Energy Monitor Group Economics

16 May 2018

Renewable energy in Latin America

Farah Abi Morshed • Latin America’s renewable energy share is roughly twice the global figure
Energy Economist • Hydropower is the key source of renewable energy, but its importance is
Tel: +31 6 1095 2889 slowly declining in favour of non-hydro renewable energy sources
farah.abi.morshed@nl.abnamro.com • Energy policies and energy trade dynamics differ among Latin American
countries…
• ...but there is a clear overlap in incentives and threats to renewable energy

Marijke Zewuster
The world’s renewable energy capacity has grown by an average of 8% over the last
Head Emerging Markets
decade. So far, investments in renewable energy are increasingly flowing into the
Tel. +31 20 383 0518
marijke.zewuster@nl.abnamro.com emerging market, whereby a significant portion is flowing into Latin America. Investments
totalled around USD 54 bln between 2012 and 2015, with the bulk taking place in Brazil,
Chile and Mexico (IRENA 1). For quite some time now, renewable energy in the form of
hydropower has played a key role in electricity generation in Latin America. Renewables
therefore already account for roughly 25% of the energy supply. This is almost twice as
much as the overall global figure and the share of renewable energy in the United States.
Even though policies, energy mixtures, and energy trade dynamics differ among Latin
American countries, there is a clear overlap in incentives and threats to renewable energy.
This article will look at the drivers and barriers steering / hindering renewable energy
development in Latin America. The focus is on Brazil, Mexico, Colombia, Argentina and
Chile, which jointly account for around 77% of the total energy consumption and around
75% of the total renewable energy capacity in Latin America (figure 1).

A brief overview of the energy sector for the countries within scope
Brazil, Mexico, and Colombia will continue to be important oil producers and exporters.
For some time, this was the case in Argentina as well. And given the discovery of vast
reserves in the Vaca Muerta field (shale oil and gas), Argentina can once again become a
net exporter. Among the countries in scope, Chile’s oil and gas production is minor and
remains dependent on energy imports. While the Latin American oil and gas sector will
continue to grow in importance (pre-salt oil deposits in Brazil, the Gulf of Mexico, Vaca
Muerta fields in Argentina etc.), renewable energy is gaining focus, especially in the area
of electricity generation.

1
IRENA, International Renewable Energy Agency

Group Economics: ‘Enabling smart decisions’

2 Renewable energy in Latin America

1. Primary energy consumption breakdown

1%

26%
39%
Mexico 41 mtoe
1% 2%
4% 11%
5%
23%
45% Colombia
187 mtoe

43%

Oil Natural Gas

Coal Nuclear Energy Brazil
Hydro electric Renewables
6%

29%
47%
289 mtoe

6%
Argentina 11%
6% Chile
12%

48% 10%1%
37 mtoe
23% 1%
36%

11% 89 mtoe

50%

Source: BP 2016, ABN AMRO Group Economics

Brazil is one of the biggest producers of oil in Latin America and ranks third worldwide in
hydroelectricity generation. With a share of 47%, oil continues to be the largest source of
Brazil’s primary energy consumption (figure 1). Hydro ranks as the second largest source,
with a share of 29% of the total primary energy consumption and 65% of the electricity
consumption. Natural gas and coal consumption has been declining, and are being offset
by an increase in renewables, including hydro. This is due to Brazil’s target to reduce gas
emissions by more than 40% by 2030. Brazil’s installed renewable energy capacity alone
(excluding hydro) accounts for more than 52% of the region’s total renewable capacity
(figure 3) and contributes 6% to its primary energy consumption (figure 1).

Mexico is endowed with large and accessible oil and gas reserves as well, but its high
crude oil exports are paralleled with high refined oil imports because of its aging refinery
infrastructure and lack of investments. Since deregulation of the country’s energy sector in
2014, renewable energy opportunities have been on the rise to meet its 35% clean energy
generation targets by 2024. Until 2011, Argentina was an important oil and natural gas
producer and exporter. But in the wake of economic and political interference in the sector
under the Kirchner-Fernandez era, production decreased, and the country became a net
importer. The country’s primary energy supply continues to depend heavily on oil and gas
(together accounting for over 87%, as illustrated in figure 1), but it aims to reduce this
dependency. They aim is to ramp up renewable energy to achieve a 20% renewable
electricity share by 2025. Similarly, Chile continues to diversify and reduce its
dependency on oil and coal as the country is primed with a good location and abundant
solar and wind energy.

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3 Renewable energy in Latin America

Other renewable energy sources are on the rise, but hydro remains on top
Hydropower remains the most important source of renewable energy, but its importance is
slowly declining. According to figures from IRENA, in 2000 this source accounted for 95%
of the renewable energy mix, falling to around 80% in 2015 (172 GW of the 212 GW total
renewable energy). The decrease in hydropower is the result of a decrease in capacity
additions due to the fear of droughts, environmental impacts (like deforestation), marine
life impacts and social factors (e.g. the displacement of (ethnic) groups). In parallel, the
social, environmental and economic advantages of other renewable energy sources are
leading to an increase in appetite for solar energy, wind energy and biomass.

