Ecuador’s upcoming renewables auctions come with 25-year PPAs

Transmission grid in Ecuador. Federico Rios Escobar for The New York Times

Summary: Ecuador’s government is auctioning 500 MW of renewable energy projects they’ve developed, allowing the country to diversify its power matrix away from too much large hydro. LAC-CORE has been asked to take a select group of developers and investors to Quito to meet with senior officials in the energy ministry, the national utility, and the regulatory agency for detailed, personalized presentations — and to seek the answers that’ll get them comfortable.

About the publisher: Carlos St. James is a leading advisor to energy investors, developers, bankers and the public sector. He is also a board member of the Washington, D.C.-based Latin American & Caribbean Council on Renewable Energy (LAC-CORE) the Texas Renewable Energies Industry Alliance (TREIA), and publishes the Latin American Energy Review to help generate debate on the industry’s issues.                                         

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About three years ago I wrote an article on this same blog entitled, Why Ecuador doesn’t have a renewable energy sector. It was pretty harsh stuff and I stand by it. But those were different times. The same political party remains in power but a new direction is taking place under current President Moreno, friendlier towards western capital. Please check out the earlier one after reading this article, which is more optimistic given that positive changes are taking place.

The Moreno administration has come to the realization that it cannot access the capital it needs to build all its projects by itself and so must clean up its act and make nice with western investors; the Chinese are no longer a viable financing option. (I suspect Mexico’s government will also begin smiling at foreign investors next year.) Ecuador’s energy ministry has authorized the Latin American and Caribbean Council on Renewable Energy (LAC-CORE, a Washington, D.C.-based non-profit) to take key developers that have financial wherewithal and noteworthy track records in the wind, solar and hydro power sector to meet with them and hear it directly from the source.

Ecuador’s motivation? The country actually has enough installed power generation capacity, which is overwhelmingly clean; as a matter of fact, it periodically seeks to export surplus power to neighboring Colombia — but gets shunned. The issue is that Ecuador’s current power matrix relies too heavily on large hydro power. Last month, for example, power generated in the country was 90% hydro and 10% thermal; the country is one El Niño dry spell away from a possible Colombia-style energy crisis, and so the wind, solar and small hydro auctions have rather attractive price points to ensure interest.

Two dozen projects totaling 500 MW of projects available

There will be three separate convocatorias:

  • Two wind projects: Villonaco II (46 MW) and Villonaco III (56 MW)
  • One 200 MW solar photovoltaic project (El Aromo)
  • And another 200 MW comprised of about two dozen smaller wind, solar and small hydro projects. There’s a separate Galapagos Islands piece with small projects and storage.
Wind resource map of Ecuador. Source: Ecuador Ministry of Energy

The two Villonaco wind projects (see wind resource map above) are located near the operational 16 MW Villonaco I wind farm in southern Ecuador near the Membrillo and Huayrapamba substations. Wind speeds averaging 8.4 m/s (V-II) and 10.9 m/s (V-III) are expected to generate a combined 385 GWh/year of energy.

Solar radiation map of Ecuador. Source: Ecuador Ministry of Energy

The El Aromo PV project (see solar resource map above) is located in western Manabi province and is the single largest renewable project in this batch. It’ll sit on 290 hectares (1.1 sq. miles), with radiation of 1648 kWh/m2/year, and is estimated to generate 337 GWh/year.

The third auction’s smaller bundle of projects are in various stages of development. LAC-CORE has partnered with Equitable Origin, a New York-based non-profit that specializes in non-technical issues — such as ensuring community involvement early on — to ensure minimal conflict later. This is an issue that has caused painful delays on projects across Latin America and perhaps it is wise to get these ones done right from the start. They will play a key role.

Projects to become available at Ecuador’s 2019 auctions.
Source: Ecuador Ministry of Energy

The structure: not your typical auction

Ecuador’s sovereign ratings are in the “Highly speculative” category, two steps below investment grade. All three majors give it the same rating: B3/B-/B- (Moody’s/S&P/Fitch). This is why the Quito meeting is important: developers will hear it straight and interact directly with the decision makers on the Public Selection Process, overall structure, lender’s rights — and above all guarantees. You’ll be able to hear and discuss the legal structure of the power purchase agreements (PPAs) from off-taker CELEC and discuss regulatory specifics with ARCONEL, the regulator. There are standard fiscal incentives and exemptions and these will be explained.

