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Final ReportComponent 3: Financial Mechanism

Final ReportComponent 3: Financial Mechanism

PERÚ

NOVEMBER 2011

http://www.otromundoesposible.net/wp-content/C

PERÚ

This document was prepared by the following consultants:

THE CONSERVATION CENTER OF ENERGY AND ENVIRONMENT (CENERGIA)

The opinions expressed in this document are those of the author and do not necessarily reflect the views of the sponsoring organizations: the Latin American Energy Organization (OLADE) and the United Nations Industrial Development Organization (UNIDO).

Accurate reproduction of information contained in this documentation is authorized, provi-ded the source is acknowledged.

Perú- Product III

CASE OF PERU

Final Report

Product 1: Base Line of Energy Technologies

Product 2: State of the Art

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CONTENTS

EXECUTIVE SUMMARY .......................................................................................................... 7

3. FINANCING MECHANISMS FOR RENEWABLE ENERGY PROJECTS...................... 8

3.1 Introduction .................................................................................................................. 8

3.2 Methodology................................................................................................................. 8

3.3 Financing Mechanism................................................................................................... 8

3.3.1 National Financial Institutions.............................................................................. 9

a) Corporación Financiera de Desarrollo S.A. (COFIDE) ............................................ 9

b) INTERBANK ......................................................................................................... 12

c) Banco de Crédito del Perú ...................................................................................... 15

d) SCOTIABANK ...................................................................................................... 17

3.3.2 International Financial Institutions ..................................................................... 20

a) International Finance Corporation (IFC) ................................................................ 20

b) Inter-American Development Bank (IDB) ............................................................. 22

c) KFW Bankengruppe (KFW)................................................................................... 23

d) Andean Development Corporation (CAF).............................................................. 25

e) Global Environmental Fund (GEF) ........................................................................ 30

f) Export Credit Agencies (ECAs) ............................................................................. 34

3.4 Comparative Analysis of Financial Mechanisms........................................................ 38

3.5 Supportive Mechanisms ............................................................................................. 46

3.5.1 Public Policies .................................................................................................... 46

3.5.2 Financial and Tax Incentives .............................................................................. 46

3.5.3 Clean Development Mechanisms ....................................................................... 46

3.5.4 International Technical Cooperation................................................................... 47

3.6 Successful Cases......................................................................................................... 49

3.6.1 Case of the H.P.S. “Santa Cruz II” ..................................................................... 50

3.6.2 Case of T.P.S. “Paramonga I”............................................................................. 50

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3.6.3 Learned Lessons ................................................................................................. 50

3.7 Barriers and/or Gaps ................................................................................................... 51

3.8 Conclusions ................................................................................................................ 51

LIST OF CHARTS: Chart N° 1: Funding Tab of COFIDE ........................................................................................ 11 Chart N° 2: Funding Tab of Project – INTERBANK ................................................................ 14 Chart N° 3: Funding Tab of “Banco de Crédito del Perú”......................................................... 16 Chart N° 4: Funding Tab of SCOTIABANK............................................................................. 18 Chart N° 5: National Financial Mechanisms.............................................................................. 19 Chart N° 6: Funding Tab of IFC ................................................................................................ 21 Chart N° 7: Funding Tab of the Inter-American Development Bank ........................................ 23 Chart N° 8: Funding Tab of KFW Bankengruppe ..................................................................... 25 Chart N° 9: Funding Tab of PROPEL Program – CAF ............................................................. 29 Chart N° 10: Funding Tab of the GEF ....................................................................................... 34 Chart N° 11: International Financial Mechanisms..................................................................... 37 Chart N° 12: Comparative Analysis of Financial Mechanisms ................................................. 39 Chart N° 13: Cooperative Sources ............................................................................................. 48 LIST OF GRAPHICS: Graphic N° 1: Agreement with KFW......................................................................................... 10 Graphic N° 2: Agreement with JICA ......................................................................................... 11 Graphic N° 3: GEF Project Details – Photovoltaic .................................................................... 32 Graphic N° 4: GEF Project Details – Renewable Energy Systems............................................ 33

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ABBREVIATIONS AND ACRONYMS

ABC Brazilian Agency for Cooperation ADB Asian Development Bank

AECID Spanish Agency for International Development Cooperation AfDB African Development Bank Group AGCI International Cooperation Agency of Chile AIDS Acquired Immunodeficiency Syndrome APCI Peruvian Agency for International Cooperation BBVA “Banco Bilbao Vizcaya Argentaria” Bank BCP “Banco de Crédito del Perú” Bank

BERD European Bank for Reconstruction and Development BIF “Banco Interamericano de Finanzas” Bank BTC Belgian Development Agency CAF Andean Development Corporation -Development Bank of Latin American CAR Construction All Risk CDM Clean Development Mechanism

CELEPSA “Compañía de Electricidad El Platanal S.A.” CER’s Certified Emission Reductions CESCE “Compañía Española de Seguros de Crédito a la Exportación” CIDA Canadian International Development Agency

COFIDE “Corporación Financiera de Desarrollo S.A.” COFIGAS “Conversión Financiada a Gas Natural”

DED Deutscher Entwicklungsdienst DNA Designated National Authority EAR Engineering All Risk

ECA’s Export Credit Agencies ECGD Export Credits Guarantee Department

EDPYMES Micro and Small Development Enterprises EE Energy Efficiency

EEP Environmental Exports Program EPC Engineering, Procurement and Construction ER Renewable Energies

ESCOs Energy Service Companies FAO Food and Agriculture Organization FES Sustainable Energy Financing FIP Italian Peruvian Fund

FOMIN Multilateral Investment Fund FONAFE National Fund for Financing State Business Activity FONAM The National Environment Fund

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FONTAGRO The Regional Fund for Agricultural Technology GEF Global Environment Facility GEF Global Environmental Fund GHG Greenhouse Gases GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit

H.P.S. Hydroelectric Power Station HIV Human Immunodeficiency Virus IDB Inter-American Development Bank

IFAD International Fund for Agricultural Development IFC International Finance Corporation IFH Interbank Group IFI Financial intermediary IFS Intergroup Financial Services Corp. IGV General Sales Tax IIC Inter-American Investment Corporation

IICA Inter-American Institute for Cooperation on Agriculture ILO International Labour Organization

INTERBANK “Banco Internacional del Perú S.A.A.” IOM International Organization for Migration IRR Internal Rate of Return JBIC Japan Bank for International Cooperation JICA Japan International Cooperation Agency KFW Kreditanstalt für Wiederaufbau

KOICA Korea International Cooperation Agency L.D. Legislative Decree LCA Green Credit Line

LULUCF Land Use, Land-Use Change and Forestry MASHAV Israel’s Agency for International Development Cooperation

MEF Ministry of Economy and Finance MINAM Ministry of the Environment

NGO Non-Governmental Organization NZAID New Zealand Agency for International Development

OAS Organization of American States

OEI The Organization of Ibero-American States for Education, Science and Culture

PAHO Pan American Health Organization PLAC+e Latin American Carbon, Clean and Alternative Energies Program

PPA Power Purchase Agreements PROPEL Special Financing for Clean Energy Projects

RE Renewable Energy S.A.C. Public Limited Company

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SBS Banking and Insurance Superintendent SCOTIABANK Bank of Nova Scotia

SDC Swiss Agency for Development and Cooperation SIDA Swedish International Development Cooperation Agency STAP Scientific and Technical Advisory Panel T.P.S. Thermal Power Station TAF Technical Assistance Funds U.S. Unitated States UN United Nations

UNDP United Nations Development Programme UNEP United Nations Environment Programme UNEP United Nations Environment Programme

UNESCO United Nations Educational, Scientific and Cultural Organizaton UNFCCC United Nations Framework Convention on Climate Change UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund UNIDO United Nations Industrial Development Organization UNODC United Nations Office on Drugs and Crime UNOPS United Nations Office for Project Services USAID United States Agency for International Development VER´s Verified Emissions Reductions

WB World Bank WFP United Nations World Food Programme WHO Regional Office of the World Health Organization

