Despite a devasting pandemic, there have been several positive developments in Latin America’s energy sector. The price for renewable energy, and related technologies such as batteries, are at record lows. The push to become carbon-neutral is embraced by most government policies, helping to accelerate the global energy transition. But troubling challenges remain. The region’s dependence on China is at an all-time high as it struggles to move up the value chain. Moreover, COVID-19 has reversed decades of employment gains, forcing millions of Latin Americans into poverty. As economic and social frustration builds, large-scale government projects will be difficult to finance. AMLO and Bolsonaro, the populist leaders from Mexico and Brazil, are also using their increased popularity to impose disruptive polices in a vulnerable energy sector.
There is strong consensus among governments and investors that the world needs to reduce its greenhouse gas emissions to avoid catastrophic climate consequences. In fact, in an effort to meet the Paris Agreement by limiting temperatures to 2 degrees Celsius above pre-industrial levels, over 110 countries have committed to becoming carbon-neutral by 2050. The investor pressure to embrace this change, and the goodwill from the countries to comply, is emboldened by plummeting renewable energy costs, now cheaper than fossil fuels in most economies. Public pressure, COVID-induced oil price volatility and supply chain disruptions further the argument for the push into renewables.
Improved technologies, cheap capital and financial subsidies have drastically reduced the cost of renewable energy in Latin America. To measure the long-term costs of building an energy project, the industry often resorts to evaluating the Levelized Cost of Energy (LCOE). In 2019, eight countries in the world had a lower country-level weighted LCOE for new onshore wind projects when compared to the cheapest fossil fuel project in the market. Of those eight countries, two of them—Argentina and Brazil—were from Latin America. Brazil, Chile, Peru and Mexico also recently announced record-low solar photovoltaic (PV) auction prices, reflecting the growing feasibility of constructing solar projects in the region. 
Average auction price for solar and wind projects in USD, most recent energy auctions in 6 Latin American markets 
Note: In the above table, auction price was not differentiated between solar and wind.
The development of renewable energy has also been accompanied by the drop in battery prices, a fundamental technology for the large-scale deployment of green energy. In fact, the average cost of a lithium battery pack has fallen from over $1000 per kilowatt hour (kWh) in 2010, to $125 kWh in 2021. As demand increases and its technology improves, battery prices are expected to drop much further, supporting the growth of electric vehicles and the development of energy storage solutions for renewable power. 
In the conventional energy realm, oil exporting countries are starting to benefit from the resurging energy demand around the world. Supply cuts led by OPEC+ recently raised crude prices to pre-pandemic levels and provided a boost to oil nation’s balance sheets. However, the benefits are not distributed equally among exporting countries. Latin American nations that produce mostly heavy crude with high sulfur contents, such as Venezuela, Mexico, Ecuador and Colombia, are seeing diminishing global demand for those types of resources. They must develop their own renewable energy portfolio, and cleaner fossil fuels, to thrive in a greener world economy. Guyana and Brazil, whom have lighter crude and lower sulfur content, in addition to relatively low operating costs, will attract abundant new foreign investment.
As Latin American unemployment reaches the highest level in a decade, and 45 million people are forced into poverty, voters will reject expensive new government funded energy projects. Local communities, fiscally starved by falling transfer payments, will seek to extort compensation for new extractive sector projects in exchange for their support. Although this was already a serious problem in Latin America prior to the pandemic, Covid-19 has exacerbated the economic and social frustration in the region.
In Mexico, local communities increasingly oppose wind farms in the state of Oaxaca. In May 2020, a Zapotec activist group protested the construction of EDF’s 252 MW wind park, complaining of excessive noise and lubricant leakage from the wind turbines.  In Guyana, where nine billion barrels of recoverable oil have been discovered, there is growing public pressure to renegotiate the production sharing agreement signed between the previous government and the Exxon-led oil consortium. To mitigate local community risk, it is essential to employ local citizens in all stages of the project—from construction to operation. If locals are only contracted for the building phase, they may grow restless over time and jeopardize the long-term operation of the project. It is equally as important to manage the environmental impact of the project by implementing protocols that reduce climate impact. Any sign of environmental damage can be a death-sentence for the asset.
Listening to local communities, a key factor that is often overlooked, is also crucial for a successful project. By organizing roundtables, conducting surveys, and hosting training workshops, companies will be able to create realistic expectations in the community and receive feedback on the types of investments the community would like to see. This dialogue will create goodwill and project support.
