For a PDF version of this roundtable, click here.

Editor's note

The big story this year in Latin America, as elsewhere in the world, has been the Covid-19 pandemic. And as far as power and renewable energy projects are concerned, the main worry has shifted away from immediate supply chain issues to the problem of short-term demand destruction.

But there is more going on in Latin America than just coronavirus. In Brazil, for instance, where power purchase agreements have typically been denominated in local currency, and projects, therefore, have been financed by local institutions, there are efforts in some corners of the private sector to introduce dollar-denominated contracts that could attract capital from overseas.

Meanwhile, many countries across Latin America have developed and continue to build out large renewable energy fleets. While this has lessened an overreliance on hydro that has historically led to wild swings in power prices from year to year, it also brings its own intermittency issues, as market participants have seen as they look north to California.

But every new energy challenge brings new opportunities, and Latin American dealmakers are already looking ahead to the technologies that will be needed to plug the gap – battery storage and possibly green hydrogen.

On the financing side, development finance institutions continue to be the mainstay for projects located in much of Latin America, with commercial banks carefully picking their spots in more developed economies like Mexico, Chile, Peru and Colombia.

Lending to power and renewable energy projects in each of these countries still bears its own risks, however. In Chile, some lenders were chastened by the experience of financing merchant solar projects in the in the past decade, while in both Chile and Mexico the prospects of political instability and regulatory uncertainty remain top of mind. In Peru, on the other hand, the problem is a lack of projects in the first place, as the political class grapples with the fall-out of the Odebrecht scandal.

It is no secret that investing in Latin American infrastructure can be highly rewarding – but it pays to do your homework first. So, to bring you up-to-date on the latest developments, PFR brought together a panel of officials from three leading developers in the region along with representatives from lenders MUFG and IDB Invest.

Enjoy!

Richard Metcalf

Editor




PFR: This year has been very different because of the Covid-19 pandemic, which has impacted power markets in the region. What will the effects of the pandemic be in the long term?

Helmut Kantner, Austrian Solar: There certainly has been an impact on the reduction in power consumption, which we have seen in most parts of the world, if not all. Even so, I think renewable energies will have a strong comeback, because there is more and more liquidity available in the world from pension funds and other cash deposits that require to be invested.

             If I look back, we have financed our projects with international commercial banks, a lot of the time from Asian countries. More and more, we can see European entities eager to finance those, and not only to finance. As I said, there are even pension funds going into projects, full equity, because they’re flooded with cash. And these investments are going to renewables.

So I think this will have a very positive impact on renewables, particularly in those regions which are politically and economically stable. In my opinion, Chile is one of the leading ones in Latin America.

Rafael Matas, IDB Invest: From the IDB Invest side, being as we are counter-cyclical, we’re experiencing more requests for financing in the region. The projects in which we are mandated have been moving forward normally. As a general trend in renewable energy, we are seeing the need for liquidity in the long term, versus enhancements like guarantees or wraps.

             And as Helmut said, we need to find a way to bring institutional investors and infrastructure funds to the region. At IDB Invest, we are trying to use several structures in order to bring them in. Obviously, the A/B bond is one of them, and we have other products available, like the thematic bonds, such as the green bonds. We have just launched the green transmission line certificate and we have liquidity lines available as well.

We’ll need to see the impact of the pandemic on the public energy utilities, because people are consuming less, and there have been certain targeted energy bill reliefs.

Ralph Scholtz, MUFG: Looking forward, there are at least three countries that are on negative watch. A downgrade could affect the appetite from the lender community and from a commercial bank perspective. So we’re on the opposite side from the IDB, in that sense.

             During the early stages of the Covid pandemic, due diligence was delayed because of having to assess what the impact of Covid would be on the construction schedule, delivery of equipment and so on. Those issues are now sort of in the past, because every assessment now includes a Covid-like delay. And I think the manufacturers have also had contingency plans for deliveries.

             Finally, the first part of the crisis was very liquidity-intensive, and the sovereign spreads widened tremendously, which really created uncertainty as to what the lending spreads could be from the markets. But those are now in some cases lower than they were pre-Covid. So projects have access to good rates, there is appetite, and as long as countries are able to reactivate their economies and not face downgrades, there shouldn't be an ongoing lasting impact from Covid.

