An Interview with Hernan Diaz Del Castillo Fernandez, Structured Finance Manager, BICSA
Q) As an estimation, what do you envisage the potential Wind Power projects pipeline in Central America to be over the next 3 years?
Taking into account that the time needed to develop and build a wind project is very long if we include the necessary time to have favourable wind studies available on site, every project to be connected in the next 3 years should be already in its first stages at least. Having this in perspective and using the public information from most of the countries (licences under study and approved), in the central American region we should be able to see an average of 100MW of wind farms per year being connected and starting production.
|What I believe is really important is that the different countries have identified the need to include non-conventional renewables, such as wind and solar, in their sources of electricity.|
However the regulations and incentives to come may change this figure providing additional support for some projects that are in early stages of studies and the changes in legislations may facilitate the following stages, improving this average for the end of the 3 years and going forward.
Q) What are the 3 top challenges organisations face when looking for finance for wind farms in the region?
a) Even if the renewables in general are proven technologies, most of the commercial banks in the region have no experience with the nature of these projects, forcing in many cases the projects to deal with multilaterals that may take a longer time to close the deals.
b) Given the high amounts for financing needed for a wind farm, commercial banks that are willing to finance wind farms regularly have restricted tickets sizes, creating the need for syndications that require an important amount of documentations, due diligences and studies so the respective credit approvals can take place in each of the banks. Additionally both multilaterals and commercial banks have high restrictions to finance projects with no PPA’s therefore restricting the projects to close some deals that are not easy to locate in some of the markets.
c) Most locations in the region have less than three years of studies, even if these time-lapses can provide a good highlight of the expectations for the wind source, it is not enough in some cases to reduce the risk of seasonality and have a good understanding of the energy source. This short period of studies tend to make the due diligence process difficult, leading to high risk at the moment of signing PPA’s and committing repayments for a credit facility
Q) How do you advise they overcome these challenges?
In general I advise developers and sponsors to make sure they work not even with realistic scenarios, but to go one step further and make all projections with conservative scenarios. If a project is strong enough to pass through the different filters and they are able to convince investors that even in the worst case scenario the project will provide returns, they will break a big barrier and the discussion will then focus on how big those returns can get to. This approach may not fix all issues that the developer might face but will facilitate the approval of funds, reduce the risks of commitments acquired and ease the way for a financial close.
Q) What makes a PPA bankable in Central America?
In general, when there is a PPA there is a transfer of the risk to a third institution, what lenders will evaluate is how strong is the institution to absorb this risk by acquiring the commitment to buy the electricity produced by the project. Such institutions will be reviewed by credit and risk departments of the lenders to make sure they have a balance sheet and operations that support the responsibility to be taken.
In addition to it, and as it should be in every contract among parties, there must be a win-win situation for all parties involved, making sure that commitments are realistic and the risk of applying penalty clauses is reduced as much as possible.
Q)Which country, in your opinion, has the most favourable policies for Wind farm development in Central America?
In general all the region has been developing the regulations to make sure there are enough incentives for the wind projects to be developed or at least the regulations have been developed to ensure there is a normative to follow, some of the countries have made special tenders for wind power, others have special regulations and tax incentives. What I believe is really important is that the different countries have identified the need to include non-conventional renewables, such as wind and solar, in their sources of electricity. In cases such as Costa Rica they have included in their master plan of growth a vision to be 100% renewable by 2022 and for sure this will come with some additional incentives, tenders and regulations to trigger the desire growth of renewables.
If we need to point to one single country that is leading the race we might point to the efforts taking place in Guatemala, where there have been several projects identified under development and the support from regulations and local authorities are favourable for developers and sponsors to take the first steps.
Hernan will be speaking about financing opportunities for wind projects in Central America at the Wind Central America congress.
If you would like more information please visit Wind Central Central America Congress at www.windcentralamerica.com