to design and implement an

energy efficiency project and the ESCO is paid related to the performance of the project (IEA, 2011). The

ESCO will give some sort of guarantee of the energy savings of the project to the client. The ESCO can

provide a wide range of services to the client including design, engineering, construction and operation

and maintenance of the energy efficient investments, as well as training and measurement and

verification of the resulting energy and cost savings. A variety of financial models for energy

performance contracting exists. Singh et al (2010) has divided EPC into three main financial models;

shared savings model, guaranteed savings model and energy supply contracting or chauffage.

Shared savings model

The ESCO takes a loan from the investor and assumes the clients credit risk (IEA, 2011). The cost savings

are shared according to the contract between the ESCO and the client for a certain period of time. The

ESCO will recover its implementation costs and receive a return on its investments. This alternative

provides off balance sheet financing for the client.

Figure 13. Shared Savings Model based on IEA, 2011/ Limaye, 2009



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Guaranteed savings model

In the guaranteed savings model the client takes a loan from the investor and pays the ESCO (IEA, 2011).

The ESCO gives the client a guarantee of certain performance parameters and receives it payments once

these parameters have been confirmed.

Figure 14. Guaranteed Savings Model, based on IEA, 2011/Limaye, 2009

Energy supply contracting or Chauffage

The energy supply contracting or chauffage is a form of energy management outsourcing (IEA, 2011).

The ESCO takes over the operation and maintenance of an energy using equipment in the clients

building and sells the output energy to the client to a fixed price for a longer period of time. The client

normally owns the equipment.

Figure 15. Energy Supply Contracting Model, based on IEA, 2011/Limaye, 2009



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2.4- MAIN OUTCOMES

In this section the key stakeholders regarding financing public energy efficiency retrofitting projects

have been presented, how they interact and what different financial solutions that are commonly used

on the market. Public-private partnership is becoming a more common approach were the public

institution and a private actor sets up an agreement on how cost, risks and profit is divided between the

partners in an energy efficiency retrofitting project. The scale of the project can be small (single

building) up to district scale. Energy Performance Contracting is probably the most commonly known

example of public-private partnership.

There are often barriers for implementing energy efficiency projects irrespective of size. The barriers can

be legislative, structural or market related. Problems of getting funding for energy efficiency projects are

common in Europe. There are however initiatives and models for solving this barrier. One example is

grants and subsidies that are the most common used financial instrument in EU. Other financial options

are debt financing, equity financing, mezzanine financing and leasing that all are comprehensively

described in this section.

3- Technical and economical input to the financial analysis

The financial assessment of a building retrofitting is a step which follows the phase for the technical and

economic evaluation of the proposed investment (or set of investments). The scope of the technical and

economic evaluation is the provision of the necessary parameters to be used as input for the

forthcoming financial analysis. Such parameters derive from the comparison between a Baseline

Scenario and a Project Scenario in terms of investment costs, operating and maintenance costs and

energy/water consumption.

The Baseline Scenario is defined as the reference scenario: improvements associated with the

implementation of the retrofitting investments are evaluated with respect to this scenario. In general,

the Baseline Scenario is represented by the existing situation of the building which is object of the

retrofitting. There could be cases where the retrofitting measures are chosen to be implemented for a

building not yet constructed (i.e. greenfield buildings): in this situation, the Baseline Scenario is

represented by a building with characteristics defined by the “original” design (in this case the “project”

scenario represents an improved energy efficiency design with respect to the “original” design). In other

cases, the Baseline Scenario can be defined assuming the minimum building characteristics according to

the current legislation. An example of the latter situation could be represented by the installation of a

ventilation system in an existing building for making it compliant with the current legislation: in such

case, the Baseline would be the relevant building performance if the ventilation system energy

efficiency characterisation are defined in compliance with the legislation standards, while the project

scenario of the actually projected improved ventilation system. The potential benefits associated with



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the installation of the project system are to be calculated in comparison with the standard “baseline”

system. Please refer to section 6.2- where an example of such a situation is described.

To this purpose, it is important to introduce the concept of equipment adopted in the document in

hand: equipment is a building item which impacts on energy consumption, water consumption or, in

general, on the overall comfort level. Examples of equipment are: boilers, windows, ventilation systems,

thermal insulation, etc.

The Project Scenario is represented by the Baseline Scenario after being upgraded thanks to the

implementation of the considered retrofit investment (or set of investments). Energy and water savings

deriving from the implementation of a specific retrofit investment are estimated by comparing the

expected building consumption of the Project Scenario with respect to the Baseline Scenario.

In addition to the achievable Project energy/water savings, other inputs which are required for

performing the financial analysis, and deriving from the previous technical and economic analysis, are:

equipment investment costs, costs due to the operation and the maintenance of equipment, costs due

to equipment removal and disposal, equipment lifetime and residual value for both the Baseline and the

Project Scenarios.

3.1- BUILDING MODELLING AND ACHIEVABLE SAVING

As already described in Section 1-, this Task represents an input to the step “Intervention Packages” of

Task 2.5 (also refer to Figure 1 for a graphical representation of the different steps of Task 2.5 and the

related interactions).

The evaluation of the potential energy/water savings achievable after the implementation of the retrofit

investments is performed on the basis of a building modelling which consents determining the building

energy/water consumption both in the Baseline and in the Project Scenarios. Examples of building

modelling software available on the market are: IES Virtual Environment, Termus (Acca Software), MC4

Software or Edilclima.

The building modelling requires as input a set of technical data concerning the building main

geometrical characteristics, the envelope and the installed equipment main technical properties as well

as information on the occupancy level, the required lighting and ventilation levels, etc.

Such data are generally collected during the site visit activities, through dedicated interviews to the

building owner/management (Step “Building/District Characteristic of Task 2.5).

The results of the building modelling in the Baseline Scenario can also be compared to reference values,

in general represented by international benchmarks related to the considered building typology or by

minimum national law requirements in terms of building performances and comfort level. This helps

identifying and confirming the potential retrofitting at the building (Step “Relevant Technical Retrofitting

Gaps” of task 2.5).



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The following step is the identification of the potential retrofit investments to be implemented in the

audited building (Step “Technical Intervention Possibilities” of task 2.5). Retrofit investments are

identified through a comparison between the Baseline equipment level and the Best Available

Techniques (BAT)4 level, through a comparison between the Baseline performances and the

international benchmarks performances (regarding energy/water consumption) or can be mandatory by

law requirements.

Example of retrofit investments are: improvement of the building insulation level, installation of more

efficient Heating Ventilation and Air Conditioning (HVAC) systems, installation of more efficient lighting

systems, implementation of an Energy Building Management System (EnBMS), etc.

After retrofit investments identification, the Project Scenario is defined: the modelling of the Project

Scenario allows the evaluation of the achievable benefits, mainly in terms of physical savings of energy

and water.

Potential savings are output of the “Technical Synergies” step of the Task 2.5 and are necessary

information for performing the financial analysis of the considered investments, as described with more

detail in next Sections.

3.2- CAPEX, O&M, ADDITIONAL COSTS AND RESIDUAL VALUE

Further data required as input to the financial analysis refers to: the Investment Cost (Capex), the

Operating and Maintenance Cost (O&M), additional cost (e.g. cost due to equipment removal/disposal)

and residual value, related to both the Baseline and the Project Scenario.

The Capex typically includes the following cost items:

• equipment purchase cost :depending on the nature of the equipment itself, on its technological

level and on its size;

• equipment transportation cost: depending on the equipment typology and size but also on the

distance to be covered;

• installation cost: mainly depending on the equipment typology and size. For some equipment it

could be negligible with respect to purchase cost but for others it represents an important cost

4 As an example, BAT for building energy efficiency are described in the IPPC BREF on Energy Efficiency

(http://eippcb.jrc.ec.europa.eu/reference/)



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item (it could be comparable to the purchase cost, as, for instance, in case of thermal insulation

installation).

The Capex for the new investments can be provided by the supplier (directly or through a research on

the supplier website), by the building owner/management (in case the investment had already been

planned and therefore the owner/management may own proposal from the suppliers of the equipment)

or estimated by a comparison with similar equipment already evaluated in other projects.

O&M costs include the cycling expenditures (e.g. on annual basis) required for the correct operation of

equipment. Typical O&M costs are those due to replacement of some worn-out parts and cleaning of

some parts.

Also for Project O&M costs the source of data for their evaluation can be information provided by the

equipment suppliers or by the building owner/management. Also estimation from similar project is

possible, if more affordable data are not available.

The Capex and O&M values for the Baseline equipment, which is to be replaced in the Project Scenario,

are necessary since, considering the investment profitability, the fact that this equipment is removed

consent saving the associated O&M costs as well as the expenditure which would be required in case of

a replacement of this equipment (when it reaches the end of its own lifetime) by a new, identical, one.

In general, Capex and O&M values related to the currently installed equipment are made available by

the building owner/management; if not the same approach described above for the Project Scenario

can be adopted.

Additional costs mainly include cost occurring when the equipment has to be removed because it

reaches the end of its own lifetime and therefore must be replaced by a new one. Such costs mainly

include: equipment removing cost and disposal cost.

Removing cost is associated with the physical removal of the equipment from the place where it was

installed in the building.

After equipment removal, certain materials associated with the existing equipment may require a

special handling or disposal. Examples include fluorescent lamps, computers, refrigerators and

construction material containing asbestos. Cost due to equipment removal and disposal can be very

different according to equipment typology; anyway, in general, they are not very large compared to

other costs associated with a project.

Concerning Baseline equipment removing and disposal cost, their utilisation as data input for the

financial analysis is analogous to those of Capex and O&M cost (i.e. avoided costs).

When a piece of equipment has to be replaced, the Residual Value (if any) has to be evaluated.



