kenneth langer, ph.d. global environmental investment group washington, d.c. 20012 insurance...
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Kenneth Langer, Ph.D.
Global Environmental Investment Group
Washington, D.C. 20012
Insurance MechanismTo Facilitate Financing of Energy Efficiency Projects
in China
Energy & The Environment:Engineering Sustainable GrowthThird WEC Gold Metal ColloquiumMay 17, 2001
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The Opportunity Chinese industry offers some of country’s best
opportunities for energy efficiency projects Short payback period, quick installation Projects could
– make significant reductions in greenhouse (GHG) gases, and regional/local emissions
– increase productivity, make companies more competitive in global economy
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The Problem
Many SOE’s not creditworthy, highly leveraged Private companies small, young -- no
credit history Difficult to get credit guarantees, which are also
asset-based Banks not familiar with EE projects, don’t know
how to quantify risks, get back Few leasing companies operating
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The Result
To date, few EE projects financed by lending institutions, ESCOs, EMCs, or leasing companies
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Possible Solution
Create a financial mechanism that can enhance the credit of the borrower,
Bypass traditional credit requirements
or… Combines both strategies
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Assumption
Economically sound EE projects should
be able to secure loans on a partially limited-recourse or cash flow basis. Here
the performance contract and M&V contract could serve as components of project’s security package
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Probably not…also need
insurance backstop guarantee New payment channels with
safeguards
Is That Enough Security?
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Proposed Loan Structure
Loan Components
Security Package
Internal External
50% (corporate loan)
Corporate balance sheet
50%(off-balance sheet)
Performance contract
M&V contract
Insurance Improved
Payment channel
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Some kind of grant funding that would serve as “first-loss” equity to mitigate
insurers risk
Public-Private Partnership
How To Attract Insurance Companies?
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Example of Fund Structure Total at Risk: $100 million
$75 millionfrom Insurance Companies
$25 millionGrants
Revenue
Annual Premium
Earned Interest from the Grant
Expenses
Claims (first loss)
Claims
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Guarantee Structure: Example 1
Using Export Credits
US Ex-ImBank
CDB(insurance
policyholder)
Collateral
Annual insurance premium
50% debt repayment guarantee
EEproject
Insurancecompany
50% debt repayment guarantee
Repayment
Direct loan
NEW
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Guarantee Structure: Example 2Using Domestic Loans
DomesticBank
(policyholder)EE
project
Insurancecompany
50% debt repayment guarantee
Repayment
Direct loan
NEW
Annual insurance premium
Collateralloan guarantee 50%
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Difference Between IPP & EE Projects
BankBank
Utility
Project =Power Plant Host
Company
EE project
IPP PROJECTIPP is a single purpose entity:
easy to repossess
EE PROJECTEE is part of larger business:
difficult to “attach” revenue from energy savings in case of
nonpayment
Breach of power purchase agreement
$
$
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Possible Solution
Use intermediary to assure payment to various stakeholders
Example, use utility as intermediary Benefit to utility:
– service fee– sells saved electricity to new customers– reduces need to build new power plants
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Utility as Intermediary(percentages are illustrative only)
Project Utility
EMC
Insurancecompany
Bank/Leasing company
Historic electricitypayment
35% savings
40% savings
15% savings (guaranteed)
25% savings (15% pass-through)
Utility collects historic payment, retains reduced
amount
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Distribution of Savings Over Time
Bank X
Insurancecompany
X
EMC X X
Project host X X X
End payback period
End of Performance
contract
End ofproject
3 yrs 5 yrs 15 yrs
Savings
Distribution of Savings
Historic payments
Payments after project
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Product Supports China’s Economic Reforms
Interest rates are fixed by PBOC No incentive for banks to assume risk As interest rates are deregulated, banks will
adopt new lending procedures Will assume more risk in return for risk
premiums (higher interest rates) Insurance companies and banks will find
right “balance” in sharing risk