Latin America Energy Sector 2023: The Good, the Bad and the Ugly

By Arthur Deakin  Posted February 19, 2023  In Energy

As 2023 unfolds, there are some impressive opportunities in Latin America’s energy sector, such as providing biomass for clean fuels, scaling up distributed generation and exporting green hydrogen derivatives. However, inadequate transmission is plaguing the region and impacting both consumers and businesses alike, increasing electricity costs and hampering the region’s cost-competitiveness. Above all, political interference may well be the biggest risk that the energy sector will face, as governmental policies could cripple growth in a wide range of areas. Below we delve into where the best LatAm energy opportunities will lie in 2023, as well as key risks to factor into investment plans with respect to specific countries.

The Good

NASA and other respected scientific institutions predict that the earth is roughly 75,000 to 100,000 years away from undergoing another Ice Age period. From now until then, human civilization must reduce emissions quickly enough to prevent catastrophic repercussions, ranging from sea levels making coastal cities uninhabitable to the growing presence of air-pollution related diseases.

Latin America will play a role that goes far beyond reducing its own emissions, as it will serve as a main raw material supplier for the energy transition. From providing the majority of the world’s green minerals such as lithium and copper (covered in AMI’s mining practice), to supplying producers with cheap hydrogen exports, low sulfur crude and biomass for sustainable aviation fuel, Latin America could serve as a key provider for the clean energy transition. This is a daunting, but exciting, task.

Akin to Saudi Arabia’s role in the oil industry, for Latin America to play a fundamental part in the clean energy transition it will have to provide cheap, reliable, and abundant raw material. One specific opportunity is in the provision of biomass used to produce clean fuels, such as sustainable aviation fuel (SAF) and renewable diesel. Globally, there is a major feedstock deficit that is hampering the ramp-up of cleaner fuels and raising the costs of the final product. In fact, the entire global feedstock of virgin and waste oils could provide just over 3% of our total oil demand. And that ignores the fact that virgin oils compete with food supply.

Countries that are nearby the U.S., such as Mexico and Colombia, that have an abundance of waste and residue, such as used cooking oil, agricultural waste, or animal fats, are likely to do particularly well. Countries with established soybean export industries, such as Brazil and Argentina, will also see increased demand for those products. Although the trend is to move away from feedstock that competes with the food industry, the chart below shows that soybean oil (which is widely used in the US) will still be the main feedstock used by the biofuel industry through 2027. 2nd and 3rd generation feedstock, such as forestry residue and algae, are likely to only become a reality in the later part of the decade.

Another sector that continues to grow in spite of bad policies is distributed generation. Markets that have done particularly well in the past few years, such as Brazil and Chile, have reached a level of maturity that have naturally led to the phasing out of subsidies (lower compensation is now provided for PMGD in Chile and subsidies in Brazil have begun to be phased out). Those markets will continue to grow but at a less ferocious pace, giving way to smaller, less-developed markets such as Puerto Rico, Panama, and Colombia, who will all see upwards of 3x growth in installed distributed generation capacity through 2030. Providers of solar modules, inverters, and transformers, such as Trina Solar and First Solar, will do particularly well. Having a comprehensive expansion strategy for each of these markets will ensure that companies position themselves appropriately to capture market share from their competitors.

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