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Residual Value is defined as the estimated value, net of any disposal cost, of any building or building

system removed or replaced during the study period (i.e. calculation period), or remaining at the end of

the study period, or recovered through resale or reuse at the end of the study period5.

Within the analysis described in this report, Residual Value is evaluated on the basis of the Straight-Line

Depreciation Method (one of the most commonly used methods), which assumes a constant

depreciation (D), over time, of the equipment value till reaching the end of its Lifetime, starting from the

purchase cost and reaching the Residual Value, as described by the below formula6.

� = �� − �

Where:

Cpur=Purchase cost

D= Depreciation

Vl=Residual value of the equipment at the end of its lifetime

l= Equipment Lifetime

Within this report, Residual Value is calculated through the above mentioned formula, without taking

into account any cost for equipment removal or disposal, but only the depreciation of the equipment

over time. Such costs are then subtracted from the result obtained through this formula.

Residual Value and equipment Lifetime are strictly depending on the equipment typology: these values

are to be specifically evaluated according to the specific case.

More details on the utilisation of the Residual Value, concerning Baseline and Project Scenarios in the

financial analysis, are provided in section 4.1.2.

5 Source: Life-Cycle Costing Manual for the Federal Energy Management Program, U.S. Department of

Commerce, 1995)

6 Source: Steven M. Bragg, The Ultimate Accountants’ Reference, Wiley 2010



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4- Investment Viability Assessment

The financial analysis of a retrofit investment is an essential step of the process for the definition of the

investment plan which can be implemented in the building which is under renovation.

Starting from the input defined by the technical and the economic assessment, such an analysis

examines the economic viability of each evaluated retrofit measure.

The financial analysis is based on a financial model (the Investment Cash Flow) which receives as input

the data from the technical/economic assessment and provides financial indicators, such as the Simple

Pay-Back Period (PB), the Net Present Value (NPV), the Internal Rate of Return (IRR) and the Benefits

over Cost Ratio (BCR).

4.1- INVESTMENT FINANCIAL MODEL

In this section main financial assumption required by the financial model, its components as well as the

associated outcomes, are briefly described.

4.1.1. Financial assumptions

The financial analysis is based on the assumption of some financial parameters, briefly described in the

following.

Discount Rate (r)

The discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine

the present value of future cash flows (i.e. to “actualize” the future cash flows). The discount rate in DCF

analysis takes into account not just the time value of money, but also the risk or uncertainty of future

cash flows: the greater the uncertainty of future cash flows, the higher the discount rate. Additional

information on DCF is available in Section 4.1.3

As a general approach, the discount rate utilized for discounting positive cash flows (i.e. revenues) is

higher than that used for discounting investment costs: this is mainly due to the fact that future

revenues estimation is affected by an higher level of uncertainty than the expenditure related to a

future investment (i.e. future equipment replacement). In fact, generally Capex amount are based on

supplier estimations and data from executive projects: therefore the associated uncertainty is lower

than those associated to revenues estimation.

When determining discount rate, two possible approaches may be followed (Source: Davis Langdon, Life

Cycle Costing (LCC) as a contribution to sustainable construction: a common methodology, 2007):

• Using a ‘nominal’ discount rate, that is a rate that is not adjusted to remove the effects of actual

or expected inflation. This means that inflation predictions are built into forecast costs and

prices;



D2.4



37

• Using a ‘real’ discount rate, that is a rate that has been adjusted to remove the effect of actual

or expected inflation. This means that future costs and prices are estimated at present day

(‘real’) prices and inflation can be dealt with separately

When calculating revenues from energy/water saving, and considering a related escalation net of

inflation, the discount rate has to be corrected taking into account the assumed inflation rate.

The real discount rate (rnet) is calculated as follows (Source: PgDip/MSc Energy Programme/Economics &

Asset Management, The Robert Gordon University 2002):

�� = 1 + �1 + � − 1

where i is the percentage inflation rate.

In the public sector, national ministries of finance generally specify the discount rates to be used in the

economic analysis of publicly funded projects. These typically fall into the range of 3 to 5% (Source:

Davis Langdon, Life Cycle Costing (LCC) as a contribution to sustainable construction: a common

methodology, 2007).

Energy/Water Prices and Escalation (e)

In general the cost escalation (one of the most risk in Project Management) is when the prices of

services and/or goods increase during the project lifetime. The primary goal of the project cost

management is to estimate the cost and to complete the project within the approved budget.

In order to taking into account the effective calculation of cost and revenues, considering the price

escalation of all items involved in the analysis is then fundamental. For example, when energy savings

are to be monetised, it must be considered that associated revenues will have a different value over the

years due to a change in the energy price.

Considering a constant price escalation through years, resource prices in future years is expressed by

the following formula.

�� = ��0� × �1 + ��

Where:

E(t) = resource price at the generic year t

E(0) = resource price at the initial year (year 0)



D2.4



38

e = annual percentage escalation (net of inflation).

Estimation of fuel and electricity price development trends, provided by the European Commission, are

available at the following website: http://ec.europa.eu/energy/observatory/trends_2030/index_en.htm.

Calculation Period (ττττ)

The Calculation Period (τ) is the time period over which the financial calculation is performed. The

Calculation Period begins when the retrofit investments implementation is completed (i.e. when

potential savings due to retrofit investments can be achieved): the Calculation Period is assumed as 30

years, as indicated in Commission Delegated Regulation (EU) No 244/2012, Annex I – 4.2 for public

buildings retrofitting. Calculation Period must not be confused with the Equipment Lifetime, which is

period of time during which the equipment can operate offering its best performances, as already

defined in Section 3.2-.

4.1.2. Components of the Investment Cash Flow

Cash flow is the movement of money into or out of a business, project, or financial product over a

certain period of time.

Positive cash flows represent net inflows of money, while negative cash flows represent net outflows or

costs. A positive cash flow may be a direct inflow of cash to a company, such as an equipment sale, or an

avoided expenditure, such as energy cost savings or not purchasing replacement equipment when the

original equipment would have reached the end of its useful life. A negative cash flow may be

represented by the purchasing of new equipment as well as by the associated operating costs.

A net cash flow is calculated for each year of the Calculation Period (i.e. from year 1 to year 30) by

arithmetically summing the different components considered for each year.

Considered components of multi-year cash flow are described in the following.

Project Capex (Cp)

The capex of the retrofit investment: it includes the cost of equipment and associated materials (Cpur,p)

as well as installation cost (Ci,p) and transportation cost (Ct,p) . This is a negative cash flow.

Project Equipment Replacement Cost (Crep,p)

The equipment of each measure is assumed to be replaced at the end of its lifetime by a system of the

same design and efficiency. In some cases, replacement cost may be lower than the original cost

because, for example, the infrastructure is already in place or the purchase price of the equipment

lowers due to the introduction of new, more advanced system. For simplicity, in this analysis, the Project



D2.4



39

Equipment Replacement Cost is assumed as equal to the Project Capex. Crep,p represents a negative cash

flow.

Project Equipment O&M cost (CO&M,p)

O&M costs associated with the Project equipment utilisation. They represent a negative cash flow.

Project Equipment Residual Value (Vp)

When project equipment has to be replaced, the residual value (if any) has to be considered as a

positive cash flow.

At the end of the Calculation Period (assumed as equal to 30 years as described in Section 4.1.1) the

Residual Value is calculated considering the actual age of the equipment at the end of the Calculation

Period and the depreciation as in Section 3.2-.

For instance, if an equipment features a purchase cost of 10,000 EUR, a lifetime of 9 years and a residual

value of 1,000 EUR (at the end of its lifetime), its depreciation amounts to: (10,000 – 1,000)/9 = 1,000

EUR/yr. Over a 30-year project lifetime, 3 replacements occur (at year 9,, 18 and 27); at the 30

th year, the

equipment aging is 30 – 27 =3 years. The residual value at that time therefore amounts to [10,000 –

(1,000x3)] = 7,000 EUR.

Project Equipment Removing Cost (Crem,p)

When retrofit investment equipment lifetime comes to an end and has to be replaced, a removing cost

occurred, which represents a negative cash flow. In addition, cost for the equipment removing is also

considered at the end of the calculation period (i.e. year 30).

Project Equipment Disposal Cost (Cdisp,p)

Certain materials associated with the project equipment may require a special handling or disposal

procedures after the equipment removal: this represents a negative cash flow. In addition, cost for the

equipment disposal is also considered at the end of the calculation period (i.e. year 30). This means that,

at the end of the calculation period, the equipment residual value, calculated through the Straight-Line-

Depreciation method as described in Section ¡Error! No se encuentra el origen de la referencia., is

diminished by the cost necessary for the equipment removal and the disposal of some of its part (if any).

As an example, considering the Residual Value of the equipment described above (7,000 EUR) at the

calculation period end, if the removing cost is 500 EUR and the disposal cost is 1000 EUR, the “net”

Residual Value of the equipment is: 7,000-500-1,500= 5,000 EUR.

Resource Savings Revenues(R)

Revenues related to the implementation of the retrofit investment (and deriving from the energy (Re) or

water saving (Rw) which characterise the Project with respect to the Baseline, considering the retrofit

investment in hand). Revenues represent positive cash flows.

Energy Selling Revenues(Es)



D2.4



40

Revenues deriving from the additional (with respect to Baseline Scenario) selling surplus of self-

generated energy (e.g. surplus of electricity generated by a wind turbine).

For instance, if in the Baseline Scenario a wind turbine is installed (producing a surplus 50 MWh/yr with

respect to the building’s needs) and in the Project Scenario a new, more performing unit is installed

(producing 60 MWh/yr surplus), assuming an electricity selling price of 80 EUR/MWh, the Energy Selling

Revenues amount to (60 – 50)MWh/yr x 80 EUR/MWh = 800 EUR/yr.

