FINANCIAL ASSISTANCE TO

FINANCIAL ASSISTANCE TO ENERGY EFFICIENCY INVESTMENTS I. Introduction In 1997, 160 nations agreed on new targets for emissions of carbon dioxide at Kyoto Climate Change Conference. Carbon dioxide contributes to the greenhouse effects and a scientific consensus has emerged associating climate change with global warming. And recently we all have witnessed or suffered from the environmental or atmospheric disasters not to mention Korea and China's unprecedented flood damages this year. The primary source of carbon dioxide is the combustion of fossil fuels. The reduction of emissions of CO2 can be achieved either by using alternative energy or using less energy, that is, energy efficiency & conservation. For this purpose, a range of policy measures may be put into place and financial support and tax incentives to energy efficiency investments is one of the most important and effective measures being practiced in Korea. Investment in energy-saving facilities or R&D of energy technologies entails great expenses, which is a practical burden for manufacturers. Besides enterprises of small & medium sizes may not have adequate access to normal banking channels whose loan terms are not so favorable. However, if the government provides loans with long term and preferential interest rate or diverse tax incentives, it can induce voluntary participation in energy efficiency and conservation investments. II. Korea's Financial Assistance Program to Energy Efficiency Investments Since 1980, based upon the Rational Energy Utilization Act, the Korean government has provided long term and low interest rate loans named the Fund for Rational Use of Energy (hereinafter referred to as the "Fund"), along with tax incentives, for energy efficiency and conservation investments. KEMCO is in charge of its operation and monitoring. At the beginning of every year KEMCO is allotted budget for the "Fund" from a government financial source named the Special Accounts for Energy and Resources, and puts it on the accounts of 24 financial institutions which made contract with KEMCO to manage the loaning and repayment of the "Fund." When one files an application to KEMCO for a loan recommendation, it reviews whether he is qualified or not according to the Fund loaning criteria. If he is assessed as qualified, KEMCO issues a letter of loan recommendation to the bank so that it may give the loan to the recommended applicant under the internal loaning provisions of its own when he applies for the loan. KEMCO monitors through the bank's checking function whether the loaned money actually goes to the energy efficiency investments, and evaluates the loan effects as well. III. Legislation 1. Rational Energy Utilization Act Article 21 : Support in Finance and Taxation "In order to promote the rational energy utilization, the Government may give any support in the finance, taxation, etc., or payment of subsidy, or other necessary support to any investment in facilities of energy saving type, manufacture, installation, execution, etc. of machinery and materials of energy saving type, and other projects concerning the rational energy utilization as prescribed by the Presidential Decree." 2. Enforcement Ordinance (of REU Act) Article 19 : Investments in Energy-saving Facilities - Detailed description of investments in energy-saving facilities and the types of projects to be supported referred to in Article 21 of the "Act" 3. MOCIE Announcement: Guide to Financial Assistance for Rational Use of Energy - A guide and instruction to the management of the Fund Loan in the areas of the projects for rational use of energy and mass energy supply projects 4. Enforcement Ordinance of Energy & Resources Special Accounts - Concerning the allotment of the Fund for rational use of energy 5. MOCIE Notification Concerning Energy & Resources Special Accounts - Details of the allotment and use of energy & resources Special Accounts IV. Specification of Projects to be loaned and Loan Scale The Article 21 of the Rational Energy Utilization Act prescribes the types of projects to be financed by the "Fund" as follows: Rational Use of Energy Mass Energy Supply Projects Dissemination of Alternative Energy 1. Rational Use of Energy (1) Installation of Energy Conservation Facilities A. Cogeneration Facilities for Industry & Large Buildings B. Production of Highly-Efficient Products ① Facilities for mass production of first-graded products among "grade indicated machinery & materials" as prescribed in REU Act, and which KEMCO's president acknowledges the need of its dissemination ② Facilities for mass production of highly-efficient energy machinery & materials as prescribed in the Article 13 of REU Act C. Installation of Energy Conservation Facilities ① Waste Energy Recovery Facilities - exchangers, heaters, boilers and power generation systems that use waste heat; waste heat recovery burners; heat exchangers; accumulators; heat recovery ventilators; etc. ② Energy Conservation Facilities in Industry - furnaces & kilns, continuous rolling & extrusion casting devices, dyeing machine, evaporators, etc. ③ Highly-Efficient Fluid Treatment Equipment and