Energy Efficiency as an Investment Proposition

26 November 2009
 The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views or policies of
the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does not
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interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.

Disclaimer

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Table of Contents

1. How Does the Bank Define Energy Efficiency

2. What is the Financing / Investment Opportunity
3. How Does the Bank Analyse the Opportunity

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Energy Efficiency: Sector Definition
ENERGY EFFICIENCY SECTORS

SUPPLY SIDE INDUSTRY TRANSPORT BUILDINGS DIGITAL ENERGY

Distributed Generation Process Control Electric Vehicles Lighting Virtual Power Plants
Load Leveling Waste-heat recovery Efficient Combustion Building Materials Smart Metering
High Temp. Combustion Motors Materials Windows Data Centres
CHP Pumps Insulation Demand / Response

Covers technologies that Includes technologies Technologies that reduce Covers technologies Technologies which
result in step-change used to streamline and fuel consumption which reduce the use of monitor and relay digital
improvement in the save resources in associated with all types energy in homes, retail information about supply
generating efficiency or industrial processes. of transportation. E.g. and commercial buildings. and demand between
the reduction in GHG hybrid vehicles, electric energy users and power
E.g. process control and E.g. advanced insulation
emissions of existing vehicles, electric vehicles produces.
monitoring, sensors and and building components,
power generation infrastructure and
software and waste-heat lighting, intelligent Plus self-healing grids,
equipment. combustion efficiency.
recovery systems etc. virtual power stations and
E.g. breakthroughs in ……………………….…… It does not include …………………………… automated demand-side
motor or generator ……… biofuels, LNG or CNG, …………… energy reduction
design, or software and nor power storage
sensor and control technologies
technologies ……..............

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 Potential Alternative Energy and Environmental Investments
Total USD 3.5 trillion Through 2020

Projected investment for subset of carbon abatement opportunities

Total
Scale of potential investment through cumulative
2020, 2007 USD billion investment
SCB footprint – Critical to climate
Wind
change and renewable resource
630
“rich”
Solar 543 543 • SCB’s footprint will contribute
Energy
~1,90
Generation**
0
75% of all incremental CO2
Nuclear 270 270 emissions till 2030

Other 520 520 • SCB’s footprint has 60% of

world’s total solar power
Buildings Residential 800 800 generation potential
efficiency ~100
(e.g., insulation) Commercial 200 0
200 • SCB’s footprint has 50% of
world’s (excluding USA) total
Transport Biofuels 330
efficiency 330 wind power generation potential
(e.g., ~600
Automobile
autotechnology) 250 250
technology

Total 3500
3,543

* Based on 2005 investment figures

Source: McKinsey analysis.

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 Global Energy Efficiency Opportunity

Energy efficiency represents
an opportunity to invest Capital Requirements for capturing global energy productivity
USD170bn pa to 2020, with opportunity, USD Billion / annum
an average IRR of 17%

Total 170 Total 170

This could halve the
projected increase in global
energy demand Transportation 25 Other
Developing
69

Would deliver half of the Commercial 22 China 28

emission abatement required
to cap the long term
concentration of GHGs in the Other
Residential 40 35
atmosphere to 450 ppm Developed
USD Billion USD Billion

Industrial 83 USA 38

Would represent a reduction
of energy use by 13
quadrillion BTUs a year, 0 50 100 150 0 50 100 150
equivalent to 4 million
barrels of oil a day

Source: McKinsey; Assumptions: existing technologies used, only potential with IRR greater than 10% included

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 Energy Efficiency Opportunity in Developing Countries

Just by using existing End-Use Energy Demand by Region, 2005-2020,

technologies developing Quadrillion British Thermal Units (“BTUs”)
countries raise their energy
productivity and slow Total: 231 380 93 287
increase in energy demand
400
5 USD 90bn pa
350 27 of investment
10

This would save consumers 29 required
300 14
and business USD 600bn a 45
22 7

Quadrillion BTUs
year by 2020 250 36 29 Savings of
11
16 30 USD 600bn pa
42
200 23 14 possible
30
23

