Cover Page for CTF Project/Program Approval Request [a]

Transcription

1 Cover Page for CTF Project/Program Approval Request [a] 1. Country/Region Colombia 3. Investment Plan (IP) or Dedicated Private Sector Program (DPSP) 2. CIF Project ID# (CIF AU will assign ID.) IP 4. Public or Public DPSP Private Private 5. Project/Program Title Renewable Energy Program in Colombia (PERC) 6. Is this a private sector program composed of sub-projects? 7. Financial Products, Terms and Amounts USD Financial Product (million) Grant Fee on grant MPIS (for private sector only) Public sector loan Harder terms Softer terms Senior loan See footnote 1 Senior loans in local currency hedged Subordinated debt / mezzanine instruments with income See footnote 1 participation Second loss guarantees Equity Subordinated debt/mezzanine instruments with convertible features Convertible grants and contingent recovery grants Contingent recovery loans First loss guarantees Other (please specify) Yes No EUR (million) [b] Total Implementing MDB(s) Inter-American Development Bank Group (IDBG) 9. National Implementing Agency N/A 10. MDB Focal Point Claudio Alatorre (calatorre@iadb.org) 11. Brief Description of Project/Program (including objectives and expected outcomes) [c] In spite of significant regulatory efforts for over a decade, penetration of renewable energy (RE) technologies in the Colombia power matrix remains quite limited, at only about 2% (excluding large hydro). Its high dependence on hydropower (about two thirds of the installed capacity) 1 The investment resources are expected to be mostly utilized as first loss guarantees. We also include, however, terms for senior and subordinated debt in the proposal in the event that such instruments were required for a specific operation. 1

2 makes it vulnerable to extreme hydrologic conditions (such as the ones that occurred in and ) and particularly to El Niño, and this vulnerability is set to increase due to climate change. At the same time, growth of hydropower capacity is limited due to high environmental and social risks. If the contribution of hydro to the system continues in a declining trend, the use of fossil fuels to cover for this deficit will continue to increase, impacting the level of GHG emissions in the long term. Through the recently approved Law 1715, a new regulatory support framework offering significant fiscal benefits to RE solutions is in place to increase the penetration of these technologies and achieve a more diversified matrix. The proposed CTF Renewable Energy Program in Colombia (PERC) is aimed at supporting this government effort, mainly by providing risk mitigation support for private companies developing RE projects under this new regulatory context. While the program s support will be available to projects of all sizes, given current market conditions and regulatory incentives we expect that small-scale, self-supply RE solutions will lead market development. Consistent with the approach and success achieved in other markets (Mexico, Honduras) with CIF support, the Inter-American Development Bank Group (IDBG) will combine technical assistance with financing to support various business models that will help jump-start this market. The program aims to support self-supply corporate solutions as well as structured financing (including third party financed aggregation models) to provide initial demonstration of the technical and financial viability of RE technologies. CTF financial resources will be mostly used as first-loss guarantees, to provide risk mitigation vis-à-vis perceived and real risk associated to the technologies, the energy off-takers, and the new, untested regulatory environment. The program expects to support about 28 MW of RE generation through multiple projects, leveraging over USD 50 million of investment, and directly abating over 500,000 tons of GHG emissions over the lifetime of the projects. Furthermore, the program will support the introduction to Colombia of third party solar development models, such as those successfully developed in the US, Europe and more incipiently in some other Latin American countries. 12. Consistency with CTF investment criteria [c] a. Potential GHG emissions savings See page 14 b. Cost-effectiveness See page 14 c. Demonstration potential at scale See page 15 d. Development impact See page 15 e. Implementation potential See page 15 f. Additional costs and risk premium See page 16 Additional CTF investment criteria for private sector projects/ programs g. Financial sustainability See page 16 h. Effective utilization of concessional finance See page 16 i. Mitigation of market distortions See page 17 j. Risks See page For DPSP projects/programs in non-ctf countries, explain consistency with FIP, PPCR, or SREP Investment Criteria and/or national energy policy and strategy N/A 2

