CHILE Final Report Component 3: Financial Mechanism

Transcription

1 NOVEMBER 2011 Observatory of Renewable Energy in Latin America and The Caribbean CHILE Final Report Component 3: Financial Mechanism C

2 CHILE This document was prepared by the following consultants: POCH The opinions expressed in this document are those of the author and do not necessarily reflect the views of the sponsoring organizations: the Latin American Energy Organization (OLADE) and the United Nations Industrial Development Organization (UNIDO). Accurate reproduction of information contained in this documentation is authorized, provided the source is acknowledged.

3 CASE OF CHILE Final Report Product 3: Financial Mechanisms

4 Index 1. Introduction Methodology Financial Mechanisms International Agencies Inter-American Development Bank Structured and Corporate Financing Inter-American Investment Corporation European Investment Bank Individual Credits Intermediated Credits International Finance Corporation CleanTech A- Loans Overseas Private Investment Corporation United States Agency for International Development Others National Banking Export Credit Agencies Comparative Analysis Success Cases Totoral Wind Farm Lircay Run-of-the-river Hydroelectric Power Plant Laja Run-of-the-River Hydroelectric Power Plant San Francisco de Mostazal Cogeneration Power Plant Barriers and Breaches Support Mechanisms Public Policies Financial and Tax Incentives Specifics Generics

5 4.3. Clean Development Mechanisms Success Cases Loma Los Colorados Nueva Aldea Barriers and Breaches Conclusions Bibliography Tables Index Table 1 Projects Financed through a CORFO NCRE Credit... 6 Table 2 Financial Mechanisms... 8 Table 3 SCF Summary Table 4 IAIC Summary Table 5 EIB Individual Credit Summary Table 6 EIB Intermediary Credit Summary Table 7 IFC CleanTech Summary Table 8 IFC A-Loans Summary Table 9 OPIC Summary Table 10 USAID Summary Table 11 National Banking Table 12 Comparative Analysis Table 13 CDM Generation Projects

6 Abbreviations and acronyms ACERA ALC BID Asociación Chilena de Energías Renovables A.G.(Chilean Association for Renewable Energies) America Latina y el Caribe (Latin America and the Caribbean) DSCR Banco Interamericano de Desarrollo (Inter-American Development Bank - IADB) Corporación Interamericana de Inversiones (Inter-American Investments Corporation - IAIC) Corporación de Fomento a la Producción (Corporation for Production Development) Debt Service Coverage Ratio ECA Export Credit Agency ER Energía Renovable (Renewable Energy - RE) ERNC KfW Energía Renovable No Convencional (Non-Conventional Renewable Energy NCRE) Fondo Multilateral de Inversiones (Multilateral Investment Fund) Corporación Financiera Internacional (International Financing Corporation) Kreditanstalt fur Wiederaufbau OPIC Overseas Private Investment Corporation PF Project Finance UF Unidad de Fomento (Indexation Unit) CII CORFO FOMIN IFC 3

7 1. Introduction In Chile, renewable energy has been present since the beginning of the energy grid development, being the hydroelectric energy, without a doubt, the most prominent source. When considering the country s two major interconnected systems, SIC and SING, during the year 2010 a 36.5% of the generated energy came from this source, although the year 2010 was not a particularly representative one, as the availability of water was less than average. By contrast, in 2006, 52% of the generated energy came from dam or run-of-theriver hydroelectric power plants (Comisión Nacional de Energía, National Energy Commission, 2011). On the other hand, it is necessary to point out that the participation of other renewable technologies has been very limited; by the year 2010, the joint participation of wind and biomass energy accounted for no more than 2% of the total energy injected in the country s interconnected systems. Given the high dependency on fossil fuels in the current energy grid, and the uncertainty that this entails (due to the lack of these in the country), the government has set new guidelines for energy development, among which stands out the objective of increasing the participation of non-conventional renewable energies, through the implementation of Law (Tokman 2008). From these new guidelines have emerged institutions and programs to encourage the development of new projects, including technologies that still do not operate on a big scale in the country, as those that operate from solar and geothermal resources. In spite of the support for the development of renewable energies given by the public sector, and the private sector s desire to generate new projects, the increase in energy generation based on renewable sources has been gradually carried out. Access to financing is one of the barriers for its development, acting as a stumbling block for Chilean energy policy. Although local alternatives for financing are scarce, several international agencies are committed to promoting sustainable electricity projects in emerging economies, which create opportunities for the development of clean energies in the country. Within the regulatory framework and the local reality, there are also barriers for the granting of international funds. This chapter provides a review of the existing financing alternatives for the development of new energy generation projects, highlighting the barriers that exist within the Chilean context. 2. Methodology To create this report, collaboration was obtained from the Centro de Energías Renovables (CER) (Renewable Energies Centre), an institution that consolidates the Government efforts to develop the Non Conventional Renewable Energy (NCRE), which is a nucleus of support for information on the promotion of investments and technology transfers. 4

