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A New Financing Approach for Renewable Electricity Projects

By Fernando Alvarado and Douglas J. Arent

The enterprise-centered model – featuring a combination of services and financing – provides a fresh approach to structuring the financing of renewable energy projects. Use of the approach facilitated development of several small hydro projects in Central America.

Sociedad Hidroelectrica La Nieve (SHLN), owner of the 480-kw La Nieve hydroelectric plant in Honduras, is providing electricity to local schools, supplying clean water to 410 families, and providing local jobs. La Nieve is Honduras’ first privately owned, grid-connected renewable energy power plant. The run-of-the-river plant supplies electricity by selling to the state-owned utility through a 15-year power purchase agreement (PPA).

La Nieve got its start thanks to a financing approach called the enterprise-centered model. Under this model, a specialized financier acts as a “value-added middle man,” helping an entrepreneur bring an electricity project to fruition. The financier not only provides initial funding for feasibility studies or business plan development, but also attracts commercial bankers and trains both entrepreneurs and bankers.

In Central America, E+Co – a non- profit organization based in Bloomfield, N.J., USA, with offices in Bolivia, Brazil, China, Costa Rica, Ghana, South Africa, Thailand, and The Netherlands – has applied the enterprise-centered model to develop ten hydro plants. The company worked with the entrepreneurs, local government, utilities, and local bankers to ensure that the necessary legal, environmental, and financial resources were available. E+Co also provided the early-stage financing necessary to complete planning, legal, and environmental work required to satisfy stakeholders and secure the necessary capital for construction.

Understanding the need for a new model

Electricity demand in developing countries far outstrips supply. In the next ten years, Central American countries will need to install about 5,500 mw of new capacity to cope with the projected demand growth, according to recent independent market studies contracted by our company and the Economic Commission of Latin America and the Caribbean (ECLAC) of the United Nations. More than 35 projects, predominantly hydro, are being developed in Central America, with a total capacity of more than 400 mw and a total investment of more than US$500 million.

Many sites exist for small hydro projects, which we define as those with less than 25 mw in total generating capacity. Developing these sites brings people in the region clean, renewable electricity, along with a host of non-power benefits – increased local employment, reforestation, rejuvenation of the natural habitat, rebuilding of local facilities, and provision of clean water. Typically, E+Co works with entrepreneurs to design these social and environmental benefits into the projects.

Lack of money is the main limiting factor in developing these projects. The small private developer doesn’t have enough capital to build the dam and buy the equipment. In addition, the developer often lacks the experience and knowledge to prepare business plans and feasibility studies necessary to get financing.

At the same time, commercial investment companies are reluctant to involve themselves in privately developed small hydro projects. The developer may seem like a high credit risk, and transaction costs are high because of the relatively small amount being borrowed. E+Co’s average loan size is about $300,000. Commercial investment companies also don’t have the capacity to analyze small-scale projects because they require similar levels of due diligence to large projects, making them more costly on a per-mw basis. Consequently, these organizations limit funding options. Because these companies don’t understand how to accurately assess risks for these projects, developers typically cannot afford the interest rates or required guarantees.

As a result, renewable electricity projects often are not developed. Instead, developing countries are more likely to generate electricity using fossil fuels, which contributes to air quality problems and deforestation.

The enterprise-centered model could encourage the development of more hydro projects, reducing these countries’ dependence on fossil fuels.

Breaking down the model

Under the enterprise-centered model, a “mission-driven” financier works to bring small, privately owned companies in emerging markets together with a commercial investor to back small renewable electricity projects. The financier provides a range of services to individuals who want to make their living supplying clean, renewable electricity to their neighbors and helping them improve their lives and income. The financier provides these services one project at a time. Services include:

The financier receives reimbursement in the form of cash flow or recapitalization, which involves a change in the company’s capital structure, such as exchanging bonds for stock.


Construction of the 480-kw La Nieve hydroelectric plant in Honduras, inaugurated in November 2002, was financed with a US$250,000 loan from E+Co. The plant provides electricity to local schools and clean water to 410 families.
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Here’s how the enterprise-centered model works:

The financier first provides seed capital to the developer to pay for legal, engineering, or environmental preparations. This funding can range from US$50,000 to US$250,000, depending on the size of the project, and terms are negotiated on a case-by-case basis.

The financier then acts as an advisor, helping the entrepreneur with business plan development, working with banks to get construction financing, negotiating PPAs, and training developers on approaches to business management and expansion. Once an enterprise begins to meet its objectives, it may be appropriate to provide a growth loan up to US$750,000.

The model in action

Our company adopted the mission-driven financing philosophy in 1994 and has applied it to hydro projects in 17 countries. In Latin America, we recently supported five specific projects: the 7.6-mw Kanata hydroelectric plant in Cochabamba, Bolivia, that began operating in July 1998; the 8.2-mw Poza Verde and 3.5-mw Jones plants in Guatemala, which began operating in March 2001; and the 480-kw La Nieve and 13.4-mw La Esperanza plants in Honduras, which began operating in November 2002 and June 2003, respectively. All five projects were developed by sociedades anonimas (corporations with anonymous shareholders).

