Rio de Janeiro, Brazil — Latin America is primarily a least-cost driven generation market focused on tapping hydro resources and building thermal plants. But the region is set to become a global wind powerhouse in the coming decade with more than 40 GW of wind capacity by 2025. That, at least, is what IHS Emerging Energy Research forecasts in a recent report, which expects growth to be fuelled by an increasing regional push to diversify supply, supported by the maturing of the project development market and wind’s decline in costs through local manufacturing.
As Latin America has been relatively unaffected by the global recession, power demand has continued to rise, for example, at a compound annual growth rate of 4.5% for 2003—2008 in Brazil and 3.8% for 2003—2007 in Mexico. Meanwhile, traditional reliance on hydro and fossil fuels has led to a constrained supply during recent periods of unusually low precipitation, amid volatile oil prices. As a consequence, policymakers have paid greater attention to guaranteeing energy security with endogenous resources. While renewable energy policy on wealthier continents is driven by climate change concerns, in Latin America this issue remains secondary. Governments seek technologies that are proven, cost-competitive, and can spawn local industrial activity. Wind is a clear favourite, along with geothermal, biomass and mini-hydro.
Wind power has select growth opportunities to diversify supply and — led by Brazil, Mexico and Chile — Latin America is expected to reach 46 GW of total installed wind capacity by 2025, with a 12.6% compound annual growth rate of installations.
The study — ‘Latin America Wind Power Markets and Strategies: 2010 – 2025’ — concludes that Brazil will lead the region with 31.6 GW installed by 2025, followed by Mexico some way behind, with about 6.6 GW expected to be installed by then. Chile will also add significant wind power, boosted by the country’s Renewable Portfolio Standard.
Although wind penetration is still negligible, these countries have set the policy and industrial frameworks to initiate a virtuous circle that will sustain market growth, with EER analyst Vincent Gautier commenting: “Brazil’s market scale and proactive renewable energy policies are moving Latin America toward a key tipping point, from sporadic project activations to more steady wind power market growth. Improving government incentives from tenders to financing conditions are encouraging local developers, such as Dobreve Energia, Renova Energia, and CPFL, to lead the market.”
Certainly Brazil‘s market size, expected to represent 69% of the total installed capacity in 2025 in Latin America, positions the country as a leader in the region and a relevant supply hub. Demand and local content requirements are encouraging equipment manufacturers to invest, primarily in Brazil-based manufacturing of turbines of 1.5 MW rated capacity and larger. According to the analysis, beyond turbine assembly, an even larger opportunity is opening up to develop Brazil’s wind turbine component supply chain, with annual demand for more than 300 turbine units expected by 2011.
Turbines are sprouting to exploit Brazil’s abundant wind resources
Meanwhile, Mexico has the potential to challenge Brazil’s market leadership, although reduced political support suggests the overall market will stagnate until 2020, EER believes. Nonetheless, Gautier observes, “Mexico’s tenders, requiring established development and operational track records from developers, as well as significant financial requirements, make the market attractive to larger players.”
Chile’s growth in capacity is expected to peak at 280 MW installed in 2024, before dropping by a forecast 55% due to the achievement of its 10% renewable portfolio standard target.
Meanwhile, Peru, Argentina, Uruguay and Costa Rica host diverse market drivers, including supply security concerns and wind resources, although there is a lack of policy execution, the EER analysis contends.
Other countries indicate political will for renewable developement, but lack consistency. For example, Panama has seen multiple project cancellations and a pipeline disproportionate to its wind potential. Venezuela has also made repeated announcements on a political level, but implementation plans remain vague. Once awarded, the actual realisation of tendered projects will determine each country’s credibility, EER says.
Latin American Renewables Market
Latin America is an aggregation of markets with limited interconnection and diverse growth prospects due to differences in the power generation mix — including varying reliance on hydro — and in economic development, political orientation and wind resources. Wind power is a relative newcomer to Latin America, with yearly installations greater than 100 MW only in three of the last 10 years. This irregular activity has begun to stabilise thanks to maturing policies, resulting in a coherent context of growing pipeline, installations and supply.
The key factor in the growth of renewables, apart from competing lower-cost technologies, is country risk, which determines political will and policy support. Latin American markets are relatively immature, given that wind resources are plentiful and barely tapped in the face of an urgent need for added generation capacity. Governments show support for renewable energy, but this has failed to turn into a transparent framework in most countries. Local developers lack experience and can hinder industry growth by underestimating costs and creating a nebulous pipeline of non-economical projects, EER believes.
