PublicPolicyRecommendationstoEncouragetheDevelopmentofaDistributedSolarGenerationMarketin

SaoPaulo.

December2018

Preparedfor:

Agenda

1. AboutImplementaSur.2. Introduction.3. MarketcontextofPVDGatCIOESTE.4. CompetitivenessofPVDGandfinancialchallenges.5. Casestudies.6. Recommendationsandroadmap.

Turning climate change into a

value creation opportunity

WHO ARE WE?

Accelerate climate change mitigation and adaptation actions in Latin-America, through policy guidance, innovative business models and financial

mechanisms

OUR MISSION

WHAT IS GOING ON ?

PHYSICAL RISKS

ACUTE EFFECTS CHRONIC EFFECTS

TRANSITION RISKS

REGULATION COMPETITION REPUTATION

OUR APPROACH

We measure the climate-related risks that influence investments and projects.

OpportunityRisks Finance

We formulate business models and deliver policy

guidance, to accelerate climate change adaptation

and mitigation

We enable the mobilization of financial resources to

promote sustainable investment

OUR EXPERIENCE

OUR EXPERIENCE

OUR EXPERIENCE

OriginationandimplementationoforganicwastetreatmentprojectsinChile.

Client:GovernmentofCanada

OUR TEAM

Turning climate change into a value creation opportunity

2.Introduction

ObjectivePublicPolicyRecommendationstoEncouragethe

DevelopmentofaDistributedSolarGenerationMarketforSaoPaulo,withanemphasisonthecommercialandindustrial

segment(C&I).

Scopeofthework

Diagnostic(fortheCIOESTEcontext).

•Competitivenessofdistributedsolar-PV(focusonC&I).

• IdentifycurrentfinancialandmarketgapswithrespecttoFederalandState-levelprogramsandpolicies,withfocusonC&I(OutcomesfromtheProGD - Brazil’ssupportschemeforDG).

•Stateofthelocalsolarworkforce(focusonstandards&certificationsfrominstallers).

Lessonsfromrecentinternationalprograms.

•Choose4internationalcases(mainlyontheC&Isegment),toanalyzetheirbalancebetweenmarketmechanisms,financialincentivesandbusinessmodels(includingoptionsformunicipalitiestoaggregatedemand).

•AssesstheapplicabilityofthesecasestotheCIOESTEcontext.

Recommendationsandpolicyroadmap

•Policyinstrumentsandmarketmechanismstoboostthereplicabilityofsustainablebusinessmodelsintomarketniches(withfocusonC&I).

• Institutionalframeworktoimplementpolicyroadmap(e.g.contractingcapacityfrommunicipalities).

•WebinarwithresultstoCIOESTE’stechnicalsecretariat.

Evolutionofthesolardistributedgenerationmarket(PVDG).

• Brazilhasanexcellentsolarhorizontalirradiation(1,550and2,350kWh/m2/year),whichhasagoodfitwiththecountry’sloadprofile.• UntilrecentlyPVDGinBrazilwaslimitedonlytoapplicationsthataimedtoattendremoteconsumptions:PRODEEMandlatertheprogramLUZPARATODOS.

Evolutionofthesolardistributedgenerationmarket(PVDG).

• PVDGstarteditsgrowthon2012withResolution482 fromANEEL,anditsreviewResolution687from2015.Bothsetthebasicframeworkfornetmeteringinthecountry• Rapiddeploymentduetothefallintechnologyprices,butalsodrivenbytheneedtoreduceGHGemissions:• In2014EPEprojectedatotalcapacityof1,319MWby2024,whilein2016ithadtore-adjustitsprojectioncloserto2,500MWfor2024.

TypesofPVDG

• Micro-generation<=75kWconnectedtolow-voltage(220V).• Mini-generation>75kWy<=5MWconnectedtomid-voltage(13,8kV).

Keyelementsforasuccessfuldeploymentofdistributedsolargeneration.

Demand-sidefactors,suchasthepopulation,income(representedbytheGDP)andtheelectricitytariffs,prevailasdeterminantsofthePVDGupdate(morethansolarradiation).

