In Energy
Arthur Deakin

Arthur Deakin
Director of Energy Practice
AMI

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As 2024 unfolds, Latin America’s energy sector will be highly influenced by regional politics, high interest rates, and outdated infrastructure—despite this, energy companies are likely to see record revenues as the region continues to electrify. 

Let’s skip the formalities and dive into the heart of the matter: my expert views on this year and the diverse flavors across different markets.

2024 Outlook for Latin America Energy Sector | The good

The Good

Contrary to recent years, in which politics fell into the “Ugly” section, the likely Presidential winners in Latin America will transform the region’s energy sector—for the better. Ideology aside, energy investors and operators are giddy about the departure of Mexico’s Andrés Manuel López Obrador (AMLO), which reflects the expected positive changes brought on by this year’s elections. This is what AMI expects will happen.

Mexico

Claudia Sheinbaum’s 20%-plus polling advantage is likely to materialize into a presidential victory, putting an end to AMLO’s six-year administration that all but froze private investment in both renewable energy generation and transmission infrastructure. With Sheinbaum at the helm, Mexico will likely see:

  • Growth in renewable energy development. Energy investors, developers, and manufacturers will reignite their Mexico operations as Sheinbaum seeks a 50% renewable target by the end of her term in 2030, up from the current 15% penetration.1 Although Sheinbaum has called for private investment, the extent of her divergence from AMLO’s nationalist policies is still unclear.

AMI projects that a favorable policy shift could increase Mexico’s installed distributed generation capacity to 34 MW by 2030.

  • Increased distributed generation limit to 1 MW. To achieve the above objective of 50% renewables, we believe Sheinbaum could increase the maximum threshold for distributed generation projects from .5MW to 1MW. This would allow for an easier grid connection for larger on-site projects that supply power to industrial facilities. Mexico’s 3 GW of installed distributed generation capacity is a far cry from Brazil’s 26 GW, where the maximum threshold is 5 MW. As seen in figure 1 below, AMI projects that a favorable policy shift could increase Mexico’s installed distributed generation capacity to 34 MW by 2030, a fourfold increase when compared to a scenario in which policies remain the same.2
  • Approval of a biofuel law. Sheinbaum is more likely than any of its political predecessors to approve a biofuel law or mandate, as clean fuels are a personal interest of hers (she spearheaded a biodiesel plant in Mexico when she was mayor and wrote a paper entitled: “Potential of biodiesel from waste cooking oil in Mexico.”)

  • Contractual clarity for renewable energy developers. In January 2024, Mexico’s Supreme Court struck down AMLO’s electricity reform, which prioritized energy dispatched by state-owned CFE at the expense of independent power producers (IPPs). This will pave the way for IPPs and developers to restart looking at solar and wind opportunities in the country.

  • Billions of dollars in lawsuits from international energy operators/developers against AMLO. In February, the government announced the expropriation of a hydrogen processing plant in Hidalgo state, bought by French company Air Liquide for roughly 50 million euros in 2017.3 These disputes are likely to enter into the “panel stage” under the USMCA treaty, leading to multi-million dollar settlements.
Mexico’s distinct distributed generation paths

