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WHAT IS THE FUTURE FOR LATIN AMERICAN RENEWABLE ENERGY?

1 https://www.mentorimcgroup.com/2018/08/24/renewable-energy-in-latin-america/2 https://www.prnewswire.com/news-releases/atlas-renewable-energy-and-bancomext-announce-closing-of-long-term-financing-for-a-129-5mw-solar-energy-plant-in-mexico-300702463.html3 https://bmo.bmiresearch.com/article/view?article=1401524&iso=L-REG&active_pillar=Analysis4 https://www.mentorimcgroup.com/2018/08/24/renewable-energy-in-latin-america/5 https://www.minem.gob.ar/archivos/Reorganizacion/informacion_del_mercado/mercado_electrico/plan_renovar/ley_27191-2016%28english_version%29.pdf

We look at some of the thinking

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DECEMBER 2018

Latin America’s renewable energy market has been expanding rapidly over the last 10 years; in 2007 the total capacity in the region for non-conventional energy was 30 MW, opposed to the total installed capacity, at the end of 2017, of about 22,000 MW. This was dominated by the Brazilian market with 13,000 MW approx., followed by decent market capacity in Mexico, Chile and Uruguay. Indicators show that Colombia and Argentina could develop a prominent renewable market in the coming years due to new governmental programs1.

The above statistics suggest that Latin America hosts some of the most dynamic renewable energy markets in the world, with more than a quarter of primary energy coming from renewables, which is twice the global average. Power sectors in the region are characterised by a high dependence on hydropower, and exploiting the complementarity between hydropower and variable renewable energy sources - such as solar and wind, a key leveraging factor for all renewables in Latin America.

It is expected that non-hydropower renewables installed capacity will practically double in Latin America over the next decade, with supportive policies - such as long-term energy auctions, driving growth across the region in the same way that Atlas Renewable Energy and Bancomext long-term financing did in Mexico, with the development of a 129.5 MW solar energy plant2. According to BMI3, (a research firm that provides macroeconomic, industry and financial market

analysis, covering 24 industries and 200 global markets) opportunities and risks for renewables sector investors will be spread unequally across Latin America, depending on industry, political and economic trends.

One of the most important reasons for having such ambitious plans is to tackle climate change. The outlook for the region with regards to the frequency of natural disasters, such as the hurricanes in Cuba, Dominican Republic, earthquakes in Mexico and huge floods in Colombia and Peru, has encouraged the local governments to take action. Likewise, global emissions of carbon dioxide would be reduced by investing in wind and solar energy.

Latin America aims to position itself as a new regional leader in renewable energy. At the recent United Nations Climate Change Conference (COP23) in Germany, many Latin American countries showed their desire for a greener world through developing strategic plans to increase the deployment of renewable energy4.

Interestingly countries that did not have major share on the market are starting to make new commitments. According to the Energy Minister of Argentina, the goal of the national government in that country is to achieve 20% of the total power demand with renewable energy by 20255.

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6 - http://es.presidencia.gov.co/normativa/normativa/DECRETO%200570%20DEL%2023%20DE%20MARZO%20DE%202018.pdf

7 - https://bmo.bmiresearch.com/article/view?article=1401524&iso=L-REG&active_pillar=Analysis

8 - https://www.mentorimcgroup.com/2018/08/24/renewable-energy-in-latin-america/

9 - https://www.bbc.com/mundo/noticias-america-latina-43509780

Just like Argentina, Colombia also has benefits for investment in renewable energy. In March 2018 the Ministry of Mines and Energy issued decree 0570, which establishes guidelines for long-term renewable power generation contracts for renewable sources under a mechanism that is complementary to the existing mechanisms in the wholesale energy market. They also announced that they will be financing renewables and energy efficient projects through a fund known as ‘Fondo de Energías no Convencionales y Gestion de la Energía (FENOGE)’, which was created in 2014 to provide solutions through a total or partial financing of projects and programs directed to residential, small-scale solutions and projects of self-power generation6.

On the other hand, Mexico holds a positive long-term outlook for investment opportunities in the power sector, as the country will experience substantial growth in power consumption over BMI’s 10-year forecast period and has adopted a regulatory environment that will support investment in the development of new power capacity particularly in the non-hydropower renewables sector.

Even in Honduras and Venezuela, the opportunities for power sector investment are significant, but investment decisions need to be weighed up against elevated political, economic, and security risks7.