8 The CER made available a registry of current financial alternatives, mainly represented by international agencies for renewable energy and energy efficiency projects. Thus, a selection of the relevant mechanisms was made and their key parameters were researched. On the other hand, the CER s available information was complemented with a study made for the Corporación de Fomento de la Producción (CORFO) about the financing of renewable energies investment projects. In addition, information from relevant stakeholders from the renewable energies sector was consulted, such as the Asociación Chilena de Energías Renovables A.G. (ACERA), whose vision is based on the equal development of different energy systems, bringing together innovation and clients in a single corporate association. From this source information was gathered about the national banking and the barriers for the development and process of obtaining financing. Finally, the alternatives that did not correspond to financing mechanisms but rather to supporting tools were identified. These mechanisms promote the development of new renewable energy projects and will be discussed in the second part of the report. For each financial and supporting mechanism, an in-depth look on the details was carried out, gathering information from different sources. 3. Financial Mechanisms In Chile, governmental financial mechanisms to support the development of NCRE are currently discontinued and in a re-evaluation process. In the past there were 3 support lines for NCRE projects, which where channelled through CORFO, the agency which implements government s policies in the entrepreneurship and innovation areas. The existing alternatives through CORFO included: - CORFO NCRE Credit - Environmental CORFO Credit - NCRE Pre-investment Program The discontinuation of these mechanisms was due to a restructuring in CORFO. The second-tier loans are not within the institution s priorities, so it was decided to migrate to the granting of guarantees, whose structure and characteristics are not yet defined. Also, the new guideline seeks that CORFO s instruments not have a sectorial nature, which means that the promotion of specific economic sectors such as energy, is left out of reach1. Considering this, one can deduce that the support provided by CORFO to renewable energies will be limited. The main lesson left by the previous credits scheme is the importance of establishing adequate requirements and conditions to filter the potential beneficiaries in accordance with the objectives and their promotion area. In this way, one can ensure that resources reach the right companies, increasing the effectiveness of the mechanism. In spite of these mechanisms being discontinued, a brief description of their main characteristics will be provided. 1 Source: Interview with CER. 5

9 The first line, CORFO NCRE credit, consisted of a credit line channelled through a bank for investments in the generation and transmission of NCRE (wind, biomass or small scale hydraulic), made by private companies which produced goods and services with annual sales of up to UF2 800 thousand. The maximum amount of the credit was 400 thousand UF per company, at a fixed interest rate in UF and in USD, with a term of payment of up to 15 years and a grace period of up to 36 months. Up to 30% of the credit could be allocated to the working capital required for starting-up the project operation. The beneficiary company had to contribute with its own resources to cover at least 15% of the total amount of the required investment (CORFO 2008a). Below, there is a detail of the loans that were granted through this instrument during the period it was valid. Table 1 Projects Financed through a CORFO NCRE Credit Beneficiary Amount (USD) CORFO Rate (%) IFI Rate (%) Trueno Hydroelectric ,81 4,1 1,29 12,5 BICE Coyanco Energy ,75 5,75 2 9,5 BICE Coyanco Energy ,75 4,75 2 9,5 BICE Lircay River (Mariposas) Hydroelectric ,1 4,33 2,23 11,5 BICE Dongo Hydroelectric ,05 4,62 2,57 10 BICE Hidropaloma ,05 4,03 1,98 8,5 BICE Trueno Hydroelectric ,1 4, BICE Los Lagos Transmission System BCI Pulelfu Hydroelectric Power Plant ,15 3,65 1,5 12 BCI Mallarauco Hydroelectric Power Plant ,81 4, BICE Coyanco Energy S.A ,75 5 2,25 12 BICE KDM Energy and Services ,73 4,25 1,52 10 BICE KDM Energy and Services Huasco River Hydroelectric Power Plant ,73 4,25 1,52 10 BICE ,81 Source: (Rain 2011) S/I Spread (%) Period (years) IFI 3 15 BICE In turn, the second alternative, Environmental CORFO Credit, was also a credit line granted through a bank, whose objective was to finance investments destined to apply or introduce preventive environmental technologies; those which reduce the environmental contamination through a preventing or correcting treatment of their activities. This line consisted in a maximum amount of USD 5 million per Project, with a 30 month grace period and a 3 to 12 year term to the credit full payment, at a fixed rate in UF and in USD. It was applicable to companies with annual sales of up to USD 30 million and, if 2 UF corresponds to Unidad de Fomento (Indexation Unit IU), a unit whose exchange rate varies according to the country's inflation so that the real value of the UF can remain constant. The average value of the UF in 2010 was CLP , considering the average exchange rate during the same year between the CLP and the USD one UF would correspond to USD 41,5. 3 IFI corresponds to an intermediary financing institution. As CORFO is an institution which operates similarly to a second-tier bank, it awards credits through the local banks, institutions who assume the project s risks and translate them into higher rates. 6

