Funding mechanisms for energy efficiencyModule 4

Disclaimer

This material has been developed as part of the UTS Business School and Ernst & Young ‘Leadership & Change for Energy Efficiency in Accounting & Management’ project. The project is supported by the NSW Office of Environment & Heritage as part of the Energy Efficiency Training Program. For more information on the project, please go to: http://www.business.uts.edu.au/energyefficiency/.

This presentation is for educational purposes only, and does not contain specific or general advice. Please seek appropriate

advice before making any financial decisions.

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Introduction

One of the barriers to energy efficiency is that it is often cost prohibitive – there are scarce funds to share across the business.

This issue can be addresses by sourcing funds through alternative measures:► Grants► R&D Tax Incentives► Energy Certificate Schemes► Energy Performance Contracts► Environmental Upgrade Agreements

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Learning Objectives

At the end of this module, you will understand:► What Federal Government grants are available for energy

efficiency projects and the process to apply for a grant► The Federal Government’s Research and Development Tax

Incentive scheme and how to access it► Accounting treatments of grants and R&D Incentive► The various energy certificate schemes and how to

generate certificates► The concept of energy performance contracts and their

benefits► How to overcome the problem of split incentives with the

use of Environmental Upgrade Agreements

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Grants and Incentives Opportunities

► The Federal, State and Territory governments provide support for energy efficiency initiatives via a range of programs

► Funding programs typically cover some or all of the following:► Development of a new technology► Trial and demonstration of a new technology to confirm feasibility► Implementation of a new technology or processes to improve

environmental performance

Key Funding Opportunities

Emerging Renewables Grant $126 Million

R&D Tax Incentive Uncapped

Clean Energy Legislation PackageClean Energy Finance Corporation (CEFC) $10 Billion

Australian Renewable Energy Agency (ARENA) $3.2 Billion

Clean Technology Program $1.2 Billion

Clean Technology Food and Foundries Investment Program $200 million

Clean Technology Investment Program $800 million

Clean Technology Innovation $200 million

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Federal Government funds (1)

Initiative Funding Details Description Planned Outcomes

Emerging Renewables Grant

Available until 30 June 2012

Total funds of $126 Million, with no maximum funding accept the limit of the program funding. Some matching funding required.

Funds allocated as follows:► at least $40 million to

assist development of renewable energy and enabling technologies with potential to contribute to the generation of large-scale base load power, such as wave, geothermal and enabling technologies.

► 26.6 mil for the geothermal energy sector.

The program splits projects into two funding categories:

ACRE Projects – for renewable energy and enabling technologies and products which lower the cost of renewable energy in Australia.

ACRE Measures – renewable energy industry capacity building activity, skills development activity or a preparatory activity for an ACRE Project.

Accelerate the development of renewable energy and enabling technologies in Australia, particularly in the following sectors:► Solar► Wind► Geothermal► Wave/Ocean/Tiday► Bioenergy/biofuels► Hybrid systems

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Federal Government funds (2)

Initiative Funding Details Description Planned Outcomes

R&D Tax Incentive

Available now

A 45% refundable tax offset will be available to small-medium enterprises (SMEs) with an annual aggregate turnover of less than $20 million.

A 40% non-refundable tax offset will be available to companies with an annual aggregate turnover of $20 million or more.

Unused offset amounts may be able to be carried forward for use in future income years.

Federal tax incentive which rewards companies for conducting qualified activity in and outside of Australia in the form of a tax offset.

To encourage industry to conduct research and development activities that may not otherwise have been conducted

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Clean Energy Legislation Package (1)

Initiative Funding Details Description Planned Outcomes

Clean Energy Finance Corporation

Projected program start date: 2013 - 2014

$10 billion over 5 years.

► The renewable energy stream will invest in renewable technologies, which may include geothermal and wave energy and large scale solar power generation. ($5 billion)

► The clean energy stream will invest more broadly; for example, in low-emissions cogeneration technology, but will still be able to invest in renewable energy. ($5 billion)

Investment in the commercialisation and deployment of renewable energy, energy efficiency and low-pollution technologies. It will also invest in manufacturing businesses that provide inputs for these sectors; for example, manufacturing wind turbine blades.

Promote commercialisation and deployment of renewable energy, energy efficiency and low-pollution technologies, and manufacturing businesses.

