With the slowdown in growth and contraction in European PV markets in 2012 and 2013, many in the solar industry have been wondering where the next big market will develop, and many have been considering the potential of Central America, Mexico, the Caribbean and particularly South America.
It is easy to see why. The region offers strong market fundamentals, including high retail electricity prices, growing populations and economies which drive the need for more electricity generation, and in areas like Northern Chile and Northern Mexico, some of the best natural solar potential in the world. Additionally, the policy environment in the region has been improving, with Brazil and Mexico passing net metering policies in recent years.
This has sent developers flocking to propose large projects in the region. However, there are still many barriers to development, and the details can be unique to each nation. Some of these include not-yet-developed local solar industries, bureaucracy, transmission limitations, a lack of supporting policies, and difficulty securing contracts to sell power and funding. Despite the ambitions of many developers, the process of moving projects from the planning stage to construction has been much slower than many had imagined.
With this in mind, Solar Server brings you an in-depth look at Latin American PV markets.
Market development: Pioneering projects
Latin American PV markets have not developed as have PV markets in Europe, the United States and Japan where the residential sector led the way to increasingly larger PV projects in the commercial and utility sector. Instead, in many places large PV projects have been developed and built in nations that have small to non-existent PV markets and industries.
The first large-scale PV plants in Latin America were located in Southern Peru, where Gestamp, Solarpack and T-Solar commissioned two PV plants totaling 40 MW in mid-2012. However, these landmark projects appear to be largely a one-off, and the nation has no significant PV market at the residential or commercial scale.
- The AES Illumina is the largest PV plant built to date in the Caribbean, and one of the first large utility-scale PV plants to be built in Latin America. Image: Global Energy Services
The next large PV plant to be built in Latin America was a 24 MW PV plant commissioned by AES in Puerto Rico December 2012. However, Puerto Rico has made a commitment to switch off of oil generation, and was installing smaller PV plants before the AES Illumina, with a modest if notable PV market.
Unfortunately, Peru’s experience has been more typical of the region’s rocky path to growth. When large projects are built, they are not necessarily followed soon afterwards by other projects, and do not necessarily lead to development of other market segments.
New market models
Accompanying this very uneven growth, Latin America is seeing an emergence of new market models, including the sale of electricity from PV plants on a merchant basis.
- The Aura Solar 1 was groundbreaking not only for its size, but because its power is sold against wholesale market prices. Image: Gauss Energía
The next leading project in Latin America, the Aura Solar 1, was built at the Southern tip of Mexico’s Baja California. Here, developer Gauss Energía took a big leap into new territory, by building a 30 MW PV plant that would sell electricity not through a long-term contract, but for wholesale market prices that have no floor under the nation’s Small Power Producer Program. Adam James of GTM Research describes this as a “quasi-merchant” arrangement.
Power market conditions in Baja California Sur play a big part in this decision, as the state experiences high wholesale electricity prices due to its isolated grid and dependence upon imported fossil fuels.
But even under these circumstances, Gauss’ move marks a significant departure for the PV industry, showing that a large project can be built without the backing of a lengthy, fixed-price contract to sell power such as a power purchase agreement (PPA) or contract under a feed-in tariff.
Since that time SunPower has begun construction work on a 70 MW merchant PV plant in Chile, Project Salvador, and SunEdison has built 50.7 MW merchant PV plant in Chile, the San Andres. This is a big move for SunEdison, the PV developer which pioneered the use of the PPA for utility-scale PV.
There is often more going on than meets the eye in Latin America. Yingli Green Energy Americas VP of International Sales Jeffrey Barnett notes that even if the plants are being built on a merchant basis this does not necessarily mean that this is the long-term plan. “The intention is always in the longer term to sign a PPA,” states Barnett. “What these companies are saying is today there is high demand, we feel very comfortable with the downside risk of these merchant projects, because power prices are high in Chile in these particular nodes where they are going to inject power.”
“And as a result, we can take merchant risk for the first three years, because they see very little of it, and once these projects are operating, the intent is to lock in a power purchase agreement a couple of years down the road.”
These successes with large projects and new models must be accompanied by a word of caution, as many projects in the region have never gotten off the ground.
Latin America is a fundamentally different region than others where large PV markets have developed. Notably, it is a less affluent region than Europe, the United States or Japan, which means that fewer homeowners have the cash or access to credit to afford the up-front costs of PV systems.
It is not only homeowners. Like much of the less affluent and less industrialized world, Latin American nations struggle with access to capital, which can make international support and the role of development banks more important. Coupled with regulatory and bureaucratic barriers unique to each nation, it can be more difficult to bring projects to fruition in the region.