CompetitivedeploymentofdistributedPVgeneration

andworkforce.

Taxincentives

Financialincentives

Regulation/Businessmodels(drivenbydemandfrompublic

institutions+privatecustomers).

3.MarketcontextofPVDGatCIOESTE.

Perspectiveofthedemand-side

• FallinC&Iconsumptionbetween2014-2016.• CIOESTE'sC&Idemandrepresentsonly4.7%ofSaoPaulo'sdemand.

1789 1983 2018

27961

50712

37441

1814 1880 1923

27541

47029

36109

1770 1689 1939

26205

44619

36271

-

10,000

20,000

30,000

40,000

50,000

60,000

CommercialandServices Industrial Residential

Consum

ption(GWh)

2014CIOESTE 2014RESTOFSP 2015CIOESTE

2015RESTOFSP 2016CIOESTE 2016RESTOFSP

Source:Aneel

AnnualgrowthrateforCIOESTEwas5timeslowerthanSaoPaulo’sbetween2015-2017.

0.00 0.08 0.211.01

5.85

16.79

0

10

20

2007 2013 2014 2015 2016 2017

Installedcapacity(M

W)

PVDGSaoPaulo

Source:Aneel

14.86 0

137.19204.81

642.66

0

200

400

600

800

1000

2013 2014 2015 2016 2017

Installedcapacity(kW)

PVDGCIOESTE

CIOESTEhasalargespaceforgrowthinmicro-generationPVDG.

0.52 0.11 0.53 0.53-

5.00

10.00

15.00

20.00

25.00

30.00

Micrototal MicroC&I Minitotal MiniC&I

Installedcapacity(M

W)

CIOESTE RestofSP

IncentivestopromotethecompetitivenessofPVDGonC&Icustomers.• Programa deDesenvolvimento daGeraçãoDistribuída deEnergiaElétrica (ProGD):Generalframeworkofsupport.

• Taxincentives:• Convênio ICMS6/2013y16/2015(17–18%).

• DiscountofPIS/COFINS.• DiscountofIPI.

• LawPLS252/2014forsustainablebuilding(includingPVDG).

• Financialincentivesfrom:BNDES,Caixa,Agência deDesenvolvimento Paulista –Desenvolve SP,Empresa Brasileira deInovação ePesquisa.

Frameworkfor net-metering (Resolution 687/2015)

• ChangesmadetoimprovetheattractivenessofPVDG,beyondself-supply.

• Optiontousesurplusenergyforupto60months.

• Thresholdofupto5,000KW,allowingsignificanteconomiesofscaleinOPEX.

• Newmechanisms:• Consumerstousethecreditsfromtheirgeneratedenergytopaytheelectricitybillsofotherpropertiesthattheyown.

• Theenergygeneratedamongallconsumerunitsisdistributedbetweentheowners(multipleconsumerunits).

• CCEE,isstudyingalternativestosellalltheenergyinjectedinthegrid(netafterconsumption)intothewholesalemarket.

Statusofthemarketofsuppliers

ConcentrationofsuppliersintheSoutheastofBrazil.

LocationofPVDGcompanies,byregion(Fuente:Instituto IDEAL2017).

Statusofthemarketofsuppliers

Marketingoptionsdominatedbyturnkeycontracts.FewbasedonPPA,leasingorESCOmodel.

Statusofthemarketofsuppliers

Teamsofsmallsuppliers,withfewprojectsandlackofsufficientworkingcapital(SMEs).

Statusofthemarketofinstallers/suppliers

• Financialbarriersthatpreventbringingbusinessmodelslessintensiveincapital(basedonleasingorESCO).• Alargepartofthesuppliersstilldonothaveenoughprojectsaccordingtotheirexperience(43%– 59suppliers).

59; 43%

31; 22%

48; 35%

Noverificationandnofinancialcapability

Verificationbutnofinancialcapability

Verificationandfinancialcapability

Source:basedondatafromPortalSolarforSaoPaulo

4.CompetitivenessofPVDGandfinancialchallenges.

Paritywiththegridfor53distributioncompanies(96%ofthelowvoltagemarket).

