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La Esperanza - Case Study
is a 13.5 MW hydro project using the waters of the Intibucá River, located in the municipality of La Esperanza, department of Intibucá, in south-western Honduras, close to the border with El Salvador.
The project became operational on the 17th of July 2006. La Esperanza, consists of three power houses that have been built in stages and operate in cascade with installed capacity of 500 kW, 1 MW and 12.5 MW, respectively. La Esperanza has provided constant work for roughly 130 people since 2002, when the 500 kW started to be constructed, representing an important pillar of the La Esperanza’s economy (even though the facility could be run now with no more than 20 people).
The sponsor and project champion Ron Turner has been evaluating options to continue using his labor force in other projects in La Esperanza or nearby, taking advantage of their acquired skills. La Esperanza involves community-based reforestation and was among the first small-CDM projects approved.
Integrate local needs realistically
Establish collaborative relationships
The Policy-Enterprise-Technology Balanced Approach
The Enterprise-Customer Connection
In 1999, CISA was established as a Honduran corporation by two small electric sector companies (Honduran enterprise SIMET and Canadian enterprise UEE), for the explicit purpose of owning and operating small hydro generation facilities in Honduras and other Central American countries. CISA selected La Esperanza as its first project for development in Honduras.
La Esperanza is a 13.5 MW run-of-river hydro facility located in Intibuca, in western Honduras. It was built in 3 stages (stages 1a, 1b and 2) over several years using each stage to demonstrate success and generate positive cash flow.
The Energy Need:
From the outset, CISA sought to address both local and national needs, while generating a business opportunity by rehabilitating an old hydroelectric plant. The site, known as “La Pozona”, is located in La Esperanza’s communal lands and had been abandoned in 1969 when La Esperanza’s power supply was integrated into the national grid. The quality and reliability of power supply in the 10,000 inhabitant town was poor due to the long distance to the substation from which ENEE (the national utility) was sourcing it. CISA negotiated with the Municipality the land rights to the hydroelectric site in exchange for undertaking several measures benefitting the community; these included: repairing the access roads to the powerhouse, watershed forest protection, direct and indirect job creation, and balancing the electric system by injecting power locally into the grid, thus increasing the quality of electric services to La Esperanza. Additionally, CISA committed to contribute resources for the extension of the grid for two additional towns Santa Anita and San Fernando (750 inhabitants), which lacked access to electricity.
At the national level, Honduras was facing a strong energy supply crisis. Following extreme shortages in 1993, the country had increasingly become dependent on fossil-fuel generation that could be brought online quickly. This in turn drove up the cost of electricity for the utilities and end users. By 2000 the country was using emergency plants for generation.
$1,250,000 in two loans and one equity investment, starting in 2003.
Business planning assistance provided by E+Co in 2003 as well as help assessing and quantifying carbon offset potential, preparing the project to become the first registered provider of Emission Reduction Credits under the Clean Development Mechanism.
La Esperanza has now completed all major generation projects and is continuing to operate profitably, paying down its debt obligations and performing routine maintenance.
La Esperanza now provides clean energy to the national distribution company, ENEE. ENEE distributes the energy to its country-wide customer base. The energy provided by La Esperanza is sufficient to supply over 12,000 customers. The quality and reliability of electric service has been significantly improved for the 10,000 residents of the La Esperanza area. Additionally, 150 households in the neighboring villages of Santa Anita and San Fernando are now connected to the grid though the contribution of La Esperanza and other supporting organizations (including ENEE and the World Bank). 75 jobs have been created; over 200,000 trees have been planted; and a micro-lending program was started for CISA’s workers. In 2005, La Esperanza became one of the first two projects worldwide to receive Emission Reduction Credits (ERCs) issued by the Clean Development Mechanism. La Esperanza’s carbon offsets were estimated at approximately 37,000 Tons CO2e/year.
