1. The role of ESCOs in reducing GHG emissions & the establishing strategy for strong ESCO industry ESCO Work in Mexico – Status of the Market and Barriers COP9 Milan, Italy December 1, 2003 Mónica Pérez-Ortiz

2. Contents of the presentation 1. 1. Options to finance Renewable Energy and Energy Efficiency Projects in Mexico 2. 2. Energy Services Companies 3. 3. International Experience 4. 4. National Experience 5. 5. Action lines to foster ESCO market development in Mexico 6. 6. Barriers to ESCO work 7. 7. Strategy to strengthen the ESCO industry in Mexico

3. 1. Options to finance Renewable Energy and Energy Efficiency Projects in Mexico (1) 1. 1. Economic resources of the client (energy end user) and technical capacity of engineering firms 2. 2. Banks financing and technical capacity of engineering firms and/or efficient equipment manufacturers and distributors 3. 3. Financing and measures implementation through the services of an ESCO

4. 2. Energy Services Companies- Basics of the Scheme (1) l Companies that do business with the energy savings opportunities at an energy end user’s facility based on a performance contracting approach l They offer energy end users the opportunity of getting additional any own investment resources without any own investment Technical, Financial and of integration l Three main capabilities: Technical, Financial and of integration l They are part of a consolidated market in developed countries l Although some ESCOs develop projects based on one technology, most of them have an integrated approach and aim to combine as much technologies to have a greater energy consumption reduction.

5. Before During the contract (less than life span) After the contract Energy Bill Payment to ESCO End user’s savings Energy Bill Project Start-up Contract signed Transfer of the equipment property End of the contract 2. Energy Services Companies- Basics of the Scheme (2)

6. CLIENT FUNDING ESCO $ payment $ savings achieved Investment Capital Project, systems >risk  > Risk  Investment capital  No guarantees $ payment for project CLIENT Project, systems ENGINEERING FIRM >risk 2. Energy Services Companies- Basics of the Scheme (3)

7. l The client keeps focusing on its core business l The client transfers technical and financing risks to the ESCO l Null or very low investment of the end user - client l No debt or financing load will be registered to the client l Guaranteed savings Vs. Conditioned payment l Long term energy and economic savings, even after the contract period l Project optimization due to the ESCOs savings oriented vision, instead of a cost minimization approach of engineering firms l Operation and maintenance during the period of the contract, and in some cases training 2. Energy Services Companies - Advantages (4)

8. 3. International Experience (1) – USA l By the end of the 70’s and beginning of the 80’s  Performance contracting starts  Several initial projects were based on shared savings  Now most of the projects are developed under guaranteed savings scheme l ESCOS were developed from engineering firms, building controls and equipment manufacturers, and Demand Management Programs from the Utilities

9. l Some projects have been developed in the private sector (comercial and industrial); however, most of the projects are Municipalities, Hospitals, developed in the public sector: Municipalities, Hospitals, Schools, and Universities Schools, and Universities l There are two organizations in charge of promoting ESCO project development  NAESCO  Energy Services Coalition 3. International Experience (2) – USA

10. 3. International Experience (3) – Other countries Based on a survey carried out by the Lawrence Berkeley National Laboratory to 38 countries in relation to ESCO activities in their countries, we have that The number of ESCOs varies from country to country,  Belgium, Nepal, Thailand and South Africa have less than 7  U.S.A., Brazil, Germany, Korea, and Switzerland, have more than 50 The total ESCO activity outside the USA in 2001 oscillates between $560 and $620 million USD From 1/2 to 1/3 of USA’s ESCOs for 2002  From 1/2 to 1/3 of USA’s ESCOs for 2002  In 2002, this activities are expected to be around 50-75% of the U.S.A. activity for this same period. 50-75% of the U.S.A. activity for this same period.

11. 4. National Experience – Status of the Market in Mexico l In Mexico there are around 10 ESCOs Projects in Industrial and Hotel Sectors l Increasing number of Engineering Firms and energy efficiency equipment and systems’ manufacturers interested in offering ESCO services (different needs) l Own resources and participation of foreign partners l ESCOs are offering standard performance contracting including shared savings whereby ESCO is capitalizing installation cost

12. 4. National Experience – Status of the Market in Mexico The number of Financial players is limited, there are very scarce resources and there is no participation of commercial banks. The financing that is available by the existing players is expensive M&V does not appear to be a constraint for ESCOs Very little CDM activity. There is knowledge of the potential but only one ESCO has followed almost the whole process of carbon credit accreditation There are several successful projects in Mexico

13. 4. National Experience – Status of the Market in Mexico Some projects of Mexican ESCOs 95.096.0 500.010.8 210.0120.9 Ecotherm 61.6 Empresas ESM 72.0 175.1 21.0 43.5 ANNUAL ECONOMIC SAVINGS (THOUSANDS OF DOLLARS) Total Optima PROJECT 200.0 120.0 500.0 Diram 2,225.8 PROJEC T ANNUAL ECONOMIC SAVINGS (THOUSANDS OF DOLLARS)

14. 5. Action lines to foster ESCO market development in Mexico  Increase information about energy-efficiency projects, financing opportunities, and services offered by ESCOs.  Ensure that ESCOs provide a qualified and reliable service.  Create more information for financial institutions, and provide incentives to the “first movers” in this sector.  Develop funding sources for ESCO-type work. Based on LBNL’s survey, several types of strategic actions are needed for fostering ESCO industry internationally

15. 5. Action lines to foster ESCO market development in Mexico  Standardize contracts for ESCOs.  Standardize measurement and verification for ESCO projects.  Conduct ESCO demonstration projects.  Promote energy performance contracting in local, regional, and federal government buildings.  Develop a third-party financing network.  Establish an equipment-leasing organization.

