Patrick DoyleStructured and Corporate Finance Departmentpatrickd@iadb.org

IDB Private Sector Energy Efficiency and Distributed Generation Finance and Policies

Private Sector with Purpose

We seek to create opportunities for current and future generations in Latin America and the Caribbean through sustainable private sector investments.

Through the Structured and Corporate Finance Department (SCF), IDB partners with private sector stakeholders to achieve breakthrough financial results with high development impact.

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Structured and Corporate Finance (SCF)Our Clients

Corporations, private utilities and infrastructure operators, financial

institutions, and state-owned entities without a sovereign guarantee

Our Products and Services

Loans (syndications and parallel)

Project Finance and Private Public Partnerships

Guarantees

Technical cooperation

Climate change concessional finance

Clean energy audits

In 2011-2012, over $1 billion lent for over $5B in climate investments

Renewable power - wind, geothermal, biomass

power, hydro, biofuels, solar

planetBanking “Green lines” for banks and private equity funds

Industrial, commercial building, hotel energy efficiency

Agriculture methane capture and use

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EE projects are often low-cost emissions reductions and profitable investments, but market failures and perceived risks must be addressed

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0

50

100

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000

Annual CO2 Reduction Potential

(Volume: Million tons)

Landfill methane

Wind

Geothermal

Lighting EE

Industrial EE

Insulation EE3

Air conditioning EE

Water Heating EE

Sugarcane biofuel

Re/Afforestation

Low impact

hydropower

Coalmine

methane

Animal

methane

Oil and Gas

Fugitive

Methane

Industrial

fuel

switching

Industrial gases

Avoided

deforestation

Large-

scale

biomass

power

Solar

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Positive IRR Ops

An emissions reduction supply curve can illustrate the opportunities in each sector- but non-cost barriers often exist and individual project economics must be evaluated

Efficiency investments face well known technical and institutional barriers that we are seeking to overcome

• Information barriers

– Unaware of potential savings

– Low confidence in savings performance predictions

• Lack of finance

– Resources are finite prefer to allocate capital/time to core business

– High collateral requirements from banks and little value assigned to energy assets once installed

• High transaction costs

– Most efficiency projects require $100K to $10M upfront capital, yet complex engineering analysis

– Project finance is costly

– Monitoring and verification may be necessary if not customer financed

Barriers we are seeking to address IDB Private Sector Tools

• Grants for technical assistance –audits, feasibility studies, green building engineering analysis

• Local bank/FI “green” loans and training

• Concessional loans via the Canadian Climate Fund

• Credit guarantees

• Energy efficiency savings contract performance guarantees (in Brazil)

• Energy Efficiency Finance Facility for facilitated approval of $500K - $5M loans – first loss guarantee via donor funds

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Comparison of policies for distributed generation in Central America

Country Distributed Generation

Policy?

Eligible

Technologies

Size limit and Aggregate

Capacity Limits

Net-metering and excess power

compensation?

Costa Rica Yes but limited under

pilot plan conducted by

ICE. Facilitated

interconnection.

Hydro, wind, solar,

biomass

Unit size: 20MW

Net metering pilot plan

Aggregate limit: 10 MW

(increased to 15MW)

Net-metering on annual basis provided at

retail rate for plants enrolled in pilot plan

No sale of excess power beyond annual

consumption

El Salvador Yes. Renewable Energy

Law 462 from Dec 2007.

Agreement SIGET 283-E-

2003

Geothermal and

hydro

Unit size: 5MW

Aggregate: ?

Yes. Tariff $90/MWh + (wheelings)CUSD

$4.65/MWh + COSTAMM $0.6170/MWh

Guatemala Yes

RESOLUCIÓN CNEE No.

171- 2008

Hydro, wind, solar,

geothermal,

biomass

Unit size: 5 MW

Aggregate: ?

Yes net metering for energy cost, not

demand charge

Power may be sold to utility or spot

market and renewable DG does not pay

wheeling to distribution utility

Honduras No

CNE & ENEE –DL 70-2007

Hydro, wind, solar,

geothermal,

biomass

N/A, tax incentives for

plants up to 50MW

Not identified

Renewables are already beyond grid parity-but tariff structures can still make project economics challenging

Solar costs below $2000/kW installed

Microturbine for cogeneration less than $3000/kW installed

Paybacks are 4-8 years

IRRs are 10-30%

But tariff structures have a large impact

Costa Rica Example:

IRR at $0.17/kWh – 15%, less than power price ($0.22/kWh) but actual impact much less due to tariff structure

High demand charges and low energy charges can make solar uneconomical

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Periodo Demand Charge($/kW)

Power Charge

($/kWh)

Punta (Peak) $0.20 $0.12

Valle (Valley) $0.14 $0.04

Nocturno(Night)

