The greening of Latin America
Climate pledges are suddenly turning into real investment in the continent’s renewable-energy sector
OIL firms across Latin America have seen their fortunes fall with the industry's downturn, but another corner of the energy business is thriving on the continent: renewables.
A mix of supportive post-Paris agreement policies, plunging costs and competitive auctions that are opening new markets have pulled billions of new wind and solar investments into Latin America. It means the region's installed capacity has more than doubled over the past couple of years alone - from 6 gigawatts in 2013 to 15.4GW in 2015, according to the International Renewable Energy Agency.
That growth will accelerate as foreign investors arrive to meet ambitious government carbon-cutting goals. Compared to the region's state-dominated oil and gas sectors, where outside investors struggle with poor investment terms and constantly shifting petropolitics, the investment environment for renewables has been far more welcoming. Three of the top seven countries in the latest edition of Ernst & Young's Renewable Energy Country Attractiveness Index come from the region - Chile (4), Brazil (6) and Mexico (7). Argentina's recent pro-business turn after the election of President Mauricio Macri saw it enter the index - at 18th - for the first time. The region is now firmly on the map for investors.
Mexico offers the latest example. In March the country held a clean-energy auction, the first since its energy reforms opened up the electricity sector. Even without subsidies, solar and wind stole the show. US, local and Chinese project developers won contracts to build 1.1GW of new solar capacity and 620MW of wind capacity, with gas losing out altogether. The companies promised to pour more than $2bn into building the facilities.
Rock bottom prices
The biggest news was the low prices those developers promised to deliver - $40.50 per megawatt hour for solar and $43.90/MWh for wind. That makes them some of the cheapest prices in the world, beating out recent bids in Texas and the Middle East. The prices were so low they raised suspicions - that firms chucked in basement-level prices to win contracts and market share, and won't be able to make good on their commitments. Guillermo Turrent, a senior regulator at the Federal Electricity Commission, acknowledged the risk during a recent conference in La Jolla, California. But he's holding to the line that the investors will deliver - not least because of the financial guarantees that have been put down up front.
That is just the start for Mexico. The country plans to add 20GW of new clean power over the next 15 years as part of a plan to get 35% of its energy from low-carbon sources by 2024, up from 15% today. Cheap natural gas from the US is flooding into Mexico as fast as new pipelines can be built, but those supplies will increasingly be competing for market share with low cost renewables.
Chile is looking to cut costly liquefied natural gas imports by rolling out new renewables projects. Its power capacity auctions were once dominated by hydro and fossil-fuel providers, but as renewable costs have plunged almost all new generating capacity is coming from wind and solar plants. Clean-energy investment rose 157% last year to $3.57bn. Broad public and political support is behind the country's efforts to get 70% of its electricity from renewables by 2050.
A mix of supportive post-Paris agreement policies, plunging costs and competitive auctions are opening new markets
In Brazil, renewables have suffered through the economic and political crisis. But the fundamentals remain strong, argues Jaime Carlson, finance director at Terraform Group, an arm of renewables developer SunEdison. "You're seeing new wind contracts in Brazil being signed below the cost of building a new coal or natural gas facility," she says. "Given the political situation you might see a blip on the radar but, long term, renewables are going to be a huge piece of the Brazil portfolio."
Argentina will hold its first renewables auction this summer as it looks to displace imported gas with domestic renewables. The auction will be the first step as the country tries to add 13GW of wind, solar and hydro capacity by 2025 (almost double the amount of new gas capacity it plans to install). The plan would transform the energy mix, with fossil fuels falling from two-thirds to around 40% of the mix and renewables rising from 1% to 20%.
For all the enthusiasm - and the capital -- turning the region's green ambitions into reality won't be easy. Terrapower's Carlson pointed to a steep learning curve for investors in the region. "If we are in seven countries, each is going to have a very distinct policy mechanism that we have to educate investors on." The region also has a checkered past with foreign investors. So far governments have welcomed the green ones with open arms. But these companies are now locked into multi-decade contracts with governments that have long histories of defaults, reneging on deals and unpredictable swings in energy policy. Still, for now, investors are feeling the wind at their back.