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Purchase Agreements As Corporate Investments in Renewable Energy

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Purchase Agreements As Corporate Investments in Renewable Energy OPPORTUNITIES FOR THIRD-PARTY POWER- BUYING PURCHASE AGREEMENTS AS CORPORATE THE SUN INVESTMENTS IN RENEWABLE ENERGY: A REVIEW OF LATIN AMERICAN MARKETS Prepared by Christine Covington for David Gardiner & Associates Executive Summary the overall status of each market. Finally, we summarize our findings to provide guidance Latin America has quickly become a rising to corporations seeking to increase their star in clean energy development, and clean energy investments in Central America. corporations and developers are taking notice, putting Latin Americai above the rest Our analysis reveals that Guatemala and in terms of new investments in clean energy.ii Panama lead the pack among Central Despite a global drop in clean energy American countries in administering policies investments from 2011 to 2012, investments to support renewable energy development during the same time frame in Latin America through third-party PPAs. We reviewed the rose dramatically, with several countries following elements: experiencing triple-digit growth.iii 1. Deregulated markets with a high rate of Parallel to this growth is the rise of third- electrification. party financing of energy systems, specifically 2. Markets that allow third-party producers. third-party power purchase agreements (third- 3. Markets that allow third-party purchasers. party PPAs). Through a third-party PPA, 4. Markets that have supporting policies to end-users such as homeowners, non-profit improve financial viability, such as entities, and corporations may purchase interconnection, net-metering, and renewable power directly from a renewable energy energy certificates/credits (RECs). project, without owning the project itself. Often, the corporation also serves as host to However, to date, Panama’s and Guatemala’s the project, meaning the energy technology is exemplary policy and regulatory schemes installed on the corporation’s property, but a have not resulted in high investment totals, a separate entity owns and finances the project, trend seen in other Central American from whom the corporation purchases the countries as well. This trend indicates that generated power.iv As companies increase these countries have the policy structures to their renewable energy investments, third- support higher levels of investment, yet party PPAs are an important tool to simply investments have not yet reached their full financing and procurement of renewable potential. Efforts to harmonize regulations energy. and policies will further streamline and encourage renewable energy investment. To explore what markets would be most While Central American markets continue to attractive for corporations to make renewable mature, the region provides substantial energy investments using third-party PPAs, opportunity for the development of this paper assesses policy and market renewable energy through third-party PPAs. conditions in a subset of the Latin American market, six Central America countries: Costa [For further information, please contact the Rica, El Salvador, Guatemala, Honduras primary author, Christine Covington Nicaragua, and Panama.v Using data from a at [email protected] or Ryan variety of sources including World Bank and Hodum, David Gardiner & Associates, Bloomberg New Energy Finance, we assess at [email protected].] the presence of policies which support the development of third-party PPAs, and review 1 I. Introduction The use of third-party PPAs is expanding rapidly in the United States, and projected to Central America is quickly emerging as the grow in other markets as well. For example, top growing market for renewable energy in Colorado, the percent of new solar development, despite the slowdown in global installations financed as third-party owned renewable energy investments. Between systems grew from less than 10% in 2009, to 2011 and 2012, total new investments in over 80% in 2012; this exponential growth is clean energy in non-Brazil Latin America rose mirrored in other western U.S. states 127% to a high of $4.6 billion. Several including California, Arizona, and countries in Latin America experienced Massachusetts.x Sungevity, considered a triple-digit growth, including Mexico, Peru, leader in providing third-party financing and Uruguay.vi tools in the U.S., is also expanding to Europe and Australia, leading the way for the Additionally, corporations are increasingly development of third-party PPAs in new involved in the direction of their energy use markets.xi and development, and many are leading the way in renewable energy development and The movement has already begun. In 2012, investment. Nearly two-thirds of Global 100 developer Marena Renovables entered a 20- companies, and 59% of Fortune 100 year power-purchase agreement contract for companies, have set GHG emissions their 396MW wind farm in Mexico, the reduction commitments, renewable energy largest wind project in Latin America to date. commitments, or both.vii The wind farm will serve the local utility, and several corporations including Heineken, To meet their energy and sustainability goals, FEMSA, the largest bottler for Coke, and corporations are turning to innovative OXXO, a fast-growing chain of convenience financing and acquisition strategies, stores.xii In April 2013, Honda announced including renewable energy credits (RECs), plans to build a wind farm with enough third-party power purchase agreements (third- capacity to support automobile production, party PPAs), and on-site direct investment. and is set to become the first automaker to Companies are moving towards more direct invest in windpower in Brazil.xiii involvement in their energy production, rather than solely investing in RECs, green Due to market growth plus increased tariffs, and carbon offsets.viii Through long- availability of novel financing strategies, term PPAs companies can avoid investing Central American markets provide a prime capital in non-core (outside the corporation’s opportunity for corporations and developers business/product line) assets, while still alike to invest in renewable energy on an providing control and access to the unprecedented scale. development of the corporation’s energy.ix Thus, on-site development of power and the II. Policy Considerations to Develop Third- use of PPAs are on the rise, which allow Party Power Purchase Agreements in companies very direct involvement in the Central America development of the energy they use. Many companies have adopted a PPA strategy to acquire renewable energy, and 2 thus must consider the legality of creating Nicaragua, and Panama rejected the PPAs in each location. Generally, local vertically-integrated monopoly system, thus, utility regulations and policies supporting opening generation, transmission, and renewable energy control the details of distribution to competition. While creating a PPA. Honduras and Costa Rica maintained a monopoly system, these countries As a baseline assessment, consider the nevertheless opened generation to following questions: competition for Independent Power Producers (IPP).xvi Each nation remains in a 1. Is the market regulated or de-regulated? unique position on the spectrum between What is the rate of electrification? public and private markets, creating hurdles 2. Are Independent Power Producers (IPPs, for interconnection between markets.xvii or non-utility generators) allowed? 3. Are third-party (non-utility purchasers) In 1987, efforts began to overcome barriers purchases from IPPs allowed? to interconnection with the creation of a 4. Do policies exist to support renewable regional transmission system – The Central energy development – interconnection, net- American Electrical Interconnection System metering, Renewable Energy Credits (RECs), (Sistema de Interconexion Electrica de los etc.? Paises de America Central – SIEPAC). The purpose of the project was both to literally 1. Regulated or Deregulated Utility Market; and figuratively connect the countries of Rate of Electrification Central America, through physical infrastructure and the creation of a single A primary consideration, though not entirely regulatory environment to facilitate indicative of the legalities of a PPA, is the interconnected electricity production.xviii To status of the utility market – regulated or enhance cooperation of construction of deregulated. As a general rule, PPAs are SIEPAC, the Regional Electricity Market allowed in deregulated markets, and banned (Mercado Electrico Regional – MER) was in regulated markets. But the specific rules also developed. The MER exists as a in each market determine whether a PPA is “seventh market” overarching the six legal, rather than the market type itself. national markets, and is governed by a single set of market rules, a separate regional Most Central American countriesxiv adopted regulatory agency, and a regional market electricity deregulation in the 1990’s, far in operating entity.xix advance of most developed nations. The failure of the public model, in which a Additionally, the rate of electrification is vertically-integrated State monopoly important to determine market openness and controlled all aspects of electricity supply, ease of access to the grid. Central America spurred the deregulation movement. xv The has a relatively high rate of electrification, reforms were intended to attract private with Costa Rica leading at 99.2%, followed investment, establish independent regulators, by El Salvador, Guatemala, and Panama and create competitive markets, thus (96.8%, 84.4%, and 83.3%, respectively).
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