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1) Integrate local needs realistically:
CISA’s developers understood all along that the neighboring communities would be an important stakeholder throughout the life of the project. They strove to develop a project in a way that brought added value to the quality of life of the surrounding communities. More importantly, they sought the input of the members of the communities about what their specific needs were and the ways in which the project could work with the community to address specific needs. This is often a complex issue, because developers often fear that communities will make unrealistic demands in exchange for supporting the project. These demands are often rooted in their perception that the project is a “cash cow”, a view that overlooks the heavy burden of debt service in the initial years of a project’s cashflow, particularly when the developer is a small enterprise. This situation sometimes leads developers to try to avoid as much as possible addressing communities’ perceptions of their local needs. Instead, developers often make the argument that communities
see the project itself as a local benefit, because it will generate clean energy needed by the country, provide local employment (although the majority of the jobs are only for the construction period) and yield other local benefits as a result of the construction process, such as the improvement of some access roads. CISA’s approach to working with communities seems to have achieved a reasonable balance between addressing community needs and preventing the emergence of excessive demands. From the outset, it identified how the project’s own activities could provide benefits to the surrounding community: through employment, improved access roads, reforestation and especially by improving the quality of electricity supply to the town of La Esperanza. However, in its meetings with the surrounding communities it also listened to what the local stakeholders perceived to be their own needs, and examined ways in which the project could assist in meeting those needs. This latter case entailed additional efforts that went beyond the normal activities of constructing the power plant and maintaining the infrastructure and the water resource. CISA was willing to make a contribution on this regard, but it also stressed that the communities themselves, and the government agencies in charge of providing these services, should not be relieved of their own responsibilities in relation to the provision of these services. The need that was stressed by surrounding communities was the electrification of the smaller towns surrounding La Esperanza, which were unable to afford on their own the cost that the power distribution company (ENEE) would have charged them for extending the grid. CISA supported the communities in their request of the grid extension and made an in-kind contribution and a financial contribution of at least $12,000 that allowed the electrification of 150 households in the neighboring communities of Santa Anita and San Fernando. CISA worked in collaboration with the communities or the local power distribution company (ENEE), thus ensuring that these other stakeholders recognized their own responsibilities in pursuing the electrification of these villages. Hence, ENEE also invested its own resources in the grid extension, and the community provided in-kind work and sought loans to pay for the internal electric installation of their own homes. CISA was also instrumental in obtaining additional funds from the World Bank to support this electrification initiative.
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2) Start small:
From the outset in 1999, it was envisioned that La Esperanza Hydroelectric facility would be a 13.5 MW project. However, the project developers decided to start small by using an existing WWII-era powerhouse and installing only 485 kW of capacity (stage 1a). Later, once this stage was operational, the project was expanded to a total of 1 MW (stage 1b), also employing that same powerhouse. Though money could no doubt have been saved by developing both stages simultaneously, the phasing allowed the project to begin sooner since smaller capital outlays were needed. Then, having tested the waters and proven that the project was indeed viable, it was easier to search for and acquire subsequent loans.
Stages 1a and 1b, were more than demonstrative projects; they helped control water flow for the eventual, much larger, stage 2 portion of the project. Stage 2 necessitated the construction of a new powerhouse and dam. It became operational in 2006, the same year that CISA signed a 15-year power purchase agreement with the Honduran national electrical utility. This is three years after the stage 1a came on line and six years after CISA was incorporated.
Comparing this timeline with other similar type projects in the region, it is fair to say that three years of construction from start to finish is much longer than most other developers anticipate, yet six years for total project completion is actually very respectable.
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3) Establish collaborative relationships
CISA recognized that becoming a trailblazer in a new field, such as small hydroelectric development, would be a complex undertaking with multiple issues to address. The project’s long-term success would be dependent on good communication and strong collaborative relationships with a number of stakeholders, including the energy consumer (ENEE), the environmental regulator (SERNA), funding and investment sources, carbon trade agents, surrounding communities, municipal governments, other small-scale electricity developers, skilled local workers and experts in a number of fields.
The project developers devoted considerable attention to building good working relationships and strong communication with all these stakeholders. CISA became very engaged in the Honduran Association of Small Private Renewable Energy Producers (AHPPER) and worked with decision-makers to promote legislation that established a friendlier environment for renewable energy.
