When looking at the long list of challenges countries in the region face in relation to economic development, one could think that for a nation like Paraguay energy access is not at the top of the list. After all, when it comes to electricity, Paraguay has an ace up its sleeve: the Itaipu Hydroelectric Dam. Shared with Brazil, the 14 Gigawatts (…yes, 14 GW!) power plant produced more energy as of 2016 than any other hydropower plant in the world, surpassing the Three Gorges Dam on the Yangtze River in China, which has the world’s largest installed capacity (22.5 GW).
Considering this, it is striking to learn that even with this much electricity being generated, Paraguay still relies heavily on firewood and biomass waste as energy sources for the industrial sector. In fact, firewood and biomass sources represented approximately 74% of the energy consumed on average by the industrial sector between 2013 and 2016, much of it by small and medium-sized enterprises (SMEs). Unfortunately, this has become a major driver of deforestation for the country, as only a small part of the firewood comes from certified sustainable sources, a problem that Paraguay recognizes in its 2015 Nationally Determined Contribution (NDC).
The 2004 Zero Deforestation Law (ZDL) was adopted to counteract this trend, especially in the Eastern region of the country, where most of the industrial activity is located. However, considering that the demand for primary energy consumption is expected to grow significantly over the next decade, it is unlikely that the ZDL alone will be able to produce significant results in terms of reducing deforestation if complementary measures are not adopted. Such measures should aim to reduce the need for additional firewood consumption and promote a shift to the use of electricity, which is expected to cover the increase in primary energy needs in the long term, especially after the much-needed improvements in the electricity transmission network are completed. The ZDL regulatory restrictions on the sourcing of non-renewable biomass, as well as the progressively increasing distances between fuelwood demand and supply centers, are expected to drive biomass prices up, making the switch to electricity more and more attractive for the industrial sector.
With this in mind, the obvious question is: why aren’t industrial SMEs switching to electricity in mass? Well, there are two main reasons:
- the upfront costs and limited availability of long-term financing for equipment upgrades; and
- the lack of awareness among entrepreneurs and financial institutions on the benefits of energy efficiency improvements and, where possible, of switching from firewood to electricity (or to alternative and more sustainable fuel sources such as biomass residues), resulting in a high project-risk perception.
These challenges are what lay at the core of the new IDB project Promoting private sector investments in energy efficiency in the industrial sector in Paraguay, which was recently approved by the Green Climate Fund (GCF) to receive USD 23 million in co-financing. The project, which will be co-executed by IDB and Agencia Financiera de Desarrollo (AFD) —Paraguay’s development bank—will finance a set of measures under an innovative risk-mitigation mechanism, the Energy Savings Insurance (ESI), designed and piloted by the IDB in a number of Latin American countries to address the financial and non-financial investment barriers to energy efficiency improvements. The bulk of the financing will be made available to industrial SMEs willing to be early adopters in the implementation of energy efficiency improvements. Credit lines will be offered through Local Financial Institutions (LFIs) at adequate conditions for the energy efficiency market, while LFIs themselves, as well as technology service providers, will receive training on how to evaluate EE projects and structure financial products that respond to the needs of clients in this specific market. Finally, the project’s financial package will be complemented by technical assistance activities that will strengthen the institutional, policy and regulatory capacity of the relevant local actors engaged in promoting energy efficiency across the country.
While the US$43 million of available financing from GCF and AFD alone will not be sufficient to achieve Paraguay’s target of 60% of energy consumed coming from renewable sources by 2030, this is certainly a step in the right direction, providing a suitable platform for replication and scaling-up. And, if in addition to paving the road to transition away from unsustainable biomass use, this project also reduces along the way around 4 million tons/CO2e emissions, then we can certainly conclude that this was money well spent!
For more information on the project please contact the project team leader Maria Netto, Lead Capital Markets, and Financial Institutions Specialist: MNETTO@iadb.org.
For more info on innovative green finance operations via National Development Banks, please see www.greenfinancelac.org