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Financing the New Age of Electricity

The world’s energy demands continue to rise at a time when there is a growing need to reduce carbon emissions and protect the environment. Cities already emit 80 percent of human-made greenhouse gases and are responsible for 75 percent of the world’s energy consumption. In fact, the World Bank has estimated that urban areas will have to account for up to 80 percent of the expected $80-100 billion per year in climate change adaptation costs (per Economics of Adaptation to Climate Change, World Bank).

The transition to a clean-energy future envisages a three pronged approach – one-half of the necessary reduction in emissions would have to be achieved from improved energy efficiency, one-third from renewable energies and one-fifth from the splitting, storage and use of CO2. However, each one of these measures comes with its own set of challenges, not to mention hefty price tag. The question to be asked is who will finance the new age of electricity?

We can start with the most important measure – identifying efficiency improvements in current power generation, transmission, and consumption patterns. This necessitates a complete overhaul of traditional mechanisms. While green targets are increasingly finding favor within corporate agendas, a study conducted by SFS highlighted that an overwhelming majority find the cost of greener equipment as their chief obstacle to green procurement policies.

Even new technologies such as Carbon Capture and Storage (CCS) are not so easy to implement – the US Department of Energy estimates show that the cost of implementing CCS at an existing power plant can increase capital costs anywhere from 25 percent to 80 percent, depending on the type and configuration of the plant.

The capital intensive nature of renewable energy projects poses another set of issues. Their extensive due diligence in terms of technical, environmental, economic and legal factors is sufficient to deter most investors. Moreover, the longer tenures and lower spreads of these deals mean that short term considerations of investors often compete with strategic needs.

During and immediately after the financial crisis, the “flight to quality” set in for most banks and other financiers. There were more projects chasing less money and financing was available under especially stringent financial conditions – lower debt/equity ratios, reduced maturities and more conservative risk allocation structures.

While government stimulus packages and growth in developing countries like China has helped the renewable energy sector to quickly bounce back, there is an ever increasing gap between investment needs in these projects and the cash available to cover them.

Private investments and reliable investors have thus become even more important in order to get environmental projects financed. In particular, a financing partner that has industry expertise who is able to understand project developers’ needs better and can also assist in identifying and procuring the best equipment/technology is the need of the hour.

Here is where an integrated offering comprising technology and finance best addresses most challenges project developers currently face – enabling speedy and efficient execution. While customers enjoy the benefits of having a one-stop shop for their needs, the financial backing provided by the equipment maker also underscores its confidence in its products.

With an increasing pressure to do things more cost effectively, it is even more important and necessary to enable efficiency gains made from technology to be routed towards financing projects. We have already pioneered an immensely successful energy-saving contracting model to help reduce energy consumption via green technology implementation, thereby allowing stakeholders to finance their investments in new technology with the money saved on energy.

A prime example is the strategic partnership Siemens entered into with Beijing Chaoyang District Government to promote energy saving and emission reduction in public buildings and other areas. Siemens Financial Services provided the district government with a five-and-a-half year equipment leasing solution, enabling project costs to be met wholly from the savings achieved through reduced energy consumption and better operational efficiencies. This was a “zero investment plus zero risk” from the customer perspective.

Similarly when Siemens provided its latest LED technology to power the traffic light system in Freiburg, Germany, helping to not only lower the city’s electricity costs but also reduce carbon emissions, we developed a special financing program for the project. Spread over a 15-year term, the highlight was that installments could be fully financed from the energy savings made from the new LED technology.

Even with smaller private players who are looking to retrofit their operations, we have a successful track record. In the case of Florida Institute of Technology (FIT), the university was keen to build a green campus making its utilities efficient and cost effective. When the design of the project was complete and approved by the board, it was just around the time of the global financial meltdown. Availability of funds held up the project for close to a year when we came forward with a creative solution that met the needs of the institution. SFS underwrote the project and spread the payment transaction process over a 20 year period. The key was to defer the financing payment beyond the one year construction period so that the customer didn’t have to realize any out of pocket expenses. In fact, Florida Tech realized a positive cash flow from energy savings and after deducting expenses from year one.

That the world will continue on the path of industrialization and urbanization is a given. At the same time, limiting the environmental impact of this progress is necessary too. With integrated technology and financing solutions, making clean energy the norm does not seem that distant a dream.

Roland W. Chalons-Browne is President and CEO of  Siemens Financial Services GmbH; Munich. Based in Munich, he is responsible for leading Siemens Financial Services business worldwide. Roland has been CEO of Siemens Financial Services Inc. in the U.S. since October 2005. Based in Iselin, New Jersey, he was responsible for leading commercial finance and leasing business across North America. Prior to joining Siemens, Roland served as Managing Director of WestLB in the Americas from 1989 through 2004, including securitizations of future cash flows, project and structured finance deals, and transactions in natural resources. The Financial Services unit of Siemens is an international provider of financial solutions in the business-to-business area. The international network of financial companies coordinated by Siemens Financial Services GmbH in Munich, comprises more than 2,500 employees worldwide. Financial Services supports Siemens as well as other companies, with a particular focus on the Sectors of Energy, Industry and Healthcare. The unit finances infrastructure, equipment and working capital and acts as an expert manager of financial risks within Siemens. End of June 2011 the total assets amounted to EUR 12.8 billion. For more information see: www.siemens.com/finance.

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