Aurelio Bustilho, Enel Americas: We have a distribution business, so that’s different. We saw the impact of a strong demand reduction with lockdowns, and despite this, we maintained our ESG [environmental, social and governance] focus.

The first thing we looked at was the cash flow, after taking care of our employees and customers. Our activities are very correlated with the economic cycle, so we maintained our suppliers and our workforce. We didn’t dismiss or destroy them by having a short-term approach. Our focus is to maintain our business in a sustainable way, taking care of all stakeholders.

In terms of renewables, of course, we did have some normal delays considering the situation. But we didn’t change our strategies due to Covid. We saw Covid accelerate our vision for the future that climate change and governance are important. Our goal was to maintain our ESG focus, not destroying this concept of sustainability and the value that we add to our suppliers, to our employees, to our communities, to climate change.

For example, we maintained the projects in renewables in the region and the capex deployment. In our vision, the strategy in the long term will not change.

We still believe that people will stay in the cities. That’s why we are developing distributed generation, developing services to our customer base, like financial services related to energy and consumption, public lighting, demand response, e-mobility. What happened actually was an acceleration of the transformation in the industry.

PFR: How are both sponsors and banks managing to mitigate currency risk?

Bustilho, Enel Americas: In our case, most of our revenues are in local currency. In Brazil, Colombia, Peru, Argentina, also in Chile. So we can do nothing about translation effects because we report in US dollars. But we give preference to local financing, especially in Brazil, with Banco Nordeste, BNDES, and also local bond issuances.

             We also use inter-company loans from Enel in order to use the sources from our global program of SDG [sustainable development goals]-linked-bonds to finance projects in South America. In any case, we always try to balance revenues and debt in local currency.

Matas, IDB Invest: From our side, we have local currency in Brazil, Colombia and Mexico. And we are also trying to channel existing liquidity in dollars through the countries that need local currency. As such we are working on the possibility of benefiting from a guarantee with bilateral institutions, such as [French development finance institution] Proparco, that would allow us to fund a larger amount in local currency. In Colombia, they [Proparco] provide us with a guarantee so we can fund more in Colombian pesos. We also have the possibility of funding in local currency through swaps, whenever it makes economic sense.

Scholtz, MUFG: I hate to state the obvious, but in structured finance, in order to achieve high leverage, the structures can’t face a lot of currency risk. So we try to match the revenues of the project to the financing currencies in order to not have that risk.

Elie Villeda, First Solar: Development banks in these countries have the benefit of providing even lower interest rates. But the FX swaps offered by development banks, such as Exim Bank, could become a little bit more attractive in the long term. So it could be competitive as well.

PFR: In Brazil, local currency is key as PPAs are not in US dollars. Could this change in the future?

Villeda, First Solar: From our side, we’re seeing that there is an appetite for US dollar-denominated PPAs, and that’s something that we have seen in a specific part of Brazil. It’s not a generality, but this is growing in the long term. These may be issues that have to do with the volatility of the real.

Matas, IDB Invest: Yes, actually, we’re following a couple of PPAs in dollars with strong developers and offtakers. This is a good solution to bring more liquidity to the Brazilian market to fund renewable energy projects, based on having solid and creditworthy counterparties.

Bustilho, Enel Americas: If I may add, it depends on the industry. We see this, for example, with some clients from mining businesses or exporters in Brazil. They are requiring some kind of indexation to US dollars. The market is afraid of foreign currency volatility. On the other hand, it can be more attractive to some industries in which it makes sense with their production and selling prices.

             Let me tell you that Brazil is moving through a very intense liberalization of the energy market, so there is room to have this kind of alternative of exchange of US dollar prices. The market needs to develop more alternatives in terms of financing, and international financing; surely, having contracts in dollars can leverage those alternatives of funding.

Matas, IDB Invest: In Brazil, there’s scarce long-term liquidity, so it’s important to co-finance with the local development banks and try to find a way to develop more capital markets. There is a very vibrant debenture market. We need to set structures so that renewable energy projects can be co-financed together with the issuance of debentures in the long term.

