1. Energy in Emerging Markets
Case Competition
A look at Cuba’s Energy Future
UNIVERSITY OF PITTSBURGH
JOSEPH M. KATZ GRADUATE SCHOOL OF BUSINESS

2. AGENDA
 Executive Summary
 Current State - Cuba in 2016
 Cuba 2030 Vision
 Assumptions for our approach
 Recommendations – Phased Transition 2016 to 2030
 Resilient Infrastructure
 Competitive Advantage of Cuba
 Financing Cuba’s Energy Transformation
 Risk Analysis
 Conclusion

3. Executive Summary
Task at hand
Reduce costs and
inefficiencies of existing
energy infrastructure
Provide reliable fuel-
sourcing and technology
import options
Financial impetus and
upgradation of energy
infrastructure
Find right energy mix
to ensure energy
sufficiency and
resilience
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

4. Executive Summary
Our Approach and Recommendations
Approach
• Benchmarking with countries of comparable installed capacity & social
scenario
• Cost analysis and research on funding
• Historical data analysis
Recommendations
• Focus on energy security
• Exploring global avenues
• Building a robust & resilient infrastructure
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

5. Current State
Cuba in 2016
China, Russia, Canada, Brazil, Italy, Netherlands, Singapore, and Spain
Export Partners
Drop in crude oil imports from 100,000 BBL/D to 53,500 BBL/D
Venezuela’s Economic Crisis
Muted by falling sugarcane production
Potential for Bagasse
USD 1.8 Billion (12% of total imports)
Import of Oil and Oil
Products
Opportunities for US and foreign players in energy, agro and other sectors
Diplomatic Relations
86% less than that in the US
Per Person Energy
Consumption
USD 8.8 Billion
Tourism and Medical
Services Revenue
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

6. Cuba 2030 Vision
8%
8%
7%
1%
22%
54%
PROPOSED ENERGY MIX
Solar Biomass Wind
Hydro Natural Gas Oil
Additional capacity of 2,976 MW with the below mix
 Natural Gas – 832 MW
 Biomass (Bagasse & Marabu) – 755 MW
 Solar Energy – 700 MW
 Wind – 633 MW
 Hydro Electricity – 56 MW
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

7. Cuba 2030 Vision
Key Highlights
2976 MW of additional Capacity with the proposed energy mix
20% of oil-based plants gradually phased out and replaced with Natural Gas plants
10% improvement in PLF in existing installed capacity by 2030
Technology imports ensure increased sugarcane yields, increasing bagasse output
Flexible trade relations with US resulting in import of Natural Gas
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

8. Key Assumptions
Projected peak demand growth rate is 4% YOY
Cost of domestic oil production is based on market price of crude (USD 40 per BBL)
Cost to develop/install generating technologies is based on EIA report 2015
Auction price is based on Peru which has similar installed capacity
Distribution and refining cost of crude is based on US rates (USD 25 per BBL)
Cost of overhauling the network is based on the estimates by Dr. Manuel Cereijo
Export/Import revenues based on report by MIT and projected to grow at 4% YOY
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

9. Recommendations
Phase 1: 2016 to 2020
Energy Sector
• Power Auction of
2976 MW to generate
$1.02 B
• UE to implement
differential tariff
Fuel Market
• Access global fuel
market to minimize
dependence on single
supplier (Venezuela)
Encourage FDI
• Unify CUC & CUP
• Usufruct
• Low interest rate
• Corporate tax credits
• BITs with Canada & BRIC
Education Sector
• Increase education
opportunities for Latin
American students
• Build knowledge
capabilities across
sectors
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

10. Recommendations
Phase 2: 2020 to 2030
Power Plants
• Improve PLF
• Phase out oil-based &
replace with natural
gas plants
Top Line/Bottom Line
• Restructure UE
• Save costs through the
proposed energy mix
• Sale of carbon credits
Agro-Technology
• HYV seeds for increase
in bagasse production
(19.86 Mt)
• Increase bio ethanol
production through
cellulosic ethanol
process
Smart Grid
• Monitor, analyze,
control & communicate
capabilities to delivery
system
• Adds to resilience
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

