Uruguay Seeks Investments in Wind Power - With Price Caps

The good news for potential investors in Uruguay is that two months ago Ministry of Industry, Energy and Mining Ramon Mendez, commented that by 2015 Uruguay could have $1.3 billion dollars of wind farms if developers provided less expensive electricity than that generated by conventional fuel powered plants.

Mednez added that Uruguay's state owned national power company Administracion Nacional de Usinas y Trasmisiones Electricas (National Administration of Power Plants and Electric Transmissions, or UTE) could purchase up to 600 megawatts of electricity from projects from companies that participated in an auction for new wind farms, four times more than expected if the price was right.

Diario El Pais newspaper reported that Mendez said, "The bids are amazing. I was quite surprised when I first saw them."

What price?

Now we know.

On 15 November UTE announced on its website that over the next 30 days interested companies can submit for projects totaling 450 megawatts of capacity to UTE.

If UTE attracts sufficient investor interest and achieves its 450 megawatt goal, then Uruguay will be on target to have roughly one gigawatt of electricity generated by wind power by 2015.  The target if reached, would fulfill nearly 30 percent of the nation's total generation capacity needs, which would represent the highest proportion of wind power electrical generation in the Western Hemisphere.

But, UTE added, it won't accept bids above $65 a megawatt-hour from developers bidding to sell power from private wind farms.

Strengthening UTE's negotiating hand, Uruguayan Ministry of Industry, Energy and Mining engineer Pablo Caldeiro said that since 2008, slowing demand growth for turbines in the U.S. and Europe have driven down prices roughly 24 percent to $1.25 million a megawatt.

Accordingly, UTE has capped its interest in new wind farms to those that can produce a megawatt-hour for $65 or less.

It this feasible?

Apparently so - in a government-organized auction on 18 August, Brazilian wind developers in Brazil agreed to deliver electricity at an average price of $56.51 a megawatt-hour.

The squealing can be heard in corporate boardrooms from Europe to Washington. To put Montevideo's hardball price cap negotiations in context, consider Germany, which three months after Japan's 11 March Fukushima nuclear disaster decided to shutter all of the country's nuclear power plants and shift increasingly to renewable power. German economists determined that while, electricity from conventional coal fired plants costs roughly $83 per megawatt-hour, the price increases roughly 50 percent to $124 per megawatt-hour for wind energy.

Accordingly, Uruguay's tough negotiating stance represents a saving rate of 48 percent over German wind prices, but such hardball tactics do not sit well in the canyons of Wall Street.

London-based Bloomberg New Energy Finance's Prices analyst Eduardo Tabbush warned darkly, "prices in recent auctions are so low that some projects may not be viable."

Salving the issue somewhat, UTE will pay wind farms $110 for every megawatt-hour they generate before 2015 to stimulate development.

So, why might investors consider Uruguay's wind power initiatives?

Well, for a start, they're not going it alone. Uruguay's Programa de Energía Eolica en Uruguay (Wind Energy Program in Uruguay, or PEEU), is a joint initiative between Uruguay's government and the United Nations Program for Development (UNDP) and is overseen by Uruguay's Ministry of Industry, Energy and Mining through the country's Direccion de Energía (Department of Energy, DNE), with funding from the Fondo Global Para el Medio Ambiente (Global Environment Facility Fund, GEF).

Uruguay is also a member of the Germany-based World Wind Energy Association.

Last but hardly least, as UTE is a state-owned entity, any contracts would have the full backing of the Uruguayan government.

But the wind turbine is spinning for those outraged foreign investors hoping that Montevideo's lowball pricing tactics to prove unworkable. Four months ago UTE began preliminary discussions with Brazil's Centrais Eletricas Brasileiras S.A., more familiarly known as Eletrobras. over jointly investing in wind farms in the region.

Eletrobras is Latin America's biggest power utility company, now tenth largest in the world and coincidently, the world's fourth largest renewable energy company. As Eletrobras holds shares in a number of Brazilian electric companies, it currently generates and transmits approximately 60 percent of Brazil's current electricity supply.

Eletrobras is aggressively seeking to establish itself internationally, with a goal of securing 10 percent of its income from outside Brazil by 2020.

Furthermore, $65 a megawatt-hour may soon prove to be a decent rate of return, as Minister.

Mendez noted that while Uruguay's average cost of electrical power generation is currently $73 a megawatt hour, it could drop as low as $45 within the next four years as Uruguay receives more of its energy from wind, biomass and liquefied natural gas-fuelled power plants.

Of course, investors believing that $65 a megawatt-hour for wind power underwritten by a state agency is too low a return on their investments can always look to more stable and prosperous societies willing to pay top dollar - like the U.S. and the EU.

After all, Uruguay's economy only expanded 8.5 percent in 2010 and is expected to grow 6 percent in 2011, in comparison to Brussels' and Washington's robust managing of their economies. The EU executive said it expected economic growth in the 17 countries sharing the euro to grow a robust 1.5 percent in 2011, while economic experts predicts the U.S. economy will surge by a breathtaking 1.8-2.3 percent next year.

By. Dr. John C.K. Daly of Oilprice.com