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Accessing debt capital markets to finance energy efficiency investments in the SME sector: Experience from Mexico


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National Policy Dialogue on “Improving Access to Green Finance for Small and Medium-Sized Enterprises in Georgia”
→ Accessing debt capital markets to finance energy efficiency investments in the SME sector: Experience from Mexico - Kristian Brining

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Accessing debt capital markets to finance energy efficiency investments in the SME sector: Experience from Mexico

  1. 1. 1 Accessing debt capital markets to finance climate solutions: Experience from Mexico with designing a green bond for energy efficiency investments in the SME sector Kristian Brüning | Climate Wedge Ltd OECD POLICY DIALOGUE IMPROVING ACCESS TO GREEN FINANCE FOR SMALL AND MEDIUM-SIZED ENTERPRISES IN GEORGIA JULY 16 2019
  2. 2. 2 There are hoards of capital chasing green assets "All infrastructure now has to be green. And rivers of capital need to flow to assets and projects that are the right ones for the 2050 world we have to build.” Christiana Figueres, former Executive Secretary, UN FCCC
  3. 3. 3 And we have many green technologies available
  4. 4. 4 Growth in renewable energy shows no signs of slowing Picture source: IEA (2018)
  5. 5. 5 An increasing size of capital is targeting distributed assets Global distributed energy resources capacity is expected to grow from 132 GW in 2017 to 528 GW in 2026 (Navigant Research 2018) Picture source: IEA (2018)
  6. 6. 6 Distributed technologies are now rapidly introduced in most sectors Examples: • Distributed solar PV (<1 MW) • Small and medium wind turbines (<500 kW), • Microturbines • Fuel cells • Distributed energy storage • Microgrids • EV charging • Demand response • Energy efficiency • Waste-to-energy • Biogas
  7. 7. 7 A growing misalignment between smaller size capital needs and large asset pools (IEA WEI 2019) In 2018 1.8 trillion was spent on energy assets globally with 620 billion in low-carbon energy (way off the needed 65%) ”Just over half of low-carbon investment was in assets typically purchased or deployed at the end- user level – due to the role of energy efficiency but also distributed energy resources.... This raises a dichotomy in financing energy transitions. Utility-level assets tend to benefit from larger deal sizes and standard structures that attract interest from banks. Investments at end-user level tend to be much smaller and depend on the credit worthiness of consumers and small and medium-sized enterprises, with portfolio aggregation often needed to access larger pools of capital.
  8. 8. 8 Two central themes in our approach to managing green assets A clear need to aggregate smaller EE and RE projects • “Asset light” business • OPEX not CAPEX • Energy as a service • Distributed energy sources Create platforms for institutional capital to access smaller projects • Yield matching • Refinancing • Long-term ownership/capital • Development vs. ownership Financial innovation is the key intervention (green technologies are widely available…)
  9. 9. 9 Energy efficiency financing • Global industrial EE investments $38bn, out of $240bn in EE • Only about 13% of total energy CAPEX • Could yield 40% of needed CO2 reduction goals • EE investments are almost always the “low-hanging fruit” for clean investments in SMEs- • Why do so many projects go undeveloped? • Many reasons: operational priorities, low-return, non-core operations, interruptions…
  10. 10. 10 Mexico SME Energy efficiency financing – project aggregation and securitization through a local green bond • Revolving credit line of 125MUSD from the Inter-American Development Bank in Mexico for SME EE financing, with CTF guarantee. • Aggregating a portfolio of EE investments through local ESCOs for a 50MUSD securitization through a green bond on local capital markets • Creating a portfolio of EE receivables from SMEs • Key design issues for aggregation: • Timing of projects  deployment of capital, all projects on same schedule • Management of cashflows during warehousing • Broad technology base + size range = high flexibility VS. one technology solution • Standardization of contracts • Local capital market size sweet spot
  11. 11. 11 SME energy efficiency projects to be included in the bond Project Technology Industry 1 EE measures in a chain of supermarkets HVAC automation and control system Comercial 2 EE measures in a chain of shopping malls HVAC automation and control, variable-speed engines Comercial 3 Fuel switch in bus fleet Replacing commercial fleet of diesel buses with natural gas buses and building fueling station Transport 4 Fuel switch in van fleet Replacing commercial fleet of diesel vans with natural gas vans and building fueling station Transport 5 EE at a food industry cold storage facility Replacing refrigeration equipment, refrigerants and insulation Industrial (food) 6 Process improvement and onsite co- generation BAT production equipment, controls, EE measures and co-generation facility Industrial (silica) 7 Process improvement and onsite co- generation BAT production equipment, process improvement, EE measures and co-generation facility Industrial (ceramics) 8 EE at a food industry cold storage facility Replacing refrigeration equipment, refrigerants and insulation Industrial (cold storage)
