Latin America

The Golden Land of Clean Opportunities – Phase 2

As we enter the new year and having spent the winter break studying IRENA’s fantastic report Latin America – Renewable Energy Market Analysis. I thought it useful to take stock of what are the key trends and drivers for the energy transition across Latin America. Primarily to better plan our own activities at Green Power and ensure we continue to help our clients and de-risk decision- making.

The region has had a stable decade of politics, certainly in a historical context. It is home to 600 million people and geographically vast, it covers the surface area of China and the USA (home to 1.7 billion). Latin America is rich in resources from minerals to metals, and fossil fuels and in the past decade we have seen strong development on Human Development Indices due mainly to better governance (regional growth predicted for 2017).

In terms of the energy mix we have seen the start of the diversification away from hydroand coal with renewables taking a sizeable portion of new generation. This has been driven by concerns on energy security concerns, technological advances, the growing threat of climate change and El Nino/Nina impact on hydro.

 A Decade of Growth

For the past decade clean energy investment has grown from $4bn annually across the region to total $150bn, the markets have grown at a strong CAGR of 20%. By technology mix, wind has grown steadily to be a $10bn annual regional market and solar has exploded into life in the past 3 years. This has more than offset a decline in bioenergy, especially in liquid biofuels.

Latin American Entering Phase 2

I believe clean energy is now entering the much steeper part of the S curve of transition to take a much more dominant share of the region’s electricity mix. These are 5 main reasons why:

  1. Adoption Curve and Economics
  2. Hydropower
  3. Electricity Prices and Demand
  4. Policy and Frameworks
  5. Jobs and Security

1.   Adoption Curve and Economics

The adoption curve in technology occurs starts with early adopters and then as the economies of scale work, technology becomes cheaper and more people rapidly acquire it until the market saturates and matures. Traditional S-Curves have got steeper as innovation cycles have reduced and ease of adoption increased.

The image below shows this with the latest technologies being adopted sooner. The energy industry is different to B2C personal expenditure, as project timelines are longer where large infrastructure projects take time but the basic premise hold true. One caveat is that residential and commercial adoption of solar, batteries and electric vehicles could follow these rapid B2C deployments.

Solar and Wind Economics

Solar and wind have been following their cost curve so as they have scales so the prices have reduced. Solar module prices have fallen on average 24.3% for every doubling of the global capacity, likewise wind has fallen 19% and now batteries are following too (figures courtesy of Bloomberg New Energy Finance). In strong resource areas like the Atacama and Sonora deserts solar is now the cheapest source of electrons on the planet. Likewise in Brazil's Rio Grande del Norte and Mexico's Oaxaca wind has been highly competitive for years.

2.   Hydropower + Renewables = 3

The region has a very high 50% mix of hydropower, courtesy of the Andes, which combines well with renewables. Hydropower can back up solar and wind variability by adding greater reservoirs and "low hydro" dry seasons tend to be windy. Hydropower can also soak up excess capacity, such as midday solar “floods” through the addition of pumped hydro capability to existing hydro projects. Hydropower itself is increasingly becoming variable with the El Nino/a hydrological cycles reducing hydro's output thus necessitating the need to diversify.

50% Hydropower across the region is highly complementary to renewables

                      3.   Electricity Prices and Demand

The auction system that has gained widespread popularity across the region over the past 2 years has helped both accelerate and highlight the cost advantage of renewables. In 2016 a project in Chile agreed to a price of just $29.10 a megawatt-hour and this was half the price of a competing coal project. This is the lowest rate for any kind of electricity anywhere. What is truly interesting is that solar can still further reduce it’s cost base and IRENA and other analysts expect costs to reduce another 60% over the next decade.

Latin American electricity demand set to rise by 91%

In addition to falling costs, electricity demand is strongly rising across the region, IADB expect electricity demand to rise by 91% by 2040! See chart below for a breakdown (courtesy of the excellent IADB Lights On Report).

4.   Policy and Frameworks

More than 300 policies now exist in support of renewables in Latin American countries and also crucially legal, institutional and administrative frameworks have now been built. This soft capacity is continually improving, the easing of bureaucracy and the trend to “one counter” processing has speeded up project development time and reduced costs.

National public financial institutions have successfully seeded many markets and established projects (>3 years old) are now attracting infrastructure and pension funds in the secondary market thus releasing capital back to the risk entrepreneurs and developers who can then redeploy this back into the next wave of projects.

5.   Jobs and Security

Renewable energy projects create good quality domestic jobs and investments have a strong multiplier effect for domestic GDP. Why import gas and outflow capital? Instead by creating domestic market for renewable energy projects, far more wealth is retained in a local economy. That is not to say all capital is retained, clearly foreign investment is often required and foreign ownership from international funds often results but there is far greater participation in local markets by local players, often local entrepreneurs entering into energy for the first time. Clean energy projects are smaller, solar in particular is fairly easy from a technological standpoint compared to building a combined cycle gas plant. Evidence from Mexico and Brasil is showing that by scaling up renewable energy deployment, they will add an extra 1% to their entire countries GDP by 2030 (IRENA have a strong report on this area, Renewable Energy Benefits: Measuring the Economics).

Finally energy security is a growing concern and by diversifying the energy mix you reduce dependency on foreign gas supplies (supplies that can stop, as Chile knows) and by increasing the number of decentralised plants you have a more robust grid and energy supply that can withstand natural disasters (and cyber assaults!). More commercial and industrial self-consumption projects also help protect businesses and productivity from grid issues.

The Future

We at Green Power are committed to the region and helping to de-risk decisions, attract inward investment, circulate best practice, accelerate partnerships and projects and help our clients take part in this exciting new phase of Latin America's development. We are keen to help accelerate the movement to a flexible grid of multiple generators. A grid that is both clean and lower cost with no over-engineering of centralised generating assets idly waiting demand peaks. A system where micro-grids can accelerate rural coverage and overcome the need for costly transmission lines and a system that can be the platform for electric vehicle charging in smog free cities.