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Increasing Stability

Latin America's energy sector is seeing increasing regulatory stability as the region slowly recovers from the devastating global commodities crash that began in mid-2014. The price plunge hit the resource-rich region especially hard, exposing corruption and incompetence at the highest levels of state-owned energy firms such as Petrobras and Eletrobras (Brazil), Pemex and CFE (Mexico), and PDVSA (Venezuela). Economies fell into recession, some executives and officials were jailed, and local currencies tanked.

Concurrently, however, falling costs for wind and solar technology, combined with transformative energy reforms, opened the floodgates for massive renewable energy investment in Mexico and Chile, even as economic growth slowed regionwide. Wind energy in Brazil also continued to grow steadily through the country's 2015-16 recession. Business-friendly governments, each with reform agendas of their own aimed at attracting private investment in the electricity and hydrocarbon segments, took over during the same two years  in Argentina, Peru and Brazil.

While 2018 will not be a year of explosive growth in any of the region's major economies, each has become more conducive to private-sector energy investment, particularly in renewables. For example, since center-right Argentine president Mauricio Macri took office in December 2015 on a pro-business platform, his energy and mines ministry - helmed by former longtime Royal Dutch Shell executive Juan José Aranguren - has awarded over 5GW of renewable energy capacity through the RenovAr public auctions. In Mexico, landmark energy reforms implemented in 2014 to end the government's monopoly over the sector are bearing fruit, as evidenced by record-low prices awarded in the country's most recent long-term energy auction.

The control room inside Brazil's Santo Antônio hydroelectric dam (CREDIT: AFP)

Although Brazil's power sector remains mired in a convoluted web of lawsuits stemming from low hydroelectric reservoir levels, sentiment toward the country's renewables segment has improved dramatically in the last year as the country prepares for a return to growth after two years of recession. For example, AES Tietê - one of Brazil's largest incumbent power generators - has this year acquired 611MW of wind and solar capacity in the country in varying stages of development. US-based 8minutenergy, which bills itself as that country's largest independent solar developer, has identified Brazil and Mexico as two of the four non-US markets in which it plans to expand over the long-term. 

Meanwhile natural gas, an energy source whose share of Latin America's generation mix has more than doubled to 47% since the early 2000s, will play an increasingly prominent role in the region as well, particularly in the above-mentioned big three economies. This is due to factors including an abundance of cheap US shale gas, the burgeoning global LNG trade, increasingly severe droughts affecting Latin American reservoirs, and growing penetration of variable-output wind and solar energy.  

"[The] recovery process in Latin America is benefitting from stabilization and some recovery of commodity prices, improving external conditions, lower inflation in most countries, monetary easing and favorable borrowing rates," Fitch Ratings says in its Latin American Sovereign Overview 4Q17, adding, "However, most countries in the region are growing below trend."

Adding to the uncertainty in 2018 is a packed election calendar that includes presidential contests in Mexico, Brazil, Chile and Colombia. The following report examines the macroeconomic, regulatory and political factors that will drive electric power investment in 2018 and beyond in Argentina, Brazil, Colombia, Chile, Mexico and Peru.

Figure: GDP Growth Forecast
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