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The Bright Outlook for Renewable Energy in Latin America

In Latin America, mergers and acquisitions in the renewable energy sector have practically doubled over the past year. No other region in the world has experienced such a rate, according to data collected by PricewaterhouseCoopers, the accounting and consulting firm in Power & Renewables Deals 2016 Outlook and 2015 Review, published in February. Over the past year, the value of Latin American M&A deals signed in this sector rose to $7.6 billion, an increase of $2.7 billion compared with 2014.

“For investors in this sector, Latin America is a huge opportunity,” notes Mauro Guillen, Wharton management professor and director of The Lauder Institute. “It is a large part of the world — with [over] 600 million people — and some of its economies are doing relatively well now” even if others are in a severe recession. “All over the world, renewables are the way to go, especially given that both wind and solar are very close to being competitive” with traditional fossil fuel sources of energy.

The increased activity in Latin America reflects increased demand for energy, especially from clean sources, according to the PwC report. Countries in the region are trying to reduce their carbon dioxide emissions while producing enough energy to deal with their own economic growth, both the sluggish pace of 2016, and the more robust growth expected in coming years. Interest in the region is growing at a strong pace because there is a widespread belief that its traditional sources of energy supply will fall short over the long term. Moreover, many governments in the region are offering investors low-risk models of energy contracts.

All the more remarkably, “one has to keep in mind that many of these are countries are energy-rich” by nature, notes Guillen. “They have a lot of oil, and a lot of gas. So in principle, there wasn’t an acute need to develop renewables,” such as hydroelectric power, and clean renewables, such as wind and solar. Adds Guillen: “In South America, excluding Venezuela, what we have is quite a big bet on hydropower, which is renewable but is not really green because there are many environmental impacts. In Paraguay, most of the electricity is hydro, and in Brazil it is about 60% hydro.”

“For investors in this sector, Latin America is a huge opportunity.” –Mauro Guillen

 

The largest transactions carried out in the renewables sector last year in Latin America were, first, the award to Beijing-based China Three Gorges Corporation, a state-owned power company, of a contract to manage the Brazilian hydroelectric power plants at Ilha Solteira and Jupia. (Last fall, Brazil sold operation rights for all of the existing hydropower plants that it offered to power companies and investors in an auction worth $4.51 billion.) Second, San Diego, California-based Sempra Energy announced its $1.5 billion acquisition of that portion of shares that it did not already own in its Gasoductos de Chihuahua joint venture project in Mexico.

Opportunities for Private Investment

“The region possesses great natural resources and, as a result, from the viewpoint of viability, there exist some very interesting zones for the exploitation of natural resources that are aimed at generating renewable energy,” says Alberto Conde Mellado, a professor at TECNUN, the School of Engineering at San Sebastián of the University of Navarra in Spain, and CEO of NEM Solutions, a company that specializes in wind energy. For his part, Daniel Hugo Bouille, researcher and executive director of the Bariloche Foundation, a nonprofit organization dedicated to the research, teaching and development of various scientific specialties, including environmental science and energy, says that many opportunities are emerging for private capital, since many countries are planning to modify the structure of their energy networks in order to give a greater role to renewables.

One organization working along those lines is the International Renewable Energy Agency (IRENA), an inter-governmental organization that promotes the general adoption and sustainable use of all forms of renewable energy. In its latest report about the energy policies developed in Latin America, IRENA supports the conclusion that renewable energy sources are growing rapidly in the region. “High electricity prices in most of the region, growing demand, problems of energy security and, in some cases, the potential for exporting [energy], provide fertile ground for the take-off of renewable energy technologies.” The report notes that this trend is growing in strength even more because of the recent declines in the costs of some technologies, and the growth of competition. “Moreover, the region has a long history of developing hydroelectric energy. All of this has translated into numerous policies and laws targeted at developing renewable energies.”

 

In its analysis, IRENA says that almost every Latin American country has established goals for renewable energy, and most of them have promulgated laws in that regard. In the electric power generation sector, the most common political mechanisms for promoting renewable energy sources are subsidies and fiscal incentives. “In Latin America, innovative policies have been identified and designed, especially those that combine subsidies with other regulatory mechanisms.”

In Brazil, Silvia Palma-Rojas, a researcher at the University of Brasilia and international consultant on various projects in the public and private sectors, notes that the region offers huge business opportunities. In recent months, she says, 31 countries in Latin America and the Caribbean have officially committed themselves to collaborate with the international community to reduce their emissions and fight climate change. The various proposals presented by these countries “open the doors for research and development projects in renewable energy as well as open new opportunities for companies specialized in the sector.”

Challenges to Growth

According to Conde Mellado, “throughout Latin America, there are many places that offer great options for wind energy, from Central America down to Chile and Argentina.” He adds that “the fact that we have great wind resources, with many equivalent hours [of energy], means that investments can have a higher and faster rate of return, which is generating interest among operators and investors.” Palma-Rojas adds that the opportunities offered by the region for international investors are quite varied. When it comes to renewables and biofuels, she stresses the potential for “the agribusiness and forestry sectors in Latin America, which generate a large volume of waste.” As for biogases and bio-methane, she says that the sector offers investors great possibilities “due to the importance of the fishing sector, which needs to manage its landfills and garbage dumps.”