La Esperanza’s sponsors also developed a collaborative working relationship with the communities surrounding La Esperanza, with ENEE and with the World Bank’s Community Development Carbon Fund in order to promote the electrification of the nearby villages of Santa Anita and San Fernando. The project also worked closely with the Honduran Ministry of Energy and Natural Resources (SERNA), with several specialized organizations, and with the World Bank in the complex process of certification and trade for its carbon emission reductions; it was due to this positive collaboration and to the project’s focus on incorporating social benefits that La Esperanza became, together with another Honduran project, the world’s first recipient of Emission Reduction Credits under the Clean Development Mechanisms. Furthermore, the World Bank, through its Community Development Carbon Fund, was willing to provide an upfront partial payment of its CERs, in order to support the implementation of community benefits.
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CISA is a Honduran corporation established in March 1999 to develop the La Esperanza Hydroelectric Power Project, a 13.5 MW grid connected facility. The La Esperanza project is located in the rural town of La Esperanza, Department of Intibucá on the western side of Honduras, close to the border with El Salvador. La Esperanza uses the waters of the Intibucá River.
The phases of La Esperanza:
Phase I began with construction and, since June 2003, operation of powerhouse 1A with an installed capacity of 485 kW.
Powerhouse 1B, which completed Phase I, has an installed capacity of 950 kW and it began operating in May 2004.
Phase II consists of powerhouse 2 with an installed capacity of 12 MW. It became operational on the 17th of July, 2006.
CISA signed a Power Purchase Agreement (PPA) with Empresa Nacional de Energía Eléctrica (ENEE) the Honduran national utility for a 15-year period, with a Q4 2006 start date.
Since June 2003, powerhouse 1A had been operating normally until September 15th same year when heavy rains caused a landslide in the community of Quiaterique, 6 kilometers upstream from La Esperanza’s reservoir. The slide caused a large wave in the upper section of the Rio Intubica, which impacted the front section of the already constructed dam. The wave filled the phase 1A powerhouse to a level over 3 meters above the generator. Due to this situation, CISA’s management requested from E+Co a 5-month extension of the grace period on the principal payments to be able to repair the dam and get back to normal operation of 1A without using their capital reserved for the construction of 1B.
Carbon credits under 2ECA. On December 23, 2003, CISA signed with 2E Carbon Access for the sale of the carbon credits. As a result, La Esperanza signed an Emissions Reduction Purchase Agreement (ERPA) with the World Bank Community Development Carbon Fund. In 2005, it became one of the first small-scale renewable energy projects approved by the Executive Board of the Clean Development Mechanism (CDM). In 2005, it received obtained an up-front payment of $225,000 for its carbon offsets, making La Esperanza a showcase for renewable energy projects.
On October 29th, 2001, CISA signed a PPA with the Honduran national utility, ENEE, for a 15-year period, commencing from the scheduled date for the beginning of complete commercial operation (12.9 MW, Phase I and II), which was set in the PPA as January 3rd, 2005. However, on March 19th, 2003 CISA requested a 1-year extension to the original date, which was approved by ENEE. The request was based on the fact that at that time the project had not reached financial closing. The new date for the beginning full commercial operation was set on January 3rd, 2006 and further delayed to December 2006. The PPA allows CISA to deliver and sell electricity to ENEE from powerhouse 1A and 1B before the above mentioned date. However, the 15-year period will begin on December 1st, 2006.
This PPA covers the entire 13.5MW of installed capacity from Phase I and II. The proposed projects would increase the generation efficiency of the existing installed capacity and therefore does not require any revisions to the existing PPA.
The PPA energy price is $0.083/kWh during Peak Hour Segment, $0.068/kWh during Semi-valley hour segment and $0.053/kWh during Valley hour segment. These prices include a 10% incentive for renewable energy generation. In addition to that, the prices will also increase by 1.5% annually during the first 11 years; however, this increase is not inclusive to the 10% incentive.
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1) The Policy-Enterprise-Technology Balanced Approach:
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2) The Enterprise-Customer Connection:
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