10 necessary, the company had the alternative of requesting up to 30% of the total financing to pay for the working capital. The beneficiary company had to contribute with its own resources to cover at least 15% of the total amount required for the investment (CORFO 2008b). Finally, the objective of the third program, Pre-Investment Program in NCRE, was to finance part of the costs of basic and detailed engineering studies, analysis of electric connection, Environmental Impact Evaluation or Environmental Impact Declaration studies, among others. The co-funding was of up to 50% of the total cost for the study and/or consultancy, with a maximum of up to 5% of the estimated investment and without exceeding USD of co-funding for each evaluated Project (CORFO 2008c). Although these three mechanisms are discontinued, it is expected that CORFO will launch new support lines, focused on guarantees that can be used for renewable energy projects. Nonetheless, through the same agency, there still exist supporting mechanisms for enterprises in general that can be used by renewable energy project developers, these mechanisms will be explained in section 4 of the present study. Without the presence of specific financial mechanisms for RE projects provided by the government, the financing possibilities are reduced to the instruments available for generic projects or to international agencies that support local progress. In this way, the alternatives for funding RE projects in Chile are two. The first is via debt, where 3 potential available sources can be identified: the national and international banking sector, international agencies and export credit agencies (ECA). The second is an existing alternative for any business project, which corresponds to financing via capital, where there is a large number of national and international agents, interested in participating in NCRE investment projects (CORFO 2011a). Most of the RE projects have been financed under this framework, where large electric companies finance their projects with a combination of equity and corporate credits. This alternative is not viable for new project developers, so our analysis will focus on the first alternative mentioned. Table 2 summarizes the financing alternatives available for RE projects. 7

11 Table 2 Financial Mechanisms Name of the Program/Mechanism Type of Project Phase to be Mechanism funded Structured Corporative Finance (SCF) Long Term and Short Term Credit Capital Investment in equipments and machinery Emerging economies Inter-American Investments Corporation (IAIC) Long Term and Short Term Credit Capital Investment in equipments and machinery Emerging economies Individual Credits Long Term Credit Emerging economies Intermediated Credits Long Term Credit Emerging economies CleanTech Long Term and Short Term Credit Capital Investment in equipments and machinery Emerging economies A-Loans Soft Loan Capital Investment (Machinery and Equipments) Global Project Finance Long Term Credit Capital Investment in equipments and machinery Global United States Agency for Project Finance International Development (USAID) Long Term Credit Capital Investment in equipments and machinery. Developing countries Company InterAmerican Development Bank (IADB) European Investment Bank (EIB) International Finance Corporation (IFC) Overseas Private Investment Corporation (OPIC) Capital Investment in equipments and machinery. Capital Investment in equipments and machinery Geographical Coverage Website Source: Own elaboration Given the characteristics of electric generation projects, the alternatives are dominated by the Project Finance (PF) scheme, which presents itself as the adequate mechanism to finance them. The PF structure follows the idea that payments associated to the loan are substantiated exclusively on the project-flow generation capacity. Initially, the guarantees committed to credit payment are the assets, rights and interests associated to the project. As the loan is established in relation to future flows, their predictability is a key element in the granting of the credit. Generally, the analysis for awarding the loan is focused on the Debt Service Coverage Ratio (DSCR) indicator, equivalent to the flow divided by the credit instalment, and in which the range to approve this type of projects through a PF varies between 1.3 and 2.0 times. This index will also be a key factor to determine the percentage of equity which will be required from the company applying for funding (CORFO 2011a). 8

