Spotlight: The state of Latin America’s power markets

Brazil, Chile and Argentina are seen as the most promising markets in Latin America for non-conventional renewables, despite numerous headwinds and weak economic performance.

Argentina needs to replace around 35% of its power plants, which are highly inefficient, while Chile has laid out a plan to remove all coal-based generation by 2040, which will open opportunities to fill the missing capacity, according to a Fitch report. The two countries are seeing the largest investment, in relative terms, in renewables in the region.

Brazil’s power sector, meanwhile, is considered to offer better conditions than other sector in the country, in part because the federal government is addressing systemic problems that were affecting companies’ cash flows and plans to improve the regulatory framework to reduce sector risk. Also, credit availability has remained high for power projects despite the country’s somewhat volatile economic situation, Fitch says.

The quality of the regulatory environment is highly variable among countries, with Chile enjoying the best overall conditions while Colombia and Peru are making significant progress in moving towards a more independent regulatory framework and institutions. The regulatory outlook in Argentina, where wholesale market administrator Cammesa is the sole offtaker of generation companies and the risk of government intervention as the economy slumps, is the worst in the region, the ratings agency says.

Regional overview

Installed capacity in Latin America is expected to increase 7% between 2018 and 2021, from 341GW to 364GW. The fastest growth is coming in the non-conventional renewables segment (wind and solar), which is expected to reach 8% of total capacity by 2021, Fitch says.

In terms of cost, Fitch estimates hydroelectric remains the most expensive technology in the region when measured by investment cost per MW installed, averaging US$2mn/MW. The average has been skewed, however, by EPM’s disastrous 2,400MW Ituango project in Colombia and AES Gener’s embattled 531MW Alto Maipo dam in Chile, which were beset by big cost overruns.

Colombia

An improving outlook is expected in Colombia, with a balanced regulatory framework that sets fair prices seen as a strong asset, despite the fact the tariff review cycle sometimes lags, the report says.

Also, February’s generation tender has eased the country’s supply and demand uncertainty. The expansion, which will bring in 4GW of new capacity in the next three years increasing overall capacity by 23%, will cover an expected rise in demand.

While renewable participation in Colombia is small, the government has called for increased renewable capacity to 1.5GW from the current 22.4MW. Through the February tender, it awarded 1,160MW of wind and 238MW of solar projects. An upcoming tender for long-term contracts is expected to increase the country’s renewable pipeline and the segment is set to grow significantly in the coming years.

Mexico

Mexico finds itself in dire need of heavy investments in the power sector, for which the government has laid out ambitious growth plans, including adding 70.3GW in new capacity over 15 years, covering new demand and replacing old and inefficient units. According to Fitch, the country will need US$8bn a year in infrastructure investments for this period, for a total of US$120bn.

However, doubt remains about whether the government will offer public-private partnerships to fill the gap. The current administration favors a state-centric approach, but there have been signs of increasing openness to dialog, particularly when it comes to renewable development.

Peru

In general, the Peruvian power system is facing a power oversupply, which means the development of new projects is not currently a key concern. For this reason, Fitch estimates greater incentives will be in needed to attract investments in new renewable and hydroelectric capacity from 2023 onwards, once demand growth has caught up with the current conditions.

Also, the suspension of the Sur Peruano gas pipeline project in 2017 has made around 1.5GW of thermal generation in the country’s south cost inefficient. So when drought periods reduce the output of hydroelectric plants, prices tend to soar.

On the other hand, spot prices are being pressured downwards by domestic natural gas market oversupply. This weighs on a system that comprises 56.2% of thermal capacity, although the situation is expected to reverse as demand grows and absorbs the extra supply. According to Fitch, spot prices are expected to jump from around US$9.53/MWh in 2017 to some US$20/MWh in 2022 as the market readjusts.

Argentina

Once macroeconomic conditions improve, Argentina has great potential to become a dynamic market, in part because it is in dire need of investment. Besides replacing a lot of inefficient capacity, major transmission expansions will be needed which are estimated to cost around 1.4% of GDP. The country has already seen US$6.7bn in investments as part of its RenovAr renewables tenders.

According to Fitch, growth in the Argentine power sector is currently being curtailed by several factors. These include a high degree of government intervention, a poor macroeconomic environment, a lack of interest from private investors, high borrowing costs (also a consequence of the recession) and high foreign exchange volatility. According to the latest central bank forecast, while the peso currently sits at around 60 per US dollar, it is expected to reach 90 by the end of next year. Earlier this year, the peso was at around 45 per dollar, and below 20 at the beginning of 2019.

Power demand is seeing a continued slump as a consequence of the recession (56% of Argentina’s demand is residential), and this is expected to continue in the coming years. However, an increase in more efficient projects coming online in the next few years, coupled with a decrease in gas prices due to Argentina’s higher hydrocarbons production, will help drive residential prices down from their current levels. Fitch also estimates Argentina will need some 990MW of new capacity each year for the next 10 years to replace its inefficient plants, plus new transmission infrastructure.

Investment in new projects is expected to stay on hold in the medium term due to a lack of access to financing markets. This could in turn drive prices up, as inefficient generators must be used more.

However, the biggest risk for the sector continues to be the country's volatile foreign exchange rate, as BNamericas reported previously. This is because wholesale market administrator Cammesa's cash inflows, coming from distribution and transmission companies, are in pesos, while its payments to generators are denominated in dollars. As the currency depreciates, the payment system becomes more and more strained.