Although it is on the decline, hydropower still accounts for around 80% of the renewable
energy mix, and meets 50% of Latin America’s total electricity needs (figure 2). The
levelized cost of electricity generation via hydropower has dropped from $65/MWh in 2010
to ~$50/MWh in 2016 due to hefty investments and technological advancement (IRENA).
This means that it continues to compete with the cost of fossil fuel (ranging from $40/MWh
to $150/MWh), but with little room for further cost reductions because of its established
maturity level. In addition, most cost-effective locations have been exploited, and the
environmental and social struggles will be felt if there is a cost increase. For example,
unprecedented droughts hit the south-eastern part of Brazil between 2014 and 2017,
resulting in reduced water pressure, higher water consumption tariffs and deforestation.

2. Latin America electricity generation by type

TWh
1400

1200

1000 Geothermal/ solar/

wind
Biofuels/ waste
800
Hydro
600 Nuclear

400 Natural gas

Oil
200
Coal
0

Source: IEA, ABN AMRO Group Economics

As a result, hydro energy - which accounts for 70% of Brazil’s electricity generation - is
under threat. The government has been considering various alternatives as part of a
bigger plan to remedy structural water management problems (e.g. thermal power plants
as a short-term solution and non-hydro renewable sources as part of a longer-term
strategy). Aside from the environmental challenges, economic projects/rivers are
becoming scarce, as most of them are already in production. To increase hydro
production, Brazil will need to move to new frontiers (like the Amazon), which will create
environmental problems as well as transmission challenges.

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4 Renewable energy in Latin America

Latin America compares favourably worldwide with regards to renewable

energy…
Around a quarter of Latin American’s energy supply comes from renewable sources,
including hydropower and bioenergy. To put this in perspective, only around 13% of the
global primary energy supply comes from renewable energy (IEA). This means that Latin
America’s renewable energy is roughly twice the global figure. Of the primary renewable
energy supply in Latin America, 1% originates from solar and wind energy, 1%
geothermal, 8% hydropower, 16% bioenergy (IEA, 2015). Although the region compares
favourably to other parts of the world, fossil fuel remains the most important source of
energy, with a share of around 75%. Figure 3 presents the Latin American countries in the
order of installed renewable energy capacity, where Brazil’s share is the largest.
Additionally, this illustrates that 82% of the total installed renewable energy capacity
comes from only six countries.

3. Renewable energy capacity in Latin America

GW
250 Other
Ecuador
200 Uruguay
Peru
150 Paraguay
Chile
100 Argentina
Colombia
50 Venezuela
Mexico
0 Brazil
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: IRENA, ABN AMRO Group Economics

…and the region is expected to make further advances

Although its contribution to the total energy supply is still small, the installed capacity of
renewable energy, excluding hydropower, has grown from 10 GW in 2006 to 36 GW in
2015, with bioenergy and wind energy contributing the most to this increase (figure 4).
Factors like socio-demographic changes, energy security, climate change, risk of drought
and technological advances have brought renewable energy to the forefront. The price of
renewable technologies, especially solar and onshore wind, is becoming comparable to
hydro which continues to drive the growth of renewables. In Chile for example,
competition has driven the average price of bids down to $47/MWh, while only few years
ago it was hovering around $130/MWh. Additionally, major reforms in financial, regulatory
and institutional frameworks are supporting the dispersion of renewable energy in Latin
America.

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5 Renewable energy in Latin America

4. Renewable energy capacity breakdown,

excluding hydro (GW)
GW
40
35
30
25
20
15
10
5
0

Wind energy Bioenergy Solar energy Geothermal

Source: IRENA, ABN AMRO Group Economics

Factors driving renewable energy in Latin America

Various factors are contributing to the rise in Latin America’s renewable energy sources
such as the aim to reduce dependency on imports and environmental concerns. An
intrinsic characteristic of renewable energy is the complementarity in generation patterns
of renewable energy sources, which promotes a diversified energy mixture. This is
because the output of these sources varies throughout the day and across seasons, and
complementarity of energy sources can alleviate load balancing problems and energy
supply shortages.

The different energy consumption patterns and the level of dependency on imported
energy affect the need and urgency to consider other renewable energy sources. Richer
countries like Chile and Argentina have higher energy consumption per capita (around
2000 kgoe 2 per capita) compared to Brazil, Mexico and Colombia (1500 kgoe in Mexico
and Brazil, and only 700 kgoe in Colombia). Still these levels are less than half the energy
consumption per capita in OECD countries (roughly 4100 kgoe). Both Chile and Argentina
are net importers of energy, but Brazil also imports natural gas from Argentina and Bolivia
(cross-border trade). The dependency on imported commodities during times when supply
was suspended due to energy shortages has incentivized the exploration of more
sustainable sources like renewable energy. As is the case everywhere in the world,
renewables will not take the place of oil products and natural gas in the short term
because of their intermittent nature, marginal contribution to the total energy consumption
and unaffordable storage systems.

