Insight: Jeremy Martin - Latin America’s important role in the Global Energy Market

April 2023, 5

With disruption in global energy markets, Latin America, with its significant traditional energy sources and an abundance of renewables, can play a critical role in market stability and regional energy security. Country and investment risks have always been major challenges for the region, particularly in the energy sector where long-term horizons for large-scale projects demand certainty and stability. Nonetheless, the region has a clear role to play in fostering energy security and the energy transition to support the Paris Agreement’s emissions reduction targets.

The Madrid Energy Conference (MEC), a joint venture between the Institute of the Americas, a California-based non-profit, and IPD Latin America, a strategic advisory firm, is based on the founding principle of cross-continental synergies for energy investment and development, with an emphasis on energy transition.
The fourth edition of MEC, scheduled for April 18-20, will address the energy trilemma - affordability, reliability, and sustainability - with an implicit imperative of inclusion. The event will feature a robust agenda and a diverse set of thought leaders from Latin America and Europe, who will discuss the balance between Energy Security and Energy Transition in the context of climate goals. Key themes such as regulating volatility, hydrogen markets, wind and solar deployment, finance and managing risk, and the resurgent role of natural gas and LNG in cross-continental energy dialogue will be covered.

Regulation
Regulators, often referred to as market referees, have a crucial responsibility in managing and ensuring competitive and reliable energy markets, and consequently, promoting economic development. This is particularly true in markets that have aggressively pursued opening and deregulation.
In Latin America and the Caribbean, the role of the state and state-owned enterprises is a fundamental aspect of the energy sector, presenting unique challenges for regulators and the regulatory model. Moreover, extreme volatility and uncertainty in recent times have put significant stress on both markets and regulators. Rapid technological advancements and disruptions have added additional layers of complexity to the daily activities of regulators, making the creation of regulation and corresponding regulatory bodies more challenging.

Decarbonization and Electrification
The decarbonization of the energy sector and the increased reliance on electricity and renewable sources require significant infrastructure development. Moving renewable molecules from distant generation sites to demand centers necessitates the deployment of major transmission and distribution projects. Some argue that there can be no transition without transmission. Additionally, reducing fossil fuel reliance in transport, a key area for achieving Paris Agreement targets, has led to a surge in electric vehicles, particularly in mass transit, with charging infrastructure also necessary to support the electrification of transport. Complementary energy storage solutions are also being deployed.

As the International Energy Agency highlights, "The oil and gas industry is facing increasing demands to clarify the implications of energy transitions for their operations and business models, and to explain the contributions that they can make to reducing greenhouse gas (GHG) emissions and to achieving the goals of the Paris Agreement." But beyond the oil and gas industry itself, there are additional sectors, notably steel and cement, that represent almost half of industry CO2 emissions, according to McKinsey.

To accelerate transformation along decarbonization pathways, particularly in hard-to-abate segments of the economy, fuel switching options such as hydrogen can be utilized. Evolving technologies, such as carbon capture and sequestration (CCS), are also receiving research and development investment.

Hydrogen
Hydrogen has captured the world’s attention as a possible vector and enabler of energy transition. There are several elements to consider, including technological advancements, shipping, and the future of long-haul hydrogen and ammonia exports from Latin America. Green hydrogen has garnered significant attention, with Latin America potentially becoming a major exporter, particularly to the European market. However, questions of certification, commercialization, and financing must be more adequately addressed and clarified to fully understand the role and opportunity for hydrogen.

Natural Gas and LNG
Natural gas has played a crucial role in the investment and development of most major markets in Latin America and the Caribbean, being a principal source of energy for domestic energy matrices. Additionally, natural gas has been a significant driver of regional integration efforts. However, despite the attention of governments and industry, natural gas markets have achieved uneven growth over the last decade.

In the wake of the COVID pandemic and with renewed attention on energy security, the natural gas sector is once again in the spotlight, being seen as a critical lever for economic development and growth. Despite this, countries have shifted between aspirations as LNG exporters to becoming buyers and importers. Furthermore, new policy prescriptions and regulatory changes have unfolded in key economies such as Argentina, Brazil, Colombia, and Mexico. Longstanding exporters, Bolivia and Trinidad & Tobago, face uncertainty with reserve replacement, while developments linking untapped Venezuelan natural gas fields with T&T’s infrastructure demand attention.

Wind and Solar
According to the International Energy Agency (IEA), renewables are set to become the largest source of global electricity generation by early 2025. Latin American and Caribbean countries have experienced a six-fold increase in installed wind energy capacity since 2013, reaching approximately 40 Gigawatts, as per Statista data.
Solar energy has also seen a surge in the last few years, driven by technological and economic advances, as well as dynamic auctions in key markets such as Chile, Brazil, Mexico, and Colombia. Despite significant expansion, the region only accounts for about 3.5% of global Solar PV capacity per Statista data. However, given the abundant solar radiation levels and policies driving distributed solar solutions, there is significant potential for increased deployment of solar energy solutions as a major growth area.

Similarly, wind projects in the region have been driven by technological and economic advances, largely due to auctions in Brazil, Argentina, Mexico, and Chile. Despite the important increase in wind energy in the region, there is still room for growth, as Latin America and the Caribbean only accounts for about 4.5% of global capacity per Statista data. Attention has also shifted to offshore opportunities in the region, particularly in Brazil, Argentina, Uruguay, and Colombia.

In summary, Latin America and the Caribbean has an abundance of natural resources critical to achieving international energy and climate goals, from renewables to hydrogen potential to critical minerals. The region’s ability to play a significant role, both domestically and globally, in these areas will be determined by the intersection of policy, regulation, and financing. This is especially true for the LAC-EU nexus.