Empowering Sustainability: Ecocasa Program Revolutionizing Energy Efficiency in Mexican Social Housing

1. Financing Energy Efficiency in Social Housing: The Ecocasa program

2. The MEXICAN ECONOMY • Population: 119,7 million * • World’s 15th largest economy. • Gross Domestic Product (GDP): 1.3 USD trillion** • GDP per capita: $15,607 USD (PPP, 2013)** • Housing Sector Share of GDP: 3.4% (2013) vs 4.3% (2008) * CONAPO ** IMF

3. Housing market in Mexico National RegisterHousing (RUV) (Thousand of House Units)* • At the beginning of the new administration, the outlook of the housing sector was very complicated: • Housing construction was dropping. • Vacant houses on the rise. • Non-bank Mortgage crisis. • Public homebuilders crisis. • The new Urban Development and Housing Policy announced by President Peña Nieto has the following objectives: • To improve inter-institutional coordination • To make a transition towards a smart, sustainable urban development model. Federal loans and subsidies are to be reoriented. • To achieve a reduction of the housing deficit. • To provide dignified housing for all Mexicans. * RUV

4. Sociedad Hipotecaria Federal SHF • Sociedad Hipotecaria Federal (SHF) is a Mexican Development Bank. Its main goal is to develop the primary and secondary markets for housing finance, by providing funding and guarantees, focused on credit for home construction, acquisition and home-improvement. • In 2013, its placing of direct and induced credits was $57.6 MXN billion ($4.3 USD billon ), almost six times the placement observed in 2012. The goal for 2014 is $74.3 MXN billion ($5.6 USD billion), a 29% increase. • As a result, during 2013, the balance of the direct and induced credits grew 18.8% and reached $225.7 MXN billion ($17 USD billion ). The goal for 2014 is to reach at least a 15% growth Direct and Induced Credit Balance (MXN billion) Direct and Induced Credit Placement (MXN Million) Source: SHF,

5. Mexico’s Policy on Climate • During the previous administration (2006-2012), Mexico formulated its Special Climate Change Programme (Programa Especial de Cambio Climático, PECC), defining more than 100 greenhouse gas mitigation actions aimed at reducing 51 Mt CO2e per year by 2012. It included the ‘efficient housing and green mortgages’ • In 2010, Mexico hosted the 16th session of the Conference of the Parties (COP 16) and presented the first net-zero energy houses, and an initial concept for a Sustainable Housing NAMA (Nationally Appropriate Mitigation Action ). • In the COP 17th and 18th , Mexico presented the Mexico’s Sustainable Housing NAMA which is the first of its kind in the world, and it is the first NAMA to receive support for implementation of the NAMA Facility. • In the current National Housing Plan (PNV) one of the priorities is to allocate resources to sustainable housing, through the ECOCASA Program, the NAMA for Sustainable Housing, ‘Hipoteca Verde’ (‘Green Mortgage’) and ‘Ésta es tu casa’ (‘This is your house’).

6. ECOCASA Program: Background The ECOCASA Program is a joint initiative of SHF, the Inter-American Development Bank (IDB) and the German Development Bank KfWwithin the framework of the Mexican National Appropriate Mitigation Action for Sustainable Housing (NAMA) launched by the Mexican Government. The objective of the Program is to contribute to the efforts of the Mexican Government to reduce greenhouse gas emissions related to the residential sector; through: • Increasing the building of low carbon houses through the provision of financial incentives for energy efficiency investments, and • Increasing the supply of mortgage for low carbon housing. The Program consists of a package of financial incentives and technical assistance to support housing developers with the design and implementation of low carbon houses which generate less Green House Gases (GHG) emissions. To achieve the targeted emission reductions, the Program is based on the “Whole House Approach”, where different technologies can be applied, for example: insulation in roof and walls, reflective paint, efficient gas boiler, efficient construction materials, bioclimatic housing design, solar water heater, energy saving windows, among others.

