Private investment9 July 1998
Burckhard Thiemann* explains why a German investment company has co-financed an 18MW hydro power plant in Costa Rica
At the end of 1998, another hydro power project will enter production in Costa Rica. The generated electricity will be fed into the public grid as part of a long-term power purchase agreement (PPA) with the government’s electricity corporation, Instituto Costarricense de Electricidad (ICE). Following legislation in 1990, Costa Rica laid the legal foundations, and created the fiscal incentives, for the private generation and sale of electricity to ICE to remedy power shortages, especially during the dry season.
Since 1990, smaller projects — particularly those with a maximum capacity of 20MW — have been initiated. As the capacity range provided for at the time has now been met in full with binding PPAs in over 40 projects, the government is now seeking new ways to keep electricity production attractive for private investors.
The Doña Julia hydro power station will be built in the northeast of Costa Rica. DEG — the German Investment and Development Company — which has already gained positive experience in Costa Rica with the financing of a similar 10MW hydro power station, Rio Lajas, was approached in September 1997 with a request to finance this new 18MW run-of-river hydro power station.
DEG has provided long-term finance for private investments in developing countries since the 1960s, and concentrates on financing small and medium-sized, private power stations based on local, preferably renewable, energy sources. In the last three years alone, DEG has co-financed eight power stations with a total capacity of over 800MW in Latin America and Asia.
DEG can provide long-term non-recourse loans and minority equity finance. In small and medium-sized projects, it can also provide the entire debt finance, either as parallel or syndicated loans.
The Doña Julia project, which was already underway, nearly collapsed after various North and South American electricity companies withdrew in the autumn of 1997. Drawing on its worldwide experience and recent contacts from the Rio Lajas project, DEG reorganised the financial arrangements jointly with the local developers and current partners, Grupo Saret, a successful local construction company, and CLC Inegeniros, a consulting firm specialising in hydro power stations.
On DEG’s recommendation, the American power company, Equitables Resources Inc (ERI) was brought in with a capital stake and responsibilities in construction supervision. For DEG, involving this partner, which is already operating in the power sectors of other Central American countries, was a strategical key for conceptual, technical and financial reasons.
Total investment for the power station will amount to about US$34M (US$24.8M will be financed by long-term loans). The long-term finance, for which financial closing was reached by March 1998, will be provided by DEG (US$13.8M) and Scotia Mercantile Bank, a subsidiary of The Bank of Nova Scotia, Canada (US$10.2M) as joint lead arranger on a non-recourse project finance basis. DEG was able to channel US$5M of the loan to Dresdner Bank Lateinamerika AG as part of an A/B loan syndication.
After securing project finance, project construction work was resumed by the partner and co-shareholder as a turnkey job. The ‘engineering, procurement, construction’ (EPC) contract provides for the usual performance guarantees from construction to final acceptance by the EPC contractor, and the Spanish turbine and generator supplier ABB and GEC Alsthom/Neypric for the water to wire facilities. These guarantees were deposited in the form of appropriate bonds assigned to the lender.
The construction of the 1.7km-long tunnel, which is not unusual in Costa Rica but can often pose problems, has been subcontracted by Saret to the Mexican construction firm Gutsa Construcciones SA de CV. The EPC contractor has also commissioned highly competent experts for advice in tunnel construction. This phase is currently under way with four access tunnels. Consultant CLC Ingenieros Asociados, has been engaged during the construction phase as the plant owner’s engineer, while the finance institutions have also commissioned the Canadian enterprise Acres International as the lenders’ engineer.
Thanks to this expertise, the project construction has kept within the cost frame and time schedule. The power station is expected to be ready in two to three months and go on line ahead of 26 December 1998, which was the deadline specified in the power purchase agreement with the ICE for production start-up.
The PPA which was set up in 1994 not only provides for detailed penalty payments for late project completion, which are usually passed on to the EPC contractor in this kind of power station project, but it also regulates the commercial and financial terms and conditions for electricity supply during the 15-year period of the contract. The price per kilowatt-hour (take-or-pay basis) is pegged via price escalator clauses to changes in the exchange rate of the Costa Rican Colon against the US dollar, inflation rates and other cost increases and varies with the dry and rainy seasons and peak and off-peak hours.
Every year the power station can choose between a capacity plus energy fee, with penalty payments for non-delivery of capacity, or just a (higher) energy fee. As a run-of-river power station with daily storage, Doña Julia will opt for the, in-effect, higher rate on a capacity plus energy basis, keeping penalty payments for non-delivery of capacity low through storage management.
DEG regards this project as a successful step in its private infrastructure finance strategy, making a major contribution to completing another power project for Costa Rica by co-shaping business policy and mobilising additional private capital.
|Rainfall in the northeast area of Costa Rica, where the Doña Julia hydro power plant is being built, is extraordinarily heavy — up to 8000mm a year. The water from the Quebrada Quebradon river will be reconduited into the Puerto Viejo river and rechannelled along with the water of this river through a 1700m-long tunnel. This will lead into a 6ha reservoir, from where the water passes through pipes at about 418m asl to the power station. This houses two Francis turbines, each with a capacity of 8.8MW. The electricity generated will be transported to the Leesville substation in Guapiles via a 34.5KV high-voltage line, and will be fed into the public grid. The project will meet national and World Bank environmental standards.|