How Does Renewable Energy Investment in Latin America Stack up against the Rest of the World?

Apr 17, 2014

The Frankfurt School-United Nations Environment Program Collaborating Centre for Climate & Sustainable Energy Finance, in collaboration with Bloomberg New Energy Finance, recently published a report titled, “Global Trends in Renewable Energy Investment 2014.”  The report notes that global investment in renewable power and fuels (excluding large hydroelectric projects) stood at USD 214 billion in 2013, a 14 percent drop from 2012, in part due to falling prices of renewable energy technologies (e.g., photovoltaic cells/panels).  Despite this, the report also shows that renewable power and fuel investment in the Americas (excluding the United States and Brazil) hit USD 12.4 billon, up 26 percent jump from 2012.  The strength of this investment in the Americas reflects several large renewable energy projects in Latin America.

  • Chile and Mexico are the two Latin American countries that experienced the largest renewable energy investment in 2013, principally in wind and solar projects.  Chile saw USD 1.6 billion invested in renewable energy projects in 2013, a 72 percent jump as compared to 2012.  Mexico saw USD 1.5 billion in its 2013 renewable energy investment level, which was a 21 percent drop from 2012, although this drop could stem from Mexico having arrived at a more sustainable investment level as compared to years prior.  There is also great uncertainty surrounding the ongoing energy sector reform in Mexico, which likely also contributed to that country’s drop in renewable energy investment particularly toward late-2013 when the government announced the reform initiative; investors have taken a wait-and-see approach in regard to the energy reform’s forthcoming secondary legislation prescribing specific energy reform measures, about which we have recently blogged. Although Mexican lawmakers set for themselves a late-April 2014 deadline for adoption of much of this secondary legislation, new estimates put the adoption of such secondary legislation possibly into 2015 due to partisan disagreements, which will undoubtedly increase investors’ uncertainty toward the Mexican power sector, including for renewable energy, and weigh on their near- and medium-term investment decisions in Mexico.

  • Also strong in renewable energy investment in 2013 were Uruguay and Costa Rica.  Costa Rica saw USD 584 million in renewable energy investment in 2013, a 175 percent jump as compared to 2012, notably from a large geothermal project.  Similarly, Uruguay saw USD 1.1 billion in renewable energy investment, a 610 percent jump as compared to 2012, notably from several wind projects.

Peru, Panama and Nicaragua also showed strong renewable energy investment in 2013, with USD 400 million, USD 200 million and USD 100 million, respectively.

Perhaps most notable, according to the report, is that Latin America appears to lead the charge in regard to wind and solar projects launched and executed on purely commercial terms. Ideal solar and wind resources in such countries as Chile and Uruguay, combined with the falling price of renewable energy technologies worldwide, have allowed for the installation of “projects that produce electricity at costs per megawatt-hour that challenge conventional power sources, often with no subsidy support.”  The report notes that the Middle East and Africa follow closely behind Latin America in this regard.

That Latin America appears to be a bright spot for renewable energy investment, and that much of this investment now occurs on subsidy-free, commercial terms is certainly good news for those concerned with climate change as well as those interested in diversifying Latin American power markets; it denotes not only healthy expected financial returns but, also, a policy environment increasingly friendly to such green energy initiatives. Nonetheless, Latin America is not free of the challenges that have long plagued renewable energy project roll-out globally:

  • On the technical side, intermittency issues continue to pose significant hurdles for renewable energy in Latin American countries where conditions (e.g., wind/sun resources) are not as favorable as they reportedly are in Uruguay and Chile.  This strongly suggests that most of Latin America will continue to consume an energy mix diversified among renewable and fossil fuels for the foreseeable future;

  • On the environmental and social side, that renewable energy projects involve technology considered “green” should not suggest that they do not stoke concerns about the projects’ environmental and social impacts.  New energy infrastructure, albeit renewable, is capable of negatively affecting local plant, animal and human life, e.g., power transmission lines can encroach upon indigenous land claims, wind turbines can threaten local bird populations, solar panels can serve as visual pollution in otherwise scenic areas, etc.  Before shovels hit dirt, project developers must address in feasibility studies manners in which to minimize or entirely avoid these potential social and environmental impacts in order to allay investors’ concerns that such issues could imperil project profitability and cancel out any positive intended impact of a project; and

  • On the financial side, would-be independent renewable energy generators seek additional power market liberalization and integration, particularly in regard to transmission and distribution, before effecting sizeable capital outlays for renewable generating capacity.  This makes such undertakings as the Mexican energy sector reform and the Mexico-Central America-Colombia interconnection projects particularly relevant and welcome, given that they will expectedly diversify their respective covered power markets away from historical energy sector natural monopolies and national champions.

As the report notes, there remains reason for cautious optimism toward renewable energy in Latin America, the above-mentioned challenges notwithstanding.  Investors appear to look favorably toward the region in this regard, and financial markets, like a turbine, often tell us which way the wind is blowing and how hard.