Geothermal Financing and Risk Transfer Facility

Transcription

1 Geothermal Financing and Risk Transfer Facility Country / Region: Mexico Project Id: XCTFMX055A Fund Name: CTF MDB : Inter-American Development Bank Comment Type Commenter Name Commenter Profile Comment Date Comment 1 Danny Morris United States Dear CIF Admin Unit, Thanks for the opportunity to review the proposals for the Geothermal Financing and Risk Transfer Facility in Mexico and the Chile Geothermal Risk Mitigation Program. Both applications were well-constructed and showcase the hard work IDB has done to put them together. These proposed facilities are good examples of the types of innovative approaches the DPSP was designed to support. In the case of Mexico, we are pleased with the level of thought and care the IDB and NAFIN have given to the best use of CTF funds in the geothermal sector. We are also heartened by the willingness of Chile to employ this kind of creative financial mechanism to support its ambitions in geothermal generation. We recognize the significant risk associated with geothermal exploration and encourage the IDB and project sponsors to take all the measures they can to reduce that risk as much as it is feasible within the framework of the projects. Moreover, we ask that the IDB provide regular updated projections of the co-financing mobilized by these projects, particularly in the private sector, and how that influences the costeffectiveness of CTF investments in them over the long-term. We are comfortable with the proposed financial structures for the use of CTF funds and are pleased to support these projects. Once again, thanks for the chance to comment. danny Comment 2 Frank Fass- Metz Germany We welcome IDB's initiative to promote geothermal energy in Mexico under the CTF framework and want to encourage IDB to closely cooperate with other donors and financiers in the region. The approach seems to be well tailored to the requirements of Mexico's comparatively mature geothermal sector which nevertheless so far has been lacking suitable risk mitigation mechanism in order to mitigate the upfront resource risk during the early exploratory drilling stages and suitable financing mechanisms for later stage drilling at scale. We also appreciate the assistance of IDB to the GoM to work towards the establishment of a suitable geothermal energy regulatory framework, specifically the development of a geothermal energy law. GER approves IDB's program proposal "Mexico: Geothermal Financing and Risk Transfer Facility" subject to the understanding that the loans that are convertible to grants will be sourced from grant contributions, implicating that losses resulting from the use of this instrument will be borne by grant contributions (in the same manner as e.g. project preparation grants). Comment 3 Jennifer Purves Canada Thank you for providing the response from the Trustee regarding the project proposals for Mexico and Chile. We approve the proposed decisions, subject to the understanding that the contingent recovery grants (Mexico) and the loans convertible to grants (Chile) will be sourced from grant contributions, consistent the Principles Regarding Contribution to the CTF. Comment 4 Comment 5 Tomo Nakamura Nicolas von Kalm Japan Germany Thank you very much for sharing the comments from the Trustee. It was very helpful indeed. Please find Japan's comments on the following project proposals submitted by the InterAmerican Development Bank (IDB). - Mexico: Geothermal Financing and Rick Transfer Facility - Chile: Geothermal Risk Mitigation Program We do not have any problem in supporting these programs in themselves and the proposed approach would be agreeable to us if reflows (and other corresponding issues as necessary) are to be properly managed (i.e., making it clear that reflows on those loans funded by grant/equity contributors will accrue only to those grant/equity contributors). In the (very near) future, we would like to seek, once again, the separate management (if not separate account) of grant and loan contributions, with corresponding revisions (if any) to the decision making process. Dear Jonathan, Dear colleagues, as a necessary precondition for our approval of the aforementioned Amendment Proposal we would like to seek confirmation by the Trustee that the requested USD 31.5 million contingent recovery grant will be classified as a higher risk profile Nov 02, 2010 Apr 03, 2014 Apr 03, 2014 Apr 14, 2014 Jan 02, 2018

