Author: Judita Páralová, Factoring KB, a.s.
Who among us does not occasionally need to find savings? This challenge is increasingly becoming our everyday reality. Energy savings are unquestionably one of the most important topics in this regard. The implementation of so-called EPC (Energy Performance Contracting) projects, or energy services with a guarantee of savings, including their financing, is a successful and proven model promoted in the Czech Republic on for making savings.
The fundamental principle of EPC project is that investments in energy-saving measures are repaid from the energy savings achieved. These EPC projects are comprehensive projects aimed at reducing overall energy consumption using a combination of investment and non-investment measures, with a focus on implementation of new technologies. The complete service is offered by a single supplier, who contractually guarantees a certain level of energy savings and return on investment. The client subsequently repays the investment through operating cost savings in the form of a pre-determined payback schedule over a medium or long period of time, often 6 to 10 years.
Among the first to progressively build up successful know-how for financing the aforementioned EPC projects and other energy-saving projects was the Komerční banka group, which places a sustainable future among its priorities. For more than 13 years, it has remained one of the few banking groups in the Czech Republic that has proven to be a reliable and trustworthy partner for energy-saving providers. Through its subsidiary, Factoring KB, it provides tailored finance to EPC project suppliers in the form of the acquisition of receivables from completed deliveries. This option provides suppliers with the comfort of getting the invested funds immediately upon the handover and invoicing of the total project, as well as the significant benefit of being able to remove the receivable from their balance sheet due to the non-recourse nature of the agreement.
Suppliers are not the only ones who gain from debt purchases. The most common clients of EPC projects are cities, municipalities and other public and state institutions such as hospitals, schools, universities and the like. However, business entities, including manufacturing, can also benefit from this approach. The advantage of the debt purchase approach is that, as the owner of the receivable, the supplier guarantees its financing by assigning it to a financial institution, in addition to being accountable for the project’s successful completion.
The client does not necessarily need a standard bank loan. The client is simply required to provide responsibilities arising from supplier relations, which for municipalities and public sector organisations are typically not recorded as debt service. The purchase of a receivable by a financial institution only changes the creditor of the receivable, and therefore the payment instructions. The client does not need to be concerned that this will restrict his rights under the EPC contract. All conditions and obligations are still in place. The financial institution assumes the risk of non-payment of the receivable due to insolvency or unwillingness of the customer to pay, but not the risks associated with any complaints or disputes that could arise during the performance of the required services under the contract.
Combinations of several forms of financing are not uncommon in the implementation of projects. On the contracting authority’s side, there are also possibilities to use both their own resources and, in recent years, subsidies, with which the Czech Government have attempted to support energy savings.
The next question becomes, how does the financial institution evaluate and choose which projects to fund? In addition to examining the client’s creditworthiness and ability to repay the assigned receivable, it examines the supplier. These must be organisations with sufficient know-how that can not only produce energy savings but also guarantee them for the duration of the EPC contract.
The key aspect is therefore cooperation across the individual participants – the client, the supplier/energy service provider (ESCO) and the financing institution. All this means timely transfer of information and mutual cooperation, for example in the provision of documents. In the case of some transactions, this is supplemented by a well-structured agreement on a common procedure that specifies mutual rights and obligations, as well as invoicing and payment systems, ensuring financial transparency throughout the process. This concept, which has long been utilised in the Czech Republic, is a practical example of a structured financial ecosystem that mobilises investments in the of energy saving and decarbonization projects, and an example of good practice shared within the LEVERAGE Accelerator to explore its applicability across Europe.