Publications

- October 1, 2019: Vol. 6, Number 9

Latin and island fever: Central America and the Caribbean are ripe for renewable infrastructure investing

by Martin Vogt

Infrastructure investors cannot complain about much these days. According to the 2019 Preqin Global Infrastructure Report, $77 billion in returns were disbursed to investors in 2017, further adding to the positive vibe in the industry. As a result, the asset class is benefitting from increasing allocations by investors who want a piece of the pie.

Due to their ambitious programs for renewables and rapidly changing energy industries, emerging countries turn out to be particularly suitable for clean energy investments. They are even more attractive than developed economies, as the Climatescope 2018 report by Bloomberg New Energy Finance points out. Yet, regions such as the Caribbean and Central America, although offering an abundance of renewable investment opportunities, are often overlooked.

The Caribbean islands and the vast majority of countries in Central America provide immense potential for clean energy projects, including not only wind and solar but also geothermal and hydropower. What’s more, the market outlook for renewable infrastructure assets in the region is excellent.

ENERGY GENERATION RIPE FOR CHANGE

With a few exceptions, electricity generation in the Caribbean and Central America is still largely based on conventional power plants from the ’60s and ’70s, leading to low energy efficiencies and high generation costs. But the outdated infrastructure is not the only problem: Most of the countries still rely heavily on diesel and other fuel imports to generate power.

The investment trend is simple — replace existing conventional power stations with cheaper renewable energy infrastructure. Small- and utility-scale renewable energy installations, whether connected to the grid or as off-grid solutions (microgrids) coupled with storage technologies, are not only viable alternatives to conventional power assets, they also represent ideal partners for hybrid systems with liquid natural gas imports and gas power plants, which can bridge the gap in the countries’ energy transition to a low-carbon future.

It therefore comes as no surprise that Caribbean governments especially are increasingly committing to renewable energy targets. Jamaica, for example, aims to run on 50 percent clean energy by 2030, while Barbados expects to be 100 percent reliant on renewables by 2030. By including renewables in the power mix, the islands are cutting carbon emissions as well as fostering investments in clean energy projects.

JAMAICA AND COSTA RICA TAKE THE LEAD

Countries such as Jamaica and Costa Rica, where clean power generation has already reached grid parity, are leading the way and demonstrating that renewables can be competitive with conventional electricity sources.

Jamaica, for instance, is home to the 51 MWp solar PV farm Paradise Park, the largest of its kind in the English-speaking Caribbean. The project has a 20-year power purchase agreement in place with the Jamaica Public Service Co. and is able to sell electricity at 0.085 USD/kWh. For comparison, that is more than 50 percent below the average electricity price of conventionally produced power in the Caribbean. The latter typically ranges between 0.15 and 0.25 USD/kWh. In fact, Paradise Park is now the cheapest energy provider in the country.

More than 700 miles further west, Costa Rica is working on increasing the total share of wind in the overall power mix. The country’s track record is remarkable: Up from 66.7 MW in 2009, the national electricity system reached 407.8 MW of installed wind capacity in January this year, according to the Costa Rican power company Instituto Costarricense de Electricidad. A majority of Costa Rica’s wind farms (16 of 18) are located in Guanacaste, a province in the northwest. The region turned out to be an excellent location for wind power plants, with 2019 being an extraordinary windy year. The 21 MW wind farm Tilawind, for example, has already exceeded its expected output in terms of energy production by more than 10 percent.

Costa Rica, El Salvador, Panama and Colombia are other examples of countries that are attractive for renewable infrastructure investments in the Americas. In Latin America, Colombia is the last untapped large-scale market in the region and has a huge renewable energy potential and is about to “take off.” What makes Colombia specifically interesting to investors is its status as an aspiring member of the Organization for Economic Cooperation and Development. An OECD membership is rather exclusive for Latin American countries: Apart from Colombia, only Chile and Mexico have been accepted by the economic forum so far.

Colombia, Jamaica, Costa Rica and El Salvador are on the cusp of a radical transition to clean energy, something that would be unthinkable without strong political support. At the end of the day, the success of renewable infrastructure investment programs stands or falls by the nation’s willingness to include clean energy sources into its power mix.

POLITICAL SUPPORT IS KEY

In a sector as highly regulated as the energy industry, it’s crucial that political stakeholders are not overly protective of fossil fuel industries and drive renewables forward instead. The political elite must be willing to enable the entry of new actors, often foreign players, in the market to support the growth of a decentralized renewable energy sector. A lot of times, this happens against the resistance of the existing ruling “old club” of utilities and others from the often-centralized conventional power sector.

But there’s more to renewable infrastructure investing in the region than meets the eye. In addition to strong political support, investors can also benefit from exposure to the U.S. dollar. In most of the smaller countries in the region, key contracts such as power purchase agreements can be U.S. dollar-denominated or pegged to the dollar, offering, especially investors from the United States, an opportunity to buy at better values than in their home country. This is particularly attractive for North American investors who are currently experiencing an overvaluation and falling returns in renewable energy assets. Given the strong yield compression taking place in the U.S. renewable energy market at the moment, Central America and the Caribbean represent an attractive opportunity for anyone looking for higher returns and portfolio diversification.

ALL ABOUT LOCATION

It’s also worth noting that renewable energy technology and the renewables sector have matured dramatically. Assets can now be operated without necessarily assuming more risk. Equipment manufacturers have established global supply chains and offer identical contract types with scope, service and guarantees, while experienced asset managers can provide ongoing operator services.

The location, at least in this case, is only of secondary importance. It doesn’t matter if the solar PV park stands in Arizona or Jamaica, the operational risks are almost the same. Similarly, Texas is as chancy as Costa Rica when it comes to running wind farms.

From a renewable infrastructure investing point of view, Central America and the Caribbean are often considered to be hidden gems. While the region has been flying under the radar for quite a while, that is going to change. Central America and the Caribbean are finally entering the spotlight, and it’s about time. Green energy assets in Barbados, Jamaica, Costa Rica and other spots in the region are ready for the investment mainstream.

 

Martin Vogt is managing director at MPC Renewable Energies.

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