3 14. Stakeholder Engagement [c] See page Gender Considerations [c] See page Indicators and Targets Project/Program Timeline Expected start date of implementation [d] Expected end date of implementation [d] Expected investment lifetime in years (for estimating lifetime targets) Core Indicators GHG emissions reduced or avoided over lifetime (tons of CO 2 -eq) Annual GHG emissions reduced or avoided (tons of CO 2 -eq/year) (specify: upon completion of the project/program / on the maximum year / on a representative year) Installed capacity of renewable energy (MW) Number of additional passengers using low-carbon transport per day Energy savings cumulative over lifetime of investment (MWh) Annual energy savings (MWh/year) Identify relevant development impact indicator(s) Commercial/industrial sites implementing self-supply renewable solutions with direct Program s support. N/A N/A 25 years Targets [e] 544,000 tco 2 e a 21,760 tco 2 e/year 28 MW N/A N/A N/A Targets At least 15 Solar developers / third party finance companies supported At least Co-financing Please specify as appropriate Amount (in million USD) MDB 1 (IDBG) Loan 25.8 MDB 2 (if any) Government Private Sector Equity 12.9 Bilateral Loan 12.9 Others (please specify) Total Expected Date of MDB Approval Mandate letters covering 33% of Program resources will be available 20 months after program approval. Mandate letters covering 100% of Program resources will be available 36 months after program approval NOTES: [a] This cover page is to be completed and submitted together with the MDB project/program proposal when requesting CTF funding approval by the Trust Fund Committee. [b] For products denominated in EUR, please also provide USD equivalent in the column to the left [c] Please provide the information in the cover page or indicate page/section numbers in the accompanying project/program proposal where such information can be found. [d] Insert not applicable (N/A) if dates cannot be determined at the time of submission (e.g. private sector programs) [e] Insert value N/A if indicator is not applicable to the project/program. Version December 9,

4 RENEWABLE ENERGY PROGRAM IN COLOMBIA (PERC) IDBG Private Sector CTF Proposal for Submission to the CTF Trust Fund Committee CONTENTS LIST OF ABBREVIATIONS 5 1. COUNTRY AND SECTOR CONTEXT 6 a) Status of the power market and challenges for renewable energy in Colombia 6 b) Electric sector structure and tariffs 7 c) Recent developments supporting renewable energy 9 2. PROPOSED PROGRAM 11 a) General objective and description 11 b) Proposed CTF financial instruments and terms PROGRAM S STRATEGY FOR ACHIEVING MARKET TRANSFORMATION FIT WITH CTF INVESTMENT CRITERIA 14 a) Potential GHG emissions savings 14 b) Cost-effectiveness 14 c) Demonstration potential at scale 15 d) Development impact 15 e) Implementation potential 15 f) Additional costs & risk premium 16 g) Financial sustainability 16 h) Effective utilization of concessional finance 16 i) Mitigation of market distortions 17 j) Risks 17 k) Key performance indicators 18 l) Stakeholder engagement 18 m) Gender considerations 19 ANNEX 1 MDB PROJECT IMPLEMENTATION AND SUPERVISION FEES 20 4

5 LIST OF ABBREVIATIONS CIF CTF CREG DPSP FI GHG GWh IDBG IRENA IPSE PERC PND PPA RE SIN SREP STEM TC tco 2 e UPME VAT ZNI Climate Investment Funds Clean Technology Fund Comisión Reguladora de Energía y Gas (Energy and Gas Regulatory Commission) Dedicated Private Sector Program financial institution greenhouse gases Gigawatt-hours Inter-American Development Bank Group International Renewable Energy Agency Instituto de Planeación y Promoción de Soluciones Energéticas para las Zonas no Interconectadas (Institute for Planning and Promotion of Energy Solutions for ZNIs) Programa de Energías Renovables en Colombia (Renewable Energy Program in Colombia) Plan Nacional de Desarrollo (National Development Plan) power purchase agreement renewable energy Sistema Interconectado Nacional (National Interconnected System) Scaling Up Renewable Energy in Low-Income Countries Program Science, Technology, Engineering, and Mathematics technical cooperation tons of carbon dioxide-equivalent Unidad de Planeación Minero-Energética (Mining and Energy Planning Unit, Ministry for Mining and Energy) Value Added Tax Zona No Interconectada (Non-Interconnected Zone) 5

6 1. COUNTRY AND SECTOR CONTEXT a) Status of the power market and challenges for renewable energy in Colombia 1. Electricity prices in Colombia are among the highest of large countries in Latin America and the Caribbean and have experienced the greatest increase over the last few years. The Ministry of Mines and its Mining and Energy Planning Unit (UPME) have projected that electricity demand will grow at an annual average of 5.6% in the tertiary sector and 4% in the industrial sector between 2009 and Currently, 67% of electricity production is based on hydropower, 27% comes from natural gas and coal, and about 2% from other renewable energy (RE) sources (see Figure 1). The national electric system as a whole has not shown any significant growth since Even when the current contribution of Colombia to global greenhouse gas (GHG) emissions may not appear significant (0.4% of total global emissions), the energy system dependence on water resources may pose a significant vulnerability, particularly under changing climate conditions, due to uncertainties in the costs associated to managing backup energy supply. The system is especially vulnerable to extreme hydrologic conditions (such as the ones occurred in and ), and particularly to El Niño, which might be affected by climate change. 3 At the same time, growth of hydropower capacity is limited due to high environmental and social risks. If the contribution of hydropower to the system continues in a declining trend, the use of fossil fuels to cover for these deficits will continue to increase, impacting the level of GHG emissions in the long term. Figure 1 Colombia s Electricity Installed Capacity, National Interconnected System (SIN), June UPME Mining and Energy Planning Unit, Projection of Energy Demand in Colombia, October The IDBG is currently preparing a Technical Cooperation on Climate Change Vulnerability and Adaptation Measures for Hydroelectric Systems in Andean Countries, including Colombia (RG-T2673). 6

