Commentary: Renewables investing makes inroads in the Caribbean, Central America

The Caribbean and Central America's balmy climate not only lures millions of tourists to the area each year, it also provides ideal conditions for clean-energy investments.

Due to the region's ample energy resources and high local power prices, energy-efficienct wind and solar power projects are currently among the most lucrative investment options. Their attractiveness has increased even more as they are now able to compete with conventional fossil-fueled power plants.

Investors can also benefit from U.S. dollar exposure as financial contracts such as power purchase agreements are usually U.S. dollar-pegged or denominated in dollars.

Additionally, the renewable energy industry matured globally in the previous year. This includes not only the equipment and technology side, such as wind turbines or solar panels, but also the related supply chain and availability of qualified and experienced contractors for construction, operations and maintenance.

Fixed-price turnkey engineering, procurement and construction contracts are most common, and the same fixed-price and full-service operation and maintenance agreements are available in developed and developing markets.

Another reason for the rising attractiveness of clean-energy investments in the Caribbean and Central America is that developers and investors can build and operate renewable energy assets with the same trusted partners in the U.S., Jamaica or Panama. This has derisked investments in greenfield and brownfield renewable energy projects materially over the last couple of years, thus diminishing the importance of the project location.

In general, the region offers investors the possibility of higher returns and portfolio diversification. This is in marked contrast to the renewables market in North America, where clean-energy assets have experienced shrinking returns and yield compression during the past years leading to high (over)valuation. Furthermore, the origination of sound investment opportunities in an overcrowded market becomes more and more challenging.

It therefore comes as no surprise that investors have been eyeing the neighboring Caribbean and Central American region for quite a while now — especially since several governments have already committed to ambitious renewable energy goals. Barbados, for example, aims to run on 100% clean energy by 2030. In Latin America, nine countries, among them Colombia and Costa Rica, have set a collective target to reach 70% renewable energy generation by 2030.

The investment rationale is fairly simple: The Caribbean and Central America have a growing demand for energy in the coming decades. Energy is an expensive product in a region where the power supply is unstable and blackouts aren't uncommon.

What's more, conventional power plants are outdated and inefficient, running mainly on fossil fuels. These need to be imported by local governments and hike up the energy costs additionally.

The impact of climate change represents another issue. Droughts and shorter or more intense rain periods are already having an effect on the electricity production of hydropower plants in the region. Against this background, renewable energy comes as a solution to a regional problem as it offers cheaper, cleaner and more sustainable energy — even more so in combination with state-of-the-art storage technology.

In an effort to leverage the region's abundant natural resources and break their costly dependency on fossil-fuel imports, countries like Jamaica, Barbados and the Dominican Republic have revised their national energy policy over the last few years.

The Dominican Republic, for example, is looking to switch 25% of its electricity generation to green power sources by as early as next year. Another front-runner is Jamaica, aiming to ramp up the renewables share in its power mix to 30% by 2030. Barbados is even going one step further and plans to run entirely on clean energy by 2030.

This is music to the ears of environmental, social and governance investors. Regulatory frameworks create an ideal environment for renewable infrastructure investments, which cannot thrive without political support in highly regulated energy markets.

More importantly though, they signal long-term commitment from political stakeholders and send a strong message to the private investor community. The governments and public-sector entities of the region simply can't afford to be a major player in the energy transition, and depend on local as well as foreign direct investments in the sector.

Although the abundant natural resources and regulatory framework create opportunities, the region does have its other peculiarities, which can make investing more challenging than in other parts of the world.

Not all Caribbean and Central American countries carry the same opportunity due to the lack of cooperation between the public and the private sector. In these cases, restrictions have made it unnecessarily hard for investors to capitalize on the region's renewable energy potential. It's key, in this regard, to work with a manager that understands the geopolitical nuances and has partners on the ground.

The Caribbean's unique geographical features also make it close to impossible to build mega solar parks or wind farms. Instead, investors looking for opportunities that offer them a broad exposure to the market must be prepared to spread their cash across several smaller-scale projects. This situation offers the opportunity to make attractive investments in smaller but more profitable renewable energy projects.

The moral of it all? Once investors have familiarized themselves with the region's investment environment, they can benefit from the opportunities and attractive risk-adjusted returns south of the border. In the face of climate change, clean-energy solutions will take center stage and make renewable infrastructure projects all the more important. Looks like a new era of investment is dawning.

Martin Vogt is managing director at MPC Renewable Energies, a subsidiary of MPC Capital AG in Hamburg, Germany. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.