In 2008, Uruguay announced its intention of becoming the global leader in wind energy and embarked on a programme so encouraging that four years later the Ministry of Industry, Energy and Mining increased its estimated target for 2015 to 1,000MW. At the time, just 40MW of wind energy was plugged into the country’s electricity grid.
UTE, Uruguay’s government-owned power company, embarked on an ambitious agenda to realise its aim and, if anything, appears to be exceeding its ambitions.
The Uruguayan government has been widely praised in its handling of its wind programme. Firstly, it took a long-term view and established an outlook as far forward as 2030, which Gonzalo Secco of FERRERE says is unusual and served to reinforce the country’s commitment to ensuring renewables play an important role in the energy matrix. “When you have a government with a clear plan, that makes private companies very comfortable,” says Secco, who adds that it also helps that the plan obtained the backing of the opposition parties in 2010.
Timing has also played its hand in Uruguay’s success story. The main markets for renewable projects between 2010 and 2012 were Europe and the US, but as Secco says, the European market in particular was very depressed at that point, so manufacturers and developers were looking for new opportunities in economies that were performing well. Meanwhile, Uruguay had recently been given investment grade, which meant multilaterals like the IADB were keen to finance projects in the country.
There was also little opposition to the projects’ construction: the wind farms are being built in places where they do not interfere with other activities – on the tops of hills, where the ground is rocky and so not good for agriculture – and they can co-exist easily alongside cattle.
While the programme represented a steep learning curve for the country, the government did not rush in. It started small, awarding a round of 5MW projects in 2006 and 2007, and slightly increasing the capacity on offer to 20MW in 2008 and 2009. Spurred on by its success, the government grew more ambitious and started auctioning projects of up to 50MW capacity, and set a target of 300MW of wind by 2015. “The government said, ‘OK, we are going to take advantage of the learning curve and grow’,” says Secco. Two main groups of developers came forward for the contracts: developers from Europe with lots of experience, and local companies and individuals that understood it was a good business opportunity. Three developers from Uruguay, Spain and Argentina were awarded 50MW projects in the 2010 bid at a good price – at an average of US$90 per MWh. And so, in August 2011, the government auctioned off another 150MW, awarding three projects to Uruguay’s Ensol, and German developers. The prices of the latter round were significantly lower, at an average of US$63 per MWh. The government was close to its target, but with prices so good it decided to issue a decree allowing UTE to buy power from the remaining participants at the average rate awarded to the three 2011 winners. Some 13 of the other developers had not won accepted the terms. “That’s how we came to 1GW capacity in those three rounds, something that exceeded the government’s plans as it was more capacity and lower in price than expected,” says Secco.
Now, there have now been roughly 20 projects awarded, with 50MW of capacity each on average. Meanwhile, UTE will develop its own projects with a total capacity of 300MW, where UTE is the owner and manufacturers will supply turbines, operation maintenance and EPC. It has already contracted German wind turbine manufacturer Nordex (which hired Ferrere) and is working on three similar projects. “UTE used to be a monopoly in generation so it seems they don’t want to lose their position in renewables,” notes Secco.
It is expected that some six projects with 342MW of capacity will come online during 2014, while the remaining 13 projects with 650MW could be producing power by 2015, according to Bloomberg.
Raising the finance
The next stage was to finance the projects. Finance has predominantly come from a combination of export-credit agencies, multilaterals and European development banks.
Uruguay does not have a long history of project finance, and the wind projects have given the country’s lawyers the chance to cut their teeth on these structures.
The Uruguayan legal market is small, and only a handful of firms have international experience and the manpower to do large-scale transactions. This applies to project finance, for which that small group has found itself in a comfortable position where there is enough work to go around. “For this type of deal, you need a certain sized team and experience that makes it difficult for small firms to be able to have the capacity and structure to work on this type of project,” explains Diego Rodríguez of FERRERE.
In the project finance sphere, it has paid to be there from the start to develop the necessary experience. “We found they had a very clear idea in their minds. That gave the firm the chance to understand what the important negotiation issues were with UTE and the developers,” says Secco.
The government’s wind programme has also given rise to some novel transactions. Take the project being developed by UTE (the largest in South America at 140MW). For UTE to be able to finance the project as a private company would with a project finance structure, and to have the participation of local pension funds entering in as investors, Rodríguez explains that Uruguayan regulation states that pension funds can only invest through purchasing traded securities, so UTE needs to create a structure through which to make an issuance. “It will be an interesting structure, where UTE will hold 20 per cent of the equity. Even though UTE has control in the end, a big part of investment will be private investment,” he says. “It’s very interesting and the first time it has been seen in Uruguay.” It will also be the pension funds’ first foray into this type of project.
There are now 11 places in Uruguay where wind projects are being built, while 10 projects are still waiting for environmental approval or financing. Meanwhile, other developers are rushing to meet the incentive tariff deadline of December 2014 and seeking finance to begin construction. Some developers are selling off minority stakes to raise the capital or obtain a bridge loan from local banks to start construction within deadline.
Renewables in Uruguay will be discussed in a panel at Latin Lawyer’s Regional Project Finance Summit in Washington, DC on 7 November. Register here to join leading members of the Latin America project finance community at the conference, which will address the hot topics for practitioners in the region today.
When the wind drops
The government’s wind programme has brought a new client base for several law firms – from the wind turbine manufacturers and the European developers to the development banks. But project financing work for wind farms won’t last forever: once they are fully plugged into the grid, the legal work will die down.
Fortunately there are more opportunities in the pipeline – although perhaps not on the same scale – that the experience should put the legal market in good stead for. The government is seeking to replicate the wind experience with solar, although there are only four projects amounting to 200MW, and lawyers are generally less excited about what solar energy has to offer because the projects are not as complex in construction or cost intensive as wind.
The government has also awarded France’s GDF Suez a contract to build a liquefied natural gas plant which requires financing of around US$1 billion and will likely see the IADB take part.
The country is also playing host to numerous oil and gas companies in their hunt for oil, and they again have hired the usual suspects when bidding for exploration blocks and will likely do so again should then need financing if their search is successful.
Outside of natural resources, Secco notes the expectations for project finance more generally – such as the prison construction the government is organising (which has seen Ferrere hired by one of four bidders).
This time – which is good news for Uruguay’s lawyers – it seems the window will stay open. As Secco says, “It looks like project finance is here to stay.”
Article published in Latin Lawyer on Tuesday, 15 October 2013.