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 ESI Risk mitigation mechanisms and impact on financial decision Current Status Additional Information

Why does it not work so easily? Barriers and risks Enterprises Enterprises Not a priority (compete with other investments) Lack of understanding Lack of trust Solution Providers Not used to sell/guarantee “Energy savings” Do not have financing capacity Financial Institutions Lend to companies NOT projects Lack of understanding on EE Financial Institutions Solution Providers

Risk perception 83% providers deficient post-sales services Very low Moderate Very high 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% technology fail causing technical stop Source: Market Study in EE oportunity in El Salvador 2014 BASE/CNPML

The ESI toolkit: A package of measures to address barriers and mobilise private investments Long term Financing (credit line) Standardized performance contract ESI Program Incentives for pilot projects Capacity building, marketing and communi- cations plan Validation and verification CAPACITY BUILDING The goal is to have a self-sustaining mechanism to engage and empower providers technology- main promoters of the program Capacitation program Provider characteristics alliances proposals Promotion Partnerships Develop pilot projects Communication strategy NDB Annual Award for Suppliers in Energy Efficiency Insurance coverage

1 8 ESI Flowchart Agree on project design proposed by TSP Disburse financing for project TSP SME LFI Sign standard energy performance contract Request financing under program 4 7 Inclusion in program Notify project 8 If credit approved by LFI, request financing under program 2 3 TSP takes out Energy savings insurance/surety with Client as beneficiary Bandesal The main components of the instrument are an insurance and package of complementary measures .Technology solutions providers will purchase the insurance to back their contractual guarantees to their SME clients on the performance of their energy efficiency products.A package of complementary measures will address other barriers to investment such as technical capacity and access to capital. Measures include:• Standardized contracts to reduce transaction costs, including a clause transferring part of the risk of underperformance to the technology solution provider• Third party verification to ensure the quality of energy service providers and their projects• Credit lines from development banks, which could provide long term capital, reducing the cost of financing projects• Grant support to sustain market demand 5 Request project and TSP validation 6 Validation approval 9 LFI Local Financial institution NDB National Development Bank TSP Technology Service Provider SME Small- and Medium Sized Company Insurer may transfer part of risk to re-insurer Insurance Validator Re-insurance

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

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

Energy Savings Insurance including First-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

Independent Validation Mechanisms Evaluation of credit solicitation Installation Operational Validation of project and provider Verification on site of project installation : Installation of equipment, monitoring systems and waste disposal Verification of savings 1 2 3 Gives trust in the project and the technology provider. Simple and Replicable Methodologies to estimate savings

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

Elements of risk mitigation 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

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

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

NDBs are government-backed, sponsored or supported financial institutions which have a specific public policy mandate. NDBs have a privileged position in their local markets and, given a number of characteristics that are commonly associated with them, can have a potentially crucial role to play in facilitating climate investments and delivering climate finance directly or leveraging private capital.   This slide highlights the various features of a typical NDB which make it well-suited to the requirements of climate finance.

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 Colombia: Funding: credit and grants from CTF. Extension of the Program through the support of the Danish Energy Agency. Technologies Mexico: AC&Refrigeration, boiler, solar heating, compressed Air, Co-generation Technologies Colombia: AC& AC control systems, boiler, solar heating water (including swimming pools), Co-generation

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

BANDESAL and IDB GCF funding proposal ESI for private energy efficiency investments by SMEs in El Salvador GCF BANDESAL / IDB Funding (loan) USD $20m Non financial instruments (grants/ technical cooperation) USD $1.7m USD $0.45m (technical cooperation IDB and BANDESAL) TIME FRAME IN ESA end of 2014: Market study april-dec. 2016: Development of methodology Selection of stakeholder: “big names” in El Salvador: Attorney: Lexincop, Insurance: ASESUISA Sura group, Validator: DQS/UL early 2017: Pilot project Additional leverage = + 0.20 (equity y FIs -first floor) + possibility to finance 2 to 3 projects in 20 years

Selected technologies AIR CONDITIONING INDUSTRIAL REFRIGERATION MOTORS BOILER

Main Impacts Co-benefits GHG emission reductions 37,469 tCO2e / year Annual national energy savings: 36.5 GWh (0.6% of the total) SMEs that received access to credit to invest in EE 500 Participation of loans for investments from SMEs managed by women 40% Co-benefits Amount of government’s budget deficits reduced through reduced fuel imports USD 3.4 Millones SME productivity 11% of sales per worker in 5 years Proportion of women jobs created 46% (women) from current 39%

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 think tanks, bilateral donors, and specialized publications

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 :