1. Introduction

2. Relevant Legislation

3. Types of Projects Funded and Volume of Loans Approved

4. Terms of lending

.......	4.1	Expenses for Installation
	4.2	Working Capital Costs
	4.3	Interest rates and repayment

5. Loans, appraisal, approval and disbursement

.......	5.1	Application and recommendation
	5.2	Loan approval and repayment
	5.3	Monitoring and assessment of loan effects
	5.4	Impacts of loan scheme and the assessed impacts of the programme
	5.5	Administrative costs and risks

6. Tax incentives

.......	6.1	Tax credit
	6.2	Deferred Payment of Corporate Income Tax

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1. Introduction

At the Kyoto UNFCCC Conference held in 1997, some 160 nations agreed on targets for greenhouse gas emission reduction. The primary source of carbon dioxide (CO2) 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 and conservation. A range of policy measures may be put into place to promote greater efficiency in energy use. Financial support and tax incentives for energy efficiency investments are among the most important and effective measures being applied in the Republic of Korea. Investment in energy-saving facilities or research and development in energy efficient technologies is associated with great expenses and constitutes a financial burden for manufacturers. Enterprises of small and medium sizes may not have adequate access to investment financing through commercial banks whose loan terms may not be so favorable. However, through long term loans at preferential interest rates or diverse tax incentives, governments can induce voluntary participation in energy efficiency and conservation investments.

Based upon the Rational Energy Utilization Act **, the Government of the Republic of Korea has provided long term and low interest rate loans through the Fund for Rational Use of Energy (hereinafter referred to as the "Fund"), along with tax incentives for energy efficiency and conservation investments. Korea Energy Management Corporation (KEMCO) is in charge of operating and monitoring this fund. This paper explains the management and disbursement of the fund.

At the beginning of every year KEMCO receives an allotment for the "Fund" from a government financial source named Special Accounts for Energy and Resources. KEMCO makes this fund accessible to 28 financial institutions which are under contract with KEMCO to manage the loaning and repayment of the "Fund".
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Interested investors can file an application with KEMCO for a loan recommendation. KEMCO reviews whether the proposal is qualified according to the Fund's lending criteria. If the application 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. Applicants also need to satisfy lending criteria and requirements of the respective financial institution. KEMCO monitors and verifies whether the loaned money actually goes to the energy efficiency investments. It also evaluates the effectiveness of the project for which the loan was granted.

Table 3.1.1 Numbers of applications for tax reductions

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2. Relevant legislation

The legal framework for financial assistance to energy efficiency investments is mainly based on the Rational Energy Utilization Act (REU Act), which promotes a restructuring of the economy towards a low energy consuming development path and, eventually, to attain a reduction of greenhouse gas emissions in line with the spirit of the United Nations Framework Convention on Climate Change.

Article 21 of REU Act gives specific guidance on the financial assistance to energy efficiency investment:

" 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."

Supplementary regulations on the administration and use of the fund have been established by Ministry of Commerce, Industry and Energy (MOCIE) and published in the "MOCIE Guide to Financial Assistance for Rational Use of Energy".

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3. Types of projects funded and volume of loans approved

The types of projects and the maximum amount of loans to be financed by the "Fund" are prescribed by REU Act. A detailed listing is included in Table 3.2.1

Table 3.2.2 gives an overview of the financial support granted to energy efficiency investments during 1999. The first category of project eligible for financing includes various activities such as co-generation, production of highly efficient products, installation of energy efficient facilities. Energy Services Companies (ESCOs) can also secure funding under the REU Act.

The second category of projects eligible for financing is related to mass energy supply such as district heating and combined heat and power generation for industrial complex.

Investment in renewable sources of energy constitutes the third category of projects eligible for concessionary financing under the REU fund.

Table 3.2.2 Financial support granted to projects during 1998

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4. Terms of lending

The Fund permits to cover two types of expenses including installation costs and working capital costs.

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4.1 Expenses for installation

The loans can cover installation costs related to the expenses for the purchase of the energy saving facilities and their installation. Loans can also cover retrofit works, design and superintendence and the test run of the facilities. Following investment costs are not covered by REU Funds: VAT, expenses for the purchase of land and expenses for erecting buildings. In the case of mass energy supply projects executed by local governments and government-owned institutions, the expenses for the purchase of the building site for the purpose of installing facilities may be included. In the case of provincial energy development projects executed by local governments the expenses for feasibility studies may also be included.
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4.2 Working capital costs

Permitted loan components for working capital are confined to the expenses needed for the operation of the facilities for the initial 3 months period.

