Summary: Central America has received over $3.5 billion in renewable energy investment in the last three years. While offtaker risk is often high and individual markets slow to respond, an existing regional transmission grid is creating a significant market where risk is leveled off; this is where greater focus needs to be placed for more opportunities to arise.
About the Author: Carlos 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.
He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida in October 2016, in which various Central American governments, renewables associations and developers will play an active role.
As it turns out, even defining who is part of Central America is complicated. “Centroamerica” includes five countries: Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua. “America Central” is broader and includes the above five plus two more at each end: English-speaking Belize, which sees itself more as a part of the Caribbean (and is still eyed by Guatemala as The Territory That Got Away); and Panama, which connects the region to Colombia and South America and bills itself the “Singapore of the Americas”.
The natural energy resource with the greatest potential across the board here — and by far — is hydro, followed by wind and geothermal (depending on the country). As explained in this analysis, the entire continent has until recently shunned solar and preferred wind energy, but like everywhere, that is rapidly changing. That doesn’t mean investment hasn’t been flowing: in the last three years alone Central America has attracted over $3.5 billion in clean energy investments.
Guatemala is the 800-pound gorilla in this neighborhood. It is actually the tenth largest economy in all of LatAm/Caribbean, but has the most developed renewables sector and enough of a surplus to be the largest exporter of electricity to its neighbors. It has held four different renewable energy auctions since 2010, offering 15-year USD power purchase agreements (PPAs) to investors at increasingly lower prices. Last month the government awarded 130 megawatts (MW) of shorter term solar photovoltaic deals at an average $58/megawatt-hour (MWh).
“In the last three years Central America has attracted over $3.5 billion in clean energy investment.”
Panama is the second largest economy, about two-thirds of Guatemala’s, and has the most expensive electricity in this region. It derives an unusually large percentage of electricity from fossil fuels, in turn the result of having the shipping canal and related infrastructure at hand: it had also signed long term fixed price bunker contracts that worked against them as oil prices dropped recently.
Worse yet, half of electricity comes from hydro and due to extended dry seasons (like neighboring Colombia — see this analysis) has had to implement energy rationing at various times in recent years. Perhaps because of this Panama is making the most headway of anyone into residential solar.
In 2014 Panama held its first tenders for 60 MW of solar PV. Winners could walk away with 20-year PPAs at about $140/megawatt-hour (MWh). It was oversubscribed and ballooned out of control: within a few months the government announced approval of 1136 MW in solar licenses, with projects ranging in size from 2 to 120 MW capacity each. Everything is on hold while this gets sorted out.
However, the third largest economy, Costa Rica, gets all the press. No doubt you’ve seen their announcements of running 100% on renewables for weeks at a time and of their very credible commitment to eventually eliminate all fossil fuels from the mix. Half of its energy comes from large hydro.
Costa Rica is undoubtedly a leader in this regard and promoting its green-ness is an important part of its image as the planet’s eco-friendly sanctuary. Eco-tourism earns more foreign exchange than the exports of its top three cash crops (bananas, pineapples and coffee) combined. Plus it has no military, thus attracting considerable multilateral aid, grants, loans, and overall good will of the world’s population.
Investors need to know two things about Costa Rica: (1) its utility scale electricity sector is nationalized (private sector investment in energy is capped at 15% of the matrix), and (2) it has launched a successful residential solar program with net metering, and this is where the best opportunities lie.
El Salvador is following in Guatemala’s footsteps. In 2014 it held tenders where 94 MW of long term solar PV contracts were awarded at $116/MWh.
And it recently announced the next round, now seeking 150 MW of wind and solar PV capacity, offering 20 year PPAs beginning 2019. Here is where investors and industry stakeholders can get right into it. You have until May 4, 2016 to request documentation and until September 7th to submit your bids.
Honduras is something of the laggard in all this but attempting to catch up. Only last year it finally established a renewables regulatory commission. It has among the greatest frequency and length of power outages in the region, and offtaker risk is pretty steep. Still, for reasons that are unclear to me it was the highest-ranked Central American country on the 2015 ClimateScope study, perhaps because on paper it is doing all the right things, even though execution is somewhat wanting. It has a feed-in tariff for solar PV currently at $150/MWh. It also held tenders a couple years ago and approved 600 MW of solar, but only about half has been built because things got messy.
Some of those projects overbuilt, over-sold and over-invoiced electricity to the government — beyond the stipulations in their PPAs. The government figured it out and unilaterally lowered everyone’s pricing by $20/MWh. (Kind of like in the army, where everyone is made to do extra pushups because one guy stole food but in this case everyone now wishes they’d gotten a taste of the bologna.) And the sector’s dirty little secret is that grid losses are in excess of 20%, partly because of stolen electricity and partly from outdated infrastructure.
Nicaragua has taken a slightly different tack. The government published a new price band for feed-in tariffs by technology, to wit:
- Solar: between $103 and $118/MWh
- Small hydro: $90-107/MWh
- Biomass: $92-102/MWh
- Geothermal: $72-92/MWh
- Wind: $66-80/MWh
It has the least-clean energy matrix but the best geothermal potential in the region; already almost 15% of its energy comes from this source. Make no mistake: this power sector needs a lot of investment. Power outages are the most frequent and longest in the region, and offtaker risk is the absolute highest. This is either an opportunity or a deterrent, depending on your business.
But perhaps the important issue is that Central America is making headway towards setting itself up as a single energy market. The region has a unifying electric grid known as SIEPAC (Sistema de Interconexion Electrica de los Paises de America Central). It has plenty of kinks to work out (e.g., export contracts cannot exceed one year; tolls are high and erratic) but has the benefit of actually existing — so much of Latin America is made up of pipe dreams of great things to come — with plans to connect into Mexico to the north and Colombia to the south in a few years.
But even without connecting into North and South America, the ability to soon consider America Central as a single energy market gives it a combined GDP equal to that of Chile. As the legal and regulatory framework gets addressed, more doors for investment will open as risk levels out.
© 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.
He can be reached at info[@]santiagosinclair.com.