Executive Summary
Addressing the massive and urgent problem of climate change requires innovative investment solutions. Deetken Impact Sustainable Energy’s catalytic investment in KW Financial represents the first tailor-made financial mechanism in the Dominican Republic sponsored by an international impact investment fund to provide solar photovoltaic (PV) distributed generation solutions for commercial and industrial companies. This catalytic investment combines the marketing and business acumen of a well-connected local entrepreneurial group that generates a robust pipeline with the technical, ESG, and financial capabilities of a seasoned impact fund manager with decades of experience in the renewable energy sector. By bundling solar PV projects with a leasing mechanism, KW Financial achieves scale quickly and efficiently while generating temporary and permanent jobs in communities through locally sourced EPC contractors aligned with international standards.
Deetken Impact Sustainable Energy and KW Financial’s partnership is an example of the flexible and innovative financial mechanisms that are required to advance the renewable energy transition in small, emerging economies.
Renewable Energy Transition
Despite contributing less than 10% of global greenhouse gas emissions1, the Latin America and the Caribbean (LAC) region’s vulnerability to the effects of climate change requires urgent action. Extreme temperatures, floods, droughts, hurricanes, and earthquakes are some of the natural events to which the region is highly exposed. According to ECLAC statistics, during the last two decades, the cost of natural disasters related to climate change in LAC exceeded $195 billion and the average annual frequency of events has risen by more than 50%2.
At the same time, the region is rich in natural resources with tremendous potential for renewable energy generation at a reasonable cost. Despite significant advances in electricity coverage throughout LAC, more than 19 million people (mainly from Caribbean countries) still live without electricity access and around 65 million people are underserved3.
And yet, the energy markets continue to rely on imported fossil fuels, which experience high price volatility. Today, renewable energy sources make up only 16% of the total energy matrix in the Caribbean4. With energy generation representing 46% of GHG emissions in LAC, renewable energy is a critical – if not the most important – tool to combat the climate crisis5.
Investing in Sustainability
The global energy transition requires unprecedented mobilization of financial resources. For the LAC region alone, the required investment in clean energy amounts to USD 87 to USD 120 billion per year, 4.8 and 6.6 times higher than current investment which totaled USD 18 billion in 20196.
Although the path to climate resilience requires massive investment, it has also been widely proven that benefits exceed their costs. It is estimated that every dollar invested in climate resilience represents four dollars in avoided future cost. Therefore, investing in climate resilience supports economic growth through the avoided cost of natural disasters, increase in agricultural and livestock productivity, lower energy cost from renewable sources, improvement in public health due to lower pollution, creation of over 3 million jobs globally during the transition process, and the greater availability of resources to be allocated to education7. Additionally, it is estimated that in emerging markets, if the growth of demand is supplied by these renewable projects, the cost of electricity could be reduced by USD 6 billion per year8.
Distributed Solar PV generation is a compelling approach to sustainable energy infrastructure, especially in climate vulnerable regions such as Caribbean Island nations. Not only does it provide a resilient solar energy system by deploying technology in proximity to the end users, but it also represents an attractive financial opportunity by reducing the cost of electricity and therefore improves bottom-line results.
Although the Caribbean region is poised to capitalize on its vast natural resources, creative financial mechanisms are needed. Impact investors must consider flexible and innovative instruments to combat the most pressing environmental challenges of our time with attractive financial returns, contributing to improved energy security, resilience, and electrification in the region, as well as driving economic development.
Deetken Impact Sustainable Energy
Deetken Impact is a registered Canadian impact asset manager that invests in emerging economies to generate long-term returns while contributing to measurable and sustainable growth and prosperity. Deetken Impact currently manages USD 150 million in five impact funds, with a focus on climate action and gender equality in Latin America and the Caribbean. With a 10 year track record of strong financial returns and measurable impact, Deetken Impact was recognized as a 2022 Impact Assets 50 Manager
Deetken Impact Sustainable Energy (DISE) was created through the synergistic partnership of Deetken Impact and Sustainable Energy Central America to provide equity and quasi-equity financing to small and mid-sized sustainable energy projects throughout Latin America and the Caribbean. H-REFF (Honduras Renewable Energy Financing Facility) and CABEF (Caribbean Basin Sustainable Energy Fund) are two funds that co-invest in renewable energy and energy efficiency projects and companies that deliver solid financial returns and positive environmental and social impacts that contribute to the Sustainable Development Goals (SDGs). DISE is a signatory to the Operating Principles of Impact Management.
In the last decade, Deetken Impact investments have directly impacted more than one million people, of which 65% identify as women9. Additionally, as of 2021 year-end, Deetken Impact has financed the installation of 5,436 MW clean energy generation capacity, displacing 295,636 tonnes of CO2 by investing in a variety of technologies and countries.