             In the past, we provided guarantees to debenture issuances to enhance the ratings, so there was more liquidity, more tenor and better pricing. But at this juncture I believe the market is asking more for liquidity in the long-term, than enhancements; although structures such as the total credit guarantees could be successfully provided on a case by case basis.

Scholtz, MUFG: I think for a commercial bank, we’ve been quite active, financing dollar contracts, whether in pipelines or offshore, FPSOs, that have mainly Petrobras as offtaker and other dollar generators. In a country with a credit rating like Brazil’s, it’s important that the offtakers have the ability to withstand devaluation and currency fluctuations. Particularly, if they’re signing long-term dollar contracts, they should have access to some dollar revenue streams in their business.

PFR: There have also been more bilateral contracts with corporate offtakers.

Scholtz, MUFG: Correct, and those would be of great interest to us.

PFR: Brazil has been dominated by hydro power. What do you see as the future of solar and wind in the country?

Villeda, First Solar: This was a strange year for Brazil, and maybe my colleagues from Brazil can add more. It wasn’t forecasted that it would be a rainy year and because of that, hydropower has taken priority again in the Brazilian government. It’s easier because they can control it with the prices and it’s good for the overall market.

             But it’s still forecasted that we will have dry seasons in the following years, so I think there is a business case for integrating more solar and wind into the energy matrix. A similar story is happening in Mexico, where they also want to add more hydro, because the government is the main developer of hydro in the country.

             So there are similarities between Brazil and Mexico, that they want to have a baseline and a baseload of hydro power. But the business case for solar and wind is still there and it’s still strong.

Bustilho, Enel Americas: Totally agree. Last year, for example, the solar and wind generation, especially in the Northeast of Brazil, saved Brazil from rationing. Nobody says that, but it shows the importance of what Brazil did during the last 10 years in terms of incentivizing renewables, especially solar and wind. So of course, we are in a different situation this year, but I do not think that the government will change in that regard.

             On the other hand, the government wants to push the gas market. They are approving the gas law in order to open this market. They are discussing adding these to the baseload of generation. It is not decided yet, but anyway I think it is more complementary to the matrix. The government's plan is to increase renewables. It is a consensus, there is no doubt about it. It’s different, maybe, to other countries in the region, but I think Brazil will keep on moving faster on this direction through renewables.

Matas, IDB Invest: Yes, I agree. Brazil's dependence on hydro power makes pricing prone to volatility and seasonality, as it depends on natural phenomena. It’s similar to what happened in Uruguay, where the matrix was 35% or 40% hydro. Now it's approximately 50% renewable, and that was not the case in 2011. The main goal is just to avoid all these fluctuations. But I fully agree, I think there are huge prospects for renewables in Brazil still, definitely.

Scholtz, MUFG: What comes to mind is what’s happening in California, where they’ve pushed renewables tremendously, and now there’s instability in the grid, which is causing blackouts, and the state is pushing a battery project now in order to fill a void of how to manage the demand-supply fluctuation. In other countries, maybe they’ll use gas, but you need power to be there when the supply is low, and all the renewables rely on natural forces that are outside the control of the parties.

Kantner, Austrian Solar: Today. In the future, this may be green hydrogen.

PFR: Let’s talk about Chile. In the past few months, multiple debt packages and private placements have closed to finance both solar and wind assets. Is the Chilean market overcrowded or is there financing still available for projects?

Kantner, Austrian Solar: We as AustrianSolar underestimated the volume of PMGD  [Pequeño Medio de Generación Distribuida, or small distributed generation] projects. Recently, as I’m sure you are aware, there have been some legal changes to that, so I think there’s a slight drawback for the future. There are also big projects needed to compensate for the coal power which is being taken out of the system step by step. So big power plants from people like Enel – which we have here – or some of their competitors, coming online within the next two to three years.

These, together with – and here I refer to what we have seen in California – some kind of batteries or, maybe, in the near future, hydrogen, which is renewable energy available on demand, will come in.