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EXECUTIVE SUMMARY In the Peruvian energy market the use of renewable technologies is growing. The implementation of these technologies for electricity generation requires great investments which at the same time need financial support. Among the national financing institutions there is the “Corporación Financiera de Desarrollo S.A.” (COFIDE), which is a mixed economy company operating as a second-tier bank. Through its “Bionegocios” Program, COFIDE could transfer funds to contribute to the financing of all the stages of Energy and Renewable Energy Projects. Nowadays, this institution is negotiating the obtaining of funds from the Japan International Cooperation Agency (JICA) and from KFW Bankengruppe (KFW). Also, there are operating in the national market, private banks like: INTERBANK, “Banco de Crédito del Perú” – BCP, SCOTIABANK, that have been financing credit lines for projects in general (they are not exclusive for renewable energies). Each institution establishes the requirements to apply for the financing, being in all cases the main aspect to consider, risks generated by each evaluated project. This institutions finance the construction and in use stages, so in general it is required that the projects are at a final studies level and fulfill with the social and environmental requirements. As for international institutions, there are operating in the country the International Finance Corporation (IFC), which has the Sustainable Energy Financing (FES) addressed to financial institutions in Latin America; the Inter-American Development Bank (IDB) that finance projects for both public and private sectors; Kreditanstalt für Wiederaufbau (KFW), which is negotiating with the Peruvian State the assignment of a credit line of € 65 MM that could be used in renewable energy projects and in projects in general; the Andean Development Corporation (CAF) that has the Special Financing for Clean Energy Projects (PROPEL), through which it can be financed clean energy, alternatives and energy efficiency projects with investment costs below U.S. $ 30 million; there is also the Global Environmental Fund (GEF) that provides grants to developing countries and countries with economies in transition for diversity biodiversity, climate change, international waters, land degradation, depletion of the ozone layer and persistent organic pollutants. Private banking in agreement with international financial institutions have financed mainly RE hydroelectric projects. To date, there are under negotiation and evaluation the financing of hydropower, wind and solar projects. Some international mechanisms have been used successfully for the financing of RE projects such as the CDM and the GEF (GEF). Also the CAF have recently approved the funding for a hydroelectric project. According to what was described above, in the country there exists availability of funding sources with national and/or international capitals to support the development

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of projects with renewable technologies. This report will describe the most important mechanisms available for the financing of projects that use renewable energies. 3. FINANCING MECHANISMS FOR RENEWABLE ENERGY

PROJECTS

3.1 Introduction In this report there are identified the financial resources available for the development of renewable energy projects in the country. There are analyzed and described the financial models, mechanisms and facilities to which you can access to finance renewable energy projects.

Additionally, there are identified and described successful experiences in this field, providing the necessary information that must be taken into account by potential investors and project entities to design funding strategies for each type of technology.

3.2 Methodology The methodology used, involved the identification of national and international financial institutions operating in the country. The primary data source used for this report comes from personal interviews, as well as email and phone calls with representatives of the financial institutions identified.

The secondary data source used for the preparation of this report included: • 2010 Annual Report of the Andean Development Corporation (CAF), (CAF

2011b). • 2010 Annual Report of the International Finance Corporation (IFC), (IFC

2011b). • Different digital sources, which are listed in the references.

Then we proceeded to make a comparative analysis of each funding mechanism, identifying their main characteristics and its applicability according to the type of technology and size of renewable energy projects.

3.3 Financing Mechanism As it can be seen in the baseline report on energy technologies, the Peruvian market for renewable energy is growing, so the implementation of renewable technology projects demand significant investment and financial support.

In this part of the report it has been identified the main financing institutions that operate in the country, which have been grouped in the following way:

• National Financial Institutions. • International Financial Institutions.

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3.3.1 National Financial Institutions The main local institutions that participate in the financing of investments in renewable energy projects are: the “Corporación Financiera de Desarrollo S.A.” (COFIDE), “Banco Internacional del Perú S.A.A.” (INTERBANK), “Banco de Crédito del Perú” (BCP) and “SCOTIABANK”.

a) Corporación Financiera de Desarrollo S.A. (COFIDE) The “Corporación Financiera de Desarrollo” was founded on March 18 of 1971, through the L.D. Nº 18807 as a public company. Lately, on September 8 of 1981, through the L.D. N° 206, it turned to be a state-owned of private rights under the modality of Public Limited Company. By the S.D. N° 25694 of August 1992, it was defined its exclusive function as a second-tier bank, conducting the resources under its management only through institutions supervised by the Banking and Insurance Superintendent (SBS) and AFP.

Nowadays, it is mixed economy Company with management, economical and financial autonomy. Its capital belongs in 98.7% to the Peruvian State, represented by the National Fund for Financing State Business Activity (FONAFE), which is a department of the Ministry of Economy and Finance; and in 1.3% to the Andean Development Corporation (CAF). (COFIDE, 2011b). The mechanism used by COFIDE are long-term loans in the frame of the “Bionegocios” Program, through which it promotes exploitation and consumption of the different renewable energies sources, as well as the promotion of investments in facilities that improve the quality of life of people and the execution of productive processes that preserve the environment through the GHG emissions reduction.

The financial resources for this program are gained by multilateral bodies and government agencies, commercial and local capital market Banks, under cost and installments very favorable conditions, which are conducted to Financial Intermediaries (IFIs). The IFIs are financial institutions supervised by Banking and Insurance Superintendent which could channel the financial resources of CIFIDE to the market, like: Banks, Finance Companies. Program funds are devoted to end users of public and private sectors, which will have access to the IFI’s credits. They could apply for unconventional renewable energy projects (wind, solar photovoltaic, thermal, geothermal, biomass, and hydraulic power stations up to 20 MW) and energy efficiency projects in industrial companies, commercial and of services; as well as the conversion of thermal power stations with simple cycle to combined cycle; cogeneration and energy efficiency investments ESCOs (Energy Service Companies). The requirements that projects must fulfill to be financed are: • Demonstrate its technical, environmental and financial viability. • Authorization of the SBS to contract subordinated debt.

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• Letter of request for disbursement. • Promissory Note issued by the Financial Intermediary (IFI). Support of the IFI’s

counterpart funds, in the form of profit’s capitalization agreement properly formalized and informed to the SBS.

The financing period will depend on the cash flow of each project. The interest rate is changeable, it is fixed when the financing is done and can be financed all project’s stages. Projects that have been financed under this mechanism are: • Hydroelectric Power Station “Santa Cruz” of 6 MW. • Hydroelectric Power Station “Huasahuasi” of 8 MW.

COFIDE has established strategic alliances with international organizations like United Nations Environment Programme (UNEP), IDB, KFW, EIB, World Bank, JICA, among others. In this regard, it is expected that in the first half of 2013 there will be available funds granted by the KFW and JICA.

It is expected a credit line grant of € 65 MM, which has non-refundable Technical Assistance Funds (TAF) of € 1.5 MM, with a funding period of 12 years to pay with 3 years grace period. See Graphic Nº 1.

Graphic N° 1: Agreement with KFW

Source: COFIDE, 2011c.

For its part, JICA have planned to provide a credit line of U.S. $ 100 MM which has non-refundable Technical Assistance Funds (TAF) of U.S. $ 5 MM, with a financing period of 40 years payment with 10 years grace period, of which it has been set to designate 50% for the COFIGAS program and 50% for BIONEGOCIOS (40% for renewable energy and 10% for energy efficiency). See Graphic Nº 2.

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Graphic N° 2: Agreement with JICA

Source: COFIDE, 2011c.

In the Chart Nº 1 it is shown the Funding Tab of COFIDE.

Chart N° 1: Funding Tab of COFIDE

Parameters Units Information

Name of the Mechanism “Bionegocios” Program Institution COFIDE Application Type of Technology All RE’s and EE projects Period Geographic Area Peru

Project Stage (viability, construction, operation) All

€ 65 MM with KFW Available Budget

US$ 100 MM with JICA Brief Description Type of lending Long term, Refundable Interest Rate Variable

Application Procedures Contact the Department of Environmental Financing

Results Date 17/06/2011

Hydroelectric Power Station “Santa Cruz” of 6 MW. Name of the projects that have

been benefited Hydroelectric Power Station “Huasahuasi” of 7.8 MW.

Amount issued for renewable energy US$ Information not available

Source: COFIDE 2011a.

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b) INTERBANK The “Banco Internacional del Perú” was founded in May, 1897. In 1970, The National Bank acquires the greatest percentage of the Bank’s shares, thus becoming a member of the Associated Bank in the country. In 1980, the bank was renamed "InterBanc". In July 1994, a financial group headed by Dr. Carlos Rodriguez-Pastor Mendoza, became the largest shareholder of the bank acquiring 91% of the available actions. In 1997, the new owners decide to change “Interbanc” by its current name, "Interbank", (INTERBANK 2011a). In 1998, the reorganization of the Interbank Group involved the transfer of the main assets of IFH Peru Ltd (Bahamas). Also, in 1998 “Interseguro Compañía de Seguros S.A.” started to operate, which was a new company of the group that is devoted to the insurance sale. (INTERBANK 2011b). In 2007, the Interbank Group created a financial holding: “Intergroup Financial Services Corp.” (IFS), consolidating the ownership of “Interbank” and “Interseguro”.