Revenues represent positive cash flows.

Baseline Capex (Cb)

The capex of the equipment installed in the Baseline Scenario: it includes the cost of equipment and

associated materials (Cpur,b) as well as installation cost (Ci,b) and transportation cost (Ct,b) .

Baseline Equipment Replacement Cost (Crep,b)

In order to correctly evaluate the net cash flows associated with a retrofit investment, the replacement

cost of existing Baseline equipment (which would have occurred if the investment would have not been

implemented) has to be evaluated as an avoided cost (i.e. a positive cash flow). Such a value is assumed

as equal to the Baseline Capex.

Baseline Equipment O&M cost (CO&M,b)

O&M costs associated with the operation of the Baseline equipment. The replacement of the Baseline

equipment by the Project one allows avoiding the Baseline O&M costs, which therefore represent a

positive cash flow.

Baseline Equipment Residual Value (Vb) When existing equipment is replaced by Project equipment, its actual residual value (i.e. considering the

equipment age at the time when it is replaced by Project equipment, i.e. at year 0) represents potential

revenues, since it, or some of its parts, can be re-cycled or re-used. In most cases, replaced equipment

cannot be re-used and the value of recyclable components (such as copper, aluminium and glass) is

comparable with the cost of their removing.

When avoided replacement (at the year t) of baseline equipment is considered, such a residual value

represents a negative cash flow since potential revenues associated with this residual value are lost.

The calculation of residual value, described above for Project equipment, can be of course adopted also

for the Baseline equipment.

At the end of the calculation period (year 30) the Residual Value associated with the Baseline equipment

(at the actual aging occurring at year 30) is considered in the Cash Flow as missed revenue (i.e. negative

cash flow).



D2.4



41

Baseline Equipment Removing Cost (Crem,b)

When existing equipment is removed (at year 0 of the calculation period), due to the implementation of

the retrofit investment, a cost for its removal occurs (which represents a negative cash flow).

Nevertheless, when avoided replacement (at the generic year t during the calculation period) is

considered, such a cost represents a positive cash flow (avoided cost). Similarly to what described

before for the Project Equipment, costs for Baseline equipment removal is to be considered at year 30:

in this case it represents a missed cost (i.e. positive cash flows).

Baseline Equipment Disposal Cost (Cdisp,b)

As for the previous cost item, cost due to disposal of Baseline equipment at the year 0 represents a

negative cash flow; when avoided replacement occurs, such item is to be considered as an avoided cost

(i.e. positive cash flow). Similarly to what described before for the Project Equipment, costs for Baseline

equipment removal and disposal are to be considered at year 30: in this case they represent missed

costs (i.e. positive cash flows) and are to be algebraically summed to the Residual Value of Baseline

equipment (thus obtaining the “net” Residual Value of the Baseline equipment at the end of the

calculation period).

4.1.3. Financial Model Outputs

Investment Global Cost (Cg(ττττ))

The Investment Global Cost is defined as the sum of the different type of costs related to the considered

investment, discounted back to the starting year, plus the discounted residual value, as follows7:

�� = �� + � �� ,� �� × ��,� − � ,��

�=1!"

� =1

where:

Cg(τ) = global cost over the calculation period

N = number of considered retrofit investments

7 Definition taken from Commission Delegated Regulation (EU) No 244/2012, Annex I – 4.3.



D2.4



42

τ = calculation period

CI = initial investment costs for a retrofit investment or a set of retrofit investments j

Ca,t (j)= annual cost during year t for the investment j

Vf,τ (j) = residual value of retrofit investment j at the end of the calculation period (discounted to the

starting year t=0)

Rd,t = discount factor for the year t based on the discount rate r and calculated as

Of course, for a single retrofit investment, the global cost is expressed as:

�� = �� + �� ,� × ��,� − � ,��

�=1!

Pay-back Period (PB – DPB)

Two different methods based on Pay-Back Period are used in financial analysis: Simple Pay-back Period

(PB) and Discounted Pay-back Period (DPB).

Simple payback period is defined as the time, in years, for a project cumulative annual savings to equal

its upfront cost. It is the most simple and commonly used financial analysis method.

The formula to calculate the Simple Pay-back period of a project depends on whether the net cash flows

(sum of positive and negative cash flows) per period of the project are even (equal for each period) or

uneven (different from on period to another). In case they are even, the formula to calculate Pay-back

Period is:

#$ = �� %�&�'�� ()&�"�� (�&ℎ )+ �� )�

When cash inflows are uneven, it is necessary need to calculate the cumulative net cash flow for each

period and then use the following formula for payback period:

#$ = , + $�

Where:

A = last period with a negative cumulative cash flow

B = absolute value of cumulative cash flow at the end of the period A

��,� = - 11 + �.�



D2.4



43

C = total cash flow during the period after A

As an example, consider the below reported cash flows: investment occurs at Period P0 (20,000 EUR),

while positive cash flows occurs for the following periods.

Years Net Cash Flow (EUR)

Cumulated Cash Flow (EUR)

0 - 20,000 - 20,000

1 7,000 - 13,000

2 7,500 - 5,500

3 8,000 2,500

4 9,000 11,500

Table 1. Example of cash flow

In this example, the cumulated cash flow is positive at year 3, therefore:

A=2; B=5,500; C=8,000

therefore PB= 2+(5,500/8,000)=2.7 years.

It is important to highlight that, by not incorporating important aspects such as the time value of money,

PB provides an incomplete view of an investment financial return. In addition, simple payback period

ignores the impact of any cash flows that are received after the payback period. If PB is used as a

criterion for classifying profitability of projects, there is the risk that projects, requiring more time to

recover invested capital but assuring significant positive cash flows after that, are rejected.

Discounted Pay-back Period (DPB) is based on the same rationale which is behind PB and utilizes the

same formula; the only difference is represented by the fact that the net cash flows are discounted in

order to account for the time value of money (see also 4.1.1).

Discounted cash flow (DCF) is expressed as:

��/ = ��&ℎ )+�1 + ��

where:



D2.4



44

r =discount rate (%)

t = time period.

Considering the previous example, the cumulated discounted cash flow is as below (r=8%).

Years Net Cash Flow (EUR)

Cumulated Cash Flow (EUR)

Discounted cash flow (EUR)

Cumulated Discounted Cash Flow (EUR)

0 - 20,000 - 20,000 - 20,000 - 20,000

1 7,000 - 13,000 6,481 - 13,519

2 7,500 - 5,500 6,430 - 7,088

3 8,000 2,500 6,351 - 738

4 9,000 11,500 6,615 5,877

Table 2. Example of discounted cash flow

Therefore: A=3; B=738; C=6,615 and DPB=3.1 years.

With respect to PB, DPB is an enhanced method since it accounts for the time value of money while, like

PB, its downside is due to ignoring any cash flow received after the time when initial investment is

repaid.

Net Present Value (NPV)

NPV offers a more rigorous analysis than PB and DPB, since it extends the analysis to include all cash

flows over the calculation period also accounting (as DPB) for the time value of money.

NPV is defined as the sum of the present values (PVs) of the individual cash flows of a project; its

calculation depends on the selected discount rate as well as on the length of the calculation period.

NPV is expressed by the following formula8.

8 Sources: US DEPARTMENT OF ENERGY (2011) – “Building Technologies Program – Advanced Energy

Retrofit Guide, Office Buildings”



D2.4



45

"#� = �0 + � ��1 + ��

�=1

Where:

C0= net cash flow in year 0

t=generic year included in the calculation period

Ct=net cash flow at the year t of the calculation period

τ= calculation period

r=discount rate

Internal Rate of Return (IRR)

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure the profitability

of investments. It represents the discount rate at which the net present value of an investment becomes

zero. In other words, the IRR of an investment is the interest rate at which the net present value of costs

(negative cash flows) of the investment equals the net present value of the benefits (positive cash flows)

of the investment (i.e the rate at which an investment breaks even).

Benefits over Cost Ratio (BCR)

The Benefit over Cost Ratio (BCR) is an indicator that attempts to summarise the overall value of money

of a project. BCR is the ratio of the benefits of a project, expressed in monetary terms, relative to its

costs, also expressed in monetary terms. All benefits and costs are expressed in discounted present

values.

4.2- INVESTMENT VALIDATION FROM PROJECT CASH FLOW

When investment validation has to be performed, the financial indicators described in the previous sub-

section are useful tools. This paragraph describes how to use them for the evaluation of the investment

profitability.

As already said, the Pay-back is one of the most common methods used in financial analysis: since it

defines the required time for an investment to recover its upfront cost, it provides clear, useful

information. Anyway, not considering any benefits or cost after the time when the initial investment has

been recovered, it can push to neglect some investments characterised by a long time for recover initial

expenditure, but offering interesting potential benefits in future years.



D2.4



46

A more rigorous analysis is offered by the NPV since it extends the analysis to include all cash flows over

the calculation period, accounting for the real value of money.

A positive NPV indicates that the present value of the cash inflows is greater than the present value of

the cash outflows over the calculation period. A negative NPV indicates that the required investment is

greater that the project return, once all the cash outflows and inflows are reduced to their present value

and summed. A project should, therefore, be selected if the associated NPV is greater than 0: in this

case the investment profitability is met (for a certain, defined, discount rate).

NPV is an absolute profitability indicator and should not be used to rank project alternatives: a small,

very profitable project may have a lower NPV than a large, marginally profitable, project. The NPV

simply shows whether a project should be selected (NPV>0) or not (NPV<0). The advantage of the NPV is

that it is also applicable in case of mutually exclusive projects (i.e. projects which represent an

alternative to each other).

IRR is related to NPV since it defines, for a given series of cash flows and a calculation period, the

discount rate that would result in a NPV of zero.