7 3. After the energy crisis of 1992, the country implemented institutional and regulatory changes that seek to achieve a more efficient, robust and diversified energy system able to cope with extreme weather conditions. However, these measures have so far fallen short of significantly increasing the participation of non-conventional RE technologies in the energy matrix, amounting to only 2% of installed capacity as of June 2015 (excluding small hydro). 4. For the interconnected grid, which covers about 95% of Colombia s population, RE technologies have struggled, primarily due to the structure of the country s electricity market. In short, the market structure is designed to favor the cheapest source of generation at the moment it is needed. In a water abundant country like Colombia, that has greatly favored hydro, which makes up a massive 70% of installed capacity. What the structure does not factor in are reliability, redundancy and the benefits of diversification. As such, periods of El Niño continue to result in electricity shortages and rationing, driving electricity costs up significantly during such periods. Attempts to address this issue by charging to consumers in recent years a reliability charge, which is transferred to natural gas-fired generators, appears to not have sufficiently solved this problem and may be revisited. 5. Intermittent technology sources such as solar and wind have historically been perceived as offering little reliability to the system. Limited understanding of these technologies has prevented considering how these technologies could enhance through diversification the reliability of supply. The trend in Colombia has been towards using thermal generation, and particularly gas and coal, as backup, due to its low cost and reliability. Such resources, and notably coal, are relatively abundant in the country. In fact, public officials have been increasingly discussing the option of adding coal-fired plants in the future given the abundancy of coal in the country and the relatively low fuel cost, despite the country s declared intention to integrate RE technologies into the mix and reduce carbon emissions. 6. Finally, and despite the initial advancements in regulation for RE, the country has lacked so far sufficiently robust and clear regulations, including incentives to promote broad RE development. That, combined with the limited or outdated knowledge with regards to the country s real RE potential, and limited knowledge with regards to technological and operational advancements, has posed the main barriers to more robust RE activity in Colombia. b) Electric sector structure and tariffs 7. The Colombian electricity sector structure is broken down into generation, transmission, distribution and retailing, which are provided by different actors. While vertical integration is permitted in certain activities (see Figure 2 below), in 1994 the law prohibited new single actors to perform all of them (hence, there is limited vertical integration). 8. The electricity market functions as a wholesale market, managed by a central administrator, and is designed as illustrated in Figure 2 below: 7

8 Figure 2. Colombia s Electricity Market Structure 9. Retailers and large consumers buy large blocks of energy. This market functions according to supply and demand dynamics, and there are two models through which energy transactions are conducted: Regulated market: Buyers in this market consist of industrial, commercial, and residential consumers, provided that their monthly consumption is lower than 55 MWh and its demand lower than 0.1 MW. Transactions in this market are centralized, while prices and supply availability are determined on an hourly basis (spot market). The tariff structure is determined by the Gas and Energy Regulatory Commission (CREG). Most consumers in Colombia belong to this market (approximately 68% of electricity transactions are made through the spot market). Non-regulated market: It consists of direct transactions between generators, retailers, and large consumers. A large consumer is one that consumes more than 55 MWh per month or has a demand higher than 0.1 MW; prices are negotiated bilaterally, through long-term contracts. Prices are fixed for the entire period of the contract to avoid volatility. Comparison between prices in the regulated market (spot prices) and nonregulated markets can be seen in Figure 4 below. 10. Tariff Structure for End-users (Regulated Market). The final consumer tariff is defined as a pass-through of the costs associated to each segment of the supply chain, as Figure 3 illustrates: 11. Figure 4 below shows the average tariffs for end-users (both regulated and unregulated) in the SIN over the last four years: 8

9 Figure 3. Tariff Structure for Regulated Customers Figure 4. Average End-User Electricity Tariffs ( ) c) Recent developments supporting renewable energy 12. In recent years, some fundamental legal and regulatory progress started to take place with regards to the promotion of RE in the country. In the National Development Plans under both terms of the current administration ( and ), the promotion of RE has a salient role in the government s energy strategy. 9