INTERBANK funds projects in the form of Corporate Finance and Project Finance, being the last one the method usually applied to the electricity sector as hydroelectric power generation and ethanol production. (INTERBANK, 2011c). The maximum installment for financing is 12 years that usually include 2 years of construction and 10 years of repayment. The interest rate assigned to projects depends on their characteristics, and could reach values between 8.5% and 10% at fixed rate; and a variable rate of 5% to 6%. The rates depend on the structure, sponsor, flow capacity and repayment horizon of the project. The Bank does not have a fund exclusively devoted to finance projects of renewable energy sources, however, manages an exposure limit for each project, with a maximum amount of U.S. $ 20 million. Depending on the type of project, the percentage of funding can change to a maximum of 70%. Requirements for obtaining financing are the usual for this type of transactions and are the following ones (it also could be considered others): • Have a designed flow to validate the technical feasibility of the project; • Have an investment plan; • Outline to ensure the generation of project’s flows; • Have necessary documents such as legal permits, municipal licenses, generation

final concessions, relevant authorizations and authorization for execution of works given by the water management authority;

• Have pre-feasibility, hydrology, pre-operational studies; environmental impact assessments; among others;

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• That the project company has obtained the bid in the renewable energies auction;

• Have a work supervisor to issue periodic reports on which there are validated the work progress according to the EPC contract;

• Validation of the construction period of projects by a technical advisor; • That it has been signed a contract with the construction supervisor; • That it has been signed a contract with the technical advisor; • That it has been signed a contract with the builder, which must be an EPC

contract with closed price and installment, with guarantee’s work completion on acceptable terms to lenders;

• That has been contracted CAR (Construction All Risk) insurance policies. Additionally, the policy must include basic coverage for bases’s weakening, design risk, extensive maintenance, and in case it has adjacent properties and the EAR policy (Equipment all risk);

• That it has been made a valuation of the land where the projects will be built; • Technical advisor’s approval of the investment budget. The required guarantees are the usual for this type of transactions and are the following ones (it also could be considered others):

• Assignment conditional on licenses, agreements, permits and / or

authorizations. • Trusteeship in management and guarantee over land, power stations and other

works and assets related to projects and their implementation (the "Trusteeship of Assets").

• Trusteeship in management and guarantee over receivables and-cash flows generated by projects and other additional flows (the "Trusteeship Flow").

• Endorsement or surety bond of the promoter or project builder during the construction period plus the first 6 (six) months of the operation period.

• Assignment of the concession rights in favor of the lenders. • Mortgage.

In the Chart Nº 2 it is shown the Funding Tab of INTERBANK.

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Chart N° 2: Funding Tab of Project – INTERBANK


Name of the Mechanism Project Finance Institution Interbank Application Type of Technology Hydroelectric power Period Geographic Area Peru

Project Stage (viability, construction, operation) Construction and operation

Available Budget US$ 20 Million by project Brief Description Type of lending Refundable

Interest Rate Fixed rate of 8.5% to 10%, variable rate of 5% to 6%

Application Procedures Are described in previous paragraphs Others Results Date 22/06/2011

Hydroelectric Power Station “Santa Cruz” of 6 MW.

Name of the projects that have been benefited Hydroelectric Power Station “Huasahuasi” of 7.8

MW.


Source: INTERBANK, 2011b.

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c) Banco de Crédito del Perú

During its first 52 years was called “Banco Italiano”. It began its operations on April 9, 1889, adopting a credit policy based on the principles that would guide their institutional behavior in the future. On February 01, 1942, was agreed to replace the old name by the “Banco de Crédito del Perú”. Thus, “Banco Italiano”, the first in the country, closed its efficient work after obtaining the highest results. In order to achieve greater international weight there were established branches in Nassau and New York. (BCP, 2011a). BCP is part of the group of banks that can provide the Green Credit Line - LCA, an initiative supported by the Swiss Cooperation - SECO. The bank uses the following mechanisms:

• The Capital Market is set through the issuance of bonds to finance projects.

This mechanism seeks for institutional investors to participate in these emissions and to finance part or the whole cost of a renewable energy project. To secure funding for this mechanism, it is important to consider the following aspects: o The flows of the project should be stable, based on the existence of a PPA,

or been awarded in a RER auction where it could be acquired the benefit from selling this energy at a fixed price.

o You must have a renowned sponsor behind the project with experience in the sector.

o You must have a construction plan through an EPC contract or a Lump Sum Contract.

o The risks must be properly distributed. • Medium Term Loans, are expected to meet the same criteria explained in the

previous mechanism. In this case, the bank can be more flexible with the project during the construction period, as it can be applied ad-hoc financing for the required disbursements. It is set a deferred subscription that allows make capital disbursements as given capital requirements for the project’s construction. The bank has restrictions on its providing ability due to limits for certain guarantees; the real collateral for this mechanism can be 15% of the bank's effective equity.

• Leasing, gives certain advantages for most projects, such as accelerated

depreciation and the financing or anticipated recovery of sales tax. Many of renewable energy projects have this mechanism. The bank has limitations in its ability to provide due to limits set by certain guarantees. For leasing the limit is 30%. (BCP 2011b).

BCP supports all types of projects, if they do not have experience in a type of project; they hire consultants to properly assess the risks. The interest rate applied depends on the following conditions: the period of financing, project risk,

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guarantees, expertise, insurance, flows to provide, and so on. The funding period is variable; they can finance the project from the start or during the construction stage. They can fund between 50% and 80% of the investment, depending on the project, magnitude, guarantees, financing term, truth flows, expertise and project contracts. (BCP 2011b). The guarantees required by this bank may be: Completion (the sponsor put the necessary funds to complete the work); surety bonds, assets under construction, concessions; flows; extra business. In the Chart Nº 3 it is shown the Funding Tab of “Banco de Crédito del Perú”.

Chart N° 3: Funding Tab of “Banco de Crédito del Perú”


Capital Market Medium Term Loans Name of the Mechanism Leasing

Institution Banco de Crédito del Perú Application Type of Technology All Period Geographic Area Peru


Available Budget US$ Brief Description Type of lending Refundable Interest Rate Variable

Application Procedures Contact: Corporate Banking or Banking Company

Others Results Date Information not available

Hydroelectric Power Station “El Platanal” of 220 MW

Name of the projects that have been benefited Hydroelectric Power Station “Huanza” of 86

MW


Source: BCP, 2011b.

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d) SCOTIABANK “SCOTIABANK Peru” is part of The Bank of Nova Scotia (BNS) or SCOTIABANK Group, one of the most important financing institutions of North America and is the Canadian Bank with major presence and international renown. (SCOTIABANK, 2011a).

In 2006, SCOTIABANK consolidates and begins its operations in Peru by combining the expertise and knowledge of “Banco Wiese Sudameris”, the focus in service of “Banco Sudamericano” and the support of The Bank of Nova Scotia (BNS), one of the leading financial institutions in North America and Canada's financial conglomerate with most international presence. (SCOTIABANK, 2011b).

SCOTIABANK has two financing mechanisms:

• Credit Line and risk sharing: for projects with renewable energies of medium

or great importance, established by a cooperative alliance with the World Bank through the IFC.

• Green Credit Line – LCA: for small projects. It is an initiative supported by the Swiss Cooperation – SECO which seeks to increase the attraction for investments in cleaner technologies and thus promote sustainable industrial production. It is a non-reimbursable fund up to 40% if the one who apply for the loan reaches the standards to which it has had committed (emissions reduction, reducing the impact of Climate Change, etc.). (SCOTIABANK, 2011d).

SCOTIABANK also can finance projects with equity funds at risk sharing, as it did with the H.P.S. “El Plantanal”, which contributes with 220 MW of clean energy. For the operationalization of this station were required 10 years of studies and negotiations, 3 years of construction, 3 million man-hours and an investment of 350 million U.S. $ (CELEPSA, 2010). This investment was supported in 44 percent by the shareholders (Cementos Lima, Cemento Andino and Corporación Aceros Arequipa), and the remaining 56 percent by local financiers like “Banco de Crédito del Perú” (BCP), which provided a loan of 120 million, and Scotiabank with a loan of 60 million dollars. (MERCADOENERGIA, 2009).

SCOTIABANK, finances all renewable energy technologies (unconventional). In the case of wind energy projects, they are working with secured transactions made in the parent company of this type of project (Spain, France, and Germany) through abroad guarantees. (SCOTIABANK, 2011d). Interest rates applied are variable; depend on the level of risk, the situation, term, guarantee and payment methods. What is normally expected in these projects is a TIR of not less than 25%, but do not rule out projects with lower returns. It can be financed up to 70 or 80% of the investment. (SCOTIABANK, 2011d).

