In October, the Latin America and Caribbean Council on Renewable Energy (LAC-CORE) held its fifth finance summit, a gathering of industry professionals focusing on market opportunities, successes, challenges, and innovative solutions to complex energy challenges.
The pressing specter of climate change was not lost on the Latin America and Caribbean Council on Renewable Energy (LAC-CORE) summit’s attendees. Hurricane Matthew was tearing through the Caribbean and making its way to the mainland United States. It was a good reminder of the importance of the work undertaken in the clean energy sector.
Progress in Clean Energy
This year’s summit showed just how much the Latin America and Caribbean region has advanced with clean energy and climate finance. When I last covered this event in 2013, much of the conversation was rooted in the need for strong policies and political will to create a favorable investment climate for sustainable energy.
Back then, presenters explored the various policies that countries were implementing to spur project investment, reduce harmful greenhouse gas emissions, and transform energy markets away from fossil fuel reliance. Capital was still largely testing the investment waters, and rapidly advancing technology was trying to find souls brave enough to take a chance.
Fast forward a few years, and renewable energy and climate finance are thriving industries in the region:
At the LAC-CORE conference, a panelist from the Uruguayan Wind Energy Association noted how wind power now supplies 95 percent of the country’s electricity, thanks to Uruguay’s use of open tenders for renewable energy projects wherein developers compete to see who can provide renewable energy for a long-term contract at the lowest price.
Mexico also drew a lot of interest for its recent success in transforming its energy market. In September, the country held a power auction that received 457 bids from 57 participants. The lowest bid in these auctions was a mind-boggling US$33 per megawatt-hour (MWh) with an average of $41 per MWh.
After more than 10 years of mismanagement, all eyes are on Argentina and the efforts of its new government to right the country’s economic ship. “The new Argentine government has staffed its energy ministry with top-notch professionals,” said Carlos St. James, founder of the Argentine renewable energy chamber and managing director of Santiago & Sinclair, LLC, which provides guidance to investors.
News of Argentina’s better-than-expected energy auction elicited a respectable level of “oohs” and “ahs” from the crowd. And rightly so. The country’s recent round of an open tender for 1 gigawatt (GW) of renewable energy capacity resulted in 123 submitted proposals, of only which 18 failed. In total, projects totaling 6 GW of capacity were submitted by would-be developers, with prices for wind and solar projects seeing bids at the amazing low prices of $49 and $55 per MWh, respectively. However, challenges still lie ahead. Although there is tremendous interest from the private sector, Argentina has an uphill climb setting a signal for long-term stability within the country.
Risks for Clean Energy
Despite all of this positive news, panelists and participants spent a decent amount of time exploring the pervasive issue of risk. Although innovative financing solutions have strengthened sector investment, risk remains one of the biggest factors scaring off would-be developers and investors. One panelist remarked that it seems financiers are “running out of bullets” in terms of creating new ways to reduce long-term risk.
If that is the case, what role might there be for governments? In times past, governments tried to reduce investor risk by offering subsidies and other financial incentives that were unsustainable over the long run. Therefore, if government is going to remain relevant in tackling risk, it likely requires a paradigm shift toward factors creating a stable investment climate.
As an example, Michael Eckhart, managing director and global head of environmental finance and sustainability at Citigroup, cited foreign exchange risk as a barrier to cross-border electricity sales. While investment and prices may be stable in one country, moving electricity to an unstable neighbor can be difficult to arrange if the latter’s currency is fluctuating wildly because of political turmoil or macroeconomic instability.
Of course, climate change remains THE long-term risk in all clean energy investment. As one presenter noted, climate change becomes a unifying thread across many big issues like energy, agriculture, healthy, and governance.
Many at this year’s conference agreed that at some point, all clean energy projects will have to deal with the very real and constant threat of climate change. Increased storm damage threatens project equipment and infrastructure; droughts threaten hydropower projects meant to offset the variability in wind and solar projects, etc. This type of uncertainty not only has the potential to derail a project in operation but also can prevent that project from ever seeing the light of day because of financiers’ inability to accurately price such an unknown risk into their analysis.
This brings us back to policy. “It still matters,” according to John Paul Moscarella, chairman of LAC-CORE. True. But it has to be consistent. After all, it was strong policy on the part of the Costa Rican government that has led to the country setting records for the number of days procuring 100 percent of its electricity from renewable sources. But countries in the region are not always on the same page. All boats floated higher and higher during the commodities super cycle in the first decade of the 21st century, but recent global contraction has resulted in some countries being more hard hit than others.
For example, the drop in commodities prices has significantly impacted Chile because of its over-reliance in this area, while its neighbor Argentina, with its more diverse economy, has been able to weather the storm more evenly. Further, low oil prices have nearly devastated the Venezuelan economy while providing a bit of reprieve to Caribbean islands that, for a long time, have been overly reliant on fossil fuels for electricity generation.
Bottomed-out oil prices make the status quo look a little better, thereby hindering sustainable energy development in places where renewable resources are abundant. This uneven policy landscape across the LAC region might infringe on the promise of clean energy investment that might otherwise be strengthened by more uniform conditions across the region.
Further, it was strong policy from donor countries that led to the emergence of facilities such as the Green Climate Fund to support low-emission and climate-resilient investment. Funds like this still have a strong role to play precisely because they are backed by long-term policy initiatives, which allow them to absorb more risk and alleviate an investor’s hesitation when approaching a project.
However, consistent policy—and its long-term efficacy—may be in doubt as new governments in some donor countries begin turning inward and abandon commitments of past administrations. Such action might weaken investors’ confidence and add uncertainty to complex project finance mechanisms that rely on long-term predictability.
Looking Ahead in Latin America and the Caribbean
All that said, it is very clear that renewable energy and climate finance have come into their own in the Latin America and Caribbean region in recent years, moving away from reliance on government policy and subsidies toward innovative financing solutions and stricter scrutiny of market fundamentals.
But even in one of the world’s most dynamic markets, risk is still on everyone’s mind. Geopolitics, macroeconomics, and climate change can derail forward progress at any time. Fortunately, the region seems to have the right mix of factors to increase the level of clean energy generation that it, and the world, so desperately need. Que continuen el progreso y éxito de energía renovable en la región!
Mark Konold is a Senior Fellow for the Worldwatch Institute’s Climate and Energy Program.
Banner photo: Lance Cheung