Energy Monitor – Renewable energy in Latin America

by: Farah Abi Morshed , Marijke Zewuster

  • Latin America’s renewable energy share is roughly twice the global figure
  • Hydropower is the key source of renewable energy, but its importance is slowly declining in favour of non-hydro renewable energy sources
  • Energy policies and energy trade dynamics differ among Latin American countries…
  • …but there is a clear overlap in incentives and threats to renewable energy
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The world’s renewable energy capacity has grown by an average of 8% over the last decade. So far, investments in renewable energy are increasingly flowing into the 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 ). 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.

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.

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.

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.

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.

…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.

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 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.

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.

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.