  12. 12. 12 Solution to enable ESCOs to develop more SME EE projects through support for securitization Enhancing securitization of assets • Transfer EE project to SPV • Debt facility up to 80% • Rights for EE project cash flows moved to a warehousing trust • Trust and SPVs placed for securitization
  13. 13. 13 EE projects pooled through structure for Asset Backed Security Esco 1 Esco 2 Esco 3 P P P Warehousing Trust IDB Senior Loan Master Trust CTF’s Guarantee Green Bond Asset Backed Security IDB’s Guarantee SME EE projects What is the market for a local green bond?
  14. 14. 14 Green bonds have grown into largest green asset class 2018
  15. 15. 15 Why are Green Bonds emerging as the key green asset class globally? 1. Mobilizing many existing actors in the financial value chain 2. Creates networking effects in financial ecosystem (exchanges, NGOs, investors) 3. Diverse range of issuers  market development with localized offerings 4. Localized green bond regulation (exchanges, government) 5. Supporting many product types: • Corporate bond (recourse to issuer, use of proceeds obligation) • Project bond (exposure to project with (w/o) recourse to issuer) • Asset-Backed Security (collateralized by several projects, recourse varies) • Supranational, agency bonds (e.g. IFC Green Cornerstone Bond Fund) • Municipal bond (local gov’t, cities) • Sovereign bond (Poland, France, Nigeria, Indonesia) • Financial bond (bonds by banks for green on-lending)
  16. 16. 16 Green bonds as a green asset class debt instruments to finance projects that deliver environmental benefits. A green bond is differentiated from a regular bond by its commitment to use the funds raised to finance or refinance ”green” projects, assets or business activities... Environmental benefits  what is green? Definitions, project types, measurement Commitment to use the fund  use of proceeds, impact of investment, second-party opinion, audit, third-party certification Ultimately, similar to normal bonds: bond issuer raises a fixed amount of capital for a term (maturity) from investors and repaying the capital (principal) at matirity and paying interest (coupon) during the term of the loan.
  17. 17. 17 Green Bonds market standards for process and content/quality
  18. 18. 18 The global debt capital market at $100 trillion is large enough to accomodate capital need for low-carbon transition • The global stock of infrastructure will double by 2030 • Requires rapid re-allocation and re-prioritizing of current investment plans
  19. 19. 19 Dedicated fund to aggregate rooftop SME solar portfolio • 10MW portfolio with 30-50 projects in Spain • Across commercial, industrial and service sectors • No CAPEX • 10-15 yr contracts
  20. 20. 20 Aggregation to create a bankable portfolio of SME solar projects for institutional investors presence Enhancing on-sale options for assets • an asset sale (smaller institutional, family office, asset manager) • debt refinancing (local banks, IFIs) • portfolio securitization (local debt markets, ABS, bank green bonds) Aggregation platform
  21. 21. 21 Shared savings contracts as a way to distribute benefits of cheap solar to SMEs
  22. 22. 22 Conclusions • For smaller EE and RE projects, in the SME sector, there is a mismatch between the size of capital and the size of the assets/investments. • Different forms of aggregation  enable SMEs to pool projects during development phase to build portfolios of size suitable for larger investors. • New forms of financing and aggregation are supportive of “asset-light” and “energy as a service” models, lowering the CAPEX need for SMEs • Aggregation needs “carriers” of development risk during build-up phase; equity, special debt facilities, financial and technical guarantees. • On-sale of assets, e.g. through securitization or re-financing should aim at matching the long-term return profile, term and risk with for the consolidated portfolio of assets, yielding benefits of scale to single small project.
  23. 23. 23 Annex: OPEX based customer solution ① Technical design ③ Generation profile & savings ④Financial proposal ② System specification
  24. 24. 24 Annex: Differences between distributed and utility-scale solar projects
  25. 25. 25 Management Contact Details NORTH AMERICA Alexander Rau Principal Climate Wedge LLC 19 Bromley Pl San Francisco, CA 94115 +1 415 215 3476 EUROPE Kristian Brüning Principal Climate Wedge Oy Bulevardi 14 A3, 00120 Helsinki, Finland +358 40 581 7771 Climate Wedge Clean Energy Asset and Investment management since 2006