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 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

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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

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And we have many green technologies available

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Growth in renewable energy shows no signs of slowing
Picture source: IEA (2018)

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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)

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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

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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.

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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…)

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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…

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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

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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)

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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

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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?

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Green bonds have grown into largest green asset class
2018

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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)

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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.

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Green Bonds market standards for process and content/quality

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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

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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

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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

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Shared savings contracts as a way to distribute benefits of cheap
solar to SMEs

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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.

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Annex: OPEX based customer solution
① Technical design
③ Generation profile & savings
④Financial proposal
② System specification

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Annex: Differences between distributed and utility-scale solar projects

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Management Contact Details
NORTH AMERICA
Alexander Rau
Principal
Climate Wedge LLC
19 Bromley Pl
San Francisco, CA 94115
+1 415 215 3476
alexander.rau@climatewedge.com
EUROPE
Kristian Brüning
Principal
Climate Wedge Oy
Bulevardi 14 A3, 00120
Helsinki, Finland
+358 40 581 7771
kristian.bruning@climatewedge.com
Climate Wedge
Clean Energy Asset and Investment management since 2006