Globeleq warns of unexpected costs in new markets

WORLDWIDE: Mitigating the risks that drive up financing costs is the key to scaling-up renewable energy in emerging markets, says a developer with more than a decade's experience of wind projects in Central America.

Honduras… Wrongly charged $4 million sales tax bill through red tape
Honduras… Wrongly charged $4 million sales tax bill through red tape

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"It's a minefield of risks that end up occurring as you work on these projects, and many of them cost you," says Jay Gallegos (above), CEO of Globeleq Mesoamerica Energy (GME), which has 193MW of operating projects in Honduras, Nicaragua and Costa Rica, and 130MW due online by 2017.

The risks Gallegos refers to run the gamut from abrupt changes in law and regulatory uncertainty to financially insecure utilities buying the power. Policies and incentives for renewable energy may exist on paper, but they can be hard to apply in the real world, he says.

The costs

GME, for example, was forced to pay an unexpected $6.4 million to get the turbines off the ship for its 50MW Orosi project in Costa Rica, despite government policy exempting the equipment from import duties. Its 126MW Cerro de Hula project in Honduras faced a $4 million sales tax bill it should not have because of bureaucratic red tape - money GME has been trying to recover since 2011. And its 44MW Eolo project in Nicaragua was improperly curtailed 165 times in the first half of this year in favour of thermal plants, many owned by the government, which cost GME about $1 million in lost revenue. "These are fairly typical examples of what happens," says Gallegos.

Attracting equity investors and debt providers to these markets means building in price premiums to cover the risks they face. A report from the United Nations Development Programme (UNDP) in 2013 found that in developed countries, the cost of equity is 10% and the cost of debt is 5%. In developing countries, those numbers jump to 18% for equity returns and 10% for debt. The higher financing costs translate into wind generation that is 40% more costly, says UNDP, about $0.094/kWh compared to $0.067kWh in richer countries.

As wind companies in mature markets look to emerging sectors for diversification and growth, failure to understand the risks they face can make it difficult for them to raise the financial backing they need to move projects forwards. "What happens is you get people who don't know these stories, aren't aware of this stuff, and they end up winning bids with prices that are too low," says Gallegos.

In at the start

To bring down risks and their accompanying costs, developers need to be willing to work with governments on renewable energy policy design, capacity building and best practices. "I'm a strong believer that we need to help emerging markets progress towards more stability," he says. "We need companies that are truly willing to embed themselves in the culture and take a long-term view."

All parties in the financing of a project need to be involved, he adds, by maintaining close contact with government and utility officials, and making sure contracts are honoured and promises kept. "I think the banks need to have a bit more of an active role once they place money into a project, and do what I do," says Gallegos. "For me it is continuous maintenance. I constantly do the rounds. About once a month I go to each country and I visit the minister of energy, and the central bank. I continue to remind them, this is why you did wind," he says.

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