             In terms of financing, we can see more and more new sponsors getting into the market and people are less scared to invest in merchant-based projects. In 2013, 2014, 2015, there were a couple of projects being financed on a merchant basis, but they got into difficulties, so they had to be refinanced in order not to get into default. The banks closed to merchant projects fairly completely. If you didn’t have a certain percentage of PPA coverage, they didn’t look at these projects to be financed.

             Right now, they’re open again. So, all in all, financing is available, also for new actors in the market. From 2016 to 2018, we saw financing coming out from the US and Asia, with some few exceptions from Europe. Recently, we’ve seen more and more appetite from European commercial banks who want to participate in these financings in one way or the other.

Villeda, First Solar: I do think that there is a little oversupply in the Chilean market, but it’s because of this economic crisis. The demand destruction that’s happened because of coronavirus is contributing to this oversupply. But still you have fundamentals in the market that are driving towards even a lack of projects in the long term. You have the decarbonization plan of the Chilean market, which could drive even further the demand for projects. It all depends on Chile’s economic recovery. But I do think that this oversupply will be a short-term issue.

Bustilho, Enel Americas: Just to add that Chile is passing through a very big transformation. What we saw last year, I mean the big riots paralyzing the country due to its inequality, was something never seen before. We have to take into consideration the big transformation that the country’s passing through right now. In October, we have a big referendum regarding constitutional changes, which makes it very important for the government to have a clear path.

On the energy industry, we see a very big effort from the government and companies to accelerate the decarbonization process. In our case, we’re closing our coal plants.

Financing, I agree with Helmut, is not a problem considering the alternatives in local and foreign market. The issue is how we can assure these long-term PPAs with price volatility.

On our side, we are deploying our solar and wind projects. We are also analyzing green hydrogen processes generated with renewable sources. The country has a very good and stable market and regulation – that won't change.

Matas, IDB Invest: In Chile, being investment grade, there’s more liquidity in the market, and actually I think commercial banks can be more aggressive, which is fine for us because we need to be where are needed. We’re just doing a portfolio of wind and solar, a large portfolio. One very good feature of Chile is the presence of institutional investors. Being investment grade, it is a country that fits better their appetite for more creditworthy investments.

Scholtz, MUFG: Chile’s been a mainstay for our bank in terms of project finance for the past 10 years. We continue to view the country favorably, despite the riots that occurred and the deferral mechanism that was implemented. We recently closed a deal, actually, with IDB Invest for a renewable portfolio, so we continue to be active and are looking forward to considering more financing there.

PFR: We mentioned commercial banks financing merchant-based projects but prices in the spot market have dropped. Are those financings still a possibility?

Matas, IDB Invest: We can take some limited spot price risk. I’m not sure if in Chile that would be the case. We have done it in Brazil, which has a legal floor on the spot price, which helps in terms of the sizing. We’ve taken some limited tail of spot in Mexico as well but complemented by cash sweeps and higher reserve accounts. In Chile, we would take a more conservative approach drawing on precedents.

             But in any case, there was a major drop in the price, so we would take limited spot risk. I’m talking like 20% of the tail, something like that. But probably we would need to take a view in Chile. I am interested, Ralph, to see what’s your position on spot in Chile.

Scholtz, MUFG: What we’ve done today is mainly contracted. Our bank is very active in the merchant power space in the US, and we take limited amounts of merchant profile-type projects. But in the US, financial markets are much more developed, and there’s a segmentation of players who want to take more risk for a higher price, for example.

             I think in Latin America the challenge is that there’s a much more limited sub-investment grade appetite. So the market’s limited to development banks, who sometimes take that risk, and commercial banks, who don't like to take the risk. Then you have export credit agencies or national development banks that are supporting their home team by supporting projects or the local markets.

             In Chile, local banks financed some of the merchant deals a few years ago, but the prices in Chile were very high, and they dropped significantly, and a lot of those financings were challenged and restructured, or some entered bankruptcy.

