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Environmental Finance

Environmental Finance

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Renewable Energy Investors Flock to Latin America

Investors are rushing to finance renewable energy projects in Latin America, as many countries in the region now have attractive incentives and investment-grade ratings.

“If you're not in a renewable project in Latin America and you’re a private equity investor, it's a little strange,” George Osorio, managing partner of New York-based private equity firm Conduit Capital, said at the Latin American and Caribbean Council on Renewable Energy's finance briefing in New York on Monday.

Renewable energy has become a very attractive business throughout Latin America because of the stability of cash flows, with the exception of Argentina, which cannot afford subsidies or tax incentives, he said.

Just seven years ago, Osorio said he questioned where the returns would come from when investing in Latin American renewable projects. But then a pullback in European market incentives led companies such as GE and Vestas to ship their products to a new market: Brazil.

“Latin America – Brazil to start – comes up with some of the best incentives you've ever seen in this sector,” he said. “I consider it a model to go after.”

These countries did not adopt feed-in tariffs, but the development banks in Brazil and Mexico provided inexpensive financing and attractive incentives that have led to some concern that Brazil in particular has become a “bubble waiting to burst”, Osorio said.

“In Brazil, I think it's mature,” he said. “In every other country, it’s beginning.”

Countries in the region provide helpful tax exemptions, although those can be taken away, Osorio noted. But they also organise wind-only or renewable-only bidding so developers do not have to compete with other types of technologies. And, in certain countries, distribution companies are required to buy this power under power purchase agreements.

Returns are also improving for these projects because of rapidly declining equipment costs. The returns Osorio said he is seeing for wind projects throughout the region range from 15% to 9%, allowing private equity firms to sell these assets at a nice profit, he said.

Latin American officials and stakeholders are becoming more sophisticated about financing, with a better understanding of mechanisms such as non-recourse debt, he said. Many of the local financing institutions, especially in Peru, are starting to provide bridge financing, Osorio added.

About five or six years ago, only Chile and Trinidad & Tobago had investment-grade ratings, but that number is up to eight countries. 

“That means you're getting better financing, especially for some of the major countries; some of the more creditworthy like Peru, Mexico, Brazil and Chile,” he said. “The strategic investors and some of the pension investors in those countries could only invest in investment-grade projects. Now, they look at the whole region in order to buy assets.”

Chile has a strong regulatory framework, is the most highly rated country in Latin America and has one of the fastest growing economies in the region, said Patricia McDougall, managing director of power project finance for Canada’s Scotiabank.

“It's a market-oriented economy, characterised by a high level of foreign trade,” she said. “It's open for foreign investment.”

Chile will need up to 15GW of new generating capacity within the next 5-10 years to meet increasing demand, nearly doubling the existing capacity of about 17GW, McDougall said. The country currently derives about 34% of its electricity from hydropower, with only 2% from biomass and 1% from wind, but there is a shift toward more renewable energy development.

Mexico also represents a good investment opportunity because the electricity industry will require an estimated 27GW of new capacity over the next 15 years to cover growing demand, added Leonie Maruani, director of power project finance for Latin America with Scotiabank in New York.

Mexico has put in place incentives such as 100% depreciation in the first year for all renewable energy capital investments and special transmission agreements for certain projects.

By. Gloria Gonzalez

Source: Environmental Finance


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