Full version: Stage set for Latin America

Colin Bennett

Long a region of vast potential - but lagging in concrete action - Latin America’s renewable landscape is finally starting to take shape.

Latin America as a whole has held together well on the economic front despite the ripples of the global economic crisis.

Some states, for example, especially in the case of Brazil, are even excelling on a global scale and embracing renewable energy - not just as a source of energy for the grid - but as a way to continue to grow the economy.
According to Climatescope 2012, a ranking of Latin American countries’ renewable energy investment climate; public policy; and lending opportunities (compiled by the Inter-American Development Bank and Bloomberg New Energy Finance), the region sees around 7% of its 310GW of total capacity come from renewable sources. This comes from:

  • Biomass and waste (10.4GW);
  • Small hydro power (8.4GW);
  • Wind power (2.4GW);
  • Geothermal (1.5GW); and
  • Solar (1.5GW).

But the potential, and more importantly the need, is much more than the figures would suggest. And the rising costs of conventional energy and falling prices for renewable equipment make Latin America an attractive option for companies looking to expand their project portfolio to new parts of the world.

In this article Renewable Energy Focus examines the leading developments throughout the region, and takes a geographical look at where the hot spots are for today’s projects and tomorrow’s investments.

Brazil hits right note with renewable energy

Brazil’s future looks bright, and in Latin America is the undisputed leader for renewable energy. It has a strong, growing economy that is diversifying and attracting investors from around the world. The 2014 World Cup and the 2016 Summer Olympics are all coming in the next few years – not to mention billions in infrastructure improvements and spending from visitors.

While the country still faces numerous challenges in spreading this growth and prosperity to the whole of the population, there is ample reason to be optimistic about Brazil’s future.

In terms of energy Brazil looks much different from the rest of Latin America due to the sheer quantity of consumption. In fact the country is the third largest energy consumer in the Western Hemisphere behind the U.S. and Canada, and 9th largest in the world, according to the US Energy Information Agency (EIA).

Much of the production in Brazil is still focused on oil, however, being the second largest oil producer (behind Venezuela), with production for 2012 expected to hit 2.8 billion barrels a day.

But despite its major role as an oil producing nation, interest in developing a greater share of renewable energy has long been on the radar of Brazil’s successive Governments, and in 2004 a long-term plan - and agency (PROINFA) - was formed, whose stated aim was to maximise the share of energy from renewable sources.

From 2004-2024 the agency plans the deployment of 144 production plants, which will bring some 3,299 MW of installed capacity onto the grid. This will include 1,191 MW from 63 small hydro projects, 1,423 MW from 54 wind farms, and 685 MW from 27 biomass plants, all which will be operated by Eletrobrás, Brazil’s largest electrical utility company.

The country’s status in terms of renewable energy is high even compared to European nations. According to Ernst & Young’s Country Attractiveness Indices, Brazil is tied with Sweden for the number 10 spot. And The Climatescope 2012 ranking came to the following conclusion:

“Compared with its peers Brazil has the most diverse set of clean energy policies with at least one incentive in place for nearly every one of the categories examined…”

Brazil’s Government is taking a lead role through auctions and financing, that both allow private companies to compete for the installation plants on a cost basis - independent of the technology.

Interest in finding renewable energy sources stems from energy problems experienced in the 1970’s after fuel prices shot upward. This created a political will to find new energy options, largely focusing on large scale hydro power projects, although lower rainfall and ecological issues surrounding these large projects has led to interest in other more sustainable sources as well.

Wind in Brazil

With more than 4,200 miles of coastline, wind energy represents an immense potential source for new energy projects.

The Government opened the doors to the industry in 2009 through an auction of 71 projects, which will start to come online in July 2012. In total these projects will consist of 773 new turbines, and add capacity of 1,805 MW once fully online.

There have been a number of auctions held, which include three more planned to December 2012. The auctions are open for all technologies, but wind production has been the main beneficiary thus far, due to a lower cost structure.