Governments have also given state utilities several important roles in the implementation of their renewable energy policies, including offtake agreements, tender organisation, and grid adaptation. These roles set market size, the type and the number of players that can enter the market, and the regions where development can occur. This centralization provides the clarity and security that allow lower financing costs, but can also create bottlenecks, for example delays to an Argentine tender. Mexico’s tenders, requiring established development and operational track records from developers, as well as significant financial requirements, cater to large players. Meanwhile Brazil, Uruguay, Argentina, Peru, Chile and Panama are aiming for greater competition with a more open development process for large projects, encouraging a larger number of developers to build pipelines. Elsewhere, single-project tenders organized by Costa Rican and some Caribbean utilities (in Dutch Antilles, Dominican Republic, Puerto Rico and Jamaica) generate sporadic competition.
Even so, “with Latin America’s large potential and limited installed capacity, developers are racing to secure market share in a single country, while those companies with more mature pipelines have initiated regional expansion. This trend is dominated by international players, while local firms presently find their home markets large enough,” says Gautier.
European wind players are poised to dominate wind power development and ownership in Latin America in the near term, leveraging their experience and financial resources. Iberdrola Renovables was the first player to develop a significant presence regionally, with operational projects in Brazil and Mexico. Other international developers such as Acciona Energia are now following suit. Indeed, most players focus on a single country as an entry into the Latin America wind market or as an attractive niche, led by Spanish and German players targeting Mexico and Brazil.
With experienced European firms leading the way, smaller, inexperienced greenfield players are being bypassed in securing sites in markets where foreign competition is welcome. Locally, IMPSA Wind is currently the only Latin America developer with regional ambition, as most major local engineering players and utilities apparently remain focused on moving along the experience curve domestically with the technology. Nonetheless, domestic industrial players and independent power producers are expected to move to challenge these foreign entrants by the latter half of the decade, according to the study.
Ownership market shares are unstable at the player level due to Latin America’s small base of capacity, but European companies clearly dominate the market, with 56% of installed capacity. Their near-term pipelines suggest this position will increase further.
Local entrepreneurs, meanwhile, are creating independent power producers (IPPs) that are securing sites, whereas local utilities lack the impetus and experience to build wind portfolios. But, even starting from a small base, the installed capacity is quickly growing, up from 0.5 GW at year-end 2008 to 1.3 GW at year-end 2009. Players’ market shares have therefore yet to stabilise. For example, commissioning its only operational Latin American project, the 250 MW Eurus installation, made Acciona Energía the market leader.
The improving demand and local content requirements also encourage OEMs to invest in domestic manufacturing capacity, but the ensuing build-out of component supply is key for the industry to deliver, with Europeans leading the push to address local content requirements with subcomponent production capacity.
Latin America’s inconsistent march toward a more developed wind power market is beginning to take shape around technology trends seen in other more mature regions. Tapping high-wind resource sites with lower-cost, more easily installed, proven machines has served to kick-start the market with projects in Costa Rica, Mexico, Brazil and Argentina. With increasing experience with the technology, EER anticipates imports of newer, larger models will reach Latin America with a steadier level of demand. Nonetheless, sub-1 MW class turbines will remain relevant. This segment has, on average, represented 45% of deliveries since 2005, declining from 100% to 9% now. The installation and O&M advantages of these machines suggest the market will remain active through the next decade.
The largest demand segment in the near term comes in the 1 MW to 1.99 MW class. OEMs’ reliance on these machines, announced plans for manufacturing focused on Brazilian assembly, and increasing orders for this model size suggest a market representing nearly 40% of annual installations through 2015 before larger machine production capacity becomes available locally. Larger 2 MW to 2.49 MW machines are gaining traction and EER anticipates players leading the move to installations of 2 MW machines (Enercon, Vestas and Suzlon) will continue to offer this product in greater quantities despite consistent demand for smaller machines. This segment will likely scale to nearly 50% of annual installations by 2015 before the onset of competition in larger segments and the migration of local production lines to 3 MW and larger models, EER concludes.
In the 2.50 MW to 2.99 MW class, competition is limited, EER says, but there is significant potential upscaling from 1 MW to 2 MW machines. Few OEMs with megawatt-size machines target this segment. However, US heavyweight GE Energy‘s roll-out of its 2.5xl machine in the region will make its impact on the market, as well as other 2.5 MW players.
In the longer term, a slow shift to 3 MW turbine platforms is expected until 2020. EER suggests that — assuming Latin America follows North America’s take-up of 3 MW and larger machines on a delayed timeline — this segment will likely scale from 10% to more than 40% of the total annual megawatts added regionally through 2025, with a stronger take up in the 2020—2025 period as older, smaller machines are phased out.