IRR can then be compared to a standard rate (for example the current interest rate) or a minimum rate

(e.g. the discount rate), and, if the IRR is higher, the project would be profitable.

Unlike NPV, which is an indicator of how much a project will earn, the IRR is an indicator of the efficiency

of an investment and allows a direct comparison between investments and market interest rates.

There are two constraints on the use of the IRR.

The first constraint indicates that, as an investment decision tool, the IRR should not be used to rate

mutually exclusive projects (unlike NPV), but only to decide whether a single project is worth investing

in.

For example, let’s consider the two investments represented in the following table.

Investment Year

NPV (at r=5%) IRR 0 1 2 3 4 5 6

A - 1,000 220 220 220 220 220 220 117 8.6% B - 1,000 - - - - - 1,550 157 7.6%

Table 3. Comparison between two alternative investments cash flows

The investment A has a greater IRR than the investment B, but the NPV (at r=5%) is greater for the

Investment B. So, considering IRR, the investment A should be the better choice, while the NPV suggests

the opposite result.

The variation of NPV against discount rate is shown in the figure below.



D2.4



47

If only one of the two investments has to be chosen, it is necessary to make a guess about what future

discount rates will be. If the discount rate is expected to be less than 6.4% (which is the value at which

the two curves cross), investment B is the best choice since it assures the greatest earnings. If the

discount rate is greater than 6.4% but lower than 8.6%, A is the most profitable. For discount rates

above than 8.6%, none has to be chosen: both the two investments have a negative NPV.

-200

-100

-

100

200

300

400

500

0% 2% 4% 6% 8% 10% 12%

NP

V (E

UR

)

Discount Rate (%)

Investment A Investment B

Inv. B IRR

Inv. A IRR

Figure 16. NPV – Discount Rate Curve Related to Alternative Investments

The second constraint suggests that the IRR cannot be used to rank project alternatives. If the IRR is 15%

for one alternative and 20% for another one, it does not prove that the second alternative is better and

should be selected. If the discount rate is 10%, both should be implemented.

Considering the BCR, as a general rule, the higher the BCR the better the investment (or, in other words,

if the benefits are higher than the costs, the project represents a good investment). In terms of

investment profitability evaluation, an investment should be chosen if the BCR is greater than 1,

rejected otherwise. BCR is adopted as financial indicators in particular when there are funding

constraints regarding the investment plan: in this case BCR is preferred than NPV.

Finally, the Investment Global Cost suggests which is the total expenditure which an investment requires

over a certain period of time (calculation period), diminished by the residual value of the investment at

the end of this period, considering all these discounted to the calculation period starting year. It is

helpful to identify which is the total cost of a certain investment, without taking into account any

associated revenues.



D2.4



48

4.3- SENSITIVITY AND RISK ANALYSIS

As previously described, the outcomes of the financial analysis are depending on a set of input

parameters such as technical/economic parameters (Capex, O&M costs, energy/ water savings, etc.) and

financial assumptions (discount factor, energy/water prices, prices escalation, etc.).

All such independent variables may be affected by a certain level of uncertainty: for instance, estimated

energy saving could be lower than predicted value or project Capex could be higher than expected one.

In other words, the profitability of the considered investment could be worse than that expected in the

Reference Case, which is the scenario where all the independent variables are those fixed for such

particular investment. The purpose of the sensitivity analysis is to evaluate how a variation (with respect

to the Reference Case) of some, key, independent variables in input to the financial model could affect

the investment profitability.

The evaluation of how sensitive to independent variables the investment profitability is expresses the

risk which is associated to the investment itself: a lower sensitivity to a certain variable means that the

risk associated to a variation of such a variable is limited.

Since NPV is one of the most significant tools for the evaluation of the investment profitability, a

sensitivity analysis can be performed through monitoring how a variation of the key parameters

influences the investment NPV. As an example, it can be of interest to observe how much a certain

increase of the investment capex lowers the NPV.

Sensitivity analysis also offers the possibility to estimate the higher variation a certain parameter can

undergo till investment profitability remains acceptable (i.e. NPV>0): for investment Capex, the higher

value that Capex can assume (till reaching the condition NPV=0) is defined as the Capex ceiling level.

It is important to underline that the sensitivity analysis has to be performed evaluating how the

variation of only one chosen parameter impacts on the investment profitability, keeping constant all the

remaining independent variables and equal to those characteristics of the Reference Case.

An example of sensitivity analysis is represented in the below picture.

In the example, three independent variables are considered: namely investment Capex, electricity price

escalation and electricity saving. On x-axis the percentage parameter variation is presented while on the

y-axis the related NPV variation (with respect to the Reference Case).

It is clear that an increase of the electricity saving as well as of the electricity price escalation contributes

to improve the investment profitability, since associated revenues increase, while an opposite effect is

attributable to the investment Capex. The example shows that the strongest sensitivity (which is



D2.4



49

represented by the absolute value of the curves slope) is to electricity saving and Capex for this specific

case.

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

-20% -15% -10% -5% 0% 5% 10% 15% 20%

Δ N

PV

(EU

R)

Change in Parameter (%)

Electricity Price Escalation Capex Electricity Saving

Figure 17. Example of the Variation of NPV against the Variation of Some Independent Variables

5- General Methodological Approach for Public Building Financial

Plan_Operating Manual of the “Financial Analysis Tool.xls”

In this section the operating manual of the “Financial Analysis Tool” is presented. The tool is created to

enable the user to perform a financial analysis of a set of investments according to the financial model

described in the document in hand.

The tool is flexible enough to be utilised at either single building level or district level. In case of analysis

at district level, a constraint has to be considered. Let’s consider a certain investment at district scale: of

course, it includes a set of projects to be implemented in the different buildings of the district. It is

important that the projects can be grouped in homogeneous technologies so that a financial analysis

can be performed at district level only once for each type of technology.

As an example, let’s consider a district-level investment regarding the replacement of the windows of

the 5 different buildings included in a campus. In this specific case, the projects implemented in the

different buildings of the district are homogenous (windows for all the buildings) and therefore the

single projects for the different buildings can be grouped into one single investment at district level.

Instead, in a case where, for instance, for 3 buildings, out of 5, the project consist in the replacement of

windows but, in the remaining two, the project consists in the installation of a new lighting system, the



D2.4



50

technologies are not homogenous and therefore the analysis cannot be performed as a single

investment at district level: in this case, two different investments are to be considered at district level

(the windows replacement, for the 3 buildings, and the boiler replacement, for the remaining two

buildings).

The “Financial Analysis Tool” allows the user to perform the financial analysis for maximum ten

investments. The tool is structured as follows:

• General Input Datasheet: for the insertion of a set of data common to all investments included

in the package;

• Cash Flow Sheets (10 sheets plus one cumulative sheet): cash flow of the different investments;

• Investment Package Summary: summary of the results obtained after the financial analysis of

the different investments;

• Sensitivity: for performing the sensitivity analysis of the different investments;

• Scenarios for the definition of the range within which the sensitivity parameters can be varied.

The tool utilizes the following convention with regards to shown data:

green values: value to be inserted by the user (Independent variables)

blue values: constant values (not to be modified by the user)

black values: values which are a result of a calculation (dependent variables)

In the following, a description of the different sheets included in the tool, as well as indications on how

insert the necessary data, are presented.

5.1- “GENERAL INPUT DATASHEET”

The first sheet of the “Financial Analysis Tool.xls”, so called “General Input Datasheet”, is filled with data

which are constant values for all the considered investments.

The figure below shows an example of “General Input Datasheet”. For the definition of the below

indicated data, please refer to Sections 4-.



D2.4



51

Basic assumptions

Nominal Discount Rate - Reference Case 8.00%Nominal Discount Rate - Sensitivity 8.00%Inflation Rate 3.00%Real Discount Rate 4.85%Implementation Year 2012

Resources price (purchase) 2012 value Cap

Energy Source 1 80.00 100.00 EUR/MWhEnergy Source 2 40.00 50.00 EUR/MWhEnergy Source 3 20.00 30.00 EUR/MWhWater 1.00 1.50 EUR/m3

Resources price escalation (purchase) - Reference caseEnergy Source 1 3.0%Energy Source 2 3.0%Energy Source 3 3.0%Water 2.0%

Resources price escalation (purchase) - SensitivityEnergy Source 1 3.00%Energy Source 2 3.00%Energy Source 3 3.00%Water 2.00%

Resources price (selling) 2012 value Cap

Energy Source 4 80.00 no EUR/MWhEnergy Source 5 40.00 60.00 EUR/MWh

Resources price escalation (selling)- Reference caseEnergy Source 4 3.0%Energy Source 5 3.0%

Resources price escalation (selling)- SensitivityEnergy Source 4 3.00%Energy Source 5 3.00%

Figure 18. Example of “General Input Datasheet”

The data to be inserted by the users are the following:

• Nominal Discount rate in the Reference Case (%);

• Inflation rate (%);



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52

• Investment implementation year;

• Purchased energy sources names (e.g. electricity, natural gas, diesel oil, etc.- max. 3 items):

names of the energy sources which are consumed both in the Baseline and the Project Scenario

(it may happen that the energy source are not the same in the two scenarios, e.g. in case of fuel

switch);

• Purchased energy sources and water prices (EUR/MWh and EUR/m3) and cap : the cap is the

maximum value the prices of water and energy sources can reach during the calculation period.

This is useful to limit the escalation of the prices over years to a maximum. In fact there could be

situations (e.g. investment implemented in countries where the energy market is shifting from a

state-owned system to a liberalised system) where the prices are low but characterised by a

high escalation. In such situations, it can be assumed that the energy prices will grow according

to such an escalation till reaching the long-term forecasted value for the EU western countries9.