12 In the following section, the mechanisms alternatives shown in Table 2 will be described in greater detail. After the description of the funds and financing mechanisms, there will be a review of the national situation regarding loan granting through banks. In spite of not being considered as specific financing mechanisms, banks are an important alternative for RE projects. Nonetheless, this alternative presents important barriers which are replicated for the awarding of funds through international agencies International Agencies In general, international agencies operating in Chile offer different funds for financing projects whose objectives are to boost development, eliminate poverty and the lack of opportunities. The advantage of funds offered by international agencies, is that since such institutions are familiarized with advanced technologies and are aware of those with less development in the region (i.e sources for solar and wind generation), it gives a chance to implement those technologies with a much lower maturity level. The more these technologies are used year after year they become more competitive. Regarding the electricity field, instruments used by these organizations consist in financing via debt. The minimum financing range for the benefited projects is of approximately USD million and the credit terms can be paid in up to 20 years (CORFO 2011a). All the available international agencies acting as financing platforms operate with a PF scheme. Furthermore, the existence of instruments that give certainty to the project s cash flow will be the key to the provision of financing. On the other hand, the environmental standards demanded by these agencies can be stricter than those promoted by national banks or other financing alternatives, something that could increase the cost of the project. Below is a description of the entities and their financing alternatives, available for RE projects Inter-American Development Bank The IADB is the biggest financing source for Latin America and the Caribbean for development projects. Established in the year 1959, this institution supports economic and social progress. It also works towards regional integration through the granting of loans to governments and governmental institutions. One of the areas that the organization supports is energy sustainability and climate change, from which three mechanisms can be derived that can be an alternative for funding RE projects in Chile. To obtain financial support through the IADB, it is necessary to follow a common process which consists of four stages:4 (IADB 2010): 4 For governmental loans, the process is different. 9

13 1) 2) 3) 4) Eligibility: In an early contact with the IADB, projects that do not have a high impact in the progress of the country of origin, are dismissed. They must have a viable business plan and comply with eligibility criteria. At this stage, the agency also determines the value that it can contribute to the project through its involvement. Mandate Letter and Analysis: Once eligible, the IADB can sign a Mandate letter that has the function of generating a formal commitment among the institutions so as to begin the consultancy process or make the necessary arrangements for the financing of the project. Once the letter is signed, the IADB begins the transaction analysis. Approval: The IADB executive board must approve the project and give instructions to the Structured and Corporate Financing department so that it signs the agreement with the client. Signing: Once the agreement is signed, it is possible to begin paying out the loan or to making effective the requested guarantee. It is worth mentioning that the credits for financing described below follow a PF type structure Structured and Corporate Financing The Structured and Corporate Financing (SCF) department is responsible for the IADB financing operations with large banks and private investments, which operate in almost every economic sector of Latin America and the Caribbean. The SCF awards loans mainly through A-Loans and B-Loans. A-loans consist in granting loans derived from their own resources. For B-Loans, the IADB works with banks and investors who participate as cofinancers through the underwriting of loans. In addition, the SCF grants partial guarantees for obtaining credits. The subsidies for preinvestment stages are also tools given by the SCF to enhance development in the region. The credits awarded are considered of a "soft" nature with a term between 8 to 15 years, with the alternative to extend it up to 20 to 30 years depending on the project execution, and whose interest rate depends exclusively on the project. The following table summarizes the key aspects of financing through SCF. 10

14 Table 3 SCF Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Procedure Others Results Date Name of Benefited Projects Awarded Amount Unit Information SCF IADB All 8-30 years Emerging Economies USD % Construction (Investment) Up to 100 million Variable, but it is demanded that the majority is financed by the applying companies Depends on the project Making Investment Proposal 06/20/2011 Without information USD - Source: Own elaboration Inter-American Investment Corporation The Inter-American Investment Corporation (IAIC) is a multilateral investment institution part of the Inter-American Development Bank s Group (IADB). Its mission consists in promoting the economic development of its member countries in Latin America and the Caribbean, through the granting of finance options to private companies, preferably of small and medium scale (IAIC 2011a). For a project to obtain financing, the sponsoring company must be profitable and with growth potential. The companies that are a part of the market that the IAIC seeks to finance are those with sales between USD 5 and 35 million. However this is not a mandatory requirement. It is worth mentioning that these amounts do not constitute the definition of small to medium sized companies, as this is relative to the country or institution that uses it and in this case, the IAIC distinguishes based on this sales range (IAIC 2011b). The sponsoring capabilities are key in the awarding evaluation, a commitment equivalent to the IAIC s is expected regarding the abiding of legal, tributary, labour and environmental norms of the country hosting the project. 11

15 The process to apply for a credit begins by sending the preliminary information form, available at the IAIC website5. Also, one must attach the historic financial information of the company s last three exercises and the respective financial projections. The awarding process can take between 3 to 6 months as it is necessary to comply with the following steps (IAIC 2011c): 1. Initial review of the project 2. Initial credit proposal 3. Field evaluation 4. Final credit proposal 5. Directory approval 6. Signing of contracts For the electric sector, the agency finances projects of up to USD 100 million, with a minimum scale in the order of 8 MW. If the project is less than 5 MW it will require a joint guarantee fund and for the granting to become effective, a debt coverage (DSCR) of over 1,3 times of what was asked is expected (CORFO 2011a). The following table summarizes the key parameters for the alternative described above

