Energy Efficiency for SMEs in Colombia

The IDB’s Multilateral Investment Fund (MIF) will prepare a Clean Technology Fund (CTF) project to foster the use of energy efficiency technologies by small and medium-size enterprises (SMEs) in Colombia through the development of a market for performance-based contracting and energy services companies (ESCOs).

The project will also support the growing market for energy efficiency technologies with innovative financial instruments designed to address barriers related to access to finance for energy efficiency and high perceived risks for ESCOs and SMEs.

The project. US$3.5 million in CTF resources administered by the MIF, plus US$5 million in CTF resources administered by IDB/SCF, coupled with up to US$2.5 million in matching financing from the MIF and up to US$12 million from the IDB/SCF, will be used to implement the operation Innovative instruments to foster energy efficiency in smes in Colombia.

The operation will include components to finance technical cooperation and to promote access to finance. On the supply side, the technical cooperation, will identify, and create capacity in, specific entities positioned to offer energy-saving services to SMEs and promote the use of performance-guaranteed contracting through ESCO models. Energy service providers (ESPs) will receive training and support to operate according to ESCO models to meet the demand for services and products to reduce energy efficiency gaps in the Colombian economy. On the demand side, the project will foster the development of a reference market for ESPs and ESCOs, providing technical assistance to an insurance company for the design of risk-mitigation instruments to address the real or perceived performance risks of energy efficient technologies.

To address the problem of access to finance for ESCOs, the operation will establish a highly specialized Energy Efficiency Fund to be seeded with a combination of CTF, MIF and IDB/SCF loans. The fund will provide resources in the form of loans and partial credit guarantees to the ESPs, ESCOs graduating from the project’s technical assistance activities and to any potential client interested in implementing energy efficiency projects.

A US$200,000 project preparation grant from the CTF has been used to finance a market analysis study to scope and assess the potential market for energy efficiency services. It defines a methodology for the analysis using variables such as business size, geographic/climatic characteristics, and type of technology used. Market size will be estimated for the different sectors, which will be ranked according to volume of potential absolute energy and GHG emissions savings, awareness, technical readiness and willingness of potential clients to adopt more energy efficient equipment or processes, financial capabilities and potential to access credit, and cost-benefit ratio of the interventions.

The study will also identify the most promising sectors, their potential growth and investment risks, and sensitivity variations in energy prices and consumption levels. In addition, it will identify the credit potential of clients in the selected sectors and analyze barriers to technological upgrades. Based on the analysis, a detailed estimation and quantification of the potential for ESCO services will be made along with identification of investments and credit requirements. Finally, the study will estimate the CO2 emission reduction potential of the identified sectors, providing a an estimate of the overall mitigation benefits of the project.

In a second component, the project preparation grant will provide technical support for the design and structuring phases of the Energy Efficiency Fund. The fund will be designed in accordance with the Colombian legal and institutional framework, the energy supply/demand analysis, key market stakeholders, local available financing, and market barriers.

A main challenge facing the adoption of energy efficiency measures in Colombia is the lack of financial and market services to support stakeholders in the development of projects and, in particular, to support ESCOs. In addition, there is a lack of information on new technology options, limited knowledge on the economic benefits of energy efficiency projects, and lack of interest from local financial institutions to invest in energy efficiency projects.

High-priority on energy efficiency. In terms of energy sector emissions, Colombia ranked 48th in the world and fifth in Latin America in 2005, with 31 percent of total emissions from fossil-fuel combustion.

Colombia’s electricity sector is relatively clean in terms of emissions, since some two-thirds of the country’s electricity is generated by hydropower plants. Nevertheless, a reduction in the total energy demand through efficiency measures or through electricity generation from renewable energy sources can have a significant emission reduction impact because the last marginal units of power utilized are often generated by fossil fuels.