United States

  • A Biden reelection would likely result in the continuation of the moratorium on US Department of Energy (DOE) LNG export permits, likely postponing the final investment decision on Mexican LNG export terminals that do not yet have a DOE permit.
  • Since the proposed Mexican LNG terminals use U.S. natural gas as feedstock, they require DOE approval for exports to nations that lack free-trade agreements (FTA) with the United States.  This includes New Fortress Energy’s Altamira LNG project (1.4mmty) which is under construction and nearing completion. This will likely require them to shift their LNG sales to countries with existing FTA agreements such as Korea and Chile, which account for only 11% of US LNG exports. This could lead to a more restricted buying pool and lower revenues.
  • Meanwhile, planned LNG export terminals in Mexico that already have DOE approval (e.g., Mexico Pacific and Sempra’s Visto Pacífico) will likely see accelerated development as they suddenly become more valuable assets that can “replace” the supply deficit created in the U.S. market. In fact, Mexico Pacific received the green light from the U.S. regulators (FERC) for a cross-border pipeline that would supply its 15 billion LNG export facility with natural gas from America.4
  • LatAm countries that are still dependent on heavy fuel oil or natural gas (e.g., Dominican Republic, Argentina, Panama) for power generation will look toward global suppliers or US suppliers with existing export permits to meet their LNG and RNG demand in the future. LatAm is also rich in feedstock for both RNG and other sustainable fuels (SAF, e-fuels, hydrogen) which means that countries will also start producing these fuels soon. This is already happening in Brazil, but Mexico’s lack of regulation makes domestic production of RNG or SAF unfeasible.
Impact of the DOE moratorium on Mexican LNG export terminals. Total US LNG exports via vessels, 2022.
  • With a Trump victory, the former president and his staff could potentially delay and intentionally disregard the implementation of some of Biden’s IRA climate benefits. This could slow down some of the green supply chain development, from mining to solar panels, taking place in countries with free trade agreements in the region (Mexico, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Peru, Panama, Honduras, and Nicaragua).
  • A full repeal of the IRA is very unlikely, not only because it would require substantial legislative maneuvering, but it would negatively impact Republican states that have benefitted from the bill.  However, President Trump could instruct certain departments (e.g., Treasury) to not implement IRA tax credits or guidelines, scaling back the IRA’s reach.5

Argentina

  • Even though Javier Milei is a climate denier, his pro-business policies will likely mean more multinational investment in the long term, creating an Argentina with a cleaner power generation matrix and a better transmission and pipeline infrastructure.

  • Milei included provisions for a national cap-and-trade system in his first major legislative piece sent to Congress (as part of the Omnibus bill that was not approved), which would create a carbon market in the country. This signals that the President is likely to move forward with “green policies” that fit Milei’s strategy of raising fiscal revenues and cutting spending.

  • Although electricity prices will increase in the short term as energy subsidies are removed, they should see long-term declines with additional renewable power installed and the continued growth of Vaca Muerta. This will reduce costly gas imports during the winter, and may even lead to profitable gas exports to neighboring countries (if it is accompanied by pipeline infrastructure).

Dominican Republic

  • President Abinader will likely be reelected in the Dominican Republic and keep fostering a green investment/pro-business environment.

  • Although developers are starting to experience longer wait times due to congested grids,  both investors and developers state that the Dominican Republic has been one of the easiest places to develop renewable projects in recent years, with utility-scale solar permitting times averaging less than 3 years (from greenfield to ready to build), compared to six years in Mexico.

Panama

  • If former President Martinelli wins, a pro-business environment will likely follow. This means increased international investments in renewable energy and an FID on the U$7.7 billion SGP Bioenergy plant.6 However, Panama’s Supreme Court recently rejected Martinelli’s last appeal against a money laundering conviction and experts say he is now ineligible to run for office.

  • Panama already announced it is holding a 500MW tender for renewables and energy storage in the second quarter of 2024, signaling that there is both demand and the need for more clean power.7 Renewable developers and investors are taking heed and are closely monitoring the situation in the country.

Venezuela

  • The unsurprising anomaly when it comes to positive political implications for the energy sector is the likely “re-election” of Maduro.

  • Venezuela is making more money now than it has for the past five years, selling 22% more crude in January 2024 than it did a year before. Temporary sanction relief allows it to avoid selling crude for a heavy discount to China/Iran, which could raise the country’s national oil revenue to U$8 billion in 2024 (up from U$2 to U$3 billion with sanctions).8

  • However, Maduro’s decision to prevent the leading opposition candidate from running in this year’s election will likely lead the U.S. to reimpose sanctions on the country, essentially freezing all new foreign investment flowing toward the energy sector.

El Salvador

  • Bukele’s reelection has raised questions on the fairness of the electoral process and the constitutionality of a 2nd term, but it will allow him to double down on his energy policy as he seeks to reduce dependence on bunker fuel imports and lower electricity costs for consumers.9 His goal is to create energy independence for the country by adding as much natural gas and renewable power as possible (Bukele recently inaugurated a massive natural gas power plant called Energia del Pacifico).

