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