With this booming energy market, the largest energy companies are being attracted to the region to capture market share. Big players like Enel Spa, AES Corp. and Iberdrola SA are entering into the Latin America market at an accelerated rate. In 2017 investment grew more than 35 times faster than the global rate, and large projects are being undertaken across the region8.

Investments from China have been observed in certain parts of Latin America, as seen elsewhere, China continues to increase the presence on the global stage through its companies. This month in Chile, the company China Southern Power sealed the purchase of a 27.7% stake in Transelec, the largest electric transmission company in the country, from a Canadian fund, an operation estimated at USD 1,300 million. On the other side of the Andes, in Argentina, different media reported in March 2018 that the Chinese firm State Grid is interested in acquiring the state share in the country’s main electricity transmitter, Transener9.

Renewable energy itself involves a broad range of technology - including wind turbines, solar panels, hydroelectric plants, biomass power stations, anaerobic digestion systems, wave and tidal power generators, ground source heat pumps and hydrogen cells among others - all of which require insurance to protect them from natural hazards, mechanical breakdowns and losses caused to gear boxes and foundations including the consequent business interruption.

Markets such as Allianz have answered with tailor-made solutions besides the traditional Property Damage and Business Interruption coverage for the renewable market needs. Currently a range of products are available in the market such as the Weather Risk Management ART product which offers weather resource protection in anticipation of energy-generation shortcomings.

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The insurance market is becoming ever more aware of the impact of climate change. As insurers and reinsurers, one of the ways to contribute to environmental sustainability is to establish thermal coal policies to support the transition to a low-carbon economy.

Reinsurers such as Swiss Re, AXA Corporate Solutions, Zurich, Allianz, Munich Re and SCOR to name a few, have implemented new policies following the Paris Agreement in December 2015, where members of the UNFCCC reached a landmark agreement to combat climate change and to accelerate and intensify the actions and investments needed for a sustainable low carbon future10.

In July 2018, Swiss Re stated in their news releases that they will not be providing re/insurance to businesses with more than 30% thermal coal exposure. AXA communicated something similar in December 2017 regarding their numerous decisions to accelerate their commitment to fight climate change.

Other markets have adopted a slightly different approach, such as Aviva, refusing to write standalone coal unless the CO2 and methane emissions are below a certain level (640 kg/MWh and 0.01kg/MWh respectively). Therefore, the renewable energy sectors such as solar, wind and biomass will be an increasingly important source of income for insurers in the Power Generation market.

The market’s challenge now is to offer new products for emerging needs for every stage of a renewable project, from development through operation, for all project sizes including project developers, owner/operators, Engineering, Procurement and Construction (EPC) and Operations & Maintenance (O&M) providers around the globe, and, at the same time making them profitable.

Sources:

• https://bmo.bmiresearch.com/article/view?article=1401524&iso=L-REG&active_pillar=Analysis

• https://www.mentorimcgroup.com/2018/08/24/renewable-energy-in-latin-america/

• https://www.minem.gob.ar/archivos/Reorganizacion/informacion_del_mercado/mercado_electrico/plan_renovar/ley_27191-2016%28english_version%29.pdf

• http://es.presidencia.gov.co/normativa/normativa/DECRETO%200570%20DEL%2023%20DE%20MARZO%20DE%202018.pdf

• https://bmo.bmiresearch.com/article/view?article=1401524&iso=L-REG&active_pillar=Analysis

• https://www.mentorimcgroup.com/2018/08/24/renewable-energy-in-latin-america/

• https://www.bbc.com/mundo/noticias-america-latina-43509780

• https://www.agcs.allianz.com/sectors/energy-renewables/

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10 - https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement

11 - https://www.axa.com/en/newsroom/press-releases/axa-accelerates-its-commitment-to-fight-climate-change

AXA’s CEO Thomas Buberl said:

A +4°C world is not insurable. As a global insurer and investor, we know that we have a key role to play. We have made some pioneering moves since 2015, notably by starting to divest from coal, setting an ambitious green investments target, and restricting our insurance business with the coal industry. We are proud to have taken these decisions and to have inspired other actors. Today, in the spirit of the Paris Agreement, we want to accelerate our commitment and confirm our leadership in the fight against global warming.11

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The opinions and views expressed in the above article are those of the author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information

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