Let the Market Decide: The Third Wave of Energy Investment in Latin America and Caribbean

by Stoel Rives LLP

I recently moderated an ABA/ACORE webinar focused on cross-border renewable energy development in Latin America and the Caribbean. To introduce the topic, I recounted a recent experience at an on-the-record dinner hosted by David Bradley, publisher of The Atlantic Magazine. The dinner was sponsored by the global CEO of one of the largest energy companies in the world, and included a Pulitzer prize winner, a former Member of Congress and other prominent energy, government and media representatives.

What does this Washington vignette have to do with renewable energy in Latin America and the Caribbean? Quite simply, everything, because it goes to the fundamental challenges inherent in making good policy decisions without metrics that allow for "apples to apples" comparisons.

As you might expect, the dinner conversation focused on global energy. As the meal progressed, it became clear that most guests fell into one of three categories: those invested in traditional fossil fuel technologies; those invested in renewable energy technologies; and those who were either agnostic or insufficiently knowledgeable to choose a side.

The fossil fuel proponents emphasized the cost benefits of moving to un-conventional natural gas and emphasized that renewable energy remains too expensive to compete effectively with fossil fuels. They also argued it is simply not feasible, at present or in the foreseeable future, to meet our energy requirements using only renewable resources.

By contrast, renewable energy proponents focused on the steep downward price curves experienced by renewables (particularly solar and wind) over the past few years. They noted that, but for the failure to price the environmental externalities of fossil fuels, renewable energy would have achieved grid parity some time ago.

How do these arguments relate to energy investment opportunities in the Latin America and Caribbean (LAC) region? It’s important to note that we are at the beginning of a third wave of energy investment in the LAC region. The first wave occurred in the late 1980s with the beginnings of electric company privatization and restructuring in LAC markets funded by the World Bank and U.S. AID, among others. The second took hold in the mid-1990s, peaked between 1998-2000, was weakened by criticisms of privatization and then collapsed in the wake of the 9/11 attacks.

What's different about today's LAC markets is that many of them offer a near-level playing field for competition among renewable and fossil fuel options. For example,

  • Brazil's generation base is already 85% plus renewable energy based on its hydro-electric resources alone;
  • Chile is implementing a "20-by-25" program, with the goal of generating at least 20% of its energy from renewable resources by 2025;
  • Mexico is reforming its energy sector to facilitate foreign investment and attract more renewable energy development; and
  • These and other LAC markets offer remote off-grid locations, extractive industries and other niche markets where renewables can successfully compete with expensive diesel-fired generation.

In other words, the LAC region presents a near clean-slate where renewable energy will in many cases be price competitive and non-emitting resources are already an important part of the generation stack. A set of markets where issues of fossil fuels vs. renewable resources can be resolved as they should be: on the merits.

Equally important, the region's now-substantial prior experience with competitive markets, together with niche opportunities for renewables, mean that policy makers in the region know what it takes to integrate new generation resources. For example, in markets like Chile and Brazil integration is being facilitated through planned construction of additional infrastructure and procurement of technologies that are responsive to market challenges.

Debt financing for LAC region projects is available through International finance institutions like the Overseas Private Investment Corporation, International Finance Corporation and U.S. Export Import Bank, which mitigate political risk (where necessary) and incent private bank participation through A/B Loan structures. Equity (or quasi-equity) capital is available from an even wider array of sources, including project sponsors, equipment suppliers, construction contractors and private equity funds focused on infrastructure or energy development.

In short, the LAC region offers unique opportunities for matching investment capital with a broad range of development scenarios. Institutions in the region have matured since the last cross-border investment boom and capital is available from a variety of sources for well-structured projects. If the past is any guide, energy stakeholders of all stripes are considering this third wave of LAC projects as potential vehicles for exploiting competitive advantage.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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