Table 3.2.3 Approved project financing in 1999 (in million won)

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4.3 Interest rates and repayment

The loans for installing energy-saving facilities or equipment are typically granted a 3 to 5 year grace period and 5 year repayment period. Loans carry 5.5 - 7.5 per cent of interest rate equivalent to about half of the going market or prime rates. Up to 90-100 per cent of investment cost can be covered by loans. The maximum amount of provision for industrial energy-saving facilities and voluntary agreements are 3 billion won per project; for ESCOs and provincial energy development 5 billion won per project; for energy-saving facilities in building and transportation 1 billion won per project; and for home insulation retrofit 10 million won per house. Funds are available to both public and private sector companies.

Table 3.2.4 Terms of Loans (1999)

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5. Loans, appraisal, approval and disbursement

5.1 Application and recommendation

A person or a company can apply for loans in compliance with the procedures set by the Ministry of Commerce, Industry and Energy (MOCIE). All project proposals and loan applications for installation of energy-saving facilities and mass energy supply or dissemination of alternative energy should be accompanied by a recommendation from KEMCO. Applicants for less than 200 million won (in case of boiler, less than 500 million won) would go to one of KEMCO's 12 branch offices to apply for and obtain the loan recommendation. Applicants who intend to invest in non-electric cooling systems or insulation retrofits for housing can apply for the loan directly to financial institutions without KEMCO's recommendation. KEMCO can provide direct loans to local governments, government-owned institutions or public corporations established by special laws.

Figure 3.2.1 describes the loan application and recommendation procedure. The KEMCO pre-investment appraisal determines the eligibility of the project, and the amount of funds to be loaned. KEMCO sends the applicant a copy of recommendation letter with an application form attached. And at the same time KEMCO sends the original letter of recommendation to the financial institution. For the projects with long implementation and repayment periods, KEMCO provides the loan only for the initial 3-year project period.

Figure 3.2.1 Loan application and approval procedure

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5.2 Loan approval and repayment

The banks assess the size of loan required to carry out the investment plan through a field survey. Loans are approved within 30 days following the receipt of the loan application. Loans for non-electric cooling systems or insulation retrofit for housing are supposed to be handled by the financial institutions without KEMCO's recommendation. The loans may be approved within 45 days. Lending conditions of the respective financial institutions apply.

Banks and other financial institutions may ask KEMCO for the money to be loaned at least 3 days prior to KEMCO's regular lending day (every Thursday) and KEMCO makes the loans to the banks and banks lend them to the applicants within 5 work days from KEMCO's lending day. The lending banks are responsible for collecting repayments after the grace period has elapsed. The repayments are to be returned to KEMCO's fund. The principal amount and interest should be repaid 4 times a year by installment (15th day of March, June, September and December) after the grace period has elapsed.

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5.3 Monitoring and assessment of loan effects

The financial institution (or KEMCO in case of direct loan from KEMCO) has the authority to monitor the use of the loan by on-site survey. If loans are used for purposes other than the ones authorized, the bank (or KEMCO) shall suspend and recall the loan. The borrower will also be obliged to return to the fund the interest accrued on the loan amount used for non authorized purposes. The entity that misappropriated the money shall not be allowed to obtain a loan from government afterward.
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5.4 Impacts of loan scheme and the assessed impacts of the programme

KEMCO conducts periodical surveys using random sampling schemes to assess impacts of the loan scheme and reports the result to the government. In Republic of Korea, over a period of 19 years 2,800 billion won has been invested in rational energy utilization. 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 financial support, a profit of 160 thousand won per 1 toe was made, and it took 4.9 years to offset the expenses for investment.

Table 3.2.5 Assessed impacts of financial assistance

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5.5 Administrative costs and risks

KEMCO levys a commission on the loan : 0.5 per cent will be applied in case the project has high publicity and credit security and 1.0 per cent in case of high loss possibility even though there may be no problem in securing credit.
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6. Tax incentives

6.1 Tax credit

Based on the Article 26 of the Regulation on Restriction in Exceptional Taxation, the Government of the Republic of Korea provides 5 per cent income tax credit for energy efficiency investments. The replacement or installation of the facilities and equipment listed below qualified for the income tax credit: (a) replacement of old industrial kilns; boilers, furnaces and kilns for industrial use, installation of energy-saving facilities, co-generation facilities, heat supply facilities, energy-saving equipment, (b) alternative fuel using-facilities, (c) other facilities which are assessed as being able to produce more than 10 per cent of energy saving effects.

Applicants who want 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.

Applicants who want 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 site. Then, the applicant can hand in an application for tax credit to the competent tax office with the confirmation.
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6.2 Deferred payment of corporate income tax

As second tax incentive for the investment in energy-saving facilities, corporate income tax payments may be deferred for up to 15 per cent of the total invested money. Tax payments may be deferred for up to three years.