This is achievable with an 52 31 32
150 26
investment of USD 90bn 26 38
annually 2008-2020 – or about 100 42
138
half the amount required to be 50 106
74
invested in energy
0
infrastructure to keep pace
2005 Energy Projected 2020 Demand Potential Lower
with increasing demand Demand Energy Demand Abatement Energy Demand
Opportunity from in 2020
Energy
Productivity

Column 1 China Eastern Europe Latin America

Southeast Asia Middle East India Africa

Source: McKinsey; Assumptions: Global GDP of 3.2% annually to 2020, av. Oil price of USD 50 / barrel)

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 Example - Waste-Heat Recovery

There are 11 GW of waste-
heat to electricity projects
in the CDM pipeline

There are also many
projects using waste-heat
projects for thermal use

These projects require an
investment of ~USD 12bn

The industrial sector is one
of the easiest and
cheapest sources of waste
heat – e.g. from iron and
steel production processes
DEFINITIONS
Process of recovering heat discharged as a by-product of one
Waste-Heat Recovery
process to provide heat needed for another
Waste Heat-to-Electricity
Using recovered waste heat to generate additional electricity.
E.g. via steam turbine
Cogeneration / or Combined The production of electricity and useful thermal energy
Heat & Power (CHP) simultaneously from a common fuel source
USD 5bn investment in waste heat-to-electricity in 2008 in developing markets; China and
India largest markets; Iron and steel most common industry
CDM waste heat to electricity investment Capacity of CDM waste heat to electricity
by ‘Credit Start’ Date, USD million project pipeline by country, GW
Total: 162 1,614 5,552 3,601 0.5 7.5 2.2 1
8
6000

Conventional power plants 5000

6
are about 35% efficient. 4000
usd mILLIONS

CHP technology produces

GW
3000 4
2 to 3 times the usable
energy and can raise total 2000
2
efficiency levels to 80-90% 1000

0 0
2006 2007 2008 2009 Brazil China India Other
Cement Coke Oven
Iron & Steel Power Sector
Brazil China India Other Chemicals, PetroChemicals, Other

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What is the Investment Opportunity

The issues created by Climate Change (CC) are creating a long term “through the cycle” trend that will
fundamentally change business and society, and represent a very large commercial opportunity

Standard Chartered Bank works across the entire financial product spectrum including

Project Finance

Debt

Equity (both principal investment and Equity Capital Markets)

We consider opportunities exist for all products depending on sector, stage of development and size. Key issue is
what is the right financial structure for the individual opportunity

Investors typically look for: At a Project level:

Making Investments Attractive
Attractive project financials

Predictable, long term growth

Resilient, non-cyclical earnings
Sound structuring

Commercial upside, exit
Project management

strategy
Growth story

Barriers to entry At the National level:

Regulation
Enabling environment

Cashflow
Understanding of investor

Capital structure needs

Track record, proven expertise
Reduced political risk

Transparent tariff policy

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 What are Investors Looking For

Standard Chartered Fundamentals
Bank Investor Perspective

 Infrastructure, utilities and environmental projects are Investors understand:

considered as defensive investments
 Favored in difficult financial times especially if:
 Related to concession type contracts offering steady long
term revenues
 Associated with strong Government support through policy
and regulations
 Venture capital type investments into technology are being
considered if technology is proven and related to policy /
regulatory initiatives and has clear lab to market path
 the potential in Asia
 the market drivers
 the policy and regulatory framework
 Investors are becoming more mature in their analysis
and expectations
 Investors now require proof of revenue and profit
generation potential and future growth

Utilities and energy Stocks Are Defensive Investor Interest

Particular focus areas:

 Urban utilities: water, wastewater and developing in
waste and waste to energy
 resource / energy saving
 related technology innovations

(1) (1)

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 Who is Investing – Who is Suitable
Main Investors Suitability of Investors

• Investment banks Fund Specialised Strategic Private Passive

Investor Investor Equity Financial
• Venture and PE funds
Suitable    
• Specialist funds Return
Expectations
• Multi-lateral banks
• Local banks for debt Ability to invest   X 
for the long
term
• Crucial to match project financing needs to
the needs of the investor Operational    X
• Different types of investors will be more expertise
suitable at different stages of the project /
company Investment    X
and financial
• Most investors have little presence on the expertise
ground – need to make an effort to meet them
• Finding the first cornerstone investor is the Local  X  
most difficult presence

