Summary: Investment in clean energy assets in Brazil, Mexico and Chile continue to dominate the region, capturing a remarkable 87% of all investment in 2015. But Colombia, Venezuela and Argentina are consistently absent from the list of investment recipients. A discussion of the reasons behind this.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He founded the Argentine Renewable Energies Chamber; is a board member of the Latin American & Caribbean Council on Renewable Energy; founded and is chairman of the Middle East-Americas Energy Council; and is publisher of the Latin American Energy Review.
Let’s begin with the good news. Latin America has received in excess of $130 billion in clean energy investment over the last decade. These are new wind farms, solar parks, big exports of biofuels. Thousands of new jobs and cleaner air. Bravo.
Better yet, the compound annual growth rate (CAGR) of this investment is the world’s third highest, beaten only by (of course) China and Middle East/Africa — which has the benefit of having started from a very small investment base. In fact, Latin America’s CAGR of 25% over the last decade is higher than the world average of 20%, and also beats out the United States, India — and Europe, whose numbers are getting so dismal (they’ve dropped to half their 2011 investment peak) that they are increasingly lumped into the “rest of the world” bucket. Ouch.
Latin America’s renewable energy success stories are well known. In the last four years alone Brazil, Mexico and Chile have attracted over $44 billion into their economies for clean energy. In the next tier of investment recipients you have investment grade countries like Uruguay and Peru. And even Central America as a whole, attracting almost a billion a year thanks in part to strong development bank support.
But the more interesting story – to me, at least – is who is missing from this party and why: Argentina, Colombia and Venezuela, the 3rd, 4th and 7th largest economies in the region, respectively. Bluntly put, if Uruguay — with less than one-tenth the economy of neighboring Argentina — has managed to attract a billion a year for the last three years, why can’t these other guys attract anything? Are they perhaps swimming in excess energy capacity?
Certainly not. All three countries (let’s call them ArCoVe) suffer from blackouts and periodic energy emergencies. Argentina has finally come clean and acknowledged its energy crisis; Venezuela remains in denial. Colombia is a somewhat more complex situation.
Latin America has the cleanest energy matrix in the world due largely to the hydropower coming from its massive rivers. ArCoVe in particular make big use of hydropower as part of their energy supply (Colombia 67%; Venezuela 65%; Argentina 31%). Well done, but it leaves them vulnerable to increasingly common draughts. Venezuela and Colombia have both gone through periods of blackouts in recent years due to insufficient water in reservoirs. And as I wrote recently, Argentina is fortunate to be surrounded by countries with an abundance of energy for sale to help plug the gaps.
As far as policy implementation for renewable energy there are inconsistencies that reveal a common denominator: weak institutions that lack independence and the ability to get traction.
- Argentina was among the first countries in the region to have a renewable energy law (2006). No one invested. A “new & improved” replacement law had to be drawn up in 2015 since the initial targets have not been met at all.
- Colombia is among the last to have a formal framework (2014). In fact, its renewable energy law took over two years of negotiations to conclude, and doesn’t even include specific targets. And their regulations — without which investing is a true gamble — have yet to be completed by the executive branch (President Juan Manuel Santos’s administration has been in power since 2010. But in his defense, reaching a peace agreement with the FARC has been all-consuming).
- And Venezuela is a political basketcase with unduly subsidized fossil fuel prices that leave no incentive to invest in clean energy. It has a renewables law dating to 2011 which has been roundly ignored.
Sound economies? Well, Colombia is investment grade; Venezuela is on the brink of a massive economic meltdown and Argentina has lost all credibility in international markets as a serial defaulter.
But their missteps have unintended consequences: they do not seem to realize that by leaving money and job creation on the table they are also having a negative effect on their neighbors: foreign investors, unclear on which countries in our region behave badly or well, typically decide they are better off not sitting at the Latin America table at all and place their capital elsewhere.
Brazil has been losing momentum, plagued by corruption scandals and overactive government spending. At least one of the three countries will need to step up to become the economic engine while Brazil cools for a couple years. Personally I believe that Argentina has the best chance of making an impressive turnaround: it has a decade’s worth of pent-up demand, a new pro-business government and a sophisticated business class hungry to finally do some deals. Colombia remains stuck in first gear at best and needs a very noteworthy show of commitment to jumpstart its renewables platform. But there has been no real evidence this will happen.
Venezuela is the wild card. In the event of change in policies leading to greater friendliness to the international investor community, its need for any and every type of investment could prove The Next Big Thing in the region. A country to watch closely in the coming year.
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the founder of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish); board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.