10 13. In 2010, the country signed the International Renewable Energy Agency (IRENA) statutes. On July 16, 2013, Colombia s Congress approved the country s commitment to such statutes. This decision was ratified by the country s Constitutional Court in January Meanwhile, UPME started conducting preliminary steps to better evaluate the country s RE potential and challenges, and to identify strategies for the development of these technologies. Those initiatives resulted in the most consolidated effort to date in establishing an objective basis by which RE can be integrated into the country s power system. As a result, UPME has become the leading governmental institution in promoting RE in Colombia. 14. The National Development Plan (PND) acknowledges that the increase in residential and industrial energy demand produces a deficit in the balance between demand and supply in adverse hydrologic conditions, which requires high levels of thermal power generation. At the same time, the PND also recognizes the need to introduce new generation plants with lower operating costs and less intensive use of liquid fuels, in order to reduce prices in the spot and forward markets. For this reason, the Government of Colombia has been interested in maximizing the use of its natural resources, while complying with the highest environmental and social standards, in order to prevent an ever increasing need for thermal power generation, especially in adverse weather conditions. 15. The PND prioritizes the creation of incentives and the use of the existing opportunities to leverage international funding in order to promote investment in nonconventional energy sources. Such incentives are being defined in Law 1715, approved in May 2014, and its supplementary regulations (some of which are in the process of finalization). Law 1715 is the cornerstone of RE developments in Colombia, and seeks the integration of RE in the country s electricity market and in Non-Interconnected Zones (ZNIs), as a necessary means for sustainable economic development, greenhouse gas reductions, and energy supply security. 16. The law opens up the following possibilities, among others: Self-generators can deliver excess electricity above that produced for self-generation purposes to the country s national power grid (this was not previously possible). In fact, in March 2015 the CREG published its resolution 024/2015, which regulates selfgeneration activity. Thus, today it is fully possible for a self-generator to deliver excess, and such a delivered excess will be recognized as energy credits. Those energy credits can be subsequently negotiated with legal entities or persons. (Procedures regarding this last point have yet to be regulated.) Distributed generators can sell electricity, which will be paid according to the perceived benefits in the distribution system where it is connected. Regulations to establish mechanisms to compensate these sales and to calculate those benefits have yet to be executed. Investors can access economic incentives for the development of RE projects. 17. Such incentives include: Income tax deduction (up to 50% of total investment cost) for investors. 10

11 VAT exemptions (100%) for equipment and machinery and national or imported goods and services used in the project. Tariff exemptions (100%) for imported assets used in the project (investors must prove that such assets are not produced in Colombia). Accelerated depreciation of assets used in the project (up to 20%). 18. These incentives established through Law 1715 are targeted to small-scale (<20MW) selfgeneration and distributed generation projects (the latter defined as those placed locally and connected to the local distribution grid). 2. PROPOSED PROGRAM a) General objective and description 19. Consistent with this new regulatory framework, this CTF program will support the development of RE technologies and supply modalities that are eligible for the financial and other incentives established by Law 1715 and its regulation 4, with the aim of supporting its implementation and the achievement of its development objectives. 20. Given the structure of electricity tariffs (as shown by Figures 3 and 4 above), information gathered through stakeholder consultation, and the parameters and incentives provided by Law 1715, small self-generation projects (<1MW) that supply regulated costumers (industrial, commercial and residential users consuming less than 55 MWh/month) seems to be the modality that stands the best chance in the short term to compete with traditional power supply options and lead the way in the market penetration of non-conventional RE. 21. This is due to two factors: Self-generation doesn t incur the costs associated with transportation (transmission, distribution, losses) or with retailers (unless a retailer/third party is operating the selfgeneration plant), which combined represent as shown in Figure 4 between 50 and 60% of the total tariff structure. Its cost mostly consists instead of the generation cost. It could therefore with the additional support of the Law s incentives stand much more competitively relative to the low cost of conventional generation sources (hydro, coal, gas) of the power provided through the grid. Small self-generation is exempt from some requirements (back up contracts, need to have a retailer, simplified connection and other requirements) that larger self-generators or distributed generators face and which can significantly increase the cost of development and operation, making them not financially competitive. 22. So, while the CTF program will be available to support RE project of all sizes, it is expected that distributed generation and self-generation projects of up to 20 MW, and in particular projects below 1 MW, will have the highest uptake in the short term given current market conditions and the incentives provided by the law. Within such segment, and consistent with 4 The program will also be available to support larger scale projects, if regulatory and market conditions during its implementation period evolved in a way that would make them competitive. 11