             So I would say if you're looking to finance a pure merchant deal, don’t come to MUFG. However, every project has some merchant unknown price component to it, and we have to take those into consideration. For example, in Chile, the PPA start dates are not tied to the project. They are more of a financial obligation, so you have to start delivering power on a certain date, and the project may not be ready. You need to have either a backup PPA or take some merchant risk for a few months, for example. Or if you're producing less than what your PPA obligation is, you may have to buy power, so you have some merchant components there. We can evaluate that type of merchant risk on a case-by-case basis.       

PFR: I also wanted to ask you about the PMGD projects that are being developed in Chile. There are a lot of players getting into this space. Is this trend likely to continue?

Villeda, First Solar: When it started, the PMGD projects were really good, for example, for wind companies. It’s a mechanism that is still growing in Chile as something that could help the country alleviate issues of transmission. Since it doesn't have too many risks, the project could be successful and could be easier.

             Companies are still learning the issues of PMGDs day-by-day, finding those niches where they can even make more money.

Maybe they will be a little bit suffocated by the big projects because of this carbon-efficient trend, but as well, it will help Chile to secure those goals that they are setting themselves. So it’s part of the strategy, and I think that, definitely, we will be hearing about it in the medium term as well.         

Busilho, Enel Americas: Yes, growing PMGDs is also our focus in the region, and we believe it’s the part of the solution, especially for cities, to have generation injected nearby the consumption. Not only in Chile, but also in Brazil and Colombia. We are developing lots of projects at a national level of distributed generation. I believe that Chile will also move this way. There is no turning back.

PFR: Let’s talk about Mexico. After the administration cancelled the fourth auction, many developers turned to corporate offtakers. How do sponsors and banks deal with non-investment grade offtakers in Mexico?

Villeda, First Solar: The cancellation of the auction led to more private PPAs. The companies that are involved in those PPAs don't have investment grade. But what we are seeing is that they put it in a pool, so that banks could see it as a whole. One example could be for the hotels in the Yucatan Peninsula or the Baja California Peninsula.

These projects go through a type of virtual PPA, where they don’t subscribe to the PPA directly with the hotel companies, but rather they do a virtual PPA with the main project developer. It’s kind of a merchant scheme so that the project is not affected by the main PPA contractors.

These types of pools and schemes are growing in Mexico. It’s kind of complicated because the regulation in Mexico doesn’t allow you to trade energy directly, so the only way to trade energy and do this type of bilateral contract is through the grid operator.

PFR: Mexico’s government has put forth several measures to limit renewables starting in the spring. I was wondering if project financings will be able to close in this scenario, or if there’s too much risk involved.

Scholtz, MUFG: We have tried to parse the risks. One of the risks is the interconnection of the projects. So if they’re in the construction period, it’s an issue if there’s a risk that the government can take an action, which prevents the project from economically interconnecting efficiently and using the grid.   But if the project is in operation, the government to date has not challenged projects that are already interconnected, so we’ve kind of looked at the world from that perspective.

But it is an issue. The government has taken several actions against renewables and private sector projects, and that’s certainly concerning to banks because any regulatory change that could affect the cash flow is going to be of primary concern to any lenders.

Villeda, First Solar: I was going to add, maybe to give a little bit more confidence to the financial institutions, that companies in Mexico are relying on the rule of law. Those changes that the government has proposed haven't even taken effect, really, and have been stopped because they were anti-market, anti-competitive. The rule of law has to stand. This sense of judicial strength is helping the confidence of investors here in Mexico.

PFR: What about transmission? How could private companies and banks get into that space?

Villeda, First Solar: In Mexico, the only one that could develop a transmission line and could benefit and get revenue from the transmission lines is the Mexican government. They have confirmed that it is a good investment because they even have some financial bonds that are linked to the transmission lines in Mexico and to the utilities of the transmission lines. But they don't let anyone else jump into it.

             But since the government will not have any money to develop any more transmission lines, and they won’t have any support or budget to develop it, I think that they will need to go to a private-public association to try to develop these kinds of projects. They are limiting themselves in this situation.

