The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act
Out-Law Analysis | 11 Jan 2021 | 12:29 pm | 7 min. read
Ambitious plans to grow the use of renewable energy in South America, and link coronavirus economic recovery plans to 'green' projects, make the market an attractive proposition for international energy companies and investors.
Climate change, and the challenges of Covid-19, has forced countries around the world to realise that more effort is needed to harness renewable energy. Latin American countries last year collectively pledged to meet a 70% renewable energy use target by 2030 – a total of 312 GW in power – while a number of governments, including those in Colombia and Chile, have committed to putting sustainability and decarbonisation at the heart of their countries' Covid-19 recovery plans.
Although the Covid-19 pandemic means some South American renewable energy projects that are already in development are likely to be delayed, the market is expected to continue to grow in the years ahead, with focus likely to increasingly turn to using digital technologies to build 'smart grids' where the balancing of demand and supply can be optimised.
Our experience in the market has demonstrated there are commercial opportunities for those that can tap into local expertise to navigate the diverse and often complex financing, regulatory and foreign investment regimes that apply in the different countries of South America. In this article, we have taken a look at three markets in South America showing particular potential for investment: Brazil, Chile and Colombia.
Currently, Brazil has capacity to generate approximately 170 GW of power from various sources. Hydropower makes up more than 100 GW of that capacity.
In a bid to decrease dependency on hydropower, following the 2001 drought in the country, Brazil bolstered the development of onshore windfarms. As a result, there are now more than 600 wind farms in operation. Capacity from wind is currently 16 GW and is expected to reach 20 GW by 2023.
The offshore wind market could prove to be highly lucrative for foreign investors and energy companies
It is likely that further growth in wind energy projects, both onshore and offshore, will follow if the Brazilian government elects to participate in Latin America's goal of 70% renewable energy by 2030 and if it wants to achieve its stated target of meeting 48% of energy use in the country from wind and solar by 2027.
The offshore wind market could prove to be highly lucrative for foreign investors and energy companies – the Ministry of Mines and Energy's research firm EPE has estimated that wind farms at water depths of up to 50 metres could generate up to 700 GW of electricity.
Ten new offshore wind projects have already been announced in 2020, mostly located in the north-east of Brazil's waters, while seven offshore wind projects – all of which involve structures fixed to the seabed – are currently applying for environmental licensing. However, there is a push to reduce the environmental impacts of offshore wind projects by reducing the weight of wind turbines so that they can operate via floating structures. This would have the benefit of reducing regulatory hurdles and costs for offshore wind projects, which already have higher installation costs.
Most project finance deals are funded in Brazilian reals (BRL) as the cash flow of these renewable energy projects are in BRL.
Loans from Brazil's Special Agency for Industrial Financing (FINAME), which is part of the Brazilian Development Bank, provide capital financing via the direct transfer of funds to companies located in Brazil for the acquisition or leasing of new machinery or equipment, such as those required for renewables projects.
This machinery or equipment must be manufactured in Brazil, with financing only available for non-Brazilian machinery if domestically-manufactured machinery is unavailable. This condition to FINAME financing has led to a number of renewables entities including turbine suppliers setting up manufacturing or assembly facilities in Brazil.
Regulations applicable to renewable energy projects differ depending on the nature of the parties involved and whether projects are funded in whole or in part by public money. Brazil's Civil Code governs agreements entered into by private parties but public projects are dependent on concessions from the government, and concession agreements are themselves governed by public administrative laws.
The National Electric Energy Agency (ANEEL) is currently assessing whether to adapt the existing regulatory framework to deal with offshore wind, or develop new regulatory processes to attract investors. Currently, businesses behind offshore wind projects must prepare and present an environmental impact study and an environmental impact report to the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA), which is the country's environmental regulator, to enable IBAMA to assess the project's environmental feasibility.
At approximately 26.6 GW, Chile's energy generation capacity is much smaller than Brazil's, but the country's existing mix of renewable energy sources is likely to grow in importance over the coming years.
Chile's government has set the goal of powering 20% of the country from what it refers to as 'non-conventional renewable energy' (NCRE) sources by 2025. The term encompasses energy from wind, solar, geothermal and hydro.
There are further opportunities for solar projects in the Atacama Desert where it has been estimated that a 4% surface coverage with solar panels would produce enough solar energy to power Chile in its entirety
Longer term targets are already spurring growth in the wind and solar sub-sectors.