KW Financial
In 2018, Deetken Impact Sustainable Energy (DISE) made a catalytic investment in KW Financial, SA:
Original Investment: USD $5,000,000
Total Investment: USD$ 9,300,000
Country: Dominican Republic
Sector: Distributed Generation
Technology: Solar PV projects & Energy Efficiency
Instrument: Common Equity, long-term leases
Planned Investment Term: 11 years
KWF Holding, S.A. (KWF) is a Panamanian- registered company operating via a subsidiary in the Dominican Republic as a financier of distributed generation solar photovoltaics projects for Commercial and Industrial clients within the Dominican Republic. KWF contracts Engineering, Procurement, and Construction services to build solar power plants on clients’ properties for self-generation. Any surplus electricity may be fed back to the national grid.
These projects are financed through tailor-made commercial structures including leasing agreements for up to 15 years, after which ownership of the system is transferred to the end client and the energy savings are fully captured for at least 15 more years. Systems achieve significant cost savings compared to electricity from local utilities, with KW Financial’s first project client enjoying a 40% cost savings on local electricity prices. During the agreement term of a lease KWF owns the equipment.
KWF was born through the opportunity identified by the DISE team and the Grupo Pais conglomerate of Dominican Republic. Grupo Pais is made up of various franchises of commercial retail brands, commercial and industrial, and various companies operating in the energy sector, such as Grupo Pais Solar (GP Solar).
With its extensive network of clients and associates in the Dominican Republic, GP Solar was able to identify potential off-takers that could benefit from the net-metering rules and the financing by KWF. DISE identified an opportunity to drive the renewable energy transition in the commercial and industrial sector while maintaining stable cash flows and with the support of a strong partner. As such, KWF was created as a partnership between Deetken Impact Sustainable Energy (DISE), and GP Solar. KWF currently has five projects within its portfolio (CONACADO, Khoury Industrial, Green Star Partners, Plater Rental and Block González), with various other potentials in the pipeline.
KWF Structure
1. CONACADO
The off-taker agreement was signed with CONACADO AGROINDUSTRIAL (Confederación Nacional de Cacaocultores Dominicanos), the largest cacao producing cooperative in the Dominican Republic. The group has over 30 years of experience in production, processing and commercialization of cacao, with beginnings as a guild of various independent producers. The company employs over 580 people throughout the Dominican Republic and are responsible for the majority of cacao exported in the country.
A 745 kWp roof-mounted solar array was constructed by Soventix Caribbean, S.R.L, under contract with KWF at CONACADO’s production facility in San Francisco de Macoris. At the time of construction, this plant represented one of the largest investments by any private corporation within the city of San Francisco de Macoris, and is responsible for creating 150 permanent jobs in the community. It has the capacity to produce 26,000 metric tons of cacao per year – a major share of the expected total exports of 80,000 for the country as a whole.
Cacao production is seasonal and as such CONACADO peak energy demand corresponds to only one period of the year, and demand is greatly diminished for the remaining part of the year. In light of this demand profile, the solar PV project would only be economical if the cooperative could sell surplus energy to the grid operator. This system allows the end client to benefit from the surplus electricity generation, while paying KWF a lease based on a fixed price linked to solar generation.
Lease (virtual PPA) term: 15 years from NRU certificate
Acquisition date.
Total cost of project: US $700,600.00
2. Khoury Industrial Complete Power Solution
KWF’s second portfolio project is the power solution installed for Khoury Industrial’s Cement Block Aggregates manufacturing facility in the city of Cabral, within the southwest region of the country.
Khoury Industrial is a leader in the region in manufacturing cement blocks and associated products. The company has a strong focus on the sustainability of their operations, supporting the reforestation of old quarries, recycling over 40% of water utilized, and promoting the ecological reclamation of the Cabral lagoon among other efforts. The latest of these was the partnership with KWF in generating clean energy for their aggregate’s facility.
Cutting edge technology has been installed in the KI photovoltaic generation system, with a total power of 1,497 kWp, and an estimated generation of 2,000 MWh/year. Along with these arrays, a substation and transmission lines were constructed to connect the solar power system to the national electricity grid. The company intends to connect to the local electrical utility to deliver power to approximately 5,000 people in 5 of the surrounding communities in the near future.
Lease (virtual PPA) term: 15 years
Total cost of project: US $3.18 MM
3. Block González
Block González is a concrete block manufacturer located in the province of Peravia in Dominican Republic, operating since 2011. Aiming to reduce their energy cost and become more competitive, the company completed the installation of a 797 kWp photovoltaic ground mounted system in September 2022.
The commercial structure provided by KWF is a 5-year term loan agreement. Energy savings are projected to be higher than loan payments, hence, the company will have positive cash flow from the beginning of the project while keeping property on the assets and contributing to climate change. KWF holds a pledge on the assets during the term of the loan.