If an energy source is not used, set prices equal to zero; if no cap is foreseen, type “no”;

• Purchased resource prices escalation in the Reference Case (%): positive if prices are expected to

increase, negative if they are expected to decrease, null in case of constant prices;

• Names of the energy sources that can be sold (e.g. electricity, steam, etc.- max 2 items);

• Sold energy sources prices (EUR/MWh) and cap (which is the maximum value which energy

sources prices can reach as a consequence of annual escalation). If an energy source is not sold,

set prices equal to zero; if no cap is foreseen, type “no”;

• Sold energy sources price escalation in the Reference Case (%): positive if prices are expected to

increase, negative if they are expected to decrease, null in case of constant prices.

Data in black refer to value calculated from the input data inserted by the user; such values are:

• Nominal Discount rate - Sensitivity: which is the nominal discount rate used in the Reference

Case to which sensitivity variation is applied (please refer to Section 5.3-);

• Real Discount Rate: discount rate net of inflation. It must be highlighted that such an item is

assumed to be greater than zero, or at least equal. In cases of high inflation rate, it could

9 Values indicating forecasted electricity prices till 2050 in the EU are available at

http://ec.europa.eu/energy/observatory/trends_2030/index_en.htm



D2.4



53

happen (applying negative variation to the nominal discount rate through sensitivity analysis)

that the real discount rate assumes negative value, which is not very significant for such

analysis. In this case, the tool assumes a value equal to zero. This concept is further described in

Section 6.2.2;

• Purchased and sold energy sources and water price escalation – Sensitivity: escalation of

resources price of the Reference Case, to which sensitivity variation is applied (please refer to

Section 5.3-).

5.2- “CASH FLOW” SHEETS

The “Financial Analysis Tool.xls” presents ten identical sheets, namely: “Cash Flow 1” - “Cash Flow 10”.

These sheets consent performing a financial analysis for ten different investments. There is also a

cumulative sheet (“Cash Flow Final”) which refers to a unique investment (cumulative of the ten

previous considered ones). New sheets can be added by simply copying one of the ten “Cash Flow”

sheets: in this case the “Cash Flow Final Sheet” must be modified in order to take into account the

additional sheets.

Considering, for instance, “Cash Flow 1”, starting from the top of the sheet, the following information

must be inserted by the user:

• Investment name;

• Baseline:

o Year of equipment original installation: it is the calendar year when the presently installed

equipment was last installed. This value must be lower than the Implementation Year

(or at least equal);

o Capex at original installation: Capex (kEUR) of the currently installed equipment, at the

time when it was last installed (split according to purchase cost, installation cost and

transportation cost). Values must be positive;

o Escalation (e): percentage yearly increase (if positive) or decrease (if negative) of Baseline

purchase cost (net of inflation). If cost is assumed constant, set e to zero. Its use is

analogous as those described in section 4.1.1;

o Past limit year: number of years, starting from the Project implementation year, and going

back in the past, during which the original purchase cost of the Baseline equipment is

assumed to have increased. For instance, let’s consider 2012 as the year foreseen for

the Project equipment to be installed and to replace certain Baseline equipment. If the

Baseline equipment original installation occurred in 2000, and if a 1% escalation and 9

as Past limit year are assumed, it means that the Baseline equipment purchase cost

(after year 2000) is assumed as constant and equal to the original value till year 2003

(i.e. 2012 less 9) and then increases at a constant escalation of 1% for the following

years. This parameter is used to limit the variation of purchase cost over time: in fact,

there could be cases in which the price of new equipment remained almost constant for

a certain period and, then, started to lower. This parameter must be a positive integer.

Further explanation of this concept is provided in Section 6.1.2;

o



D2.4



54

o Future limit year: as the previous, but related to the increase of Baseline purchase cost in

the future years. It represents the number of years, starting from the Project equipment

implementation year a going forward, during which the Baseline equipment purchase

cost is assumed to grow. For example, let’s assume a constant escalation of 1%, a future

limit year of 10 and 2012 as the Project equipment implementation year. This means

that the Baseline purchase cost will grow, at 1% yearly escalation, from 2012 value for

10 years, till 2022, and then remain constant. This parameter must be a positive integer;

o O&M cost: O&M cost (kEUR). It must be a positive number. It does not include energy

and water costs. Such a cost is assumed to be constant over calculation period and

occurring each year. Anyway, the tool is flexible to accept also O&M costs concentrated

in specific years: in this case, the user has to insert manually the value in the cash flow

cells corresponding to the appropriate years (please note that also the manually

inserted number must be positive);

o Removing cost: cost required for the removal of the equipment when it reaches the end

of its own lifetime (kEUR). Such a cost is assumed to be constant over calculation period.

It must be a positive number;

o Disposal cost: cost required for the disposal of the equipment when it is removed (kEUR).

It is a positive number;

o Residual value at the end of equipment lifetime: it is the residual value (expressed as a

percentage of the purchase cost) of the equipment at the end of its lifetime, when it has

to be removed. The percentage is applied to the purchase cost of the equipment at the

year when was last installed. It is a positive number;

o Equipment lifetime: expected lifetime of the installed equipment. This parameter must be

a positive integer and, of course, greater than the equipment age at the year 0, which is

defined as

�0��'�� 1�� 0 = ��'��'��) 1�� − �2�� ) �0��'�� )�� &��)�

The picture below represents the screenshot take form the “Cash Flow 1” sheet referring to

the Baseline data input.

BaselineYear of equipment original installation 2006

Purchase cost at original installation 100 kEUR Escalation 1% Past limit year

5 Future limit year

10

Equipment installation Cost 10 kEUREquipment transportation Cost 2 kEURO&M cost 5 kEURRemoving cost 4 kEURDisposal cost 10 kEURResidual value at the end of equipment lifetime 20%Equipment lifetime 8 yr

Figure 19. Baseline Data Input

• Project:



D2.4



55

o Implementation year Capex – Reference Case: Capex (in kEUR) of the considered retrofit

investment in the Reference Case (spilt according to purchase cost, installation cost and

transportation cost). Values must be positive;

o Escalation (e): as in Baseline above;

o Future limit year: as in Baseline above;

o O&M cost: as in Baseline above. In case of manual insertion of O&M costs in cash flow

cells, please note that values must be negative numbers;

o Removing cost: as in Baseline above;

o Disposal cost: as in Baseline above;

o Residual value at the end of equipment lifetime: as in Baseline above;

o Equipment lifetime: expected lifetime of the Project equipment; it must be a positive

integer.

The picture below represents the screenshot taken from the “Cash Flow 1” sheet referring to the Project

data input.

Project

2012 Purchase cost - Reference case130 kEUR

Escalation 1% Future limit year

10

Equipment installation Cost - Reference case 10 kEUREquipment transportation Cost - Reference case 2 kEURProject Capex - Reference Case 142 kEURProject Capex - Sensitivity 142 kEUR2012 Purchase cost - Sensitivity 130 kEUREquipment installation Cost - Sensitivity 10.0 kEUREquipment transportation Cost - Sensitivity 2.0 kEURO&M cost 2 kEURRemoving cost 3 kEURDisposal cost 6 kEURResidual value at the end of equipment lifetime 20%Equipment lifetime 12.0 yr

Figure 20. Project Data Input

• Resource Saving – Reference Case:

o Energy Source 1,2,3 and Water Savings: achievable Energy Sources 1, 2 and 3 savings (in

MWh/yr) and Water saving (in m3/yr) with respect to the Baseline Scenario. If no saving

is foreseen, set values to zero.

The picture below represents the screenshot take form the “Cash Flow 1” sheet referring to the

Resources Saving input.

Resource Saving - Reference CaseEnergy Source 1 saving 100 MWh/yrEnergy Source 2 saving 150 MWh/yrEnergy Source 3 saving 350 MWh/yrWater saving 1,000 m3/yr

Figure 21. Resources Saving Data Input



D2.4



56

• Energy Selling – Reference Case:

o Energy source 4 and 5 production: amount of energy sources 4 and 5 which can be sold

(MWh/yr), in both Baseline and Project Scenarios. If no production is foreseen, set

values to zero.

The picture below represents the screenshot take form the “Cash Flow 1” sheet referring to the Energy

Selling input.

Energy Selling - Reference CaseEnergy Source 4 production - baseline 50 MWh/yrEnergy Source 5 production - baseline 30 MWh/yrEnergy Source 4 production - project 60 MWh/yrEnergy Source 5 production - project 50 MWh/yr

Figure 22. Energy Selling Data Input

In addition, the sheet includes other data which are outcomes of the calculation and therefore are not

to be modified by the user. Such data are briefly introduced in the following:

• Project Capex – sensitivity: Project Capex values described before, to which sensitivity is

applied (please refer to section 5.3-);

• Resource Saving – Sensitivity: these values represent the energy and water saving described

before, to which sensitivity is applied (please refer to section 5.3-);

• Energy Selling – Sensitivity: amount of energy to be sold in the Project Scenario described

before, to which sensitivity is applied (please refer to section 5.3-);

• Resources Price: prices of energy sources and water over the calculation period, calculated

starting from prices and escalation indicated in the “General Input Datasheet” (referring to both

purchase and selling).

