To retrofit its public buildings, Mexico City should creatively adapt its internal budget and seek out external financing. Photo: Alvaro Sánchez/ Flickr
When it comes to improving energy efficiency in buildings, cities can lead by example to create a big impact. By retrofitting public buildings, cities can demonstrate the benefits of action on energy efficiency and inspire change from within the private sector. However, this will require new policies, technologies and financial investments, as replacing inefficient technology with more efficient options requires additional budgeting or external financing—even if the technology can pay for itself over time.
The most common channel for financing retrofits of publicly owned buildings is internal budgeting. However, this is often a challenge, as many retrofits have a long pay-back period and many cities only have the legal authority to budget for one year. Additionally, city agencies may find that, as a result of lower energy bills in one year, their budgets are lowered in subsequent years. If internal budgeting is not a viable option, cities may seek external resources to finance their building efficiency projects. However, the market for energy efficiency retrofits is often not mature enough to attract the level of investment needed.
On August 6th, nearly 100 participants with both international and domestic backgrounds gathered in Mexico City to explore options for overcoming these financial barriers to implementing energy retrofits in Mexico City’s municipal buildings. From internal strategies to public policy, these innovative solutions have the potential to make Mexico City’s buildings leaders in energy efficiency.
Adapting Existing Budgeting and Financing Options for Municipal Retrofits
Agencies in Mexico City should consider utilizing existing legal and financial mechanisms to invest in energy efficiency retrofits. For example:
- Agencies may be able to establish contracts with terms exceeding one year, which would facilitate multi-year agreements with energy services companies.
- Mexico City should explore the potential for public-private partnerships. In such a partnership, government agencies would maintain ownership of the building, but the operation of the building, including energy efficiency retrofits and energy management, is transferred to a private sector operator who would receive compensation.
- Existing funds, such as Mexico’s national infrastructure fund FONADIN, may be potential sources for financing energy efficiency. FONADIN’s purpose is to support projects that generate public benefits but are not attractive enough for the private sector to support.
Mobilizing External Sources of Funding
Municipal governments should also focus on making projects more financially attractive to investors. Two potential ways to accomplish this are:
- Support the development of an energy services market for both municipal and private buildings. While the energy services company (ESCO) model has successfully catalyzed energy efficiency investments in markets such as China and the United States—where energy savings are used as collateral to finance retrofits—the model has not yet matured in Mexico. This is partially due to uncertainty around repayment, which poses a risk to financial institutions. More third party auditors are needed in Mexico to conduct credible assessments of energy savings so that cities and building owners have accurate, reliable information about how much energy has been saved. Fortunately, efforts are underway to train and certify more auditors in Mexico. In addition, standardizing the documents needed for projects and bundling projects will better enable financial decision makers to assess them.
- Explore the creation of an energy efficiency trust fund, drawing on current trust funds in Mexico for examples. Such a trust fund could aggregate multiple energy efficiency projects, reducing overall risk and transaction cost, consequently making projects more attractive to external investors. This could also be used to address the budgeting challenge, in that the fund could allow the government to set aside and “recycle” the savings from efficiency projects into new investments, rather than having the cost savings reduce future budgets.
While overcoming these barriers will be challenging, examples of innovation and leadership in the energy efficiency space abound in Mexico. For example, Sociedad Hipotecaria Federal’s EcoCasa program, as well as INFONAVIT’s green mortgage, are enabling the construction and retrofit of thousands of energy efficient homes in Mexico. Further, the Inter-American Development Bank has recently announced a new green bond program to finance Mexican ESCOs. Demonstrating its commitment to boosting investment in energy efficiency, the Mexican government is co-chairing the G20’s International Partnership for Energy Efficiency Cooperation. Financing efficiency is a global challenge, but Mexico City is continuing to move the dialogue forward.