Despite a devastating Pandemic, several positive developments have emerged in the Latin American energy sector. The price of renewable energy and related technologies, such as battery prices, are at their lowest. The push by governments to be carbon neutral is helping to drive the global energy transition. However, challenges still remain. The dependence that the region has on China generates friction to increase the value chain, COVID-19 has lost ground gained in employment for decades , which has led to millions of Latin Americans being in poverty, exacerbating social crises and postponing large infrastructure projects that would allow for a change in the dynamics of the sector.
The good: stable growing prices and new opportunities in renewables
There is a great consensus among Latin American governments and investors on the need to reduce carbon emissions.
An example of the above is ECOPETROL. The Colombian state-owned company, with its SosTecnibilidad program, seeks a model of contribution and generation of value to society, through innovative and technological solutions, to promote economic, social and environmental development. The net carbon emissions for ECOPETROL according to its strategic plan are zero by 2050.
The increase in the price of oil and other raw materials in the Oil & Gas sector, together with the efficiencies derived from periods of crisis and austerity in previous years, has allowed companies today to have operational efficiency and to achieve better operating margins.
These surplus liquidity, combined with lower financing rates, are being used by companies to invest in their installed capacity , new technologies and in some cases investments to achieve a definitive energy transition in Latam.
Proof of this is that 2 of the countries with the highest generation of wind energy were Argentina and Brazil. While Brazil, Chile, Peru and Mexico stand out for offering the market the lowest prices in photovoltaic solar energy auctions.
Average price of solar and wind projects in USD, from recent auctions in 6 Latam markets. [*]
The bad: social crisis in local communities
With the region having the highest unemployment in a decade and 45 million people living in poverty, voters are expected to have a priority preference for social investment policies, beyond expensive and large energy generation projects leveraged with resources. public . Social frustration in the regions would cause existing and new projects to require more fiscal transfers that remain in the communities to have their support.
In Mexico, for example, it has been evident how local communities have demonstrated against wind farms in Oaxaca, arguing excessive noise and filtration of polluting material from the turbines. In Guyana, 9 billion barrels were discovered and there is ongoing pressure to renegotiate extraction terms with Exxon to employ as many local people throughout the entire project development from construction to operation.
Another recent example is Colombia where we have seen how some companies have had to cease their activities due to the social protest that has blocked the roads. To ensure new and existing developments in the long term, it is vital that both companies and local state authorities are able to dialogue and understand the expectations that local communities have. In this way, vital feedback can be received with the type of investment and support that the local community expects to receive. This dialogue will generate goodwill and local support.
The ugly: few projects in the generation of added value and dependence on China
In Latin America, countries like Brazil continue to impose tariff rates of 65% on some battery components, making large battery manufacturing projects unviable.
Chile, Argentina and Bolivia, which together contain 58% of the identified Lithium reserves, have also not been able to develop assets for battery processing , which would allow them to move up the value chain. This is how the Lilpi project, which intended to become the first plant for commercial lithium processing, was canceled by the government in 2019 due to protests from the local community of Potosi.
What has continued to happen in the countries in Latam is the continuous export of this type of raw materials, where only China is responsible for receiving between 50% to 70% of the Lithium generated worldwide along with refined cobalt. China also controls between 85% to 90% of rare earths, which are vital for all types of electronic products.
Given that China produces 63% of the lithium batteries in the world, in addition to 70% of the graphite, an initiative that would be easy to implement by this country is to impose taxes or restrictions on these goods, which would prevent the development of essential products for renewable energy. Thus, it happened with Japan when China restricted its exports of rare earths for 50 days, causing the prices of these raw materials to increase by 350% . During 2021, it is likely that China will continue to impose restrictions on the export of these US raw materials due to the tripartite conflict between the USA-China and Taiwan. For the USA these elements are vital for the manufacture of weapons.
Latin American countries are increasingly being forced to take sides between China and the United States. Choosing one or the other has implications that may contain disruptions in the supply chain coming from frictions and obstacles from the non-selected side.
In addition to the above, Latin Americans are confronting with greater dynamism another “ugly” factor and that is the rise of populist leaders. Brazil, Mexico and Argentina already have a leader with these characteristics, while the same could happen in the next elections in Peru and Colombia. The presidential actions of this type of leaders decrease investor confidence and prevent a more open, affordable and competitive development of the energy market.
The growth in 2021 in consumption, air travel, commercial and industrial points towards sustained growth by energy in Latam. Given the fiscal gap of Latin American governments, for now they cannot afford to invest in the expansion of their energy capacity. However, opportunities abound in Latam for the development of new private energy projects. It is crucial for its effective development to navigate these challenges with careful due diligence that allows us to read, in addition to the benefits of the project, the macroeconomic and political climate.
[*] Own elaboration and related reference.
[**]Taken from English:
Author: Arthur Deakin
Published on: February 28, 2021
In Energy
