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Electric Power

Intelligence Series

Electric Power Outlook 2017:


New Opportunities amid an
Uneven Recovery
Contents
Introduction
Figure: Electricity Usage
Figure: Installed Capacity

Renewables
Figure: Tenders

Conventional Sources
Figure: Production Share
M&A Overview
Argentina
Figure: Renewables Goals

Brazil
Chile
Figure: Construction
Colombia
Mexico
Figure: Supply Mix Outlook

Peru
Figure: Reserve Cushion
Conclusion
Introduction
 

Like in most emerging markets, energy demand in Latin America closely tracks the health of its economy.
The present deceleration, beginning around 2014 when the decade-long commodities boom came to a close,
has impacted electricity consumption across much of the region.

Regional GDP posted near-zero growth in 2015, and most current forecasts indicate a contraction in the
range of 1-1.5% for this year. Electricity use (excluding transmission losses) across 24 Latin American and
the Caribbean countries expanded just 0.7% in 2015 to 1,275TWh, according to BNamericas estimates using
data from local sources and multilateral institutions.

Preliminary figures from some of the region's largest power markets - Argentina, Brazil, Chile, Colombia,
Mexico, Peru, and the six Spanish-speaking Central American countries in aggregate - show that growth in
electricity demand has continued to slow during the first nine months of 2016. Most outlooks cautiously
predict that economic activity in the region will begin to gradually pick up in 2017, but the recovery will
likely be uneven from country to country, given that some have fared far worse than others over the last few
years.

Latin America's largest power market, Brazil, has struggled with a severe economic recession, political
turmoil, and rising inflation and unemployment. To the north, in crisis-stricken Venezuela, the local
power grid is now teetering on the brink of collapse due to droughts and underinvestment.

Other countries in South America, such as Peru, Chile and Colombia, have managed to adjust to the new
economic scenario in a relatively orderly fashion. In Argentina, the government is currently dismantling
cumbersome subsidies and price controls, a process with painful short-term effects but which is expected to
start paying off in 2017. Mexico, Central America and much of the Caribbean have all benefited from their
strong trade ties to the recovering US economy.

However, the upset victory of Donald Trump in the US presidential elections on November 8 introduces an
element of uncertainty to the outlook for next year. His aggressive anti-trade and anti-immigrant rhetoric
could have serious implications for Latin America - and for Mexico and Central America in particular. In the
power sector, one possible repercussion is a decrease in US cooperation with Latin America on energy and
climate change issues. But for now, it remains unclear which specific policies Trump will (or can) implement
after he assumes office next January.

Despite the fact that electricity demand is cooling off, activity in the Latin American power industry has
not stagnated. The region added nearly 17GW of new generation capacity in 2015, just slightly exceeding
377GW by the end of the year, according to BNamericas estimates. In the nine months through September
this year, at least another 11.4GW had come online.

Over the last year, some large power firms have exited or scaled down their operations in Latin America.
Others are expanding their regional footprints, acquiring the assets of the exiting firms or pursuing organic
growth opportunities in, for example, the newly liberalized Mexican power market, or in the various supply
auctions held throughout the region.
The recent auctions have also served to bolster the region's rising renewable energy sector, with wind and
solar projects securing power purchase agreements (PPAs) at record low prices. Several countries are also
building or putting out to tender transmission projects to connect new generation capacity to the grid,
alleviate congestion problems, and reduce losses.

This report will examine these trends and others in the Latin American power sector, with an eye toward the
challenges and opportunities it will face in 2017.

Figure: Electricity Usage

Annual Electricity Consumption


2016 figure is for first 9 months, or most recent data available
15

10
% change

-5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Argentina Brazil Chile Colombia Mexico Peru


Central America
Source: BNamericas.com with data from local regulators, grid operators
Figure: Installed Capacity

Generation Capacity in Latin America


2016 is likely higher since data was not available for Mexico or Peru
500

400

300
GW

200

100

0
End-2014 End-2015 Mid-2016

Total Installed Capacity


Source: BNamericas estimates using data from local sources
Renewables
Latin America has become one of the fastest-growing markets for renewable energy, reflecting a global
shift in investment flows from developed to emerging economies. The region invested US$16.8 billion in
renewable power and fuels during 2015, up 26% from the previous year, according to data from the latest
Global Trends in Renewable Energy Investment report.