16 Table 4 IAIC Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Unit Wind, Mini-hydro Up to 20 years Emerging Economies USD % Procedure Others Results Date Name of the Benefited Projects Awarded Amount Information Loan with PF structure IAIC USD Construction (Investment) Up to 100 million per project Market Rates The procedure begins with the completion of a preliminary information form available on the Web page once approved begin the 6 steps of the process to get the credit. It is necessary to have the permits and studies made within the national regulatory framework previous to the granting, already approved. The generation equipments must come from countries belonging to the IADB. 06/21/2011 Co-generation Power Plant of San Francisco de Mostazal Not specified (IAIC 2008) Source: Own elaboration European Investment Bank The European Investment Bank (EIB) is the financial institution of the European Union (EU), whose shareholders are the 27 participating countries of the Union. The main objectives of this agency are to: Fund and support small and medium sized companies. Reduce the lack of opportunities and inequality. Fight climate change. Protect the environment and sustainable society. Support renewable and sustainable energy generation alternatives. Promote knowledge through the support to information technologies. From these objectives, it is possible to deduce that RE projects are within what the EIB wishes to promote. 13

17 The Bank began its financing activities in Latin America in 1993 and since then has accomplished 3 Mandates in support of the region. The Mandates consist of development objectives sent from the European Union, for the current Mandate (ALA IV), that comprises the period between 2007 and The Bank has a EUR million available fund to finance projects in alignment with the development of the region, and that contribute to support the presence of the EU through direct investments or technology transfers and know-how in the region. Also, under the Line for the sustainability of energy and the security of supplies (EIB 2010) it has EUR million available for the financing of RE projects, which makes a total of EUR million available for competing funds. In 2010 the EIB signs a Framework Agreement that establishes the basis for the Bank s future activity in Chile. The Bank has the objective of stimulating a sustained and high quality growth through the funding of investment projects of mutual interest. This event plus the availability of funds, make the EIB an important financing organization for potential RE projects in the country. In fact in the year 2011, the run-of-the-river hydroelectric project of Laja was the first in Chile to obtain credits from the EIB. To apply to these credits there are no special formalities required. Sponsors for the project must submit a document to the Bank s operational board that includes a detailed description of the project along with a prospect for financing and investment capital (EIB 2011a) Individual Credits The individual credit is awarded to projects where the total investment exceeds the EUR 25 million. With this option the EIB is willing to finance 50% of the total investment cost and is available for both public and private organizations (EIB 2011b). The conditions to obtain this credit depend on the type of investment. As the correct financing scheme to evaluate RE projects is the PF, it is likely that the conditions to obtain these credits will not be met. On the one hand, this is due to the electric regulatory framework prevailing in Chile and, on the other hand, to the lack of instruments to mitigate risks associated to new generation technologies. This will be further explained in the section related to existing barriers. The offered interest rates vary according to each project, where the existing alternatives are fixed, variable, and convertible rates. A point in favour of EIB credits is that they are awarded in a variety of currencies, including the EUR and the USD. Below is a summary of the key parameters of this credit. 14

18 Table 5 EIB Individual Credit Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type de Loan Interest Rate Unit All Depends on the project Emerging Economies EUR % Procedure Others Results Date Name of Benefited Projects Awarded Amount Information Individual Credit EIB EUR Construction (Investment) From 25 million 50 Fixed, variable and convertible Submit for consideration an investment proposal 06/20/2011 Run-of-the-river hydroelectric project in Laja 55,3 million Source: Author Intermediated Credits In addition to the Individual Credits that consist of direct funds, the Bank offers intermediated credits that are indirect credit lines or loans designed to allow the financing of projects with a total investment under EUR 25 million. Just as with the individual credits, it would only be possible to finance up to 50% of the total through the credit line (EIB 2011b). Credit lines are granted to intermediary banks and financing institutions in the country hosting the project. These institutions are in charge of delivering the funds from the EIP to the developers, and the companies that apply to this credit line should have less than 250 employees. The local intermediary bank establishes the final granting conditions including the rate, grace period and the amount of the loan. The following table provides a summary of the subject. 15

19 Table 6 EIB Intermediary Credit Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Unit All Depends on the intermediary institution EUR % Procedure Others Results Date Name of the Benefited Projects Awarded Amount Information Intermediary Credit EIB EUR Construction (Investment) Up to 25 million 50 Depends on the intermediary Submit to consideration an investment proposal In Chile they have been granted via the banks Banco Santander, the Banco Crédito de Inversiones and others 06/20/2011 Without information - Source: Author International Finance Corporation The International Finance Corporation (IFC) is an institution associated to the World Bank group that deals with the private sector. Its mission consists of promoting sustainable investment of the private sector in developing countries, so as to help the reduction of poverty and improve the quality of life of the population. The agency is committed and firmly devoted to promoting a sustainable development. For this reason, the projects that they finance must comply with the strictest of environmental and social norms. During the granting process, participant localities are consulted about the specific opportunities, and environmental and social repercussions of each project. On March 2011, the program Programa de Financiamiento para Energía Sostenible en Chile (Financing Program for Sustainable Energy in Chile) was approved. This was a joint initiative between the IFC and the Ministry for Energy whose aim is to boost renewable energies and energy efficiency. The program components include: Development of capabilities from services providers and developers of RE projects. Regulatory analysis to generate an environment favourable to cleaner technologies. 16

