What's holding back Latin America's renewable energy aspirations?

A look at whether renewable energy use across Latin America can follow Costa Rica’s lead

Investments in renewable energy seem to be growing across Latin America. In particular, Costa Rica stands out as the leader in the use of renewable energy in the region, and arguably in the world. In fact, Science Alert reported recently that Costa Rica ran on 100% renewable energy for 76 straight days between June and August this year, according to a new report, demonstrating that life without fossil fuels is possible - for small countries, at least. This is the second time in two years that the Central American country has run for more than two months straight on renewables alone, and it brings the 2016 total to 150 days and counting.

Costa Rica’s natural resources, size, economic make-up, and government focus are unique – not just in Latin America, but globally. According to Nick Sangermano, Managing Director and Head of Corporate and Private Placements on the renewable energy team at CohnReznick Capital Market Securities, a boutique investment bank that specialises in renewable energy, oil and gas, middle market M&A, and special situations, Costa Rica’s ability to run exclusively on renewables for long periods of time is related to its unusually large percentage of hydropower compared to its overall energy mix. This stands at 65% of total capacity and 78% of generation in 2015 according to Bloomberg.

“Despite being buttressed by geothermal and a small amount of wind and solar, Costa Rica’s ability to operate without fossil fuels relies on above average rainfall levels replenishing the country’s reservoirs,” he says, noting that the country’s small population of roughly five million and the fact that it has no major industries also contribute to its renewable energy success. It enjoys a lower national power demand than similarly sized countries.

“While Costa Rica’s ability to maximise its renewable resources can be a model for other countries, the country still needs to procure additional capacity from wind and solar to avoid burning oil to generate power,” he adds.

Despite this example of renewable energy success and the relative low costs of some alternative energy resources in the region, energy reform remains complicated for Latin America as a whole. According to Renewable Energy World, recent electric power auctions in Argentina, Chile and Mexico resulted in record-low bids for solar, ranging from $29 per megawatt-hour to $41 per megawatt-hour. These low prices should translate into increased adoption, but hurdles remain.

Thomas Conroy, President at Array Technologies, Inc., explains that from one perspective, the state of renewables in the region could be characterised as mature. “Latin America is resource-rich for renewable energy. Hydro energy has been a staple in this region for decades. Utility-scale wind energy is well established, some sites having at least 10 to 15 years of operational experience,” he says, but, he adds, the place where Latin America is most ripe for explosive growth is solar, particularly utility-scale solar.

“Solar is emerging as a major market force across Latin American countries and adoption is rapidly growing. The key reason for this is that solar is generally regarded as the lowest cost energy generation technology for peaking demand periods. Solar tracking technology furthers this by producing more energy for longer periods throughout the day,” he says.

Conroy adds that, for countries with growing electricity demand, a strategic path has become clear within the last two to three years. “The price of renewable energy generation has been dropping at 10% a year for the past 12 years. The clear strategy that has emerged is to maximize generation from wind, solar, hydro and geo-thermal resources. With utility-scale solar projects, for example, Latin American developers and owners are maximising their investments by selecting solar trackers that provide the lowest cost of ownership and the most reliable product.”

Alejo Lopez, Senior Director of Business Development for the Latin American region at NEXTracker, says that it has some of the most vibrant unsubsidised solar markets in the world. He explains that the region is expected to install approximately 4 GW by the end of 2016. Mexico, Chile, Argentina and El Salvador have recently had power auctions where solar had to compete directly with other renewable and fossil technologies and solar PV was the lowest cost source of power. 

For Sangermano of CohnReznick, renewable energy – outside of hydro which is widespread – is still in the relatively early stages of adoption across Latin America but is progressively emerging as an important part of the energy mix.

Sangermano explains that Latin American power capacity is 364GW, of which 48% is hydro, 23% gas, 15% is oil and about 5% is renewables (mostly solar and wind). “The rise of renewables stems from an increasing awareness of the commercial competitiveness, practicality of execution, and social benefits of this option of power generation. As there is great diversity of nations and markets across the region, the level of sophistication and adoption varies widely across countries,” he says.

Chile – a leader in renewables – had a recent national solar auction with its lowest bid ever of $29/MWh. Mexico continues to reform its power market and realise significant equipment cost declines. While according to Bloomberg, Peru achieved 78% rural electrification in 2015, up from 29% in 2006, in part due to small scale solar systems.

“Conversely, a decline in the value of the Brazilian Real and an increase in the cost of cheap financing has increased that country’s wind project costs and reduced interest in Brazil’s national auction for the first time in several years. Overall, the region is on the cusp of ‘what is possible’ in renewables, but that status isn’t without near-term, country-specific obstacles,” says Sangermano.

Latin America’s adoption of hydro, though, could help the region achieve similar success to that reaped in Costa Rica. Conroy believes that there is a great synergy between other renewables and hydro. He explains that renewables can produce reliably across the region due to their distributed nature, and if a cloud comes across a solar farm or the wind drops in one region, the hydro resource can pick up the small amount of demand due across the geographically distributed generation portfolio.

Hurdles remain, though, chief among them cost, since power generation projects are some of the highest capital projects in any country. “The availability of sufficient capital at low interest rates is one of the key factors required to drive power generation projects, of any type, and of course renewable projects are included in that,” Conroy says.

For Lopez, renewable energy and solar in particular have proven that clean power is viable in unsubsidised markets today. He says that in order to sustain the rate of growth and clean up the fossil energy matrix with more renewable power, better energy legislation and regulation are required. Robust renewable energy targets and effective mechanisms for monetising clean energy certificates will be critical in sustaining this growth. Also, smarter yet simplified permitting and interconnection will regulations will enable the integration of more solar and wind. Energy storage and distributed solar are two major elements that are largely misunderstood and therefore not appropriately regulated or supported. 

Lopez highlights that grid integration is a key obstacle in markets such as Chile or will become a roadblock soon for places like Mexico and Argentina. “Simplified energy procurement mechanisms will be needed in Chile if solar and wind are to grow,” he says. “Overall economic stability and country risks will always need to be understood and managed to avoid boom/bust cycles in these markets.”

Latin America has huge strengths such as strong wind and solar natural resources, and are some of the best available worldwide, such as solar in northern Chile. While Sangermano adds that other factors make renewables even more compelling, including the levelised cost of energy (“LCOE”) for renewables versus imported natural gas or diesel-based power generation as well as an aging or non-existing transmission grid infrastructure that favours regional or local power generation such as solar DG.

Sangermano adds that labour is highly skilled and less costly than in developed markets, allowing for even more reduced project costs. “Additionally, local developers and international energy utilities and service providers are seeking a toehold in the industry and are therefore willing to bid below market,” he says.

“Renewables have every commercial and social reason to become a part of the energy mix in the region. While traditional power generation will, for practical purposes, always have a role, many markets across the region could source a large part of their power needs from renewables. All of the necessary conditions are either in place or within reach.”

He cites the examples of Chile’s mining industry and Peru’s rural communities, which are currently sourcing various solar applications to advance electrification in places where conventional energy and infrastructure are less competitive.

Sangermano believes that Latin American businesses would benefit from the predictability of power costs through PPAs with renewable power assets, and there would also be an additional benefit of a lift in power reliability, in certain cases. He says that this is especially true with solar C&I applications which have been a noticeable trend for Mexican corporates that have procured 2.4GW of wind energy from 2009 to 2015. “Given some of the grid and power reliability struggles in the region, the rise of power storage could be especially helpful in making renewables a favoured choice for both long-term cost transparency and greater availability.”

As Conroy puts: “The world is in an unprecedented situation where we are able to build non-polluting, non-water using, low-cost electricity into fast growing regions. Providing reliable, low-cost energy is a core economic development driver and renewables – particularly utility-scale solar – are uniquely positioned, for the first time ever, to provide this critical driver of economic development.”


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