Fluid Control Devices ④ Energy Conservation Facilities in Buildings - automatic temperature control devices, automatic lighting control devices, dry coolers, double-glazed window, far-infrared heating systems, spring cool systems, solar collectors, etc. ⑤ Energy Conservation Facilities in Transportation ⑥ Electricity DSM Facilities - demand controller, electronic ballast, bulb-type fluorescent lamp, 26mm slim fluorescent lamp, heat pump, compressor, highly-efficient motor, etc. ⑦ Process Improvement and Building Retrofit which are assessed by KEMCO's energy audit team as being able to bring forth more than 10% of energy saving effects ⑧ Substitution of Old Boilers ⑨ Other Facilities which are assessed by government-authorized test labs as being able to bring forth more than 10% of energy saving effects , and which KEMCO's president acknowledges the need of its dissemination ⑩ Projects for Commercialization of already developed technologies which KEMCO's president acknowledges the need of its dissemination ⑪ Highly-Efficient Machinery & Materials ⑫ Ultrasonic Wave Scale Preventer ⑬ Heating Temperature Regulating Valve using Shapememory Alloy D. Non-electric Cooling Systems - gas cooling systems, heat-storage cooling systems, absorption cooling systems, etc. E. Regional Energy Development Projects - Energy efficiency investments in public buildings or facilities, energy efficiency & conservation projects targeted for a specific village or towns, unused energy utilization projects, etc. of which local governments are in charge. F. Energy Service Company (ESCO) ① Seed money for its establishment ② Investment in energy efficiency G. Voluntary Agreement(VA) ① Energy-saving or greenhouse-gas-reducing investment of the companies that contracted the Voluntary Agreement with the government (2) Insulation Retrofit for Housing A. Insulation of roof, floor or external wall B. Double-glazed window C. Substitution of the inefficient boilers and pipes 2. Mass Energy Supply (1) District Heating and Cooling (2) Combined Heat & Power for Industrial Complex 3. Dissemination of Alternative Energy (1) Dissemination of Alternative Energy Table 1. '99 Financial Assistance Performance (Unit : million won) Project Sub-project Installation of energy-saving facilities Rational Use of Energy Insulation retrofit for housing Subtotal District Heating & Cooling Mass Energy Supply Industrial complex CHP Subtotal Dissemination of alternative energy Subtotal Total Budget 193,000 1,500 194,500 194,380 23,620 218,000 33,300 33,300 445,800 Performance 193,000 1,500 194,500 194,380 17,845 212,225 19,582 19,582 426,307 Dissemination of Alternative Energy Table 2. Projects & Loan Scale in 2000 Project Sub-project Cogeneration Production of highly efficient products 125,000 Installation of Energy-saving Facilities Rational Use of Energy Energy-saving facilities Non-electric cooling systems Regional energy development VA ESCOs 30,000 65,000 Expenses for Installation & Working Capital Expenses for Installation Expenses for Installation Budget (million won) Types of Loan Expenses for Installation Expenses for Installation & Working Capital Insulation Retrofit for Housing Subtotal 2,000 222,000 District Heating Mass Energy Supply Dissem. of Alter. E. CES CHP for Industrial Complex Subtotal Dissemination of Alternative Energy Total 156,156 27,310 40,242 223,708 27,800 473,508 Expenses for Installation Expenses for Installation V. Types of Loan 1. Expenses for Installation is confined to the expenses needed for ① the purchase of the proper facilities and their incidental facilities & equipment, ② installation and retrofit works, ③ design and superintendence (including expenses for the introduction of technology) and ④ test run of the facilities, except VAT, expenses for the purchase of land and expenses for erecting buildings which do not contain constructions indispensable for the installation of the facilities. But, in case of mass energy supply projects executed by local governments and government-invested institutions, the expenses for the purchase of the building site for installing facilities are included, and in case of regional energy development projects executed by local governments, the expenses for feasibility study are included. 2. Working Capital is confined to the expenses needed for the operation of onerotation (3 month) of the facilities on the basis of the annual or estimated sales amount of the products produced by the facilities VI. Qualification for Loan Project I. Cogeneration Qualification the person who obtained permission or made report requested by the Electricity Business Law the person who intends to mass-produce energy efficient facilities and equipment II. Production of Highly Efficient Products III. Installation of Energy Efficient Facilities the person who intends to install or extend energy efficient facilities, or to retrofit existing energy-using facilities (in case a large enterprise is to install industrial energy efficient facilities, loan will be offered only to the substitution of the facilities) ※ In case of small & medium-sized enterprises, loan will be offered only to those prescribed by Article 2 of Basic