Opportunities and Challenges to ESCO Model in Vietnam

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Opportunities and Challenges to ESCO Model in VietnamNguyen Dang Anh Thi January 14, 2013

Table of Contents

ESCO Business Model 3

Status of ESCO in Vietnam 6

Legal Framework 7

Market Opportunity for ESCO Development 8

Major Challenges to ESCO Development 12

Case Study 14

Recommendations for ESCO Development 16

Appendix: Key ESCO Players 17

Energy Service Company (ESCO) Business Model

What is an ESCO? ESCO is an organization that offers

a broad range of energy-saving solutions, including energy audits, design and implementation of energy conservation measures, operation and management of introduced facilities, and procurement of project funds.

The basic concept of ESCO is that the client does not have to incur any upfront capital investment and is only responsible for the payment for the investment made or arranged by the ESCO.

Two key remuneration models of ESCO contracts: shared savings and guaranteed savings

Energy Consumption

or utility cost

Energy Consumption or

utility cost

EClient’s financial gain

Repayment

Interest

Capital investment

ESCO’s fee

Guaranteed

Before ESCO

project

During ESCO

project

Energy Consumption or

utility cost

Client’s financial gain

After ESCO

project


Shared Savings Financial Model

Source: IFC energy service company market analysis (2011)


Guaranteed Savings Financial Model

Source: IFC energy service company market analysis (2011)

Status of ESCO in Vietnam

Overview The ESCO market in Vietnam is still in its infancy and unlikely to develop without sustained

government support.

There are about 15 “so-called” ESCOs operating in Vietnam. These are generally small in size and weak in asset base.

Data on level of ESCO activities is limited

Majority of ESCOs in Vietnam remain incapable in terms of finance and technology, therefore they only offer simple services and haven't fully met market demand

Most of ESCOs can not access to financing due to limited financing capacity and weak balance sheet.

National EE Law

National EEprograms

Grants for ESCO

Energy Auditassistance

Tax incentives

Yes Yes No No No

Legal Framework

The Law No. 50/2010/QH12 on Energy Efficiency and Conservation took effect in 2011;

Decree No. 21/2011/NĐ-CP of the Government provides guidance on the implementation of the Law on Energy Efficiency and Conservation;

Decision No. 1427/QĐ-TTg dated 2nd Oct. 2012 approving the National Target program for Energy Efficiency and Conservation in period 2012-2015;

Decision No. 1393/QĐ-TTg dated 25th Sep. 2012 approving the National Green Growth Strategy;

The Law No. 59/2005/QH11 on Investment; and its guidance documents; The Law No. 60/2005/QH11 on Enterprises; and its guidance documents; The Law No. 14/2008/QH12 on Corporate Income Tax; The Law No. 45/2005/QH11 on Import Tax and Export Tax.

Market Opportunity for ESCO Development in Vietnam

Huge market potential Power consumption is forecast to increase from 81TWh

in 2010 to 451TWh in 2030 while supply is shortage.

More than 1,200 key energy-consumption facilities using over 1,000 TOE per year

The total investment needed for EE projects during 2011-2015 is US$ 847m

Fuel shortage after 2015 Vietnam has started to import steam coal and oil

products over the last 5 years

Although oil is currently its largest source of export revenue, Vietnam is projected to become a net importer by 2015

Industrial Commercial

$368

$479

$94 $96

Total investment potential (US$ million)Annual saving potential (US$ million)

Source: Reexcapitalasia, October 2010

Market Opportunity for ESCO Development in Vietnam (Cont.)

Current efforts of the Government and international organizations to create electricity market based on competitiveness Removal of fuel subsidies

Power sector reform based on competitive market

Interest of stakeholders in energy efficiency market Campaign on EE launched in Nov 2012 under which Vietnamese firms having EE projects will

have an opportunity to borrow capital from various financial institutions such as:

IFC at $100 million

Danish embassy at $30 million

Asian Development Bank at $100 million

World Bank at $70-$100 million, and

Japan International Cooperation Agency at $50 million

Energy Efficiency in Industrial Sector

Food products and beverages

Non-mentallic mineral products

Fabricated mental products

Chemicals and chemical products

Textiles0

20

40

60

80

100

0

2

4

6

8$103

$42 $38$29 $28$30

$9 $9 $8 $5

3.4

4.74.2

3.9

5.6

Total investment potential (US$ million)

Annual saving potential (US$ million)

Payback(in years)

US$

mill

ion Y

ears


Energy Efficiency in Commercial Sector


Hotels Commercial offices Retail outlets0

100

200

300

400

500

0

2

4

6

8

10

12436

834

92

1 3

4.6

6.6

10.7

Investment potential Annual Saving Potential Payback

US$

Mill

ion

Year

s

Difficulty accessing financing Scarce capital and immature banking sector

ESCOs are not aware of how to access financing

Unawareness of existing grants, loans, credit facilities offered by a large number of international financial support mechanism.