In Latin America, countries such as Brazil, continue to impose a 65% import tax on battery components that make large-scale battery projects unfeasible. Chile, Argentina and Bolivia, who together contain 58% of the world’s identified lithium reserves, have also been unable to develop battery manufacturing assets that would move them up the value chain.  Bolivia’s Lilpi project, which was set to become the first commercial lithium plant in the region, was annulled by the government in 2019 due to protests by the local Potosí community. This has forced the countries to export their raw materials to China, which is responsible for 50 to 70% of the global lithium and cobalt refining. China also controls 85 to 90% of the refining process of mined rare earths, which are vital for the manufacturing of products ranging from electric vehicles to F-35 fighter jets. 
Since China produces 63% of the world’s lithium-Ion batteries, in addition to 70 percent of the world’s graphite, it can easily impose taxes or restrictions that would halt the exports of those goods and subsequently hinder the development of essential products used for renewable energy. Following a territorial dispute with Japan, China banned rare-earth exports to its neighbor for 59 days in 2010, leading to a 350% increase in prices. In 2021, likely because of the sale of U.S. arms to Taiwan, China signaled that it could limit exports of rare earth minerals to the United States that are used in the manufacturing of American weaponry. 
As Latin American countries become increasingly forced to pick sides in a Sino-American rivalry, it is possible that they will face supply chain disruptions if they upset either economic godfather: China or the United States. Such political risk hinders the development of renewable energy projects, electric vehicles and even high-technology weapons. In other cases, these interruptions can come from the superpowers’ need to prioritize their own domestic market. In the February blackouts suffered in the state of Texas, the United States limited natural gas exports to Northern Mexico that left 5 million customers without power and led to $2.7 billion in manufacturing losses as factories closed temporarily.
Emboldened by recent upswings in approval ratings, populist leaders in Latin America are another “ugly” factor in the regional energy market. Latin America’s largest countries, Brazil and Mexico, as well as Argentina and Ecuador, are likely to have populist presidents through 2022. Their recent presidential actions have scared investors and hindered the development of a more open, affordable and competitive energy market.
Following a dispute over fuel prices with Petrobras’ CEO, Brazil’s President Bolsonaro replaced the market-friendly Castello Branco with an army general with no previous oil and gas experience. Investors saw this as direct government interference in the state-owned company and a potential wrench in Petrobras’ privatization plans. Bolsonaro also attacked the pricing in the electricity sector, vowing to use public funds and tax cuts to reduce consumer utility bills. In two days, Petrobras lost a quarter of its market cap and Brazil’s currency plummeted against the U.S. dollar.
In Mexico, AMLO continues to fiscally rescue its moribund public sector energy assets. In February, the government announced a $5 billion lifeline to its state-owned oil company, Pemex. This is in addition to AMLO dolling out nearly $17 billion dollars to Pemex in his first 14 months as President. AMLO’s desire to keep the company afloat is indebting the state and shifting the focus away from the development of other energy sources. AMLO also introduced an energy reform bill that will prioritize the dispatch of state-owned CFE gas plants at the expense of cheaper renewable energy generation.
In Argentina, populist President Fernández is providing billions in subsidies to promote state-owned YPF and revive the company’s shale-play in Vaca Muerta. This comes as the country struggles with a $65 billion foreign debt restructuring and high levels of inflation. Instead of propping up its state-owned company, the Argentine government should focus on improving the foreign investment climate by providing certain companies with tax subsidies and special access to U.S. dollars. In Ecuador, the projected election of Andrés Arauz, a populist successor to former President Rafael Correa, could lead to a resumption of interventionist policies adopted by his mentor.
2021 growth in consumption, air travel, trade and industrial activity will all underpin an increase in demand for energy in Latin America. Governments cannot afford to fund the expansion of energy capacity, and where they do spend, their plans are ineffective. Opportunities will abound in LAC for new energy projects. But navigating the challenging investment climate that awaits these projects, requires careful ESG due diligence and a precise reading of the new political alignments forming in key jurisdictions. That is where AMI can help.
Contact us to find out more about our monthly market monitoring or to explore a more specific study for LatAm’s energy sector, such as a market landscape, pre-acquisition due diligence (e.g., ESG, reputational, political and security), key intelligence to help you navigate the approvals process and ongoing risk monitoring for existing projects.
 IRENA, Renewable Power Generation Costs 2019  Local auctions and energy sources  The Wall Street Journal, “The Battery Is Ready to Power the World,” February 2021  BN Americas, “Flawed community consultations threaten completion of Mexican energy projects,” May 2020
 AS/COA, “Explainer: Latin America’s Lithium Triangle,” February 2021
 Foreign Policy, “Time for a Responsible Clean Energy Supply Chain,” January 2021
 Financial Times, “China targets rare earth export curbs to hobble US defence industry,” February 2021