Patrick DoyleStructured and Corporate Finance [email protected]
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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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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t o
f A
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/to
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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
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
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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