Law of Small & Medium-size Enterprises IV. VA the person who makes the VA(Voluntary Agreement) with the government according to the Rational Energy Utilization Act V. ESCOs the person who is registered as an Energy Service Company as prescribed in the Rational Energy Utilization Act VI. Regional Energy Development VII. Insulation Retrofit for Housing the local government which promotes regional energy development projects owners of a non-insulated house which was constructed after obtaining construction permission prior to March 27, 1984 Ⅷ. Mass Energy Supply Ⅸ. Dissemination of Alternative Energy the person who is permitted to execute mass energy projects as prescribed by the Mass Energy Project Act the person who intends to install or produce the alternative energy facilities using VII. Terms Of Loan (as of 2000) The loans for installing energy-saving facilities or equipment in most cases have 3 to 5 year grace period and 5 year repayment period with 5.5 - 7.5 % of interest rates which are about half the market or prime rates. Up to 90 - 100% of investment money can be provided to the applicants. The maximum amount of provision for industrial energysaving facilities and VA is 5 billion won per project; for ESCOs and regional energy development 5 billion won per project; for energy-saving facilities in building and transportation 1 billion won; for home insulation retrofit for housing 10 million won per house. Funds are available to both public and private sector company. Table 4. Terms of Loan Loan Types Project Support Limit Interest Rate* Repayment (year) Grace Energy-Saving Facil. for Industry Energy-Saving Facil. for Build. & Trans. up to 90% of the required money per project (up to 100% in case of facil. for electricity DSM & waste energy recovery, and installation of furnaces, kilns & boilers) up to 100% up to 100% up to 100% up to 90% up to 100% up to 100% up to 80% up to 70% 7.5% 7.5% 5.5% 5.5% 8 3 1 3 5.5% 5 Pay-back 3 5 ESCOs Expenses for Installation VA Regional Energy Development Non-electric Cooling Systems Insulation Retrofit for Housing Mass Energy Supply Dissemination of Alternative Energy Producer of High Efficient Products, ESCOs 5 5 7 5 2 Working Capital * Theses are the interest rates for end-users. Financial institutions get loans from KEMCO with the interest rates lower than those for end-users by 1% or so. VIII. Loan Procedure 1. Application and Recommendation A person or a company who wants a loan to invest in energy efficiency and conservation can apply for it following the loan procedure set by "MOCIE Announcement : Financial Assistance for Rational Use of Energy" As you see in the figures 1 and 2, the loans for installation of energy-saving facilities and mass energy supply and dissemination of alternative energy are recommended by KEMCO. And the applicants for the loan which cost less than 200 mil. won (in case of boiler, less than 500 mil. won) should go to one of KEMCO's 12 branch offices for the loan recommendation. But, the applicants who intend to invest in non-electric cooling system and insulation retrofit for housing can apply for the loan directly to financial institutions without KEMCO's recommendation. On the other hand, local governments, government- invested institutions or public corporation established by special laws should get a loan directly from KEMCO. Figure 1. Loan Procedure ① to apply for recommendation ② to notify the loan recommendation ③ to apply for the loan KEMCO ④ to ask for the lending of Fund ⑤ to lend ⑥ to give the loan ② ② ④ ① ⑤ ③ Applicant ⑥ BANK Loan recommendation is the process in which whether an applicant is qualified as a loan recipient (see the Section VI), whether his project comes under the specified types of projects (as discussed in section III), and how much it will cost are examined. When KEMCO receives application for recommendation from a company which has a plan to install or retrofit energy-saving facilities or equipments, KEMCO, only when it is assessed as a qualified recipient of the loan after a close review on its plan, sends the applicant a copy of recommendation letter with an application form attached. And at the same time KEMCO notifies the bank of the recommended applicant and sends the original letter of recommendation to the bank. Fund recommendation has to be finalized within 20 days from the day application for recommendation is made. For the projects lasting for years, KEMCO provides the loan only for 3-year project, but this is not applied to mass energy supply projects. 