RENEWAL ENERGY IN DOMINICAN REPUBLIC
The Dominican Republic (DR), the second largest economy in the Caribbean and Central America, has been attracting its fare share of foreign direct investment thanks to its pro-investment laws, political and economic stability, developed infrastructure, and proximity to large export markets. The demand-driven state policies on renewable energy and sound legal framework providing financial incentives have resulted in a recent spike of foreign direct investment (FDI) in the energy sector.
Investor-friendly Legal Regime
The DR has a highly competitive investment regime, which it continues to improve. According to the local investment promotion agency, the mining, energy, financial, tourism, commerce and industry sectors together has captured US$1.9bn of FDI in 2010, US$2.37bn in 2011, and US$2.39bn in the first half of 2012. European Intelligence Unit projects the FDI inflows to amount to 2.7 percent of GDP annually in 2012-16.
The country is a party to 15 bilateral investment treaties with standard investor protections, WTO, DR-CAFTA, CARIFORUM and the Economic Partnership Agreement with the EU, as well as a double taxation treaty with Canada and one with Spain pending ratification. Law 16-95 (1995) on foreign investment guarantees to any investor national treatment and free repatriation of capital, net dividends, royalties and fees, without any prior authorizations. The law qualifies as investment all types of capital contributions (in cash, in kind, or in intellectual property and know-how), acquisition of real estate and financial assets.
The investor in the energy sector can start a company, choosing from a variety of corporate forms and business combinations provided under Law 479-08 on companies. The law contains contemporary corporate governance rules, but does not require excessive financial disclosure, incorporation of a Dominican subsidiary or joint venture, or a bond to do business in the DR. By establishing a local branch, the investor can distribute any profits to the parent company abroad tax-free, although a Dominican subsidiary limits the parent company’s liability and allows crediting any taxes on dividends against its income tax.
The DR has extremely favorable conditions for production of solar, wind, wave and biomass generated energy. According to Worldwatch Institute data, the country has strong solar potential throughout (including its largest cities Santo Domingo and Santiago), comparable with the potential of the U.S. Southwest and superior to other well-positioned areas, such as the Mediterranean coast. For wind resources, Worldwatch Institute identified 78 sites with a capacity factor of over 30 percent, with superior resources located in the southwest and northwest. Any wind and solar variability can be mitigated by the high rate of backup power systems (mostly diesel-powered generators) already available in the residential and vast tourism sectors.
Thus, the ever increasingly demand, coupled with the generous government’s incentives and extremely favorable natural conditions, truly créate a window of opportunity for investors, resulting in a five-fold increase of renewable energy projects since to 2007. Although, according to the National Commission of Energy (“CNE”), the majority of the project applications, which, have been submitted by small-scale self-generators, two of the four existing utility-scale wind park projects has been already brought into operation and at least two solar park projects are underway.
Energy Sector Regulation and Incentives
The energy sector is regulated by the general Law No. 125-01 (2001) on electricity and special Law No. 57-07 (2007) on renewable energy. The State, through Decree 143-11, in light of the deficit of low cost energy, Fishing: has made generation of energy a national priority.
Law 125-01 on electricity provides the comprehensive legal framework covering generation, transmission, distribution and commercialization of electricity, as well as defines the functions of all the following governmental agencies: National Commission of Energy (“CNE”); Superintendence of Electricity (“SIE”); Coordinating Agency (“OC”); Dominican Corporation of State Electric Companies (“CDEEE”); and Dominican Electric Transmission Company (“ETED”). It applies to all companies, whether of national and/or foreign capital, private and/or public, and is designed to promote private participation and competition at all levels.
The companies that generate, transport or distribute electricity to third parties (i.e. electricity generators, self-generators and co-generators of electricity, which sell their surpluses through the system, as well as the owners of distribution lines and electric distribution sub-stations) can directly trade their electricity and their distribution capacities.
To operate in the electricity sector, a project is required to obtain a concession. A provisional concession, requested from and granted by SIE, gives the right to access either private land for an indefinite period of time or state or municipal land for up to 18 months to carry out feasibility studies. A definite concession is requested from SIE and granted by the Executive Branch on recommendation of CNE, together with any easements, for a term of up to 40 years, with a right to renew for another 20 years. If SIE receives several applications for the same definitive concession, it will conduct a public bidding.
In remote areas without facilities for interconnection to the national grid, a generating company can obtain a special concession to install the interconnection line and get reimbursed by ETED for costs, usually through credits against its transmission toll payments to ETED.