20 Generate consultancy services to local financing institutions so as to facilitate the access to funding on the part of the developing companies. Generate knowledge and disseminate results about the benefits and opportunities of sustainable energy. The program will be coordinated with the CER and the Agencia Chilena de Eficiencia Energética (Chilean Agency for Energy Efficiency) (IFC 2011a). This initiative suggests that the IFC support of the development of renewable energies in Chile will increase. In this way there will be an increase in the financing alternatives in the medium term. In the next section a description of two supporting lines that can already be used to finance RE projects in Chile is provided CleanTech The IFC strategy for the energy sector and its CleanTech program, is centred in providing support to the first operations of renewable energies in the company s country of origin, considering as renewable energies the hydraulic, wind, solar, geothermal and biomass. The instrument consists of various supporting alternatives, including those in capital contributions and also subsidies and credits for power plant operations. This support is translated into credits to finance capital and debts financing. CleanTech searches for companies working in technology, manufacturing or services fields, which have already demonstrated success in their projects. It focuses on the private sector that generates technology transfer in developing countries (IFC 2010). The selected projects must demonstrate to have environmental benefits, be innovative and commercially sustainable. Below is a table summarizing the relevant information for the CleanTech fund. 17

21 Table 7 IFC CleanTech Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Procedure Others Results Date Name of the Benefited Projects Awarded Amount Unit Information CleanTech IFC Hydro, wind, solar, geothermal and biomass Depends on the project Emerging Economies USD % USD Operation and construction Depends on the instrument Depends on the project Submit into consideration an investment proposal 06/20/2011 None - Source: Own elaboration A- Loans In addition to credits available for the operation, the IFC offers credits at a fixed and variable rate to finance the investment of private sector projects in emerging economies. There is freedom in the choice of the loan currency, which gives an advantage for the RE sector as the credits offered by local banking are generally given in Chilean pesos. The terms go from 7 to 12 years, although, some loans have been extended up to a 20 year period. The grace periods are determined case to case with the developers and because the IFC operates in a commercial way, it only invests on profitable projects using market rates. To stimulate the participation of other investors, the IFC only commits a 25% of the investment of large scale projects and 35% for smaller projects. For expansion projects the IFC considers to contribute with credits of up to 50%. Generally, A-Loans consider amounts from USD 1 million to 100 million. The main requirements for the project to obtain the credit are to: Belong to an IFC member country Belong to the private sector Have solid technical knowledge Have good prospects and be profitable Benefit local economy 18

22 Be environmentally and socially solid, satisfying the IFC standards and those of the project's host country. Next is a summary with the relevant parameters. Table 8 IFC A-Loans Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Unit A-Loans IFC All 7-20 years USD % Procedure Others Results Date Name of the Benefited Projects Awarded Amount6 Information USD Investment (Construction) million Depends on the project To submit into consideration an investment proposal 06/19/2011 Totoral, La Confluencia, Lircay (IFC 2011b) million Source: Own elaboration Overseas Private Investment Corporation The Overseas Private Investment Corporation (OPIC) is the development financial institution for the United States Government. It was founded in 1971 and since then it has functioned in an economically sustainable way, without receiving state funding for its operations. Its main activity is to mobilize private capital to help resolve worldwide critical challenges, thus advancing the United States foreign policies. Because capital handled by the OPIC comes from the private sector of the American economy, the institution helps local businesses to access emerging markets in developing countries, thus increasing jobs and growth opportunities, both locally as well as internationally. To this date the projects 6 These correspond to the amounts awarded through A-loans, for these projects credit was also awarded through B and C-loans. 19

23 encouraged by OPIC have generated 74 billion USD and have supported the creation of over jobs. Regarding the RE projects, these could apply to financing through the Global Technology and Innovation Fund offered by OPIC. This fund offers amounts that range between USD 25 million up to 150 million in long term credits. To apply, the requesting company must register in the organization s web page7 and fill out a form. The applying process expires on the 30th of November every year. The following information must be detailed in the form: General information on the project Investment strategy Economic development strategy Team of participating professionals Project history The main requirements are centred in management capacity and credibility of the applying company. Next is a summary with the fund key parameters