Scholtz, MUFG: From a bank perspective, if Mexico allowed transmission lines to be owned by the private sector, we would be an active player. We just closed a transmission line deal in Colombia, we closed a couple in Chile in the last years, and previously in Peru. It’s a very attractive sector because it’s very predictable with steady revenues. And that’s what project finance practitioners look for.

PFR: Given the situation in Mexico, are you delaying the development of your own projects or considering looking for mandates in other countries?

Villeda, First Solar: It all depends on 2021. Everyone asks if this situation is going to be a short-term or a long-term thing. To be honest, there is a risk to have a counter-energy reform in Mexico, which could mess up all those previous engagements that were happening in Mexico.

             Developers are seeing it, and are going towards Central America, since we have some influence in Central America, the Caribbean, and Colombia. 

If, in 2021, the party of the president wins the mid-term election, then we definitely could see some even deeper challenges and changes in the Mexican market. But it all depends on the mid-term elections.

Scholtz, MUFG: We’re currently working on mandates and approaching our credit committees and trying to close deals in 2020, so we’re still open for Mexico. And despite the noise that the government has made, the laws have withstood the test of government challenges. But it’s never good to have the sovereign trying to implement rules that are against the fundamentals of a project.

PFR: A few months ago, CFE, the offtaker for many projects, was downgraded. Is that a concern?

Scholtz, MUFG: Well, the rating of the offtaker on any project is a fundamental building block of a good project. So to the extent that the rating is lower, that’s not a favorable development. But we have to recognize, too, that CFE is an integral part of the Mexican state. It’s a key company, and as long as it’s so tied to the Mexican government, the rating of CFE is likely to be similar to the Mexican state.

             And Mexico may have challenged some of the contracts in the power sector, but overall it’s still a strong country with a very big private sector and a very attractive market for a lot of industries.

Villeda, First Solar: I would say that there are two issues to watch in 2021. One is the mid-term elections, the second is the investment grade rating of Mexico. There is a risk that Mexico could lose its investment grade status in 2021. CFE and payments are tied to the sovereign credit rating, so there could be an issue going on if this happens. The economy could be severely affected.

             But I remain confident because the fundamentals of the market are still strong, private companies are still demanding PPAs, and they’re still demanding renewable energy.

             It still depends on how deep the crisis of Covid is and how this economic crisis impacts the Mexican market. But in 2023, 2024, the demand is still going to grow at 3%. This is going to be driven by the USMCA [United States-Mexico-Canada Agreement] Treaty. A lot of companies are seeing Mexico as a way out to even foster manufacturing facilities in Mexico. So this will drive the power demand.

             Even if there is a counter-energy reform, and CFE becomes the main player again in the market, they will be the ones demanding even more finance, and even more solar modules for their own projects. If these changes happen, other avenues for demand and power demand could be opened in Mexico as well.

Matas, IDB Invest:  From our side, we’re actually structuring a couple of deals in renewables, solar or solar and wind, with A/B bonds.

PFR: Another market that we’ve mentioned is Colombia. Colombia held its first renewable auction in October of last year, with longer PPAs than expected. But still the market is largely dominated by local lenders, given that everything is in local currency. How are commercial international banks trying to finance projects there?

Matas, IDB Invest: Yes, this is one of the jurisdictions in which local currency is key, in terms of liquidity and in terms of structures that allow other institutions to participate. We do have pesos and we are acting with guarantee structures to increase our firepower.

             So in that sense, we would like to be active, not only on solar and wind but also in green transmission. In Colombia, it goes hand-in-hand. We are talking with the key players to develop [projects] as well as transmission.

             Our approach in Colombia has been twofold. There’s a need for local currency in the long term, but also, due to Covid, we see liquidity in the shorter-term also being scarce, which we are looking to provide. As per structures to finance infrastructure projects, it’s either a long-term or a mini-perm structure that I think is setting in.

Scholtz, MUFG: We’ve financed a couple of toll roads which had two currencies, dollars and pesos. Interestingly, the financing in one case was 100% in dollars with derivatives to cover the peso risk on a mini-perm structure. And then, more recently, we did 100% dollar financing for a transmission line, and there, all the revenues are in dollars, so during the construction you could argue that there are some FX risks. A lot of the expenditures of any construction project in another country are usually in local currency. So through derivatives or cross-border dollar loans or synthetic loans, we are able to offer pesos and dollars in Colombia or in the other markets.