Finally, there is the under-appreciated aspect of culture. The pace of life and business is slower in Latin America, and more emphasis is placed on relationships. All of this can mean that the development of projects will not always happen on European or American timelines.
Chile: the long wait
Perhaps no other market has displayed both the high hopes and the hard realities of the region as much as the Chilean PV market. Chile has the largest project pipeline in the region, with over 5 GW approved by the nation’s environmental authorities.
- A large number of projects have been proposed for Chile’s Atacama Desert, which offers some of the best natural solar potential in the world
This rush of developers to Chile has led many over the last few years to speculate that the nation’s PV market will grow rapidly, and this rapid growth has seemed to be right around the corner for the last two years. While some very large projects have been approved during this time, the nation had less than 7 MW of operational utility-scale PV at the end of 2013.
GTM Research Solar Analyst Adam James notes the disparity between potential and what actually gets built. “There is a very large potential market, but individual projects will depend upon individual business decisions,” explains James.
“A lot of the early gold rush to the Chilean market was by European developers, and there has been mixed success. Developers tried to imitate a business model that they used in Europe and to scale that rapidly, and have failed to do so.”
As for the projects that are moving forward and the ones that appear stuck, geography and off-takers play big roles. Most of the more than 5 GW of approved projects are located in Northern Chile in or around the Atacama Desert, where developers have attempted to sell the electricity to mining companies through power purchase agreements.
And while environmental approval for projects has been relatively easy, the process of negotiating with mining companies has not. “The mining companies hold all the cards,” notes James. “They can sit back and wait for the best deal to come to them.”
James also notes that many mining companies are usually not interested in signing contracts beyond five or ten years, which is difficult for PV developers whose business model is based on contracts of 20 years or longer.
- Santiago’s demand for power is cited as a factor in the greater success rate of PV projects proposed in the nation’s Central Grid (SIC)
By contrast, fewer projects have been proposed for the nation’s central grid (SIC), but these have seen a higher rate of success. In January and February 2014, SunEdison completed both its 100 MW Amanecer PV plant and the San Andres plant, both of which are connected to the SIC grid. Also on the SIC grid is SunPower’s Project Salvador project, which was under construction at the time this article was published. While on-site solar potential for all three may not be quite as high as in the Atacama Desert, these plants will feed the growing demand for power in Santiago and other cities, and help alleviate capacity shortages.
With to the commissioning of the Amanecer and San Andres plants, Chile reached 150 MW-AC of solar photovoltaic capacity by March 2014, and a rush of project starts has brought the nation to 225 MW-AC under construction. However, this is still less than 10% of the capacity officially approved.
It is also worth noting that Chile has shown an interest in solar thermal and concentrating solar power (CSP). Sunmark completed Latin America’s largest solar thermal plant in 2013 to supply process heat to a mining operation in Northern Chile, and during the year the government also awarded a contract to Abengoa to build a 100 MW CSP plant. This will be the first full-scale CSP plant in the region.
Brazil and bureaucracy
Brazil is another market that developers and market analysts have expressed great interest in which has not yet delivered. While Brazil has installed some high-profile PV systems on World Cup stadiums, the overall market remained small in 2013.
Yingli’s Jeff Barnett describes the Brazilian market at “beautiful, brimming and bureaucratic”, noting that the combination of net metering, strong natural solar potential, high electricity prices and poor quality of electricity generation are matched by formidable impediments.
- The installation of PV on the World Cup Stadiums has been important for visibility of PV in the nation, however Brazil’s market remains small
These include a 14% tariff on imported PV modules and inverters. All Brazilian tariffs and local taxes combined add roughly 25% to module prices, and additionally the weakness of Brazil’s currency against the dollar must be considered. Another major problem is that valued-added tax is applied to the output of PV systems under net metering, which impacts the economics of systems participating in the program.
As for the utility-scale segment, many had been excited about public tenders, and here results have been mixed. While zero solar projects were awarded under a national renewable energy solicitation in December 2013, in the same month the state of Pernambuco awarded 123 MW in the nation’s first solar-only auction.
Brazil is also attracting PV manufacturing. Hanergy signed an agreement in 2013 to build a thin-film PV factory in the state of Rio Grande do Sul, and local manufacturer Solar-Par Participações plans to build a vertically integrated 95 MW PV factory in the state of Espírito Santo.
