Latin America’s Renewable Energy Revolution

Technological advances, attitude shifts and market development are all coming together at the same time to transform Latin America’s energy sector…

For centuries Latin America’s natural resources have helped move the world economy. From the silver galleons that financed the Spanish Empire to the iron and copper exports that are rebuilding China, Latin America’s natural resources have long been sold around the globe. But now the growth of renewable energy across the region is creating a new economic phenomenon – exploiting those natural resources for domestic growth.

In recent years Latin America has made huge strides in exploiting its incredible wind, solar, geothermal and biofuel energy resources. It is now on the cusp of an energy revolution that will reshape the region and create a host of business opportunities. To investigate the changes taking place Canning House helped to organise the recent Green Finance Summit in London and commissioned a Canning Paper from Latin News.

Oil addiction

At the moment Latin America is still very dependent on another one of its natural resources – oil. According to the BP’s Statistical Review, Latin America accounts for more than 20% of the world’s oil reserves, making it the second-most important oil region in the world, which, is probably why it relies so heavily on the stuff. Oil accounted for 46% of the region’s total primary energy supply (TPES) in 2013, well above the global average of 31%.

When it comes to transport, oil-based fuel is likely to keep its pole position for some time to come. Electric cars and hybrids have been slow to make an impact globally, and in Latin America they are barely present. Brazil has made impressive strides with ethanol alternatives, but oil and its derivatives remain the number one choice. Moreover, Latin America’s outdated transport fleet, which is heavily made up of cast offs from the US or older models produced locally, is going to remain behind the curve on any transition to electric vehicles for at least the medium term.

Powering up

But Latin America’s electricity sector has already begun to wean itself off its oil dependence. According to the Inter-American Bank, Latin America is expected to almost double its electricity output between 2015 and 2040 and will need an extra 1,500 terawatt hours (TWh) of power. That’s a huge amount - enough to power the entire UK’s electricity grid for five years. Practically none of Latin America’s new large-scale power plants will be oil-fuelled, which opens up the field for different technologies.

Countries in Central American and the Caribbean, whom traditionally imported oil, were the first to move away from oil-based power plants, after suffering a decade of high and volatile prices at the start of the century. In some cases, such as the Dominican Republic, that meant a switch to coal, which represents 5% of Latin America and the Caribbean’s TPES. However, growing environmental objections mean that new coal plants are unlikely to be adopted by many Latin American countries in the future.

"Large hydro plants across the region are struggling from irregular rainfall, with fewer new dams being built because of increased environmental concerns…"

Another declining energy source is traditional renewable energy, a term that covers large hydro plants and biomass. At present traditional renewable energy is responsible for meeting 24% of Latin America’s TPES. Of that, 16% comes from bio energy and waste, while 8% comes from large hydro plants. But both component parts are in decline. Large hydro plants across the region are struggling from irregular rainfall, with fewer new dams being built because of increased environmental concerns. Meanwhile, the spread of electricity and gas infrastructure is cutting the use of solid fuels for household heating and cooking.

One fuel that will certainly see its share increase is natural gas, which currently provides 25% of the region’s TPES. Indeed, whether it is pipelines bringing cheap shale gas from the US down to Mexico, or liquefied natural gas import terminals on the Chilean coast, natural gas is replacing oil in power plants across the region.

Time for renewables

Latin America may be better known for its incredible hydrocarbon, mineral and agricultural resources but it also has world-beating renewable energy potential. The mix of the Andean mountains, vast plains, deserts, jungle and coastal strips mean that nearly every country in South America has varied and extreme – by British standards – weather conditions. Whether it’s the constant sunshine of Chile’s Atacama Desert, or the strong winds that buffet Mexico’s Yucatan Peninsula, Latin America has excellent conditions for generating renewable electricity. It’s also home to plenty of tectonic activity, which gives it great geothermal energy potential too.

At present, non-conventional renewables, such as wind, solar and geothermal, have barely made a dent in Latin America’s energy landscape. Power generated by these technologies account for just 1% of the region’s TPES. But that tiny figure belies the massive strides that have been made. According to the International Renewable Energy Association, Latin America saw $80billion invested in renewable energy projects between 2010 and 2015. As a result non-conventional renewable capacity more than tripled between 2006 and 2015   - hitting 36 gigawatts (GW). Of course that’s just the nameplate capacity, but the growth in power output is just as impressive. Across the region non-conventional renewable power generation was 81 TWh in 2015, almost seven times more than in 2000.

Improving conditions

The early investment in Latin American non-conventional renewable energy may not have made the technologies major players in the region’s energy landscape. However, it laid the foundations for the energy revolution to come. One important consequence is that countries in the region have adapted their regulatory frameworks to accommodate renewable energy. There is no silver bullet or standard formula across the region but in many countries regulators have experimented with renewable energy auctions and clean energy certificates to boost non-conventional technologies.

Another advance has come in the financing of projects, which tend to be capital intensive. Latin America has strong development banks, such as Brazil’s Banco Nacional de Desenvolvimento Economico e Social (BNDES). By 2015, this type of institution accounted for about 30% of all clean energy financing in the region. Another development has been the emergence of renewable energy public funds. Fourteen countries in the region have them, while others offer incentives such as loans for R&D. Local and international private-sector investors have also increased the amount and sophistication of renewable energy financing.

"recent renewable energy auctions held in Mexico and Chile have seen developers make incredibly low bids…"

But the most important factor boosting Latin American renewable energy actually has nothing to do with the region. Latin America looks set to benefit as global technological advances cut renewable energy prices. The World Economic Forum estimates that solar panel conversion efficiency, which was stagnant for two decades, recently rose to 22% from 15% over the last five years. Meanwhile the International Energy Agency, calculates that wind turbine capacity factors have doubled to 50% from 25% a decade ago. These greater efficiencies mean that each new solar panel or wind turbine can produce more energy from the same amount of sun or wind, thereby bringing down costs. Indeed recent renewable energy auctions held in Mexico and Chile have seen developers make incredibly low bids that are more competitive than traditional energy sources, such as coal. There have also been important technological advances in biofuels that allow a wider range of biomass to be used as feedstock, thereby bringing down costs. The combination of all of these factors means that Latin American renewable energy is set to boom.