Requirements to obtain financing are:

• Demonstrated financial capacity.

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• Demonstrated technical capacity. • Generation of cash flow. • Coverage (guarantees). • Image and trajectory of the loan applicant. • Environmental and economical policies, among others.

SCOTIABANK has participated in the two RER auctions (which were executed under the frame of the Law to Promote Investment in Electricity Generation with Renewable Energies L.D. N° 1002), in the first and second announcement of the first auction with wind and biomass projects, and in the first announcement of the second auction with a wind project and 03 small hydroelectric power stations. (SCOTIABANK, 2011d). In the Chart Nº 4 3 it is shown the Funding Tab of SCOTIABANK.

Chart N° 4: Funding Tab of SCOTIABANK Parameters Units Information

Credit Line (IFC) Name of the Mechanism

Equity (Risk Sharing) Institution SCOTIABANK Application Type of Technology All

Period From 7 to 10 years and with a grace period of 1.5 to 2.

Geographic Area Peru


Available Budget US$ Brief Description Type of lending Refundable Interest Rate Variable

Application Procedures

Contact the loan officer, then conduct the project to the environmental area, it continue the standard credit process (score of financial statements, projections and cash flow, feasibility of studies)

Results Date Information not available

Name of the projects that have been benefited Hydroelectric Power Station “El Platanal” of

220 MW

Amount issued for renewable energy US$ 60 Million (H.P.S. El Platanal)

Source: SCOTIABANK, 2011d.

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Chart N° 5: National Financial Mechanisms

Institution Name of the Program/Mechanism

Type of Mechanism

Fundable Project Stage

Geographical Coverage Website

Corporación Financiera de Desarrollo S.A. (COFIDE) BIONEGOCIOS Financing

Generation and distribution of

renewable energies Peru http://www.cofide.com.pe/

INTERBANK Project Finance Financing

Construction and

Operation

Peru http://www.interbank.com.pe/

Banco de Crédito del Perú (BCP)

Capital Market Medium Term Loans

Leasing Financing

Construction and Operation

Peru http://www.viabcp.com/

SCOTIABANK Credit Line (IFC) Equity (Risk Sharing) Financing


Peru http://www.scotiabank.com.pe/

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3.3.2 International Financial Institutions

a) International Finance Corporation (IFC) The International Finance Corporation - IFC is a member institution of the World Bank Group in charge of the private sector. It promotes sustainable investment in the private sector in developing countries, helping to reduce poverty and improve the quality of life of the population. (IFC, 2011b). IFC's 182 member countries provide its authorized share capital, collectively determine its policies, and approve investments.

The IFC has several programs and financing mechanisms for renewable energy projects including direct financing (through debt, guarantees or venture capital) and indirectly through lending to financial institutions. It has a program of Sustainable Energy Finance for financial institutions in Latin America. It finances all types of renewable energy projects including hydro, solar, wind and biomass. To finance the projects, they must be commercially and financially viable. IFC is committed to using between 20% and 25% of their total funding each year for projects related to climate change (mitigation and adaptation).

To qualify for funding, projects and the sponsor should be financially viable. The period, the rate and guarantees of financing vary according to the project. The IFC has financed the H.P.S. “Cheves” of 168 MW of installed capacity by a credit line with BBVA. (IFC, 2011c).

In the case of financing projects to financial institutions, they could approach to the IFC when they were interested in getting funding for renewable energy projects. In the Chart Nº 6 it is shown the Funding Tab of the IFC.

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Chart N° 6: Funding Tab of IFC


Name of the Mechanism Sustainable Energy Financing Institution International Finance Corporation Application Type of Technology All Period Variable Geographic Area Latin America

Project Stage (viability, construction, operation)

Available Budget US$ Between 20% and 25% of the total IFC’s funding for each year is designated to projects related to climate change.

Brief Description Type of lending Refundable Interest Rate Variable Application Procedures Contact the IFC Others Results Date Information not available

Name of the projects that have been benefited Hydroelectric Power Station “Cheves” of 186

MW


Source: IFC, 2011.

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b) Inter-American Development Bank (IDB) The Inter-American Development Bank was founded in 1959. Its shareholders are 48 member countries, including 26 Latin American and Caribbean borrowing members, who have a majority ownership of the IDB. (BID 2011a).

The IDB grants loans to national, provincial and municipal governments and autonomous public institutions. The civil society organizations and private companies may also receive funding from the Bank. (BID 2011b). The IDB Group is composed of the Inter-American Development Bank, the Inter-American Investment Corporation (IIC) and the Multilateral Investment Fund (MIF). The IIC focuses on support for small and medium-sized businesses, while the MIF promotes private sector growth through grants and investments, with an emphasis on microenterprise. The bank has three lines of funding:

• Public Sector: Loans are made to states, which can be investment or policy adjustments such as programmatic lending. The programmatic lending includes topics related to renewable energy and climate change. Financing is given on concessional terms.

• Private Sector: It finances large-scale private projects such as Camisea I and Camisea II. In this case, financing conditions are set by the market.

• Multilateral Investment Fund (MIF): It finances private sector small-scale

activities oriented to Basis Organizations or NGOs so that it can be generated innovative ideas or pilot projects. If they are successful, they can be considered inside public policies that then could be financed by the public sector. In these cases are non-refundable funds.

The IDB could finance all development stages of projects with renewable energy (all technologies), including geothermal energy. Financing conditions depend on the applicant. If it is the State, it would be under concessional conditions and if it is private, it would be according to market conditions. (BID 2011d). The bank could finance up to 80% of the project’s investment amount and the compensation would be put by the beneficiary. If it is the State, it could be in kind and if it is a private, party can be in kind and the other in cash.

Requirements to obtain financing vary depending on the facility chosen: (BID 2011d).

• Public sector undertakes 20% counterpart. • Private sector according to the level of progress of the project.

In the Chart Nº 7 it is shown the Funding Tab of the IDB.

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Chart N° 7: Funding Tab of the Inter-American Development Bank


Public Sector Name of the Mechanism

Private Sector Institution Inter-American Development Bank Application Type of Technology All Period Geographic Area Latin America

Project Stage (viability, construction, operation) All stages

Available Budget US$ There is no funding limit for each project. Brief Description

Type of lending

Public Sector: Concessional Private Sector: Refundable MIF: Donations, Non-Refundable

Interest Rate Variable, it does not specify a range


Review funding opportunity and donations: http://www.iadb.org/es/recursos-para-empresas/hacer-negocios-con-el-grupo-bid,6307.html

Others Results Date 2011

Name of the projects that have been benefited Hydroelectric Power Station “Chaglla” of 400

MW (in elaboration)

Amount issued for renewable energy US$ 150 Million

Source: IDB, 2011d.

c) KFW Bankengruppe (KFW)

KFW Bankengruppe was founded in 1948 and is executed through the German Financial Cooperation in developing countries, Europe and throughout the world commissioned by the Federal Government. The Bank finances specific investments and supports programs of macroeconomic and sectorial reforms and assesses the feasibility of projects from the perspective of development policies, finances and supports its implementation and execution and evaluates through third parties the results of each project. (KFW, 2011a).

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As part of a financial cooperation agreement with the Peruvian State, KFW will finance projects through the Program of Renewable Energy and Energy Efficiency, which runs through COFIDE. The program's objective is to contribute to national and global security climate, as well as a sustainable energy supply and service security. In this way it is expected to contribute to the widespread of renewable energy and energy efficiency measures use through the appropriate, efficient and sustainable access to investment credits. (KFW, 2011b). As part of the activities of this credit line, it has been planned the implementation of a system for the identification, evaluation and monitoring of environmental risks in order to assist in the identification and assessment of environmental and social risks, as well as the evaluation and compliance monitoring of with contractual clauses relating to environmental and social risks in credit operations of COFIDE. The group of beneficiaries includes companies or private investors as well as the public sector in Peru. Program funds will be used to finance investments in unconventional renewable energies, to say: small hydroelectric power stations (up to 20MW), wind farms, solar photovoltaic stations, geothermal energy and biomass generation. In the field of energy efficiency, the program will focus on productive sectors (industrial, commercial and of services companies, including micro, small and medium enterprises) and private homes. This includes replacement investment for machinery, efficient heating and cooling systems, conversion of simple cycle power plants to cogeneration plants and energy efficiency investments by ESCOs (Energy Service Companies). The amount of financial cooperation is € 120 MM from the German State and KFW own resources. To date, it has allocated to the Peruvian Government by credit lines an amount of € 65 MM; additionally the agreement includes a grant of € 1.5 MM which is aimed at a Technical Assistance Fund (TAF).

