Investing in Energy in the Americas: Positive Frameworks for Renewable Energy

Speakers:

• Steven Puig, Vice President of Private Sector, Inter-American Development Bank (opening remarks)
• Tim Richards, Managing Director, International Energy, GE
• Carla Tully, Chief of Staff, Latin America & Africa, The AES Corporation
• Leandro Alves, Division Chief, Energy, Infrastructure and Environment Department, Inter-American Development Bank
• Nicole Spencer, Director, Energy Policy, Americas Society and Council of the Americas (moderator)

Summary

The Americas Society and Council of the Americas Energy Action Group and Inter-American Development Bank (IDB) hosted a public discussion on May 10 about positive investment frameworks for renewable energy in the Americas. Panelists spoke about the tremendous potential for renewable energy in the region, yet acknowledged serious challenges for investors.

Positive Investment Trends in Renewable Energy

Latin America is experiencing significant growth and investment in renewable energy. In his opening remarks, IDB’s Steven Puig outlined what the Bank is doing to promote renewable energy in Latin America and the Caribbean. IDB has allocated $3 billion a year for projects that mitigate climate change and promote renewable energy, with a focus on energy efficiency, regional energy integration, and smart grid technology. Addressing recent investment trends in the region, moderator Nicole Spencer said that from 2004 to 2010, renewable energy investment in Latin America increased nearly 30 fold. Already utilizing a large amount of hydroelectric power, the region is taking steps to diversify its clean-energy matrix through infrastructure, technology, and manufacturing.

Significant infrastructure for transmission and distribution of electricity is in place in the region. GE’s Tim Richards noted that 93 percent of the population in Latin America has access to electricity, compared to the world average of 78 percent. According to IDB’s Leandro Alves, infrastructure rehabilitation has proven to be one of the most effective ways to attract investment in the renewables sector. Financing any large-scale energy project requires substantial upfront capital, but rehabilitation projects minimize investment requirements and reduce the risk associated with constructing a costly infrastructure project. For example, IDB provides support for the rehabilitation of hydroelectric plants to increase energy efficiency.

While Latin America has historically relied heavily on hydroelectric power, reduced rainfall and volatile weather patterns have encouraged the expansion of new low-carbon technology. By 2030, electricity generated by wind is projected to grow 13 times that of 2008, according to Richards. Biomass technology will continue to progress to meet the demands of Latin America’s growing middle class, whose buying power is increasing the number of vehicles on the road. And technological advances in solar energy have reduced solar costs by 40 percent in the last 12 months, according to Alves.

New credit lines by governments and banks have encouraged the manufacture of renewable energy inputs in the region. The Brazilian Development Bank (BNDES) offers long-term, inexpensive financing for foreign companies to invest in the country. Such practices have made Brazil Latin America’s renewable energy powerhouse.

Challenges and Constraints

Despite the vast potential for renewable energy investment in Latin America, major challenges for investors remain, in particular the risk created by uncertainty in regulatory frameworks. Subsidies, feed-in tariffs, and other government incentives are often subject to political will and may be changed or revoked at any time. AES' Carla Tully noted that government subsidies can “create a system that is financially unsustainable” in the energy market. This is not only an issue in emerging markets, but globally. Tully explained that the recession has caused European countries to renegotiate feed-in tariffs for renewable energy. Such instability in government policies can lead to a contraction of private investment.

The ability of renewable energy to compete with conventional energy is another challenge for the sector in Latin America. Companies seek projects with the greatest potential return on investment. While some governments and developments banks in the region are beginning to promote renewable energy investment, the overall financial structure tends to favor continued reliance on fossil fuels.

Future Outlook

Panelists agreed that the market for renewable energy in Latin America has great investment potential but that policymakers need to address constraints. Alves said that by eliminating particular incentives and contract provisions, governments could level the playing field for renewable energy in the region. In addition, because energy investments are long term, investors need secure and stable regulatory frameworks that allow for a long-term growth strategy.

Energy Action Group

The Americas Society and Council of the Americas Energy Action Group convenes meetings with high-level energy leaders and experts across the Americas in order to provide input to the countries of the hemisphere as they seek to increase cooperation on energy and climate change.