Latin America offers a wealth of business opportunities in the energy sector. But knowing the local landscape and the associated risks – and increasingly climate risk – is vital to any successful incursion. In terms of securing the requisite financing to get energy projects built, winds of change are blowing as financial institutions – especially multilaterals – sharpen their focus on the environmental impact of projects that are seeking funds. Projects that support decarbonization efforts are well-positioned to secure financing, with the winners being the non-conventional renewable energy, distributed generation and transmission segments, among others. And then there is the potential of green hydrogen and the marine power business. Coal and oil projects face a future of restricted financing options amid global pressure over emissions. Financing of natural gas projects, since the hydrocarbon can support the energy transition by replacing liquid fuels, may remain more resilient.
PF in Latin America depends on the broader returns available in the region and beyond. In other words, local factors – such as credit ratings – play an important role. But so do returns available in the US, Western Europe, Japan, China, etc. So, even the US bond market has an impact on the availability, tenor, and pricing of PF for Latin America. for development finance institutions (DFIs), like IFC, IDB, CAF and the US Development Finance Corporation (formerly OPIC), there are also a host of non-commercial factors to be considered. The primary one across the board is that these institutions are increasingly focused on supporting renewable energy projects. In some cases, such as the European Investment Bank, they even have mandates now that prohibit them from supporting fossil fuel projects. This is having a major impact on PF, particularly in non-investment grade countries, where commercial banks are often reluctant to go it alone, without “cover” from a DFI. One area where we are seeing considerable interest from the DFIs is in financing regional transmission projects, such as connecting the Central American grid to the Andean one via Colombia. DFIs are well-placed to support such multi-country projects that depend on political, economic and juridical stability in two or more jurisdictions. Many investors are expressing an interest, in part due to the proximity of this area to the US and Western Europe, noting that it can help replace the Venezuelan supply. Also, there is a concern that Guyana and especially Suriname may turn to China and Russia for support in developing the basin, so better to try to pre-empt them. Financing oil and gas projects with international funds (especially from DFIs) is becoming increasingly difficult due to the pressure to move towards green energy. This may also mean that some of the gas projects get preference over oil.