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

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

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

The Result

To date, few EE projects financed by lending institutions, ESCOs, EMCs, or leasing companies

Possible Solution

Create a financial mechanism that can enhance the credit of the borrower,

Bypass traditional credit requirements

or… Combines both strategies

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

Probably not…also need

insurance backstop guarantee New payment channels with

safeguards

Is That Enough Security?

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

Some kind of grant funding that would serve as “first-loss” equity to mitigate

insurers risk

Public-Private Partnership

How To Attract Insurance Companies?

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

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

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%

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

$

$

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

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

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

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