“Latin America and the Caribbean possess abundant natural resources and positive conditions for generating renewable energy.”–Silvia Palma-Rojas

 

“In many of these countries, the power picture is dominated by hydroelectric energy, but hydro still has that problem of seasonality,” notes Wharton’s Guillen. As a result, “You have to take into consideration the entire energy matrix — and look at the complementarities.” In Latin America, Guillen says, nations don’t rely as much on coal; there is more reliance on hydro. “But the problem with hydro is that there is a dry season, and [these countries] cannot generate as much hydropower in the dry season” as they do during the rest of the year. “Some renewables, such as wind, are great because the cycle is just the opposite; it is precisely during the dry season when wind blows strongest. [In any event,] hydro and wind are very complementary” sources of energy in a country like Brazil. “If Brazil can build up its wind capacity, they are going to be able to reduce the amount of coal that they need to use in order to generate [power during those periods] when they don’t have enough hydro” power to achieve that goal, Guillen adds.

The Most Attractive Markets

Climatescope, an initiative by the Inter-American Development Bank’s Multilateral Investment Fund and Bloomberg New Energy Finance for evaluating investments related to climate change in the 55 countries of Latin America, Africa and Asia, noted in its latest report that of a total of 352 gigawatts of energy installed in Latin America and the Caribbean in 2014, only 11% belonged to the category of clean energy, such as biomass, wind, solar and geothermal. When the large hydroelectric power plants are included in that calculation, more than half (56%) of the grid in the region involved sources of electric energy that are free of CO2 emissions.

In recent years, Brazil has been the regional leader in developing clean energy. Despite the fact that Latin America’s largest country is undergoing a period of economic and political challenges, its renewable energy sector continued to grow at a strong rate last year, leveraging the comparative advantage that foreign enterprises derived from the significant devaluation of the region’s local currencies. Chile has become a leader in solar energy. Mexico — which has opened the electricity sector to private-sector investment — has become an important point of global interest. The Spanish firm Iberdrola has singled out the Mexican market as one of its main international objectives for promoting its growth in coming years.

No Shortage of Engineering Talent

Despite the huge development experienced in the clean energy sector in the region, experts nevertheless note the need to improve some aspects for maintaining its growth and attracting more private-sector investment, both in local and international markets. Bouille says that the main obstacles facing investors in the region are “the shortage of legal frameworks and appropriate regulations, low prices for fossil fuels, and the difficulty of integrating an intermittent source of energy into its electrical systems.” Bouille is referring to prices of petroleum and natural gas, because retail prices of electricity have a strong correlation with prices of fossil fuels; plants that produce electricity use those sorts of energy sources, which are generally more expensive. According to Climatescope, the decline in the price of crude oil could have an impact on commercial projects for clean energy, since these projects are based on the high prices of retail markets for electricity, in order to achieve a return for their investors.

Palma-Rojas says that some of the key problems for companies that move into Latin America are “the lack of a solid political and legal framework for the introduction and use of renewable energy, and the absence of electricity systems that are flexible, reliable, secure and accessible for the introduction of variable sources [of energy] such as solar and wind power.” At the same time, she warns of other barriers: “The shortage of infrastructure and economic incentives; restrictions on … distribution; the lack of planning in many of the countries of the region, and the inability to prepare the market for legal competition between these kinds of energy sources and those energy sources used in both electrical energy and transportation.”

“Latin America will be a magnetic pole for renewables, attracting interest from around the world.”–Alberto Conde Mellado

 

Regarding the availability of experienced engineers, Guillen notes, “If you focus on the biggest markets — Mexico, Brazil, Chile, Argentina — these are places that produce many engineering graduates, although not enough to turn the whole economy into a highly developed one. But when you take a look at the industries that tend to attract the engineering talent that they have, the renewables sector is one of them.” That’s because the renewables sector “pays well and there is a lot of technology content, so engineering talent is not a bottleneck. In fact, we see that in the case of Brazil, that country has set up research institutes for renewables, and there are a lot of local firms that normally bid together with foreign firms for renewables projects — and they hire local engineers…. So wind power in Brazil has multiplied its installed capacity five-fold over the past few years, and they’ve been able to hire local technicians and engineers for that effort.”

According to Conde Mellado, financing can always be an obstacle for investors, although he does not consider it a problem unique to the region. “Another key factor is having enough trained labor for operating and maintaining the renewable assets; although Latin America has always been considered a major player in the realm of maintenance,” he notes. “In the area of wind power, for example, the co-existence of other industries can be a key [to success.] To the extent that those other industries may develop more investments, it will make it easier to access the ideal sorts of tow-trucks, for example, for mounting and maintaining wind turbines, and finding [appropriate] locations for the logistics and storage of big pieces of equipment, and achieving economies of scale for the operators.”

Facing the Future

The PwC report forecasts that the growth rate of the sector in Latin America will continue during 2016, especially propelled by developments in Brazil, Mexico and Chile. Experts support that view looking forward beyond this year, although with various nuances. Bouille says that the data collected in the last few years reveal an upward trend for the sector in the region. However, he warns about the pace of growth in coming years. “We cannot expect such strong upticks as there were between 2014 and 2015.”

Conde Mellado says that the importance of this sector and its further development in the region go beyond any of the numbers generated by the large energy installations that show up in reports, such as those published by PwC. “And so, we find ourselves living through a period of interest in the region.” For all that, when assessing the sector’s importance for the region, he says, “I would not limit myself solely to focusing on the increase in capital investment, but to the repeat business that will be generated in the [Latin American] region by the maintenance and exploitation of all those assets that are put into operation during these years.” He concludes, “Latin America will be a magnetic pole for renewables, attracting interest from around the world.”

 

Source: http://knowledge.wharton.upenn.edu/article/bright-outlook-renewable-energy-latin-america/



Category/ies:Articles, Hydropower, Hydropower Tech, Regional Articles, Regional Energy Awareness, Renewable Energy, Solar Energy, Wind energy.
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