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Clean Energy Legislation Package (2)

Initiative Funding Details Description Planned Outcomes

Australian Renewable Energy Agency (ARENA)

Projected funding start date: 1 July 2012

$3.2 billion over 9 years.

ARENA will also receive future funding from discretional dividends paid by the Clean Energy Finance Corporation and a share of future carbon pricing mechanism revenue should the Jobs and Competitiveness Program be modified following Productivity Commission reviews.

ARENA will provide early-stage grants and financing assistance for projects that strengthen renewable energy and energy efficiency technologies and make them more cost competitive.

ARENA will oversee existing Government support for programs currently delivered by the Australian Centre for Renewable Energy, the Department of Resources, Energy and Tourism, the Australian Solar Institute and the proposed Australian Biofuels Research Institute.

Distribute funds to Companies which promote clean energy technology development through a multitude of industries.

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Clean Energy Legislation Package (3)

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Initiative Funding Details Description Planned Outcomes

Clean Technology Food and Foundries Investment Program

Available Now

$200 million over 6 years.

The grant ratio is dependant on the size of the grant and the turnover of the applicant:

The program will assist food and beverage processing and metal foundries to embrace less emissions-intensive and more energy-efficient production processes and capital investment.

Examples include:► Adoption and deployment

of technologies to reduce energy use/carbon emission

► Process re-engineering involving adoption of energy or carbon efficient manufacturing

► Conversion of facilities from coal to natural gas

► Cogeneration plants► Implement energy

efficient opportunities

Reduced emissions and costs of manufacturing in the food processing sector.

Applicant to Grant Funding

Annual Turn-over

GrantSize

1:1 <100 M $25k -<500k

2:1 ≥$100M $25k-<$500k

2:1 N/A $500k - <$10 M

3:1 N/A ≥$10 M

Clean Energy Legislation Package (4)

Initiative Manufacturing Activities Covered

Clean Technology Food and Foundries Investment Program

In order to qualify for the Clean Technology Food and Foundries Investment Program, the applicant must have one of the following ANZSIC class: (1111 – 1173, 1181 – 1199, 1211 – 1214, 2121, 2141 and 2210).

Of particular note: Food and Beverage Processing and Manufacturing1. 1131 Milk and Cream Processing2. 1161 Grain Mill Product Manufacturing3. 1182 Confectionery Manufacturing4. 1212 Beer Manufacturing

Metal Foundries5. 2121 Iron and Steel Castings6. 2141 Non-Ferrous Metal Casting7. 2210 Iron and Steel Forging

Ineligible Activities:8. 1174 Bakery Product Manufacturing (Non-factory based)

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Clean Energy Legislation Package (4)

Initiative Funding Details Description Planned Outcomes

Clean Technology Investment Program

Available Now

$800 million over 7 years.

The applicant must meet prescribed energy or emissions thresholds in the 12 month period before submitting an application or be directly liable under the carbon pricing mechanisms.

The grant ratio is dependant on the size of the grant and the turnover of the applicant:

Support investments in energy‑efficient capital equipment and low‑pollution technologies, processes and products, such as:► Development of products

and adoption of technologies to reduce energy use/carbon emission

► Establish new facilities to replace existing eligible manufacturing facilities

► Process re-engineering involving energy/carbon efficient manufacturing

► Conversion of facilities from coal to natural gas

► Cogeneration plants► Implementation of energy

efficiency opportunities

This investment will help modernise parts of the Australian manufacturing sector and help manufacturers compete in a low‑carbon world, with benefits for the job security of manufacturing workers.

Applicant to Grant Funding

Annual Turn-over

GrantSize

1:1 <100 M $25k -<500k

2:1 ≥$100M $25k-<$500k

2:1 N/A $500k - <$10 M

3:1 N/A ≥$10 M

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Clean Energy Legislation Package (4)

Initiative Manufacturing Activities Covered

Clean Technology Investment Program

In order to qualify for the Clean Technology Investment Program, the applicant must have one of the following ANZSIC class: (1220 – 2110, 2122 – 2139, 2142 – 2149 and 2221– 2599).