Favorable conditions of the funds will be transferred to final customers. Both, COFIDE and financial intermediaries will apply for program funds only the adequate margins to cover operating expenses and to compensate credit and currency risks. COFIDE may finance up to 80% of intermediation loans with funds of the Financial Cooperation, providing 20% with their own resources. Financial intermediaries may finance up to 80% of the total cost of investment (project) with program resources. End users will have to contribute, at least 15% of the final investment cost with equity capital.

The requirements to obtain financing and method of payment will be determined by financial institutions responsible for providing sub loans. At the time of preparing this document, the financial institutions involved with this mechanism and the

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requirements requested were unknown. The Chart Nº 8 shows the Funding Tab of KFW.

Chart N° 8: Funding Tab of KFW Bankengruppe


Name of the Mechanism Agreement with the Peruvian State Institution KFW Bankengruppe Application Type of Technology All Period Geographic Area Latin America

Project Stage (viability, construction, operation) All stages

Available Budget € 65 Billion Brief Description Type of lending Refundable Interest Rate Variable Application Procedures Contact COFIDE Others Results Date The program has not started yet

Name of the projects that have been benefited None

Amount issued for renewable energy € None

Source: KFW, 2011b.

d) Andean Development Corporation (CAF) CAF is a development bank established in 1970 that currently consists of eighteen countries in Latin America, the Caribbean and Europe, as well as fourteen private banks from the Andean region. The organization promotes a model of sustainable development through credit operations, grants and technical support, and offers financial structuring to public and private sector projects in Latin America. Based in Caracas, Venezuela, CAF has offices in Buenos Aires, La Paz, Brasilia, Bogota, Quito, Madrid, Panama City, Lima and Montevideo.

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PROPEL Program The Special Financing for Clean Energy Projects (PROPEL), is an internal program of the CAF, which has been created in order to finance new or expansion projects (“greenfield” and “brownfield”) with investments cost under USD 30 million, in the clean alternative energy sector, along with energy efficiency in CAF shareholders countries. Operational modalities of PROPEL include loans, endorsements, full or partial guarantees and equity investments which include shares and other risk instruments such as subordinated debt and convertible bonds. They have access to the operations of PROPEL corporate bodies, private or mixed, which are domiciled in the CAF shareholder countries. PROPEL’s operations will be considered of non-sovereign risk. To be eligible to receive funding from the PROPEL projects or companies must fulfill the following characteristics: • Clean and alternative energy or energy efficiency projects in a CAF shareholder

country. • Must be able to generate Carbon Emission Reduction Certificates. • Total cost of the project must be over USD 3,000,000 and under USD

30,000,000. • Proven technology or limited technological risk. • Key technical and financial studies for project implementation must be available

or in an advanced phase of execution. • Issued or pending licenses, especially environmental license. • Limited construction risk or likely to be mitigated. • Existence of an efficient market with strong regulatory framework and credible

institutions that allow qualify as tolerable the market risk or possibility of mitigating market risk through special agreements (“take or pay”, “PPA”, etc.) with acceptable credit subjects for CAF.

• Availability or reasonable access to required infrastructure for delivery of the final product (such as access to transmission lines for electricity generation).

For the inclusion in the PROPEL program, it is considered as clean and alternative energy the one which generates no pollutants during the generation of electricity or energy in general, or consumption and which is also innovative and provides a solution to the traditional use alternatives and reduces environmental impacts. In this category can be classified wind, geothermal, solar, tidal, biomass power generation and biogas, without prejudice the inclusion of other types of energy generation that meet the definition of clean alternative energy. The generation through the run-of the river Hydroelectric Power Station which does not use large reservoirs and generates low environmental risks, can also be considered as a clean alternative energy. Energy efficiency refers to the production and consumption of energy resources with rationally and efficiency, optimizing its use.

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Developers must meet the following things:

• Presence of a partner with stock control, in the case of limited resource financing

(“Project Finance”); • Financial capacity in accordance with the level of obligations to be assumed; • Self experience or external expertise in development, construction and / or

operation of similar projects. PROPEL only funds projects related to clean energy, alternative energy or energy efficiency. The program also ensures that its loans or investments are exclusively conducted to achieve the purposes for which they were granted. PROPEL loans are for a minimum amount of USD 2 million and a maximum of USD 15 million. PROPEL will determine during the evaluation process of each operation the amount that would be willing to finance. For structured transactions under schemes of limited resource (Project Finance), the total PROPEL’s participation (including loan and equity investments) may not exceed 70% of the total cost of the operation. The financing term of the operation, disbursements and others that correspond to the nature of it, will be determined during the evaluation process of the operation. The term of credit operations will not exceed fifteen (15) years, including grace period. PROPEL’S credit operations will have capital semester or consecutive trimester payments. Payments may be equal or adapted to the project’s cash flow. So far in 2011, the PROPEL’s Screening Committee of the CAF approved a loan for the company “Peruana de Inversiones en Energías Renovables S.A.C” for USD 8 million, an amount that will be used to the partial finance of the construction, start-up and operation Hydroelectric Power Station “Manta”, whose generation capacity will be of 19.8 MW and will be located in the basin of Manta in Corongo Province, Ancash Department, Peru. That CAF loan is part of its PROPEL program. The total cost of the building work is approximately USD 24.3 million, of which 34% will be covered with funds from the shareholders of the company that will run the project, while the remaining 66% will be financed with long-term loans of BBVA Banco Continental (USD 9 million) and CAF (USD 8 million). (CAF, 2011c).

The information to be submitted to PROPEL’s Screening Committee is detailed below:

1. Funding for clean energy projects description:

a. Process and technology to be used. b. Installed capacity, estimate of annual electricity generation. c. Location. d. Estimated investment cost by category. e. Schedule of budget execution.

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2. Promoters/Shareholders:

a. List of main shareholders. b. Previous experience in similar projects.

Recent financial statements (if available).

3. State or Progress of Project: a. Feasibility study. b. Project design (Basic engineering and detailed engineering). c. Description of main contracts if available (EPC, offtake contract, among

others). d. Situation of the land required for the project (% owned, % to be

acquired, % rented/leased). e. Description of main permits, licenses, government authorizations. f. Financial projections. g. Financial Plan.

4. Information of Carbon Trading:

a. Potential of project for generating emission reduction certificates (CER’s).

b. State of registration of project as a Clean Development Mechanism.

In the Chat Nº 9 it is shown the Funding Tab of PROPEL Program – CAF.

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Chart N° 9: Funding Tab of PROPEL Program – CAF


Name of the Mechanism PROPEL Institution Andean Development Corporation Application Type of Technology All clean alternative energy generation Period Indefinite Geographic Area In any CAF shareholder country


Available Budget US$ Maximum 30 million per project Brief Description

Type of lending

Loans; equity investments, shares and other like subordinated debt bonds, convertible bonds and others of similar nature; endorsements and guarantees total or partial.

Interest Rate It will be determined during the evaluation process of the operation

Application Procedures Gather information required by the committee and contact the CAF

Others Results Date 2011

Name of the projects that have been benefited H.P.S. “Manta” of 19,8 MW

Amount issued for renewable energy US$ 8 Million (Approved in Committee)

Source: CAF, 2011.

PLAC+e Program

CAF established the Latin American Carbon, Clean and Alternative Energies Program - PLAC + e by mandate of its Board and under the leadership of the Directorate of Environment in 1999, year when begins to operate successfully as the first acquisition program of greenhouse gas emissions (GHG) reduction within a regional development bank. In this context, the funding issues approached from three perspectives, of which we describe the ones that are currently in force:

• Financing schemes available in the Corporation, which are available to discuss

activities of projects for GHG emissions reduction. Additionally to the Corporation funding in its different areas (infrastructure, social and

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environmental development and private sector), coordination with the PLAC + e allows ensuring the inclusion of flows from the sale of emission reductions (both in the regulated and volunteer markets) properly, thus creating a solid Carbon Finance component for projects.