2 Response 1 Jonathan Caldicott IBRD Trustee Comment 6 Karl McAlinden United Kingdom financial product and will consequently be excluded from the CTF Net Income and loss sharing calculation. Thank you for your efforts. Best, Nicolas Dear Nicolas, Thanks for your comments. Yes, as a higher risk financial product this would be excluded from the loss sharing calculation. Best, Jonathan (CIF trustee) Comments and Questions: Recognizing that conditions often change and that there is a need for flexibility and to adapt to new circumstances, in this instance, we believe this to be the case. However, while we hope that a restructuring of CTF funding could provide the necessary push for geothermal energy projects in Mexico to move forward, we have a number of questions that we hope the project team can provide more details on before a decision can be made: 1. Government Strategy and Political Commitment What is the Government of Mexico's current strategy towards geothermal energy being part of the energy mix going forward? Is the level of political commitment sufficient to provide incentives to move forward and provide a degree of certainty that a power plant will be constructed if sufficient geothermal energy source is proven? Also, will the technology still be domestically relevant if Mexico's energy storage capabilities become viable in the near future, and what is the likelihood of this? Jan 09, 2018 Jan 08, Cost Competitiveness As part of the national energy mix, does this resource have a competitive role when considering the future cost of other renewable alternatives, including with storage? The document seemingly cites the increase in wind and solar and the falling average renewable energy price (USD 20.57/MWh) as a key reason for the necessary restructuring, and the analysis shows that geothermal energy prices would be comparable to the top end of combined-cycle power plants ($45-$55/MWh). Please explain how at these current estimates geothermal energy prices would be competitive against the other renewable sources on offer? Is the GoM considering a subsidy for geothermal or would geothermal continue to be considered part of wider renewable energy auctions in the future and be required to compete on an equal basis. 3. Fixed Interest Rate Given that the results of drilling will be quite variable, why for all viable projects is it proposed to convert the CRG into a flat rate 0.75% loan (including projects which may prove highly commercial and could pay more)? While recognising that there are efforts to "maintain to overall rate to the developers as low as possible so that the selected geothermal projects can be competitive in the Mexican energy market," under the principles of minimum concessionality the loan rate should be related to the viability of the resource and the competitiveness of their selling price. Furthermore, CTF could be compensated for taking the 'equity risk' for the drilling. Could you explain how this flat rate was set and whether this could be adjusted depending on the success of the project?

3 4. Loan Repayment The proposal states that "at the end of the new disbursement period (8 years counting from the day of the approval of this amendment by the IDB), all repaid funds would be returned from NAFIN to the CTF." However, there is also a reference for a grace period (provided by NAFIN using CTF resources) of at least 6 years to be on the safe side. Are we right in believing that the loan would be paid between years 6 and 8 if a viable resource is proven? Could you please clarify? 5. Moving from Phase 1 (Drilling) to Phase 2 (Construction) Setting a deadline for the developer to make the investment decision is appropriate. However, is it realistic that if CFE is not able to do this that another developer could take this project forward? Given CTF is taking a significant risk, could a formal agreement or other mitigation measure be in place to ensure that Phase 2 will be taken forward in a timely manner if geothermal resource is proven? 6. Level of Contingent Recovery Grant How has the level of CRG needed been calculated, could you provide some analysis which shows this is the marginal amount needed to make this project work. Is there not a scenario where not all of the funding is converted into CRG such that the CTF does not bear the entire risk? Response 1 Claudio Alatorre IDB Answer 1: The Government of Mexico is committed to promoting all renewable energy technologies, including geothermal. In addition, it promoted (and got Congress approval) for the Geothermal Law, which sets a transparent, competitive process for the concessions. The Government of Mexico, including the Ministry of Energy (SENER), the Federal Electricity Commission (CFE), the Ministry of Finance and Nacional Financiera (NAFIN), which is the executing agency and also one of the main development banks of Mexico, are all working towards the development of geothermal power in Mexico, and all agree that the proposed mechanism will be key to achieving this goal. The parties named before consider that the changes to the financing mechanism will provide the correct incentives to move geothermal projects forward, whether purely private funded projects or through public private partnerships (PPPs) with CFE. SENER believes that this mechanism will allow CFE to actually develop geothermal PPPs (and PPPs are a very important element of the Mexican energy reform). If at least one geothermal PPP is established with CFE, the project would be a total success. As part of the due diligence of the preparation of the new proposal, the IDB project team spoke to two geothermal developers in Mexico as well as to CFE and all three manifested their strong interest in using these funds to develop geothermal projects for which they already have exploration concessions with drilling commitments. It is true that a combination of intermittent energy sources such as wind and solar, combined with storage, may one day provide a flexible, round the clock supply of zero-emissions electricity that is competitive with geothermal power in the context of Mexico. However, our analysis indicates that, despite recent significant reductions, the costs of energy storage are very far from reaching this point. Therefore, geothermal has and will continue having a role to play in the transition towards zero emission power systems. IDB is working on energy storage projects in areas where it makes economic sense, namely small islands or non-interconnected isolated areas. Jan 11, 2018 Answer 2: As mentioned in the answer to the first question, energy storage is far from being viable for a market such as Mexico. In the context of Barbados, for example, it is considered an option (considering natural gas as the alternative) because it is expected that the cost of electricity supplied by a combination of energy storage and solar photovoltaic could drop to 150 US$/MWh and even as low as 100 US$/MWh by 2027 (today it is higher than 250 US$/MWh). Today the electricity market in Mexico does make a difference between baseload renewable energy power and intermittent renewable energy power: The former