Ineligible Activities:1. 2121 Iron and Steel Casting2. 2210 Iron and Steel Forging3. 2141 Non-Ferrous Metal Casting4. Activities covered under the Clean Technology Food and Foundries Grant

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Clean Energy Legislation Package (5)

Initiative Funding Details Description Planned Outcomes

Clean Technology Innovation Program

Projected funding start date: July 2012

$200 million over 5 years

Funding will be on a co‑contribution basis, with industry providing one dollar for every dollar from the Government.

This assistance recognises that, in some instances, a higher rate of Government support for innovation to reduce carbon pollution will be important, at least for a transitional period, until private investment increases.

The Government will provide an additional $200 million over five years for grants to support business investment in research and development (R&D) in the areas of:► renewable energy;► low‑pollution/clean

technology; and► energy efficiency.

This funding will be in addition to the broader R&D tax concession and will help Australian businesses creatively work towards a clean energy future.

Increased investment in clean technology from the private sector.

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General Features of Competitive Applications

► Company has focused strategic business plan and project fits

within core business

► Track record in successfully undertaking and commercialising

technology

► Strong management team and well qualified technical team

► Strong technical and commercial advantages for project

outcome

► Need for funding and ability to provide matching fund

► Able to quantify climate change benefit

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R&D Tax Incentive – Eligibility Guide

► Are you a company incorporated in Australia or a permanent establishment?

► Will the R&D activities:► Include experimental activities► Generate new knowledge to fill a gap in technical knowledge► Follow a systematic scientific process

► Is the company undertaking the project on its own behalf?

► Is the majority of the project to be undertaken in Australia?

► Will the company maintain contemporaneous records that substantiate the carrying on of these activities?17

R&D Tax Incentive - How to access

► Identify eligible R&D activities and calculate eligible R&D expenditure.

► Register R&D activities with AusIndustry (within 10 months of the

company’s year end).

► The AusIndustry registration team will review the application for

completeness and may ask for further information.

► Once processed, AusIndustry will provide a notice of registration which

includes a number for inclusion in the ATO R&D Tax Incentive Schedule.

► Claim the benefit by completing the Australian Taxation Office R&D Tax

Incentive Schedule and the relevant labels in the company’s tax return.

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Case Study 1 – Small manufacturing company ► A small Australian manufacturing company has become aware of the ‘waste’ heat which is created during their novel manufacturing processes.

► The company does not have internal expertise in this area but have engaged an engineering consultancy firm who has collected heat data, produced models and presented a series of potential ways to recycle the heat.

► The budgeted project costs are as follows:► Design and modelling - $250,000► Procurement and construction - $500,000► Commissioning and testing – 150,000► Project management - $100,000

► Could this project be eligible for the R&D tax incentive, what expenditure may be eligible, and what could the benefit be?

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Case Study 2 – Mining Company

► A mining company is aware that one of its current waste water plant is struggling to

process water to meet the EPA requirements, primarily due to increasing plant

throughput.

► The company has considered replicating the existing treatment plant (to double

capacity) however it has also identified an opportunity to develop a new water

treatment process, which could also reduce emissions associated with the current

process.

► The cost to duplicate the existing plant is $3 mil.

► The costs to develop a new process includes:► Design and modelling – $500,000

► Detailed design, procurement and construction - $4 mil

► Commissioning and testing - $500,000

► This second option would cost more to deliver, but could it be eligible for a

grant/R&D tax incentive?20

Accounting for Grants and R&D Tax Incentive

Government grants► Entities account for government grants in accordance with AASB

120 (Accounting for Government Grants and Disclosure of Government Assistance)

R&D Tax Incentive

45% refundable R&D tax offset: ► Should be treated as a government grant (AASB 120) rather

than a reduction in tax payable as the receipt does not depend on taxable profits, and it is certain.

40% non-refundable R&D tax offset: ► Should be treated as a reduction in current income tax

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Energy Certificate Schemes

► There are a number of schemes in Australia that support and encourage renewable energy installation and energy efficiency initiatives. The schemes are designed to increase opportunities to improve energy efficiency by rewarding companies who undertake eligible projects that either reduce electricity consumption or improve the efficiency of energy use.

Victorian Energy Efficiency Certificates (VEECs)► Current price: $19/ VEEC

Energy Savings Certificates (NSW) ► During 2011 the price fluctuated

between $25 -$31/ ESC

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Energy Savings Scheme (NSW)

How it works: ► An Energy Savings Certificate (ESC) is a tradable certificate. Each ESC

represents the equivalent of 1 tonne of CO2-e and is derived from the measurement of energy savings.

