Cuba’s new renewable energy market in need of capital

Summary: Cuba is being courted by numerous governments seeking to gain influence for the country’s significant energy investment needs. But given the lack of traditional development bank funding, there is an opportunity for creative capital sources and for Latin American countries to come to Cuba’s aid and take a leadership role in the renewable energy sector — especially sugarcane bagasse biomass and ethanol.

Carlos St JamesAbout the AuthorCarlos St. James is an advisor to energy investors and developers in emerging markets. He co-founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and publishes the Latin American Energy Review in his free time. 

LAC-CORE Finance Summit

He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit to be held at the Ritz Carlton in Miami, Florida this October 3-5 and which will include a keynote from Delice Moreno Garcia, Director General of INEL, Cuba’s engineering company and part of its Ministry of Energy and Mines. INEL is responsible for assessing all technical aspects of the influx of renewable energy investment onto the island.

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Cuba, having announced an economic opening in recent years, has been deluged by governments seeking to gain business influence.

Before U.S. President Obama arrived in Cuba in late 2014, the presidents of Russia and China had both already been there and signed oil exploration agreements. The French president visited too. But their focus was on oil, and since then every one of them has shunned offshore exploration to focus instead on the onshore basin on the north coast of Cuba, which in any case produces low-quality oil. At current prices these are going nowhere.

On the renewables side, Great Britain arrived early with the establishment of a joint venture called Havana Energy Ltd. in 2010 and the intention to produce biomass-based electricity from sugarcane bagasse. And recently another UK company, Hive Energy, signed an agreement to build a 50 megawatt (MW) solar PV plant on the island.

Cuba’s energy policy is now focused on self-sufficiency – and that bodes very well for renewable energy, as oil & gas players pass on the island.

“Cuba is a place where you stick to the basics to succeed. Overall uncertainty remans high, so technology risk needs to be minimized.”

To put Cuba’s power sector in perspective, it has some 6 gigawatts (GW) of installed capacity, virtually all fossil-fuel based. This is a little more than both Puerto Rico and Ecuador, for example. But Cuba has 11 million inhabitants, compared to Puerto Rico’s 3.5 million. To get a sense of the opportunity it may be better to compare Cuba to a country like Portugal, which also has a population of 11 million — but installed capacity of almost 20 GW.

Cuba’s energy needs come with an increasing sense of urgency, as its sweetheart oil agreements with Venezuela will soon likely come to an end and with it the potential to plunge the Cuban economy into a recession. Hence the projects most likely to meet with success in the early stages will be smaller in nature, use comparatively simple technology, and require less capital. To date there are a few experimental wind and solar plants operating but they are all quite small – total combined capacity of around 12 MW. The rest of existing renewable energy is primarily biomass-sourced and tied to existing industry, i.e., sugarcane bagasse cogeneration.

The government has made clear they are looking to develop long term relationships, so the sooner one starts the better.

Cuba’s formal plans are for 24% of the country’s energy matrix to come from renewables by 2030 (versus less than 4% today). That means a market for roughly 1800 MW of renewables over the next fifteen years.

The official goal is to have a fairly even split between wind, solar and biomass; there is also great potential for mini-hydro and biogas.

Electricity from biomass – specifically bagasse from sugarcane – is the quickest path to achieve investment success in the short run. Cuba is no longer the sugar powerhouse it once was but remains a big exporter and more importantly, has significant bagasse availability and a deep understanding of the industry. Also, power generated with biomass is not intermittent (unlike wind and solar) and this is an important consideration in a country that already has energy shortages. And Cuba is not a market to propose energy storage. Not yet; this is a place where you stick to the basics to succeed. Overall uncertainty remains high, so technology risk needs to be minimized.

Along those lines, Cuba has some 1,800 biodigesters operating and plans to build an additional 7,000 using pig and cattle waste plus the remnants from distilleries, canning factories, sugar mills and slaughterhouses. The potential for biogas production is enormous.

Yet progress is slowly being made with wind and solar. Later this year the first utility scale 3.6 MW solar PV plant should become operational in the Palmira area with solar panels assembled in Cuba using German technology – putting it close to what, for example, Argentina currently has in installed PV.

Development bank capital is not available just yet

However, getting any of this done will require capital, and accessing the usual development bank funding will be tough. Here is a list of the financial institutions that Cuba is NOT a member of:

  • International Monetary Fund;
  • World Bank;
  • Inter-American Development Bank;
  • Corporacion Andina de Fomento;
  • Banco Centroamericano de Integracion Economica;
  • Caribbean Development Bank.

In the United States, the Overseas Private Investment Corp and the Export-Import Bank are still unable to help American investors with Cuban issues – compounded by the fact that the U.S. has no less than six laws which in various ways deter trade and business flows between the two countries. These will need to be dismantled for U.S. companies to effectively do business in Cuba.

Thus, traditional development bankers are unlikely to be of any help here initially – although the first institution to get its act together stands to have a dominant market share. (This also, incidentally, opens the door to new and creative private sector funding sources, which the government is keen to hear about.)

And herein lies an excellent opportunity for Latin America to take care of its own. There is a natural affinity here; no Latin country has ever been on Cuba’s “enemies” list. Had Venezuela not been in a desperate situation, it would be the obvious winner in this new economic openness. It is Cuba’s closest business ally and by far the largest trading partner, with one-third of all trade. But Venezuela’s descent into self-imposed hell means it is not in the running.

Latin American countries need to step up to a leadership role and develop stronger business ties with Cuba, especially since the government’s preference is for bilateral agreements. This is a great opportunity for development banks, including Mexico’s Bancomext and Nafin; Colombia’s Financiera de Desarrollo Nacional, and perhaps best of all, Brazil’s BNDES, to join forces with their sugar sector and expand overseas: three of the world’s top ten producers of sugarcane are Latin American (Brazil #1; Mexico #6; Colombia #7) and there is vast technology transfer know-how that can be accompanied with capital.

Brazil, newly humbled after stumbling in the big leagues, is an ideal candidate to take its position as the leader of Latin America – economically and culturally. It has the capital — financial and human — to make this a reality, and is especially strong in bagasse cogeneration and ethanol production.

Cuba loves baseball. In my conversations with government officials they typically agree with the analogy that the most successful investors into Cuba will be those that seek to hit a steady stream of singles rather than aim for the home run.

In any event, remember that things still move slowly in Cuba: Havana Energy — the British company that signed a JV in 2010 — only managed to sign its first agreement a couple months ago – and for a 60 megawatt (MW) sugarcane bagasse cogeneration plant.

But I bet a Latin American company could have pulled it off sooner.

 

© Latin American Energy Review 2016

About the Author: Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, a financial advisory firm focused on renewables in emerging markets. Carlos co-founded the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first President until 2011; is a board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); is the founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.

He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.

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