$0.09 $0.02

Solar may not reduce power demand charges at all

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Increasing Clean Energy in Central America -$2M Technical Assistance Fund from NDFEligible projects

Energy efficiency and self-supply renewable energy projects - methane, biomass, solar

Eligible countries

Central America, Colombia, Dominican Republic, Jamaica and Bolivia

No-cost Investment Grade Audits and Renewable energy self-supply engineering analysis :

Close to $1M already committed, studies in progress with over 20 clients including:

Agroprocessors

Beef, swine, chicken

Milk, sugar, wheat, rice, fruit, palm oil

Manufacturers

Commercial building owners

University

Airports

Recycling centers

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IDB Grant Fund

$50M SCF Energy Efficiency Finance Facility and $10M NDF Energy Efficiency Guarantee FundEligible projects

Energy efficiency and small-scale, self-supply renewable energy projects, including agricultural methane, biomass, solar

Eligible countries

Central America, Colombia, Dominican Republic, Jamaica and Bolivia

Max Loan Size: $5M

Concessional finance

The Energy Efficiency Finance Facility will benefit from an €8 million contribution from the Nordic Development Fund:

€7M is reimbursable funding to provide up to 25% first-loss guarantees to SCF loans in NDF eligible countries.

The guarantees will enhance the credit profile and reduce the price of the IDB A loan

€1 million is non-reimbursable grant funding to provide existing or potential new clients with energy audits, engineering feasibility and environmental impact analyses.

It can also be used to pay the due diligence and legal costs if they make the small loans economically unviable.

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IDB Concessional Loans and Donor Reimbursable Fund

Brazil Energy Efficiency Guarantee Facility

Performance and credit guarantees for 80% of project costs (up to $800K)

Can be used by ESCOs to obtain loans from banks; or

By consumers to guarantee ESCO energy savings performance contracts

$25M available, $10M Global Environment Facility in first loss position – covers risks and reduces costs

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IDB Concessional Guarantees

Consumer

Bank

ESCOEE Contract

(May have Performance Guarantee from IDB)

Option A: BORROWER is

EE Client

Option B: BORROWER is

ESCO

Option A - Financial Risk:

EE Client

Option B Financial Risk:

ESCO and EE ClientOption C: No loan but

ESCO Performance Risk

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$250M Canadian Climate Fund for the Private Sector in the Americas - concessional finance

• Co-financing with IDB Group loans for climate change mitigation and adaptation projects

• Concessional finance to overcome barriers (lower cost and/or higher risk subordinated debt, lower fees, longer tenors)

Risk barriers, e.g.:

– Technology risk

– Resource risk

– Offtaker risk

Cost barriers, e.g.:

– Bridge the gap between production costs and market tariffs

– Reduce costs of “greening a project” – (e.g. energy efficiency, methane capture, reforestation)

IDB Concessional Loans and Donor Reimbursable Fund

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Reducing initial costs or off-taker, resource or technology risks Value Proposition/Need

Wind, biomass, geothermal, biomass, reforestation project with risks that can not be taken by lenders

and

Equity unable to be raised or high equity requirements make project uneconomical

Financial additionality

Risk barrier – PPA or fuel sale agreement insufficient to cover loan at DSCR required based on resource assessment

Cost barrier – Power price reduced by reducing debt/equity ratio and reducing interest rate on debt

C2F Solution

Provide C2F subordinated debt (at below market rates if justified)

Use barrier analysis to quantify the amount of subordinated debt needed to cover the default risk

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Illustrative project: Energy efficiencyValue Proposition/Need

Manufacturing plant, commercial or residential building owner, potentially utility borrower is:

- Retrofiting/replacing equipment before its lifetime;

or

- Constructing a new “green” or advanced EE building

Financial additionality

Risk barrier – energy efficiency investments not prioritized, seen as higher risk

Cost barrier - paybacks of 2 years on energy efficiency investments, or IRRs of 50% and many investments won’t meet this internal bar

C2F Solution

Provide C2F debt for the cost of the systems

Use investment comparison analysis to justify the C2F investment

Our deal is with the future.

Patrick Doylepatrickd@iadb.org

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Financing low-carbon housing – US programs

and challenges

Residential Sector

Green mortgages - Increased lending capacity for energy efficient homes

US Property Assessed Clean Energy (PACE) - municipality financed, added to property tax burden of the home, recovered via homeowners tax or utility bill

Federal Housing Authority loan guarantee up to 10% (US Power Savers)

PA’s Keystone Home Energy Loan Program – State backed low interest secured or unsecured loans

Utility on-bill financing – utility or third party financed, recovered via utility payments

Issues

Skepticism about performance, lack of performance guarantees

Creditworthiness of owners

Complexity of qualifying – minimize red tape

Long tenors (7+ years) needed for larger projects

No secondary market for residential energy efficiency mortgages