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Asia Clean Energy Forum 2012

Managing Risks in Clean Energy Projects – Session 22
7 June 2012

Agenda

1. 2. 3. 4. 5.

The Energy Efficiency Opportunity Climate Change and the Insurance Industry Financial Risk Management Instruments and Energy Efficiency China Case Study Practical Lessons Learned

The Energy Efficiency Opportunity

The Energy Efficiency Opportunity

Asia Pacific Energy Efficiency market
 Pike research suggests that revenue from the ESCO market in the Asia Pacific region will grow six fold from 2009 – 2015 - a market which will require enhanced funding.  “HSBC estimates India’s Energy Efficiency market at US$77 billion”
– FT.com 1/5/2011

 According to The International Energy Authority, every $1 spent on energy efficiency accounts for $2 in energy savings.
ESCO Revenue, Asia Pacific: 2009 - 2015
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

$ Millions

2009

2010

2011

2012

2013

2014

2015

Source: Pike Research

Energy Efficiency Projects (EEPs) in Asia

 Accelerate EEPs in Asia requires financial risk management innovation  Scale and scalability impacts financing - “Hosts” and “ESCOs”  Key barriers to development of EEPs in Asia – Credit Default and/or Counter Party risk – Performance Risk  Utilize insurance platforms and financial risk management instruments

Financial Risk Management Instruments to accelerate EEPs in Asia Pacific

Climate Change and the Insurance Industry

Natural catastrophes 2011

Major catastrophic event patterns 1989 - 2011
(Insured losses, $ billions)
Major catastrophic property risk exposures and events
1H 2011 Total CAT losses estimated at $80 to $90 bn Australia Cyclone /Australia Flood / New Zealand II / Japan / US Tornadoes / New Zealand III

90 80

Earthquake

5.0
Windstorm “Hard” Market Turn

7.0 1.0 15.0
“Hard” Market Turn

70 60 Insured loss in $ bn 50 40 30 20 10 0
Hugo 7.3 Northridge

Terrorism

Katrina / Wilma / Rita

Flood “Hard” Market Turn Andrew 9/11 8.5 Charley Ivan Frances Jeanne 45.3

Gustav Ike 2.2

Xynthia Chile New Zealand

39.0

23.8
11.3

22.8

8.1 5.2 4.2

11.3

2.9

1.4 12.0 1.0
2.3

12.5
6.2

8.0 5.0

1989

1992

1994

2001

2004 Event Year

2005

2008

2010

2011

Since 2004, focus has been on Windstorm losses in the US – now shifting to Earthquake risks, with an international concentration of events
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What Concerns the Insurance Industry ?

Source: Nat Cat Risk Management from (Re) insurers perspectives (2011) Dr He Hua, 9th Conference on Catastrophe Insurance in Asia.

Financial Risk Management Instruments and Energy Efficiency

Financial Risk Management Instruments - Energy Savings Insurance
 Address counterparty credit default exposure in Energy Efficiency Projects and consequential impact to debt service obligations. Two key perils to be insured:
– Performance Shortfall – Credit default and/or insolvency of host facility (ies)

 Reimburse the Loan Provider(s) and Loan Recipient(s) when a reduction in expected performance levels exceeds a fixed % of the expected savings  Reimburse the Loan Provider (s) and Loan Recipient (s) for up to 90% of losses resulting from non-payment due to:
– Customer or host bankruptcy, – default on payment, and /or – energy management contract cancellation.

 Term of Coverage: Term of the Loan or maximum 5 years  Per project and annual aggregate caps to be negotiated - linked to debt/equity ratios

Financial Risk Management Instruments – Energy Savings Insurance

Investors

Finance for Energy Efficiency Project

ESCO

Credit Facility

Energy Savings Insurance

Energy Efficiency Services

Payment from Measured and Verified Savings Achieved

Host Facility
Source: Aon Risk Solutions

Financial Risk Management Instruments - Performance Guarantee Facility (ies)

 Accelerated growth in EEPs will bring aggregated EMC volumes  Introduce Surety as Performance Security option  Diversify away from bank instruments:
– Alternative to LCs and/or other bank instruments – Reduce reliance on bank credit utilization

 Surety as supplementary instrument to LCs in Asia  Role of Multi-Lateral Lenders such as ADB/IFC MIGA/OPIC – Balance sheets of major ESCOs versus SMEs – “First Loss” position – Guarantors of Last Resort

Financial Risk Management Instruments - Performance Guarantee Facility (ies)

Investors

Finance for Energy Efficiency Project

Performance Guarantee Facility

ESCO

Credit Facility

Energy Efficiency Services

Payment from Measured and Verified Savings Achieved

Host Facility
Source: Aon Risk Solutions

Financing Energy Efficiency Projects (EEPs) - China Case Study
      Concept of Supply Chain Carbon Risk Management China’s emissions could grow as much as 90% from 2005 to 2020 Over 50% of Chinese exports manufactured for foreign companies Scale and scalability impacts financing costs - “Hosts” and “ESCOs” Global Corporates and supply chain carbon risk management China’s 12th Five Year Plan Energy Efficiency Regulation - Suppliers need to prepare for regulatory or other changes associated with climate change and GHG emissions

A new paradigm EEP platform based on supply chain risk management and product liability insurance procurement model

EEP China Case Study – Practical Lessons Learned
     Lenders/Insurers perception of ESCO and Host Facility credit risk Lack of reliable data on credit risk/default Scale and scalability is objective for both equity, debt and insurers ESCO “bandwidth” – global versus local and “horses for courses” Role of “Sponsor” – Provide incentives to supply chain (increased orders, longer contracts)? – Secure payment streams? – Participate in funding?  Public private partnership framework to address market barriers  Insurance Industry must lead by example: – Presently funding the cost of extreme weather – Financial risk management instruments to support investment in Energy Efficiency

Contact List
James A. Maguire Regional Managing Director, Asia Gary Swinfield Regional Director, South & Southeast Asia

Construction, Power & Infrastructure Specialty
+852.2862.4293 james.maguire@aon.com

Construction, Power & Infrastructure Specialty
+65.6231.6315 gary.swinfield @ aon.com

Brian DeBruin Regional Director, North Asia Construction, Power & Infrastructure Specialty +852.2862.4296 brian.debruin@aon.com

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