Fondo de Estabilización Energética (FEE) is a mechanism established by the Government of Uruguay to reduce the impact of drought on Government and electricity utility finances. IBRD Investment Project Financing with an innovative structure boosts FEE’s liquidity with a view to easing cash crunch and improving service delivery. 2) putting in place a financial risk management strategy. The financial risk management strategy Uruguay’s electricity matrix is dominated by includes 1) reserve funds to offset the impact of hydropower. During periods of drought, when rainfall medium-to-high frequency and low-to-moderate is insufficient, the state-owned electricity company, impact weather shocks; 2) an energy stabilization Administración Nacional de Usinas y Trasmisiones fund, Fondo de Estabilización Energética (FEE), to Eléctricas (UTE), needs to switch to more expensive mitigate the impact of less frequent medium-intensity energy sources that increase the cost of electricity weather shocks; and 3) insurance-linked capital generation significantly. Higher electricity markets transactions to transfer the risk of low generation costs for UTE also impact the probability but high impact events (see case study Government of Uruguay (GoU)’s fiscal position. Mitigating the Impact of Drought on Energy Uruguay’s fiscal deficit increased from 0.9 percent of Production in Uruguay). GDP in 2011 to 2.8 percent in 2012 partly due to a severe drought and high oil prices1. The GoU has established a comprehensive risk FEE serves as an important tool to insulate GoU and management strategy to mitigate the effects of UTE’s budget against volatile electricity generation drought on its balance sheet, which includes: 1) costs. It does so by accumulating funds when weather adopting policies to diversify the energy matrix, and conditions are favorable and electricity generation 1 63 % increase in implicit cost of electricity provision costs are low, and transferring funds to UTE to Development Corporation (CND) of Uruguay with a finance necessary expenditures and limit borrowing sovereign guarantee from the Oriental Republic of when weather conditions are adverse. There are Uruguay. A commitment fee of 50 basis points (same well-defined rules in place for contributions to FEE as the DPL DDO but higher than the standard IBRD and use of funds. GoU needed to ensure that FEE loan) was charged for the contingency option. had access to sufficient liquidity at all times. The contingent financing will be triggered according to rules stipulated in Decree 422/11, which ensures that funds can be transferred to UTE only in adverse The most appropriate solution was a contingent weather conditions, and when FEE’s funds fall below financing facility that would be triggered whenever a minimum level set at $50 million. CND is FEE’s funds fell below a specified level as a result of responsible for monitoring the conditions for adverse weather conditions. This would reduce the disbursements and disbursing to FEE as part of the probability of GoU having to transfer resources to on-lending operation. The project was declared UTE and the amount of transfers needed by UTE to effective on April 21, 2015 and has a life of three meet unexpected weather-related costs. years. The Development Policy Loan (DPL) with a Deferred Drawdown Option (DPL DDO) and the Catastrophe Deferred Drawdown Option (CAT DDO) are types of The hybrid structure of the IPF is an innovative Development Policy Financing offered by the Bank. approach to support a stabilization fund. In the event However, the Bank does not have a contingent of a drought, the World Bank will disburse funds to financing option for Investment Project Financing FEE via CND, subject to specific conditions. This will (IPF). At the request of the project team the not only strengthen FEE’s ability to mitigate the Executive Board of the World Bank approved a impact of higher electricity generation costs on the waiver to modify IBRD loan terms and allow the balance sheets of both UTE and the GoU, but also team to offer a hybrid IPF with a contingent financing help reduce the volatility of electricity tariff. component to meet GoU needs. The IPF with a contingent component complements On December 2, 2014, the Bank’s Executive Board the World Bank’s other financing instruments and approved a US$200 million loan for the National may be replicated in other countries. Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 Photo Credits Front: Usinas y Trasmisiones Eléctricas UTE