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How Does SCB Analyse the Opportunity
“REEF” has gained focus due to :
• Volatility in fossil fuel prices (crude oil tripled since 2006 to July 08 and has fallen by 66% since then)
• Greater focus by countries on energy security to reduce geopolitical dependence
• Reducing capital cost of REEF technologies
• Government policies to support REEF
• Global Warming (“GW”) / Climate Change (“CC”) concerns

Asset Financing in SCB footprint has CAGR of 63% over last 4 years, reaching USD 17bn in 2008
$155.0bn
160 $148.4b
M&A + Asset Fin. 4%
140

120
VC & PE Funding
60% Key Message
100 $92.6bn

80
58% EE Is an established opportunity
$58.7b
60 with strong policy support
40 $33.4bn
76%
demonstrating clear investment
20 39% potential and is bankable
$13.3 bn $15.4b
$2.5b $6.4 bn $9.3b
0
2004 2005 Source: New2007
2006 Energy Finance
2008E

… Fiscal stimulus / US / growth characteristics of policy support likely to become a key drivers

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 How Does SCB Analyse the Risk

Energy Efficiency investments are a target of the Bank and will be governed by:

SCB adherence to Climate Principles:

“Minimise our operational carbon footprint”

“Make business decisions that will reduce climate change risks and allow the development of climate-change
related opportunities”

“Develop products and services that enable our customers to manage their climate change related risks and
business opportunities”

“Engage with our customers, suppliers and wider society to seek opportunities for a low carbon economy”

“Support the development of sound energy and climate change policy” and

“Disclose progress against our commitment

Internal position and sector statements including our commitment to sustainability

Credit procedures – main issues to-date have focussed on:

Technology risk / unfamiliarity of technology

Track record in demonstrating energy saving and resulting cashflows

Recourse – to what ?

Benchmarks

Unfamiliarity with ESCO type model in Asia
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 Case Study: Standard Chartered partners with ADB
in USD 114.5 million Energy Efficiency Initiative in China
Standard Chartered has been selected by the Asian Development Bank (“ADB”) as
the first partner financial institution in its Energy Efficiency Multi-Project Financing Program in China

• The Asian Development Bank (ADB) is extending 800 million yuan (about US$114.5 million) in a partial credit guarantee program to support small and medium
sized private sector energy-efficient projects in CHina
• The Energy Efficiency Multi-Project Financing Program is ADB’s first credit guarantee to mobilize commercial financing in PRC
• ADB has selected Standard Chartered Bank as the first partner financial institution in the pilot program that will initially target energy efficiency programs for
buildings

The Energy Efficiency Multi-Project Financing Programme Standard Chartered’s Role

 Energy demand in PRC, the world’s second-largest energy consumer and one of its largest  Standard Chartered will share the credit risk with
emitters of greenhouse gasses, is growing rapidly to support its economic growth. ADB, on projects identified by the partner
energy management company that have
 This program will enhance access to domestic finance by a large number of energy end users in significant energy saving potential.
PRC for more efficient energy use in existing and new buildings.
 The ADB has worked to develop and structure
 The program will support the retrofitting of existing buildings, typically leading to energy savings the program effectively as a private-sector
of 20%-40%. The program will also support energy efficient “green buildings”. transaction in order to make the program
 Given PRC’s rapid urbanization, energy efficiency of buildings will have long-lasting and large replicable with private-sector investment not only
cumulative effects of reducing energy use and greenhouse gas emissions. in PRC but also in other regions.