  • Bukele recently reduced energy tariffs by 14%.10
2024 Outlook for Latin America Energy Sector | The bad

The Bad

Lack of investment in transmission lines, permitting delays, and long wait times for grid equipment.

The bad section includes trends that are reaching a breaking point but are not quite at that critical juncture just yet, which is the case for the region’s electric grid and permitting delays. With the first way of massive renewable deployment in the rearview mirror, energy investors, operators, and governments are now focused on getting that power to cities reliably and affordably. By 2040, the world will need to build or replace 49.7 million miles of transmission and distribution lines, equivalent to the entire existing global grid. To do so, the IEA estimates that the world needs to spend $600 billion annually on grid upgrades by 2030.11 Of that amount, AMI estimates that US$39 billion per year will be needed for grids in Latin America and the Caribbean by 2030.

In the developed world, money is quickly pouring into transmission projects. EnergyRE, an American startup, just raised U$1.2 billion for transmission projects in the US, a sign of the growing investor interest in building out the grid.12 Private grid investments from companies such as Grid United, Berkshire Hathaway, and National Grid, are also being bolstered by nearly $3.5 billion in Department of Energy grants, and U$ 5 billion in funds from state governments and utilities.13

The story is starkly different in emerging markets such as Latin America, where government subsidies are not feasible, and project risks are higher. Transmission capacity is becoming a recurring problem in countries with high renewable penetration such as Chile, Mexico, Brazil, and Colombia. In Chile’s Atacama, there are high levels of renewable power curtailment due to grid congestions; Mexico’s Oaxaca, a region known for its wind resources, is facing energy spills caused by grid constraints.14 As stated in last year’s piece, the biggest impediment to the nearshoring boom in Mexico will be access to cheap, reliable, and clean electricity. Developers across the region, but especially in Colombia, are also complaining about long wait times to connect to the grid, partially due to permitting delays but mostly due to over-congested grids with no spare capacity. This slow buildout of the transmission grid could significantly slow down the energy transition as renewable developers look to areas in which returns are quicker and safer.

AMI estimates that $39 billion per year will be needed for grids in Latin America and the Caribbean by 2030.

The silver lining among this trend is that multinational grid-equipment providers, such as Siemens, General Electric, and Honeywell, have multi-billion-dollar product backlogs for grid-related and power equipment, which is driving record sales. This increased demand for electricity is translating into increased prices and revenues, which is why the Nasdaq Clean Edge Smart Grid Infrastructure Index, led by companies such as Eaton Corp., ABB Ltd., and Schneider Electric SE, increased by 20% in 2023.15 AMI estimates that the six main sellers of grid and power-related equipment products in the region will surpass U$13 billion dollars in revenues in 2024, up 8% from 2023. The caveat is that these companies say that supply chains are still delayed, with a European company stating that is nearly impossible to deliver a gas turbine before 2027.

Estimated revenue from grid-related products among six key players, by major market

Although transmission congestion will require billions of dollars to address, permitting is the most low-cost-high-reward challenge faced by emerging markets in the energy transition. In Mexico, it takes roughly six to eight years to take a utility-scale solar project from greenfield to operational. In Colombia and Brazil, the average time is over four years. Wind projects often face longer times, due to intensified community opposition and extensive studies needed to verify both the wind speed and the impact on bird species. Permitting for transmission lines is the worst of all.  Grupo Energía Bogotá, an energy distribution company, spent over four years and U$25 million in local consultation, compensation for communities, and environmental permits,  more than double what it had originally planned before it could build a transmission line in La Guajira, a Colombian state that is rich in wind resources.  It also had to sign 235 different compensation agreements with local landowners before receiving the legal green light to proceed with an environmental impact assessment.16 EDF and Enel, two major energy companies, were less fortunate. Both announced they were withdrawing from solar projects in Colombia due to long environmental delays in the country.

Years to develop a utility- scale solar project, from greenfield to operational (COD)

2024 Outlook for Latin America Energy Sector | The ugly

The Ugly

Higher interest rates, lower returns, and project delays.