• Imprests in future revenue for emission reductions. PLAC + e made imprests on expected revenues from the sale of Certified Emission Reductions (CER). For the evaluation of these imprests schemes it is required emissions reductions of at least 150 000 tonnes of CO2e generated before December 31, 2012.

e) Global Environmental Fund (GEF) The Global Environment Facility (GEF) unites 182 member governments — in partnership with international institutions, nongovernmental organizations, and the private sector — to address global environmental issues. An independent financial organization, the GEF provides grants to developing countries and countries with economies in transition for projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants. These projects benefit the global environment, linking local, national, and global environmental challenges and promoting sustainable livelihoods. (GEF 2011a). The GEF partnership includes 10 agencies: the UN Development Programme; the UN Environment Programme; the World Bank; the UN Food and Agriculture Organization; the UN Industrial Development Organization; the African Development Bank; the Asian Development Bank; the European Bank for Reconstruction and Development; the Inter-American Development Bank; and the International Fund for Agricultural Development. The Scientific and Technical Advisory Panel provides technical and scientific advice on the GEF’s policies and projects. (GEF 2011a).

GEF projects in climate change help developing countries and economies in transition to contribute to the overall objective of the UNFCCC "to achieve [...] stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner" (from the text of the UNFCCC, Art.2). (GEF 2011b).

The GEF supports projects in:

• Climate Change Mitigation: Reducing or avoiding greenhouse gas emissions in the areas of renewable energy; energy efficiency; sustainable transport; and management of land use, land-use change, and forestry (LULUCF).

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• Climate Change Adaptation: Aiming at developing countries to become climate-resilient by promoting both immediate and longer-term adaptation measures in development policies, plans, programs, projects, and actions.

GEF helps developing countries undertake “win-win” projects to reduce emissions of GHGs that also create benefits for local economies and their environmental conditions. GEF programs take a long-term perspective, transforming energy markets in developing countries by enabling these markets to operate more efficiently and shift away from carbon-intensive technologies. Till 2009, the GEF has invested US$2.7 billion to support climate change mitigation projects in developing countries and economies in transition, and leveraged another US$17.2 billion in project cofinancing. More than 1 billion tons of greenhouse gas emissions, an amount equivalent to nearly 5 percent of annual human emissions, have been avoided with GEF support. (GEF2011f).

The GEF funds a broad array of project types that vary depending on the scale of GEF resources, the project needs and the issue addressed. In order to be approved, each project follows a specific project cycle.

Each GEF country member has designated an officer responsible for GEF activities, known as GEF Operational Focal Point, who plays a key role in assuring that GEF projects are aligned to meet the needs and priorities of the respective country. (GEF 2011g). The information of the GEF Operational Focal Point in Peru is:

• Mr. José Antonio González Norris, (Alternate member of the Operational Focal Point of: Argentina, Bolivia, Chile, Paraguay, Peru, Uruguay since May 31, 2011).

• Head of the Directorate for International Cooperation. • Ministry of the Environment. • 1440, Javier Prado Oeste Avenue, Lima – 27, Peru. • Phone: + 511 611-6000, Fax: + 511 225 5370 ext 219. • E-mail: [email protected] (GEF 2011g).

Any eligible individual or group may propose a project. However, to be taken into consideration, a project proposal has to fulfill the following criteria: • It is undertaken in an eligible country.1 • It is consistent with national priorities and programs. • It addresses one or more of the GEF Focal Areas, improving the global

environment or advance the prospect of reducing risks to it. 1 Countries are eligible for GEF funding in a focal area if: • They meet eligibility criteria established by the relevant COP of that convention. • They are members of the conventions and are countries eligible to borrow from the World Bank

(IBRD and/or IDA). • They are eligible recipients of UNDP technical assistance through country programming.

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• It is consistent with the GEF operational strategy. • It seeks GEF financing only for the agreed-on incremental costs on measures to

achieve global environmental benefits. • It involves the public in project design and implementation. • It is endorsed by the government(s) of the country/ies in which it will be

implemented. (FMAM 2011g). In Peru, 34 GEF projects have been conducted, of which 2 are related to renewable energy. The characteristics of these projects are presented in Graphic Nº 3 and Graphic Nº 4.

Graphic N° 3: GEF Project Details – Photovoltaic

Source: GEF, 2011d.

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Graphic N° 4: GEF Project Details – Renewable Energy Systems

Source: GEF, 2011e. In the Chart Nº 10 it is shown the Funding Tab of the GEF.

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Chart N° 10: Funding Tab of the GEF


Name of the Mechanism Institution Global Environment Facility Application Type of Technology All Period Long Term Geographic Area Latin American


Available Budget US$ Brief Description

Type of lending Non refundable, (are donated, but it requires a national counterpart)

Interest Rate Not applicable


Contact the GEF Secretariat at: [email protected] or the Operational Focal Point in Peru at: [email protected]

Others Results

Date April 1999 (1) April 2001 (2)

Name of the projects that have been benefited

Photovoltaic-Based Rural Electrification in Peru (1) Renewable Energy Systems in the Peruvian Amazon Region (2)

Amount issued for renewable energy US$ 3 955 093 (1) 747 500 (2)

f) Export Credit Agencies (ECAs) Export Credit Agencies – ECAs, are government agencies that promote exports of capital goods from their countries and provides financing to buyers in emerging markets, where the rate of funding could be much higher when considering the political risk (currency transfer risk, civil wars, etc.). (BCP 2011c).

Some ECAs are listed below: (BCP 2011d).

• The Export-Import Bank – USA. • The Export-Import Bank, Korea. • The Export-Import Bank, Taiwan. • Hermes Kreditversicherungs-AG (Hermes, Germany). • SACE – Italy. • CESCE – Spain.

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• COFACE – France. • JBIC – Japan. • ERG – Switzerland. • ECGD – United Kingdom. • EXIM-BNDES – Brazil. • CORFO – Chile.

Below it is shown information from the Export Import Bank of the United States, CESCE of Spain and the ECDG of the United Kingdom:

Export-Import Bank of the United States (Ex-Im Bank) It is the official export credit agency of the United States. Ex-Im Bank's mission is to assist in financing the export of U.S. goods and services to international markets. Ex-Im Bank enables U.S. companies — large and small — to turn export opportunities into real sales which help to maintain and create U.S. jobs and contribute to a stronger national economy. (EXIM, 2011a). Ex-Im Bank is dedicated to helping U.S. exporters grab a share of that market. In fact, Ex-Im Bank has a Congressional mandate to support renewable energy and has been directed that 10% of its authorizations should be dedicated to renewable energy and environmentally beneficial transactions. Consequently, Ex-Im Bank has had a focus on the environment since 1994 with its Environmental Exports Program (EEP), and has steadily grown its portfolio of transactions. In 2007, the Office of Renewable Energy & Environmental Exports was created. Further in 2010, the Division was expanded to include dedicated credit officers to process renewable energy and environmental transaction. As of June 30, 2010, Environmentally Beneficial authorizations reached approximately $323 million. (EXIM, 2011b). The EEP as well as Ex-Im Bank's Carbon Policy offer a number of incentives that encourage the use of Ex-Im Bank products, including tenors up to 18 years, 30% local costs support, capitalized interest during construction, interest rate lock on direct loans and the ability to pay the exposure fee as a margin over an interest rate. Additionally, a streamlined approach to small solar (Solar Express) deals has resulted in a number of applications. Operations require the support of the CAF. According to the Country Limitation Schedule of the Ex-Im Bank, Peru could access to credit for periods of up to 1 year, 1 to 7 years and over 7 years for both public and private sectors. (EXIM, 2011c). The considerations for access to these credits are: Discretionary Credit Limits under Short Term Insurance Policies are withdrawn. Cover not available unless specified in a Special Buyer Credit

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Limit endorsement, an Issuing Bank Credit Limit endorsement, or a Country Limit of Liability endorsement.

CESCE – Spain CESCE, is the official agent for the Spanish export’s support, (CESCE, 2011a). Every year, CESCE insures some 150 foreign export and investment operations for the account of the Spanish state, for a total value of 1.5 billion euros. This figure includes the majority of large projects in which Spanish exporters or investors engage in developing countries. The majority of these projects contribute to the development of the countries where they are carried out. In some cases, however, the implementation of said projects has certain repercussions on the environment where they are carried out that may not be adequately mitigated. (CESCE, 2011b). Since the beginning of 2002, CESCE evaluates the possible environmental impact of all projects insured for the account of the State. All requests for cover for financed export operations must be accompanied by information detailing the impact of the project on the surrounding area. CESCE analyses this information and evaluates mechanisms for managing the impact of the operations before taking any decision regarding cover. (CESCE, 2011b). ECGD – United Kingdom The Export Credits Guarantee Department (ECGD) is the United Kingdom’s export credit agency. It was created in 1919 and was the world’s first export credit agency. (ECGD, 2011a). The ECGD works closely with exporters, banks, buyers and project sponsors and have 90 years’ experience of supporting exports to, and investments in, markets across the world. It provides guarantees, insurance and reinsurance against loss, taking into account the international policies of the United Kingdom. ECGD has Market risk appetites for each country. In the case of Peru, it can be executed operations for at least £ 750 Million, which could be cash, short term (less than two years), medium term or long term (more than two years). The maximum credit period could be 10 years; however, it could be considered longer repayment periods in the case of civil aircraft, nuclear and non-nuclear stations, ships, renewable energy, water projects and projects where generated cash flows will be used to repay loans for export credit. (ECGD, 2011b).