Chile hopes to produce 23% of its electricity using wind energy, and 10% of its electricity using solar energy, by 2050.
Just 2.2 GW (8.8%) of energy generation capacity currently comes from wind farms, but with great wind resource down the Pacific coastline, there is good potential for growth in this area.
Existing solar projects under construction will near-double the existing 3.1 GW capacity in the sub-sector. There are further opportunities for solar projects in the Atacama Desert where it has been estimated that a 4% surface coverage with solar panels would produce enough solar energy to power Chile in its entirety.
Mainstream Renewable Power is one company active with wind and solar farm projects in Chile. It is currently in the middle of a three phase project, the second part of which will see the development of three new onshore wind and two solar farms providing a total of 630 MW by the end of 2022 – enough to power 781,000 homes in Chile.
Foreign contractors are subject to the same laws and regulations as Chilean contractors. However, there are a range of strict requirements that contractors operating in the market need to meet. For instance, in relation to labour, where a workforce comprises more than 25 employees, a minimum of 85% of those employees must be Chilean nationals.
Currently, wind and solar energy plays only a small role in meeting Colombia's annual energy consumption. Hydropower meets 65% of electricity use, and gas and coal provides a further 29% of coverage, leaving wind and solar as meeting just 6% of electricity use in the country.
Colombia's biomass power potential stems from the abundance of agricultural residues, particularly on banana and coffee plantations, as well as landfills, in its four main cities
Total energy generation capacity in Colombia is smaller than in both Brazil and Chile at just over 20 GW, but Colombia intends to contribute 4 GW of renewable energy towards South America's '70% renewables' goal for 2030. Contracts for 1 GW of renewable energy were awarded in 2019. In the shorter term, Colombia is aiming to ensure that solar and wind produce 9% of the country's electricity by the middle of 2022.
Biomass, solar and wind project all show potential in Colombia.
Colombia's biomass power potential stems from the abundance of agricultural residues, particularly on banana and coffee plantations, as well as landfills, in its four main cities. Experts have predicted that this untapped energy source could fuel millions of homes. However, biomass power currently accounts for just 0.1% of Colombia's energy.
Colombia currently has more than 1.3 GW of renewable energy projects in different stages of development. Solar energy accounts for more than 60% of these projects.
It is worth noting that there does appear to be a lack of clarity in the regulatory framework and fewer incentives for new renewables projects in Colombia than in neighbouring countries. Those factors are putting off many investors.
Despite moves to diversify Colombia's energy mix, there are minimal government incentives for foreign energy companies to invest, and there are other challenges to the financing of projects.
New, innovative financing processes are required to prompt the growth of the renewable energy sector in Colombia, to make it more accessible for foreign investors. In a sign, though, that businesses will find solutions to financing challenges, Renovatio Group and Banco Itaú recently collaborated to launch Colombia's first private renewable energy auction.
In addition, while a previous lack of power purchase agreements (PPAs) in Colombia meant financing renewables projects was difficult and uncertain, we are now seeing PPAs lasting 15 years and longer being used for new renewables developments.
Foreign energy companies can apply to the Fund for Non-Conventional Renewable Energies and Efficient Energy Management (FENOGE) for help financing their projects.
Colombia's government is also facilitating access for non-conventional renewable generators into the electricity market, in a move that should open up opportunities for foreign businesses and investors.
Though incentives for foreign investment in renewables are more limited in Colombia, than those available in Brazil, some may apply.Renewable energy buyers can enjoy VAT breaks and corporate tax deductions, while renewable energy contracts awarded under the most recent tender have been extended from 12 to 15 years, reducing investor risk and financing costs. It is also understood that investors in renewable energy projects can obtain up to 50% annual reduction of taxable income for first five years following an investment.
It is clear that the scale of the development of renewables projects in South America is growing at a far greater rate than in other renewables markets. It is also important to note that developments in this sector are not limited to Brazil, Chile and Columbia, but can be seen across the continent, with noticeable activity also taking place in Peru and Argentina. As a result, the South American markets are attracting a number of foreign investors. With the likes of BP currently developing 2 GW of solar projects in Brazil, and Total undertaking a multitude of renewables projects in Chile, the sector is certainly one to watch.
Co-written by Holly Lambert of Pinsent Masons.
The link between purpose-led businesses, ‘B Corp’ certification and the Better Business Act