16. 5. Action lines to foster ESCO market development in Mexico 1) Promotion  Organization of 11 events and meetings and 29 site visits  Presentation of the scheme to Industry Chambers and Associations 2) Development of tools and support documents  Guide for ESCO project development  Guidelines with recommendations to develop performance contracts performance contracts  Portfolio of 15 Successful ESCO project cases  10 summaries of opportunity areas with identified potential around $29 million USD. around $29 million USD.  Portfolio with curricular information of Actors  ESCO section at CONAE’s website

17. 3) Support to ESCO pilot projects development  Contact, follow-up in negotiations  2 projects for the hotel sector for $3.4 and $3.3 millions USD in 10 years contracts each of them  1 project of $4.5 millions USD for the industrial sector in a 7 years contract period 4) Catalyzing activities and promotion of the establishment of strategic alliances  ESCOs, Potential Clients – Energy End Users, Financing institutions, Energy efficient equipment’s manufacturers and distributors, and Support Institutions 5. Action lines to foster ESCO market development in Mexico

18. l Lack of expertise in the design and negotiation of performance contracting  High transaction costs to get performance contracting know how (legal advisory)  Negotiation and Main contact at the facility – time consuming Process – Should aim to the highest hierarchy level l Lack of confidence and acceptance due to a lack of clear market understanding of ESCO and performance contracting  Too good to be true  ESCOs profit is too high  Who certifies ESCOs? 6. Barriers to ESCO Work in Mexico (1)

19. l No payment culture l Regulatory contraints for ESCO project development in the federally owned facilities  Incapability of committing future resources  Alternative - Private-Public Partnership (PPS)  Mexican ESCO with similar approach, the ESCO provides a service and payment shall not be made until the services a service and payment shall not be made until the services are used are used 6. Barriers to ESCO Work in Mexico (2)

20. 6. Barriers to ESCO Work in Mexico (3) l Financing 1. 1. The number of Financial players is limited with no participation of commercial banks 2. 2. The financing that is available by the existing players is expensive 3. 3. Even with available funding, it is very difficult to get financing due  Risk perception  Extremely high guarantees  Fit ESCOs into the traditional way of doing business

21. CTP is developing a financing document that reviews the current conditions that Mexican ESCOs face to access financing, and the potential national and foreign project funding sources. The paper includes:  Background information,  Action taken and remaining barriers  Recommendations to overcome the financing barriers  Chart of financing options for ESCO project development  Case Study of ESCO project developed by a Mexican ESCO  Analysis of a Survey conducted by CTP to 6 Mexican ESCOs 6. Barriers to ESCO Work in Mexico (4)

22. 7. Strategy to strengthen the ESCO industry in Mexico (1) 1. 1. Promotion – Outreach and education to increase awareness of the benefits of performance contracting  financial institutions,  energy end users (particular – associations)  manufacturers and distributors 2. 2. Strengthen the offer of ESCOs by a) Establishing a Loan Guarantee Fund (there is a current initiative) b) Help establish a financing mechanism that will allow ESCOs to bundle several projects and reduce transaction costs Current initiative of the World Bank to develop a study to design this financial mechanism c) Establish a line of credit to finance projects …. Cont.

23. 7. Strategy to strengthen the ESCO industry in Mexico (2) 2. 2. Strengthen the offer of ESCOs by (cont.) d) Foster establishment of strategic alliances to Allow Mexican ESCOs to access international financing more  Allow Mexican ESCOs to access international financing more easily and increase their equity after sharing the debt with the easily and increase their equity after sharing the debt with the international counterpart international counterpart  Help build local capacity by transfer of know how Through CTP Activities, 3 ESCOs are already working together with an International ESCO to jointly develop projects One of the Mexican ESCOs, Optima Energia, has identified potential for 50 million USD in projects, and are very positive that this international ESCO will be participating in some of them

24. 7. Strategy to strengthen the ESCO industry in Mexico (3) 3. 3. Support to project development a) Technical Assistance b) Assistance in establishing the contact, negotiations and follow-up c) Capitalization of Experiences – Promotion of results

25. Contact Details l Mónica Pérez-Ortiz CTP In-country Coordinator CTP In-country Coordinator Nrel Nrel Tel: 52(55) 5322 1000 ext. 1149 Tel: 52(55) 5322 1000 ext. 1149 email: tcapp@conae.gob.mx email: tcapp@conae.gob.mx l Jeannie Renné Leader of Environmental Projects Nrel Nrel Tel: 1(303) 384 7469 Tel: 1(303) 384 7469 email: jeannie_renne@nrel.gov email: jeannie_renne@nrel.gov http://www.conae.gob.mx//wb/distribuidor.jsp?seccion=27 l Ubaldo Inclán Director of Financing and Director of Financing and Environment Environment Sener - Conae Sener - Conae Tel: 52(55) 5000 6000 ext. 1344 Tel: 52(55) 5000 6000 ext. 1344 email: pma@conae.gob.mx email: pma@conae.gob.mx