Summary: Bucking the global trend, Latin America favors investing in wind – and by a wide margin. A brief analysis on why this might be, focusing on perceptions of risk as well as struggles to embrace new social contracts.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and is publisher of the Latin American Energy Review.
He was recently named Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida in September 2016.
The global trend speaks for itself: in 2010 investment in solar and wind was comparable, each technology receiving about $100 billion. Since then solar has taken off, attracting over $160 billion in 2015 while wind investment didn’t reach $110 billion.
But in Latin America the opposite is the case and by an even wider margin. In Brazil and Mexico for example, the region’s largest recipients of renewable energy investment, wind captured 84% and 86%, respectively, of all investment in 2014. The ratios are comparable for all other big recipients like Uruguay, Central America and Peru. Chile is the one exception defying this tendency, with solar and wind investment more evenly split; more on that in a few paragraphs.
So what’s going on here? It isn’t a lack of natural resources. Latin America is rich in both, and probably has a greater comparative advantage in solar radiation than it does in wind. I believe the explanation lies in two areas:
- perceptions of risk and its effects on bankers’ decision making, and
- public sector resistance to incorporating new social structures between citizens and government
First, the decision to invest or not lies primarily with capital providers (both equity and lenders); their perception of risk is everything. We know that emerging markets present greater risks than developed economies: government policies are not as consistent; institutions not as credible; currencies not as dependable; capital not as available. Rewards therefore need to be higher while risks need to be measured very well.
When putting together a deal in Latin America, you want to place far more emphasis on locking in variables, on selling off or minimizing risks than you would in a developed economy transaction. You have currency risk, FX risk, political risk, expropriation risk, etc., and even cultural nuances to deal with. So it makes sense that you’d want to minimize technology risk.
Perception of Technology Risk
The levelized cost of electricity (LCOE) for onshore wind has remained pretty constant over the last seven years at around $100/MWh; the LCOE for solar photovoltaic (crystalline silicon version) has dropped almost 60% in that same period and is very close to wind’s cost. But it isn’t solar’s higher cost that has kept capital away; rather, the rapidly changing technology and belief that prices would continue to drop did it. This heightened the perception that solar technology risk was too much for a deal to bear – and so capital providers leaned towards the more mature wind technologies as safer bets.
Financing in the region is dominated by one class: Asset Finance
Latin America is a market that deploys proven technology, not the latest. The region’s use of public markets and venture capital are still minimal compared to more mature economies. So any investment that takes place has to have the approval of the most conservative of all stakeholders: long term lenders that provide asset finance. They are typically worried enough about their long term exposure and are especially keen to minimize risks. Therefore credit committees are more likely to approve wind deals over solar; these have been the primary gatekeepers. (For richer and more interesting takes on this, please see articles written exclusively for The Review by two leading bankers: Jaya Viswanadha of Credit Agricole here and Michael Eckhart of Citibank here).
Microgrids have yet to take root
Half of total global solar investment now goes into small distributed capacity (SDC)*, a segment that practically didn’t exist a decade ago. Residential energy self-sufficiency has taken hold in the developed world but not yet in Latin America.
The jury is still out, but I suspect SDC may struggle to thrive in the region in the short run:
- financing for residential rooftop solar is virtually non-existent in the region — with the exception of some initial efforts being made in Mexico and Chile;
- subsidization needs to be addressed in a number of countries where cheap electricity bills undermine a user’s incentive to put panels on her roof (see here a recent article on the cost of energy subsidies in the region and who the biggest sinners are);
- amending legal frameworks and policies to allow for concepts such as net metering will take time, especially as utilities in the region are generally owned by the public sector, are slow-moving and struggle with what is seen as a threat to their power and livelihood.
Man’s relationship to governmental organizations such as large utilities is changing in the 21st century. Consumers no longer must accept what is offered – in price or quality of service – from behemoth utilities. This shift in mindset has already begun to take place in developed economies but in Latin America it remains an idea, and one that I may take time to evolve.
Will LatAm always prefer wind?
Of course not. There is a place for both technologies, solar radiation is way too good, and over time solar will continue to grow as institutional changes take hold. Certainly the differential risk perception of solar has all but disappeared in mature markets and the same will happen in this region. The fact that Chile bucks the trend proves this point. And in higher risk countries the cold hard facts remain: in Argentina, for example, our firm works with project developers seeking capital: there are over 3000 MW of wind projects, but only 220 MW of solar. The wind projects average over 70 MW in size each, whereas the solar ones only 12 MW. But this very mismatch in deals and outdated risk perceptions creates a market opportunity for greater profits.
This is slowly changing and the first step is to emulate Chile, which has the lowest country risk in the region, some of the best solar radiation anywhere and exactly where it is needed (around the mining industry), and perhaps the most pragmatic approach of any country in the region.
* SDC is defined here as smaller projects involving a microgrid different from utility-scale projects that inject electricity to a grid. The most common variant is rooftop solar solutions used in net metering.
© 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.