The “Cash Flow” sheet also includes the cash flow table which, on different rows, presents the following

data. It must be noted that each data is expressed in kEUR, according to the following rationale:

negative values represent costs, positive values represent incomes:

• Annual revenues deriving from Energy Saving, Water Saving and Energy Selling;

• CAPEX, O&M cost, removing cost, disposal cost and residual value for both Project and Baseline

Scenario for each year over the calculation period;

• Annual cost: sum of all the costs (with the exception of the Project capex), for a certain year

over the calculation period. It represents the negative cash flow (or outflow) of the investment

for a considered year. It takes into account also cost due to removal and disposal of Baseline

equipment at year 0, as well as the missed Baseline residual value (in years where Baseline

equipment would have been replaced if Project would not have been implemented);

• Gross Profit: sum of all the revenues associated to the investment, deriving from energy and

water savings, avoided cost of the Baseline Scenario and Project equipment residual value;

• Net Revenues: sum, for each year, of Annual Cost and Gross Profit;

• Net Cash Flow: sum, for each year, of the Net Revenues and the Project CAPEX;



D2.4



57

• Cumulated Cash Flow: sum, for a certain year, of all the net cash flow related to the previous

years and the cash flow related to the considered year;

• Discounted Cash Flow and Discounted Cumulated Cash Flow: cash flows discounted according

to the considered discount rate.

The picture below represents a partial view of the cash flow table. Investment cash flowkEUROperation Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Operation Period 0 1 2 3 4 5 6 7 8 9 10Energy Saving (Re) 22 22 23 24 24 25 26 26 27 27 Water saving (Rw) 1 1 1 1 1 1 1 1 1 1 Energy Selling (Es) 2 2 2 2 2 2 2 2 2 2

Baseline Capex (Cb) - - 119 - - - - - - - 128 Baseline O&M cost (Co&m,b) 5 5 5 5 5 5 5 5 5 5 Baseline removing cost (Crem,b) 4- - 4 - - - - - - - 4 Baseline disposal cost (Cdisp,b) 10- - 10 - - - - - - - 10 Baseline residual value (Vb) 40 - 20- - - - - - - - 21-

Project Capex (Cp) 142- - - - - - - - - - - Project O&M cost (Co&m,p) 2- 2- 2- 2- 2- 2- 2- 2- 2- 2- Project removing cost (Crem,p) - - - - - - - - - - Project disposal cost (Cdisp,p) - - - - - - - - - - Project residual value (Vp) - - - - - - - - - -

Annual Cost 14- 2- 22- 2- 2- 2- 2- 2- 2- 2- 23- Gross Profit 40 29 163 31 32 32 33 34 35 35 177 Net Revenues 26 27 141 29 30 30 31 32 33 33 154 Project CAPEX 142- - - - - - - - - - - Net Cash Flow 116- 27 141 29 30 30 31 32 33 33 154 Cumulated Cash Flow 116- 89- 53 81 111 141 172 204 237 270 424 Discounted Cash Flow 116- 26 128 25 24 24 23 23 22 21 96 Discounted Cumulated Cash Flow 116- 90- 38 63 88 112 135 158 180 202 298

Figure 23. Example of Cash Flow Table (partial view)

In the bottom part of the sheet, the main outcomes of the financial analysis are presented:

• Initial Investment Cost: Project Capex at the year 0 (implementation year);

• Investment Global Cost (Cg(τ));

• Average Revenues: average value of the Net Revenues over the calculation period;

• NPV;

• PB;

• DPB;

• IRR;

• BCR.

The following picture is a screenshot taken from the “Cash Flow” sheet showing the financial

analysis results.



D2.4



58

Financial Analysis ResultsInitial Investment Cost 142 kEURInvestment Global Cost (Cg(ττττ)) 298 kEURAverage Revenues 50 kEURNet Present Value (NPV) 539 kEURPay Back Period (PB) 1.6 yrDiscounted Pay Back Period (DPB) 1.7 yrInternal Rate of Return (IRR) 46.6%Benefit over Cost Ratio ( BCR) 2.9

Figure 24. Financial Analysis Results

In addition, also a graphical representation of the Investment Cumulated Cash Flow (cash flow chart) is

included in the sheet, as depicted in picture below.

-200

-

200

400

600

800

1,000

1,200

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

k E

UR

Years

Cumulated Cash Flow

Figure 25. Cash Flow Chart

5.3- “SENSITIVITY” SHEET

This sheet offers the possibility to vary some of the independent variables which may affect the Project

profitability. This allows the user to perform a sensitivity analysis of the NPV towards a set of input data

(independent variables) in order to assess the risk level associated to the different investments.

The following parameters can be varied:

• Nominal Discount Rate;

• Energy Sources price escalation (purchase and selling);



D2.4



59

• Water price escalation;

• Energy sources saving (purchase);

• Water saving;

• Energy sources production (selling);

• Project Capex.

For each considered variable a variation in the range -50% ; +50% is allowed (with a 10% step variation).

Before beginning sensitivity analysis, the user has to insert manually the value of the investment NPV in

the reference case in the related green cell.

NPV Reference Case 539 kEUR

Figure 26. Sensitivity Sheet: Reference Case NPV

For example, lets’ consider sensitivity to Nominal Discount Rate: we chose a variation of +10% of

Reference Case Nominal Discount Rate. It is important to highlight that sensitivity has to be performed

focusing on only one parameter, keeping the remaining equal to those in Reference Case.

Sensitivity Parameters

Nominal Discount Rate variation

Energy Source 1 price escalation variation (purchase)



Water price escalation variation

Energy Source 1 saving variation



Water saving variation

Energy Source 4 price escalation variation (selling)


Energy Source 4 production variation

Energy Source 5 production variation

Project Capex variation

10% Reference case (0%) Reference case (0%)

Reference case (0%) Reference case (0%) Reference case (0%)


Reference case (0%)


Reference case (0%)

Figure 27. Sensitivity Sheet: Variation of the Discount Rate

The Nominal Discount Rate in the reference case is 8%, therefore the sensitivity discount rate will be:

��&()�� _4�&��%��1 = 8% × �1 + 10%� = 8.8%



D2.4



60

A variation of the considered variable will cause a change in the investment NPV, with respect to the

Reference Case (NPV lowers from 539 kEUR in the Reference Case, to 488 kEUR in the Sensitivity Case):

the new NPV value has to be manually copied in the below table, in correspondence to the selected

variable value.

% Change

in

parameter

Nominal

Discount

Rate

variation

Energy Source

1 price

escalation

variation

(purchase)

Energy Source

2 price

escalation

variation

(purchase)

Energy Source

3 price

escalation

variation

(purchase)

Water price

escalation

variation

Energy Source

1 saving

variation

Energy Source

2 saving

variation

Energy Source

3 saving

variation

Water saving

variation

50%

40%

30%

20%

10% 488

0% 539 539 539 539 539 539 539 539 539

-10%

-20%

-30%

-40%

-50%

NPV (kEUR)

Figure 28. Sensitivity Sheet: NPV Variation after 10% Discount Rate Increase

Then, we select a new value till all the range is covered.

% Change

in

parameter

Nominal

Discount

Rate

variation

Energy Source

1 price

escalation

variation

(purchase)

Energy Source

2 price

escalation

variation

(purchase)

Energy Source

3 price

escalation

variation

(purchase)

Water price

escalation

variation

Energy Source

1 saving

variation

Energy Source

2 saving

variation

Energy Source

3 saving

variation

Water saving

variation

50% 340

40% 370

30% 405

20% 444

10% 488

0% 539 539 539 539 539 539 539 539 539

-10% 598

-20% 665

-30% 744

-40% 836

-50% 943

NPV (kEUR)

Figure 29. Sensitivity Sheet: NPV Sensitivity to Discount Rate Variation

The software will calculate the NPV variation a will build the related chart.



D2.4



61

-300

-200

-100

0

100

200

300

400

500

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

Δ N

PV

(k

EU

R)


Nominal Discount Rate variation

Figure 30. Sensitivity Sheet: Diagram showing NPV Sensitivity to Discount Rate Variation

After performing the sensitivity analysis for all the parameters of interest, it is possible to calculate the

Capex ceiling level, which is the Project Capex leading to a NPV=0 (keeping all other parameters as equal

to those in the Reference Case).

To find the Capex ceiling level, it is necessary to use the Goal Seek function of MS Excel (which can be

found following this path: Data, What-If Analysis, Goal Seek).

Figure 31. Location of “Goal Seek” function in MS Excel

Firstly, a tentative value concerning Project Capex variation has to be manually inserted in the related

cell in the “Sensitivity” sheet (for instance 150% in the example shown below).



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62

Actual values of sensitivity parametersNominal Discount Rate variation 0.0%Energy Source 1 price escalation variation (purchase)

0.0%


0.0%


0.0%

Water price escalation variation 0.0%Energy Source 1 saving variation 0.0%Energy Source 2 saving variation 0.0%Energy Source 3 saving variation 0.0%Water saving variation 0.0%


0.0%


0.0%

Energy Source 4 production variation 0.0%Energy Source 5 production variation 0.0%Project Capex variation 150.0%

Figure 32. Tentative value for Project Capex Ceiling

This Goal Seek function has to be used in the cell calculating the investment NPV (in the “Sensitivity”

sheet as shown below). The cell must be set to 0; the cell to be inserted in “By changing value” is the

Project Capex variation described above.

Figure 33. Procedure for the calculation of the Capex Ceiling Level using Goal Seek function

The Project Capex percentage variation (corresponding to the ceiling level) is calculated and appears in

the related cell. The original formula for the calculation of the Project Capex variation can be restored by

simply pressing the “undo” button.

The calculated capex variation (229.1% in the example) must be manually inserted in the dedicated cell

of the “Sensitivity” sheet, as indicated in figure below: this allows the software to calculate the Project



D2.4



63

capex ceiling level (allowed to have NPV = 0, i.e. the limit condition for the investment profitability). In

this specific case, the Capex ceiling is 428 kEUR.

Percentage ∆ Capex 229.1%Capex Reference Case 130 kEURCapex ceiling 428 kEUR

Figure 34. Calculation of the Capex Ceiling Level

5.4- “INVESTMENT PACKAGE SUMMARY” SHEET

This sheet provides a summary table for the whole set of investment package. An example of the

summary table is shown in figure below.