The government has been restructuring the ailing energy sector since 1999. In 2001, after adoption of the general Law No. 125-01 on electricity, the country experienced an influx of private investment in the generation and distribution areas of the sector. While the private generators, who supply non-renewable energy to distribution companies through the only state-owned transmission company, still operate under generous profit margins, the private distributors have not been profitable since entering the market due to the high oil prices, lack of efficiency in many of the generation facilities resulting in one of the highest tariffs in Latin America, and, consequently, widespread non-payments and state subsidies to alleviate the impact on the population.
In 2007 the country shifted its focus to renewable energy by introducing the special Law 57-07 on renewable energy.
Together with Decree 202-08, it sets an ambitious goal of achieving the share of renewable energy of 25 percent by 2025 and opens the door for investors through tax incentives, attractive feed-in tariff, preferential regime and state guaranties.
In addition, the new Dominican Constitution (2010), in Article 67, reflects the importance of clean, renewable alternative energy, which the State is required to promote, both in public and private sectors, to preserve the environment.
Law 57-07 grants renewable energy projects a wide range of financial incentives and preferential regimes. It applies to wind parks with up to 50MW capacity, small and micro hydroelectric stations with up to 5MW capacity, electric and solar (photovoltaic) parks of any capacity, biomass production farms, bio-fuel based electric plants with up to 80MW capacity per unit, oceanic wave-based installations of any capacity, and thermo-solar installations of any capacity. A project’s capacity can be increased or doubled, when at least fifty percent (50%) of the original capacity is installed and fifty percent (50%) of financing and purchase is completed.
The law provides the following tax incentives to the eligible projects:
a) full exemption from import tax on equipment, machinery and accessories required for renewable energy production, as well as transformation, transmission, and interconnection to the grid;
b) full exemption from tax on transfer of industrialized goods and services (i.e. value added tax) (“ITBIS”), regularly a 16 percent rate on value of all such equipment;
c) full exemption from income tax of electricity generators and equipment installers for 10 years, up to 2020 (installers are eligible if a minimum of 35 percent of the value from installation is produced in the DR);
d) Schmutzig Reduced fixed 5 percent (from the regular 10 percent) tax on interest payments to financial institutions abroad;
e) Up to 75 percent credit of the equipment investment cost deducted within three years from the income tax of self-generators.
In contrast to the traditional energy generators, the renewable energy generators are guaranteed the right to connect to the transmission and distribution network on equal terms within their generating groups, the right to feed into the national grid all of its produced energy or its surplus, and the right to be paid at the wholesale electricity price plus a premium payment (Feed-in Tariff) for the dispatched energy, a rate on the higher end of international benchmarks.
According to the regulation, CDEE has to sign power purchase agreements with renewable energy generators. Thus, due to the lower cost of renewable energy, the State commits to give priority to its dispatch and, consequently, associated payments. The renewable energy generators also have the right to sell energy on the spot market. While the law does not impose any minimum supply requirements, it provides a possibility for CNE to set minimum quotas for the energy market that must be reserved for suppliers of renewable energy.
Financing Renewable Energy Projects
The Dominican authorities have a firm understanding of the financial side of energy projects and have been consistently demonstrating support and flexibility when negotiating with financial lenders. Absence of requirements to obtain authorization or registration of loans, except in certain special circumstances, greatly facilitates project financing. Although any interest payments abroad are subject to the reduced 5 percent tax for the renewable energy sector, its impact can be further eliminated by including the “gross-up” clause in the loan agreement requiring the borrower to cover such costs.
Private lending is bolstered by presence on the market of international institutional lenders, such as IDB, IBRD, IFC, and French Development Agency, which include renewable energy into their strategic objectives and help to ensure international standards of compliance. In addition to the sovereign guarantees, the projects can obtain political risk insurance from MIGA or IDB.
Although the country has no bankruptcy law, real estate mortgages, DOMINICAN share pledges, liens on movable property and assignment of rights can sufficiently secure the loans, provided that such collateral is properly identified and promptly recorded. Any outstanding taxes become due upon a property transfer or conveyance. Instead of the “power of sale” rights, the law provides for a judicial foreclosure because of certain non-waivable statutory provisions on notice, procedure, and time to cure deficiencies. The parties can choose laws of any jurisdiction in their contracts, while local guarantees remain subject to local law.
The DR has a favorable environment for resolution of both local and international disputes, with its updated arbitration law (2008) and the arbitration centres at the local chambers of commerce and production in Santo Domingo and Santiago.
The State routinely waives its sovereign immunity and submits to disputes with foreign investors at such arbitral institutions as ICC. Article 220 of the Dominican Constitution recognizes the right of the State to submit to arbitration or a treaty dispute mechanism. The local courts are mostly pro-arbitration and provide assistance with the appointment of arbitrators and obtaining evidence and interim measures. The foreign arbitral awards are recognized and enforced in an efficient manner, since the DR is a member of the New York Convention (1958), while foreign courts judgments take more time to enforce.