12 the models that IDBG is increasingly identifying and financing as most adequate for replication across countries in the region, two financing models are envisioned as most likely for this program: Direct financing (with eventual co-financing from local financing institutions) of specific, highly demonstrational projects (for example, rooftop solar or biogas projects with commercial or industrial users). A structured vehicle is established to aggregate and finance multiple small projects by a third party that designs, builds, finances and operates the systems in exchange for a periodic fixed or variable payment (in the form of a PPA or lease agreement) from the user/beneficiary. 23. The IDBG has recently structured and approved with CTF and SREP support a few operations under both these models in Mexico and Honduras, and expects these financial solutions to be equally effective to demonstrate both the technologies as well as the financing modalities in Colombia. b) Proposed CTF financial instruments and terms 24. Over the next three years, the Program will provide CTF investment support to the target projects described above. IDBG financing will be provided to private sector borrowers along with additional financing from commercial lenders, companies, project developers and other trust funds managed by IDBG. CTF funds will be structured to enhance the risk profiles of eligible IDBG projects to help make the project viable while using the minimum guarantee coverage or concessional debt necessary. The pricing, terms and conditions of the IDBG financing offered with the benefit of a guarantee will be structured on a case-by-case basis. The guarantee support is expected to enhance the projects credit profile to allow debt leverage in these investments. Concessionality on the pricing of the guarantees may be needed in cases to contain the incremental cost of the guarantee in the financing structure and thus prevent a negative effect on the internal rates of return of the investments. In the case of CTF loans, pricing could offer a discount from the IDBG market rate, if justified. CTF investment criteria and principles, such as that of minimum concessionality, additionality, cost-effectiveness, and avoidance of market distortions will be observed in all cases. Below we present the proposed terms for the instruments: First loss guarantee Use of CTF The CTF will provide first-loss guarantees in support of the debt financing of the Proceeds projects, allowing the IDBG to enhance the credit profile and economic viability of transactions. Door to Door Tenor will be defined on a case-by-case basis, according to the economic profile of Tenor each investment. Maximum tenor will be 15 years. Seniority Given the first-loss nature of the guarantee, CTF will be subordinated to lenders on collections in case of default on the loans. 12

13 Pricing Call of the Guarantee Fees Beneficiary Consistent with previously approved CTF programs, pricing for the guarantee will most typically range between 50 and 200 bps per annum, with 50 bps set as the minimum floor pricing under this Program. 5 The principle of minimal concessionality will be applied and the final pricing of the IDBG Loan offered with the benefit of a guarantee will be structured on a case-by-case basis. 6 In the event of non-payment of any of the lenders benefiting from the CTF first-loss guarantee in an eligible project, IDBG shall process a guarantee payment from Program resources for the amount owed and due, up to the maximum amount covered by the guarantee. IDBG is authorized to complete the processing of a guarantee payment from Program resources within 5 business days upon non-payment of a beneficiary lender. Guarantee payments shall be subject to IDBG s applicable internal controls, which shall document evidence of non-payment. Consistent with the IDBG s fee structure. Levels may be lower than those that would be required by IDBG, depending on the analysis of the required concessionality. IDBG and/or other lenders (and indirectly the Borrowers). Subordinated loans Use of CTF The CTF may in limited cases provide subordinated debt co-financing, allowing the Proceeds IDBG to enhance the equity profile and economic viability of transactions. Door to Door Tenor will be defined on a case-by-case basis, according to the economic profile of Tenor each investment. Maximum tenor will be 15 years. Seniority CTF Program loans would be subordinated to other lenders in priority of payment and any other respects (security, collections) in case of default on the loans. Pricing Any subordinated loans will be priced at or above a fixed rate equivalent of 200 bps. The principle of minimal concessionality will be applied in all cases. Fees Consistent with the Bank s fee structure. Levels may be lower than those that would be required by IDBG, depending on the analysis of the required concessionality. Beneficiary Borrowers implementing RE projects targeted by this program. Senior loans Use of CTF Proceeds Door to Door Tenor Seniority Pricing Fees Beneficiary The CTF may in limited cases provide senior debt co-financing with IDBG loans, allowing the IDBG to enhance the economic viability of transactions. Tenor will be defined on a case-by-case basis, according to the economic profile of each investment. Maximum tenor will be 15 years. CTF Program loans would be senior in priority of payment and any other respects in case of default on the loans. Any senior loans will be priced at or above a fixed rate equivalent of 100 bps. The principle of minimal concessionality will be applied in all cases. Consistent with the Bank s fee structure. Levels may be lower than those that would be required by IDBG, depending on the analysis of the required concessionality. Borrowers implementing RE projects targeted by this program. 5 6 The guarantee fee may be credited to the CTF account in a single transfer at the end of each calendar year to reduce the financial charges otherwise involved in making quarterly transfers of $10,000 or less to the CTF account for each loan. Besides the guarantee fee, and given that the CTF guarantee resources are not disbursed unless and until the guarantee is called, CTF s compensation will be increased by the investment income resulting from IDBG s investment of these resources during the time they are kept at IDBG. 13

