The energy transition will create investment opportunities in Latin America for local and international investors alike but local sponsors of renewable energy and green hydrogen projects are competing for financing with their counterparts in other parts of the world, according to panelists at an event hosted by LatinFinance.
For the Latin American energy transition promise to be fulfilled, the region will need to be able to attract ever larger volumes of capital. And although local liquidity abounds in countries such as Mexico and Brazil, others sources of capital will be required, including from multilateral institutions, said participants of the Financing Projects in a Volatile World Roundtable.
“Multilateral agencies like us are trying to de-risk projects to attract American and European investors,” said Rafael Matas, lead investment officer for infrastructure at IDB Invest, at the October 5 event in New York. “And to take risk when private actors are not keen on taking it.”
Project sponsors need to tick a number of boxes in order to attract capital, including having reliable sources of funding, favorable regulatory conditions and good relationships with affected communities, Matas said. They also require scale, which is being to some extent addressed by the creation of renewable energy platforms that aggregate production capacity across the region, he said.
Benoit Felix, the global head of structured finance at Santander, said Latin America, with its cheap energy and good connections with Europe and Asia, is well placed to become a big player in the green hydrogen market.
“There is a lot do in terms of transmission, and green hydrogen is a new member in the family. The opportunity is massive,” he said.
Renewable energy projects are usually aimed at meeting local demand, and as a result do not necessarily compete for the global pools of capital; local liquidity can play an important role there, according to Felix.
“We are closing many projects in that space right now,” he said. “New structures like the use of dollar-denominated PPAs in Brazil are now available to tap international liquidity too.”
Andres Arahuetes, finance director at ACCIONA/NORDEX, which is investing in green hydrogen, sees some eagerness from governments in the region to support the energy transition. Furthermore, geopolitical factors, such as the Western reaction to China’s growing influence in Latin America, are also creating tailwinds.
“Latin America is probably the best place in the world to develop green hydrogen,” Arahuetes said. “The main cost to produce green hydrogen is renewable power, and the place with the cheapest renewable power is Latin America.”
However, Carlos Viana, a partner at White & Case, stressed that, for all its promise, green hydrogen projects present huge technical challenges for sponsors and their legal and financial advisers. That was demonstrated in May by the closing of a $8.4bn project finance by NEOM to build a green hydrogen plant in Saudi Arabia, which White & Case advised.
“Project finance calls go silent when someone mentions ‘project-on-project risk’,” he said. “Green hydrogen is a project-on-project-on-project, project-on-project-on-project risk. It involves power, electrolysis, ammonia, shipping storage, shipping import infrastructure and shipping export infrastructure. On top on that, there are still technological bottlenecks, and demand and offtake are no small issues either.”
Viana noted, though, that the US is also investing heavily in green hydrogen, and that should accelerate the development of technologies that could solve several issues faced by projects today. Regulation is moving in the right direction in some countries, in his view.
With capital in place, the potential is enormous, and not only in renewable energy, Viana said. Latin America’s huge reserves of minerals like copper and lithium could make the region a magnet for investments for a long time.
“Bolivia, Brazil, Chile and Argentina are vital for the world’s energy transition,” he added.