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Renewables in Latin America: Not so blown away

By Thomaz Favaro

Latin America’s renewables sector has experienced steady growth in recent years. It is fuelled by a mix of rising energy demands, decreasing technology costs, availability of renewable resources and policy changes aimed at promoting sustainable development in the region. This article explores the outlook for the sector and the challenges facing its development.

The year of 2012 was not particularly strong for the renewable energy sector worldwide, with governments cutting subsidies for new, cleaner technologies in an effort to tackle the debt crises in the US and Europe. According to Bloomberg New Energy Finance, investments in green energy fell 11% globally to US$269bn, though this was still five times higher than in 2004. However, the downturn in the US and Europe has not been mirrored in most developing regions, including Latin America.

Wind energy has so far led renewables growth in Latin America. According to the Global Wind Energy Council, regional installed capacity increased from 2,280MW to 3,505MW in 2012, a substantially higher growth rate (54%) than the global average of 19%. More than half of these investments went to Brazil, which remains the main market for renewables in the region. The country had a particularly strong year for wind power, adding more than 1,000MW to bring capacity to a total of almost 2,500MW, with the creation of 38 new wind farms. Mexico, another rising star, registered a fivefold increase in clean energy investments in 2012, totalling $2 billion.

Smaller countries have also begun to embrace alternative energies. Uruguay has only 52MW of wind power online, but recently embarked on a bold expansion plan aiming to improve capacity to 1,000MW by 2015. Uruguay has held successful tenders for three consecutive years; in a sign of the government’s commitment to its goals, in 2012 the developers that did not win contracts were allowed to sell energy at the average rate awarded to the winning bids. Major expansion of wind markets also took place in Argentina, Chile and Mexico.

Solar power is growing at an even faster pace, helped by plummeting costs worldwide, though its size still dwarfs that of other renewables. Large-scale solar projects totalling 8,400MW have been announced in the region. Chile is particularly keen to attract companies to tap favourable natural solar conditions in its northern Atacama Desert. In January, the Chilean government approved 3,100MW of photovoltaic projects, mainly to supply the energy-intensive mining sector and reduce its dependence on unreliable imports from neighbouring Argentina. California-based global solar power energy company SunEdison and Chilean mining company CAP agreed in January to build a solar photovoltaic power plant, which with a planned capacity of 100MW, will be the largest in Latin America.

Latin America can also claim a certain home advantage in the renewables sector: Brazil pioneered the ethanol industry in the 1970s and, since 2003, virtually all new vehicles produced locally are designed to take either ethanol or petrol (gasoline), or a combination of both. More recently, other sugar cane-rich Latin American countries such as Argentina, Costa Rica, Colombia and Peru have begun to follow suit – often with the help of domestic regulations obliging fuel merchants to mix ethanol into petrol. 

Developments and hold-ups

Although a green private sector is emerging in Latin America, the region still underperforms when its resource endowment and increasing power demand are taken into account. Furthermore, the region weathered the global recession remarkably well and did not endure the credit crunch seen in many developed economies. Excluding Brazil, the region received only $2 billion of green energy investments in 2011, or roughly 1% of global investment. However, this number excludes large-scale hydroelectric projects, which remain a significant energy source for the region and one of the main reasons why renewable sources represent a larger slice of Latin America’s energy matrix than in most parts of the world. The situation was markedly better in 2012, with Mexico alone registering $2 billion, but considerable room for improvement remains.

Several countries have adopted reduction targets for carbon emissions or for a minimum percentage of renewables within the total energy supply. For example, the Mexican government in June 2012 passed a climate change law that aims to cut greenhouse gas emissions by 30% by 2020. However, the lack of an adequate regulatory framework for attracting private investors remains a key bottleneck for renewables in Latin America. Few countries have drafted sector-specific legislation for energy generation through wind, geothermal and biomass, though the increasing number of technology-specific public tenders is a positive sign. Furthermore, industry players complain that policy packages are often too narrow-minded and therefore fail to make renewables truly competitive.

Although most countries have adopted some form of tax exemptions for cleaner energy, the availability of fuel subsidies for petrol and natural gas offset such benefits, favouring fossil fuels in the long run.

Financing is another important bottleneck for investors – only seven countries in Latin America have investment grade ratings, and obtaining credit locally remains expensive, difficult, or often both. Private banks are often reluctant to offer multi-year loans for renewables projects with high initial capital requirements and a long shelf life. As a result, projects continue to rely extensively on public financing, either through local governments or foreign aid.

Development finance institutions such as the Inter-American Development Bank (IADB) have also provided grants to clean energy investments, but their availability remains limited.

Latin America’s notorious infrastructure deficiencies further constrain the industry’s development. Several countries still require the developer to bear the costs of transmission lines, effectively limiting the possibility of investments from the main grid. In Brazil, delays in the construction of transmission links, which are the responsibility of most state-owned utility companies, have prevented the connection of around 1GW of recently completed wind farms. Given that few countries have developed their own clean technologies, lack of a local supply chain and the low availability of skilled labour are further challenges for new investors.   

The path to green growth

Although significant regulatory and administrative barriers have hindered the development of renewables in the region, the industry’s prospects overall remain positive: Latin America’s economic development – and consequent growth in energy demand – alongside its abundant renewable resources will continue to attract investors for the foreseeable future. Regional governments are equally interested in the industry’s spill-over effects, such as improving energy security, facilitating development in rural areas and protecting the environment from the negative impacts of fossil fuels – factors that are likely to foster more renewables-friendly government policies.

However, the pace of the industry’s maturation varies across the region. Brazil’s active stance towards the sector and institutional instruments designed to foster a local supply chain for clean energy technologies have given it a comparative advantage over its neighbours, and it is likely to continue to attract the majority of clean energy investments. According to a 2012 report by Bloomberg Energy Finance, Brazil is the only country with a complete value chain for two renewables (biofuels and biomass). Mexico, with its bold targets for clean energy, and Chile, with its strong appetite for solar power, are following suit. Peru, Uruguay, Argentina and Costa Rica have also made significant improvements in their policy framework for the sector.

Thomaz Favaro works for Control Risks, an independent, specialist risk consultancy with offices on five continents. Contact him at thomaz.favaro@controlrisks.com

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