In Depth: Risks and rewards of Central American wind
The regulatory, political and logistical obstacles associated with wind development in Central America are no surprise. But being faced with a coup d’état and Somali pirates in the midst of building a project — as Mesoamerica Energy was recently — is more than even the most seasoned developer can expect.
Jay Gallegos, managing director of Mesoamerica Energy, has been battling to build wind farms in the region for two decades and, given the challenges, has had great success.
Mesoamerica operates projects in Costa Rica and Honduras, and has a project under construction in Nicaragua. It has a pipeline of plans in Guatemala and is looking into other possibilities across South America.
“Working in Central America, as I have for almost 20 years now, has presented regulatory challenges, political improvisation, lots of changes,” says Gallegos. “It’s been quite difficult.”
But the pay-off has been worthwhile, including the environmental and social effects of his work.
“It’s a place where you can make a difference, you can latch onto certain projects, and certain things you can actually make happen and see people’s lives change,” Gallegos tells Recharge.
Chief financial officer Rodolfo Echeverría says that an element of the group’s success is being detail-oriented and “always having the good understanding of who the stakeholders in our projects are and making sure that everybody is on board”.
He says: “If you look at our projects, they always have quite a good vibe.”
Mesoamerica’s first project was the Costa Rican 23MW Plantas Eólicas, Sociedad de Responsibilidad Limitada — said to be the first utility-scale wind farm built in Latin America, in 1996. The company acquired it in 2004 from Dynegy, and it continues to generate under a power-purchase agreement (PPA) with state utility ICE.
Mesoamerica has 80MW of projects ready for an ongoing ICE tender, but the utility has not made it easy.
Dilemma over tender
No new wind farms under build-own-operate schemes have been built in the past 15 years because the utility can change the way it re-evaluates rate adjustments each year, making financing nearly impossible. In addition, the basic tariff was $0.06 per kWh for ten years, until recently being raised to $0.07 — not the best price for a decent return.
The tender is far from perfect, given that it has a 20MW project limit, but Mesoamerica is seriously considering participating despite the difficulties.
“The big question is, do we participate, knowing that we cannot move forward” because of problems with financing, asks Gallegos. “If you get an award, what would be the reputational damage if you walk away?”
However, given that this is the first tender in years, the company is inclined to join in.
Gallegos muses: “Do you participate and try to fix it? Would that allow us to bring more pressure on the government?”
Despite the barriers, Mesoamerica has had some success in Costa Rica recently, securing a 50MW build-operatetransfer scheme tender.
The paperwork, however, is still unsigned.
Honduran success story
“We have been awarded a project but you can’t open the champagne bottle and celebrate because you have to get the state attorney to agree that this process is correct,” says Gallegos. Those discussions are ongoing. “It’s a complicated place. It takes a long time, it requires a lot of patience.”
The real success story for Mesoamerica, though, is the 102MW Cerro de Hula wind farm in Honduras. Gallegos took over the Enron-owned project after the energy giant collapsed.
The project “went through a number of different developers who just quit because they were getting no traction”, says Echeverría. “It wasn’t until we took over in 2004-05 that Jay started making some progress, slowly but surely.” The project required 60,000 man hours, working with about 300 landowners — 95% of whom did not have proper land titles. Some properties had piles of paperwork going back 400 years, but eventually boundary lines were delineated and conflicts resolved.
“This gave us a wonderful opportunity to get to know the people in the community,” says Gallegos. Mesoamerica set up two large nurseries, and did archaeological digs that led to the relocation of turbines.
The private-equity group that owned the majority of the company at the time was patient with the prolonged process. “The jigsaw puzzle of land that we had to assemble was a titanic undertaking that a lot of other companies wouldn’t have had the patience to do,” says Echeverría. “A lot of it is a testament to Jay’s drive to get this project into construction and operating.” It took 14 people four years to put title to all of the land, says Gallegos. In parallel, other team members were working on legislation, permitting and figuring out how to get a PPA.
And he may have pulled off a small miracle by winning a tender process in 2008 involving coal-fired plants. Mesoamerica participated with no firm capacity to offer, and a price just above $0.10/kWh. He says it was “lucky that we offered a tariff that could survive” delays that were out of Mesoamerica’s control.
The government held an emergency session to discuss the project and ended up issuing a decree awarding the 20-year PPA to Mesoamerica.
PPA in hand, Gallegos went hunting for funding through the Central American Bank for Economic Integration and the Export-Import Bank of the United States (Ex-Im Bank). In the middle of the due diligence process, however, the government of Honduras was overthrown in a coup and the US refused to recognise the interim regime.
Unsurprisingly, that “put a tremendous amount of stress on the project”, he says.
Pirates throw spanner in the works
Eventually, the US did recognise the new government after what were considered fair and transparent elections, and the Ex-Im Bank loan went through. The project cost more than $200m.
The drama was not over, though. As a result of the delays caused by the upheaval, the company decided to buy a transformer from India rather than Mexico because it would, in theory, arrive sooner.
That is, until the ship carrying the transformer was hijacked by Somali pirates off the coast of Oman. While negotiations were carried out with the pirates to release the ship, Gallegos ordered a second Indian transformer, this time by way of the Pacific.
While waiting for the pirate drama to unfold and the second transformer to make its way around the world, the company put up lines to connect to a different point so it could start commissioning turbines. After the pirates released the ship, the transformers ended up arriving within two weeks of each other.
Construction — completed on time and under budget — was no easy feat either. Some 460 journeys were made to and from the port across mountains. But now the wind farm, a point of national pride, provides 7-8% of Honduras’ electricity and saves $50m a year in oil-fuel costs.
Gallegos deflects credit towards his team, which consists of people who “have to have their heart in the right place”. He looks for workers who have done something special in their lives, beyond just working for money. “That has served me well,” he says.
Gallegos is involved with wind energy because of a desire to make the world a better place. “I’ve always been very concerned about sustainability,” he says.
The environmental and social sustainability aspect of his work remains a priority, something the newest owners of the company, London’s Globeleq Generation, have accepted.
“It’s clearly recognised that there’s a triple bottom line,” says Gallegos. “[But] these are important considerations for any owner that sees we have that in our DNA. They haven’t changed the mystique that the company has, or our world view.”