Matas, IDB Invest: On the swap – it has to be competitive or you wouldn't have closed – but vis-à-vis the local financing, is it due to the fact that you see that there's scarcity of liquidity in the long term, or is it basically because you somewhat won the other pitches that were in pesos?

Scholtz, MUF: Well, I hate to call it an oligopoly, but there’s only four banks in Colombia that are large local banks, so there’s not a lot of competition if you look beyond the four banks.

             And in the road sector, with some of the problems that occurred related to Odebrecht, some of the lenders decided not to participate. So you lost some of the four lenders.

             But maybe in the power sector, you don't have the same dynamics, and maybe rates would be more competitive. We have certainly been approached on PPAs awarded in the auctions. But the auction had other issues, right? You didn’t know who your offtaker was going to be, etc.

             But you know, our clients are present, international companies. As I mentioned, we just closed a transmission line deal, and that was dollar financing, but we would consider peso financing and whether you're competitive or not is very dependent on the market.

Rafael, you know, today’s swap spread or dollar spread is different from tomorrow’s. So if you ask us today, we might be competitive, but tomorrow we might not.

Matas, IDB Invest: That’s interesting because in some markets, for example, Brazil, if you are going for swaps and you just have Libor, that’s very tough. But it’s true that in transportation in Colombia, there are those options, and it’s more of a deal-by-deal basis. You are right.

PFR: The last market that I wanted to talk about briefly is Peru. Gas and hydro projects have been very present in the market, to the detriment, up to a point, of solar and wind. We haven't heard about much activity in Peru in the last 12 months in the power sector, and especially in solar and wind. Is this likely to change? Is there going to be more interest in the market there?

Scholtz, MUFG: Fundamentally, Peru is a triple-B rated country, so it’s a highly desirable market for financial institutions. The issue is that the projects and the project development have not materialized, and that’s a consequence of political – I don’t know how you want to say it. Let’s say that they have an interim president and not a lot of decisions have been made to advance projects for a variety of reasons.

             And one of the main reasons is because the aftermath of the corruption scandal not only affected the government but three past presidents. Odebrecht was the largest foreign investor in the country, with many projects. So just the aftermath of that has resulted in a lack of political will to advance projects. We would have an appetite for a properly structured project, but there aren't a lot of projects that have materialized.

Matas, IDB Invest: Yes, I mean, there were the Marcona and Tres Hermanas [wind assets]. It was a long time ago. The thing is that there’s like 40% gas and it’s highly competitive. [The development of renewable assets] is a strategic decision that has to come from the top down, but at this moment, we don't see that happening in the short term. Again, as I’ve said, we’ve seen this in transmission.

             I talk a lot about transmission because we’re just giving it the spin. For us, it’s a change of paradigm, which is getting green transmission as part of the green/sustainable realm. Again, transmission is a very good asset, stable and attractive to mobilize institutional investors.

             For us, it’s been challenging entering that subsector. It’s obviously good in terms of commercial banks and the institutional investors have the real liquidity there, so we are less needed.

But again, as Ralph said, we would be thrilled to get more into the subsector of transmission. I don't see it happening that much in 2020, 2021. I don't expect it, or not in a structured fashion, as we see biddings in other countries.

PFR: Another question is about construction risk. We have mentioned there have been many delays, and maybe interconnection problems. I was wondering if that is now taken into account when sponsors approach banks.

Matas, IDB Invest: Yes, for sure. First of all, it’s been a contractual shift. With force majeure, these contractual provisions have been revisited to incorporate the current events. We shifted towards seeing if our projects were going to have liquidity constraints at certain points, generated by the situation, and we offered liquidity facilities in the short term, taking into consideration that the projects on which we’re working are solid in structure, and it’s just this short-term issue.

             But, yes. I've seen fewer [deals] being delayed. Some with more urgency because the sponsors had these deals lined up. These companies need to move in terms of capex, in terms of their investments. Now liquidity is more scarce, so it was more urgent to close the deals that were already mandated.