By law, power generating assets need to belong to the state. So they’ve structured the auctions as concessions with 25-year PPAs. At the end the assets automatically revert to the state. Lowest bid offers coupled with quickest commercial operation (COD) dates will win; the developers are responsible for obtaining financing, building and operating their projects.

Bidders must have a minimum threshold of experience (300 MW built) and equity ($300 million), plus certain liquidity and debt ratios.

Ecuador has not followed the Argentine RenovAr model, i.e., it hasn’t obtained a soft guarantee from the World Bank or similar authority to give greater credibility to the proceedings. Perhaps not so much by choice: the previous administration did a pretty effective job of severing ties with western institutions and got itself into a lot of trouble borrowing from China. Ecuador is now returning to the fold, having realized there are actually worse things out there than American imperialism (search for the New York Times article from December 24, 2018 on Ecuador’s largest dam built by the Chinese to get a glimpse of China’s dark side). All this will make financing harder to come by, so these projects will have to rely on the still-shy development banks, non-traditional lenders and export credit agencies (ECAs). Those with experience in rounding up financing for RenovAr projects may find they have acquired valuable know-how. Also, local banks in Ecuador are larger than you’d think and can participate in bank syndicates, but are not experienced in project finance. We’ll have a sampling of these kinds of lenders on hand at the Quito meeting.

A key stakeholder: the off-taker

The Corporacion Electrica de Ecuador, S.A. (“CELEC”) is the national utility and will be the off-taker on the PPAs. It has 6.4 gigawatts (GW) of installed capacity: 70% hydro/30% thermal. The only wind is the 16 MW Villonaco I farm.

In 2017 (latest financials available), the firm had about US$12 billion in total assets and minimal debt, so on paper it appears a strong balance sheet. Working capital ratios are very strong, with some $900 million between cash and accounts receivable with only $300 million in accounts payable. The assets are overwhelmingly property plant & equipment (PP&E) as should be expected; minimal intangibles. But the country has subsidized electricity rates and thus CELEC operates at a loss, getting much of its funding from the federal government. Herein lies the big hurdle, given the country’s current economic weakness. (A few years back I wrote an analysis of Latin America’s subsidized electricity rates and how they kept investors at bay. See here.)

The Agencia de Regulacion y Control de Electricidad (ARCONEL, the regulator) will also be on hand to explain the nuances of the Ecuadorean market.

The mission

LAC-CORE is a non-profit established in 2010 and based in Washington, D.C. It is a 501(c)(3) from a tax standpoint. LAC-CORE’s mission is to convene, educate and facilitate collaboration on renewable energy projects. LAC-CORE has partnered with GridNEXT on this, part of the Texas Renewable Energies Industry Alliance (TREIA), a 501(c)(6) non-profit.

The full day event will take place at the Energy Ministry itself, where senior government officials will provide presentations in English explaining the upcoming auctions and allowing for abundant Q&A time. This will be followed by presentations from off-taker CELEC and regulator ARCONEL. Late in the afternoon we’ll tour the country’s grid control room. Once back at the hotel — and without the government present – we’ll meet privately with lenders, who will tell the group how they feel about all this. Then a wrap-up dinner with the government officials. If it makes sense the following morning we’ll meet again with the ministry and provide insights and final comments.

The trip will take place the week of August 26, 2019, most likely Wednesday August 28th. For more information, cost, agenda and to register, please write info@lac-core.org, subject line, “Ecuador mission”.

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© Latin American Energy Review 2019

This report has been prepared by Carlos St. James for The Latin American Energy Review. This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The report is based on information obtained from sources believed to be reliable but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed herewith are subject to change without notice and The Latin American Energy Review is not under any obligation to update or keep current the information contained herein. The Latin American Energy Review accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. Additional information will be made available upon request.
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