Stage set in Cuba for boom in renewable investment; can U.S. companies take advantage?

Co-author Josh Sturtevant

Cuba’s classic cars are not the only relics from the 1950s on the island; Cuba’s electricity grid, a dirty and inefficient infrastructure suffering under five decades of a U.S. embargo and a state-run economy falls into the antique category as well. With the Obama administration’s recent announcement that Cuba has been removed from the U.S. list of countries sponsoring terrorism, the door for trade and investment has been cracked open for the first time in many years. The question now is how and when U.S. investment dollars can begin flowing to relieve the island nation’s economic isolation.

Although diplomatic relations are improving, the U.S. embargo against Cuba, which prevents U.S. companies from trading with the island and makes it extremely difficult for foreign countries to trade as well, is still firmly in place, embodied in several U.S. laws enacted over the past few decades. Despite President Obama’s efforts to reengage with Cuba, it will take action on the part of Congress to fully normalize relations. Unfortunately for entrepreneurs, it does not appear likely this current Republican Congress will embrace such change. Thus, it may take some time to unlock the full potential of the Cuban economy for U.S. investors.

Estimates Place Investment in Renewables at $6 Billion in the Next Few Years

Despite this hurdle, the potential for large-scale investment in clean and renewable energy technologies certainly is exciting and on par with investment in other sectors such as transportation, agriculture, and telecommunications. With the potential of lifted sanctions, Cuba’s economy is set to explode and with it, the island’s thirst for energy. Some estimates place the renewable energy market in Cuba to be around $6 billion in the coming years.

The U.S. is well placed to take full advantage of this growth. First, the U.S. is the Caribbean’s largest supplier of renewable energy, and Cuba is the largest and most populous island in the Caribbean. Further, Cuba is located geographically close to the U.S.’s energy industry and its resources, lying just 90 miles off the Florida coast and 900 miles from Houston Texas, arguably the U.S.’s energy hub.

Today, Cuba’s electricity comes principally from low-grade domestic crude oil and oil imports from neighboring Venezuela. However, like many other Caribbean islands (and as discussed in the Energy Finance Report here and here), Cuba has great potential for renewables, including biofuels and biomass from the island’s sugar cane production, hydroelectric from its many rivers, wind from ocean breezes, and photovoltaic solar from tropical sun.

Currently, the island’s renewable portfolio is small, approximately 2-4 percent of its production, mostly from solar arrays on schools, hospitals, and government buildings, with a few small biomass facilities, small hydroelectric power dams, and wind projects scattered across the nation. Renewable energy capacity has grown since 2012 and the government announced that it wants to increase its renewable energy generating capacity to 24 percent by 2030 through an investment of $3.5 billion to wean itself off of fossil fuel dependence. To achieve this goal, Cuba is looking for a mix of renewable energy technologies, including energy-efficiency, energy-savings programs, and energy storage.

To work toward that goal, recently, Cuba’s Minister of Energy and Mines, Alfredo Lopez, announced plans to build 13 additional wind facilities (to add to the existing four facilities with four megawatts of generating capacity), including seven facilities financed through foreign direst investment. The Minister is looking for approximately USD $600 million for these projects. Another major investment on the horizon is a strategic plan to convert Cuba’s aging power plants from burning oil to natural gas, which burns much cleaner. Here, the U.S. would also be a valuable partner and is strategically positioned, having already constructed several coastal depots to export liquid-natural gas. Although we see natural gas as a smart, mid-range fuel source and better, cleaner alternative to coal, we continue to believe that photovoltaic solar coupled with a mix of other renewables is the most cost efficient and viable long-term solution for many Caribbean nations, Cuba included.

Other Obstacles May Hinder Deployment of Renewables in Cuba

U.S. laws are not the only obstacle to a renewable energy-driven economic recovery in Cuba. Analysts point to Cuba’s governmental structure as a challenge and note that projects – to the extent they have been undertaken – are often mired in bureaucracy. Officials must become proactive and progressive if the nation is to fundamentally reorganize its electric landscape quickly.

However, even if the government were to embrace renewable energy investment with open arms, it is not clear that financiers would be comfortable placing early bets on infrastructure in the nation. For example, most sophisticated equity and debt partners would have fears about twenty year contracts in a nation where the rule of law hasn’t been embraced for decades.  Additionally, assuming that the government itself – or organs of it – would serve as the offtakers in some agreements, creditworthiness will undoubtedly be a concern.

Foreign companies and the government will therefore need to learn to work together again after decades of economic and legal isolation. This will likely include incorporating NGOs and the international finance community in deal structures for credit enhancement purposes, a process which will undoubtedly take time.

Finally, and perhaps even before the obstacles above are addressed, the government may have to deal with outstanding claims by U.S. litigants for property seized by Fidel Castro during the 1959 revolution. These claims could be in the billions of dollars and could be a significant impediment to normal dealings.

The Opportunity is Tangible and Exciting

Cuba has what many other developed counties do not – an opportunity to “start from scratch” and rebuild its energy infrastructure in a smart and efficient manner with 100 percent renewables. The island nation, however, will need billions in assistance to rebuild. The potential for foreign investment is real and exciting for U.S. companies – the only question is can the Cuban government adapt to work efficiently with foreign counterparties and can U.S. companies take advantage of this opportunity before other suitors, such as China and Russia, move in and dominate the market.

http://www.theenergycollective.com/van-hilderbrand-jr/2253436/stage-set-cuba-boom-renewable-energy-investment-can-us-companies-take-adv