DOMINICAN REPUBLIC—Recent Events in the Dominican Power Sector Open the Door for the Development of Power Generation Projects, Particularly in Renewable Energy

Author: Cristian Vallejo

Spanish

Recent announcements of key projects in the Dominican power sector and actions taken by the government signal that this sector is finally taking meaningful steps aimed at resolving the structural problems that affect it, including the lack of an adequate diversification of its power generation matrix. Such projects and actions open the door for the development of new power generation projects, particularly renewable energy projects that can take advantage of the various financial and other incentives available for such projects since 2007.

Current Composition of the Dominican Power Generation Matrix

Thirteen years after implementing a general reform of its power sector, the Dominican Republic remains mired in a crisis affecting this sector, which has been worsened by the sustained increase in the price of oil, which is the base fuel for its power generation matrix. Investments in power generation resulting from reform allowed the construction of new coal, natural gas and crude oil-fired (using FO #6 in lieu of traditional diesel—FO #2) power generation projects and refurbishment of some of the existing units in the system, allowing them to operate at their full capacity and improving their efficiency. As a result of such investments, there has been an increase in the supply of energy, a reduction in production costs and greater diversification of the country’s power generation matrix. Thus, in accordance with the statistics of the Coordinating Body (Organismo Coordinador) of the National Interconnected Electric System (SENI), power generation has shifted from an industry based primarily on liquid petroleum, weighted at almost 90 percent of the country’s power generation matrix, to a greater diversification of said matrix, today composed of approximately 40 percent liquid petroleum, 14 percent coal, 31 percent natural gas, 14 percent hydroelectric and 1 percent wind.

Required Changes to the Power Generation Matrix to Address the Problems Affecting the Country’s Electricity Sector

Notwithstanding the foregoing, the actual composition of the country’s power generation matrix remains inadequate and significantly contributes to current deficiencies in the electricity sector, including production costs and state subsidies, which, according to statements by government officials, amounted to US$1.4 billion in 2013. To address these problems and particularly to promote the adequate supply of power generation, several studies on the subject have concluded that the country requires that as a priority new facilities, particularly coal and natural gas-fired facilities, be added to its power generation matrix to meet the base level of demand and to displace the matrix’s dependency on oil. It is estimated that in 2016 the system will require approximately 600 MW of new capacity to maintain the current levels of supply (84 percent of the demand) or 1,500 MW to supply the total demand projected by the SENI by that date.

Significant Projects Recently Announced and Their Expected Impact on the Composition of the Power Generation Matrix and Development of Renewable Energy Projects

The Dominican government has embarked on the construction of two coal-fired power generation units with an estimated 380 MW capacity each and related port infrastructure. According to government announcements, this project is expected to cost approximately US$2.041 billion. Both units are expected to commence operation during the first half of 2018. Similarly, last February a private consortium announced the construction of an LNG terminal in San Pedro de Macoris. It is estimated that this terminal will enable the long-awaited conversion of the CESPM (Cogentrix) power plant (300 MW) and the conversion and/or development of new natural gas-fired power plants for approximately 700 MW of total capacity. In addition, last February AES Dominicana announced the closure of the combined cycle of the Dominican Power Partners power plant (108 MW).

The above-mentioned projects, once implemented, together with other smaller scale projects that have been announced and/or are in the process of implementation, are considered key in the process of formulating a comprehensive solution to the problems affecting the Dominican power sector and particularly to facilitate the urgently needed change in the country’s power generation matrix. In light of these projects, the current 44 percent share that coal and natural gas-fired power plants have in such matrix is expected to increase to approximately 70 to 80 percent.

Such a change in the power generation matrix will permit and to some extent will require (given the significant financial burden that the two coal-fired power plants being developed by the government will place on the country’s public finances) that the government place an emphasis on and dedicate a considerable portion of its efforts to the promotion, facilitation and development by the private sector of other projects that (a) contribute to the overall solution of the problems affecting the electricity sector, (b) ensure a more balanced portfolio of energy sources in the country’s power generation matrix, and (c) allow the government to realize, among others, the environmental objectives it has set, particularly through renewable energy projects, which notwithstanding (i) the existence of various incentives aimed at their promotion and development (summarized below), (ii) the country’s commitment to emissions reduction and (iii) legal mandates with respect to the incorporation of renewable energy sources to the country’s matrix¹, have faced certain obstacles (summarized below) that have prevented their proper development and implementation.

Renewable Energy Legislation

Basic regulatory framework

To incentivize the development of renewable energy projects, on May 7, 2007, the government enacted Law No. 57-07 of Renewable Energy Incentives and Special Regimes, supplemented by the Regulation for the Implementation of the Renewable Energy Incentives and Special Regimes Law, enacted on May 27, 2008 (the “Renewable Energy Legislation”). The Renewable Energy Legislation, in conjunction with the constitution of the Dominican Republic and Law No. 125-01 (Electricity Law) and related regulations, constitute the basic regulatory framework governing the development and implementation of renewable energy projects in the Dominican Republic.

