The commercial viability of green hydrogen is limited to applications where it replaces gray hydrogen –it is unfeasible as a fuel to produce electricity. Energy storage lacks regulation that would make standalone projects attractive. And electric vehicles (EVs) are still too expensive for 99% of Latin American consumers. It is no surprise, that weaning the world off dirty fossil fuels, a.k.a., the road to net zero emissions, is perhaps the most challenging task our society has ever faced. By 2030, it will require more than US$2 trillion in annual investments in both conventional and renewable energy, ranging from battery storage to LNG.
In our recent whitepaper titled the “Road to Net Zero in Latin America” we focused on region-wide trends before delving into specific investment opportunities, challenges, and roadblocks in the six main energy markets of Latin America.
The Road to Net Zero in Latin America
How investors, energy companies and suppliers can maximize opportunities while avoiding pitfalls in the region's top 6 markets
Here is a quick breakdown of what investors should focus on in each market:
In Brazil, opportunities within the energy transition are diverse and geographically widespread. Among renewables, there is a race for the sun as the government phases out subsidies for distributed generation projects approved after 2022. Investors and operators looking to secure a favorable taxation regime through 2048 should obtain project approval from Aneel before the end of this year. Those that are unable to do so will see lower returns, but PV distributed generation will continue to be an attractive segment through 2030. The privatization of Eletrobras means that there are cheap assets for sale in the generation, transmission, and distribution space—but expect competition as foreign investors swoop in to secure projects before the October presidential elections. Within the conventional energy space, the natural gas market has opened more slowly than expected after a landmark bill broke Petrobras’ monopoly, but biogas projects are gaining popularity due to a recent incentive program and large domestic feedstocks. And although Brazil’s high-quality crude could serve as a good substitute for Russian oil in Europe, recent pre-salt discoveries have been few and far between.
Mexico has had the most controversial and volatile energy sector in the region for the past three years. Andres Manuel Lopez Obrador (AMLO), Mexico’s president, has done all he can to prop up state-owned companies at the expense of private energy operators. Despite Mexico’s world-class solar and wind potential in Baja California and Oaxaca, AMLO passed a law (now suspended, pending legal review) that would prioritize energy dispatched by state-owned CFE over independent power producers. As the US and Canada launch a trade dispute with their Southern neighbor, investments in Mexico’s renewable space are not advised at this moment. In the conventional energy sector, AMLO is also restricting private competition. There is some potential for LNG export terminals in the Pacific coast to substitute Russian LNG in global markets, but they would require a public-private partnership (PPP) and a careful evaluation of the market demand. These assets, which often have a shelf life of 50 years, would need to be “transition ready” to ensure long-term profitability (i.e., equipped to transport low-carbon fuels such as green ammonia and renewable natural gas).
In Argentina, the Peronist administration is struggling with surging inflation and a weakening peso, hurting investor confidence and slowing new investments. The Peronists have also adopted an AMLO-esque approach by prioritizing state-owned oil company YPF at the expense of renewable energy development. With the Peronists in power, Vaca Muerta and its surrounding infrastructure (e.g., pipelines) stand out as the most appealing energy play in the country. Argentina’s Plan Gas 4 (GasAr) provides operators with billions in subsidies and investor guarantees that mitigate some country risk. Although Vaca Muerta’s development will continue independently of the party in power, a likely defeat by the Peronists in the 2023 elections will reignite renewable development in the country, especially in the Patagonia region. By obtaining local community buy-in, securing dollar-denominated PPAs, and rallying government support, wind projects could be a success.
In Colombia, the victory of Gustavo Petro is likely to accelerate the development of renewable generation and low-carbon fuels, such as hydrogen. Investors must be weary of hydrogen’s applications as a fuel source, as it still struggles with high costs and inefficient electricity output. This is aggravated by Colombia’s dwindling gas reserves, inconsistent hydrological conditions, and Petro’s expected ban of new oil and gas exploration, limiting the country’s energy supply and increasing the urgency for additional installed capacity that is commercially viable. This should come mostly from solar and wind projects, but Colombia’s slow permitting process and indigenous opposition in La Guajira has delayed development. Careful due diligence in selecting the right location and local partners is a must. Petro’s unorthodox economic policies, and the growing role of Ecopetrol, could also lead to the divestment of assets. Investors and operators that are in tune with the market may find cheap opportunities as the peso depreciates.
In Chile, green hydrogen is attracting foreign stakeholders’ attention. Although the country has cheap and abundant renewable power, as well as a favorable regulatory framework, there are limited use-cases for H2 that make economic-sense, except when replacing gray hydrogen (e.g., oil refining, production of ammonia). Export-focused H2 projects are garnering most of the attention, but unfeasible transport costs make green H2 (for export) an unlikely success. In the energy storage sector, there are 400 MW in projects pending environmental approval, reflecting a prolonged backlog that is lacking regulatory clarity. Storage players are still waiting for the approval of a bill N°14.731-08, which would make standalone storage projects attractive. Understanding when and how this regulation will move forward will allow energy investors and operators to capitalize at the right time.
Although Peru is seeking to “massify” its natural gas in the southern regions, obsolete gas tariffs, insufficient pipelines, and increased government scrutiny are hurting the competitiveness of the domestic natural gas market. Outside of natural gas, there could be a PPP opportunity for liquefied natural gas (LNG) exports to substitute Russian LNG, but it would face a dominant Peru LNG Consortium. On the renewables side, a 2019 regulatory change approved solar and wind as firm power, but the alteration was lopsided in favor of wind projects. For now, wind continues to be the most viable NCRE opportunity, especially in the southwest region of Ica.
As you can see, each of these markets differs significantly from the others in terms of its growth areas, risks, and roadblocks. More importantly, market and political conditions are constantly changing in all of them. As such, while The Road to Net Zero in Latin America will offer you a strong understanding of where this road could take investors and operators, a steady flow of market intelligence will prepare you for the twists, turns, and possible dead ends. Contact us at firstname.lastname@example.org to find out how our team can provide a steady flow of essential insights, data, and crucial context to help you through each phrase of an energy project, from determining the market size and feasibility of a technology to ensuring the success of an ongoing operation.
 “World Energy Investment 2022.” IEA, 22 June 2022.