Implementation of Energy Services with Guarantee of CO2 Reduction

Jun Kawana

Japan Facility Solutions Inc.

October 8, 2007

1. Reviewing energy service development of JFS (1)• Sales of its energy services have grown steadily after its establishment.

However, the growth of its gross margin is slowing down in recent years (The profit rate is decreasing).

• Meanwhile, the cumulative number of newly introduced energy services has amounted to as many as 60. However, the number of new services is in decline in recent years. Last year's new services are only five, which means JFS depends on small number of large-scale services for limited customers (big sales and big profit for one) .

　

　

Sales & Gross Magin for Energy Services

134389 497

615

1,328

2,472

3 63177 270 359 389

25

73

131

84

157 158

0.49

33 34

63 67

0

500

1,000

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2,500

3,000

2001 2002 2003 2004 2005 2006f（iscal year）

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s in

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Yen

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ross

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Initial Sales Service Sales Initial Gross Margin Service Gross Margin

Introduced Number of Energy Services

3

1216

814

53

15

31

39

5358

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60

70

2001 2002 2003 2004 2005 2006(fiscal year)

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New Services Cumulative Services

(1 Mil. Yen=6,000 Euro)

2. Reviewing energy service development of JFS (2)

• What are factors of the stagnant profit growth and the decrease in new services? Main factors: Adverse externalities to ESCOs which decrease customer advantage

The reduction of electric rate unit price The construction fee on the rise due to economic recovery of Japan The rise of leasing interest rate

　

The decreasing customer advantage deteriorates"Commodity power" of JFS’s energy service.

JFS needs an renovation of its energy services so that it can attract more wide-ranging (especially, environment-conscious) customers

↓Launch of “Double-guarantee Energy Service”(cost reduction & CO2 reduction)

3. Current situation on ETS in Japan

• Movements concerning domestic ETS The government has the policy of not founding uniform emissions

rights for the first promised period (until 2012) in the Kyoto Protocol.

Generally, the Japanese industry has long been opposite against cap & trade ETS, insisting that it is difficult to secure the impartial allocation.

Meanwhile, the emissions rights with regional limitations or targeted corporate limitations are expected to be introduced at earlier stages.

Introduction of ETS in Tokyo area (scheduled in 2009) Introduction of emissions rights for small and medium-sized

enterprise, scheduled in 2008 by METI.

Redeemability of the emissions rights will be established in the near future. ↓

The business that utilizes this redeemability will be feasible.

4. Goals of “Double-Guarantee Energy Service”

• Boost customer advantage The amount of the potential energy cost reduction is often not sufficient for

customers to accept the service. This service can utilize emission reduction credits to boost customer

advantage if the reduction can be certified and converted to economic value.

• Enclose “environment-conscious” customer segment Appeal to the senior management of the enterprise and the organization

with a high environmental consideration by the compound proposal of cost advantage and environmental advantage (i.e., CO2 emission reduction guarantee).

• Lead the industry & enlarge the market in Japan Lead energy service industry with highly innovative and competitive

energy services, thereby enlarging the market for energy services.

• Develop a new business model: total management of CO2 emission Develop TCM (Total Carbon Management) services for customers on the

basis of this service.

5. How “Double-guarantee Energy Service” Works 1

• The Outline of scheme Normal energy service: guarantees only the cost reduction by energy

conservation. This service: guarantees cost reduction + CO2 emission reduction by energy

conservation. In case of shortage of guaranteed CO2 emission reduction, JFS will compensate

for the shortage by either of the two following methods. Offer CO2 emissions rights (CDM, etc.) Pay cash equivalent to the pre-contracted unit price of CO2 emissions rights

multiplied by shortage amounts (tons). The marginal compensation risk is negligible.

The guaranteed both amounts are in a strong positive correlation. Up to now, the shortage cases for the guaranteed amounts are very few (just

one in 58 cases), which means the risk of JFS is negligibly low.

Customer

JFS

Double-guarantee EnergyService contract

Guarantee of cost reduction

Guarantee of CO2 emission reduction

6. How “Double-guarantee Energy Service” Works 2

• The service formation Offer of emissions rights: JFS gets ready to offer emissions rights

to customers by contracting call option for emissions rights with Mitsubishi Corp. beforehand.

Attestation by the third party (optional): When the customer hopes for the third party attestation of the emission reduction by the energy service, the customer asks the third party organization for the attestation (JFS owes the obligation for cooperation).

Customer

JFS

Double-guarantee EnergyService contract

Third party attestation organization

Mitsubishi Corp.

Consignment of attestation (optional)

Attestation of CO2 emission reduction

Purchase of emissions rights (by call option)

Payment for the emissions rights

7. How “Double-guarantee Energy Service” Works 3

• Assumption scheme after Japanese ETS is introduced (from customers’ standpoint). The customer acquires emissions rights by two methods.

Acquire emissions rights according to attested amount of emission reduction Acquire emissions rights granted from JFS as loss compensation (Only in case

of the effect shortage).

The customer can dispose the acquired emissions rights by two methods. Utilize them as a redemption for the customer’s capped amount. Sell them off in the dealings market (when some surplus exists).