7. Ecocasa Program: Funding To achieve the purposes of the Program, concessional funding has been granted to finance construction loans and to create capacity building in the housing sector: USD Million • The Problem: • Housing sector represents 17% from total energy use and 4.9% from CO2 emissions in Mexico* • Program Objective: • Reduction of greenhouse emissions from the housing sector. • Improve the living conditions of low income families. • Expected results • 26.000 sustainable houses by 2020 (houses with greenhouse gas emission reductions of 20%) • 600 passive houses (CO2e reductions between 70% and 90%) • 1.700 Green Mortgages • Expected Mitigation Reductions: 1 million tCO2e • Improved thermal comfort (20-25 ˚C average) TOTAL *Source: NAMA for Sustainable Housing, CONAVI 2011

8. ECOCASA Program: Financial Incentives and Benefits The key to the implementation and sustainability of the program lies in the transfer of preferential interest rates through the SHF line of credit to the financial intermediary or developer, respecting the intermediation margins. • ECOCASA Project developers receive concessional loans through SHF. • Lower interest compensate for the additional costs required to implement energy efficiency measures. • Selling price of each ECOCASA housing unit does not exceed the price of a comparable standard unit, ensuring affordability for low-income families and benefiting the final user. Additional costs of eco-technologies Cost of normal Market Funding Cost of funding through ECOCASA program ECOCASA

9. ECOCASA Program: Operation SHF-IDB-KfW have defined an operational process in 5 stages to establish the eligibility of housing projects: • The housing developer presents its ECOCASA proposal. • The housing developers run a simulation of their projects using the SISEVIVE-ECOCASA tool developed by INFONAVIT* This software forecasts the energy performance of the house. In case that housing developers are unfamiliar using the SISEVIVE-ECOCASA tool, a consultant supports them in the simulation process. • SHF, IDB and KFW accept or reject the project under the agreed eligibility criteria. • SHF notifies the financial intermediary and assigns concessional funds to the project. • The developer, using the concessional funds, starts the construction of the project. *INFONAVIT It is the largest mortgage lender in Mexico, and a strategic ally in the implementation of the ECOCASA Program

10. ECOCASA: Sample Project Simulation Emission reductions should be greater than 20% General information of the project. The reductions are achieved by implementing the materials and technologies described in this section. Solutions often include an improved thermal envelope, bioclimatic design solutions, orientation, shading devices, etc. Agreed by the developer and approved by SociedadHipotecaria Federal

11. ECOCASA Program: Process Financing for housing developers interested in building ECOCASA houses • As for September 2014, there are 22 projects in the process of construction, which account to 9,745 ECOCASA houses. • These projects are located in the following states in Mexico: Tamaulipas, Coahuila, Hidalgo, Veracruz, Sonora, Chihuahua, Quintana Roo, Nuevo León. • The construction progress in 2014 equals an 35.30% toward meeting the goal of reaching 27,600 ECOCASAS by 2020, according to this, SHF is on track to reach the 100% of the goal by 2020. • As of 30th of august 2014, the SHF granted credits equaled approximately an amount of $135,2 million USD *. Once the granted credits have been allocated, a second stage of the program will be financed using the amount of credits released of the first stage to finance new projects in (Revolving fund). Source: VPfor finance SHF, update for August 2014 *In mexican pesos $1,767,137,166.8 MXN Exchange rate for 29/08/2014 1 UDS= 13.0763 MXN, Source: Banxico.

12. ECOCASA Program: Built and Signed ECOCASAS

13. ECOCASA Program: Process and Target Program Target until 2020 27,600 ECOCASA houses Source: VPfor finance SHF, update for August 2014 Project in Pachuca/Hidalgo * Exchange rate for 29/08/2014 1 UDS= 13.0763 MXN, Source: Banxico

14. ECOCASA: Technical Assistance / Capacity Building • ECOCASA receives non refundable Technical Assistance resources for the following purposes: Knowledge management activities • Technical studies to determine the GHG emission factor of water use in Mexico. • Calculation of the carbon footprint of new housing linked to transport needs. • Communication and knowledge transfer activities (website, videos, events). • Improvement of the energy simulation capacities (SiseViveand Climate Change models). Capacity Building: • Sector wide capacity building for developers in energy efficiency standards. • Users manual and training for neighborhood associations in the correct use and maintenance of eco-technologies. • Link to Municipal and State Policies. Monitoring, Reporting and Verification: • A basic and detailed Monitoring, Reporting and Verification (MRV) system to measure the performance of the energy efficient appliances in the houses, aligned to the Mexican NAMA for Sustainable Housing.

