LatinFinance - March/April 2016 - 37

DOMINICAN
REPUBLIC
ENERGY

Scarce and costly energy resources are the biggest constraint facing the
Dominican Republic's economy. But a clutch of fresh initiatives in the sector
could finally change the picture. By Lucien Chauvin

Balance of power

sk any government official, investor or analyst about the largest constraint
on the Dominican Republic's economy, and they'll likely point to energy.
The Caribbean country's power sources are dirty and costly, creating a massive drain on
public finances when crude prices are high. Electricity shortages are common, complicated
by major problems with publicly run power transmission and distribution systems. The
government reports that, in the 10 years through 2015, it transferred $9 billion to the power
sector to cover deficits in the operating system - more than it spent on health care.
"The energy sector has always been a challenge in the country; that is well documented
and markets know that very well. A main problem here is that we are one of the few countries
in the world that uses oil for electricity," says Magín Díaz, vice minister of public credit.
Conditions have improved in recent years, with the power generation mix dropping from
an 80% reliance on fuel oil to less than 50% today, Díaz says. President Danilo Medina's government is considering several political and practical options to further improve the island's
energy supply.
Generating solutions
Manuel Orozco, who covers the Dominican Republic for Standard & Poor's, acknowledges
the country's "huge problem with the efficiency of transmission and distribution." Private
generators, he explains, sell to public companies, "which are deficient and have huge loses. It
is one of the main constraints on economic growth."
Losses from distribution are more than 30%, according to a Fitch Ratings report in 2016.
The state-run electric corporation aims to shrink that ratio in the next few years by fortifying
the grid.
The government has also acknowledged the transmission problems. It applied for, and
received, a $78 million, 25-year loan from the Inter-American Development Bank in 2014 to
improve the Dominican power grid. In the political sphere, the Medina administration established last year the National Pact for Reform of the Electric Sector, which is aimed at developing policies through 2030 to improve generation, transmission and distribution systems.
Meanwhile, the government is also exploring power sources beyond fuel oil and diesel.

Its long-term goal is a mix that would generate around 80% of power needs from
non-renewable sources, coming mainly
from a combination of coal and natural
gas. The 20% renewable component would
included biomass, solar and wind projects.
"Getting rid of oil in the electricity mix will
help a lot," says Díaz.
The local division of US energy firm AES
added 100 megawatts to its gas-fired plant,
bringing installed capacity to 300 megawatts. Its three thermal plants, two using
natural gas and one using coal, generate a
combined 40% of the country's power supply today, according to Díaz.
"We are operating amid a backdrop of
a growing economy, which is performing
well and keeping a fiscal discipline. The
government provides a stable framework
for investors," says Nicolas Van Tienhoven, regional treasury director at AES
Dominicana.
To pay for the expansion, the company
refinanced its 2020 notes last year through
regional banks. The $250 million, two-year
senior unsecured bullet loan came in at
a price that was two or three basis points
below what the bond markets would have
supported, according to the company.
"The relevant message is that lenders are
ready and able to support companies with
a sustainable and proven business, with
a healthy balance sheet. To finance these
operations, there's money available under
competitive terms. With this operation, we
are saving $1 million per month," says Van
March/April 2016 - L ATINFINA NCE.COM 37

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