Type of projects contemplated by the Renewable Energy Legislation:

• 1. Wind farms and individual windmills with an initial installed capacity (in aggregate) of up to 50 MW
• 2. Micro and small hydroelectric facilities with a capacity not exceeding 5 MW
• 3. Electro-solar facilities (photovoltaic) of any type and capacity
• 4. Thermo-solar facilities (concentrated solar power) of up to 120 MW of capacity per unit
• 5. Power plants (i) using primary biomass as a main fuel, which could be used directly or after a process of transformation to produce energy (a minimum of 60 percent of the primary energy) and (ii) with an installed capacity of up to 80 MW per thermodynamic or plant unit
• 6. Biofuel production plants (distilleries or biorefineries) of any magnitude or production volume
• 7. Energy farms, plantations and agrofarming or agro-industrial infrastructures of any kind dedicated exclusively to the production of biomass destined for energy consumption, vegetable or pressure oils to produce biodiesel, and hydrolyzing production plants for sugar liquors (glucose, xylose and others) for the production of ethanol fuel and/or energy and biofuels
• 8. Facilities for the exploitation of oceanic energies (waves, sea currents, thermal differences in oceanic waters, etc.) of any magnitude
• 9. Thermo-solar facilities of medium temperature devoted to obtaining sanitary hot water and air-conditioning from cooling equipment

Certain key incentives and other important rights under the Renewable Energy Legislation:

• 1. One hundred percent exemption from taxes on the importation of equipment, machinery and accessories required for the production of energy from renewable sources and their exemption from the Transfer Tax on Industrialized Goods and Services (ITBIS—Dominican value-added tax) and all final sales taxes
• 2. Tax rate applicable to interest payable under foreign financings is reduced to five percent
• 3. Income tax credit of up to 40 percent of the cost of investment in equipment to owners or tenants that switch to or expand renewable energy systems for private energy consumption
• 4. Inclusion of these projects in the benefits set out in the Kyoto Protocol under the Clean Development Mechanism
• 5. No requirement to sell their energy to the wholesale market but the right to sell their production to the distribution companies at the market’s marginal cost
• 6. Obligation to the distribution companies to buy these projects’ surplus at prices determined by the Superintendency of Electricity (SIE)
• 7. Preferential and priority connection rights to the transmission and distribution systems
• 8. Preferential right to transfer to the system, through the transmission company, the net energy produced
• 9. Right to subscribe a power purchase agreement (PPA) with the Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE) and receive the corresponding payments under the Renewable Energy Legislation, particularly a feed-in tariff (which fixes a premium payment on top of the wholesale electricity price)
• 10. Preferential dispatch rights

Main Obstacles Encountered by Renewable Energy Projects

The main obstacles that the development of renewable energy projects has faced are (i) excessive bureaucracy and delays in the issuance of the governmental permits, authorizations and certifications required for their development and implementation, which have significant impact on the projects’ timeline and implementation, (ii) problems procuring a PPA with the CDEEE, particularly given the high rate of the feed-in tariff contemplated by the Renewable Energy Legislation, which, among other consequences, has prevented these projects from having adequate access to the financial markets, and (iii) the unreliable nature of the energy produced by these projects, which requires the availability of reliable backup capacity to compensate for the unavailability of the energy expected from these projects, which the system does not currently have. The latter circumstance has prevented the government from devoting sufficient attention to the development of these types of projects. The government has instead focused most of its efforts and resources on incentivizing the development of more reliable power generation sources such as coal and natural gas-fired power plants.

Nevertheless, the government has taken certain actions that are expected to remove or significantly reduce such obstacles. For example, with respect to the excessive bureaucracy and delays affecting the issuance of permits, authorizations and certifications, the government is implementing a “one stop shop” (ventanilla única) for processing all such approvals, permits and certifications. This one-stop shop seeks to integrate all relevant public entities so that developers have a centralized office to request and process the different permits, authorizations and certifications required to develop and implement their projects. Likewise, the government is working on awarding PPAs under market conditions (including price and lenders' protections) so these projects have adequate access to financing. With respect to the lack of backup capacity to compensate for the unavailability of energy from these projects, it is expected that this problem will be significantly addressed by the changes to the country’s power generation matrix expected to result from the recently announced coal and natural gas projects described above. The implementation of such projects will allow the addition of new renewable energy projects to the system, while at the same time maintaining adequate levels of operating efficiency and security in the SENI.

In sum, among others, (i) following such expected diversification of the country’s power generation matrix, (ii) the financial burden that the two coal-fired power plants being developed by the government will place on the country’s public finances, (iii) the government’s environmental objectives, (iv) the country’s commitment to emissions reduction, (v) the legal mandates with respect to the incorporation of renewable energy sources into the country’s power generation matrix contemplated by the Renewable Energy Legislation, and (vi) the institutional improvements and actions taken by the government to remove or significantly reduce the obstacles that the development of renewable energy projects have faced open a window of opportunities for the development and implementation of renewable energy projects in the near future (in sizes proportionate and consistent with the needs of the Dominican electrical system), which according to some estimates could amount to up to approximately 400 MW.

_{1. According to Law No. 57-07, described below, energy subsector authorities should ensure that by the year 2015 at least 10 percent of power purchased by distribution companies and marketers comes from renewable energy sources and by 2025 25 percent of the electricity sector demand be supplied by renewable energy sources.}