Loan Amount: $570,344
Term: 5 years
Grace Period: During Construction.
Collateral: Pledge on the assets.
4. Plater Rental
Plater Rental is a trust domiciled in the Dominican Republic which owns part of the energy system that provides electricity, heating and cooling to the Catalonia Bavaro Beach, Golf & Casino Resort. The Hotel is part of the Catalonia Hotels & Resorts Group, a Spanish hotel chain which owns 73 hotels throughout Europe, Latin America and the Caribbean. Catalonia Hotels & Resorts Group landed in the region in 1998, and now has 13 hotels in the Caribbean basin of which 7 are in the Dominican Republic. The large presence in the country signals a strong commitment by the company not only to the hotel in question but to the Dominican leisure industry.
The Punta Cana region has an isolated, stand-alone energy system operated by a private company called Consorcio Energético Punta Cana-Macao, S.A. (CEPM), which generates, transmits, distributes, and commercializes electricity in the Punta Cana-Bávaro and Bayahíbe area. During the first decade of this century, electricity generation from CEPM, and in the country in general, was primarily based on diesel and fuel oil, mainly due to a lack of natural gas/LNG infrastructure. High electricity prices together with an unreliable service from CEPM, led the Hotel to find an alternative solution for its energy needs.
Cogeneration produces heat and electricity simultaneously, which is an optimal solution for certain types of clients, such as a hotel. Its high efficiency generates savings ranging between 20% and 30% when compared to other technologies, and it diminishes transmission losses, as the plants are usually located in the consumption site.
Leasing term: Until April 2028
Total cost of project: US $4.2 million
5. Green Star Partners
Green Star Partners owns the distribution license for Starbucks in the Dominican Republic. The company was looking to decrease its energy bill by using renewable energy, without sacrificing the aesthetics of their location, therefore, they opted to use modules optimized for high transparency, which allows you to choose how much shade your solar module should provide. The 10.4 kWp photovoltaic system was installed in Acrópolis Center shopping mall in Santo Domingo, and it started operations in 2022. It is expected that the system will generate 11,411 kWh in the 1st year.
KWF provided a 7-year term loan agreement, which is being repaid by the energy savings generated by the system.
Loan Amount: $34,163
Term: 7 years
Grace Period: During Construction.
Collateral: Pledge on the assets.
KWF’s Impact
KWF is meaningfully driving the renewable energy transition in the Dominican Republic and reducing the carbon footprint of large commercial and industrial companies in the country10:
Clean energy generation has the two-pronged effect of improving the supply of cleaner and more affordable energy and offsetting the emissions from would-be fossil fuel sources to combat climate change, directly advancing the UN Sustainable Development Goals 7 (Affordable and Clean energy), and 13 (Climate Action).
Looking Ahead
The renewable energy transition in small, emerging markets requires innovative approaches. On one hand, impact investors are called to provide flexible and tailor-made instruments to successfully grow the world’s sustainable energy infrastructure. On the other hand, distributed solar PV generation is one of the most compelling approaches in climate vulnerable regions to expand renewable energy capacity in proximity to end users, while reducing overall electricity costs.
Deetken Impact Sustainable Energy provides an attractive channel for financing distributed solar PV generation projects for commercial and industrial companies. By bundling relatively small DG solar projects via KWF, we are able to achieve a scale that makes the projects financially feasible. Additionally, it offers co-investment opportunities for lenders that have a clear interest in supporting resilient renewable energy infrastructure and can benefit from the portfolio approach that mechanisms such as KW Financial make possible.
References
↑1 CEPAL: Economics of climate change in Latin America and the Caribbean (2019)
↑2 ECLAC 2021 Statistical Yearbook.
↑3 Status of the off-grid renewable energy market in Latin America & and The Caribbean. Alliance for Rural Electrification.
↑4 OLADE: Panorama energético América Látina y el Caribe (2021)
↑5 ECLAC: The economics of climate change in Latin America and the Caribbean: paradoxes and challenges (2014)
↑6 IRENA 2019b
↑7 Global Commission on Adaptation: Adapt now: a global call for leadership on climate resilience (2019)
↑8 IRENA: Renewable Power Generation Cost in 2020
↑9 Current figure represents complete gender diversity data for the Ilu Women’s Empowerment Fund, the two Deetken Impact Sustainable Energy funds, and available data for Deetken Impact Alternative Finance Funds I and II.
↑10 Energy generation is based on real energy production provided by the operator. The CO2 emissions avoided conversion is based on the Standardized baseline Grid Emission Factor for the Dominican Republic by the United Nations Framework Convention on Climate Change, for which the latest emission factor is 0.5962 tCO2/MWh.