Investment 1 Investment 2 Investment 3 Investment 4 Investment 5 Investment 6 Investment 7 Investment 8 Investment 9Investment 10

All Investment Package

Initial Investment Cost (kEUR)Investment Global Cost (kEUR)Average Revenues (kEUR)Net Present Value (kEUR)Pay Back Period (yr)Discounted Pay Back Period (yr)Internal Rate of ReturnBenefit over Cost Ratio

Figure 35. Investments financial results summary table

5.5- “SCENARIOS” SHEET

This sheet includes the step variation ranges which can be applied to the variables considered in the

“Sensitivity” sheet. Such ranges are fixed (-50%; +50%, with a 10% step increase). Anyway, there is the

possibility for the user to modify the range and the step increase according to its own requirements. In

this case, the user has to fill the green cells in with the preferred values, as indicated in the below figure.

Nominal Discount Rate variation50% 50%40% 40%30% 30%20% 20%10% 10%

Reference case (0%) 0%-10% -10%-20% -20%-30% -30%-40% -40%-50% -50%

Figure 36. Tables for setting the sensitivity variation step



D2.4



64

It must be highlighted that the steps must be the same for all the considered variables, therefore the

user can modify only the steps referring to one variable (Nominal Discount Rate): the steps related to

the remaining variables automatically update.

6- Financial Assessment applied to real cases: A2PBEER Real Pilots

In this Section, the developed methodology is applied to two different Pilot Projects referring to real

examples of public buildings retrofitting. The A2PBEER pilot projects are actually three, one Swedish,

one Spanish and one Turkish project. Nevertheless, the Swedish pilot case has been recently changed at

time of writing this report, and the data are not available. Once they are available, a dedicated annex

will be added.

6.1- SPANISH PILOT

The building is a central rectors’ office building located in the Leioa University Campus (Vizcaya, Spain).

The investments package includes the following measures:

1. Envelope retrofitting;

2. LED lighting and optic fibre lighting installation;

3. Solar thermal panels installation;

4. Building Energy Management System Installation;

5. Installation of a ventilation system with heat recovery;

6. Upgrading of the building heating and cooling facilities.

6.1.1. Involved Stakeholders, interactions and adopted financing option

6.1.2. Financial Analysis Tool application

The Spanish Pilot project includes 6 different investments; it must be highlighted that the financial

analysis is performed only for 4 of them, since for the remaining 2 no sufficient data have been made

available yet, due to the fact that the project is still at the initial stage of development.

The table below shows the data input utilised for performing the financial analysis. It must be

highlighted that some data are hypothesised for the purpose the example application.

Investments

1 2 3 4

Baseline

Year of equipment original installation 1979 2012

No baseline

No baseline

Purchase cost at original installation (kEUR) 9.4 45.9

Equipment installation Cost (kEUR) 6.3 11.5

Equipment transportation Cost (kEUR) - -

O&M cost (kEUR) - -

Removing cost (kEUR) 1.3 5.0



D2.4



65

Disposal cost (kEUR) 1.3 5.0 Residual value at the end of equipment lifetime (%)

- -

Equipment lifetime (yr) 50 3

Purchase cost escalation (%) 8% -

Past limit year 15 -

Future limit year - -

Project

Purchase cost - Reference case (kEUR) 437.8 114.9 34.2 27.6 Equipment installation Cost - Reference case (kEUR)

291.9 28.7 3.8 6.9

Equipment transportation Cost (kEUR) - - - -

O&M cost (kEUR) - - 0.5 -

Removing cost (kEUR) 1.3 5 1.3 0.3

Disposal cost (kEUR) 1.3 5 1.3 0.3 Residual value at the end of equipment lifetime (%)

- - - -

Equipment lifetime (yr) 50 6 25 25

Purchase cost escalation (%) - -1% - -

Future limit year - 10 - -

Resources Saving

Electricity saving (MWh/yr) - 152 - 5

Natural gas saving (MWh/yr) 327 - 410 20

General Data

Implementation year 2014

Nominal discount rate (%) 5%

Inflation rate (%) 1.4%

Electricity price /cap (EUR/MWh) 230/300

Natural gas price /cap (EUR/MWh) 75/150

Electricity price escalation (%) 5%

Natural gas price escalation (%) 5%

Table 4. Spanish Pilot Project – Summary of the Financial Analysis Toll input data

In the following some suggestions on how to run the Financial Analysis tool are presented. In general

purchase cost escalation, past and future limit years are assumed, as default value, equal to zero.

Investment 1 – Envelope retrofitting

• Baseline: the installation of the envelope occurred in 1979 and the original purchase cost of the

envelope elements were about 9 kEUR. A 8% escalation applied for the last 15 years (i.e starting

from 1999, being 2014 the implementation year) is applied to take into account the variation of

the purchase cost over such a long period of time and to calculate the actual purchase cost at

the expected replacement in the Baseline Scenario (which would occur in 2029 if the Project

Scenario was not implemented).



D2.4



66

Investment 2 - LED lighting and optic fibre lighting installation

• Project: a negative escalation (-1%), applied for ten years after the equipment implementation

year, is considered to take into account that the LED lighting purchase cost could diminish in the

future, due to the diffusion of the technology (which has been recently introduced on the

market);

Investment 3 – Solar thermal panels installation / Investment 4 - Building Energy Management System

Installation

• Baseline: since in the Baseline scenario there are no solar thermal panels, all the Baseline data

input are set equal to zero (the same approach is utilised in the investment 4: in the Baseline no

energy management system is installed).

The results of the financial analysis are presented in the below table.

Investments

1 2 3 4 All

Investment Package

Initial Investment Cost (kEUR) 730 144 38 35 946

Investment Global Cost (kEUR) 669 499 55 42 1,265

Average Revenues (kEUR) 48 64 52 5 168

Net Present Value (kEUR) 90 745 878 30 1745

Pay Back Period (yr) 17.9 1.9 1.2 10.2 7.8 Discounted Pay Back Period (yr) - 2.0 1.2 12.5 9.0

Internal Rate of Return 4% 46% 88% 9% 14% Benefit over Cost Ratio 1.12 2.58 17.28 1.62 2.34

Table 5. Spanish Pilot Project – Summary of the investments financial analysis

The whole investment package NPV is greater than zero, therefore the investment package profitability

is confirmed; the IRR is 14%, the payback period about 8 years and the BCR is greater than one. Looking

at the single investments, it can be seen that all are characterised by a positive NPV, highlighting that

each investment is characterised by a good profitability.

The sensitivity analysis results for the whole investment package are represented by the figure below.



D2.4



67

-1000

-500

0

500

1000

1500

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

Δ N

PV

(k

EU

R)


Nominal Discount Rate variation Electricity price escalation variation (purchase) Natural gas price escalation variation (purchase)

Electricity saving variation Natural gas saving variation Project Capex variation

Figure 37. Spanish Pilot Project – NPV sensitivity

It can be pointed out that the NPV greatest sensitivity (represented by the slope of the curve in absolute

value) is to the nominal discount rate, to the natural gas saving variation and to the Capex variation.

6.2- TURKISH PILOT

The Pilot Project building is in the city of Ankara, Turkey. It is the boy’s dormitory within the student

campus (Vocational School in Ankara). The investments package includes the following measures:

1. Envelope retrofitting;

2. Lighting system retrofitting;

3. Solar collector system installation;

4. Domestic Hot Water, heating and cooling system retrofitting;

5. Building Energy Management System Installation;

6. Ventilation system installation.

6.2.1. Involved Stakeholders, interactions and adopted financing option

6.2.2. Financial Analysis Tool application

The table below shows the data input utilised for performing the financial analysis. It must be

highlighted that some data are hypothesised for the purpose the example application.

Investments

1 2 3 4 5 6

Baseline

Year of equipment original installation 1963 2014

No baseline

2005

No baseline

2014

Purchase cost at original installation (kEUR) - 3.4 245.2 27.4

Equipment installation Cost (kEUR) - 0.8 61.3 9.1

Equipment transportation Cost (kEUR) - - - -



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68

O&M cost (kEUR) 1.2 - 8.7 4.3

Removing cost (kEUR) 2.5 0.5 3.0 1.2

Disposal cost (kEUR) 3.5 0.1 0.9 0.6

Residual value at the end of equipment lifetime (%)

- - 10% 10%

Equipment lifetime (yr) 30 3 30 10

Purchase cost escalation (%) - - - -

Past limit year - - - -

Future limit year - - - -

Project

Purchase cost - Reference case (kEUR) 64.2 8.4 51.3 76.0 27.6 45.6 Equipment installation Cost - Reference case (kEUR) 42.9 2.1 5.7 19.0 6.9 11.4

Equipment transportation Cost (kEUR) - - -

- -

O&M cost (kEUR) 0.6 - 0.3 5.4 0.1 3.9

Removing cost (kEUR) 2.5 0.5 1.5 3.0 0.3 1.2

Disposal cost (kEUR) 1.7 0.1 0.3 0.8 0.0 0.6 Residual value at the end of equipment lifetime (%) - - - 10% - 10%

Equipment lifetime (yr) 15 6 25 25 20.00 15

Purchase cost escalation (%) - -1% - - -

Future limit year - 10 - - -

Resources Saving

Electricity saving (MWh/yr) - 17 - - 0.80 -

Natural gas saving (MWh/yr) 268 - 40 56 9.10 91

General Data

Implementation year 2014

Nominal discount rate (%) 8%

Inflation rate (%) 7.5%

Electricity price /cap (EUR/MWh) 100/172

Natural gas price /cap (EUR/MWh) 30/100

Electricity price escalation (%) 5%

Natural gas price escalation (%) 5%

Table 6. Turkish Pilot Project – Summary of the Financial Analysis Toll input data

In the following some suggestions on how to run the Financial Analysis tool are presented. In general

purchase cost escalation, past and future limit years are assumed, as default value, equal to zero.

