Government incentive packages have spurred Mexico and Brazil to dominate Latin American wind project financing. Projects throughout the rest of the region are scattered and largely one-offs. For most of Latin America, that is not likely to change any time soon. Especially given the amount of time it took for a renewables market to emerge in the two leaders.

The stars aligned that made the [Mexican] government officials get behind renewables, says one Mexico City-based lender who has worked on various wind financings. The country passed the Renewable Energy Usage and Energy Transition Financing Act in November 2008, which made it easier to develop renewable self-supply projects, where a private entity is the offtaker of, and owner of a nominal equity stake in, generators. It further enhanced the competitiveness of wind power against other sources of electricity, with a 70% reduction in the wheeling tariff in April 2010. The country had more than 500MW of installed wind generation capacity at the end of 2010.

Brazil has a similar first-mover advantage. The government created the Proinfa programme, which mandates 20-year power purchase agreements from the state-owned power company Eletrobras for renewable developers, in 2002. However, wind plant financings remained few and far between in the early years of the programme, because of high technology costs, local turbine content requirements and high interest rates. This changed as the cost per MW came down and financing costs decreased. Installed generation capacity was 1,074MW at the end of June, according to Aneel, the Brazilian electricity regulator.

Domestic financial support was crucial to the development of the sector in Mexico and Brazil. Domestic development banks, including Banobras in Mexico and BNDES in Brazil, along with multilaterals, drove early wind project financings. Banobras was a mandated lead arranger of the $148.8 million in peso-denominated debt used to finance Grupo Cobras $214.7 million Oaxaca I wind plant, the first with a 20-year Comision Federal de Electricidad (CFE) power purchase agreement in Mexico, which closed in June 2010. BNDES arranged the $206.5 million equivalent Real-denominated financing for the 150MW Ventos do Sul project that closed in October 2005. The 12-year debt was split between a R105 million direct loan from the development bank and a R360 million covered tranche from syndicated to six lenders.

Support for wind in other Latin American markets is limited. Peru passed a renewables law in 2008 that includes regular ProInversion-run regular renewable capacity auctions, but development has been slow to date. Various local sources say the country has less than 10MW of installed capacity. Other countries lack a regulatory framework that encourages wind power, though there are still scattered projects in locations with high-density resources such as Chile and Honduras.

Development bank bonus

Development of wind hinges on government support. Every country in the world where the sector is sizeable has a regulatory regime to back it up. But in Latin America regulations are not everything. The availability of low-cost debt is vital, even though many Latin developers control wind resources that would put their US counterparts to shame.

Alvaro De Rojas Rodriguez, chief financial officer at Acciona Mexico, says it is easier to close financing for wind plants in Mexico than in other Latin American markets with the exception of Brazil. He attributes this to the availability of Banobras, Fonadin (the national infrastructure fund) and commercial debt funding.

While Cobras Oaxaca I was the first Banobras-financed plant, Acciona took the multilateral route to finance its 250.2MW Eurus facility. The International Finance Corporation and Inter-American Development Bank (IADB) structured a two-tranche $375 million debt package for the facility that closed in June 2010. Bancomext, CAF, DEG, ICO, IADB, IFC, Nacional Financiera and Proparco provided the $310 million 15-year senior tranche and Espirito Santo and BBVA split the $65 million 15-year syndicated subordinated tranche. The sponsor made an equity contribution of $229 million for the $604 million plant. Cemex is the projects offtaker, under the self-supply scheme. The deal, and Oaxaca I, opened the door for the Mexican wind deals that are in the market now and increased commercial lender comfort.

Brazil followed a similar path with development bank debt. BNDES and other state development lenders, including Banco do Nordeste, continue to dominate wind project financing in the country. BNDES has already approved nearly R1.4 billion ($888.9 million) for wind projects this year, including R790 million for nine plants sponsored by IMPSA with FGTS and EDPs Elebras subsidiary in March and a R588.4 million 18-year loan for nine plants that are being developed by Renova and have a total generation capacity of 195.2MW in January. The debt for IMPSAs projects is split between a R277.5 million direct loan to the 70MW Elebras Cidreira project in Rio Grande do Sul and a R562.6 million loan from Caixa Economica Federal for eight facilities in Acarau (156MW), Itarema (30MW) and Aracati (25.5MW).

Only now, after numerous closed deals, are commercial lenders beginning to propose fully uncovered financings for wind plants in Mexico and Brazil, and, rather than compete with BNDES financing, are often providing corporate-backed bridge financing or holding company debt. This level of market maturity is good but would not be occurring now without the support of development lenders.

Andean wind

Peru has three [wind] projects currently in due diligence to receive financing, says Brendan Oviedo Doyle, head of the electricity and climate change practice group at Estudio Rubio in Lima. The projects are Energia Eolicas 30MW Talara and 80MW Cupisnique plants, and Grupo Cobra and Peru Energia Renovables 32MW Marcona facility. He says these are Perus first utility-scale wind projects.