According to Ernst & Young's Brazil Country Attractiveness Indices, what is special about the recent auctions is that wind is now starting to become cost competitive with conventional energy sources. For example, through the auctions the price for wind energy has fallen below that of natural gas. However, experts believe that the low margin on returns could result in problems once projects enter the construction stage.

In terms of installed capacity for wind energy Brazil passed the 1GW milestone in 2011, adding 587 MW during the year to reach a total around 1500MW, according to the Global Wined Energy Council (GWEC). By the end of 2016, GWEC expects over 7,000 MW of installed wind power in Brazil.

But the large uptick in wind projects faces future uncertainties and some in the country's power sector have said an excess of contracted power supply could wipe out the nation's wind industry.

Energy distributors have told local press that an economic slowdown in 2011 and the migration of midsized companies to unregulated energy markets could mean an excess amount of energy available on the regulated grid. According to a report published on the energy distributors’ industry association Abradee even suggests that an upcoming project auction may be canceled.

Critics have said that the distributors are also to blame since they miscalculated demand estimates several years ago, and now the industry is paying the price.

Biomass in Brazil

Another sector that Brazil has courted aggressively is biomass, using its large sugar industry as a source of biomass fuel.

According to a presentation by L.A. Horta Noreiga with Brazil's Universidade Federal de Itajubá, experiments using vegetables to produce fuel date back to the early 1920's, although it was a Government mandate after President Lula took office in 2003 that led to an increase and stronger policy to encourage its use. Tax breaks were expanded to include the use of sugarcane based biofuel.

The first step away from fossil fuels headed towards ethanol production. Brazil has been a world leader in ethanol production and export for some time.

While the majority of ethanol uses sugarcane as feedstock, there are a number of other materials that are attractive to fabricate biodiesel, including palm oil; babassu; sunflower; rapeseed; castor plant; peanuts; and soybeans, all of which are produced industrially in Brazil.

But problems exist with the controversy over different feedstocks, especially corn and sugarcane. For ethanol this has caused controversy on a global scale, due to the unavoidable link to food prices and land use competition between food sources and energy crops.

Mexico increases its wind portfolio

As Latin America's second largest market, Mexico represents an attractive market that has increasing interest in diversifying its energy matrix towards renewable energies. However unlike Brazil this is almost solely focused on harnessing wind energy, and not many other clean energy alternatives exist on the ground.

Largely dependent on its fossil fuels for energy production, the country's energy ministry said in its 2012–2026 Energy Outlook, that the country gets 35% of energy from clean sources (albeit that this includes large hydro power projects).

The first actions toward a diversified energy matrix on the regulatory front took place in 2009, and opened the door to new wind energy projects. At the time there were already several generating projects online, and the installed capacity jumped to 202 MW – compared to 85 MW in 2008 – according to numbers from GWEC.

That number has since grown to 519 MW at the end of 2010.

In 2009 the Government set a goal for 7.6% of the energy matrix to be supplied by renewable sources in 2012. The most recent plan calls for 35% of the county's energy to come from renewable sources by 2024. Critics have called the number “unrealistic” and questioned whether new projects being developed are considering their environmental impact, especially in the case of wind farms.

Most of the wind farms are in the Oaxaca state, according to the GWEC.

2011 was also a big year for wind energy in Mexico, with some 719 MW of wind energy coming online. More developments continue, with a March 2012 announcement that Marena Renovables would install a 396 MW wind farm in Oaxaca.

While wind energy accounts for the grand majority of installed renewable energy there are new projects in the pipeline for solar energy that involve Mexican companies. For example in Baja, California, U.S. solar provider SolFocus announced a partnership with Mexican land and real estate developer Grupo Musa and U.S. energy developer Synergy Technologies LLC to build a 450 MW solar plant.

Chile targets foreign money

A robust economy and stable political environment has made Chile a favourite for foreign investment over the last 3 decades, renewable energy being no exception.