Customerc) emissions rights redemption

JFS

Double-guarantee EnergyService contract

Third party attestation organization

Attestation of CO2 emission reduction

Governments

emissions rights delivery requesta) emissions rights delivery

b) emissions rights transfer as compensation(In case of effect shortage)

Emissions trading market

d) emissions rights sell-off

8. The Effect of “Double-guarantee Energy Service” on profitability 1

• Utilizing JFS’s existing services, we conducted simulation of the effect of the profitability improvement when the services are introduced,.

(prerequisites) ETS has been introduced into Japan. CO2 emission reduction by energy conservation is certified for emissions rights. The market unit price of the emissions rights is assumed to be 2,000 yen(12 Euro) /t. Apply the service to 31 existing services for which their energy conservation amounts have been verifi

ed.

• Remarkable effect has been observed (as shown in the table below). Average improvement on energy conservation (in currency value): 6.2% increase (equivalent to 29 mil

lion yen (180 thousand Euro) in total/year) Average improvement on customer advantage: 31.5% increase

(unit: 1,000 yen(=6 Euro)/year)The effect of “Double-guarantee Energy Service” on profitability

Actual EnergyConservation

CO2 EmissionReduction

(t/ yr)

Incrementalby Emissions

Rights

IncrementalRate by

EmissionsRights

PreviousCustomerAdvantage

IncrementalRate of

CustomerAdvantage

A National Laboratory 98,480 3,278 6,556 6.7% 4,385 149.5%B Municipal Hospital 82,606 2,883 5,766 7.0% 16,606 34.7%C Department Store 31,205 1,080 2,160 6.9% 2,095 103.1%D Building 17,255 666 1,332 7.7% 4,255 31.3%E Building 20,247 621 1,242 6.1% 8,847 14.0%F Newspaper company (Head office) 29,889 740 1,480 5.0% 2,889 51.2%G Municipal Office 22,478 558 1,116 5.0% 1,041 107.2%H Factory 10,437 509 1,018 9.8% 2,637 38.6%31 Facilities in Total 469,785 14,624 29,249 6.2% 92,902 31.5%

9. The Effect of “Double-guarantee Energy Service” on profitability 2

• The improvement of customer advantage is secured in most cases (shown in the graphs below). Increase in energy conservation: roughly within the range of 4-8% Increase in customer advantage: roughly within the range of 10-70%

“Double-guarantee Energy Service” enables improvement of profitability, thereby increasing appealing power to customers.

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10. Meiji College of Pharmacy Kiyose campus (the initial service application) 1

< Outline of the Service>

･ Service category: Equipment renewal type energy service

･ Contract method: Shared-savings contract

･ Duration of policy: April 2008 – March 2023 (15 years)

･ Subsidy: 1/3 of the initial cost (granted by the Ministry of the Environment)

･ Business formation

JFS

Meiji College of Pharmacy

Mitsubishi UFJ leaseLeasing contract

The Ministry of the Environment

Subsidy

A contractor

B contractor

C contractor

Selection by competitive bidding

Façade of Meiji College of Pharmacy Kiyose campus

Double-guarantee EnergyService contract

11. Meiji College of Pharmacy Kiyose campus (the initial service application) 2

< Applied energy-saving technologies>

1. Air conditioning facilities: a) Ice storage & highly effective heat source

b) Temperature optimization control c) Energy-conserving fan belts

2. Hot water apparatus: a) Highly effective type boilers b) Insulated jackets for steam valves

3. Lighting equipment: a) Highly effective lamps b) Sensor lights

< Effect of energy conservation (guaranteed amounts)>

13,40013,400[[ GJ/GJ/ Yr]

Primary energy Light, fuel & water expense

12.4% 13.1%

29.4［Mil. Yen/Yr]

COCO22 emission

14.1%

641641[[tt --COCO22//Yr]

Guaranteed Reduction

JFS guarantees reduction more

than this amount(double guarantee) JFS guarantees

reduction more than this amount

(standard guarantee)

Guaranteed Reduction

Guaranteed Reduction

(188 thousand Euro)

12. Emissions-rights-related services to to be launched in the future

• CO2 emission amount management service Manage and control total CO2 emission for customer’s selected facilities,

especially chain stores including convenience stores, banks, post offices, etc.

“PDCA of the emission management” Set the target CO2 emission for the facilities. Measure the actual CO2 emission for the facilities Analyze the differential between the target and the actual emissions. Report the analyzed facts for future improvement.

• CO2 emission ceiling guarantee service In addition to the above service, JFS guarantees the upper bound of the CO2

emission for the facilities. In case of the excess over the ceiling, JFS will compensate by cash or

emissions rights.

Customer

JFS

CO2 emission ceilingGuarantee service

Guarantee of cost reductionGuarantee of

CO2 emission reduction

13. Questions to the experts from EU countries

• “Double-guarantee Energy Service” is assumed to be more feasible in countries with ETS. So,

• Is this service really feasible in your countries? If yes, what aspects of this service could be improved

so that it could be more attractive to customers? If no, what are the obstacles to the introduction of the

service?

Thank you for

your attention!