Environmental drivers, such as the ambition to reduce greenhouse gases and

environmental concerns also play a role. Although emissions from the electricity sector are
low, when combined with the transport and the industrial sectors they are approaching the
levels of OECD countries (IRENA). Meanwhile, the price of carbon emission rights is also
increasing. Those aspects promote the search for environmentally accepted energy
sources to meet the emission reduction targets.

2
Kilograms of oil equivalent (kgoe)

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6 Renewable energy in Latin America

Technology-specific auctioning cuts renewable energy development costs

Given the above drivers, several governments are incentivizing renewable energy
deployment by implementing technology-specific auctioning (land auctioning, day-time slot
auctioning, project auctioning etc.). These auctioning systems are being used to reduce
the cost of renewable energy development and promote price transparency. They also
ensure that the targeted capacity is installed, while optimizing the location that best serves
demand hubs and grid connection availability. As a result, we see a number of sponsors
and companies interested in renewable projects in Latin America. For example, Argentina
has initiated the RenovAr programme, among others, to drive renewable energy
deployment forward. With a plan to add 1GW of wind, solar, biomass, and small dams in
two years’ time (capable of powering roughly 700,000 houses), the first round of auctions
was oversubscribed with tenders and proposals.

Governmental regulations and local measures play a key role as well

Chile has penalization measures in place to ensure targets are met and policies are
binding, but this is not the case in other parts of the region (IRENA). Meanwhile, Chile has
set targets to start phasing out coal and replace it with renewable capacity with a view to
delivering 70% of its electricity from renewable sources by 2050. The lack of penalization
measures for non-compliance in other Latin American countries is a barrier to renewable
energy. Let alone the lack of political support for renewable energy. In addition, the
subsidization of fossil fuels such as natural gas, especially in the industrial sector,
discourages the shift to more renewable sources as the use of fossil fuels remains more
cost effective.

Equally important to the governmental regulations are the local, municipal-level measures.
For housing, solar thermal heating systems are more sustainable and effective
alternatives for heating and cooking purposes than traditional solid biofuels, but these
alternative sources remain untapped. A few residential solar thermal projects and solar
water heating systems have emerged in Mexico, Brazil and Chile but have yet to be
picked up in other Latin American countries. This is because of a lack of municipal
cooperation and limited social residential housing plans.

The increase in renewable energy calls for continuous grid reinforcement

One aspect that is already hindering the further development of renewable energy within
Latin America is the lack of continuous grid investments. Grid investments are deemed
necessary to expand grid capacity, integrate intermittent and volatile generation of
renewable energy sources and secure a stable supply. Additionally, the (1) long distances
that need to be covered between demand and supply sources, (2) the physical
interruptions in grids due to topographical challenges, and (3) the high losses and lack of
optimisation of the grids in Latin America require continuous investment and
reinforcement. It was only in November 2017 that Chile managed to finish building the
necessary transmission lines to connect the solar power plants located in the north of the
country with the densely populated area in the south. However, according to New York
Times (2018), more than 12,000 km of transmission lines are needed in Latin America to
make use of the full potential of cross-border energy integration.

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7 Renewable energy in Latin America

Access to public and private funding is key for upscaling renewable energy
Access to affordable, timely and sufficient financing is key for investments in infrastructure
in general, and hence also for renewable energy development. Many Latin American
countries have set up public funds to extend affordable credits to renewable energy
projects. These public funds incentivize private investments in renewable energy projects
by (1) taking over the riskier portion of the project development (e.g. financing the
construction phase of the renewable project development), (2) providing guarantees and
securities to mitigate risks for private investors and (3) supporting immature technologies
until they are established and well-recognized to attract private investments. However,
public and private funds and investments need to ramp up in order to align with the
renewable energy targets.

Conclusion
Although Latin America’s renewable energy share compares favourably to other parts of
the world, fossil fuel remains the most important source of energy (~75%). So far,
hydropower is the key source of renewable energy, but its importance is slowly declining
due to environmental factors (e.g. droughts), social factors, and the lack of economic
untapped locations. Non-hydro renewable energy sources are picking up as a result of
competition driving down the average price per MWh, the technological advancement, and
regulatory and institutional changes. At the same time, various factors, such as the aim to
reduce the dependency on oil and gas imports as well as environmental concerns, are
promoting an increasingly diversified mixture.

But other factors are hindering the development of renewables. The lack of penalization
measures for non-compliance in several Latin American countries is a barrier to the
advancement of renewable energy. Meanwhile, the subsidization of fossil fuels such as
natural gas, especially in the industrial sector, discourages the shift to more renewable
sources. Equally important to the governmental regulations are the local municipal-level
measures, but there is insufficient stimulus from that level. Grid investments are deemed
necessary to integrate the intermittent and volatile generation of renewable energy
sources and to secure a stable supply. But grid investments have yet to catch up with the
deployment of renewables. On the financing side, public and private funds and
investments need to ramp up in order to align with the renewable energy targets.

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8 Renewable energy in Latin America

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