The Colombian national development bank Bancóldex is targeting the country’s fast-growing hotel and hospital/clinic industries in an IDB program financed by the Clean Technology Fund (CTF) to provide investment financing and technical cooperation to decrease energy consumption, reduce greenhouse gas (GHG) emissions, and increase competitiveness.
The program will address problems that currently inhibit financing for energy efficiency, particularly for small and medium-size firms. It will also serve as a model that can be replicated in other sectors and countries.
The program. The Energy Efficiency Financing Program for the Services Sector in Colombia will be carried out with a US$10 million CTF loan and $1millionin technical cooperation grants. The Bank approved the operation in July 2013.
The program will enhance the competitiveness of Colombia’s hotels and hospitals/clinics and reduce GHG emissions through the adoption of an innovative financing model for energy efficient investments. The model includes a combination of mechanisms to address investments risks, enhance local demand for credit to invest in energy efficient projects, and increase the participation of energy efficiency service providers. The technical cooperation will help strengthen the capacity of Bancóldex to coordinate these instruments and support local financial institutions (LFIs) and other market participants in structuring, financing, monitoring, and evaluating projects that both enhance competitiveness and address environmental issues.
Eligible LFIs will extend sub-loans to small and medium-size firms in the hotel and hospital/clinic sectors for energy efficiency financing. The financing will be tailored to the requirements of the firms and the projects through the use of long maturities that spread the amortization of costly, energy-saving technologies over time.
It is estimated that the LFIs could leverage CTF funds by an additional 100 percent in addition to the funds provided by the program, yielding $20 million in all. In addition, funding for individual projects will be complemented by two related IDB operations designed to strengthen the competitiveness of firms through investment projects for innovation andtechnological development and mitigation of environmental impacts, as follows:
- A US$250,000 IDB technical cooperation grant to finance the definition of the terms of the sub-loans financing line; the design of requirements to engage the participation of partners in the execution of the sub-loans; and methodological approaches and protocols to monitor, report and verify results.
- A $750,000 CTF technical cooperation grant to support Bancoldex in developing and implementing risk management tools provided for in the operation (and further promote the program with pilot projects.
Colombia’s hotel industry consists of some 6,000 firms, most of which are small and medium-size enterprises operating with obsolete, energy-inefficient technologies. The industry’s rapid growth is expected to increase energy use and GHG emissions unless firms adopt new energy efficiency technologies and standards. The arrival of large foreign hotel chains that incorporate modern energy efficiency technologies is likely to exert powerful competitive pressures on smaller and older hotels; reducing electricity costs for such hotels will help them to compete.
The hospital-clinic sector includes some 9,605 private health firms, many of which also have been operating with outdated energy technologies. This sector has also been growing rapidly in recent years, partially as a result of health services provided to foreigners. As with hotels, more efficient new entrants into the market are expected to exert competitive pressures on existing firms.
The program’s risk-mitigation measures are designed to be replicated by additional hotels and hospitals and by businesses in other sectors. Most service industries in Colombia have similar energy demands, which make the eligible technologies in the program easily replicable.
Climate change impact. In the hotel industry, implementing the CTF program in a planned 90 hotels is expected to produce energy savings of 55.8 gigawatt-hours per year, reducing GHG emissions by 10,774metric tons of CO2 equivalent per year; the hotel industry as a whole has a potential for savings of 468 GWh/yr and 90,501 tCO2e/yr (equivalent to a 19% average reduction in energy costs).In the clinics and hospital sector, it is estimated that once implemented in the planned 34 clinics/hospitals, the program would result in savings of 12.4 GWh/yr and 4,642 TCO2e/yr; the clinics/hospitals industry as a whole has a potential for savings of 75 GWh/yr and 26,217 tCO2e/yr, which is equivalent to a 9.6% average reduction in energy.
If the program was replicated to support investment of similar technological changes in the service sector as a whole, the program could achieve a total of energy savings and GHG emissions reductions of 2,796 GWh/year and 335,520 tCO2e /year (considering an emission factor of 0.12 Kg of CO2 for each kWh of electric energy in Colombia).
Update on results. The framework for implementation of the project is under development. A number of potential pilot projects that could benefit from the financing line are being identified. Bancoldex has held meetings with hotels, clinics, hospitals, financiers, and service sector associations, along with energy service consultancies working in Colombia, in the design of various risk mitigation tools and conditions for the financing line. The overall program is expected to provide funding to Bancoldex and on to LFIs starting in 2014.
High-priority on energy efficiency. Colombia has placed a high priority on energy efficiency as an importantpriority for climate change mitigation. Studies by the IDB and Germany’s KfW indicate that low-carbon technologies have a high potential to reduce GHG emissions in thecountry’s industrial and service sectors.Colombia provides an important test case, as its electricity is relatively low-carbon compared to its neighbors, and its electricity price is lower than many other countries in LAC, especially Caribbean ones. If the model proposed in the program is successful in Colombia, it is expected to be replicable in other countries in the LAC region – especially those without ESCOs and where high GHG emissions and high electricity prices provide even more incentive for such EE programs.
Lessons learned. The project provides a series of innovative instruments to address energy efficiency financing risks in a country without a developed ESCO market. It is expected that the project model could be replicated further in other sectors in Colombia and even other countries in the region. The program intervention combines the development capacity of the market to invest in energy efficiencyand a line of financing. The grant component of CTF was key to ensure that this integrated and innovative approach could take place.
The preparation of the program required detailed market studies and deep understanding of specific barriers for energy efficiency investments. While there are many studies available about cost effectiveness of energy efficiency activities and broad analysis of sectors performance in the market, there was an important information gap relating to specific barriers and opportunities for investments in energy efficiency activities.
Ongoing consultations with many relevant stakeholders and the relationship and ongoing lending operations of the IDB with the client were also key for the program’s implementation.