             And in terms of due diligence, we had to be a little bit more creative. Physical site visits, due to Covid, were not possible anymore. We had to be creative and adapt.

Scholtz, MUFG: The projects that were under construction did get impacted because equipment deliveries were possibly delayed or workers were not allowed to go to work due to government regulations or permits. We’ve had projects where we were expecting permits to be issued, but the government office is closed and despite operating virtually, they’re not operating very quickly.

             We don’t take a lot of permitting risk as a senior lender, so we need the permits to be issued. Maybe we’re not taking any incremental risk, but the project’s not happening because the permit is not being issued, is one example.

             We have one example where we haven't been able to register a security interest in a project because the local notary office is not open. Things of that nature that you wouldn't think would be impacted, but they are.

PFR: To wrap up, we can talk a little bit about what market trends we expect to see in the region in terms of what sources are going to be more developed.

Kantner, Austrian Solar: Well, I think Chile will see a strong year 2020/2021. A strong end to 2020 and a good year in 2021, all due to the effect of the shut down of some of their coal power plants. The need for renewable energy is strong. It will continue being strong. Hopefully, infrastructure construction will go ahead as scheduled because if not, we may run into difficulties, as we have seen in 2014/2015, with curtailments.

             All in all, whether wind will be stronger than solar is difficult to say. Right now, we see more big solar projects starting construction, but you are all aware of the big wind projects to come once they have the final permits. In the north, I think solar will dominate. However, on the southern end of Chile, some significant wind projects are in the negotiation phase.

PFR: And in terms of financing? Will it mostly come from commercial lenders, will it be DFIs?

Kantner, Austrian Solar: I think commercial lenders will lead the financing.

Scholtz, MUFG: To the extent projects are greenfield, they would likely look to commercial banks or development banks, but operating projects have an interesting possibility, particularly in countries like Chile or in high investment grade countries, to access the capital markets, private placements or 144As, because they certainly have a long-term appetite. They’re able to monetize all the cash flows of a contract, and the rates are extremely attractive right now. You probably can get a project in Chile to access sub-4% debt with the right profile, which is very attractive.

Matas, IDB Invest: I believe, as well, there’s more and more influence of institutional investors in the region. The challenge will be how to bring them in and how to make the projects attractive.

             We mentioned sustainability, integrity, corporate governance – how you manage those risks embedded in the transaction. That is going to be key to bring institutional investors into the region, and that would represent a significant surge in needed liquidity.

Villeda, First Solar: It’s not because I work in the solar industry, but I do think that more solar is going to be installed in the region. Not because it’s beautiful, not because it’s good, but because of the prices. And there is a drop in solar prices, so this will definitely move to all the region. This is a trend that is happening.

             I do see, as a trend, and I’m kind of a pessimist, that 2020 and 2021 will be slow years for Latin America, so we have to be prepared for that.

             I also think that Central America has the potential to grow in renewable energy. There is an appetite. We have an auction in Panama going on and it’s happening soon, so these kinds of drivers will continue in the market. In Colombia, the same thing is happening with the storage. Storage is going to drive this demand. 

             Finally, I’m a big promoter of hydrogen, so Chile with hydrogen will definitely drive the demand for renewables in the region.

PFR: How far along is the development of green hydrogen?

Villeda, First Solar: I think that it is going to take a little while, but they have the base, and the base is the decarbonization of the sector as a whole in Chile. And that’s, I think, the main driver of demand in hydrogen in Chile. So when you have considered the demand for those kinds of projects, then I think they’re going to kick off in two or three years.

             They’re going to wait for the lessons learned in Europe, and how they are handling these types of issues and the financing.

Kantner, Austrian Solar: I don't know how many lessons we can learn from Europe, since the conditions in Europe for hydrogen are not as good. There’s basically no week passing by where you don't have a conference, individual meetings between the one or the other European country, the UN, the European Union and the Chilean government and also private companies. We’ll see when the first projects kick off, but certainly, there’s huge interest in this technology, and as Elie has said, this will drive more renewable energies in Chile.


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