14 3. PROGRAM S STRATEGY FOR ACHIEVING MARKET TRANSFORMATION 25. The proposed Program financial structure is innovative in that it will allow the IDBG to provide debt to private companies in Colombia where this would otherwise be impossible. It will support innovative RE projects, effectively creating a more robust market for these technologies in Colombia. In addition, it will aim to support new business models such as third-party finance of projects within companies facilities. This third-party finance or PPA model has greatly expanded the growth of the solar industry in the U.S., resulting in over half the installed solar for residential and commercial consumers in recent years. While the program will be open to all RE technologies supported by Law 1715, the program will likely mostly focus on solar PV, given the results of IDBG s evaluation of current market demand for financing as well as financial viability considerations. 26. These transformations will lead to the availability of more adequate commercial financing for viable projects through: Use of concessional finance and technical cooperation (TC) to address risk factors and transaction cost barriers, allowing adequate financing and catalyzing the development of self-supply and distributed generation projects. Targeted investments to demonstrate the technical, commercial, and financial performance of RE self-supply and distributed generation projects. Effective knowledge management interventions to achieve the desired demonstration by lowering informational barriers and adequately disseminating the Program s outcomes. 4. FIT WITH CTF INVESTMENT CRITERIA a) Potential GHG emissions savings 27. The Program will support projects expected to reduce GHG emissions by an estimated 544,000 tco 2 e over 25 years. 7 The IDBG will document the GHG reductions and other environmental benefits such as waste reduction. Other co-benefits that are expected but will be at significant scale to be documentable include increasing (as these investments are replicated at scale) the resilience of the power supply (by further diversifying the mix and reducing the vulnerability associated to hydro regimes) and decreasing the need for costly electricity grid investments. b) Cost-effectiveness 28. Given the direct GHG mitigation potential mentioned above, the cost effectiveness of CTF investments would be USD 18.4/tCO 2 e (this estimate corresponds to Program lifetime abatement of 544,000 tco 2 e). Assuming an estimated financial leverage of at least 1:3 of 7 GHG emissions reductions over 25 years assuming 28MW of installed RE capacity (24MW solar PV and 4MW biomass/biogas and); capacity factors of 20% for solar PV and 60% for biomass/biogas; investment costs of USD 1.7 M/MW for solar PV and USD 2.5 M/MW for biomass/biogas; and an emission factor of tco 2 e/mwh based on Clean Development Mechanism estimates for Colombia. 14

15 CTF resources total cost effectiveness considering other sources beyond CTF would be around USD 94.8/tCO 2 e. c) Demonstration potential at scale 29. As introduced in the previous point, while this Program is expected to support directly at least 28MW of power RE generation capacity, the demonstration effect is expected to help catalyze further self-supply RE investment and development. While the technologies are proven, there are still perceived technology risks, and the Program would develop confidence among private companies and local banks about using their capital or debt capacity to invest in them. The prospect for replication is supported by the vast potential in the commercial sector in various cities in Colombia, but also the agricultural and industrial sectors. To maximize the demonstration potential at scale, the projects supported by the Program, their impact, and lessons learned will be profiled in case studies and shared in presentations at local and regional conferences in which the IDBG participates regularly. 30. Given the vast solar resource potential in the country (particularly in the Caribbean coast) it is reasonable to assume that the direct demonstration offered by these investments could be replicated by at least a 5x factor. This would result in GHG emission reductions of at least 2.7 MtCO 2 e. d) Development impact 31. This Program has a significant number of potential development co-benefits. Many of these are expected to have immediate direct impact and all are expected to become significant as the demonstration effect of the Program generates impacts in a scale larger than that of the directly supported investments. Expected co-benefits are: Energy stability: Self-supply RE projects provide greater stability to industrial clients whose operations rely on consistent flow of energy to maintain productivity. This is especially pronounced: a) in companies located in remote areas where power stability is weak, and b) in periods of drought (during El Niño cycles, for example), when the country s high reliance on hydropower may result in power shortages. In the market assessment conducted by IDBG, energy supply stability has been found as one of the main reasons behind consideration of self-supply RE solutions among companies in Colombia s Caribbean coast. Employment: The development of a supply chain for self-supply, small-scale solar can have significant benefits in terms of development of qualified jobs, both in the commercial, installation and operation and maintenance areas. e) Implementation potential 32. This Program will be implemented immediately upon its approval by the CTF Trust Fund- Committee. The relative small size of self-supply investments would allow the IDBG to utilize expedited approval procedures. IDBG has previous experience with similar donorbacked guarantee programs and has established legal and administrative procedures to facilitate this type of operations. 15