Orders placed for 2010-2011 delivery in Latin America, totalling nearly 4.5 GW of capacity, represent key developments in firming up the supply side of an industry that has, until recently, been more focused on solidifying demand. Significant developments include Brazilian developers, which began turbine sourcing discussions in early 2009 for PPA-winning projects from a capacity tender in December the previous year. Over 1 GW was initially committed in 2009 and a steady flow of firm turbine supply agreements are expected through 2010 to finalise these commitments.
Mexican orders are also gaining in scale, reflecting a short-term surge in wind demand — up to almost 1.8 GW of orders — as self-supply power purchase agreements (PPAs) for players such as CEMEX, and for local municipalities that are seeking power supply, provide IPP opportunities under CFE-backed private offtake deals.
Other markets offer one-off opportunities. Chile, Venezuela and Argentina are the region’s only other markets with 100 MW or more turbines on order.
Players taking on the risk of these markets include Enercon, Gamesa, Vestas and IMPSA Wind, although EER argues that Gamesa is likely to dominate in the near term. The Spanish supplier’s utility partner company Iberdrola, with its strong generation position in the region, has set up Gamesa for nearly 1 GW of orders in Mexico, which will push the manufacturer out in front as the leading regional player.
The $2 Billion Market
Given the growth trajectory of Latin America’s wind turbine market, underpinned by diverse country-specific demand drivers, EER anticipates a total investment level scaling from under $1 billion in 2009 to over $2.2 billion by 2015. Key assumptions behind this expected increase include falling prices in 2010-2011 as financing challenges soften market demand.
EER anticipates relatively flat demand in the region around 1.3 GW, with prices per MW installed falling. Brazil is still likely to depend on foreign imports at a premium, as well as Mexico. Leveling out in 2012-2013 as import competition increases, increased supplies from additional European, US, and Asian players will likely stabilise prices, the report’s authors conclude.
Furthermore, localisation and economies of scale are expected to emerge through 2015 and impact the cost curve. Beyond 2013, EER anticipates significant regional production capacity to be in place across the component supply chain to increase this downward price pressure.
David Appleyard is chief editor of Renewable Energy World
The full IHS Emerging Energy Research report on which this article is based: ‘Latin America Wind Power Markets and Strategies: 2010-2025’ can be found online here.
Sidebar: Brazil Stokes the Region’s Wind Development
Anticipated to account for the lion’s share of regional wind installations, Brazil is at the forefront of Latin American wind development with 31.6 GW forecast to be installed by 2025.
With a strong industrial base, Brazil combines a relatively stable business environment with abundant wind resources and the largest regional power demand. Other positive influences include soft loans and financing offered by the Brazilian Development Bank (BNDES) of up to 80% of project value, a strong manufacturing base — including Enercon, IMPSA, Alstom and GE — together with credible transmission expansion plans, and superior administrative experience.
Brazil is proving its ability to deliver, EER believes, and this is borne out with the strong growth of installations (18.5% CAGR) which will drive activity from the 263 MW installed in 2009 to some 4 GW anticipated installations in 2025. Brazil recently announced the winners of the second reserve energy auction for wind energy power purchase agreements (PPAs) in which 71 projects with a combined capacity of 1.81 GW were selected. The Dutch-style auction set a price cap of BRL189/MWh (US$104/MWh) for a 20-year PPA with national federal government-owned utility Eletrobrás. Winning bidders offered between BRL131/MWh ($72/MWh) and BRL153/MWh ($84/MWh) for offtake starting on 1 July, 2012 and this is expected to bolster EPC capacity investments and installations from 2011 onwards, while larger turbine supply contracts also point to more large-scale installations in 2011.
Saturation will remain a distant issue, as wind penetration will reach only 8.5% by 2025 and a mere 21.9% of resource potential will be realised. Meanwhile, unused turbines ordered for the PROINFA programme and 635 MW of announced turbine supply agreements (TSAs) guarantee prompt turbine supply. Wind projects also benefit from connection obligation and 50% reduction on grid tariffs. Other positive influences include a sparse population, cutting barriers to development at the best wind sites in the country’s northeast. But perhaps the key driver comes from the need for energy, with a capacity crunch forecast as soon as 2010-2012 due to under investment and strong demand growth of 4.5%/year CAGR.
However, the Brazilian wind market also faces several development obstacles. Key inhibitors include the low PPA price and the absence of experienced international developers on the auction winners’ list, which raises questions over project profitability. A lack of long-term incentives also potentially inhibits supply chain investments. Furthermore, with the conclusion of the auction there is little opportunity for additional sites and there are issues associated with the relatively untested bureaucracy in the country. EPC bottlenecks for transport, cranes and engineering are a strong barrier to growth in the near term, although the visibility provided by repeated large tenders will lead to their resolution.