In 2012, UK-based Havana Energy entered into a joint venture with the Cuban company Zerus SA, part of Azcuba, the Cuban Sugar Group, to build five biomass power plants in Cuba. The deal was one of the biggest joint ventures between Cuba and a British company in almost half a century, and the first notable renewable energy contract between Cuba and a UK entity.
The joint venture, Biopower SA, will generate power from bagasse from sugar mills and, outside the sugar harvest, will use an invasive weed that has taken over vast areas of Cuba and is a highly calorific biofuel. Valued at a total of $200m, the power plants are expected to generate in the region of 60MW. The first power plant, one of five planned, is at the Ciro Redondo sugar mill and is expected to break ground in late 2016. A second phase of four additional biomass plants at different sugar mills will begin later.
Andrew Macdonald, Director and Vice-President of Havana Energy, recently spoke with New Energy Events about its biomass project in Cuba, and what he believes it takes to invest in Cuba’s energy sector.
Havana Energy established a joint venture with the Cuban government in 2012 and you initially had hoped to have power online by 2015 at Ciro Redondo. What milestones have you achieved since then, and what hurdles have you faced that have taken more time than anticipated?
It been a long journey and many new policies have been agreed upon for the first time. Because this is the first biomass power plant and there will be many more in the future with us, and the Cuban government will do additional power plants themselves or with other foreign partners, it is vital to ensure the policies and standards are defined correctly. This takes time. This process has taken longer than anticipated but has always been positive and professionally handled by all parties involved.
The key policy helping everybody investing in Cuba is the new Foreign Investment Law instituted in 2014 (Law No. 118). It means they want new foreign investment and there is a new platform on which to try and make things happen more quickly streamlining the process. The law includes bigger benefits for companies, a tax holiday for new investments for about 8 years on corporation tax; overall, it makes investing in Cuba much more attractive.
The trade embargo with the USA on the other hand has, to be frank, caused the joint venture costly delays.
How are you financing the project? Has the location of the project in Cuba made financing more challenging?
The financing has only been more challenging due to the trade embargo with the USA. (Mr. Macdonald declined to comment on who will be financing the project.) This situation should become easier in the future. The business model for the biomass power plant is easy to understand and the financial returns are strong. In Cuba, generally speaking, the high cost of generation today is due to expensive oil serving as a primary source of electricity. Biomass generation, unlike Europe, has no state subsidies, but it is still attractive in Cuba because we will generate a lot cheaper than Cuba is currently through oil power stations.
This marks the first JV in Cuba’s biomass sector. Do you believe the country is well equipped from a regulatory and policy perspective to enable the project to get off the ground?
Yes, Cuban institutions are mature and well prepared to deal with the growth of investment in the renewable energy sector. I’ve spent much of my career working in emerging markets, where the key problem is often that institutional strength is weak, with no foundations in contractual law, etc. This is not the case in Cuba. Institutions are very strong. The government and cabinet cannot cut through these institutions as they are part of the fabric of business and legal structure. With biomass (because it is a new sector in Cuba), we have assisted Cuba in helping to define standards and putting legal structure agreements in place, and so forth.
How has the thawing of the US-Cuba relationship had an impact on the development of your project?
Hopefully it will make subsequent power plants easier to finance. The biggest obstacle in the past has been the financial blockade imposed by the US. I hope with the thawing of relations – normal project finance with normal international banks will become a thing of normal business.
The reality is this: the perception is that the blockade is dismantling, but we haven’t felt that on the financial side yet. It’s disappointing, quite honestly. I did not think that restrictions would still be in place, and if you had asked me a year ago, I thought it would be different today. But if you go to any high street in the UK and ask a UK bank to transfer 10 pounds to Cuba, they can’t do it. American banks can engage in Cuba, so either its been badly communicated in the UK or they don’t know the policy update – but no UK banks will engage with Cuba. The British government is currently looking into it.
As Cuba opens up to international investment do you think the biomass sector, and the broader renewable energy sector, will become highly competitive overnight?
Yes, it’s an attractive sector. Since the majority of generation today is from imported oil, the renewable sector is cheaper thus – simply put – saving the country money.
There is a lot of interest from Cuban State to encourage foreign investment. It must come in under the terms that the Cubans want to receive it, like any other country in the world, and it takes time. Many foreign companies are looking to invest in Cuba, and it does take time to complete transactions, but in high priority areas – including renewable energy – you may move a bit more swiftly.
If you had one key piece of advice for those hoping to invest in Cuba what would it be?
You need to believe in win-win partnerships and be prepared to invest a good deal of time to build up trust and confidence from Cuban counter-parties.