24 Table 9 OPIC Summary Parameters Name of the Mechanism Institution Applies to: Type de Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Available Amount Brief Description Type of Loan Interest Rate Unit All Depends on the project Global USD % Procedure Others Results Date Name of the Benefited Projects Awarded Amount Information Global Technology and Innovation Fund OPIC USD Investment (Construction) million Depends on the project and the applying company Depends on the project To submit into consideration an investment proposal Must be handed in before November 30th of each year 06/22/2011 Without information - Source: Author It is worth mentioning that the OPIC s fundraising is quite dynamic. Funds are opened and closed year after year, where there is a variation in the availability alternatives for financing projects of interest United States Agency for International Development The history of the United States Agency for International Development (USAID) begins after World War II. During this time the US government makes efforts to extend help to nations that are facing difficulties to recover from disasters and crisis. Since then, USAID has been the main North American agency in giving assistance to countries trying to overcome poverty. From this perspective, the initiative within the USAID to encourage access to modern energy services to enhance social and economic progress in developing countries is born. USAID offers long-term credits for the development of RE projects. The amounts go up to USD 150 million in long-term credits. The applying process is not standardized, so application is made through direct contact. For this reason rates and instalments depend 21

25 directly on the applying project. However, the loan and the rest of the alternatives follow a Project Finance structure. Table 10 USAID Summary Parameters Name of the Mechanism Institution Applies to: Type of Technology Period Geographical Area Phase of the Project (Viability, construction, operation) Amount Available Brief Description Type of Loan Interest Rate Unit Project Finance USAID All Depends on the project Developing Countries USD % Procedure Others Results Date Name of the Benefited Projects Awarded Amount Information USD Investment (Construction) Up to 150 million Depends on the project and the applying company Depends on the project Contact directly USAID. Contact Tel: pinquiries@usaid.gov 06/19/2011 Without information - Source: Author Others Besides from the just mentioned agencies and alternatives, there are other organizations looking to support and participate in the development of environmentally friendly projects in developing countries. However, these institutions try to have an active involvement in the project, many times with majority participation. For this reason the support comes from foreign capitals and is translated into direct support to the management and operation of the project. This chapter provides a review of some examples. Ecoenergy International seeks participation in wind energy projects that are economically viable and socially responsible. This company finances and operates projects in high-growth markets and financing is made directly by taking control of the operations. The loans correspond to long-term credits and they focus on the project investment phases. Amounts ascend to USD 50 million and the contact is made directly with the company. 22

26 Good Energies is a leading company in investments for the development of renewable energy projects, technologies and services. It has USD 19 billion in assets and invests annually over USD 3 billion in energy and water projects. It finances projects in periods from 20 to 30 years and projects are generally of the wind, solar, biomass, hydroelectric and geothermal energy technologies. Additionally, they also offer the option of refinancing projects. In this way, through financing, Good Energies looks to have a larger participation in the development area. In this same line there are other alternatives for financing projects through foreign capital. Some examples are RNK Capital, Triodos Bank and Global Environment Facility. These institutions seek to have an active participation in projects, therefore they usually demand a clear description of future project flows to make the corresponding evaluation and in this way define the degree of participation they will have. Again the financing falls within the PF structure, an alternative that lacks the tools to mitigate risks in the regulatory framework, which makes it difficult to promote renewable energy projects. This will be explained in detail in the barriers and breaches section National Banking Within the national banks the predominant financing method is through corporate credits. To obtain these credits it is necessary to be a client of the bank one is applying to, and have a considerable back up capital. For this reason, big companies are the ones with more advantages to be able to obtain this type of financing. In general, loans are granted in pesos and for periods of up to 12 years, something that does not conform to the reality of RE projects. Due to the fact that the generation technologies come from abroad, the initial investment is made in dollars. Therefore, a credit granted in pesos for an RE project would have associated, apart from the risk which is common to this type of projects, a risk associated with exchange rates, which will definitively make the granting of the loan more difficult. On the other hand, to grant loans, local banks demand guarantees for amounts that are close to the total amount of the loan. Thus, the access to financing on the part of new development companies is limited, reducing competition and slowing the growth of the sector. Local banks characteristics have complicated credit granting for the RE sector and as a result the vast majority of projects have been financed through corporate loans. However, there are some entities willing to grant credits under the PF structure, which would be granted under the scenario that there are new tools for risks mitigation present in this type of projects. Table 11 shows the entities that have shown interest in funding such projects but that the current national situation has hindered in its granting. 23

