While renewable energy investment globally fell by 11 percent in 2012, renewable energy financing increased by 127 percent in Latin American countries, excluding Brazil. According to Bloomberg New Energy Finance, this included gains of 595 percent in Mexico, 313 percent in Chile, 285 percent in Uruguay, and 176 percent in Peru. In total, renewable energy investments in Latin America reached $9.7 billion in 2012.
When adding the important renewable energy portfolio of Brazil ($5.2 billion in 2012), the renewable energy sector in Latin America is growing and will continue to attract significant capital in the coming years. A combination of favorable government policies, receptiveness to foreign investment, and attractive regulatory regimes has drawn investors to renewable energy projects in the region. These issues were debated in Washington on July 30 during a roundtable discussion on financing renewable energy in Latin America at the Council of the Americas, held under the auspices of the Council’s Energy Action Group.
The conditions for renewable energy in Latin America are favorable. From the photovoltaic potential of the Atacama Desert in Chile to the many rivers that feed into hydroelectric dams in Brazil to the fields of African palm oil in Colombia, developers have been drawn to the region due to a unique geography that offers great potential for renewable feedstocks.
Countries are also beginning to adopt renewable energy standards. Chile is leading the way with its 20/20 renewable plan—20 percent of the country’s electrical grid powered by renewable energy by 2020. While the target may be a long shot, the initiative demonstrates that countries in the region are serious about developing their renewable energy potential.A solid investment climate usually contains a strong regulatory mechanism. For investments to prosper, regulatory regimes must honor rule of law and contract enforcement. Fortunately, issues regarding regulations are often declared in the original contract, which states that regulations will not be reactive. However, financial crises can often deter a regulatory regime and lead to uncertainty. Stable contract and regulatory systems exist in countries where renewable energy development is surging, such as Chile, Mexico and Peru.
Nevertheless, there are roadblocks for renewable energy development. In Brazil and other countries, strict local content rules are stifling the investment climate for foreign investors. For example, in Brazil’s wind industry, to be eligible for Brazilian Development Bank (BNDES) financing, the projects must have a 60 percent local content requirement. Because of price differentials, this strict requirement can dissuade foreign developers from investing in the country. While local content rules can drive away financing projects, in some cases, such as Uruguay, the local content rules tend to be in line with what would normally be acquired locally.
Several institutions are engaged in project finance transactions in Latin America. These include the Inter-American Development Bank, the Andean Development Corporation, the Overseas Private Investment Corporation, the Export-Import Bank, and the U.S. Trade and Development Agency. These institutions are either based in Washington DC or well represented in the city, so one could argue that the capital of emerging markets finance is also the capital of the United States. These institutions work with developers to put new projects online, along with other entities such as commercial banks.
Renewable energy financing is likely to continue its upward trajectory in the region as long as policies continue to favor its development. Through initiatives such as feed-in tariffs, private-public partnerships and renewable energy targets, the public and private sectors can work together toward making renewable energy viable, affordable and effective.