Skip to content

Other Featured

Latin American Policy Changes: Investing in Renewable Energy, Climate Change and Clean Technology

13 July 2010

By Ramon Olivas, Senior Associate, Emerging Energy & Environment LLC. 

Introduction on regional drivers for policy regime changes

Over the past couple of years, all the major markets in Latin America have introduced or updated different variations of regulatory and fiscal incentives to stimulate renewable energy, climate change mitigation and clean technology investment to foster the penetration rates of renewable energy and increase the energy efficiency of their domestic energy mixes.  At Emerging Energy & Environment (EEE), we perceive that these regulatory adjustments are a demonstration of their national commitment to global policies towards a low-carbon economy that will open both short and long-term investment opportunities in markets throughout Latin America.

In some cases, these stimuli have been designed to increase price or demand certainty via renewable portfolio standards, feed-in tariff schemes, fiscal incentives, or dedicated auctions for renewable energy.  Brazil has been a clear leader in the region. PROINFA, for example, provides financial incentives for renewable energies with schemes such as long-term loans covering up to 70% of project costs through national development bank, BNDES. BNDES has been a strong supporter of bioelectricity and other renewable energy projects.  Its asset financing in bioenergy totaled $9.8 billion in 2009, making it the largest provider of project finance to the sector globally [1].

Other markets like Costa Rica, Peru and Chile are also picking up the pace in modifying their policy framework for renewable and clean investments.  The Mexican government has recently received positive remarks by reducing the transmission rates for renewable energy, and the potential enactment of a Comprehensive Climate Change Law in anticipation to the Conference of the Parties 16 in Cancun this December.

Carbon legislation is likely to catalyze capital inflows into the region as countries move to introduce measures to limit emissions. An early mover under the Clean Development Mechanism (“CDM”), the region is expected to play an important role in the production and monetization of compliance credits following the beginning of Kyoto’s compliance period in 2013. EEE estimates that the range of potential carbon revenues for Latin American projects by 2020 may lie between $34 billion and $42 billion per year.

Furthermore, economic growth and low per capita energy consumption will create the need for renewable energy infrastructure, with wind, small hydropower, solar, geothermal, biomass, and other natural resources providing a competitive source of generation.  Low penetration of renewable generation technologies relative to the region’s resource potential provides an opportunity to develop new renewable energy projects. Excluding conventional hydro, the region has a relatively insignificant share of alternative energy generation resources in wind, solar, geothermal, small hydro, and biomass despite their abundant natural resources, which have remained historically untapped due to cost barriers. For instance, Mexico, Chile, Peru, Brazil, and Colombia have large wind resource bases with less than 5% utilized currently in installed or active project development. Technological improvements, combined with regulatory incentives, have made these generating sources more competitive for their increased acceptance and deployment.

Examples on recent policy instruments supporting RE/CC/CT in Latin America

Mexico’s wheeling charge reduction for RE generation

Mexico’s energy regulator, CRE, published in April 2010 a new methodology to calculate the transmission costs of renewable energy projects.  The regulation will require the state power company CFE to charge around US$2.5-5.0/MWh depending on the voltage, to transmit electricity from renewable and cogeneration sources on the national power system.  Previously, the tariffs were not standardized and required the additional expense of bringing a CFE expert to conduct a study on the site. The protocol brought a lot of uncertainty to investors about what the final price would be to pay CFE for transmission.  Depending on the specific conditions of each project, this new methodology could cut rates as much as 50%[2].

Costa Rica’s government analyzing changes in ICE

Costa Rica’s new government forecasts the need to add about 2GW over the next 10 years to meet the rising domestic demand, and analysts seem to agree that the nation’s energy monopoly, ICE, will not be able to deliver this growth without the participation of private players. Moreover, Costa Rica will need to invest almost US$500 million to meet its commitment to the Central American grid. To this end, outgoing President Óscar Arias’ government recently submitted a bill to the national assembly to modernize the sector by creating a new framework that would allow surplus generation to be allocated in the local and regional market. Producers would have the option to look for higher electricity prices, as they no longer will be required to sell power to ICE. This will optimize production since they currently either sell to ICE or lose the energy produced[3].

Peru’s renewable energy auction results in 2010

Late in February 2010, Osinergim, the Peruvian energy and mining investment regulator, awarded 26 projects in an auction to supply 500 MW from renewable energy over 20 years, with projects in biomass, wind, solar and hydro under 20MW.  This first auction was regarded as a great success by sector investors, given the certainty it provides on future cash flows for any given project. In June, Osinergim released consolidated bidding rules for a second auction for late 2010, with an expected supply of an additional 338 MW of hydro, as well as requirements for up to 419 and 8 GWh/year from biomass and solar respectively.


Latin America is experiencing a new wave of regulatory changes across the region to stimulate renewable energy, climate change mitigation and clean technology investment. Technological improvements and vastly untapped resources, combined with concrete stimulus from governments, are making these generating sources more competitive for their scalable deployment.

Regulatory incentives can be found both in the supply and demand curves of electricity, as well as affecting both the capacity and the actual generation of power from clean sources.  However, a detailed look on the nature of the most relevant incentives currently in place shows a trend on generation-based mechanisms on the supply of energy that will certainly have an effect on direct investment.

And in general, these policy changes provide a good reason to invest in the sector.  The correct interpretation of the different incentives deployed allows investors to identify specific opportunities in each Latin American market on the short-term, and anticipate major trends on the long-run that will open the door to new business opportunities in the supply-chain of the energy sector and others, such as transportation and construction. In 2002, the Brazilian government reduced the industrial production tax for manufacturers of ethanol-powered cars and subsidies were introduced for the purchase of new ethanol cars. It also introduced credits for the sugar industry to cover storage costs in order to guarantee ethanol supplies. As a consequence, by the end of 2008, ethanol in Brazil accounted for more than 52% of fuel consumption by light vehicles[5]. Our expectation is to find similar examples of technology deployment and market shifts in the coming years in all major markets of Latin America.


1 Sources: BN Americas. ISI Emerging Markets. Center for American and International Law.

2 David Biller, Business News Americas, May 28th, 2010.

3 Eduardo Zúñiga, Arias & Muñoz, Interview, Business News Americas.  May 7, 2010.

4 Sources: Brazil: Tendencias: Consultoria Integrada.  Industry Report.  September 2008. BN Americas., Ministry of Mines and Energy, Energetic Matrix 2030.  Central America: Regional energy strategy. Chile: Reference to legislation in English. BN Americas 1. BN Americas 2. BN Americas 3. BN Americas 4. BN Americas 5. Peru: BN Americas. Government’s decree 1.  Government’s decree 2.  Mexico: BN Americas 1. BN Americas 2.

 5  HSBC Brazil Sugar and Ethanol Industry Report, 2009.