The CTF – IDB Group Energy Program is supporting the ability of local financial intermediaries (LFIs) in Mexico to provide financing products and services for energy efficiency. by . The investments will help improve the competitiveness of Mexico’s economy, reduce the country’s vulnerability to volatile fossil fuel prices, and mitigate CO2 emissions.
Technologies that could be financed through the program include energy efficient motors, cogeneration, thermal insulation, solar water heating, air conditioning, and lighting.
The program. The Mexico CTF-IDB Group Energy Efficiency Program, Part 1, is being financed with a US$22 million CTF loan and US$1,680,000 in CTF grants for knowledge products and technical cooperation approved in 2011. It is expected that each dollar of CTF participation will mobilize at least four dollars from commercial banks, donors, and bilateral agencies.
The program is complemented by a public sector component in which CTF financing is supporting the Mexican Housing Agency (SHF in funding the construction and purchase of energy-efficient homes for low-income families.
The program’s objective is to transform the commercial energy efficiency finance market by providing financial guarantees or funding to enable banks to expand their loan portfolios into energy efficiency finance, capacity building for implementing investment portfolios, and collecting and disseminating information to key stakeholders.
The program was established to work with three large commercial financial institutions to directly finance their on-lending portfolio for energy efficiency or to provide partial credit guarantees for this purpose. The support is tailored to the financial needs of each LFI. Some are well capitalized but may need guarantees to mitigate risk; others may require softer-term loan financing to help develop a long-term portfolio of energy efficiency sub-loans. Concessionary loans will be provided to LFIs that target small and medium-size enterprises.
By involving both large and small banks in financing for energy efficiency, the program will have a demonstration impact for different classes of commercial institutions. The program is also supporting energy efficiency projects in a wide range of sectors of the economy, including large, medium-sized, and small industrial and commercial companies.
The program’s knowledge management programs are designed to consolidate existing knowledge on energy efficiency finance, produce lessons learned and gather data from the program, and disseminate this information to stakeholders. Included will be comprehensive information on energy efficiency in Mexico; training materials on international standards for energy efficiency; contracts, including energy savings agreements and loan agreements; data management to track the success of the interventions; communications to disseminate materials; and cooperation with universities in studying energy efficiency and the activities of the program.
The technical cooperation component will strengthen the capacity of Mexico’s banks, SMEs, and technical intermediaries in basic energy efficiency concepts, assessing risk and return, lending based on energy savings versus solely on a collateral asset basis, special types of contracts needed, the use of technical partners to reduce financial risk and knowledge needs, and market opportunities.
Experience in Mexico and elsewhere has shown that knowledge management and capacity-building programs are crucial for success in energy efficiency financing.
Climate change impact. Assuming that the US$110 in program resources from the CTF, the IDB Group, and other sources were used by small and medium-sized firms for energy efficient industrial motors, cogeneration, air conditioning, and lighting, the program would result in emissions reductions of 4.33 metric tons of CO2 over the lifetime of the equipment. Emissions reductions that could be achieved if the CTF program were to be replicated throughout the targeted businesses across the economy using the same four technologies would be 227 metric tons of CO2. Reductions would be larger if other technologies are included.
Program results. By 2016 the program will result in energy efficient financings to support an outstanding portfolio of US$110 million in energy efficiency loans to small and medium-size enterprises.
Priority for energy efficiency. GHG emissions from fossil fuels combustion in Mexico in 2006 were 383 million tons of carbon dioxide equivalent, or 54 percent of total national emissions. Mexico’s Special Climate Change Program (PECC) commits the country to help stabilize global atmospheric concentrations to 450 PPM of CO2 emissions by 2050.
Energy efficiency is a key element for achieving these overall reductions. According to government estimates, up to 18 percent of Mexico’s energy consumption in 2030 could be reduced through cost-effective energy efficiency measures. But while the country’s first-tier financial intermediaries are well-positioned to mainstream energy efficiency investments, financing for this purpose is very limited.
The IDB country strategy with Mexico 2010-2012 includes support for climate change adaptation and mitigation at the federal and sub-national level. The IDB-CTF project is also consistent with the climate change initiatives set forth in the IDB’s Ninth General Capital Increase.
Lessons learned. Mobilizing the resources of the program with commercial banks has been challenging, mainly because the market does not have a track record for energy efficiency loan performance that could help banks measure risk. Through this experience, the Bank learned that the program should have been opened to all financial intermediaries, including other non-bank financial institutions such as leasing companies or Mexican SOFOMES, which are nitch players in the energy efficiency market.