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INTER-AMERICAN DEVELOPMENT BANK TOPIC TO BE DISCUSSED

Energy Savings Insurance. INTER-AMERICAN DEVELOPMENT BANK TOPIC TO BE DISCUSSED. TRAINING ON THE ECONOMIC RATIONALE FOR ENERGY EFFICIENCY, CARICOM / GIZ / CDB / Green Cooling Initiative. Christophe Hoor, National Coodinator in El Salvador, 15/09/2016. Index.

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INTER-AMERICAN DEVELOPMENT BANK TOPIC TO BE DISCUSSED

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  1. EnergySavingsInsurance INTER-AMERICAN DEVELOPMENT BANK TOPIC TO BE DISCUSSED TRAINING ON THE ECONOMIC RATIONALE FOR ENERGY EFFICIENCY, CARICOM / GIZ / CDB / Green Cooling Initiative Christophe Hoor, National Coodinator in El Salvador, 15/09/2016

  2. Index • ESI Risk mitigation mechanisms and impact on financial decision • Current Status • Additional Information

  3. Why does it not work so easily? Barriers and risks Enterprises Financial Institutions Solution Providers

  4. Risk perception Risk Very high Very low Moderate • 83% providers deficient post-sales services • 73% companies not feel responsible for the installation or installed equipment • 72% promised performance of equipment not respected • 50% technologyfailcausing • technical stop Source: Market Study in EE oportunity in El Salvador 2014 BASE/CNPML

  5. The ESI toolkit: A package of measures to address barriers and mobilise private investments Long term Financing (credit line) Incentives for pilot projects Standardized performance contract ESI Program Capacity building, marketing and communi-cations plan Validation and verification Insurance coverage

  6. ESI • Flowchart Disburse financing for project 8 1 2 8 6 5 3 4 7 9 Agree on project design proposed by TSP LFI SME TSP Sign standard energy performance contract Request financing under program Notify project Inclusion in program If credit approved by LFI, request financing under program TSP takes out Energy savings insurance/surety with Client as beneficiary Bandesal Request project and TSP validation Validation approval • LFI Local Financial institution • NDB National Development Bank • TSP Technology Service Provider • SME Small- and Medium Sized Company Validator Insurance Insurer may transfer part of risk to re-insurer Re-insurance

  7. The standardized performance contract:Incentives and certainty • Contract Provider - Client, focuses on trading "savings" • Turnkey contract warranty clauses • Supplier responsible for achieving "promised savings" otherwise Customer must compensate for damages • Responsibility for maintenance, monitoring and reporting • retention is created that guarantees a percentage of the savings

  8. PerformingScenarios Scenario 2 Project total value Retention Compensation Scenario 1 First payment to supplier Compensation to the client by the insurance company Promised savings Scenario 3 Compensation to the client from the retention Promisedsavings Achievedsavings Compensation to the client $ $ Achieved savings years x Achieved savings < promised savings Retention and Insurance used to compensate Achieved savings ≥ promised savings The supplier get the retention Achieved savings < promised savings Retention used to compensate x ✓

  9. Energy Savings Insurance includingFirst-loss Guarantee Reserve • Existing instrument adapted (Performance Bond - ASESUISA Insurance / Swiss Re) • It covers commitments made in standard contract provider • Should provider can not cover compensation for damage to the customer, and that retention is not sufficient, then the insurance covers the difference

  10. IndependentValidationMechanisms 3 Validation of project and provider 1 Verification of savings Evaluation of credit solicitation Installation Operational 2 Verification on site of project installation : Installation of equipment, monitoring systems and waste disposal

  11. Implementation challenges / risk • Transaction costs • ESI depends on existing contract types in the country (e.g., EPC or vendor contracts) • Political and policy risk • Investors’ creditworthiness • Participation of banks • Participation of insurers • Participation of technology solution providers

  12. Elements of riskmitigation Standards technologies proven on the market to be promoted under standard performance contracts Validated suppliers based on their experience and support Validated projects based on their ability to generate savings before being approved for funding Verification of the implementation of the project and meeting of its energy indicators Integration of a bond including a performance guarantee fund

  13. Distribution of underperformance across the different stakeholders Source: The Global Innovation Lab for Climate Finance

  14. Impact of ESI intervention on equity holder expected NPV Equity NPV (discounted at 17.6%) calculated for different scenarios and different levels of underperformance of an investment in an energy efficient boiler Source: The Global Innovation Lab for Climate Finance

  15. Pilots in Colombia and Mexico Mexico : agro-industry Executing partner: FIRA - Trust Funds for Rural Development ≈ 4,900 enterprises Target ⇨ 190 projects Investment ⇨ USD 25 million Credit Line launched Nov 2015 Website Colombia: Hospitals/Hotels Executing partner: Bancoldex - The Bank of Foreign Trade ≈ 1,100 private Hospitals/≈ 6,800 Hotels Target ⇨ 125 projects Investment ⇨ USD 20 million Credit Line launch Jun 2016 Website

  16. Time Frame ESI in El Salvador • From 2014 : Support of the • End of 2014: Market study and technical support of • April-dec. 2016: Development of methodology with stakeholders Validator Insurance Attorney • July 2016: Approval of the • Early 2017: Begin of pilot projects

  17. BANDESAL and IDB GCF funding proposal ESI for private energy efficiency investments by SMEs in El Salvador Additional leverage = + 0.20 (equity y FIs -first floor) + possibility to finance 2 to 3 projects in 20 years

  18. AIR CONDITIONING INDUSTRIAL REFRIGERATION Selected technologies BOILER MOTORS

  19. Additional information • The Global Innovation Lab for Climate Finance :one of the most promising instruments to mobilize private sector investments in EE (video). • The Danish Government: grants to develop ESI in Colombia and Mexico, as well as in other countries of the Region. (ME-X1025 and RG-X1258) • Development Finance Magazine : article about The Lab • The Clean Energy Finance Forum of the University of Yale : a winning idea and a successful financial vehicle for climate change mitigation • the Green Climate Fund (GCF): a concessional line of financing for private sector investment projects in EE in El Salvador • Endorsement of SURA Seguros Colombia for their Innovation by Best’s Review

  20. THANK YOU for your ATTENTION BANCO DE DESARROLLO DE EL SALVADOR Christophe Hoor - Coordinador local Programa Ahorros Energéticos Seguros christophe.hoor@bandesal.gob.sv Con el apoyo de :

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