Lack of cash clouds Cuba's green energy outlook

Lack of cash clouds Cuba's green energy outlook
By Sarah Marsh | CIRO REDONDO, CUBA

Cuba, battling a chronic energy deficit, has all the sunshine, wind and
sugar to fuel what should be a booming renewables sector - if only it
could find the money.

The country's first utility-scale renewable energy project, a biomass
plant in Ciro Redondo, is finally under construction thanks to an
injection of funds from China, a socialist ally and in recent years, the
communist-led island's merchant bank of last resort.

Turning Cuba's renewables potential into reality has become a state
priority over the past year since crisis-stricken ally Venezuela slashed
subsidized oil shipments to Cuba that were supposed to help power its
traditional plants.

Some foreign players in green energy, such as Spain's Gamesa and
Germany's Siemens, have shown early interest in the country. But the
overall paucity of foreign financing means that this project, being
carried out by Cuban-British joint venture Biopower, is still the
exception rather than the rule.

The financing puzzle is a crucial one to solve if cash-strapped Cuba is
to hit its target of renewables filling 24 percent of its energy needs
by 2030, up from 4 percent today, a strategy that would require billions
of dollars in investment.

The government announced last July it was rationing energy, raising
fears of a return to the crippling blackouts of the "Special Period"
after the collapse of the Soviet Union. The energy shortage comes at a
time when growing tourism and private business creation are generating
greater demand.

"The most challenging thing we have had to deal with in the last six
years of developing this project has been the financing," said Biopower
President Andrew Macdonald, while touring the site of the Ciro Redondo
plant.

The Scotsman, who has been doing business with Cuba for more than a
decade, said the U.S. blockade had "strangled" funding from Europe "and
other obvious sources", with banks afraid of sanctions.

His start-up Havana Energy joined forces with a subsidiary of domestic
sugar monopoly Azcuba to create Biopower in 2012, with a contract to
build five plants attached to sugar mills.

The plants are projected to use sugar cane byproduct bagasse and
fast-growing woody weed marabu as biofuels, costing around $800 million
to add some 300 MW to the grid.

Biopower was finally able this year to start building the first one,
thanks to a decision by China's Shanghai Electric Group Ltd to buy an
equity stake in Havana Energy. The JV is now looking for external
financing for the next four plants.

"We have to check whether the funders are open for the Cuban market or
not," said Zhengyue Chen, former investment manager at Shanghai Electric
and current Biopower chief financial officer.

RISKY INVESTMENT

Some international companies have shown an interest in gaining a
foothold in the slowly opening Cuban market, encouraged by a three-year
old investment law that allows full foreign ownership of renewables
projects.

Cuba last year signed a deal with Spain's Gamesa for the construction of
seven wind-powered plants and with Siemens for the upgrade of the
creaking power grid.

These are just preliminary agreements, however, which may not become
concrete contracts, Western diplomats based in Havana say, given
difficulty agreeing on a financing framework and actually securing the
funds.

On top of the U.S. trade embargo, which frightens banks from offering
Cuba loans, Cuba's payment capacity is questionable. While it has
improved its debt servicing record under President Raul Castro, it is
falling behind on paying foreign providers.

And it has little to offer as payment guarantees in hard currency. Its
state electricity utility generates revenue in Cuban pesos, which are
not traded internationally, only into convertible Cuban pesos at a
state-fixed rate. The government has promised to unify those two
currencies, but it is unclear how.

"If no currency indexation is provided from the government, significant
devaluation poses a great threat to investors' revenue," said World Bank
renewable energy expert Yao Zhao.

Moreover Cuba does not belong to multilateral institutions like the
Inter-American Development Bank that could provide external guarantees.

CHINESE FUNDING

That is likely to force further reliance on China, already Cuba's top
creditor in recent years, having offered loans as a way to hike trade
with the island. Shanghai Electric is importing and building the Ciro
Redondo plant, as well as helping finance it.

Project Manager Li Hui, already directing excavators shifting earth on
site, said he will stay on after the factory is built as the head of the
company's first branch in Cuba.

"We will hand them over a fully-functioning power plant," he said,
adding that Shanghai Electric had to bring over new building equipment
because the Cuban ones were antiquated and lacked spare parts.

But even Chinese largesse may have its limits. Chen said Biopower was
now in discussions with overseas funders, mainly from Europe, and hoped
to secure commercial funds for the second plant by the end of this year.

Macdonald said he hoped his project would be part of the launch of many
foreign participations in the energy sector.

"But today, we are still pioneers," he said.

(Editing by Christian Plumb and Edward Tobin)

Source: Lack of cash clouds Cuba's green energy outlook | Reuters -
http://www.reuters.com/article/us-cuba-energy-idUSKBN1720EB