ProInversion awarded each project a 20-year PPA with the Peruvian Ministry of Energy and Mines in its first renewables auction in January 2010. The grantor had a maximum per MWh payment of $110 per MWh, for up to 365MW of wind capacity, in the auction. Eolica offered a rate of $87 per MWh for Talara and $85/MWh for Cupisnique, and Cobra/Peru Energia offered $65.52 per MWh for Marcona. Under the terms of the offtake agreement, the developers will sell electricity from the plants on the Peruvian spot market and the government counterparty will pay them the difference between the rate they receive and their offer price. Peru is expected to hold its second renewables auction, which includes up to 429GWh per year of wind production, later this year.

Financing does not appear like it will be a problem for Eolica or Cobra/Peru Energia. Oviedo says the PPA with the ministry is considered strong among both international lenders and equity investors. The roughly $46.2 million Marcona project has already received its environmental approvals and is expected to be the first to reach financial close. Project debt is expected to come from a combination of domestic and international lenders without the support of multilaterals or Corporacion Financiera de Desarrollo (Cofide), the national development bank.

Wind has less support in other countries in the region. Chile has a law stipulating that the country must generate 10% of electricity from renewable sources by 2024 it is currently roughly 3% but lacks any government incentives. Sebastien Layton, a lawyer in the energy practice at Morales & Besa in Santiago, says to operate at the least cost is one of the core principles of the countrys privatised electricity sector, which hampers the development of more expensive renewable sources, including wind. He says that financing would likely not be an issue in Chile because the three largest generators and distributors could finance plants on balance sheet. The country currently has roughly 174MW of installed wind generation capacity.

Development is scattered elsewhere in the region. Uruguay awarded a consortium of Grupo San Jose, Corporacion America and Conreras Hermanos a contract to develop a 50MW wind plant with a 20-year PPA with UTE, the national utility, in March. Multilaterals closed project level financings for Globeleqs $250 million, 102MW Cerro de Hula (US Ex-Im and Cabei) in Honduras and AEI, Centrans and Arctas Capitals 23.1MW Amayo II (Cabei, FMO, EKFG and BIO) in Nicaragua in November 2010. Otherwise the dealflow is limited.

Commercial comfort

Uncovered commercial loans to projects in Brazil have so far occurred only as bridge or mezzanine debt or, in the case of last years SIIF refinancing, complemented project-level development bank debt at the holding company level. The fact that international commercial lenders are increasingly willing to take on uncovered Latin American government counterparty risk is a sign that the wind project structures, at least in these two countries, are maturing. Mexico is poised to close its first all commercial project-level financing of a wind plant in the fourth quarter.

Acciona is in discussions with lenders to close roughly $450 million in peso-denominated debt for its 304.2MW Oaxaca II to IV plant by the end of the year. A five-bank club is expected to provide financing with a tenor of 10 years or more for the roughly $600 million plant. Rodriquez says 17 banks responded to its term sheet, including BNP Paribas, Caixa Madrid and Societe Generale, though he did not elaborate on who is participating in the club. While the project itself is not notable it is neither the largest wind facility in Mexico nor the first in Oaxaca it does have an established developer, follows a number of successful financings, and includes a 20-year offtake agreement with CFE. The latter, perhaps, being the most important.

Its not that we prefer the CFE instead of a private company as the offtaker for a project, says another Mexico City-based lender. Companies like Heineken and Femsa are good counterparties. But 15 years is a long time and its difficult to analyse what would happen in the remote case one of the companies were to fail. They add that a sponsor will pay a minimal premium to finance a plant with a comparable self-supply contract.

This is likely why Macquarie Mexican Infrastructure Fund, Femsa and Macquarie Capital are combining commercial bank, Banobras and possibly multilateral debt to finance their roughly $1 billion Ion plant. The 396MW facility has a 20-year self-supply contract with Cervecera Cuauhtmoc Moctezuma, a Heineken brewery. Banco Santander, Banorte, BBVA, HSBC and two additional commercial lenders are structuring the debt for the project.

Further south, Banco Santander and Banco Votorantim provided a R400 million refinancing of bridge and mezzanine debt on the 210MW SIIF wind portfolio in Brazil. The refinancing took out loans originally provided by Standard Bank and Liberty Mutual in 2007.The deal is notable because it was the first for an operational wind asset in the country and complements R626 million in low-cost project-level debt from state lenders Banco do Nordeste and Superintendncia de Desenvolvimento do Nordeste (SUDENE). Every commercial lender Project Finance contact says that they are comfortable with the Proinfa offtake structure but simply cannot compete on price with the state lenders.

Brazil and Mexico will continue to dominate wind project financings in Latin America in the medium term. Based simply on the growth in energy demand, no other market will have the needs of these countries, with the exception possibly of Argentina, for significant new sources of energy. Without a government incentive programme and state development funds the countries that do have a budding pipeline of wind, for example Peru, are likely to grow slowly.