Following are two examples of application of the enterprise-centered financing model and lessons learned.

La Esperanza

Consorcio de Inversiones, S.A. (CISA), a privately owned Honduran company, built the 13.4-mw La Esperanza hydroelectric project on the Intibuca River. The project includes three powerhouses with capacities of 485 kw, 950 kw, and 12 mw.

CISA’s mission is to develop small-scale hydroelectric projects in rural Honduras. CISA has surveyed the country to identify the best development sites. The biggest challenges CISA has encountered involve dealing with lengthy government permit approvals and raising financing.

In early 2000, we helped CISA prepare a business plan for the La Esperanza project. We then began working with local banks to arrange project financing. This work included facilitating financial models and analyses, processing information, and helping CISA negotiate appropriate financial terms and conditions with banks.


Training project developers in the work to get a hydroelectric project off the ground and teaching bankers about the business opportunities available in the development of these projects are two important services offered under the enterprise-centered financing model.
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A US$250,000 loan from E+Co in October 2001 allowed CISA to construct the first powerhouse. After successful completion of Phase I in mid 2003, CISA closed financing with BGA, a Honduran private bank, as well as the Central American Bank for Economic Integration (CABEI), receiving US$8.9 million in long-term debt – loans of longer than one year with associated interest payments – to complete Phase II. The company also negotiated a PPA with state-owned utility Empresa Nacional de Energia Electrica (ENEE), which guarantees ENEE will purchase electricity generated by CISA for 15 years. The first powerhouse began operating in June 2003, and all three were completed in 2005.

In 2004, E+Co made a US$200,000 preferred share investment in La Esperanza. In 2006, E+Co provided an US$800,000 senior loan to fund an 8.5 percent increase in the facility’s capacity.

In addition to supplying power to about 115,000 people, the plant underscores many of the benefits of clean electricity projects. CISA planted more than 32,000 trees and provided employment to 135 local people. CISA estimates that 45,000 tons of greenhouse gases will be displaced annually because less electricity will be supplied by polluting fossil fuels.

La Nieve

A second plant, 480-kw La Nieve in Honduras, was built to serve local facilities, including the local school. SHLN, which was formed to build the plant, was unfamiliar with the development requirements, and the project was too small to attract traditional financing. We provided guidance on business plan development, as well as introductions to personnel in the Ministry of the Environment, which facilitated the necessary approvals.

In addition, SHLN required capital to complete the feasibility and environmental impact studies and construction. E+Co provided a total of US$250,000 in loans to cover these requirements.

When the plan and PPAs were approved, construction of the plant provided more than 25 local jobs, as well as six permanent jobs. The plan included elements for reforestation, water protection, and forest conservation. Each year, La Nieve will produce more than 3 gigawatt-hours of electricity, and production at the plant will offset more than 30,000 tons of carbon dioxide over ten years. The plant will also provide potable drinking water, which was previously unavailable in the village.

Training developers, bankers

Training is an essential element of the enterprise-centered model. Entrepreneurs seeking to develop hydro projects need information about financing and partnership opportunities. Local bankers need education to understand how small projects can benefit their communities and provide strong returns.

In 2003, E+Co and The Citigroup Foundation partnered to provide financial and investment training to 20 Central American developers. Topics covered included project finance, structured finance, investment funds, and carbon finance. Working with the Central American Bank for Economic Integration (CABEI) and EcoSecurities, an international carbon credit expert firm, our partnership identified the level of commitment and professionalism of these developers and uncovered partnership opportunities between developers and financiers. The event helped us identify new projects being developed in Honduras, which have since been added to the list of projects under evaluation for potential investment by E+Co and local financial institutions.

Training for both financiers and local entrepreneurs, focused on risk assessment using real-world examples, has proven an effective tool in helping raise funds. For example, we have conducted workshops on financing of hydro projects that have drawn more than 80 executives and project officers from more than 50 Central American banks. The program was designed to raise awareness among local banks of the business opportunities in the development of clean, renewable electric resources. In 2006, more than ten new projects were prepared in Central America, representing about US$4 million of new investment. s

Fernando Alvarado is CEO of E+Co Capital Latin America, a fund management affiliate of E+Co. Doug Arent, PhD, MBA, senior advisor for E+Co, provides strategic and operational advice and works with investors.

Mr. Alvarado may be contacted at E+Co Capital, P.O. Box 13443-1000, San Jose, Costa Rica; (1) 506-2963532; E-mail: fernando@energyhouse.com. Mr. Arent may be contacted at 12009 Blackhawk Drive, Conifer, CO 80433, USA; (1) 303-359-7627; E-mail: doug@energyhouse.com.


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