Financial-Contract-Chains for Domestic Solar Water Heating from Green SMEs.

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Financial-Contract-Chains for Domestic Solar Water Heating from Green SMEs.

Honduras
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

We motivate consumers to save water heating energy and costs, formalizing a chain of contracts and participants: funding agencies, green SME for marketing, installation and operation of the systems and the local utility firms to collect the monthly quotas within the electricity bill. Consumers would not feel the cost.

About Project

Solution: What is the proposed solution? Please be specific!

Being “green” is costly; few people are willing to reduce their standards of life neither to pay the extra costs of bring “green”, in spite the environmental risk we are facing. We promote energy saving devices that maintain consumer’s standards of life, but we still have to face the financial problem: electricity saving devices are durable goods which require an important investment, taking years to recover. An adequate financing strategy is a necessary marketing tool. Then, we solve two additional problems, the financing risk assumed by the funding institution, and the transaction cost generated to collect such a big number of small loans. The solution is to charge the quota in the monthly electricity bills. We design the credit term in a way that the total value of the electricity savings is similar to the loan quota payment. The buyer will not fill the cost. Once the device is paid, the consumers will fell the energy cost savings in his bill and cash flow. It is a gift to the consumers and to the society by reducing energy consumption. To make the transaction feasible: the local electricity utility firms must enter in the transaction; their main function is to collect small loans payments in the monthly electricity bill, reducing funder risk. They can enforce the collection. Such a financial scheme requires a four years financing term to adequate the quota and the buyer will not feel the cost of the investment.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

Hundreds of new works will be generated. CO2 emissions will be reduced. Millions of dollars saving in imports of oil, in some countries. Positive impact on Trade Balance. Many local Green SME will be able to grow
About You
Organization:
EAP Zamorano U
About You
First Name

ernesto

Last Name

gallo

Website
Your Organization
Country

, FM

About Your Organization
Organization Name

EAP Zamorano U

Organization Phone

+50499240001

Organization Address

KM 30 carr Danli

Organization Country
Organization Type

Private Institution

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Your solution
Country your work focuses on

, FM

If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa.

Range of turnover in your target firms, in USD

$1-5 Million.

Average turnover in USD of your target firm

2 million

Number of employees in your target firms

5-24.

Average number of employees of your target firm

10

Specify the size, average and range of expected loans or investments in each target firm

Loans should be about US $ 2 million per firm, depending on the size of the cities. Single operations are US $ 1,000 but we will sell many equipments in every city.

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

The project saves energy in countries using electricity to heat water using massive amounts of fossil fuels and generating massive amounts of CO2.
Electricity production is a major environmental concern around the globe. Governments should be interested in promoting the utilization of such devices.

This innovative Green and Financial business model solves buyer’s needs and their constrains. Green SMEs limit their operations and risk to installing and maintaining the system, which is quite stable because those have almost no or few mobile pieces, SMEs can leverage their operations.

The financial engineering involved mixes marketing, environmentalism, legal and financial issues all in one contract chain.

To make the transaction feasible: the local utility firm must enter in the transaction; their main function is to collect the monthly quotas, reducing funder risk. They enforce the collection. Such a financial scheme requires long term financing in a way the quota is reduced and the buyer will not feel the cost of the investment. Years after, once the quotas are paid the buyer will feel the cost reduction due to the installation of the device.

But, most of the electricity utility companies are public or are monopolies regulated by state commissions; that is why selling our electricity saving device, needs public intervention.
Multilateral funds might be provided to finance this project. Multilateral funds normally operate through governments. Even the private arms of multilaterals like World bank’s IFC or IADB’s IIC, would be more prone to invest in this project, if the public or supervised electricity companies are included in the chain of contracts.

Because this financial scheme minimizes the risk the SME, those are more likely to receive the funds required to install the equipments and to collect cash.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), Lack of financing to women entrepreneurs.

If you checked any of these barriers, describe how your solution addresses them

Small loans collection transaction costs. Collecting the small monthly quotas in the elctricity bill make it very easy and enforzable.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Direct Solar Water Heating. (Not electricity cell panels).
The water heating device is installed in the roof. The heating device does not require sun but irradiation, neither requires to transform sun in electricity, it directly heats the water and storages it.
We have tested the product for one year in a residence, in Zamorano University, verifying that the service of the device: the available hot water along the year is similar than the current electric system, the consumer will not lower the level of satisfaction; this is a necessary condition specially for non-green buyers.
It has been demonstrated that a home consuming 614 kwh reduced its consumption to 430 kwh.
The water heated from 70° to 100 ° Celsius degrees, depending on the season of the year. Hence the service is very good.
The system has electronic controls to regulate the water flows and pressure.

How many firms do you expect to reach?

About 50 firms to begin in Honduras, We could reach 500 mid tech Small firms, in all L.A.

What is the volume of private SME finance you aim to catalyze?

In a first stage can install 20,000 equipments requiring about 19 million dollars.

What time frame will be required to reach these targets?

It would take two year to sell the equipments and 3 more to collect all the credits

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

Buyers ‘risk aversion.
Political interest and groups of power who would steal the idea.
The opposition of politicians who have power over the electricity companies.
Enforcing the payment in the electricity bill might be considered illegal. But some companies work that way when installing water and electricity flow gauges.

Sustainability
List all the funding sources that are required for the sustainability of this solution

IFC (World bank) or IIC (IAD Bank) if it is privately managed.
World Bank or Regional Banks in the business is done trough governments.
In a second stage private banks and local capital markets might enter in the business.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Once the system has worked for three years and the banks have been educated and because of the completeness the chains of contracts, the banks should be prone to invest in this safe system.
We could reduce the term of payment if we get lower interest rate, I have used 1% monthly in US dollars, and due to economies of scale I can buy the equipment not at 946 US $, but because of the scale at 700 US $.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The electricity firm can ask the loan to the local capital market, by themselves, financing the SME.
In many Latin American markets the capital market is developing due to the growth of private pension funds that need to invest in the local stock exchanges; we could issue securitized debt sold in the capital markets, based on fiduciary operations.
In the worst case, "d plan" the system may survive asking the buyer to use credit cards, payable in 36 quotas, but it is very expensive about 3% by month.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The operation is designed to promote a long chain of contracts intervening: The bank, the local SMES, and the electricity utility firm and the consumer.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The worst risk is the groups of economic power in some countries who might take the idea for themselves, in any case the project will work but it will benefit the traditional groups, rather than SMEs.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

The business is highly scalable geographically. It also might be diversified to air conditioning energy saving systems. We have also worked in the air conditioning market with some results, in this case, the financing scale of single operations is much bigger.