Governments have proposed ambitious goals to increase the percentage of renewables in the coming years, where more than 15% of the more than US$58 billion that China invested in the energy sector in Latin America between 2000 and 2020 were allocated to renewable energies, according to data from Boston University.
By Fermin Koop
Santiago de Chile.- Latin America has almost everything it needs to make a transition to renewable energy: ambitious goals, huge solar and wind potential, and growing local industries. However, financing for the transition is still insufficient, with numerous barriers to overcome to reverse it.
The International Energy Agency (IEA) estimates that emerging countries, a category that includes much of the region, will need a trillion dollars a year between now and 2050 to finance their energy transition, compared to with the 150 billion dollars available on average in 2020.
Achieving this goal will require a leading role for the private sector, which must channel more than 70% of the investments, together with financing institutions, such as the Development Bank of Latin America (CAF), according to the IEA, which expects a more limited role of the public sector in energy investments.
Together with the CAF, the Inter-American Development Bank (IADB), the China Export-Import Bank and the United States Agency for International Development (USAID) have been the main actors in energy financing in Latin America in the last two decades.
However, the funds have not only been insufficient but have also been concentrated on fossil fuels over renewables, according to figures from the Latin American Economic Observatory. That is why the increase in financing must also be accompanied by a redirection, specialists agree.
“It is a political and not an economic problem,” said Leonardo Stanley, a researcher at the Center for the Study of State and Society (CEDES) in Argentina. “When looking at the costs, it is more rational to invest in renewables than in fossil fuels. But the decision of which sectors the money goes to is political from the lobby of the oil companies”.
The transition in Latin America
Latin America’s energy sector is responsible for almost half of the region’s greenhouse gas emissions, and around 25% of these come from electricity generation using fossil fuels, such as coal, oil and gas. . Transportation also accounts for a significant portion of these energy-related emissions.
Governments in the region have committed to reducing these emissions within the framework of the Paris Agreement on climate change. In fact, 15 countries have already adhered to the goal of reaching a 70% share of renewable energies in their energy matrixes by 2030 within the framework of the RELAC regional initiative.
This responds to the numerous advantages of Latin America to accelerate its energy transition. The region has reserves of strategic minerals, such as lithium, necessary to produce batteries and equipment for renewable energies, in addition to outstanding potential in solar and wind energy and green hydrogen.
However, achieving this will be very difficult without an increase in financing, as the presidents of Latin America have highlighted at the recent COP26 climate change summit. The argument is that the region is responsible for only 8% of global emissions and therefore should receive more support on its way to renewables.
Rebecca Ray, a researcher at the Global Development Policy Center at Boston University, argues that China can play a growing role in the energy transition of Latin America after the pandemic, in line with the investments already registered in solar and wind energy, electric mobility and lithium production.
More than 15% of the more than US$58 billion that China invested in the energy sector in Latin America between 2000 and 2020 went to renewable energy, according to data from Boston University. Argentina, Brazil, Bolivia and Chile have been the main recipients of this financing.
“If governments are looking to expand the renewables sector, they will find a partner in China. But they are the ones who have to promote the projects and frame the relationship with China in that way,” says Ray. “Chinese investors are not going to come here to convince governments to push renewables.”
Meanwhile, investment in fossil fuels continues, with most governments deciding to use natural gas as a transition fuel from oil and coal. This means public and private funds directed to gas infrastructure projects that could be used for renewables.
“For countries in the region that have a lot of income and jobs linked to fossil fuels, talking about transition is difficult,” said Jeremy Martin, vice president for Energy and Sustainability at the Institute of the Americas, a US think-tank. “Fossils are easy money, unlike going into renewables.”
The barriers in the transition
In addition to a commitment from governments to promote an energy transition, mobilizing financing in Latin America will require overcoming a series of obstacles, specialists agree. The first and most important is the cost of capital, higher than that of developed countries and other emerging regions.
This responds to several factors, such as the volatility of the economy, the constant risks of a devaluation, underdeveloped financial systems and political instability, according to an article by Mauricio Cárdenas, former Colombian Minister of Finance, and Luisa Palacios, a researcher at Columbia University.
Such is the case of Argentina, with more than 90 renewable energy projects that had been assigned today with an uncertain future after the country’s economic crisis, or that of Mexico, with energy investors disconcerted by the recent attempt by President Manuel Lopez Obrador to completely reform the energy sector.
“Dealing with these limitations is particularly important because financing the energy transition is not like financing fossil fuels,” Cárdenas and Palacios argue in the article. “In extractive industries, state or multinational companies invest because the revenues outweigh the greater economic and political risks.”
The transition is also a fiscal challenge for the governments of the region, whose economies depend heavily on the export of fossil fuels. Unlike renewables, which are not yet large sources of tax revenue and require government support such as subsidies for their development.
Reversing it will require broad reforms of the region’s tax systems, redirecting current fossil fuel subsidies to clean energy, Stanley argues in an analysis for the Carolina Foundation. Governments should even consider blocking public and private sector funding for fossils, she adds.
For Carlos de León, a Mexican economist specializing in the energy sector, it is very difficult for countries that depend on oil revenues, such as Mexico and Brazil, to have incentives to invest in renewable energy. Electromobility is one of the few exceptions, he maintains, with policies for more electric vehicles.
“The transition is not an isolated problem in one country, it is present throughout Latin America,” says de León. “Much more capital is needed and the challenge is where to get it from. If the region is going to align itself more with China as an ally in its transition or if new investment funds are going to be created. For now, everything remains promises.”
Article originally published by our allied medium Diálogo Chino