My fiancée and I are planning our honeymoon at the moment. After weeks of looking at brochures we’re no closer to booking anything, but I have become pretty familiar with how Latin American countries sell themselves to tourists. The pitch generally goes something like this: “[insert country name] is a land of contrasts. A long coastline is set against some of the world’s highest mountains, while the interior has vast swathes of jungle/desert/wilderness to explore.” It’s not that they’re lying. Indeed nearly every Latin American country I’ve ever been to has spectacular landscapes. But for those competing for the tourist dollar, so do all their neighbours, unfortunately.
But this breathtaking, extreme geography isn’t just good for tourism. It also creates ideal conditions for renewable energy. Until now, renewable technologies such as wind and solar power have been slow to get off the ground in Latin America, but that looks like it’s starting to change. And that should throw up exciting opportunities for investors. And today I’ll share with you one great way to get in on this opportunity.
Why Latin America had a slow uptake of renewable energy
The daddy of all renewable energy is hydropower. Humans have been harnessing it for thousands of years, while modern large-scale hydropower plants are common across the world – including in Latin America. However, the next wave of renewable technologies – solar and wind – have been much slower to take off there. Indeed, according to the latest figures from the Global Wind Energy Council, Latin America has just 1.3% of the world’s installed wind power capacity, while its share of the solar market is even smaller.
One reason is that fancy solar panels or wind turbines were long seen as a luxury for rich countries to ease their consciences. It was not a serious way to provide power. Back in 2000, for example, these new technologies were far more expensive than a traditional thermal – coal, gas or oil – power plant.
Latin America also had more pressing priorities. Given the levels of poverty, many governments understandably preferred to subsidise food or schooling rather than solar panels.
There was also a lack of interest from the international renewable energy firms. In the last decade global renewable investment has shot up, first in Europe, then America and finally China. According to Bloomberg New Energy Finance, clean energy investment grew from $54bn in 2004 to $302bn in 2011, with around 80% of that money being spent in those three regions. The massive rise in demand, fuelled by subsidy schemes in the West and a pro-renewable five-year-plan in China, put enormous pressure on manufacturers. With waiting times going up, capacity constraints across the board and more contracts than they could handle, few firms felt the need to bother with Latin America.
What’s different now?
But in the last few years a lot of the factors listed above have disappeared or reversed completely.
The most important is the cost of renewable energy. The flood of investment in the last decade has encouraged competing manufacturers to design ever more efficient turbines and solar panels. As a result, the cost per kilowatt hour (kWh) has come tumbling down.
The rise of Chinese renewable manufacturers has also helped to reduce prices. While Europe went about subsiding the consumption of renewable energy, the Chinese shrewdly spent their subsidies on its production. Thanks to various types of government support – and lots of hard work and ingenuity – China now has several of the world’s largest renewable energy firms. And their low-cost products are helping to reduce prices further still.
Another change has been the collapse of renewable energy investment in Europe. Countries such as Spain, Italy and the UK have cut back on generous subsidies as they struggle to get to grips with their debt.
Of course, these developments haven’t been good for renewable energy firms. Unsurprisingly the collapse of a major market, combined with falling prices, has hit the industry hard. Many companies have gone bankrupt, while others now trade at a fraction of their former price. Even the seemingly all-conquering Chinese players are struggling. For example, this week Chinese solar firm Suntech, which was once the world’s biggest, lurched towards bankruptcy when it defaulted on some of its debt.
All in all it’s been a painful time for renewable energy investors, but it has a silver lining for Latin America. Desperate renewable energy firms are now looking for new markets, and Latin America looks very attractive.
Why Latin America looks good
Last week I attended the Latin American Investment Forum (LAIF) in London. LAIF is Britain’s biggest Latin American-focused investment conference and I’ve attended every year since it launched in 2011. Over the years it’s been interesting to see how the event has grown in size and importance as more UK investors wake up to the region’s potential.
This year, one of the main themes was renewable energy. I was particularly struck by comments from Eduardo Bozo, a director at Actis, a private equity firm that specialises in emerging markets: “Latin America has some of the best conditions in the world for renewable energy. For example if you put a wind turbine in the right place in Honduras, it will generate twice as much power as the same turbine in any part of Germany.”
Thanks to their unique geography and climatic conditions, many Central American countries have some of the best wind potential in the world, says Bozo.
Another factor, says Bozo, is that the competition is weak. Countries such as Nicaragua and Honduras were relying on oil-fuelled plants that have become incredibly expensive over the last ten years.
This isn’t just idle conference talk either. Over the last few years Actis has successfully invested hundreds of millions of pounds in Latin American renewable energy.
A healthy economic climate is vital
But it’s not just Central America that stands out. Thanks to the combination of falling prices and favourable conditions, solar and wind power plants have now achieved ‘grid parity’ – the point when they are similarly priced to traditional thermal plants – in several parts of Latin America.
But making large-scale investments happen isn’t just about having lots of sun and wind. The economic and political conditions also have to be right.
And in that regard, most Latin American countries are in a far better situation now than they were at the beginning of the century. Rapid economic growth is causing increased demand for electricity. Meanwhile, Latin America’s success at managing huge inflows of foreign direct investment in recent years makes it a more attractive destination for the type of investors that finance large renewable energy projects.
Following the conference, I arranged an interview with Matías Mori, the head of Chile’s foreign investment committee. Matías is the main point of contact for major international investors and helps to shape investment trends in the country. He told me that Chile is keen for international investors to launch renewable projects in the country. “At the moment we are very dependent on fossil fuels and hydro. But we have great potential for both solar and wind power.” While not willing to enter into costly feed-in tariffs the government has unveiled a series of tax-breaks and incentives to encourage investment in a string of projects. And, says Mori, there’s a lot of interest from international investors.
A great way to get in on this play
It’s clear that Latin America is going to be one of the fastest growing markets for renewable energy in the coming years. But, just like my honeymoon, I find it hard to pick out one country in particular.
So one interesting way to play the story across the whole region could be Spanish wind turbine manufacturer Gamesa (GAM:SM). The firm makes and installs turbines and also manages wind farms. Like many of its peers the firm has had a terrible few years. Indeed its shares are down more than 80% since late 2009. Just last month it wrote off €650m of losses stemming from reduced demand and plant closures.
One of its main markets, Europe, is hardly rolling in cash, while growth in its other big customer, China, is being held up by grid constraints. Little surprise then that Gamesa is pinning its hopes on Latin America.
In its latest business plan the firm outlined its commitment to the region. In 2011 Latin America accounted for just 17% of the group’s sales in electrical power terms. This year that’s due to hit 47%. Latin America is now the firm’s biggest market, accounting for 32% of overall sales.
Buying a firm that has fallen so far, so quickly is never easy but there are several signs that Gamesa may be turning things around. Last year the board replaced Jorge Calvet, the executive chairman who had overseen the disastrous share price slide. The new executive chairman, Ignacio Martin, has an impressive record at large industrial groups such as GKN and Alcatel Spain. He says he will be focused on cutting costs and winning new business in Latin America. The new plan has convinced a Banesto Bolsa analyst, Antonio Cruz Guzmán, who has a €3.92 target rating for the stock which currently trades at €2.50.
Of course, Gamesa won’t be the only renewable firm trying to up its Latin American exposure. But its success in winning so many Latin American contracts in the last few years bodes well for the future.
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