16 33. Moreover, the IDBG is already in discussions with a couple of project sponsors aiming to developed the solar PV third-party finance models that IDBG has already successfully structured (with CTF and SREP support) in Mexico and Honduras. This results in robust internal experience in the structuring and approval of this type of models that will contribute (in terms of both quality and speed of implementation) to the development of similar approaches in Colombia. f) Additional costs & risk premium 34. The RE investments to be supported by the Program are currently perceived as having higher technology and implementation risks and therefore face higher financing costs (if it can be accessed at all) and first-mover implementation costs when compared to conventional energy sources such as gas, coal, or diesel. Given the high initial capital expenditure involved with RE, as opposed to high ongoing fuel costs with more established energy sources, these perceived risks result in limited access to financing and high premiums for RE projects. 35. Due to the degree of knowledge that IDBG has developed in CIF countries by working with private companies on feasibility studies, the economic viability of these projects is understood, as long as projects have access to financing with adequate terms and requirements. Currently, the private sector in the region is interested in long-term investments such as the RE projects proposed, but these investments require access to longterm debt, which at this stage in the market requires developmental institution risk-sharing. g) Financial sustainability 36. The Program s financial sustainability is inherent in the economic viability of identified RE investments and the demonstration that these projects will offer, which will reduce perceived risks (and therefore the need in the future for risk mitigation support such as these CTF guarantees), as well as financing costs in the market for future projects. Furthermore, the Program s efforts will involve companies and developers through co-financing, TC and training, and the dissemination of case studies profiling the projects supported, aiming to ensure a comprehensive approach to local capacity building that will result in sound, financial sustainable and replicable projects. With regard to the third-party PPA/leasing financing model, the grant funding requested may be used to pay for the contractual and legal documentation necessary for the establishment of this business model and for its acceptance by local agents. Once this business model is established, it is expected that legal and due diligence costs will decrease for future projects. h) Effective utilization of concessional finance 37. The proposed Program is considered an effective utilization of concessional finance, since it will (i) demonstrate the financial viability of RE applications (in particular self-supply solutions); (ii) utilize targeted TC resources for investment-grade feasibility studies and/or development of adequate contractual models; (iii) tackle informational and risk barriers currently preventing financially viable investments from scaling up; and (iv) leverage additional co-financing and investment. 16

17 38. As explained in previous sections, investment in self-supply RE is limited by the lack of access to appropriate and sufficient debt by private companies. Even in the simplest financial structure, for example, a corporate loan to an owner of an industrial or commercial building to install a rooftop solar system, the costs of the project generally exceed the companies ability to pay with equity or working capital. Long-term debt reduces the initial equity costs and allows the energy savings to cover the debt payments so the project can pay for itself over time. However, when companies seek debt for these projects, banks are often reluctant or unable to accept the savings as future cash flows or the RE technologies as collateral, and in any case after installation the resale value of the equipment is greatly reduced. In many cases, the industrial and agricultural companies do not have strong enough credit or other assets available to pledge to allow them to invest in these projects, and the projects compete with core-business investments that are higher priority or have higher expected returns. Additionally there are technology and operational risks due to the lack of experience with these projects and higher return expectations. 39. An alternative is a project finance or third party structure, such as the solar leasing, chauffage or PPA model, where an independent company finances, owns and operates a small-scale RE plant located on the industrial client s property. In these structures the independent company is specialized and can better manage the technical risks, but there are additional contractual risks, and often they are financed with 100% equity. Even if this amount of equity can be raised, it is very expensive. By replacing the high-cost equity with low-cost debt, the overall cost of capital is reduced, enabling the projects to produce energy for a levelized price that is competitive with fossil fuels. 40. In both these scenarios, the TC and first-loss guarantees or debt provided by the CTF under the proposed Program will help overcome the risk and cost barriers faced by developers, companies and financial institutions. The proposed program would allow the IDBG and local lenders to provide the financing these projects need. i) Mitigation of market distortions 41. The market will not be distorted since IDBG will target a segment and certain types of financing modalities that currently are not being served. In covering this gap it will demonstrate the viability of these technologies and financing approaches and help create a market expected to be commercially financed by local institutions in the future, as the risk/return profile of these investments is better understood. In addition, and to support this objective, the principle of minimum concessionality will be observed in all cases. j) Risks 42. One of the program s risks is of low demand for the program s financing solutions. This risk is mitigated by the soon expected finalization of the regulations of the Law 1715 and the availability of the financial incentives it provides for, which will reduce regulatory risk and enhance the financial returns of these investments. Demand risk will be mitigated by promoting and introducing the Program to companies receiving TC for feasibility studies and capacity-building within the nascent industry of RE project developers. 17