Brazil has consistently ranked among the top 10 global renewables investors over the last few years, coming
in at no. 7 in 2015 despite a 10% dip in spending to US$7.1 billion. For the first time ever, in 2015 Mexico
and Chile also joined Brazil in the top 10, placing ninth and tenth with US$3.9 billion and US$3.4 billion,
respectively. These three countries should remain the biggest renewables markets in Latin America during
2017, especially Mexico, due to the recent opening of its power market.

In October, Argentina concluded its first successful renewables auction in about seven years and then
held a repechage round on November 25. Altogether, the two auctions awarded PPAs to 59 projects with
a total capacity of 2,424MW. Argentina has long had the potential to become one of Latin America's major
renewables markets, but previous attempts to jumpstart investment mostly failed. The recent auctions and
the interest they have generated are thus a promising fresh start.

Peru was one of the first countries in the region to promote utility-scale wind and solar projects, but
additional growth there is hampered by low wholesale electricity prices, a supply surplus, and limited
policy support and incentives.

Several smaller countries have made notable progress as well. To date, Uruguay has built 28 wind farms with
1.1GW of capacity - most of them completed after 2014 - and now generates more than 90% of its
electricity from renewable sources (including large hydro). By September this year, the six Spanish-speaking
nations of Central America had installed approximately 3.3GW of wind, solar, geothermal and biomass
capacity, representing about 21% of the 15.4GW online on the Isthmus, according to BNamericas estimates.

In contrast to European and US energy markets, Latin American countries have generally not relied on direct
subsidies or premium pricing to incentivize renewable power. Major draws for early investors included high-
quality renewable resources and attractive electricity prices, especially in countries that depend on
expensive energy imports, such as Chile, Uruguay and most of Central America. For policymakers in many
countries, the need to diversify the hydro-dependent electricity matrix, made vulnerable by the region's
worsening droughts, was and still is a major incentive to promote alternative sources.

In the last few years, however, technology costs for wind and solar power have fallen sharply, boosting the
economic competiveness of both sources. This trend, which is transforming global energy markets, started to
manifest in Latin America as early as 2014, butappears to have intensified this year, as reflected in recent
power auctions.

At a small renewables-only tender held by the Peruvian government in February, wind and solar projects
won PPAs with respective bids of US$37/MWh and US$48/MWh. Mexico's first two clean energy auctions in
March and September secured average prices of US$46/MWh and US$33/MWh, respectively. In Chile,
August, bringing the bid average down to a 10-year low of US$46/MWh and sweeping half of the
12,430GWh/y of supply blocks on offer.

In addition to technology costs, other factors are likely influencing these recent prices, such as the
willingness of investors to accept lower er turns in exchange for a larger market share. The competitiveness of
the prices also varies from country to country. In Peru, for example, the lowest wind and solar bids are still
more than double the current price of electricity in the spot market. Moreover, bids for wind and solar at
this year's auctions in Brazil and Argentina were somewhat higher compared to their regional peers, perhaps
reflecting investor perceptions of business risk in those two countries.

"In general, we have seen prices trending downward, and rates are now significantly below what we saw just
a few years ago. Some investors will agree to take lower prices in order to get into new countries and
markets, and as long as there is significant interest and demand from international investors, this trend will
continue," says Margarita Oliva Sainz de Aja, an international partner at the law firm Chadbourne & Parke.

"The price of oil, international currency exchange rates, and political changes in Latin America, the US and
Europe will all have an impact as well. It will all depend on the particular country's policies to deal with all
those factors," she adds.

Nearly 4GW of the renewables tendered within the last year are due online in 2018 (see chart below),
including plants in Brazil, Peru and Mexico. Many of these projects should break ground during 2017, if they
haven't already. In addition, earlier in 2015 Brazil and Panama tendered wind and solar plants that are
scheduled to begin operating next year. Startup deadlines in the other 2016 auctions range from 2019 to
2021. Meanwhile, Argentina, Brazil, El Salvador, Mexico and Chile are all planning new supply auctions with
slots for renewables, either for later this year or sometime in 2017.

"Another big challenge will be the transmission systems. Renewables growth tends to be very fast, and some
countries are experiencing curtailment due to the fact that transmission expansion could not match the
pace of capacity growth," say Salvatore Bernabei, Enel's head of renewable energies for Latin America.
"Planning is crucial to the prevention of future grid congestion in countries where significant development
of renewables is expected."
Figure: Tenders
Conventional Sources
While wind and solar have gained steam in recent years, hydropower remains the principal source of
electricity in Latin America. Dams generate just under half of the region's annual power supply, according to
World Bank data, although that figure can reach 60-70% in South American countries like Brazil,
Colombia and Venezuela.

