Charging ahead with renewables
The switch is gathering pace, despite resistance in some countries where NOCs are dominant
Central and Latin America in recent years have been hit hard by the impact of climate change. The region is never likely to forget 2017, when hurricanes struck parts of Central America, causing severe flooding and resulting in deaths in parts of Nicaragua, Costa Rica and Honduras. It's beginning to look like a pattern. The Intergovernmental Panel on Climate Change counted 613 extreme climate- and hydro-meteorological events (typhoons, hurricanes, floods and droughts) in the region between 2000 and 2013. In 2014, Brazil was hit by one of the worst droughts in decades, causing knock-on effects in electricity prices, inflation and business confidence. Panama has seen extended dry seasons leading to energy rationing and Colombia basically struggles from one energy crisis to the next due to frequent rain shortfalls.
Hydropower has historically been the focus of the region's clean-energy efforts, to great success in Costa Rica, which ran on close to 100% renewable energy for the past two years thanks to its high hydro capacity. But this combination of a high-reliance on hydro and increasingly erratic rainfall is stressing existing energy complexes to their breaking point. It is also pushing countries in the region to diversify their energy mix.
Central America, exploiting the region's favourable climatic conditions, saw record levels of solar installation in 2016. Total new capacity of solar and wind reflected an increase of 23% on the previous year. The only debate in the industry is over what rate of exponential growth to expect: significant growth is guaranteed. In 2016, El Salvador topped the installation charts with over 100 megawatts of new solar capacity, and Panama with a combined 97MW of new capacity between wind and solar. Honduras is emerging as another Central American solar success story, facilitated by 20-year power-purchase agreements with state utility Empresa Nacional de Energía Eléctrica.
In 2017, investment showed no sign of slowing. The Norwegian Fund for Developing Countries (Norfund) is facilitating the financing of solar-energy projects in Costa Rica and countries in Central America. In September this year, AES El Salvador and Corporación Multi Inversiones announced the construction of 10 solar plants with total capacity of 10MW in different areas around the country.
Latin America is following the same exponential growth path after adding 2.2 gigawatts in 2016. By end-2020 the entire region is forecast to add over 12GW of solar capacity and over 13GW of wind. These are big numbers in and of themselves; but it's also notable in that solar is finally having its day in the sun. In the first half of the decade, regional capex on wind was four or five times that of solar. That's changing in the latter end of the decade, with the region finally waking up to its terrific solar potential.
The shift to distributed generation has meant that policy makers have somewhat lost control of the reins when it comes to steering energy markets
While renewables are on the rise in an impressive way, Central America still relies heavily on imported oil and is therefore clearly incentivised to find ways of reducing the consumption of fuel in the transport sector. This means getting on board the accelerating electric-vehicle (EV) train. Costa Rica remains the regional driver, with a robust commitment to building out its charging network, and with offers of both fiscal incentives for EV purchases and mandates for governmental fleets
Latin America is a more complex story because of the region's robust oil reserves (about a fifth of the world's total), and the resulting heavyweight national oil company presence in several key countries. These NOCs are typically big political players as a result of them being cash cows for the government. Venezuela's PdV, Brazil's Petrobras and Mexico's Pemex are unlikely to be enthused by the rise in EVs and the resulting end of oil-demand growth. Other LatAm countries don't have such an outsized reliance on their NOCs and are likely to be more accommodating. Colombia, for example, has already pledged to convert half of its taxi fleet to EVs within 10 years and is aiming to convert its entire bus fleet to a mixture of hybrid and EV by 2024.
Some NOCs are embracing the trend towards changing the way that vehicles are powered so they can reduce the harmful effects on the environment. Despite the weighty presence of Pemex, Mexico is a regional leader in terms of addressing climate-change concerns. Mexico has committed to cutting greenhouse gas emissions by 40% by 2030 and will only achieve this goal through a decarbonisation of the country's transportation system. Giant Motors, the joint venture between Mexican billionaire Carlos Slim and Chinese car manufacturer Anhui Jianghuai Automobile Company (Jac Motors), has announced plans for producing electric taxis for the domestic market. Cleaning up Mexico City's air became a political priority in May 2017 when Mexico declared an environmental emergency for five consecutive days—the longest period in 17 years.
The changes underway are by no means restricted to directives from on high. Far from it. The shift to distributed generation has meant that policy makers have somewhat lost control of the reins when it comes to steering energy markets. That's one of the reasons why institutional forecasts for solar uptake have been so consistently behind the curve. Changing the energy mix used to require a high-level governmental or corporate decision. Now almost all home owners can install solar panels on their roofs and change the energy mix themselves. Similarly, the drivers of the fuel mix in transportation are changing. They used to be a mix of corporate and governmental decision makers. But now the sector is witnessing a wholesale shift on the corporate side, with GM, Ford, Toyota, Mazda, Daimler, Renault (and their alliance partners Nissan and Mitsubishi) Volvo and VW all vowing to focus overwhelmingly on EVs by the middle of the next decade. Latin America may face the choice of getting on the EV bandwagon or seeing the whole continent end up like Cuba, a museum for automobile antiques. This is unlikely and untenable.
Furthermore, while there are some powerful NOCs in some countries in Central and Latin America, every single state has a powerful utility player. In a world of rapidly-rising solar uptake, and mounting grid abandonment—especially as the cost of batteries continues to fall—the regional utilities will have to embrace EVs as their salvation in terms of putting power demand back on an upward trajectory. Central and Latin America didn't lead the charge on solar or wind, but it's charging ahead now. Similarly, it's likely to lag in terms of EV uptake, but will get there eventually.
Seth Kleinman is a solar entrepreneur in Central America, and former Global Head of Energy Strategy at Citi
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here