Where is the Cash? Financing Renewable Energies in the Dominican Republic

Banco BHD, the only bank in the Dominican Republic with a credit line for renewables projects

Overlooking one of Dominican Republic’s beautiful black sand beaches in Palmar de Ocoa, Barahona, a row of seashore villas dominates the bay. Throughout this picturesque landscape one would notice whistling wind turbines and glistening rooftop solar panels. Although the first utility-scale wind farm will be connected to the grid in August 2011 — a significant landmark in the Dominican Republic’s energy transition –  the Dominican market for wind and solar energies is still largely dominated by small, off-grid installations for private homes. Wealthy Dominicans and foreign real-estate investors take advantage of the abundant solar and wind resources to power their villas with a mix of wind and solar energies technologies. Such power supply however, is an exception in the Dominican Republic, where more than 90% of electricity generation comes from imported fossil fuels.

 

Overcoming market barriers

“I have been developing and installing renewable energies in the Dominican Republic for 10 years now,” said Hector Martinez, a long time renewable energies advocate and the head of the Dominican Renewable Energies Business Association, comprising around 40 renewable energies manufacturers, suppliers and project developers. “The main barrier for a larger deployment of these technologies was and still is finance. Dominican entrepreneurs see the opportunity and they see the potential, but there is currently no funding available for renewable energies.” Funding is particularly necessary to cover projects’ upfront investment cost. To be eligible for funding from banks, developers also need public or private guarantee mechanisms. These are not available either, however.

Dominican project developers usually lack capital of their own to invest in renewable energies, and have no access to borrowing instruments such as soft loans, credits, or grants. Therefore, only self-financing businesses can take advantage of the renewables potential. The largest solar PV installation in the Dominican Republic is a 100 kW roof-mounted installation on a water purification and bottling plant in Santo Domingo north owned by the Lily Water Company. Like many of the Dominican Republic’s large consumers, Lily Water Company generated its own electricity with on-site diesel generators. In 2009, it installed 250 roof-mounted solar panels, able to meet more than 70% of its electricity needs. The system was installed by Trade Master International, one of the Dominican Republic’s major suppliers of wind and solar equipment.

Leveraging private capital for renewable energies: the role of Dominican banks

The terms offered by banks for renewable energies are currently not more favorable than those offered for conventional power projects. When I talked to representatives of Dominican banks about renewable energies, they mentioned their inability to provide financing of sufficient length. The longest repayment period that the banks are currently able to offer averages 5 to 7 years. The repayment period for renewable energies project, however, typically spans from 10 to 15 years. An expert from Bank BHD (one of five major banks in the country) also mentioned the lack of an appropriate public or private guarantee mechanism (allowing banks to off-load some of the risk to the government or another organization), as well as a high rate of loan loss provision for banks. The loan loss provision, determined by the Dominican Taxes Superintendence, requires banks to set aside a high allowance in case of customer default. In the absence of a developed domestic market for wind and solar technologies, banks are wary of using the equipment as collateral.

Currently, BHD is the only commercial bank that provides a credit line for renewable energy, energy efficiency and cleaner energy production. Supported by the International Finance Corporation (IFC), the credit line offers low-interest (around 5.5 percent) medium-term (repayment within 5 years with a 1-year grace period) loans for small to medium project developers, with 80 percent of the project’s investment cost available for financing. BHD is responsible for most aspects of the lending process, including marketing, appraisal and credit approval. The company has also set up a project developing assistance facility, which will provide technical expertise (resource assessment, feasibility studies, etc.) and business assistance to developers through the project preparation process. BHD has already started lending to fuel-switching projects, but not yet to renewable energy projects.

In countries where the capital market is not equipped to adequately finance renewable energy projects because of a structural lack of capital, awareness, and experience, strengthening financial intermediaries like banks and investment companies is a good way to leverage private capital to develop renewable energies projects. However, this alone may not be sufficient. Countries that have been successful in promoting renewable energies at a larger scale have not only enabled commercial financing for renewable energy projects, but also set up effective public support mechanisms for renewable energies.

In Part 2 I will write about the role of the Dominican Government in creating an effective support mechanism for renewable energies. Stay tuned.

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