Mexico: A first mover
While markets in both Chile and Brazil have taken longer to arrive than expected, Mexico has surprised many by emerging as the clear leader in the region. By the end of 2013 Mexico had 219 MW of utility-scale PV projects under construction, which GTM Research estimates will cause the nation’s installed capacity to triple to 240 MW in 2014.
Adam James of GTM Research calls Mexico a “hotbed for solar deployment”, predicting growth across the board in 2014 and beyond. The largest capacities of announced projects to date are in the states of Baja California Sur, Yucatan and Sonora, on opposite ends of the nation.
Mexico has a generally attractive regulatory and policy environment, including a national net metering policy. The relatively small charge for developers to “wheel” power from one part of the nation’s grid to another is a particular advantage for projects in Northern Mexico, which has strong solar potential but fewer large population centers. Additionally, Mexican development bank NAFIN has been proactive in supporting PV projects in the nation, including the Aura Solar 1.
These advantages have been important not only for solar, but also other renewable energy projects including wind and biomass projects.
There are also good fundamentals in the Mexican residential market. The nation’s retail electricity rates are structured to punish high amounts of power usage, which can create very attractive economics for projects that allow users to access lower rates. GTM Research expects 40-50 MW of PV projects in Mexico’s distributed generation market alone in 2014.
Mexico is currently changing the structure of its electricity sector, with plans to open up state utility CFE to competition on the generation side. This may change important details for solar developers, and may also delay some projects.
“Energy reform will likely be a very positive force for solar development,” states James. “However, because details about the new market structure are still being developed, there has been a temporary delay in development as companies await the new rules of the game.”
The many other nations of Latin America and the Caribbean offer a range of opportunities. Island nations in the Caribbean are often highly dependent upon expensive imported fuel, with makes for highly favorable economics for PV and other renewable energy projects.
While Puerto Rico has been the most visible leader, there have been a number of projects planned in the Dominican Republic, and Aruba has announced plans to move to a zero-carbon footprint by 2020, including widespread deployment of PV and wind.
Ecuador has also been seen as a promising market, but here regulatory uncertainty is high. The nation implemented a feed-in tariff in 2011, under which more than 100 MW of utility-scale PV projects were accredited. However, the Ecuadorian government has since rescinded many of these projects and only around 10 MW began construction in 2013.
Central America’s solar market is also growing. Costa Rica commissioned its first utility-scale PV plant at 1 MW in 2012, and in March 2013 Panama’s first PV plant at 2.4 MW came online. Additionally, El Salvador has launched a solicitation for 60 MW of utility-scale PV.
As many communities in Latin America do not have regular access to electricity, there is also an interest in off-grid solar in the region. Peru has launched a program to provide electricity using PV to two million residents living who are not connect to the grid by the end of 2016. However, implementation of the program may be difficult as there is little incentive for suppliers, and the issue of maintenance may be difficult for the program.
Fast growth from modest beginnings
When taken together, the growth of the total PV market in Latin American and the Caribbean has been much slower than many have anticipated. Yingli’s Jeffrey Barnett notes that leading analysts and international institutions had predicted a Latin American PV market anywhere from 275 to 850 MW in 2013, while his estimate is that only 200 MW of PV was installed regionally during the year.
- With the Amanecer (pictured) and San Andres PV plants, SunEdison brought 151 MW-DC of PV plants online in Chile in January and February 2014. Image:SunEdison
This is set to change in 2014, when Barnett expects 500 MW of new projects in Latin America to either begin construction or be completed by year’s end. With more than 150 MW completed in early 2014 and another 225 MW under construction in Chile, as well as 219 MW under construction in Mexico, these two nations alone could easily meet this milestone during the year.
GTM Research has higher expectations, predicting that 724 MW will be installed in Latin America in 2014. However, even with this substantial growth the company predicts that the region will represent only 2% of the global market over the next few years.
“2014 is going to really depend on Chile,” notes Yingli’s Jeff Barnett. “Installations in Chile are almost binary, in the sense that a few large projects could make for a substantial PV market in 2014, whereas continued slow progress could make the market seem relatively small compared to its near-term potential.”
Looking only at utility-scale pipelines may be misleading. Barnett of Yingli also says that he sees sustainable solar markets as being based on distributed generation, from which utility-scale projects are a development. In this regard, nations including Chile, with its uneven growth, may be less attractive over the long run than Mexico.
With this caveat, Barnett expects continued rapid growth in the region. “Is Chile, is Brazil, are Mexico’s utility-scale projects going to come on big – fast and furiously?” asks Barnett. “Then we could say new installations in 2015 and 2016 could range anywhere from say 600 MW to just under 1 GW. But there are a lot of things that have to fall into place to hit those numbers.”