Renewable Energy, a trend or an opportunity?

Renewable Energy, a trend or an opportunity?

For a few weeks now, when talking about the question posed by the title of this short article, I often hear that renewable energies are not just a trend, but a trend that has already seen the last of its days in El Salvador. When asking about this position, arguments usually revolve around the following conclusion: "Megawatt prices are no longer attractive enough as they were before."

The trend.

As of August 1, 2011, the National Energy Council, under the supervision of the regulator SIGET, promoted what is known as Long Term Contracts, which must be subscribed by legal obligation among the distribution companies and generating companies through a free competition processes, better known in El Salvador as Public Tenders, with the purpose of guaranteeing the necessary supply of electric energy to meet the demand of our country.

To better understand the reason for the conclusion I mentioned at the beginning of this article, I must first refer to the last Public Tender for the supply of 170 MW of power and its associated energy, where on January 11 of this year, after the stage of evaluation of economic offers, were awarded a total of 169.9 MW, of which 50 MW will be generated by wind technology by the company Tracia Network Corporation, at a price of $ 98.78 MWh; And 119.9 MW will be generated by photovoltaic technology as follows: 100 MW will be generated by Capellar Solar, S.A. DE C.V. -a company owned by the French group Neoen- at a price of $49.55 per MWh; another 10 MW will be generated by the company Sonsonate Energía, Ltda. De C.V., at a price of $ 67.24 per MWh; And the remaining 9.9 MW will be generated by the consortium Ecosolar, at a price of $ 54.98 MWh.

Notwithstanding the above mentioned prices, many people also reached the same conclusion after the previous Public Tender process that took place between the years 2013 and 2014, for the supply of 100 MW of power and its associated energy, when 94MW were awarded with prices that ranged from $123.41 MWh to $101.90 MWh; more than double in some cases with respect to the prices of this last Public Tender with only three years difference between one and another. In order to understand this, we must consider that both photovoltaic and wind technology have considerably reduced their manufacturing and maintenance costs in recent years, as well as increasing their efficiency and durability exponentially, and will continue to do so in the coming years.

Nonetheless, to think that the prices of the last Public Tender, which has set this generation projects through renewable resources a "trend", and put them in the radar of many investors, lies solely in the costs of the equipment’s would be a mistake, given that other factors such as the bargaining power of companies that were previously awarded in other Public Tenders allowed them to acquire such equipment at wholesale prices -note that the French group Neoen was awarded in 60 MW in 2014, in addition to the 100 MW of The last Public Tender- as well as the financial capacity of these large developers to negotiate the necessary financing with multilateral
financial institutions with a debt equity ratio up to 70/30 at prices that are inaccessible to small developers, among other factors.

The opportunity.

The electricity market in our country is composed of two large business areas: the Market of Contracts, and the Market of Opportunity, also known as Spot Market. Within the Contract Market there are two types of contracts, the Long Term Contracts -which are usually subscribed between a distribution company and a generating company as a result of the award to the latter after a Public Tender- and Bilateral Contracts.

The latter types of contracts are the ones that, from my point of view, constitute a real opportunity for both small and large developers of electric energy projects, as well as for all those institutions or companies that consume large amounts of electrical energy to maintain their operations, may them be ports, airports, hospitals, production plants, hotels, shopping malls, etc.

The reason for this is due in large part to the fact that the negotiation of these contracts is carried out between the parties depending on the conditions and the needs of each one, resulting in an Ad hoc Contract, as opposed to the Long Contracts Term, where the project developer is imposed a pre-established contract model, as it happens in a Public Bidding process.

Within a Bilateral Contract, the Parties can freely agree on several points, as the way of calculating the price of energy, either by a fixed or variable rate; as well as the capacity of the generator to sell part of the energy it generates in the spot market, or to other consumers; also on the date of entry into commercial operation according to different variables, such as generation type, construction site, etc.; the amount of the guarantees for the entry into commercial operation and maintenance of the generation plant, and the payment of energy delivered to the consumer, etc.

Likewise, this type of Contracts allows the structuring of other types of generation projects, such as distributed generation projects, meaning those where the energy is consumed in the same place where it is generated, which lowers the price of the projects, as the construction of a transmission line is not necessary, or the payment of tolls for the transmission of electric energy through a third party to the place where it will be consumed or delivered.

Finally, even if energy prices in these types of contracts are possibly higher than those seen in the last tenders, these will be lower than the purchase prices of the electric power to the distribution company -at least for the next 5 years- since a good part of the energy matrix of our country still continues to be thermoelectric generation, this would represent a strategic opportunity to reduce the costs of the big consumers in relation of its competitors, or, it would be a significant saving among other actors which could mean that the company could undertake new projects or lines of business.

Piero Rusconi Bolaños
Senior Associate | CENTRAL LAW El Salvador

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