Economics

In 2012 oil accounted for 8% of domestic power production, as it had consistently for past years.  Following June’s inauguration of the Central American Mercado Electrico Regional, stretching from Mexico to Colombia, hydrocarbon increased to 22% of the nation’s power supply.  With 99% of the nation electrified and a 6% annual increase in demand, the nation seeks a greater expansion in renewables with incentives for private developers of hydroelectric, solar, wind, and biomass thermal power.

The cost of electricity in Costa Rica is around $0.30 per kilowatt hour, slightly more than twice the average retail price in the United States.  Private hydroelectric generators can secure 20-year contracts pegged at 35-50% of the retail price, subject to complex price modeling.  RRH limits its development interest to sites capable of achieving an ROI of 10% and higher and predicates its forecasts at a rate of $0.11, or 37% of retail.   Our valuations also do not take into account the effect of inflation in energy costs.  Because capitalization represents sunk costs and maintenance costs are typically lower than annual inflation in energy costs, projected ROI is actually considerable higher across the 20-year contractual terms of such contracts.  Moreover, the contract period is consecutively renewable based on confirmation that facilities approaching their contractual period are consistent with industry specifications and subject to amortization write-downs on the rate paid by the utility.

While hydroelectric cogeneration is reliably profitable, small scale grid-tie and independent systems are often outcompeted economically by solar power systems, this despite the fact that hydroelectric operates 24 hours per day while solar power operates at full capacity an average of only around 4 hours per day.  The steep decline in prices for solar panels over the past few years is largely responsible for the disparity in economic favorability for small systems.  Despite the high reliability and consistency of even small hydroelectric facilities, the cost of pipeline, turbine and housing, stream intakes, and transmission lines to the facility being powered commonly outstrips the cost of the number of solar panels required to produce comparable output.  Moreover, solar panels do not require environmental permitting, an inescapable obligation for grid-tie systems, technically required for independent systems as well.

 

Energy Production %age of Total 2010 2012
Hydroelectric 72% 63%
Oil 8% 22%
Geothermal 14% 8%
Wind 5% 5%
Biomass 1% 2%

 

Costa Rica does not have hydrocarbon reserves and must import oil and natural gas to supply domestic needs.  But it has rich and abundant hydroelectric resources.  But for recent market trading on the MER and seasonality compounded by a few drier than normal years, Costa Rica would be on the verge of nearly liberating itself of all dependence on oil.

With about 5% annual increase in power demands in addition to pressures to export under MER, the nation is aggressively seeking to expand its power generation capacity, targeting carbon neutral renewable resources.  As a small nation, Costa Rica’s land is increasingly a premium commodity.  Opposition to the expansion of reservoir-scale commercial hydro is vigorous not only in the environmental community, but in a small nation with a relatively high population density, it is also simply impractical to flood arable or habitable lands to create more reservoirs and widely opposed on social grounds.  Absent hydrocarbon reserves and given the relatively small extent of existing and projected solar power generation capacities, the nation seeks to expand its wind and hydroelectric capacity accordingly and is aggressively pursuing biomass power generation and actively researching tidal and wave power generation as well.  Yet, Costa Rica is located within the doldrums, and favorable wind patterns are restricted to certain mountainous regions of the country, the most adaptable of which have already been exploited for wind turbine power generation.  With limited choices for expansion for conventional hydro and geothermal options largely already under production, run of river hydroelectric generation is inevitably a style of hydroelectric that will be increasingly exploited in Costa Rica and other nations similarly blessed with mountains and rain to not only satisfy existing and growing domestic demands but also to satisfy export aspirations in line with MER trading and a broadened market.

Given the relatively low capital commitment to develop run of river hydroelectric facilities, the considerably lower environmental permitting costs, and the absence of social and environmental opposition, run of river hydroelectric is a power generation paradigm that is on the verge of exploding onto the market as a go-to technology and a low-risk investment option for relatively high returns that are predictably consistent and subject only to increases in demand and value.

riverrunsthrough