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Chart N° 11: International Financial Mechanisms

Institution Program’s Name/Mechanism Type of Mechanism Stage of the Fundable Project

Geographic Coverage Website

International Finance Corporation

(IFC) Sustainable Energies Funding Financing Construction and

Operation Latin America http://www.ifc.org/spanish

Public Sector Concessional loan All Inter-American

Development Bank (IDB) Private Sector Financing Construction and

Operation

Latin America http://www.iadb.org/

KFW Bankengruppe Agreement with the State Loan Construction and Operation Latin America http://www.kfw.de/

Andean Development Corporation

(CAF)

Special Financing for Clean Energy Projects (PROPEL). Financing Construction and

Operation Member Countries http://www.caf.com/

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3.4 Comparative Analysis of Financial Mechanisms In the following chart there are summarized all funding mechanisms, in order to facilitate the comparative analysis of them.

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Chart N° 12: Comparative Analysis of Financial Mechanisms

Institution Program’s Name

Public/Private Mechanism

Geographical Scope

Project’s Stage

Interest Rate Loan Guarantee Financing

Period

Minimum financing amount

Maximum financing amount

Loan Requirements

COFIDE Bionegocios Public National All Stages Variable

Trusteeships, concessions, rights assignment, policy, etc.

Variable - -

Demonstrate technical, environmental and financial viability Authorization of the SBS to contract subordinated debt. Letter of request for disbursement. Promissory Note issued by the Financial Intermediary (IFI).

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Geographical Scope

Project’s Stage


Period



Loan Requirements

INTERBANK Project Finance Private National


Fixed rate varies between 8.5% and 10%. Variable rate varies between 5% and 6%.

Assignment conditional on licenses, agreements, permits and / or authorizations; operation contract rights in favor of lenders; trusteeships of flow and assests; endorsement or surety bond of the promoter or project builder; assignment of the concession rights in favor of the lenders; mortgage

10 years of payment and 2 years grace period.

- US$ 20 000 000

Have a designed flow and an investment plan of the project; legal permits, municipal licenses, generation final concessions, authorization for execution of works; Have pre-feasibility, hydrology, pre-operational studies; environmental impact assessments; among others; have the bid in the renewable energies auction; Issue of periodic reports on which there are validated the work progress according to the EPC contract, the construction supervisor, the technical advisor, the builder; hiring of

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Geographical Scope

Project’s Stage


Period



Loan Requirements

CAR and EAR insurance policies; valuation of the land where the projects will be built; Technical advisor’s approval of the investment budget

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Geographical Scope

Project’s Stage


Period



Loan Requirements

BCP

Capital Market Medium Term Loans Leasing

Private National Construction and Operation

Variable

Completion (the sponsor put the necessary funds to complete the work); surety bonds, assets under construction, concessions; flows; extra business.

Variable

The flows of the project should be stable; have a renowned sponsor behind the project and with experience in the sector; have a construction plan through an EPC contract or a Lump Sum Contract.

SCOTIABANK Línea de Crédito (IFC) Private National


Not less than 25%

Guarantees are variable, may be machinery, concession rights through an assignment of rights contract, extra business (eg for a small hydroelectric

From 7 to 10 years and with a grace period of 1.5 to 2.

Demonstrated financial and technical capacity. Generation of cash flow Coverage (guarantees). Image and trajectory of the loan applicant. Environmental and

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Geographical Scope

Project’s Stage


Period



Loan Requirements

power station it could be a house), the headquarters through Stand By of first-order banks cataloged with an appropriate risk level.

economical policies, among others.

IFC Sustainable Energies Funding

Private Latin America Variable Depends on the

project Variable The project and the sponsor should be financially viable.

BID Public Sector Private Sector Private Latin

America All stages

In the public sector it is not required because they have sovereign guarantee.

Public sector undertakes 20% counterpart. Private sector according to the level of progress of the project. Other stuffs according to World Bank requirements.

KFW Agreement with the Peruvian State

Private National Construction

and Operation

Was not specified

The requirements to obtain financing and method of payment will be determined by financial

Is up to 12 years with up

to 3 years grace period

Are determined by financial institutions responsible for providing sub loans.

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Geographical Scope

Project’s Stage


Period



Loan Requirements

institutions responsible for providing sub loans.

CAF PROPEL Private Latin America

Construction and

Operation Variable

Presence of a partner with stock control, in the case of limited resource financing (“Project Finance”); Financial capacity in accordance with the level of obligations to be assumed; Self experience or external expertise in development, construction and / or operation of similar projects.

Indefinite US$ 3 000 000

US$ 30 000 000

List of main shareholders, previous experience and recent financial statements; feasibility study; main contracts (EPC, offtake contract, among others); land required for the project; main permits, licenses, government and authorizations; financial projections; Certified Emission Reductions (CER’s).

GEF Private Latin America

Construction and

Operation Variable

Long term

That takes place in a country consistent with national priorities and programs. It aims to improve the

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Geographical Scope

Project’s Stage


Period



Loan Requirements

global environment. Public opinion is considered in the design and implementation of the project.

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3.5 Supportive Mechanisms

3.5.1 Public Policies Public policies to support the renewable energies development are established trough the regulatory framework that includes the following rules:

Law N° 28832, Law to Ensure the Efficient Development of Electric Power Generation of July 2006, whose goal is to refine the rules established in the Electrical Concessions Law, to ensure the efficient generation supply. This will reduce the exposure of the SEIN to price volatility and prolonged rationing risks due to lack of energy, ensuring final users a more competitive electricity tariff.

Law N° 26848, Organic Law of Geothermal Resources. It was the first exclusive rule for renewable energies. It was enacted in July 1997 with the goal of developing this energy source to contribute to the supply of the required energy for economic growth, energy matrix diversification and the welfare of Peruvians.

Legislative Decree N° 1002 enacted in May 2008 and its Regulations approved by S.D. N° 012-2011-EM of March 2011, which provides effective incentives for renewable energy investment in Peru for electricity generation.

3.5.2 Financial and Tax Incentives Investments in renewable energies could make use of two tax benefits systems, which are:

• The Legislative Decree N° 793 (March 2007), which establishes the Anticipated

Recovery Regime of the General Sales Tax or IGV (IVA), for projects that have investments not less than US$ 5 Million and have a minimum pre-operative period of two years. Legislative Decree N° 1058 (June 2008), which establishes the benefit of assets accelerated depreciation to effect the payment of income tax of up to 20% annually for investment in hydroelectric projects and other renewable resources.

3.5.3 Clean Development Mechanisms The Designated National Authority (DNA) for the Clean Development Mechanism (CDM) which works as focal point for the processing of projects that contribute to emissions reduction is the Ministry of Environment (MINAM). This institution has as function providing a letter of approval as a prerequisite for projects that could be considered and registered as CDM projects likely to generate Certified Emission Reductions (CERs) of Greenhouse gases, and stand out that the project contributes to sustainable development in the country and that participants do it voluntarily. Joining forces with MINAM we found the National Environmental Fund (FONAM), which is a nonprofit private institution in charge of promoting public and private investment in developing environmental priority projects in Peru.

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Peru, as a recipient of funds that promote emissions-saving projects, is located in the 6th position in the ranking of most attractive countries worldwide in the CDM market. (FONAM, 2011).

FONAM has registered 23 projects in the United Nations (UN), 17 in process of validation and registration and 5 in verification. In addition, 51 projects have the Letter of Approval issued by MINAM. Additionally, FONAM has achieved that 10 projects that are already in operation receive Certified Emission Reductions (CER's) and 2 projects receive Verified Emission Reductions (VER's). To date, the CER's requested for these projects amount to 1,377,402, of which the hydroelectric power station “El Platanal” has 508 000 CER's. As for the amounts requested by VER's these are 668 027. (FONAM, 2011).

3.5.4 International Technical Cooperation In Peru, the Peruvian Agency for International Cooperation (APCI) created through the Law No. 27692 in April 12 of 2002, is the governing body of international technical cooperation and has the responsibility to lead, plan, organize, prioritize and monitor non-reimbursable international cooperation, which is managed through the state and comes from abroad sources of public and / or private character, depending on national development policy. (APCI 2011a).