11. Resilient Infrastructure
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

12. Cuba’s Competitive Advantage
Porter’s Diamond Model
Chance
Government
Firm Strategy,
Structure and
Rivalry
Factor
Conditions
Demand
Conditions
Related and
supporting
industries
 Skilled labor
 Knowledge import
 Capital/Infrastructure
 Home demand changes
 Increasing size of Cuban market
 Early saturation
 Tourism
 Education
 Service
 Cigar
 Rum
 Sugar
 Cuba’s unique culture
 Public’s adaptability to Government policy
 Increase in domestic competitiveness
 Emphasis on globalization
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

13. Cost and Savings estimation in 2030
COSTS BENEFITS
 $4.4 Billion savings in 2030
 20% reduction over the forecasted
requirements of Oil and Diesel
 Approx. revenues from tourism &
medical services: $16 B
 Export revenues:
 Cigars ($770 M)
 Rum ($217 M)
 Sugar ($734 M)
 Increased energy security
 Proposed mix: $7.9 Billion
 $7 B – renewable
 $831 M – NG
 Purchase of NG: $80 M
 Imports:
 US ($8 M)
 Canada ($48 M)
 Russia ($160 M)
 China ($289 M)
 Overhaul of transmission lines:
$40.32 M
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

14. Our Funding Propositions
Union Electrica
holding company
PPAs set up for UE
D&S for purchase
of power at least
cost
Tariff structure at
sale- retail end
UE Distribution
and Sale
UE Centralized
Generation
Private Players
Generation
(Renewables)
Transmission
UE D & S pays the
Transmission costs
- contracts
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

15. Funding Mechanism
JICA/USAID/UNDP
• Purchases
the bonds
of CPA
Center for Power
Assistance
• Issues
bonds to
the above
UE Holding • Receives funding for
high value projects
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

16. Risk Analysis
Risk Segments Risks Risk Mitigation
Country
 Nationalization
 Natural disasters
 Corruption
 US Trade relations
 CUP & CUC
 High Capital at Risk
 International arbitration
 Resilient infrastructure
 Strengthen judiciary & stronger IP laws
 BRIC & Canada
 Devalue CUP, use it for FDI
 Insurance/Hedging
Technology
 Equipment obsolescence
 High fixed costs
 Communication channels
 Modernize telecom infrastructure (Wi-Fi)
Input
 Change in input prices
 Security of supplies/availability
 Long term contracts/hedging/diversify the supplier
countries
Output
 Sale of power
 Power trading
 Price, tariff, PPA
 Funding from BITs countries
 Independent power regulator
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

17. Conclusion -
Impact and validation of our proposition
Strong
Cuban
Diamond
46%
NG/Renewables
$18 B savings
Restructuring
of Union
Electrica
Potential for
ties with the US
“If we talk about energy
security versus energy
independence, most certainly
the energy security is
preferable, and this can be
achieved through a membership
in integrated market”
–Vasile Iuga
Country Partner for PwC, Romania
Executive Summary Current State Cuba 2030 Vision Assumptions Phase-1 Phase-2 Resilience
Competitive
Advantage
Financing Risk Analysis Conclusion

18. Q & A

19. Appendix
References:
 Cuban Govt. statistics: http://www.one.cu/
 International Energy Agency: http://www.iea.org/
 Energy Information Administration: http://www.eia.gov/
 Sugar cane statistics: http://sugarcane.org/
 Snippets on the Cuban economy: http://thecubaneconomy.com/
 ‘The Electric Power Sector in Cuba: Potential ways to increase efficiency and sustainability’,
Juan AB Belt, Director US Agency for International Development
 ‘Republic of Cuba Power Sector Infrastructure Assessment’ by Dr. Manuel Cereijo

20. Current imports of oil & projections for
Bagasse production
Current Imports of Oil and Oil products and estimated
expenditure spent by Cuba on Oil including cost of domestic
production and refining (Conservative estimate of costs based
on quantity from IEA database)
Current and projections for production of Bagasse based on
data from sugarcane.org and cubaneconomy.com

21. Cost of proposed energy mix
Cost of the proposed Energy mix and Revenue generation from
auction based on data from ‘Electricity Auctions’- World Bank Study

22. Projected PLF Improvement

23. Cost of importing Natural Gas for our
proposed mix

24. Data analysis sheets
Cuba Expenditure on
Energy revised
assumptions for power
Finance Master Ideas from
Understanding
Utilities and
Deregulation
Ideas from
Understanding Utilities
and Deregulation