15. ECOCASA Program: Expected Results • Long Term Transformational Results: • The ECOCASA Program will contribute significantly to the transformation of the Mexican housing sector from the baseline situation, where energy efficiency considerations were largely absent • The project focusses on a long-term impact leading to an increased construction and use of energy efficient houses, decreasing GHG emissions, and will therefore contribute to a sectorial transformation towards a less carbon intensive housing sector, promoting the following aspects: • The Establishment of clear and transparent eco-standards to create incentives for developers to upgrade their project designs and build their capacities. • Showcasing of financial and technological feasibility as well as higher level of comfort of energy efficient housing leads to higher acceptance and demand for ECOCASAs. • Increased demand for eco-technologies fosters the development of domestic engineering and production capacity, leading to increased availability and falling costs. Establishment of eco-standards and showcasing of feasibility Fostering the development of a “Green” National Industry Increased demand for eco-technologies Long Term Sustainability Lowering the eco-technologies cost

16. ECOCASA Program: Complementary Initiatives • Latin American Investment Facility from the European CommissionEUR$ 7 million • In order to maximize the level of energy efficiency standards in the Mexican housing sector, the Program has secured additional funds for a limited number of houses to reach the most ambitious standard defined in the Housing NAMA: the passive house standard, or ECOMAX. • A reduction of approximately 80% of CO2 emissions with respect to the baseline case can be achieved with this ambitious standard. The LAIF grants will cover a significant share of the additional investment for achieving the standard, and the remaining costs will be covered by the developers or household. • Project Execution Process: • To date SHF and KfW are in the bidding process for the recruitment of the technical consultant that will be in charge of coordinating and implementing the program. * Nationally Appropriate Mitigation Actions (NAMA) are emerging market mechanisms that enable developing economies to align sustainable development with national economic priorities. Mexico’s Sustainable Housing NAMA is the first of its kind in the world. The NAMA mitigates emissions in the residential sector by providing supplemental finance to improve electrical, fossil fuel, and water efficiency.

17. ECOCASA Program: Complementary Initiatives NAMA Facility BMU-DECC EUR$ 10 million • This Project is the financial component of the Program “Implementation of the NAMA for Sustainable Housing in Mexico”, which is being financed by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) and the Department of Energy and Climate Change of the United Kingdom of Great Britain and Northern Ireland (DECC). • The main goal of this project is to facilitate the progressive integration of small and middle sized (SME) housing developers into the low carbon housing market by eliminating investment barriers and improving access to finance for the construction of low carbon housing. This will contribute to the development of a self sustained market for energy efficient houses in Mexico. • Project Execution Process: • To date SHF and KfW are in the bidding process to recruit the technical consultants who will be in charge of designing the implementation plan of the Project. * Nationally Appropriate Mitigation Actions (NAMA) are emerging market mechanisms that enable developing economies to align sustainable development with national economic priorities. Mexico’s Sustainable Housing NAMA is the first of its kind in the world. The NAMA mitigates emissions in the residential sector by providing supplemental finance to improve electrical, fossil fuel, and water efficiency.

18. ECOCASA Program: Challenges • Housing sector barriers*: • Lack of awareness about energy efficiency technologies and their benefits in the housing sector • Lack of technical knowledge on sourcing and proper installation of new energy efficient building materials and technologies; • Lack of incentives as energy prices are highly subsidized, especially for the lower-income groups • Financial barriers due to a short term focus on up-front acquisition costs and not on life-cycle costing by builders and buyers, and • Limited and expensive eco-technologies • Looking forward: ECOCASA 2 • For the second stage of the Program, additional criteria like location, material lifecycle analysis and water usage will be considered. • A capacity building strategy for developers is being developed to guarantee the sustainability of the Program. • Implementation of a stronger verification process through SHF and the Financial Intermediates, to ensure proper installation of technologies. • Implementation of a broad communication strategy to reach locations where the Program is still not known, and to explain the benefits and incentives of the Program. *Source: NAMA for Sustainable Housing, CONAVI 2011

19. ECOCASA Program For more information: Homero Garza: hgarza@shf.gob.mx Ernesto Infante: einfante@shf.gob.mx Grettel Romero: gromero@shf.gob.mx Rocío Montaña: coordinación.ecocasa@shf.gob.mx Claudio Alatorre: Calatorre@iadb.org Ingrid Hahn: Ingrid.Hahn@kfw.de