27 Table 11 National Banking Institution Type of Generation that it Participates Maximum Level DebtCapital Investment Term Payback Banco BICE Mini Hydroelectric years Corpbanca Mini Hydroelectric - 3 to 12 years Banco Itaú Biomass, Solar PV and Mini Hydroelectric years Banco Santander Mini Hydroelectric - - Banco BCI Mini Hydroelectric - - Source: prepared by the author from CORFO (2011a) In the absence of a second-tier bank8 in Chile, CORFO and KfW have taken the role of such institutions helping development. For example, KfW created a credit line to finance NCRE projects that was channelled by CORFO through local banks. The BICE bank made intensive use of this line since the year 2007, financing 9 mini-hydro projects (a total of EUR 80 million) with a PF structure (Rusnok 2010; CORFO 2011a). Once the line is used, its continuity is uncertain Export Credit Agencies Export Credit Agencies (ECA) are a little known alternative at a national level, but since the last financial crisis it has become an attractive alternative (CORFO 2011a). These are entities of a private or quasi-governmental nature that act as intermediaries between governments and exporters. In this context ECA s encourage the exporting of energy generation technologies to developing countries in which there are difficulties for financing, in this way, they can offer credits, insurances or guarantees. Although some entities offer direct credits, most operate through a local bank. The main advantage of using a local bank is that it allows the bank to offer greater payment terms and lower interest rates. These advantages appear given that during the operation, ECAs replace the client s risk for the risk of the country of origin of the ECA and, additionally private credit risk is interchanged for the sovereign credit risk. This diminishing of risk entails a reduction in the loan interest rates. 8 Financial institutions that do not deal directly with credit users, but instead make credit placements through other financial institutions 24

28 These entities offer grace periods up to the start up of the power plant or even up to its commercial start up. The ECA offer both corporate credits as well as PF s options, the repayment periods are 10 and 15 years respectively Comparative Analysis The following table provides a summary of the main financing sources for RE projects in Chile through their key parameters. The alternatives considered are those present in international agencies due to the fact that they have formal and standardized mechanisms. For its part, local banks have only financed projects through corporate loans, where the parameters are related to the client and not to the project itself, so they have been left out of the comparative analysis. The ECA credits are a new alternative that still has not been used in the Chilean market therefore there are no values or references for them. 25

29 Table 12 Comparative Analysis General Name of the Public or Description of the Geographical Financed Private Organization Program/ Program/ Scope project phase Mechanism Mechanism Mechanism IADB SCF Granting of credits with the IADB funds. A-loans and pre-investment subsidies IADB IAIC Financing of projects of up to 100 MMUSD with a minimum scale of 8 MW. EIB Individual Credit Credit granted to projects whose investment exceeds the 25 MMEUR Private Emerging Economies All Financing Term (For Rate or Loan how long the Interest loan is granted?) Depends on the project, soft loans 8-30 Years Investment Amount Loan Requirements Application Process Up to 100 MMUSD Comply with these 4 stages. Eligibility, Mandate Letter and analysis, approval and signing The basic requirements are: job creation, income generation on net foreign currency or foreign currency savings promotion, resources and Comply with the following steps: initial technology transfer, revision of the project, initial credit improvement of national proposal, field evaluation, credit final business management, proposal, approval by the Board and promoting wider signing of the contracts participation in businesses ownership and encouragement of economic integration in Latin America and the Caribbean Private Emerging Economies Construction (Investment) Markets Rates up to 20 Years Up to 100 MMUSD Private Emerging Economies Construction (Investment) Fixed, variable and convertible Depends on the project From 25 MMEUR To contribute with the EU political objectives The projects developers should present a document with a detailed description of the project including its investment capital and a prospecting funding

30 Financing Term (For Rate or Loan how long the Interest loan is granted?) Investment Amount Loan Requirements Application Process Construction (Investment) Depends on Depends on the the project and intermediary the intermediary Up to 25 MMEUR To contribute with the EU political objectives Project developers must submit a document with a detailed project description including its capital investment and financing prospects Construction and operation Depends on the project, soft loans From 3 MMUSD Belonging to an emerging economy and being under considerable risk. There is no financing for I+D Generate a proposal of no more than 6 pages describing the project MMUSD Belonging to an IFC member country, to be in the private sector and to have sound technical knowledge. Have good prospects and be profitable, to benefit the local economy in an environmentally and socially desirable way Generate a proposal of no more than 6 pages describing the project. General Name of the Public or Description of the Geographical Financed Private Organization Program/ Scope project phase Program/ Mechanism Mechanism Mechanism EIB Credit lines or indirect loans designed to enable the financing of the Intermediary project with an Credit investment of less than 25 MMEUR through other institutions. IFC CleanTech Credits and subsidies for companies offering technology transfer, environmental benefits and that generate new knowledge. A-Loans Credits with funds from the IFC. Have been granted to wind generated project (Totoral) and hydroelectric ones (La Confluencia and Lircay). IFC Private Private Private Emerging Economies Emerging Economies Emerging Economies Construction (Investment) Depends on the project Depends on the project, soft loans Depends on the project 27