However the need for energy is far more complex than Brazil and Mexico, which have vast reserves of fossil fuels. Instead Chile has relied on importing natural gas from its neighbours, together with its large-scale hydro projects, both of which have provided serious challenges in the last couple of years.

In contrast to Brazil's public policies that have promoted renewable energy projects, the initiative in Chile has come from the private sector, driven largely by the rising cost of imported natural gas and diesel, droughts and increased demand from the whole of the country for electricity (especially from industry).

However the overall use of renewable energy compared to thermal plants burning natural gas and coal (as well as large hydro power) is still very small. GWEC says only about 3.7% of Chile's energy comes from renewable sources.

A law passed in 2004 called for power companies that sell directly to the public to source 5% of their supply from renewable sources by 2024 or face fines. But apart from this measure there are few benefits for large renewable projects. Chile's ultra-free market policies call for energy prices to reflect production costs and the legal framework for creating renewable incentives is not clear.

Most projects of scale are being employed by large energy consumers in different industrial sectors. For example, mining, one of Chile's most important industries, has been involved in funding new parks, especially for wind, solar and thermal energy.

The most recent large scale announcement was made in March 2012, when Spain's Ibereolica announced it would build a US$2.6 billion 360MW solar park in the Atacama desert, mainly to supply the mining industry in that region of the country.

Wind energy is the focal point of investment and developments in Chile. With overall potential of 40GW (according to GWEC), Chile in 2010 had 172 MW of installed capacity. However this number is set to grow in the next five years as more projects – currently under construction or in the planning phases – come online.

Central America

Central America is emerging as something of a Cinderella story in terms of new investment in renewable energy projects. In fact the Climatescope 2012 ranking of Latin American countries placed Nicaragua and Panama as the second and third friendliest countries for renewable investment, behind Brazil.

In the case of Nicaragua, the ranking centres around the country's clear public policy, industrial power structure and opportunities for green finance as a driving factors for its position. There are some 10 lending institutions directly offering financing for small scale projects. On the macro level Nicaragua has received some US$1.1 billion in renewable energy investments since 2006. Biomass and waste account for most of the installed capacity, currently at 122MW, while geothermal represents the opportunity for the future.

For Panama the distinction is due largely to its legal framework which enables greater use of renewable energies, although it lags behind many other countries in financing options, especially in terms of micro financing. But the ranking found it is strong in terms of its desire to curb greenhouse gas emissions.

The country's renewable sector is centered around small hydro power projects, which provide 13% of the country's energy – or 262MW of installed capacity. Looking forward, wind energy is expected to provide new growth.

Honduras has also seen an uptick in investments, most notably a 102 MW wind farm, Cerro de Hula, implemented by Globeleq Mesoamerica Energy. The Project was inaugurated in February 2012, and is the largest of its kind in Central America.

Central America also makes an attractive destination for socially minded investments, due to the lack of services in many rural areas and the real potential for renewable energy to become a legacy service in some cases.

Other countries – slow uptake, but vast potential

There is a long list of countries that have immense potential for renewable energy projects and investments, but haven't managed to embrace them yet. Argentina is probably the biggest such example, with vast wind resources but a rocky investment rating and climate.

Its Patagonia region for example has vast, world class wind resources, but in terms of installed capacity there is still little use of this resource.

Peru, with vast rivers, waterways and wind potential, is another area that could attract new investment, especially as the country grows its infrastructure, economy and demand for power. Colombia is also a country with vast potential in terms of resources and a growing economy, but little in terms of installed capacity.

In all, 2012 will likely be a very interesting year for Latin America's renewable energy industry as several success stories take centre stage. But it will take much more work and investment to get the region to embrace even a small part of its great potential across the renewable energy board.

About the author: Colin Bennett is based in Santiago, Chile, and is Renewable Energy Focus’ Latin America correspondent.

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