Peru receives annually about U.S. $ 300 million from Non-Refundable International Technical Cooperation, which is conducted to support projects of national, regional and local character in priority issues such as overcoming of poverty and hunger, universal primary education, reducing child mortality, improving maternal health, combating HIV / AIDS and other communicable diseases, environmental protection, and gender equality. In recent years there have been a number of restrictions on funding and Development Cooperation resources that Peru receives. The transition of Peru to the category of middle-income countries when its per capita income exceeded the border from U.S. $ 2,000 per person, has gradually conduct to the cease of its condition of non-reimbursable recipient, and become eligible to receive only reimbursable cooperation. Cooperative sources are detailed in the following chart:

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Chart N° 13: Cooperative Sources

COUNTRIES German Cooperation for development-GIZ Embassy of the Federal Republic of Germany KfW - German Financial Cooperation Counterpart Fund Peru- Germany German Service of Social Technical Cooperation - DED

GERMANY

INWENT ARGENTINE Argentine Fund for Horizontal Cooperation- FO-AR

Belgian Development Agency - BTC BELGIUM

Embassy of Belgium BRAZIL Brazilian Agency for Cooperation - ABC CANADA Canadian International Development Agency-ACDI

COLOMBIA Presidential Agency for Social Action and International Cooperation – SOCIAL ACTION

CHILE International Cooperation Agency of Chile - AGCI CHINA China Embassy

Unated States Agency for International Development - USAID Embassy of the United States Americas Fund

UNITED STATES

Inter-American Foundation SPAIN Spanish Agency for International Development Cooperation - AECID FRANCE French Embassy

Counterpart Fund Peru-Japan Japan International Cooperation Agency - JICA Japan Bank for International Cooperation- JBIC

JAPAN

Embassy of Japan KOREA Korea International Cooperation Agency - KOICA

Embassy of Italy ITALY

Italian Peruvian Fund - FIP ISRAEL MASHAV - Israel’s Agency for International Development Cooperation NEW ZEALAND New Zealand Agency for International Development (NZAID) SWEDEN Swedish International Development Cooperation Agency - SIDA SWITZERLAND Swiss Agency for Development and Cooperation - COSUDE EUROPEAN UNION Delegation of the European Union to Peru UNITED NATIONS AGENCIES United Nations Office on Drugs and Crime - UNODC United Nations Office for Project Services - UNOPS Regional Office of the World Health Organization - WHO Pan American Health Organization. - PAHO World Health Organization - WHO Food and Agriculture Organization of the United Nations - FAO

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United Nations Educational, Scientific and Cultural Organization- UNESCO World Food Programme - WFP United Nations Children’s Fund - UNICEF United Nations Population Fund - UNFPA United Nations Development Programme - PNUD in Peru United Nations International Labour Organization - ILO OTHER INTERNATIONAL BODIES Organization of American States - OAS International Organization for Migration - IOM The GEF Small Grants Programme Global Environment Facility -GEF Organization of Ibero-American States for Education, Science and Culture - OEI Regional Fund for Agricultural Technology- FONTAGRO Inster American Institute for Cooperation on Agriculture - IICA DEVELOPMENT BANK Inter-American Development Bank - IDB Multilateral Investment Fund Member of the IDB Group World Bank – WB in Peru Development Bank of Latin American - CAF International Finance Corporation - IFC Source: APCI 2011b.

Among renewable energy projects financed by international cooperation it could be mentioned:

• Small Electrical System “San Ignacio” First Stage – Second Phase, with the

colaboration of the United States Agency for International Development (USAID), culminated in 18/06/2008. (APCI 2011c).

• “EURO-SOLAR” Project, with the support of the EUROPEAN COMISSION and national in-kind contribution. In execution. (APCI 2011d).

• PHOTOVOLTAIC-BASED RURAL ELECTRIFICATION IN PERU, grant resources provided by the Global Environment Facility – GEF through the PNUD and National Counterpart. (MEM 2011a).

3.6 Successful Cases With the mechanisms offered by local banks and international institutions in the country there have been funded hydroelectric projects that are in service or under construction. Also it is being evaluating the finance of wind and solar energy projects, which is a sign that the barrier of financing for renewable energy can be overcome.

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Below we present the cases of the H.P.S. “Santa Cruz II2 and the T.P.S. “Paramonga I”.

3.6.1 Case of the H.P.S. “Santa Cruz II” The Hydroelectric company “Santa Cruz S.A.C”, is a Peruvian-owned company created for the development of the hydrological potential existing in the “Blanco” River. It is empowered to perform the operations of generation, transmission and distribution of electricity.

The design and construction of the Hydroelectric Power Station and of the substations of medium and high voltage was in charge of “GCZ Ingenieros SAC” who are also associates of “Hidroeléctrica Santa Cruz SAC” and contributed with approximately 30% of the capital and the engineering required for the execution of the project.

In addition, in the financing of the project participated INTERBANK, finance entity belonging to the local banking system, which financed the project through the Leasing mechanism. The investment in the construction of the H.P.S. “Santa Cruz” of 6 MW was approximately 10.2 million dollars. Additionally, the H.P.S. “Santa Cruz” qualified as a CDM project, having as counterpart in the purchase of certificates of emissions reduction the company “Endesa Carbono S.L.” which contributions helped to improve the cash flow of the project and to give it sustainability.

3.6.2 Case of T.P.S. “Paramonga I” Another successful funding case was the Bagasse-fired termal power station “Paramonga I2 of 23 MW that uses as fuel the cane’s bagasse. It was implemented through the mechanism of Leasing. The institution that participated in the financing was the “Banco Interamericano de Finanzas” (BIF) (MEM, 2011b). 3.6.3 Learned Lessons Renewable energy projects that are in the stage of study must take into consideration the following requirements of local and international financial institutions to have access to resources for their implementation.

• Pre-feasibility, final, environmental impact, pre-operation studies, among others, must be technically well prepared.

• Have a designed flow to validate the technical feasibility of the project and have an investment plan.

• Provide a framework to ensure the project's cash flow generation (supplier contracts secured and also customers.

• That the company was awarded the bid of the Renewable Energy auction in related to projects.

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• Have necessary documents such as legal permits, municipal licenses, generation final concessions, relevant authorizations and authorization for execution of works given by the water management authority.

• Have a work supervisor to issue periodic reports on which there are validated the work progress according to the EPC contract (Engineering, Procurement and Construction).

• Validation of the construction period of projects. • That it has been signed a contract with the builder and the construction

supervisor. • That has been contracted CAR (Construction All Risk) insurance policies.

Additionally, the policy must include basic coverage for bases’s weakening, design risk, extensive maintenance, in case it has, adjacent properties, and the EAR policy (Equipment all risk).

• That it has been made a valuation of the land where the projects will be built. • Technical advisor’s approval of the investment budget • We can take advantage of emissions reduction to apply for the CDM in order to

ensure higher incomes for projects.

3.7 Barriers and/or Gaps The main barriers founded in financing of renewable energy projects are detailed below: • Investments in non-conventional renewable energies (wind, solar, geothermal)

are perceived as of high risk by the lack of experience in the country. • High preparation costs of projects and lack of financing mechanisms for this

stage. In most of cases there are available funding mechanisms only for the construction and commissioning stages.

• Lack of specific commercial financial mechanisms for renewable energy projects.

• Lack of available resources for exploration activities of geothermal projects. • In some cases there is no technical capacity to assess the risk of projects with

new technologies. • Social and environmental cost / benefits not counted. • The main difficulty to get financing is not having a long term contract for the

sale of energy at a set price, so that you have guaranteed revenue streams for loan repayments.

3.8 Conclusions The renewable energy development in Peru is growing, so it is important to spread the availability of funding sources at national, regional and international levels. On the national scene, it is the “BIONEGOCIOS” Program of COFIDE, which is aimed at energy efficiency and renewable energy projects. This program seeks to place financing funds through intermediary financial institutions (IFIs). The other available funding through private domestic banks like INTERBANK, SCOTIABANK and “Banco de Crédito” apply for projects in general, but are not specific to renewable energy.

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In most of the cases, funds are limited to the stages of construction and commissioning of projects, which also must meet environmental and social requirements. Therefore, it is necessary to identify funding sources for the stages of study and confirmation of resource availability in the case of geothermal projects.

Some international mechanisms have been used successfully in renewable energy projects such as CDM and in a lesser extent the GEF. It is important to outline that there are other mechanisms such as the PROPEL (CAF) and the FES (IFC) that can be applied to future projects. Barriers have been identified for the development of renewable energy projects. However, these can be overcome within the existing regulatory framework, with the promotion of government projects and dissemination by the stakeholders of the financial mechanisms available to the national market.

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Manager.

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