WASHINGTON, December 2nd, 2014 – The World Bank Group approved today a US$200 million loan to stabilize electricity costs and tariff in the event of droughts, thereby avoiding budgetary pressures that might impact government’s ability to provide services to the poor. Specifically the project provides insurance coverage to support the Energy Stabilization Fund (FEE, in Spanish), in mitigating adverse climate shocks while promoting the diversification of the energy matrix.
“Uruguay is vulnerable to climate volatility and oil prices; because of this, the country created an Energy Stabilization Fund that provides government with the peace of mind of knowing that, in the event of an adverse climatic situation, it will be able to tap the funds needed to cover any deficit caused by additional costs in energy generation without altering rates or negatively affecting public finances.” said Mario Bergara, Uruguay’s Minister of Finance and Economy
In case of droughts, Uruguay has to switch to thermal energy sources, which increases the cost of production. This innovative program allows management of this risk in a proactive way, so as to avoid shifts in government spending that might affect public services or the need to increase tariffs, both of which disproportionally affects the poor.
“Uruguay’s comprehensive framework to manage climate risks is an international best practice. We are proud to partner in this initiative that protects consumers from potential rises in electricity tariffs, and that will help the country towards a cleaner energy matrix” said Jesko S. Hentschel, World Bank Director for Argentina, Paraguay and Uruguay.
This is the first time the World Bank Group uses an investment project financing (IPF) as an innovative tool to support risk management in the energy sector, which will also be available to other countries facing similar risks. The Drought Event Impact Mitigation project will be financed via a fixed spread, US$200 million loan, with a 17 year maturity period and a 4 year grace period.
