Distributed generation is booming across Latin America. In the first 10 months of 2022, Brazil’s installed capacity increased 67%, reaching 14 GW of distributed generation power. By 2030, AMI predicts that amount will nearly triple. Brazil’s neighbor to the west, Chile, also saw a 28% growth through August of 2022. Both countries will break annual records this year.
As solar costs continue to decrease and attractive regulations are implemented (e.g., net metering, opening of the free market and discounts for self-generation), distributed generation is expected to grow exponentially throughout Latin America. For companies and individuals looking for immediate long-term solutions to reduce their carbon footprint, while saving on energy costs, distributed generation is a safe bet. Finding the optimal location and the right local partner is now the biggest challenge.
Brazil: Distributed Generation will Continue to Grow under the Lula Administration
Although Chile and Brazil will continue to see growth in their distributed generation sectors through the end of this decade, both countries have begun phasing out subsidies for these assets.
In Brazil, Lula was recently elected for a third Presidential term after 12 years away from office. The impact on the distributed generation sector should be limited, as it has continued to grow regardless of the party in power. Moreover, with a far-reaching regulatory structure approved for distributed generation assets in 2022, it is unlikely that the sector will see any major changes in the mid-term horizon.
Under the new framework, these assets will incur a gradual application of the distribution fee (TUSD) starting in 2023, with a complete phase out of subsidies by 2028. Despite the removal of subsidies, these assets still provide lofty returns for those that can afford the upfront cost of roughly USD 10,000 (for SME consumers). With more than half of distributed generation purchases being financed in Brazil, installers that can provide long-term flexible financing will have a strategic advantage over competitors.
Free market subsidies, projected to equal roughly USD 1bn in 2023, are paid by regulated consumers. Hence, the biggest threat to the free market (which includes many distributed generation players) comes from a potential misrepresentation of the idea that low-income regulated consumers will pay for the subsidies offered to the free sector, nudging the new administration to overhaul the existing regulatory framework. The reality is that low-income consumers in the regulated market are exempt from paying this subsidy, as they are subject to a different social tariff.[1]
Chile: The First LatAm Country to See Mass Adoption of Distributed Generation Paired with Battery Storage
In Chile, the maturity of the sector has also forced the reshaping of favorable subsidies. In April of 2022, the renumeration for PMGD projects (small and medium distributed generators of up to 9 MW) was adjusted from a stabilized price to hourly blocks, preventing generators from being overly compensated for energy produced during the day (in which energy demand is low). Although this new rule has caused some uncertainty around the feasibility of the distributed generation sector, the recent approval of Chile’s energy storage law has now made hybrid solar-battery projects highly attractive. Now, the priority for distributed generation clients will be finding the right location—coupled with flexible financing—to mitigate high interest rates and expensive battery costs.
In sunny markets where there is already a high penetration of renewable power generation, such as Chile’s Atacama region, storage paired with new solar projects will become the new norm. This trend is already reflected in the United States, where solar projects in California are almost entirely paired with batteries to increase the value of the asset. As solar and battery technologies improve, AMI also expects there to be more development in areas with less sun, such as Chile’s center. Although Chile’s central region faces higher land costs and less solar radiation than the North, it is closer to both urban centers and existing transmission infrastructure. Distributed generation projects also require less land than utility-scale, making them attractive in congested city centers.
Mexico: Distributed Generation Becomes the Main Solution to Decarbonize Operations
Although Mexico has struggled with utility-scale renewable projects, a byproduct of AMLO’s preference for state-owned power generation over renewable IPPs, distributed generation projects do not require generation permits and are often approved in a few weeks. New projects simply require a contract signed with CFE, the public utility who manages the nation’s grid. With over 1 GW of utility-scale renewable projects stalled in Mexico, multinationals have few alternatives to reduce their emissions outside of distributed generation.
Solar marketplace focused on Mexico, Solfium, is capitalizing on this opportunity by streamlining the entire supply chain of distributed generation projects. By providing an uber-like app in which customers can get an instant quote based on their location and consumption, their clients can subsequently order panels and have them installed in as quick as two weeks—all within a one-stop shop. In addition, companies are using the Solfium app as well as Solfium’s corporate dashboard to promote solar energy as a way to decarbonize their value chain. Its CEO, Andres Friedman, says that the biggest challenge is keeping up with market demand, alluding that the sector’s growth is equivalent to “drinking from a firehose.” The most popular states for distributed generation continue to be Jalisco (West), Queretaro (Bajio), Nuevo Leon (Northeast), Chihuahua and Sonora (North), areas with high solar radiation and stable energy demand from industrial facilities.
Although Mexico’s distributed generation capacity grew 14% in the first six months of the year and is on pace for a record-breaking year, growth has fallen below projections because of regulation (RES 142-2017) prohibiting consumers with more than 500KW of energy demand to qualify as distributed generators. Allies of the Morena administration, the PVEM party, have proposed a legislation to raise the limit to 1 MW, but three similar initiatives have been rejected in the past.
There are currently no major leaders in distributed generation in LatAm, and Mexico is no exception. The market is very fragmented and includes different players servicing each part of the value chain (e.g., from installation to manufacturing). The involvement of multiple, disconnected players means customers pay a major markup for the product and are often subject to bad service. This creates an opportunity for companies that can provide the full value-chain of a solar project, from installation to operation.
Puerto Rico, Panama, and Costa Rica outshine the Dominican Republic and Argentina
Distributed generation opportunities also exist outside of the major Latin American markets and are likely to see exponential growth, albeit from a smaller base. Recent legislation introducing favorable subsidies and net-metering policies for markets such as Puerto Rico, Panama and Costa Rica will encourage multi-fold growth in the sector. In fact, AMI analysis shows that Panama could experience a nearly 20x growth in installed distributed generation capacity between 2022 to 2030.
In the Dominican Republic and Argentina, competing interests have delayed the removal of gas subsidies and improvements in net-metering regulation. Both countries have relatively cheap electricity costs, most of which is subsidized by the government, discouraging consumers from transitioning towards new forms of cleaner energy. Argentina also struggles with high costs of capital, limiting affordable financing for these projects.
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
Rapid Growth Leads to Growing Pains and Creates Risks for the Sector
Distributed generation does not come without risks. This influx of demand has encouraged the formation of several suppliers across the value chain, from installers to manufacturers, that are not always professional or sincere. Conducting partnering studies to find the ideal local partner can help avoid delays, losses, and contractual disputes. Competitive intelligence analysis, looking at direct competitors to understand their capabilities and future plans, will also allow your company to better position its offering in this highly competitive market.
High growth in the sector has also created supply chain issues and a large queue of interconnection requests with distribution companies. Land-use competition with crops, cattle, and wind projects, are also a point of contention. Conducting an opportunity benchmarking study, which looks at factors ranging from the ease of getting an interconnection point to the cost of getting equipment on-site, will help developers, service providers, and installers find the best location to build and provide services for a distributed generation project. Failure to do so may lead to a stranded or unprofitable asset.
Americas Market Intelligence (AMI) is a leading provider of research and data for the energy sector in Latin America. Whether your company is looking to pinpoint the best location to developed distributed solar, or looking for potential buyers for distributed generation equipment and services, AMI has a 20+ year track record of ensuring a successful venture in the region.
Contact info@americasmi.com for a free consultation.
Sources
[1] October 2022, Poder 360. “Subsídios à geração distribuída devem custar R$ 5,4 bi em 2023”