2. Loan Approval and Repayment The bank assesses the size of loan required to carry out the investment plan through a field survey, and approves the loan according to the assessment result under the internal loaning provisions of its own within 30 days after it receives loan application. But in case of the loans for non-electric cooling system and insulation retrofit for housing which are supposed to be handled by the financial institutions without KEMCO's recommendation, the loan should be approved within 45 days. The banks ask KEMCO for the money to be loaned at least 3 days prior to the KEMCO's regular lending day(every Thursday) and KEMCO makes the loans to the banks and then the banks lend them to the applicants within 5 work days from KEMCO's lending day. The bank is also responsible for collecting money from the fund recipient after the grace period elapses and repaying the loan to KEMCO. When a financial institution or KEMCO gives an applicant loans, it should find out to which degree energy-saving facilities have been installed or manufactured and whether any effort have been made for that purpose by the applicant, and may provide the loan according to the assessment result. In case that KEMCO lends to a financial institution, commissions are levied at a fixed rate, which are a preparation for the possible loss ; 0.5% will be applied in case the project has high publicity and credit security, and 1.0% in case of high loss possibility even though there may be no problem in securing credit. The principal amount and interest should be repaid 4 times a year by installment (15th day of March, June, September and December) after grace period elapses. In principle, the money once approved as allotment for this year cannot be carried forward to next year's fund to be withdrawn. However, if some amount of money is left not withdrawn within that year owing to some unavoidable circumstances after loan approval is made during that year, it can be withdrawn by the end of February of the next year by obtaining the approval of the Minister of Commerce, Industry and Energy. 3. Monitoring and Assessment of Loan Effects The financial institution (or KEMCO in case of direct loan from KEMCO) has the responsibility to monitor the usage of the Fund by on-site survey or a report lest the loan should be misappropriated for other purposes. If an misappropriation should be revealed, the bank (or KEMCO) should get the loaned money back at once although the repayment period may not be terminated. In this case the interest that might have been accrued from the loan during the misappropriation period will be obligatorily levied at the fixed rate the government determines. And the person who misappropriated the money shall not be able to get a loan from government afterward. KEMCO also conducts a survey on some selected loan recipients using random sampling scheme in order to assess the effects of the loan, and makes a report on the assessment result to the government. In Korea, 3,226 billion won has been invested in rational energy utilization for 20 years. In average, 238 toe was saved per 0.1 billion won of assistance, 38 million won of energy was saved per 0.1 billion won of support, a profit of 160 thousand won per 1 toe was made, and it took 4.9 years to offset the expenses for investment. IX. Tax Incentives 1. Tax Credit The government provides a tax incentives for energy efficiency investments based upon the Article 26 of the Regulation on Restriction in Exceptional Taxation. Before 1997, the replacement or installation of the following facilities and equipments was qualified for a 10% of income tax credit for domestic products while 3% for foreign ones. But from 1997 a 5% income tax credit is equally provided without discrimination. Replacement of old industrial kilns - boilers - furnaces & kilns for industrial use Installation of energy-saving facilities - cogeneration facilities - heat supply facilities - energy-saving equipment Alternative fuel using-facilities Other facilities which is assessed as being able to bring forth more than 10% of energy saving effects A person who wants tax credit for the replacement of old boilers, installation of energy-saving facilities and alternative fuel using facilities should submit an application for tax credit and a report of assessment basis to the competent tax office after investment. A person who wants tax credit for other facilities mentioned above should file an application to KEMCO. KEMCO issues a confirmation on completion of investment after examining the application and inspecting the installation site. Then, the applicant can hand in an application for tax credit to the competent tax office with the confirmation. 2. Deferred Payment of Tax If a company invested a certain amount of money in the energy-saving facilities, it can get deferred tax payment for 15% of the total invested money for three years including the year when the investment happened. For example, if a company invest 10 bil. won in 1996, and 20 bil. won in 1997, limit amount for deferred payment of tax in 1996 will be 1.5 bil. won (10×15%); in 1997, 4.5 bil. won ((10+20)×15%); in 1998, 4.5 bil. won ((10+20)×15%); and in 1999, 3 bil. won (20×15%). Taxation on that amount of money can be deferred for three years, that is, tax will be levied two years after the completion of the investment, so the company can increase its income as much as the amount equivalent to the interest on the tax-deferred money (15% of the total invested money) during that period. The company should invest the money in energy-saving facilities. If it misappropriate the money for the other purposes than energy-saving investment, the interest income will be forfeited and the tax for the tax-deferred money for three years will be levied retroactively as well.