Market drivers align over Latin America

WORLDWIDE: The economic and regulatory uncertainty rife in Europe and the US and a slowdown in growth in the once seemingly unstoppable China has sent firms involved in all parts of the wind-power business searching the globe for new opportunities.

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Not by accident, many are alighting in South and Central America. The region's relatively dynamic economies are resisting recession, while market forces are aligning with financial policy initiatives to put Latin America on the map as the new El Dorado of the wind business.

National wind markets across the region are as different from one another as they are in Europe, Asia and North America. What the countries have in common, however, is an extraordinary wind resource in many areas, plus a particular mix of drivers for wind sector growth — a relatively virgin landscape for supply of new generating capacity; a history of lending by development banks and a hotly competitive supply chain leading to low equipment prices that help make wind an attractive economic option for electricity customers.

The electricity market in Latin America is fundamentally different from the traditional markets of Europe and North America, where uptake of wind power is mainly driven by policy-inspired regulation aimed at pushing out previously subsidised incumbent technologies in favour of new ones.

In contrast, wind energy feeding into the grid in Latin America is serving demand for more electricity rather than displacing kilowatt-hours from existing capacity. Wind is being chosen as the cheapest long-term option by customers confident in the knowledge they are buying into price stability and reduced dependency on global fuel markets.

Key conduits

Playing a big part in keeping costs down are development banks. These conduits of government aid provide loans under terms not available from private banks. Brazilian development bank BNDES is a vital player at national level, the Inter-American Development Bank is a regional player, the US Export-Import Bank provides bilateral trade finance and the World Bank's International Finance Corporation acts globally.

Development banks are more prepared to shoulder risk than commercial banks and will accept a lesser equity commitment from the wind project's sponsor. A bank providing up to 80% debt at low interest leaves only 20% of cost exposed to an equity investors' demand for higher returns. Available equity also goes further — financing more projects, more cheaply.

Equally important, by setting an investment precedent, development banks provide confidence in the markets to commercial lenders who have little or no experience of wind projects. In leading the investment charge, they create momentum in the sector.

Also serving to lower capital cost is a highly competitive wind supply chain. With growth slowing elsewhere, Latin American opportunities have assumed strategic importance for the international industry.

In the US, the market could drop from over 10GW this year to as low as 3GW next. Similar dynamics are at work in China. In Spain the imperative to secure export contracts is stronger still. With all eyes on Latin America, pricing will be a keen competitive parameter. Requirements for local manufacturing, such as in
Brazil, can affect the balance, but history has demonstrated wind industry ingenuity in making
the best of such trade barriers.

Great winds, strong demand for more generation, supportive financial policy and a rich supply chain are aligning to create a potentially true El Dorado. But the path to the fabled Latin American city of great riches and fabulous opportunity has never been clear. Latin America faces the same challenges with integrating wind into its power systems as faced by Europe and the US, with grid modernisation top of the list. The current time lag in transmission infrastructure for wind in Brazil is equally likely to be faced by the Chilean or the Central American power systems.

Other integration constraints such as grid congestion and the natural variability of wind generation, are likely to be more easily overcome than in more established markets. Today's wind turbines are better at providing grid support services to ease management of high volumes of wind than their predecessors. In countries such as Brazil, Peru and Mexico, flexible hydro power can balance wind's variability.

Perhaps most important in overcoming bumps in the road to a projected 20GW of wind in Latin America by 2020 are the lessons learned over 40 years of worldwide experience in building, financing, operating and managing wind power. Latin America is providing what may be a unique opportunity to apply those lessons in a real-world proving ground.

Carlos Albero is senior analyst in GL Garrad Hassan's Strategy and Policy Unit specialising in Latin American markets.

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