• Effectofincentivesandincreaseinrates(associatedwiththedroughtandexpansionofthesystem).

• Factorsthatrestrictthedevelopment:• LawNo.12.783of2013forceddistributioncompaniestoreducetariffsby18%.

• SomeC&Icustomersmaybetemptedtomigratefromaregulatedtariffstructuretothewholesalemarket(or"MercadoLivre").

• EPEstatesthatonlyconsumerswithhighpurchasingpowerandanaverageconsumptionof400to1,000kWh/month,willhavethefinancialconditionstobecomeearlyadoptersofPVDG.

Fuente:Syrkis,2017.

Financialchallenges

• Hightransactionalcosts(e.g.highduediligencecosts)

• LimitedacceptabilityofthecollateralsandguaranteesthatMSMEscanprovide

• Theaveragefinancialinstitutionhaslittlespecializedknowledgeandwillhardlyconsidertheexpectedrevenuesasavalidcollateral

• Cuttingdown20%offinancingcostcouldhaveapositiveimpactonincreasingthenumberofPVprojectsby6%to10%

Roleofinvestmentaggregators

• Cantranslatetheinitialcapitalintoatarifforleaseandaggregateatomizedassets:• Thefinalcustomerpaysamonthlyfeetothecompany.

• Itallowssignificanteconomiesofscaleininvestmentandfinancialcosts.

• Nevertheless,themarketforaggregatedcleanenergyinvestmentsisstillincipient:• Developershavetogothroughacapitalandresourceintensiveoriginationprocess.

• Aggregatestandardizedassetstofulfilltheminimumrequirementsfromfinancialinstitutions.

• SomeofthesedevelopersareMSMEsthatbearwiththedifficultiestoaccessfinance.

5.Casestudies.

Financialprogram:PACE(PropertyAssessedCleanEnergy).

• Long-termloanapplicabletoalldifferenttypesofenergyefficiencyandrenewableenergyfacilities,andtodifferenttypesofbeneficiaries.

Financialprogram:PACE(PropertyAssessedCleanEnergy).

• Theenergysavingscanrepresentanamountgreaterthantheamortization,whichistransferredthroughasurchargeonrealestatetaxes.

• Alternativelyitcanoperatethroughamortgageloan.

BenefitsfromPACE.

Residentialinstallations

Commercialinstallations

Totalinvestment(MMUS$)

5,128 588

Numberofinstallations

216,000 1445

Jobscreated 40,300 8,826

• Itallowsthebanktousetheasset(embeddedintheproperty)asavalidcollateralfortheloan,justlikewithastandardmortgageloan.

• Itgenerallydoesnotrequireacreditcheck,justtheownershipoftheproperty.

• Itcanleveragetheexistingcollectionsystemassociatedwithpropertytaxes.

• Increasesthevalueoftherealestateproperties.

Covered33States– 80%ofthetotalpopulationoftheUnitedStates.

Source:PACENation

CasestudiesSonomaCountyEnergyIndependenceProgram(2009)• Issuanceofresult-basedgreenbonds,whichcanbepurchasedbySonomaCounty’sTreasuryandWaterAgency,andprivateactors.

• Marketplacetoaccesscontractors,incentivesandfinancingoptions.

• 11.3MWofinstalledcapacityequivalenttoUS$53,732,943andmorethan1,480jobscreated.

BoulderCountyClimateSmart LoanProgram(2009)• FirstPACEprogram(addressingenergyefficiencyandrenewableenergyneeds)andthefirsttofinancedthroughthepublicauctionofbonds.

• LoanswitharangebetweenUS$3,000andtheminimumvaluebetweenUS$50,000andthe20%ofthepropertyvalue.

• Interestratesintherangeof6.75%- 8.75%.

• US$9MMofinvestments(229projects),fromwhichUS$3.6MMarePVprojects,equivalentto520jobs-year

CasestudiesConnecticut’sCommercialPropertyAssessedCleanEnergy(C-PACE)• CooperationwiththeConneticutGreenBanktoissuegreenbonds.

• C-PACEfocusedonnon-residentialrealestateassets.