Investment 1 – Envelope retrofitting

• Baseline: the installation of the envelope occurred in 1963 but it was not replaced at the end of

the expected lifetime. For this reason, no replacement of the envelope is considered for the

Baseline scenario (i.e. no avoided Baseline capex) during the calculation period. Only removal

and disposal costs are considered at year 0 (2014-Project envelope implementation year);

• Project/Baseline: the O&M costs correspond to the facade paintings and occur every 5 years for

the baseline scenario and every 10 years for the Project Scenario. Since the tool considers O&M



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69

occurring every year and not at fixed years, the O&M costs are inserted manually in the relevant

years (positive number for the Baseline, since they represents an avoided cost, and negative for

the Project). Since the Baseline envelope was installed in 1963, assuming that the maintenance

was performed according to the schedule, the O&M costs during the calculation period are

considered in years: 2018, 2023, 2028 and so on. For the Project Scenario the O&M costs are

considered in years 2024, 2034 and 2044.

Investment 2 – Lighting system retrofitting

• Baseline: since the Baseline lighting system is expected to be replaced in 2014 (by a system of

the same properties of the existing ones since it lifetime comes to an end), 2014 is considered as

the Baseline equipment original installation year: due to the fact that this corresponds also to

the Project implementation year, the tool considers the Baseline Capex as an avoided cost (but

not including costs for replacement or disposal because they would have occurred even without

the Project implementation);

• Project: a purchase cost negative escalation (-1%) and a 10-year limit is considered, according to

the same rationale described for the Investment 2 in the Spanish Pilot.

Investment 3 - Solar collector system installation / Investment 5 - Building Energy Management

System Installation

• Since no Baseline Scenario exists for such investments, all the Baseline data input are set equal

to zero (as already indicated for Investments 3 and 4 of the Spanish Pilot).

Investment 6 – Ventilation system installation

• Baseline: since in the Baseline Scenario there is no ventilation system, the installation of a

ventilation system would cause an increase of consumption and therefore no benefits in terms

of energy saving. It is assumed that the installation of the ventilation system is mandatory

because of law requirements. In that sense, the Baseline is assumed as corresponding to a

building where a ventilation system, featuring the necessary characteristics for being compliant

with the law requirements, has to be installed. The year of the equipment original installation is

assumed therefore as equal to the project implementation year (i.e. 2014 in the specific case)

The results of the financial analysis are presented in the below table.

Investments



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70

1 2 3 4 5 6 All

Investment Package

Initial Investment Cost (kEUR) 107 11 57 95 35 57 361 Investment Global Cost (kEUR) 216 50 83 282 57 218 905 Average Revenues (kEUR) 17 4 4 18 1 10 54 Net Present Value (kEUR) 281 71 -9 354 -37 174 834 Pay Back Period (yr) 10.4 2.4 0.0 0.0 0.0 5.7 6.7 Discounted Pay Back Period (yr) 10.6 2.4 0.0 0.0 0.0 5.8 6.8 Internal Rate of Return 9% 40% - - - 23% 17% Benefit over Cost Ratio 2.36 2.51 0.91 2.97 0.44 2.58 2.16

Table 7. Turkish Pilot Project – Summary of the investments financial analysis

The whole investment packages NPV is greater than zero, therefore the investment package profitability

is confirmed; the IRR is 17%, the payback period about 7 years and the BCR is greater than one. Looking

at the single investments, it can be seen that all are characterised by a positive NPV, with the exception

of investments 3 and 5, which turn out to be no profitable.

The sensitivity analysis results for the whole investment package are represented by the figure below.

-500

-400

-300

-200

-100

0

100

200

300

400

500

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50%

Δ N

PV

(k

EU

R)


Nominal Discount Rate variation Electricity price escalation variation (purchase) Natural gas price escalation variation (purchase)

Electricity saving variation Natural gas saving variation Project Capex variation

Figure 38. Turkish Pilot Project – NPV sensitivity

It can be pointed out that the NPV greatest sensitivity (represented by the slope of the curve in absolute

value) is to the nominal discount rate, to the natural gas saving variation and to the Capex variation.

It must be highlighted that the curve representing the NPV sensitivity to the Nominal Discount Rate

variation is not plotted for variation lower than -10%. This is due to the fact that, in this specific Pilot

Project, a negative variation of the Nominal Discount Rate makes the Real Discount Rate negative

(because of the high inflation rate). The tool is structured to limit the Real Discount Rate to zero in case

it assumes negative value: therefore, for Nominal Discount Rate variation lower than 10%, the tool sets



D2.4



71

the real discount rate to zero, making the related curve horizontal (i.e. no NPV variation): for this reason

it is chosen to not represent this part of the curve.

7- CONCLUSIONS

This document covers the Task 2.4 of Work Package 2 and presents a methodology to be followed in the

financial assessment of public buildings retrofitting, at either single building level or district level. Within

the scheme defined by Task 2.5, it represents an input to the “Intervention Packages” step.

The outputs of Task 2.4 are necessary data for the “SWOT” step, which is subsequent step of task 2.5.

Task 2.4 is mainly focused on two macro areas regarding the financial assessment of public buildings:

• Identification of stakeholders, their interactions and different financing options;

• Identify the available financing options for public building retrofitting projects;

• Propose a method for the retrofit investment profitability evaluation.

There are different financing options available for energy efficiency projects in Europe. In this report

different financing models is described such as, budgetary funds, equity financing, mezzanine financing

and leasing.

Budgetary funds and European Structural and Investment Funds provide means for bridging the energy

efficiency gap. National grants and subsidies are national examples of support for energy efficiency

projects. Public-private partnership is becoming a more common approach were the public institution

and a private actor sets up an agreement on how cost, risks and profit is divided between the partners

in an energy efficiency retrofitting project.

The proposed method for the investment profitability evaluation is based on a set of financial indicators

(Net Present Value, Pay Back Period, Internal Rate of Return, etc.) which are useful for assessing the

financial viability of the considered retrofit measures.

Such a method has been utilised for the development of a dedicated tool which can be used as mean for

carrying out the financial profitability assessment of the considered investments and for evaluating the

associated risks.



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8- BIBLIOGRAPHY

EUROPEAN COMMISSION “Commission Delegated Regulation (EU) No 244/2012”

US DEPARTMENT OF ENERGY (2011) – “Building Technologies Program – Advanced Energy Retrofit

Guide, Office Buildings”

S.M. BRAGG (2010) “The Ultimate Accountants’ Reference”

DAVIS LANGDON (2007) “Life Cycle Costing (LCC) as a contribution to sustainable construction: a

common methodology”

THE ROBERT GORDON UNIVERSITY (2002) “PgDip/MSc Energy Programme/Economics & Asset

Management”

U.S. DEPARTMENT OF COMMERCE (1995) “Life-Cycle Costing Manual for the Federal Energy

Management Program”

INTERNATIONAL ENERGY AGENCY, IEA (2011) Joint Public-Private Approaches for energy efficiency

finance

INTERNATIONAL ENERGY AGENCY, IEA (2010) Money Matters- Mitigating risks to spark private

investments in energy efficiency

EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT, EBRD (2011) ESCO and Energy

Performance Contracting in the public sector Presentation by Daniela Diedrich-Ristic

JOINT RESEARCH CENTER, JRC, (2010) Financing energy efficiency: forging the link between financing

and project implementation

SINGH, J., D.R LIMAYE, B., HENDERSON, AND X. SHI (2010) Public Procurement of energy efficiency

Services, World Bank

BULLIER, A., MILIN, C., (2013) Alternative financing schemes for energy efficiency in buildings ECEEE

Summer study proceedings

ENERGY CHARTER SECRETARIAT, (2001) Fiscal Policies for Improving Energy Efficiency: Taxation, Grants

and Subsidies, ECS, Brussels, pp. 11-13.

ENERGY CHARTER SECRETARIAT, (2003) Third Party Financing: Achieving its Potential, ECS, Brussels

Genovese A., Koh S.C.L., and A. Acquaye, 2013, Energy efficiency retrofitting services supply chains:

Evidence about stakeholders and configurations from the Yorkshire and Humber region case, Int. J.

Production Economics 144, 20-43.



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MAIO J, ZINETTI S, JANSSEN R, 2012, Energy efficiency policies in buildings – The use of financial

instruments at member state level, Buildings Performance Institute Europe.

ManagEnergy (2014) European Structural and Investment Funds 2014 – 2020: The negotiation process

and the emphasis on financial instruments

http://www.managenergy.net/sm_european_structrural_and_investment.html

Marino A., Bertoldi P., Rezessy S. and B. Boza-Kiss, 2011, A snapshot of the European energy service

market in 2010 and policy recommendations to foster a further market development, Energy police 39,

6190 – 6198.

BUILDINGS PERFORMANCE INSTITUTE EUROPE, 2010, Financing Energy Efficiency (EE) in Buildings -

Background Paper

STANIASZEK DAN AND LEES EOIN, 2012, Determining Energy Savings for Energy Efficiency Obligation

Schemes, eceee

EPEC, 2012, European PPP Expertise Centre (EPEC), Guidance on Energy Efficiency in Public Buildings

Directive 2006/32/EC

INTERNATIONAL ENERGY AGENCY, IEA (2009), Worldwide Implementation Now Boosting the economy

with energy efficiency financing

MOSTERT, W. (2010), Publicly-Backed Guarantees as Policy Instruments to Promote Clean Energy, UNEP

– Sustainable Energy Finance Alliance.

EUROPEAN COMMISSION, EC, 2014, webpage:

http://europa.eu/legislation_summaries/internal_market/businesses/public_procurement/l22009_en.h

t

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