4 compete for capacity contracts, whereas the later compete for energy supply contracts. This is why the true competitor for geothermal power in Mexico is natural gas, as it is the only technology that can provide 24/7 power at a competitive price. Our analysis shows that with the mechanism proposed, geothermal power will be able to compete with natural gas at 3 US$/million BTU (at this price of gas, natural gas electricity would be US$/MWh, similar to geothermal at US$/MWh). This is a very low reference price for natural gas, and therefore there is a high likelihood that this reference price might very well reflect prices in the short term. If prices eventually increase, this will make geothermal power even more competitive. Geothermal has of course additional advantages over natural gas. First and foremost, its price stability offers a free hedge, as compared to natural gas. It also offers lower environmental and social impacts, as compared to other renewable technologies. In this context, we estimate that off-takers will be willing to purchase electricity from geothermal power plants. Therefore, the Mexican government and the IDB are counting on the proposed mechanism as a key factor for the development of the geothermal market. Answer 3: The previous financial mechanism involved an ex-ante assessment of the level of exploration risk and of the fee to be paid by the developer. However, any assessment of risk that is carried out before the drilling takes place will be subject to a high level of uncertainty. The financial feasibility of the resource can only be determined once drilling has occurred. This is why the project team and SENER consider that a more efficient mechanism to adjust the concessionality is to adjust the speed of the repayment of the successful wells to NAFIN. In this way, upfront risks are reduced by offering a predefined, low interest rate, and the successful drilling projects with a better financial standing would be able to repay NAFIN quicker, freeing up these important risk mitigation resources for them to be used for other drilling projects. This approach for the use of contingent recovery grant resources is the same that was used for the geothermal initiatives of Sustainable Energy Facility for the Eastern Caribbean and for Nicaragua. Moreover, it is the approach now used by the Geothermal Development Facility (GDF) for Latin America, in which IDB also participates. In this context, we consider that this new proposal is the best way to use the CTF funds to catalyse the geothermal market in Latin America. The rate proposed was obtained by understanding what was a competitive price for geothermal power, using as reference a natural gas price of US$/MWh, and assuming the conditions of geothermal resources in Mexico. We then adjusted the variables of the financial model and obtained that price. We used two financial models: one produced by IDB for the other geothermal projects and another used by CFE. Both models reached the same conclusion. Answer 4: Once the resource is proved, the grant turns into a loan. Repayments would start once the plant is constructed and is able to sell power to the off-taker. The exploration period might take 2-3 years and the plant development (including transmission line) could take 2-3 years as well. Therefore, the grace period of six years would be enough to cover both periods. The idea is that every sub project that NAFIN approves under this facility would have a maximum grace period of 6 years. However as mentioned before, NAFIN could reduce the grace period based on how soon the plant is constructed and their ability to sell their power. Based on the latter and the financial standing of the geothermal developer NAFIN would also negotiate the repayment period of the loan, which could range from a bullet payment to a 5-year repayment period. This means that if a viable resource is proven, the loan would be paid by the sub-borrower to NAFIN between the moment the grace period has ended, which is no later than year 6 of the sub-loan, and up to the end of the repayment period for that sub-loan which will be not later than year 11 of the sub-loan. The disbursement period (8 years) for the IDB loan to NAFIN is the time that IDB has the project open for NAFIN to use the funds and reuse them again. After the 8th year the project would close and all remaining funds (unutilized fund and any repayments received from NAFIN s sub-borrowers) would return to CTF. Answer 5: Yes, it is realistic to assume that if CFE is not able to do the project, then another developer could take control over the successful wells and move the project forward. We have double checked this with CFE and private geothermal developers. CFE has some of the best geothermal fields, but there are also other private geothermal developers with a vast geothermal experience that would be eager to take that concession if CFE is unable or unwilling to exploit that family of successful wells. The formal agreement to ensure that Phase 2 will be taken forward in a timely

5 manner if geothermal resource is proven is the contract between NAFIN and the developer. If the developer takes the funding, and the drilling program is successful, then the loan repayment obligation is triggered. If they don t pay, or fail to continue with Phase 2, the geothermal concession is taken from them, and SENER will have the capacity to find a new developer who would have to pay for the well. Fines in case of non-payment could also be implemented. Answer 6: Please see answer 3.