In Energy

Weaning the world off of dirty fossil fuels, a.k.a the Road to Net Zero emissions, is perhaps the most challenging task our collective societies has ever faced. It will require the transformation of industries that for decades have failed to noticeably innovate. The transportation sector, which accounts for 23% of global CO2 emissions, continues to rely on the 19th century invention of the internal combustion engine. Buildings and construction, which account for another 37% of carbon emissions, have obsolete buildings codes and regulations.[1] In fact, to combat climate change, global energy systems will require an average of US$5.7 trillion dollars in annual investments through 2030, a nearly sixfold increase from 2021 levels.[2] Latin America, boasting 9% of the world’s economy, is woefully underinvested in the net zero cause, mustering less than 4% of the total energy transition investments in 2021.[3]

Latin America’s capital starved economy relies on commodity exports such as oil, thus complicating its ability to balance energy and fiscal security with climate targets. By 2035, the region might have to leave between 66% to 81% of its estimated oil reserves in the ground if the Paris Agreements are to be met.[4] This would reduce Latin America’s oil tax revenues by up to U$4.2 trillion, precisely when its rapidly aging populations begin to strain fiscal balances.[5] Not only could this lead to major financial loses for traditional energy stakeholders, several of which are state-owned, but it could also raise skepticism over the feasibility of the energy transition.

Clearly, the road to net zero is not as straightforward as one would wish, as each country in Latin America has unique resources, complex regulatory structures, and cultural idiosyncrasies.

Free Report: The Road to Net Zero in Latin America

FREE REPORT

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

Through our network of 400 consultants in over 30 LAC markets, AMI pinpointed the following trends in LatAm’s energy transition:

1. The lack of local demand and high costs slow hydrogen’s takeoff

At first glance, green hydrogen makes sense in Chile, Brazil and Colombia, countries with low renewable energy costs, accessible ports, and attractive regulatory frameworks. But it is unlikely that the electrolysis’ technologies being developed outside of Latin America will arrive in a timely and feasible manner to the region, given abundant demand elsewhere. The lack of a domestic hydrogen market, and prohibitively costly hydrogen exports, are casting a question mark over the hottest topic in the energy sector.  Other clean energy technologies that are not yet commercially viable or that lack regulatory clarity, such as carbon capture and battery storage, also risk being deprioritized in emerging markets if education and healthcare continue to be underfunded. Right now, Latin American (and global) consumers are worried most about accessing more affordable energy, regardless of the source.

2. Renewable diesel and SAF do not make sense in LatAm

“Next generation” low carbon fuels that are expected to do well in Europe and North America, such as renewable diesel and sustainable aviation fuel (SAF), are also poised for a bumpy road in the region. Latin American consumers will continue to seek out ethanol and biodiesel, which are a cheaper and better fit for their existing cars, while more advanced economies (U.S. and Europe) will capitalize on their limited domestic feedstock and more climate conscious consumers to spread the adoption of these “newer” fuels.

3. Electric vehicles are growing at a snail’s pace in the region

In the same vein, electric vehicles (EV) in Latin America are materializing at a snail’s pace when compared to Europe, Asia, the U.S., and even other emerging markets like India. In fact, EV sales as a percentage of total light vehicle sales in Latin America were less than 1% in 2021, a far cry from the EU’s and China’s 19% and 16%, respectively.[6] Again, Latin America’s adversity to more expensive products, worsened by a lack of EV incentives and still lingering protectionist tariffs, will continue to put the brakes on EV adoption. Colombia, Costa Rica and Brazil are some of the few bright spots in the EV space and are creating opportunities for utilities, OEMs, big oil, and startups to develop the supporting EV charging infrastructure.

4. Distributed generation continues to be a key winner in select markets

Outside of the most innovative clean energy technologies, there is tremendous potential for distributed generation in most Latin American countries, particularly in Panama, Puerto Rico, Brazil, and Chile. More mature markets like Chile and Brazil are phasing out their distributed generation tax and pricing incentives, but both markets are still attractive due to their mature regulatory frameworks, affordable solar radiation and supporting grid infrastructure. Panama and Puerto Rico don’t have as much scale, but their expected growth is exponential.

5. Opportunities among lighter crude and LNG

When looking at hydrocarbon assets, Latin America’s long-term outlook is directly impacted by the Ukrainian war. As we go to press, it has been nearly six months since Russia invaded Ukraine and uprooted the commodities market as we know it. As horrifying as the war has been, Latin America economically benefits from the sanctioning of Russian supplies.  In addition to its vast renewable energy sources, a robust agricultural sector, and large critical metal reserves, Latin America boasts an abundance of light crude and shale gas. Peru increased LNG exports by 74% in the first half of 2022, while Vaca Muerta’s shale oil production is breaking records.[7] Brazil and Guyana, who have light and relatively sweet crude, are also ramping up oil production.  

Future growth trajectories, however, are asymmetric. Countries that have “dirtier” fossil fuel reserves (e.g., Venezuela, Colombia, and Ecuador), or that depend on oil imports (e.g., Caribbean and Central America), will have to quickly diversify their energy sources to avoid higher inflation, weaker fiscal balances, and stranded assets. All new hydrocarbon infrastructure that is developed to provide short-term energy security must also be “transition ready,” allowing for the future transportation of low carbon fuels such as hydrogen and renewable natural gas.

The disruptive power of COVID-19 in Latin America continues to usher in a new breed of political leaders who eschew the policies of the establishment they replace.  New leaders in Chile, Colombia and Peru may soon be joined by important changes in Brazil and Argentina.  More progressive political thinking ought to bode well for the net zero transition, but the economics of conventional energy in South America and Mexico are compelling and deeply embedded within the region’s economies. Political will alone will not get the job done without public and industry support.  Threading that needle between the forces of economic and energy security on the one hand, and saving the environment on the other, will require deft hands in policy making and leadership.  Private industry, particularly foreign investors, will be crucial players who help define the rules, penalties and incentives that shape a viable path to net zero in Latin America.  Latin America’s new governments seek solutions today.  Those who provide them will leave their footprints for decades to come.

Free Report: The Road to Net Zero in Latin America

FREE REPORT

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

Next Steps

We are pleased to share with you our whitepaper: The Road to Net Zero in Latin America, which lays the groundwork for a fuller understanding of the energy transition opportunities and challenges ahead in Latin America’s six largest economies: Brazil, Mexico, Chile, Argentina, Colombia, and Peru.  As we continue to serve energy sector investors with their market research, due diligence, political intelligence, risk assessment, and forecasting needs, we will continue to share our learnings in this exciting space.  

We welcome your feedback and questions at info@americasmi.com. You can also watch our latest webinar on these opportunities and risks here.


Sources

[1] “The property industry has a huge carbon footprint. Here’s how to reduce it.” The Economist. 16 June 2022.

[2] This is if the world wants to stack on track of limiting temperature increases to 1.5°C above pre industrial temperatures

[3] “World Energy Transitions Outlook: 1.5°C Pathway.” IRENA. March 2022.

[4] 3P oil reserves are the total amount of reserves that a company estimates having access to, calculated as the sum of all proven and unproven reserves

[5] “Implications of climate targets on oil production and fiscal revenues in Latin America and the Caribbean.” Energy and Climate Change. December 2021.

[6] AMI Analysis

[7] “In Latam, Peru streaks ahead in LNG race to Europe as Trinidad stumbles.” Reuters. May 2022


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