IEEE Power & Energy Magazine - January/February 2021 - 76

A View From Inter-American
Development Bank's Experience in
Financing Renewable Energy Projects
Latin America is abundant in natural resources, and overall
the region's power sector has a larger share of renewables
than many other developing regions, especially thanks to the
extensive development of hydropower. As of 2018, the electricity mix in Latin America and the Caribbean, in energy
production terms, was 47% hydropower, 39% thermal generation, 2% nuclear power, 1% geothermal power generation,
5% wind power, and 1% solar generation, with the rest from
other sources. Some countries, such as Uruguay and Chile,
already have a larger market penetration of variable power
generation, such as wind and solar: 35% in Uruguay and
6.7% in Chile. In 2018, Costa Rica ran with 99% renewable
generation, mainly hydro followed by wind power.
In addition to having a rather clean power mix, the region
is close to being the first developing area to achieve 100%
electricity access. As of 2018, the electricity access rate in
Latin America and the Caribbean stood at 97.6%. Haiti and
Honduras are the only two countries with access rates well
below the others, at 39% and 81%, respectively.
Given the load growth in the region, electricity demand
in the period 2012-2018 grew by 88% overall in the
region, and, in some subregions, such as Central America,
demand grew by as much as 18%, as reported by the Latin
America Energy Organization. In addition, many countries in the region increased policy support for renewables, thus growing the need for effective mechanisms to
incentivize low-cost generation, such as long-term electricity auctions.
The development of new renewable technologies, such
as wind and solar power, has proceeded rapidly in Latin

35,000

9,540 (41%)

NCRE Capacity, 2014

America, primarily due to long-term contracts awarded
via auction mechanisms. This system was pioneered in the
region by Brazil in 2005 and Uruguay in 2006 and rapidly
extended to other countries, such as Chile and Mexico.
The use of electricity auctions-a wholesale market design
option that consists of competition for the market rather
than in the market-has proven quite effective to accelerate
the uptake of renewables in Latin American countries with
growing demand and clear policy goals.
The auctions are successful because those entities
awarded long-term contracts, which usually range from 15
to 30 years in a region's first auction, provide revenue certainty to RE producers, help attract lower-cost financing,
and, in tandem with reduced costs of RE, deliver lowestcost renewables. Revenue comes not only from the contract
but also from other important factors, such as the creditworthiness of the contract offtakers and the market structure where they operate, improved by guarantee schemes
when necessary.
While auctions continue to be very effective mechanisms
to deploy renewables at a rapid pace and for competitive
costs, there are signs in some markets that high penetration levels of renewables may introduce risks in the medium
term. Auctions in Brazil, Mexico, Argentina, Chile, Peru,
and Jamaica, from 2016 to 2019, awarded projects for a total
of US$46.8 billion of new investments in RE. Projects commissioned from 2014 to 2019 added 27 GW of RE (mainly
wind and solar power), mostly in the three largest markets
in the region: Brazil, Mexico, and Chile. These additions
represent historical increases in the addition of renewables
in the region, as shown in Figure 1.
While long-term contracts at a fixed price are the common design of auctions in Latin America, projects still face

NCRE Capacity of Projects Winning Auctions, 2015-2019

30,000

(MW)

25,000
20,000

23,330

15,000

7,013 (169%)
6,161 (267%)

10,000

4,466 (527%)
5,000
0

2,304
Brazil

Chile

4,158
Mexico

Argentina

430 (41%)

847

1,056
Peru

(52%)
37
71
Jamaica

figure 1. The nonconventional RE (NRCE) capacity additions represented by the winning projects in auctions held from
2015 through June 2019 compared to the 2014 renewable capacity in Latin America and the Caribbean. The percentages
in parentheses show the increase over the 2014 NCRE capacity, assuming all projects are completed. [Source: Viscidi and
Yepez (2019); used with permission.]
76	

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