High Voltage at the UN

As the annual demand for energy increases due to expanding economies and growing populations, the UN is leading the charge to pull 1.5 billion people out of poverty by providing them access to electricity by 2030. Will it work?

Eager energy suppliers who sense a new global market trend are lining up fast at the UN entrance gates, but only to learn that the rules of the game are also changing.  Government subsidies for renewable projects including the lucrative feed-in-tariffs are drying up.  New solutions are in order including the unthinkable, namely, Public-Private Partnerships or PPP’s, where diplomats and CEO’s collaborate as legally bound partners.

PPP’s are popular with large infrastructure projects such as major highways or public transportation systems.  In exchange for access to capital and management expertise from the private sector. governments use PPP’s to shield private investors from unduly investment risks.  It is no surprise then that a group of CEO’s of utility companies, energy equipment suppliers, UN dignitaries and the World Bank recently convened at the UN to share their experiences and best practices using PPP’s to finance electricity producing projects.  Some examples of the ‘best practices’ given, demonstrated a wide variety of objectives.

For example, AEP’s (American Electric Power) renewable energy sustainability project for the Galapagos Islands located off the coast of Ecuador, focused on structuring partnerships that eventually transfer ownership to the government.  Kansai Electric from Japan traded land and permits with Tuvalu’s local government for a PV Power Plant to be operated by trained local workers.  Kansai Electric’s main objective was to transfer sufficient technology to encourage local production of their solar panels.  The Mexican government’s CFE managed to push construction risk on to the private sector by luring them with guaranteed purchase agreements to be financed using long term loans backed by 20-year PPA’s (Power Purchase Agreements).  Finally Brazil’s Belo Monte’s mega-hydro project, which recently received approval for construction, is leaning on its government to soothe local tensions from indigenous tribes who are at risk of losing their lands.

It was agreed that diplomats and CEO’s view the PPP value proposition very differently.  While diplomats seek reduction of poverty for billions, CEO’s focus on shareholder value.  Their differences are closely monitored by the World Bank whose mission is to attract the right kind of investors for projects that will render the best long term capacity-building results for generating electricity.  On paper and at their first meeting held at the UN on June 2, 2011, the UN’s PPP made an impression among a room full of key players from both sides.  Even if partnerships do not emerge right away, one can be certain that the ground work for a high voltage future at the UN was cast.

Brazil Eyes Ethanol Producers

With sugar prices on the rise, Brazil is importing ethanol to meet its domestic consumption.  This market anomaly has prompted their equipment manufacturers to convince other countries to produce ethanol.  For what purpose? …to secure ethanol imports or to launch a global competitive strategy?

In a move to promote ‘Made in Brazil’ beyond its shores, Brazil is aggressively selling its ethanol production equipment and know-how to other countries including the Dominican Republic.  What Brazilian firms have to offer is significant — over 40 years of experience in an industry that has earned the attention of politicians and investors alike.  Their advice demonstrates the depth of an Olympic-level champion that through trial and error has optimized production to extraordinary levels of efficiency.  Why then is Brazil exporting their expertise and why would anyone be interested in competing with the absolute lowest cost producer?

What is good for ethanol is also good for Brazil.  By getting more governments to write laws that require increasing blending levels of gasoline with ethanol, Brazil believes that the demand for ethanol will continue to rise — followed by a similar increase in the demand for ethanol-producing equipment.  Hence, Brazilian cooperatives such as APLA, Brasil are aggressively showcasing their goods outside of Brazil to countries that have ethanol-blending quotas.  For some of these countries like the Dominican Republic, a base-line efficient ethanol plant that produces about 500,000 liters of ethanol/day and costs around USD$125m would be, in their minds, a good place to start.  That’s a tidy sum for any country, since the price does not include feedstock production and infrastructure expenses.  Brazil appears confident that buyers will emerge.  Some countries already have, despite two glaring issues. First, buyers of Brazilian equipment to produce ethanol will unlikely ever compete on price and capacity with Brazilian made ethanol, and second, Brazil’s profit margins for exported ethanol will always be maximized due to the presence of higher cost producers.

This global strategy encourages Brazil to share its expertise and populate a list of other ethanol producing countries.  As stated in a recent facilitated debate in Santo Domingo between Brazilian and Dominican experts, Brazilians are eager to help any one who buys their equipment.  Their goodwill package includes debt financing for up to 80% of the value of the equipment, consulting, and installation. If this offer is such a good deal, why then are some potential buyers hesitating?  Even at a minimum 20% equity stake, the success of the operation depends heavily on a steady stream of quality feedstock from multiple land owners,  a strong political will to issue permits, and the ability to overcome plant construction and operating delays.

If Brazil stands to benefit from having more producers of ethanol, why wouldn’t they be open to becoming equity investors of these projects as a sign of confidence?  Surely, a buy-back clause overtime would make their investment whole, once the operation is up and running.  It would also provide a higher comfort zone locally, while potentially opening the floodgates for private investor interest elsewhere.  Presently, Brazil’s enthusiasm to promote ethanol production frowns upon partnership interest.  During the debate, their intentions were made clear.  They just want to export their equipment and know-how and assume that their buyers can deal with the other details. Are they right?