The elephant in the room when it comes to developing energy projects around the world, but especially in emerging markets, is accessing low-cost capital to make returns attractive. This has become increasingly difficult in Latin America, where high-interest rates make it harder to justify the level of risk that energy companies face when developing projects. Developers are strategically increasing their PPA prices and are indexing a larger percentage of their PPAs (not just the variable costs) to inflation, lowering their real cost of capital. Solar photovoltaic (PV) modules are also 70% cheaper than five years ago, which can reduce the upfront capex of projects by almost 15%. Although this means returns will slowly improve in 2024 compared to 2023, high-interest rates are driving energy investors and developers to shift capital away from markets with slow permitting and transmission congestions such as Colombia and Mexico, and towards markets with generous government subsidies and better rule of law, such as the US and China.

The reality is that there is a finite amount of capital available for low-carbon technologies if the returns do not justify the risk. In Latin America, high single-digit IRRs for projects that are ready to build do not provide a compelling case against 10-year U.S. treasury bonds paying over 5%, especially given the construction risks and political instability that come with an energy project.17 That is why we predict investors and energy companies will start getting involved much earlier in the value chain, either in manufacturing the inputs for clean energy, investing in cleantech startups, or in the development stages of renewable projects. If Latin American energy projects and companies cannot significantly de-risk their operations, they will struggle to attract financiers during a period of high-interest rates. With the right strategy and market clarity, multinationals with deep pockets are set to capitalize as local competition dwindles.

Next Steps

AMI helps energy operators, manufacturers, equipment distributors, and investors operate in the Americas by providing strategic market intelligence to beat the competition, increase market share, and find new opportunities. Whether it’s sizing the market for grid equipment sales, or understanding the pricing and strategy of the competition, AMI’s energy practice ensures that its clients win new business in the region.

Explore our energy practice.


Sources

  1. Natural Gas Intel, January 2024. “Mexico’s Presidential Frontrunner Sheinbaum Seeks 50% Renewable Generation By 2030.” ↩︎
  2. Energia Estrategica, January 2024. “Recomiendan elevar el límite de potencia a un 1MW en generación distribuida en México.” ↩︎
  3. Bloomberg, January 2024. “Air Liquide Pushes Mexico for Answers After Government Seizes Hydrogen Plant.” ↩︎
  4. Reuters, February 2024. “US regulators approve Mexico Pacific LNG’s Saguaro connector pipeline.” ↩︎
  5. Energy Intelligence, February 2024. “US Election: Could Trump Unravel Biden’s IRA?” ↩︎
  6. Argus Media, October 2023. “SGP plans 2024 FID for Panama biorefinery.” ↩︎
  7. ETN, January 2024. “Panama floats 500MW RE plus energy storage tender; first in Central America.” ↩︎
  8. Bloomberg, February 2024. “Venezuela Oil Industry Fears Losing Ground if US Revives Sanctions.” ↩︎
  9. BN Americas, May 2022. “Government of President Nayib Bukele consolidates energy matrix with diversification strategy with the start of operations of energia del pacific.” ↩︎
  10. Associated Press, October 2023. “El Salvador aprueba reducción del 14% en tarifa de energía eléctrica.” ↩︎
  11. International Energy Agency, November 2023. “Electricity Grids and Secure Energy Transitions.” ↩︎
  12. Wall Street Journal, December 2023. “The New Green Investment: Getting Clean Energy to Big Cities.” ↩︎
  13. Canary Media, October 2023. “The US just made its biggest-ever investment in the grid.” ↩︎
  14. S & P Global, December 2023. “The Energy Transition And Its Impact On Latin American Power Prices.” ↩︎
  15. Bloomberg. January 2024. “This $20 Trillion Climate Theme Is Trouncing Other Strategies.” ↩︎
  16. Bloomberg, November 2023. “Colombia’s Green Energy Ambitions Hinge on Windswept, Wary Province.” ↩︎
  17. Energy Intelligence, October 2023. “ EIG CEO: Low Transition Returns a Problem for Private Equity.” ↩︎

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