Energy transition: The pending challenges for 'the cleanest region on the planet'

Latin America is taking important steps to face the challenge of making the transition to a green energy sector.

Countries such as Uruguay, Chile, Brazil and Colombia are advancing in planning and deepening their international commitments while trying to promote the development of industries such as wind and solar generation, battery storage and green hydrogen.

However, in other countries, such as Mexico, it seems that public policy objectives have become misaligned with energy transition commitments.

BNamericas spoke with Leonardo Beltrán, a non-resident fellow at the Institute of the Americas and former Mexican energy undersecretary, about the region's pending clean energy challenges, its leadership position and the future of new technologies.

BNamericas: After a few years of progress in the various countries in the region, how do you assess the state of the energy transition in Latin America and how is the region positioned for the challenges to come?

Beltrán: Latin America is the cleanest region on the planet in terms of electrical energy. Six out of every 10MW produced come from clean energy. That puts the region in an unbeatable spot. The other relevant element is that the region also has an extraordinary endowment of natural resources. It has a large number of rivers, the largest on the planet. It has extraordinary solar radiation in much of the region, with some standing out more than others, such as parts of Chile and Mexico. In wind terms, there are large resources throughout the region, both onshore and offshore. In geothermal, it has the neovolcanic axis, which crosses the entire region, with Mexico ranked as the fifth largest producer of geothermal electricity on the planet and other countries making progress, such as El Salvador and Ecuador. Naturally, it makes sense for the region to focus on taking advantage of this great natural wealth.

For this reason, the region today can speak from a position of leadership. Undoubtedly, marginally, the effort we have to make is relatively less than the stretch that other regions of the planet have to cover. In addition, because it’s such an urbanized region, it has a demand that is real. Eight out of 10 Latin Americans live in cities, so there is a very real demand, which is another incentive to invest in renewable resources. As an economic and sustainable development opportunity, we are located in a strategic place. Finally, the leadership that they are proposing at the international level is a sign that international cooperation is having an effect, and that it’s necessary to invest decisively and develop strategic alliances to develop the potential of each nation, contributing to improving the quality of life of the region.

In political terms, the most relevant fact that has occurred was that at COP26, hosted by Chile and Spain. Latin America committed to increasing its portfolio of clean electricity generation, by 2030 to 70% from the current 60%. It is an extraordinary sign of the commitments that the different countries have. This global commitment signed by an important part of the region places it in a leadership position in terms of clean energy. So you have the resources, you have the political commitment and you also have a matrix that already has a very clean base. In economic terms, this represents an unbeatable opportunity. Precisely, the leadership that the region is proposing is reflected in investments for the development of both raw materials – critical minerals, for example – as well as technology to take advantage of this endowment of resources and supply electricity to this region.

BNamericas: The outlook you outline looks quite positive, but in some countries we also see significant setbacks. What are the main challenges that hinder this vision of a clean continent?

Beltrán: The natural cycles of any democracy are observed. There are movements where authorities change and policies are being modified, which injects a dose of uncertainty for a given jurisdiction. For example, in Chile the government team has just changed and at the same time the constitution is changing. This injects a dose of uncertainty, despite the fact that the signs the government has sent are positive in terms of the use of renewable resources. As the rules of the game are changing, this obviously creates uncertainty to invest in projects that last decades.

In other places, the constitution is not changing, but the laws and regulations are. This is the case of Mexico, for example. With the change of administration, the new team is changing the rules of the game in the energy sector and, despite the potential and the important momentum that the renewables sector brought, the policy changed and this adds a layer of uncertainty for new projects. In other countries, for example in Ecuador, they are changing the rules of the game, but to favor the development of clean energies. There are auctions of large-scale projects. In Uruguay and Paraguay, which are pioneers in terms of their renewable energy matrix, the development of new clean energies is also being strongly promoted. In the region, the main bottlenecks are currently changes in public policy and the legal framework and regulatory changes. Another element that hinders [developments] is that the processes to grant permits take a long time, which also creates a bottleneck for the development of clean energy. A final relevant element is the infrastructure component. Transmission lines are limited both within the jurisdictions and interconnecting the region. A great area of opportunity should be found in strengthening the interconnections between countries to stimulate commercial exchange, attracting investment.

BNamericas: You mentioned the case of Mexico, where you were undersecretary of energy and played a relevant role in the 2013 reform. What is your assessment of the process that this country is going through, and what effects is it having on Mexico's commitments to the energy transition?

Beltrán: The government, in its official outlook, has already stated that it will not achieve the goals established in the electricity industry law, the energy transition law and the general climate change law. The national goals will not be met and, consequently, neither will the international ones. The policy changes are undoubted, but the materiality is still present. Mexico's endowment of natural resources is extraordinary in each of the different resources. The internal engine explains a relevant part of the growth of the economy, and this internal engine is affected by the new policies.

But Mexico has a portfolio of trade agreements that are still in effect and that, as soon as there is a new policy change, will allow economic activity to continue to develop. In addition, exporting companies that have connections with the whole world –automotive, cement, manufacturing, steel, petrochemical, hydrocarbon sectors – are beginning to make commitments, first voluntary and in some cases mandatory, regarding the sustainability of their operations. To the extent that Mexico cannot supply those clean energy needs, this will have a negative feedback in that circle, which can become a vicious circle. If public policy changes, a virtuous circle would naturally be generated, and the momentum that the industry saw until 2018 [when the current government took office] could be resumed, where in each of the clean energy auctions Mexico set an internationally competitive price.

BNamericas: In several Latin American countries that are still very dependent on fuels, natural gas is spoken of as a transition energy source. However, we see that the natural gas market is in great turmoil due to the Russian invasion of Ukraine, with sky-high prices and supply problems in Europe. Do you think this new scenario will make gas less attractive for some Latin American countries?

Beltrán: Naturally, in the countries that are more dependent on more polluting fuels, it’s a good alternative to move towards cleaner fuels. But it’s simply a transition fuel: the future still lies in having sources that don’t generate emissions, if we want to comply with a deep decarbonization route, as agreed by the different countries in the United Nations Framework Convention on Climate Change.

In countries that already have a very clean matrix, such as Brazil, perhaps the role of gas is not so decisive at the local level, although it is for the external sector. The incentive you have is to take advantage of the available resources to take advantage of the opportunities that are being generated in Europe or Asia. The incentives are in the short term to meet that demand. But in the medium and long term, the market will adjust and it will be necessary for the decarbonization route to continue, and even more so because of all the problems we’re seeing: more frequent droughts, sporadic rains, cultivated areas that have deteriorated, coastal sites that will progressively lose their modus vivendi, etc. It’s a process that doesn’t happen overnight, but in the medium and long term there is no doubt that the responsible and strategic action is to move towards a low-carbon future.

BNamericas: Several countries in Latin America have made important gestures to advance the development of the green hydrogen sector. In other regions of the world, especially Asia and Australia, gigantic-scale projects are already moving forward. Is our region behind in this matter?

Beltrán: Without a doubt, it’s very positive to observe these roadmaps that the different countries are drawing up. Chile was the first, then came Colombia, now Panama. Countries are starting to adjust and there’s an acceleration of public policy to take advantage of this opportunity. But in technological terms, development has occurred in other regions. Although you have installed capacity capable of adapting and developing the product, ultimately the technology is external. In that sense, we have the raw materials for generation, we also have some assets that make sense: heavy industry that’s difficult to decarbonize where there is potential demand, for example, some ports, the aviation sector. But in terms of technological development, the region is not ready. For this reason, we won’t take advantage of the added value produced by technological development, but rather we’ll take advantage of the raw materials, the primary industry, to generate the finished product.