LatAm's renewable recovery: Green shoots emerging in 2024
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LatAm's renewable recovery: Green shoots emerging in 2024

Construction of a wind turbine, by Enercon, on the Mottbruchhalde, in Gladbeck-Brauck, operated by the energy company STEAG, NRW, Germany.

Financing greenfield projects across Latin America had been tough over the past few years as inflation and high interest rates continued challenge the region’s renewable energy sector.

Fewer transactions were recorded in 2023 according to IJGlobal data continuing the downward trend present since 2022. The tide may be turning with softer macroeconomic conditions expected to develop, but Latin America’s renewables transition was already finding a way to make a dent in ambitious decarbonization targets.

Development finance institutions (DFIs) played – an continue to play – an important role, especially in Brazil, while sponsors wait for commercial lending and capital markets to become attractive once again.

Development banks such as BNDES and Banco do Brasil are by far the most active renewable financiers. Since 2000, BNDES has financed around 70% of the increase of the country's total generation capacity, corresponding to an additional 78.8 GW, most of which is renewable.

So far this year, BNDES provided more than $850 million in loans, including its largest loan to a renewable project to date – a $650 million loan covering 80% of the Babilônia Centro wind project -- a joint venture between Casa dos Ventos and ArcelorMittal located in the state of Bahia.

DFIs have always been very instrumental in implementing renewable deployment across Latin America but especially in the years following the pandemic as they were better able to cushion for interest hikes. But if interest rates continue go down this year more debt financing options are starting to look attractive again.

Take Brazil, the country’s central bank kicked off its easing cycle in August with a 50-basis-point cut after nearly a year of unchanged rates at a 6-year high of 13.75%. Since then, it has consistently signaled the maintenance of the same easing pace. While Colombia's central bank cut the benchmark interest rate by 25 basis points to 13% in December to mark its first cut in more than 3 years.

“Two years ago, when we started to see the rise in interest rates, for some projects in Puerto Rico and 1 of our projects in Colombia, we decided to finance on a full equity basis because we saw that there was no value added with leverage debt financing,” said Fernando Zúñiga, managing director Latin America & Caribbean at MPC Energy Solutions. “We are expecting rates to go down in the next year and we will be at some point refinancing those.”

“We've been seeing a much more active role from the local commercial banks lately, being even more competitive sometimes [than DFIs] on the terms offering for those non-recourse loans that we typically look for,” said Zúñiga referencing the financings of 3 projects with Bancolombia’s Banco Agricola that the firm closed in El Salvador.

No more tenor

Even as rates start to drop long-term debt at today’s pricing is difficult to lock in for sponsors. According to IJGlobal data, the average tenor for greenfield project financings over the course of the last year (2023) was around 5 years, less than half of what it was in previous years where it consistently stayed in the double digits.

Short-term facilities, including term loans and mini perm are increasingly used by sponsors who usually would have gone with a traditional long-term non-recourse financing facility.

“We are seeing a strong move away from tenor. Even banks who used to be able to provide tenor are increasingly reluctant to do it,” said Tobey Collins, managing director and head of Americas at Astris Finance.

“That has created an opening for the infrastructure funds who are really interested in lending in this market. They’re typically more expensive. They could definitely do tenor but they generally prefer to offer fixed rates. So, locking in today’s rates is something you really have to think about,” said Collins.

Batteries become mainstream

While new lenders enter the fray so do new technologies, with battery energy storage systems (BESS) becoming a greater part of the renewable energy story on the continent.

Across Latin America the need for battery storage is growing with transmission shortcomings that have plagued several markets across the region helping drive interest. Chile in particular has suffered significant market disruptions in the last couple of years due in large part to transmission bottlenecks that even led several sponsors to restructure entire portfolios of assets last year (PFR, 1/17).

“We don’t see the issue of the decoupling and curtailments going away before the end of the decade once the [Kimal-Lo Aguirre] transmission line is finalised. There are intermediate solutions that are being considered by the regulator, new types of concession contracts and batteries,” said Julyana Yokota, managing director at ratings agency S&P.

A modern battery storage in the nature

While many countries still lack the regulatory framework around BESS, Chile recently came out with more guidance on the profitability of stand-alone projects and is one of the most advanced countries when it comes to the deployment of the technology.

Last year (2023), several standalone storage projects were submitted for environmental assessment while solar-plus-storage projects have become standard practice.

Developers including Solek, Biwo Renovables and Oenergy all submitted standalone projects. The latter currently awaits permitting 14 battery storage projects varying in size from 12MW/65MWh to 300MW/1.590MWh with price tags from $21 million to $525 million.

Despite the rush of activity less than a handful of battery storage financings, most of them not standalone, closed last year. Last April, Innergex secured a $49.5 million 2-year non-recourse bridge loan to support the construction of the 5MW/175MWh San Andrés battery energy storage project in Chile. The remaining portion of the $61.9 million project will be financed from Innergex's existing revolving credit facilities.

Given renewables already generate 60% of the region’s electricity, twice the global average, there is no shortage of sponsors looking to take advantage of some of the globe’s best renewables resources.

According to the International Energy Agency financing for clean energy projects needs to double by 2030 to $150 billion and rise fivefold by 2050. Already green shoots are starting to appear in Latin America’s renewable energy project finance landscape and there is much left to be developed and financed.

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