• Asofearly2018,C-PACEhadreached200projects,withmorethanUS$114millioninvested,25MWofinstalledcapacityandmorethan1,300jobs-year,representingapproximatelyUS$204.5millioninsavings.

India’sSolarMunicipalBonds(SMB)Model• Targetof40GWofsolarrooftopprojectsby2022.• MunicipalitiesoperateasaggregatorsofPVDG(or

RESCO),andasissuersofgreenbondsinthecapitalmarkets.

• Municipalitiescanleveragetheirproximitytoclients,theirhealthiercreditprofiles,strongerbalance-sheetsandbetteraccesstopublicguarantees,tofacilitatetheaccesstofinance.

• Municipalbondsarebacked-upbytheassets,andcanbeissuedthroughtheSPVsofthemunicipalities.

• TheSMBmodelcouldreducethecostofPVDGby12%.

6.Recommendationsandpolicyroadmap.

SuggestedCANVASmodelforPVDGMarketsegment: C&Icustomerswithhighdailyloadforelectricityconsumptionand

creditworthiness.Valueproposition Generationofsavings,protectiontotheenvironment,increaseinthevalueof

theproperty.Demandparameters

Incomelevel,creditrating,electricityconsumptionprofiles,GHGmitigationpotentialandinternalpriceoncarbon(companieswithexportstoEuropeanmarkets).

Distributionchannels

Municipalities,organizationsthatallowaggregationofdemandinordertotakeadvantageofeconomiesofscale,match-makingplatforms.

Revenuestructure Feasibilitystudies,paymentforassets,paymentforservices(ESCOmodel).

Coststructure Financialcostsforinitialcapital,HR,dissemination,materials.Keyactors Municipalities,C&Icustomers,MinistryofMinesandEnergy(MME),banks,

providers,electricitydistributors,universities.

StepstodesignafinancialinstrumentSource: “FinancialIncentivestoEnableCleanEnergyDeployment”(NREL2016).

1. Framethedesignofthefinancialinstrument• Establishtheinstrument’sriskpolicy• Definetheinstrument’sexitpolicy

2. Involvetheprivatesectorandthefinancialcommunity,soastoidentifysourcesofprivateleverage.

3. Establishtheexpectedlifeoftheinstrument,untilthebusinessmodelisadoptedbythemarket.

4. Establishthedegreeofpoliticalfeasibilityoftheproposedinstrument.

5. Identifythearticulation,complementarityorconcatenationoftheproposedinstrumentwithotherexistinginstruments.

6. Considerresourcesforthemarketingofthefinancialinstrument,forthecreationofaportfolioofprojectsandthebuildingofcapabilities.

7. Tracktheperformanceoftheinstrumentandassessitsimpact

Deploymentofcleanenergyinvestmentthroughthedevelopmentoffinancialinstruments

Source:ownelaboration,2018,basedonSikken,Maltay,Sikken,Maltay,&Mahlerplein,2015.

RoadmapforaPVDGprogram(1/2)

Political,legislative,institutionalandfinancialcoordination.

Technicalstandardsofsuppliersandfacilitiesthatensurethequalityand

solvencyofinvestments.

Confirmmunicipalitiesdon’thaveanobstacletoactasfinancialentitiesandpromotethegenerationofenergy.

Financialsustainabilityandflexibilityofthegovernancestructuretoreceive

privateandpublicresources.

RoadmapforaPVDGprogram(1/2)

Financingtermsandconditions,includingMRVsystem,andframeworkof

environmentalandsocialsafeguards.

CapitalizationofthePVDGprogram:Strategytoattractdonorsandtaxpayers

(securitization?).

Pipelineorigination:Fosterenergyauditsandtheidentificationofinitialcapital

requirementsofinstallersandaggregators.

ImplementationofPVDGprogram:Technicalevaluationofprojects;financing;

collectionofpayments.

Transformando el cambio climático en una oportunidad para crear valor

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PublicPolicyRecommendationstoEncouragetheDevelopmentofaDistributedSolarGenerationMarketin

SaoPaulo.

December2018

Preparedfor: