Latin America’s renewable energy sector is heading towards 239 gigawatts of installed wind and solar power capacity by 2040, underpinning the tremendous investment potential in the sector. In this article, we take a look at the main opportunities for the private renewable energy market in the region, as well as addressing some of the uncertainties.
Around the world, support for old polluting industries has waned, while clean, green energy has risen in popularity. Fossil fuels are in steady decline, with the traditional energy sector consistently underperforming the S&P 500, and recent research shows that 77% of investments in new power generation to 2050 will be in renewables.
Latin America, home to some of the world’s most plentiful wind and solar resources, is set to play a vital role in this energy transition, and we see a number of trends that point to now being the right time to invest in the sector.
Unlike the more consolidated economies of the US and Europe where the conventional electricity consumer market is either stagnant or shrinking, Latin America’s middle class has been expanding over the past decade, both in absolute terms and as a share of total households, fueling domestic energy needs. The region’s demand for electricity is increasing consistently year-on-year: Social mobility enables the population to buy appliances and lead more modern lives with greater energy consumption, while in many countries the energy-intensive industries that form a core part of the business community continue to expand operations.
We believe this demand will be best met by renewables, firstly because of cost: unlike in other regions, renewable energy is competitive against new thermal generation in Latin America, even without subsidies. There is little doubt that massive cost reductions in the last decade are one of the main reasons behind renewables rapidly transforming the region’s electricity mix.
But it’s not only future energy demand that we see being addressed by renewables. In many markets, the cost competitiveness of renewable energy can undercut existing thermal assets. This opens up the opportunity of capacity replacement by renewables – something we’re already seeing in Chile, which has implemented a decarbonization roadmap, to be completed by 2040. Other countries are likely to follow suit; it’s only a matter of time.
The make-up of Latin America’s economies is also an important factor. As major exporters of the commodities that power the growth of the rest of the world, the region’s fortunes are driven in large part by international oil and mining companies and their clients – all of which are seeing increased pressure to reduce their carbon footprint and demonstrate progress in sustainability. As a result, renewable energy procurement has become an increasingly important part of their corporate strategy.
Moreover, it isn’t just the commodity exporters. We’re seeing multinational companies with a strong presence in Latin America, from the tech sector with its data centers to consumer goods brands, to chemicals conglomerates, manufacturing companies, car companies, and even large retailers, change their approach to energy consumption in the face of shareholder and consumer pressure to go green.
Projects moving forward
Like any outlook, however, there are some uncertainties.
The role of government remains instrumental to renewable energy deployment, and certain developments, such as the postponements of electricity auctions in Brazil and Chile, or recent regulatory roadblocks in Mexico that limit the operation of new renewables plants, have demonstrated the importance of strong on-the-ground knowledge when considering participating in the market.
Meanwhile, the Covid-19 pandemic has seriously dented global economic growth, and Latin America is no exception. The timing and pace of the recovery remain unpredictable, however, we believe that the pandemic has the potential to change the priority of government policies, and renewable energy will play a key role in Latin America’s rebound from the crisis.
Despite these global challenges, renewable energy projects are still going ahead. On a global level, looking at the project pipeline through 2025, almost one-third of wind and solar PV projects are already contracted and/or financed, according to the International Energy Agency’s latest renewable energy market update.
There’s another trend that we’re starting to see in the region which adds strength to our conviction of a renewables-led economic recovery. As the pandemic accelerates the focus on sustainability from policymakers and investors, we have seen an increase in the take-up of private-sector reporting on exposure to climate-based financial risks. One example is in Chile, where institutional investors and the Santiago Stock Exchange have started to implement the principles laid out by the Task Force on Climate-related Financial Disclosures (TCFD), an initiative started in 2015 by the Financial Stability Board. We think this will lead to an even greater number of funds investing in green projects, such as wind and solar power, further driving the growth of the sector.
A flight to safety
With projections for a deep and long-lasting global recession as a result of pandemic-related lockdown measures, investing in clean energy is increasingly viewed not just as a way to reduce pollution, but as a means to hedge against future risks and stranded assets.
For investors, renewable energy is much akin to real estate investment: the largest cost is the initial equipment, but once the project is completed, it represents a stable asset with few moving parts, low operating costs and very long term revenue streams that can be paired with pension and insurance obligation maturities.
If the project is developed with a power purchase agreement (PPA), the stable nature of the benefits is even more evident. These structures secure electricity revenues for a significant part of the project life, and can be likened to owning a building with a 15-year lease already signed, guaranteeing income for years to come. Meanwhile, renewable energy demand is expected to continue to surge – especially in Latin America, where electricity consumption is projected to rise more than 70% by 2030, according to the Global Wind Energy Council.
This capacity is unlikely to be made up by fossil fuels, particularly as growing concerns over carbon emissions and climate change put project approvals in doubt. As a result, we expect to see a flight to quality by investors seeking low-risk, long-term revenue streams, with increased allocations going to renewable energy infrastructure.
A maturing market
Latin America’s advantages when it comes to attracting investment into renewables hasn’t gone unnoticed. In recent years, we’ve seen the confidence of international developers and international lenders alike translate into projects across the continent.
These players were first movers, and they have since been followed by large utility companies, which have begun to switch their investment focus to renewables after conventional energy began to lose market share.
Now, as corporations start to take up PPAs in their droves, the market has become increasingly dynamic, particularly in Brazil, Chile, and Mexico. There’s still a lot of room for growth in other markets, such as Colombia, and even in the more consolidated markets, we are seeing further opportunities as new technologies are being deployed, from storage solutions to bifacial modules in photovoltaic plants.
We believe that the market is still early in its growth curve, presenting multiple opportunities for investment, and various studies back that up. According to the International Renewable Energy Agency (IRENA), by 2050, Latin America will see an additional 131GW of installed wind capacity and 172GW of new solar capacity.
At Atlas Renewable Energy, our experienced team is at the forefront of developing and operating clean energy projects in Latin America. We have provided investors with stable, strong returns in Brazil, Uruguay, Chile, and beyond, and we know first-hand the strength of the region’s renewable energy market. Throughout the region, as we’ve outlined here, there are several trends that we think make renewable energy a compelling investment play. We believe that with the right partners and carefully chosen projects, investors, financiers and corporations alike can reap the benefits of the Latin American renewable sector for many years to come – and the time to do so is now.