Alvaro is not gay. Alvaro is everyone.
Alvaro represents the typical person (meaning someone who is not intersex like Alex or attached like Alex's parents) - the "every man" who is common in stories. The flimmakers understood that a person's gender is more than a individual issue, it impacts how a person interacts with the world. Alvaro, Vando, and the rapists show the possibilities the world interacts with people who do not conform to standard female and male.
Vando, along with Alex's parents, show the interactions of close friends of family with an intersex person. They care for Alex as a person. Her sex is meaningless to them except to the extent it matters to her/him. The rapists are the opposite, caring only about his/her sex and not about Alex as a human being. They show both hatred of intersexuality ("It's gross" said one) and admiration ("No, it's great" said the other).
Alvaro is your standard peer. How he responds to Alex symbolizes how the world responds. At first he's pushed by his/her crude personality ("You just had a wank.") As a transgender person myself, I can attest that gender and sexual variance makes sexuality familiar and comfortable which appears crude to outsiders. Half because Alvaro gets to know Alex and half because they're teenagers falling prey to lust and circumstance, they begin to see each other as real people.
As the everyman, Alvaro has average sexual interests as well, namely heterosexual. (As a non-heterosexual myself - I'm asexual - this is distasteful to me but still true.) It's Alex's job to have a queer sexuality and Alvaro's job to have a standard one. This is the reason for the repetitious "I'll never fall for you" mantra between the two. Queer people are supposed to fall for people either queer or open people. Standard people aren't supposed to fall for queer people. At least in the setup. Alvaro's fall for Alex is the film's destruction of that over-simplicity just as the film's intersex character destroys the simplicity of male and female bodies. It makes the statement that human beings are not so simple, neither in our sex nor our attraction. Intersex (and transgender people as well) bridge male and female, gay and straight. The theme of the film is that we're all together - mainly female and male but with nods to straight, gay, young, old, rural, and urbanites (think of the ending scene on the beach).
Assuaging the simpleton, "Alvaro must be gay. He liked her penis," plenty of straight men who like women with penises. At cross dresser gatherings, there is one "admirer" or "chaser" for every woman. Transexual women prostitutes make as much money as their genetic women counterparts. Alvaro perceived Alex as a girl, not a man, and that's what matters regarding attraction. We're attracted to people, not genitals.
To interpret Alvaro as gay ruins that point. It says that a person would have to be queer to love an intersex person. It allows the audience to say, "I'm not gay, so I would not love Alex. I would accept Alex as my child or childhood friend, but I wouldn't choose him/her." Such a person misses the entire point of the film. Alvaro's father missed the point by labeling him gay. By seeing Alvaro as gay, Ramiro makes Alvaro "other," despite them sharing half their genes (another body allusion) and prevents him loving his son. Ramiro represents the hetersexism (belief that heterosexuality is the superior orientation) (known as "socially constructed sex" in intersex literature). The film places heterosexism as the enemy of human unity. Erika, Ramiro's wife, is a similar symbol. She believes being female is superior to being intersex, even despite Alex's wishes. When Alex says the amputee turtle will live but never be free, she alludes to herself; if her penis is amputated she loses her freedom to be who she wishes. The film yearns to tell us our bodies do not define us, nor does our sexual orientation. In the final scene, Alvaro proves this; he choose to look in Alex's eyes, symbolizing her soul, rather than her penis, her body. If Alvaro were gay, he would do the opposite. Our freedom to choose and our love for each other regardless of bodies defines us. You can only accept that message if you accept that Alvaro symbolizes everyone, not gay people. As a transgender person, symbolized by Alex, I yearn for my "Alvaro" to be everyone, not just a rare gay person.