► ESCs are created by accredited certificate providers (ACPs) when they carry out activities that increase the efficiency of electricity consumption or reduce electricity consumption.

► By 18 March each year, liable parties (NSW electricity retailers) must surrender a specified number of certificates to meet with their compliance obligations for the previous calendar year.

Future Developments► The Federal Government is considering a National Energy Savings Initiative.

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How it works

Energy Saver Organisation

Implements Energy Saving actions such as lighting retrofits

Accredited Certificate Provider

► Calculates the amount of certificates, evidence of savings provided to IPART

► Generates the Energy Saving Certificates(ESC)

Trading

ACP trades ESC’s with Utilities at market price

generating cash

Cash!!

Money provided back to participant

minus any ACP Fee or commission

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Renewable Energy Certificates (RECS)

► The Renewable Energy Target (RET) creates a financial incentive for investment in renewable energy sources through the creation and sale of certificates.

The Small-scale Renewable Energy Scheme (SRES)► Creates a financial incentive for owners to install eligible small-scale installations such

as solar water heaters, heat pumps, solar panel systems, small-scale wind systems, or small-scale hydro systems. It does this by legislating demand for Small-scale Technology Certificates .

Small-scale Technology Certificates (STCs) ► 1 MWh of renewable electricity deemed to be generated by Small Generation Units unless the

Solar Credits REC multiplier applies; or ► 1 MWh of electricity deemed to be displaced by the installation of Solar Water Heaters.

The Large-scale Renewable Energy Target (LRET)► Creates a financial incentive for the establishment and growth of renewable energy

power stations, such as wind and solar farms, or hydro-electric power stations. It does this by legislating demand for Large-scale Generation Certificates .

Large-scale Generation Certificates (LGCs)► 1 MWh of renewable electricity generated above the power station baseline

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Case Study – Metropolitan Building Commercial Lighting Energy Saving Formula

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Opportunities: ► Twin T8 to single T8 with high

efficiency reflector► 150W halogen to 15W high

intensity LED► 50W halogen down lights with

LED

Outcomes:► Capital cost $446,760► Savings $94,275► 630 MWh of electricity ► 6,600 ESC value of $166,500

Energy Performance Contracts

► Energy performance contracts are an effective way of providing new energy efficient capital equipment, energy savings, or reducing maintenance costs.

► Under an energy performance contract, the contractor generally provides the capital, equipment installation and maintenance for a facility. In exchange, the

► contractor receives a fee over the length of the contract, which is generated by the equipment energy savings.

► The best applications for an energy performance contract are in high capital cost equipment and systems with high savings-to-investment ratios

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Contractor Incentive

► Achieve optimal energy efficiency to maximise earnings

Company Incentive►Ability to improve energy efficiency with limited ►resources or upfront financial commitment

Case Study 3 – Industrial Plant

► An industrial plant has limited resources for improving the energy efficiency of its equipment. How could Company ABC upgrade its equipment whilst not having to source additional capital?

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Case Study 3 – Industrial Plant

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As a result the plant will use less energy, which means savings on the annual energy

bills.

Working with a contractor, The industrial plant can upgrade its energy management

system and equipment.

An industrial plant has limited resources for improving the energy efficiency of its

equipment.

Contractor

Industrial Plant

The work the contractor undertakes is paid for by the savings which are gained from

using less energy, operating more efficiently and reducing maintenance costs.

Split Incentives – Benefit Imbalance

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Debt orequitycapitalcharge

Powersavings

Balancing out the benefits – Environmental Upgrade Agreements

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Debt orequitycapitalcharge

PowerSavings

Increase in Base

Rent

Increase in Base

Rent

Valuation Uplift

Example: City of Sydney http://www.cityofsydney.nsw.gov.au/council/documents/policies/EnvironmentalUpgradeAgreementsPolicy.PDF

Subsidised Energy Audits

► The Office of Environment and Heritage is able to provide subsidise energy audits and facilitation to help NSW businesses identify and implement energy savings.

32http://www.environment.nsw.gov.au/sustainbus/energyauditing.htm

Thank youModule 4