1. 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

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
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

4. 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

5. 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

6. 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

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. 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

9. 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

10. 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

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 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

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. 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.

16. 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

17. 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

18. 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 = (equity y FIs -first floor) + possibility to finance 2 to 3 projects in 20 years

19. Selected technologies
AIR CONDITIONING
INDUSTRIAL REFRIGERATION
MOTORS
BOILER

20. 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%

21. 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

22. THANK YOU for your ATTENTION
BANCO DE DESARROLLO DE EL SALVADOR
Christophe Hoor - Coordinador local Programa Ahorros Energéticos Seguros
Con el apoyo de :