Published on June 24th, 2014 | by Guest Contributor5
3 Lessons Learned From Latin America’s Red-Hot Solar Market
June 24th, 2014 by Guest Contributor
By Camilo Patrignani, CEO Greenwood Energy
It’s very clear Latin America has one of the world’s brightest solar power market outlooks. High power prices and volatile fuel supplies have made solar cheaper than fossil fuels in many countries, driving new investment and capacity additions. Consider Chile, Uruguay, and Costa Rica were three of the just seven nations worldwide to show an increase in renewable energy financing in 2013, according to Bloomberg New Energy Finance (BNEF).
The unique market dynamics making solar cost-competitive with fossil fuels also pose challenges to building new projects in Latin America. Low transmission capacity, high interconnection issues, supply constraints, and the need for local business connections are several of the hurdles facing foreign solar developers.
Fortunately, the rapid pace of new project development also means companies are learning lessons about what works and what doesn’t in Latin America’s solar market. I’ve spent considerable time in the region for Greenwood Energy, building local partnerships and a pipeline of over two gigawatts (GW) new solar photovoltaic projects to be built between 2014 and 2017, and I’ve learned several lessons to pass along for developers eyeing the region.
Developers Need To Be Nimble
GTM Research projects the Latin American solar market will add 700 megawatts (MW) of new capacity in 2014, representing two percent of global solar market demand through 2018. This pace means the market is literally moving at the speed of light, and requires developers to move nimbly when entering new countries.
In this regard, local partners are a secret to success. Local firms have often been developing in-projects for years, and they often have a significant pipeline of new projects either shovel-ready or in development, but lack requisite access to capital or supply chains. Partnering with a larger developer then becomes a win for both sides.
Local developers also typically have the government or business connections necessary to secure land, environmental permits, and power-purchase agreements, as well as an understanding of large power customers in the area that an outsider would need years to develop. Just by knowing these local markets, developers can access customers and get a deal done.
Once local partnerships get developers into place, reliable and solvent suppliers become just as important, especially those with manufacturing capabilities in Latin America. With a market traveling at light speed, a supplier who needs three months to satisfy an order just won’t cut it, especially when your construction contract requires projects to be completed in four months.
Greenwood Energy experienced a similar difficulty on our most recent project, a 40MW solar farm in Chile under a very tight timeline in order to secure the interconnection slot. Our existing supplier had our racking designs and favorable costs, but needed at least a couple of months more to meet our order than we had in our construction contract. In this case, we wound up working with another supplier who had the manufacturing capacity but not the solvency, requiring us to support them financially and substantially increasing the cash equity needs of the project over construction.
Developers should also consider financing in local currencies to match capital, or hedging the equity portion of your project. Either way, firms should pool balance sheets between 10-20 percent for a long-term currency hedge and ensure they are paid for the additional cost and risk of being paid through local PPAs within an underdeveloped banking sector.
Watch Out For Typical “Developing” Market Hurdles
Any new market still in its formative phase will present hard lessons for developers as both go through the learning curve, but three hurdles stand out in Latin America: interconnection access, obtaining PPAs, and securing financing.
Some of the hottest solar markets (i.e. Brazil and Panama) are also those with the most significant interconnection issues. Many nodes in these countries will need to double their interconnection capacity in order to accommodate anticipated solar additions, but developers are still working on projects assuming interconnection access will be in place when they’re ready to flip the switch. That creates business risks, which only become larger as more projects try to connect to the grid.
In other countries (i.e. Chile and Mexico), the biggest hurdle is pairing technical requirements with PPAs. For instance, a developer may have secured land control and interconnection access, but doesn’t have a PPA in place. Other developers may have PPAs in place but no technical requirements – either way, this disconnect means a deal could fall apart at the last moment.
Finally, securing financing remains a major concern. The lending sector has focused on understanding solar technology to assess investment risks and rewards, but this has been a slow process. Fortunately, multilateral lenders like IFC and OPIC have stepped into the breach and are helping bend the learning curve for other lenders.
Focus On The Highest-Potential Markets
With so much potential across the Latin American region, developers should consider the mix of risk and reward with their business model to identify the best potential markets. For Greenwood Energy, that means a focus on Chile, Mexico, and Panama; soon in Brazil as well.
Chile may be the region’s best long-term market play, boasting some of the world’s highest direct normal irradiance, high demand from remote mining operations, and a potential national carbon tax. Investment surged to $1.6 billion in 2013 according to BNEF, pushing the country to second overall in Latin America, and filling a pipeline of 11GW new potential projects. Half of that portfolio has received environmental approval, and if even a fraction of those projects are built in the near term, we’re talking about a major solar success story.
Mexico also presents a compelling long-term solar growth opportunity. The country has set a 35 percent by 2024 non-fossil fuel power supply target and is also considering a carbon tax. Mexico is in the midst of reforming its energy sector which will boost solar substantially. We’ll get a better sense of where the market is at when the nation’s first “solar census” is released this year, but I think it’s another up and coming success story.
Panama stands out as a growth market for interesting reasons. The country is a dollarized economy with good interconnection access, intermodal transportation options via the Panama Canal, and favorable power prices that typically fluctuate between 20 and 40 cents per kWh. Greenwood Energy recently completed Panama’s first utility-scale solar system and is now about to start construction on a 44mw project with a PPA with the university of Panama.
Brazil is already Latin America’s largest renewable energy market in both installed capacity and investment, but it may also represent the region’s best short-term solar opportunity. 2012 legislation established favorable net metering terms, the country’s first national solar-specific capacity auction should occur later this year, and retail rates for solar are roughly around 15 cents per kilowatt-hour (kWh). A punishing drought is also threatening generation from Brazil’s traditional renewable energy leader, hydropower, which makes expanding solar capacity even more of an imperative.
Latin American Solar Power: A Win-Win Situation
Every new solar array that goes online in Latin America boosts that country’s energy security, allays concerns about the fluctuating costs of imported fuel, and improves environmental quality by cutting emissions and slowing climate change.
By that same token, every new solar array represents an opportunity for developers to expand the clean energy economy and turn a profit while decarbonizing our energy supply and providing energy security to a country.
Experience matters in this expanding market. By combining the need for clean electricity with the ability to navigate tricky local market nuances, developers can deliver sustainable projects on time and on budget, which is truly a win-win for everyone involved.
Camilo Patrignani is the board representative of Greenwood Energy’s parent company, the Libra Group, and currently serves as CEO of Greenwood Energy. Camilo graduated with a Bachelor of Business Administration and an MBA from the Wharton School of the University of Pennsylvania. He oversees the strategic direction of Greenwood Energy’s solar, waste-to-energy, and combined heat and power (CHP) business interests, and brings over 10 years’ experience in project finance to this role. Before joining the Libra Group, Camilo was Vice President of Fortress Investment Group and prior to that was a Director of UBS Investment Bank. Camilo is also personally committed to living with a zero carbon footprint, drives an electric car, and has installed solar panels on his own home.
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