Unclear system for accessing domestic source of capital

ESCOs and their clients are unknown or not considered creditworthy

Lenders is lack of familiarity with EE financing

Lenders is lack of confidence in return of EE projects

High administrative and transaction costs related to technical challenges, time-consuming contract negotiation, lack of a legal and

institutional framework and complicated government procurement rules

Major Challenges for ESCO Development in Vietnam

Governmental supports in terms of policies and measures are not sufficient: No tax incentives

Lack of an effective overarching and comprehensive EE policy framework

Insufficient financial support and assistance

Electricity price subsidies negatively effect energy investment

EE is not yet regarded as top business priority by many companies Users are not fully aware of EE and not confident that equipments deployed can achieve projected

savings

Challenges of the EPC business model: Low profit margin due to electricity price subsidy

The uncertainties associated with remuneration based on guaranteeing savings

Risks associated with clients who do not fulfill their end of the contract

The costs associated with preparing complicated bids that may not be successful

Major Challenges for ESCO Development in Vietnam

EERF Founded in 2003 Total budgeted size: US$235mil

13 banks

EE/RE Developers

max amount ~ US$1.6m/projectLoan term: max. 7 years

Repayment + Interest (max. 4%/year)

Credit lines of US$ 2.5-10 mil/bank

Repayment within 10 yearsInterest (0.5%/year)

Projects financed: 294 Total investment: UD$519 mil Financial saving: US$177

mil/year Energy savings: 320 ktoe/year CO2 reduction: 1 mil ton

annually

Resulted

Source: Center for Clean Air Policy, 2012

Case Study 1: Thailand’s Energy Efficiency Revolving Fund (EERF)

ESCO Fund (US$32.6 mil)

Non-profit foundation

EE/RE Developers

Projects financed: 39 Total investment: UD$166 mil Financial saving: US$30

mil/year Energy savings: 23.97 ktoe/year

Resulted

Phase 1: 2008-2010 Phase 2: 2011-2012

Equity investment: (10-50% of project, max US$1.6 mil, 5-7 years investment)

ESCO venture capital: (max US$1.6 mil, 5-7 years investment)

Equity leasing: (up to 100% of project cost, max US$0.3 mil, payback <5years, interest rate 4%)

Technical Assistance: (up to US$3250/project) Credit guarantee facility: (up to US$0.3 mil/project, < 5

years, 1.75% guarantor fee) Carbon credit trading

Source: Center for Clean Air Policy, 2012

Case Study 2: Thailand’s ESCO Fund

Having a focal agency to coordinate all EE programs funded by local and international organizations.

Developing financial support mechanisms: Dedicated debt agencies, development funds or grants, loan guarantees… Thailand’s EE Revolving Fund and ESCO Fund could be suitable models to learn.

Building legal framework for ESCO business Capacity building: ESCOs, bankers, end-users, governmental agencies.

Recommendations for ESCO Development

KEY ESCO PLAYERS

APPENDIX

Key ESCO Players

Company name Description

ECC-Ha Noi Established in 2007 Supported by national budget Mainly operating in Hanoi and surrounding areas The primary function: research and consultancy assistance to organizational energy

users

ECC-Ho Chi Minh Established in 2002 as a member of the Department of Science and Technology Supported by national budget Mainly operating in Ho Chi Minh City and surrounding areas The primary function: energy auditing, technology transfer, energy conservation

training, energy conservation communication, and financial consultancy

ENERTEAM Established in 1995, Enerteam is a non-governmental organization and the first science & technology organization specializing in energy efficiency in Vietnam

Main services: energy auditing, technical & financial analysis and performance guaranty for energy saving

Completed projects: Masan, Big C

Key ESCO Players

Company name DescriptionSchneider Electric Vietnam

Moving from product sale to solution sale since 2008 Strong in providing Building Energy Management Systems and solutions Provided energy management system for Intel Manufactures, Bitexco Tower,

Hilton Hotel, Agribank Data Center, Vietinbank HaNoi, BaoViet Bank Hanoi

SYSTECH ESCO Founded in 2006 Main services: providing equipment and energy saving solutions Involved in several EE projects sponsored by foreign organizations (Meet Bis,

Danida, UNDP, GEF, Jica, USEP, WB, SIDA,..)

HATECH ESCO Founded in 2008, Hatech is a company under the support UNDP and the Vietnam National Energy Efficiency Program (VNEEP)

Main services: providing comprehensive packages of energy saving solutions with financial support to enterprises.

Involved projects: Colusa Miliket Foodstuff JSC, Truong Giang Seafood processing Corp, Thien Tri Paper Manufacture, Thanh Vinh Corp, Thuan An 3,…

Key ESCO Players

Company name DescriptionRCEE-NIRAS Founded in 2006, RCEE-NIRAS is a Danish-Vietnamese consulting company,

mainly operating in the North Vietnam Main Services: providing consultancy services in Energy, Climate and

Environment field Participating in several foreign Energy and Environment projects together with the

Ministry of Industry and TradeVESCO Founded in 2008 as a “backyard” of RCEE-NIRAS

Main Services: specializing in energy audit Involved in over 10 projects

VETS Mainly operating in the North Vietnam Main Services: Consultancy and implementation of EE systems Target sectors: garment, cement

Hoa Thuan Corp Founded in 2009; mainly operating in the South Vietnam Main Services: providing EE solutions for compressor machine manufacturers Target sectors: plastic industry

Key ESCO Players

Company name DescriptionSolar BK Founded in 2006; mainly operating in the South Vietnam

Main Services: providing packages of EE solutions focusing in solar and wind energy

Completed projects: Majestic Hotel, Morin Hotel, Norfolk Hotel, Sai Gon Hotel, Wooshu complex, Son Long Thuan Resort, Vinamilk, Tan Cang Restaurant,…

Viet ESCO Established in February 2012 by ECC HCMC and Veglia-the first ESCO in Japan Main services: providing packaged EE solutions and financial arrangement Succeeded with financial assistance from the International Finance Corporation

(IFC). Ongoing projects : Legend Saigon

Kasati ESCO Established in August 2012 by Vietnam Posts and Telecommunication Group and other individuals

Strategic partner: Enerteam Main services: providing packaged EE solutions and financial arrangement Completed projects: No information

Further info: [email protected]

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Opportunities and Challenges to ESCO Model in Vietnam