“… We are very pleased to have a credible international financial institution such as Standard Chartered Bank to participate in the
program,” …” S. Chander, Deputy Director General of ADB’s Private Sector Operations

“… This project demonstrates our commitment to growing our business and to deepening our environmental sustainability agenda in
China, where we have been active for 150 years….” Jaspal Singh Bindra, CEO, Standard Chartered Asia

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 Case Study: Wayang Windu 220 MW Geothermal Plant in Indonesia

Standard Chartered was the Financial Advisor, Sole Arranger and Underwriter for the
financing of Wayang Windu Geothermal Plant in Indonesia – US$300 million (Status: Closed)
• Two 110 MW geothermal power plants
• USD 156 million refinancing of Unit 1; USD 141.5 million financing of Unit 2; both facilities underwritten by
Standard Charterd
• First IPP financing after the Asian financial crisis
• Standard Chartered prevented delay of Unit 2 construction pre-funding the entire face vale of the bonds being
taken out under the refinancing
• Project is equator principles compliant and is currently seeking validation for Certified Emission Reductions
(CERs) or carbon credits.

Project Characteristics Financing Structure Characteristics

 The Wayang Windu geothermal power project consists of  Offtaker: Both units operate under a single Energy Supply Contract with the Indonesia
two 110 MW units. electricity utility (PLN) effective until 2038.

 Unit 1 has been in commercial operation since 2000 and a  The electricity tariff is fixed at ~US 5.5cents/kWh
110 MW expansion project (“Unit 2”) began operation in
2008  PLN’s obligations under the ESC are supported by the Ministry of Finance of the Republic of
Indonesia
 In 2006 Standard Chartered was mandated to advise and arrange
on the USD 141.5 million financing of Unit 2 expansion, and the  SCB structured and provided interest rate swaps for both Unit 1 and Unit 2 facilities
USD 156 million refinancing of Unit 1

 Financing was concluded in 2007, with the final maturity date in
2014
 The Project is 100% owned by Magma Nusantara Limited (“MNL”)
 The project complies with Equator Principles and is currently
seeking validation for Certified Emission Reductions (CERs) or
‘carbon credits’.
Financing Challenges
 Prior to refinancing Unit 1 had bonds outstanding – and it was foreseen that the bondholders
could impede the expansion – Standard Chartered with its undiluted support for its client,
decided to refinance Unit 1 and take out the bondholders. Standard Charterted pre-fund the
entire face value of the bonds, to ensure a quick take-out.
 Standard Chartered with its robust syndication network, was able to source interest from
Indonesian as well as international financial institutions for the financing.

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SCB Activities in REEF Sector

Business Initiatives Policy / Strategic Initiatives

• SCB has housed a dedicated Renewable Energy team since 2004,

and has mobilized over $4 billion of capital in 15 deals across
virtually all segments of the renewable energy market
 Geographies – Asia, Africa, Middle-East, US and Europe
 Sectors – Wind, Solar, Run-of-the-river Hydro, Carbon,
Geothermal, Biofuels
• Advisory and financing in water sector – raised US$ 20billion for 16
desalination plants in the Middle East with a capacity of 6.5 million
m3 / day.
• Principal Finance / Asian Infrastructure Fund:
 €50m investment in Climate Change Capital’s Carbon fund
 Standard & Crystal Water - Chinese water supply and
wastewater treatment
 US$40m investment in Environmental Facilities Management
Corp., a Korean water treatment company
 Meiya Power - North Asian power generation company
(increasing “green” capacity to 40%)
• World Economic Forum – serving on the expert committee on Green
Investing and Water initiatives
• Member of Carbon Finance Working Group for Project Catalyst
(McKinsey’s work to support the Global Deal)
• Steering committee for IFC-McKinsey’s Global Microeconomics of
Water Project
• Corporate sponsors for McKinsey’s Climate Change Adaptation Project
• Corporate Sponsors for the China Greentech Initiative – an in depth
collaborative analysis into the Chinese Cleantech sector
• Energy efficiency financing through a partnership with Asia
Development Bank – worth >USD100m over 9 years

• Clinton Global Initiative: Commitment to mobilize US$ 8-10 billion in

Renewable Energy and Clean Technology.

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Standard Chartered Contacts

Gurchi Kadan Frank Belitz

Managing Director Director – Head of Asia
Head of Origination and Client Coverage Renewable Energy & Environmental Finance
Indonesia Singapore
Office: + 62 21 2555 0400 Office: +65 6228 3404
Mobile: +65 8181 2940
Email: gurcharan.kadan@sc.com Email: frank.belitz@sc.com

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