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The invisible force propelling green energy

Whether it’s a new kind of solar panel or a biochemical process that turns algae into fuel, breakthroughs in renewable energy are often portrayed as a triumph of technology and innovation.

But when it comes to actually building a large scale renewable energy project, the most critical ingredient is an unglamorous service that has been around for centuries. Loans or bonds with long maturities—meaning that they can be paid back in five years or more—are crucial for the success of start-up companies and infrastructure projects in general.

For renewable energy schemes, however, long-term financing is often the difference between an idea that stays on the drawing boards and one that actually generates power. Most new energy concepts have large up-front equipment and installations costs. To compete with fossil fuels, which benefit from an established infrastructure and massive economies of scale, renewable energy projects typically need a combination of incentives and long-term contracts that enable costs to be spread out over time.

Even with subsidies and contracts in place, most green energy projects need long-term loans with attractive terms to generate returns that will interest investors. Such is the case with the wind energy projects currently being developed in Mexico´s Oaxaca state.

Last December the IDB approved $102 million in partial financing for two of these projects, which will produce a total 318 MW of electricity when fully operational.

“Financing is literally the key to the success of this project,’ Rachel Robboy, the IDB team leader for the 250 MW Eurus Wind Project, told a reporter from the New York Times’ Green, Inc. blog last December. “Without long-term financing at manageable interest rates, the project isn’t financially viable in terms of returns to the shareholder.”

Mexico’s Wind Power Strategy

The projects are part of Mexico’s strategy to diversify its energy matrix while reducing greenhouse gas emissions and generating jobs and payments to low-income rural communities. This strategy was spelled out in legislation approved in November 2008. It includes a Special Program to Exploit Renewable Energy and Special Climate Change Program that will contribute to the country’s goal of reducing emissions by 50 percent of their year 2000 levels by 2050.

The IDB Board approved a $50 million loan for the 250.5 MW Eurus wind farm. The project is currently under development by Acciona Energía México (AEM), a wholly owned subsidiary of Spain’s Acciona Energía, S.A. This is by far the largest wind power project ever built in Latin America and the Caribbean.

Mexico’s Cemex, a global producer of cement and concrete, is an equity partner in the Eurus project and will purchase all its electricity under a 20-year self-supply power purchase agreement. Cemex expects Eurus and other self-supply projects to meet a significant percentage of the energy needs of its Mexico operations.

The IDB will also facilitate an additional loan of up to $30 million from the Clean Technology Fund of the Climate Investment Fund (CIF) for the Eurus project, whose total cost will be close to $600 million. Additional long-term financing is expected to be approved for the project by other multilateral lenders, development finance institutions and commercial banks.

The IDB separately approved up to 280 million Mexican pesos (approximately $21 million) for a 67.5 MW wind farm currently under development by Eléctrica del Valle de México, S. de R.L. de C.V., (EVM) an affiliate of EDF Energies Nouvelles S.A. of France. Four subsidiaries of Wal-Mart de México, one of the country´s largest retail chains, will purchase electricity from this project under 15-year self-supply power purchase agreements, as part of Wal-Mart’s goal of using 100 percent renewable power in its Mexico operations.

The IDB loan, combined with credits expected from multilateral and bilateral lenders, could cover as much as $103 million of the EVM project’s $190 million total cost.

The Mexican government estimates that a total of around $5 billion will be invested to build these new wind farms by 2012, and that they will meet approximately 4 percent of the country´s electricity demand. Some 10,000 jobs will be generated directly and indirectly during the construction of these facilities, and around 374 permanent jobs will be created for operation and maintenance.