18 43. In regards to credit risk, CTF Guarantees or co-financing shall be processed in tandem with the respective IDBG Loan and will be subject to the project cycle and approvals applicable to IDBG Loans. Loan repayment risks will be mitigated by the IDBG s credit analysis and at the technical level by ensuring that the projects financed produce sufficient energy savings to service the incremental debt. This will be addressed by ensuring that the company has sufficient cash flows to cover the loan even if the project costs are higher than expected. 44. Supply chain challenges and risk derived from the availability of engineering services, which under current conditions could translate into project delays, cost overruns, and completion/performance risk, will be addressed by assisting companies with independent engineers and procurement as part of the engineering studies supported by the Program s grant funding. k) Key performance indicators Key Performance Indicators Tons of GHG emissions reduced or avoided Volume of direct finance leveraged through CTF funding Annual renewable energy produced (GWh) New renewable installed capacity (MW) Target 544,000 tco 2 e USD 51.6 M 64 GWh/year 28 MW Additional Development Indicators Target Commercial/industrial sites with self-supply solutions At least 15 Solar developer / third party finance companies supported At least 2 l) Stakeholder engagement 45. The IDBG has met and consulted with key actors within both public and private institutions in the context of the program design stage and particularly after the approvals of legislation and regulations for RE over the last 18 months. On the public side, consultations included those with the UPME and Ministry of Energy and Mines representatives, the Energy and Gas Regulatory Commission (CREG), and the Institute for Planning and Promotion of Energy Solutions for Non-interconnected Zones (IPSE). Private institutions and NGOs consulted included Colombian Chamber of Energy, ProBarranquilla Investment Promotion Agency, Chamber of Commerce of Santa Marta, and Colombinvest. Private firms consulted include major energy producers/distributers such as Codensa S.A., Empresas Públicas de Medellín (EPM), numerous local and international RE developers, and major energy users (industrials, ports, airports, and free trade zones). In addition, a number of local financial institutions were consulted, including Banco ProCredit, Bancolombia, Findeter, and Bancoldex. 46. The IDBG has actively performed outreach and performed over 60 detailed engineering and feasibility studies over the last two years to understand private sector potential to carry out self-supply and distributed generation RE investments throughout Latin America and the Caribbean. This process has validated both the willingness of private companies in the region to pursue these opportunities and the need to count with risk mitigation and TC resources to support first movers in several key markets, among which Colombia has great potential. IDBG has also conducted direct outreach to regional stakeholders in the public 18

19 and private sectors through the design and implementation of the CTF-funded Energy Efficiency programs in Colombia and the regional Energy Efficiency and Self-Supply Renewable Energy Program (under a CTF DPSP). The IDBG has presented at regional conferences and held trainings and workshops for numerous financial intermediaries, developers, and energy service companies to build capacity and extend co-financing for investments in RE and energy efficiency. m) Gender considerations 47. The proposed CTF program will promote the implementation of inclusive policies in private businesses by supporting the program s beneficiaries (through direct involvement and advisory by IDBG gender specialists) to explore opportunities and help implement measures that promote gender equality and inclusion in the workforce. A special emphasis will be placed on training and employment opportunities for women from local communities where projects are to be implemented. The IDBG s gender specialists will support project sponsors in: Assessing opportunities for greater gender inclusion in the company s workforce and supply chain. Estimating the costs and benefits of increased female participation in the RE project or the sponsor company. Incorporating the initiatives identified from the outset of the eligibility phase, through the financial structuring of projects, and the financing documents. 48. As an example of this work in a previous project, the IDBG s gender specialists and the sponsor designed an internship program for women from local universities (focusing on STEM and business university programs) to gain experience in the engineering, operations, and finance areas of the company. Project sponsors have also committed to fostering equitable and inclusive workplaces by signing onto the United Nations Women Empowerment Principles and obtaining certification under nationally recognized norms for gender equality and inclusion. 49. From a reporting perspective, the IDBG s development effectiveness officers assign monitoring and evaluation indicators to each project, which are included in an annual Project Supervision Report. In addition to climate, energy, and economic indicators, the development effectiveness system can track sex-disaggregated indicators such as employment, training provided, and number of jobs added to the formal sector. These results will provide input into the CIF Admin Unit s and the IDBG s own monitoring and reporting outcomes, as part of the wider coordination between the CIF s gender working group and the MDBs that is set out in the CIF Gender Action Plan. 19

20 ANNEX 1 MDB PROJECT IMPLEMENTATION AND SUPERVISION FEES Summary for 15 Years (USD) Implementation 145,000 Legal Cost 145,000 Supervision 95,000 Total 385,000 20