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Energy Update: Latin America and Renewables in the Global Context

Latin American countries are investing in renewable energy, such as wind power.

August 30, 2012

Latin America is attracting new investments amid rising funding for renewable energy in emerging markets. In 2011, global investment in renewable energy (RE) reached a record $257 billion, nearly doubling since 2007. These investments boosted worldwide renewable power capacity by almost 10 percent from 2010 to 2011. Aided by rapidly decreasing technology costs and barriers to entry, renewable energy is moving into emerging markets, including Latin America.

Emerging economies are receiving more investments as the cost of renewable energy decreases and generation systems become more sophisticated. The UN Environmental Programme reports that 13 percent of renewable energy investment in 2011 took place outside the G20, and the International Energy Agency projects that global renewable power generation will rise 40 percent in the next five years. Two-thirds of that growth will occur in non-OECD countries, the report says. 

While renewables represent only 6 percent of global power generation, their share in the energy mix is growing. Nearly half of investment in new power generation capacity in 2011 went to renewables, helped in part by a 50 percent drop in the cost of solar photovoltaic cells. Although renewable energy investments have historically been dominated by a few countries—around 95 percent of total renewable investments are in G20 countries—this appears to be changing. Excluding the United States and Brazil, the Americas saw a nearly 30 percent increase in renewable energy investment from 2004 to 2011. During the same time period, renewable energy investments in Asia and Oceania—excluding China and India—increased by 17 percent.

However, there are obstacles to continued growth. Several global trends, including the global economic downturn and increasing interest in shale gas, threaten to disrupt investments in renewable energy sources. Preliminary reports indicate that renewable energy investment in the first half of 2012 was sluggish. Nevertheless, energy analysis site Clean Energy Pipeline projects that RE generation and capacity will continue to grow in the short- to medium-term.

Trends: Explaining Recent Investments

A number of factors help explain the high levels of investment in 2010 and 2011 and the decline in 2012, including the expiration of subsidies in Europe and the United States. Europe cut solar subsidies in 2011 after cost reductions in solar power technology resulted in “greater-than-intended” returns for solar power developers. The U.S. Production Tax Credit (PTC), which grants tax credits for renewable energy produced, expires in 2012. Meanwhile, the Investment Tax Credit (ITC), which awards tax credits for investment in renewable energy, expires in 2016. While the PTC, ITC, and other tax credits and subsidies have been in effect, investment in RE surged—but such funding declined dramatically as some of those benefits came to an end. The uncertainty over future policy support in both regions tempered RE investment in early 2012.

The global economic crisis and shale gas have negatively impacted RE investments in developed nations. Limited liquidity and austerity measures resulted in lower levels of investment flowing into and out of some of the biggest RE markets such as Italy, Spain, and the United States. Shale gas also tempered interest in RE investment. Thanks to technological advances in the extraction of shale gas and abundant shale gas deposits in countries like Argentina, China, and the United States, low-carbon natural gas has become an increasingly cost-effective alternative to both coal and renewable sources of energy.

Renewable Energy in Latin America

Renewables account for about 30 percent of the total energy mix in Latin America, a high ratio compared to approximately 6 percent in OECD countries. A large portion of this is hydroelectric power. Brazil, Paraguay, and Peru receive over 80 percent of their electricity from large hydropower plants. Meanwhile, Central America is more reliant on geothermal power than any other part of the world.

But RE investment in Latin America remains limited. Leaving aside Brazil, Canada, and the United States, the Americas received only 1 percent, or $2 billion of global investments, in RE in 2011. Costa Rica attracted the most investment, followed by Peru, Chile, Mexico, and Argentina. Wind, solar, and small hydropower led in project development. On the other end of the spectrum, Caribbean countries remain dependent on imported oil for power generation.

According to the Inter-American Development Bank, the “policy gap” is the largest obstacle preventing the region from capitalizing on its RE potential. Investor risk increases with the lack of a regulatory framework for renewable energy, as well as gaps in energy policy from one government administration to the next.

Still, some countries have put incentives or requirements in place for increased use of renewable energy. One example is Chile, which requires 10 percent of electricity to originate from renewable sources by 2024; the government is considering increasing this value to 20 percent by 2020. Mexico enacted climate change legislation in June 2012 that calls for just over a third of the country’s energy to come from renewable sources by 2024. Guatemala provides 10-year tax exemptions on customs and income taxes for RE producers in order to stimulate renewable energy use. But these RE policies remain examples of exceptions rather than the norm.