Hydropower's contribution to the regional electricity supply has gradually declined since the 1990s, a trend
that should continue into 2017. Recently, intense and prolonged droughts have reduced the generation
output and storage capacity of existing dams. In addition, many of the newer hydro plants in Latin America
lack large reservoirs, making them even more vulnerable to fluctuations in the water cycle.

Moreover, construction of new dams has become increasingly difficult due to concerns about their impact on
the environment and local communities - especially in the case of large dams, although the problem extends
to projects of all sizes. Many dams currently under construction are beset by cost overruns and delays,
usually as a result of intransigent local opposition, legal challenges in local courts, increased scrutiny by
government regulators, or some combination thereof. Last September, for example, Brazil suspended a
tender to build the 8GW São Luiz do Tapajós dam after the project's environmental permit was cancelled.

Despite these issues, hydro should remain the dominant source of electricity in Latin America for some time
yet. A handful of mega dams are still being built and completed. Ecuador just finished its largest dam, the
1.5GW Coca Codo Sinclair complex, while in Brazil the 1.8GW Teles Pires, 3.75GW Jirau and 3.15GW
Santo Antônio dams are all ramping up to full capacity this year. Other projects of similar size are
underway in Colombia, Venezuela and Argentina. Bolivia is also carrying out pre-investment studies for
two export-oriented mega dams.

In general, though, the future of conventional hydropower in Latin America appears to be in medium to
small-sized installations, while there is an increasing burden on hydro developers to engage with local
communities in order for their projects to succeed. Some countries are also promoting mini hydro projects
(typically 20MW or smaller), which often fall under the same category of "unconventional renewable energy"
as wind and solar power.

Natural gas, in turn, has more than doubled its share of the Latin American supply mix since the mid-1990s
and is now the second largest source of electricity in the region. In Mexico and Argentina, gas-fired plants
generate most of the electricity consumed.

Gas is a cleaner, more efficient alternative to oil fuels and coal. Modern combined-cycle plants can also
provide, along with hydropower, a reliable cushion for the intermittent loads of wind and solar plants. For
these reasons, many policymakers view natural gas as a bridge fuel in the transition to a low-carbon grid.
Latin America's gas-fired plants are also taking on an increasing share of demand from hydro plants,
especially during the dry season.

The power sector has driven gas demand in most Latin American countries in recent years, and should
continue to do so in 2017. New plants are under construction or in development in Mexico, Brazil, Peru,
Latin America is home to some of the world's largest shale gas reserves, but these have remained, for the
most part, undeveloped, and the region is a net importer of gas. Many countries have turned to liquefied
natural gas (LNG) shipments to supplement local gas production. Chile, Argentina and Brazil all have
projects underway to expand their existing LNG infrastructure, while Uruguay and Colombia are completing
their first import terminals. In Panama, AES Corp is building one of Central America's first LNG-fired
plants, along with a regasification and storage facility.

A major uncertainty for 2017 is the effect of the US election on Latin American gas imports. The US has
been expanding its LNG exports to South America and supplies a large chunk of Mexico's natural gas via
pipeline. As noted above, the plans of the incoming US administration remain unclear, but Trump's
protectionist rhetoric on trade could translate into policies that negatively impact US gas exports to the
region.

On a more local scale, Bolivia, one of the main regional hubs for natural gas exports, has had some recent
troubles with meeting its supply obligations to Brazil and Argentina due to stagnating production at its
largest gas fields. The Andean country is working to replace and expands its gas reserves, but strong demand
from both of its export markets next year could cause supply problems, which would in turn affect thermo
generators in those two countries.

Figure: Production Share

Natural Gas and Hydropower


Annual share of electricity production in Latin America
80

60

40
%

20

0
1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013

Natural Gas Hydropower


Source: BNamericas.com with data from World Bank
M&A Overview
As Latin America settles into a period of more subdued growth, some international power firms have started
to exit or scale back their operations in the region.

Some of these decisions are strategic moves to reduce exposure to political uncertainty, FX volatility and/or
drought-related risks in the region. In October, for example, Duke Energy announced a deal to sell all of
its Latin American assets, including operations in seven countries, for US$2.4 billion as part of a plan to
refocus its attention and resources on its domestic market in the US.

Other deals are motivated by financial troubles at individual companies, or are the result of privatization
efforts by local governments in need of cash. At the beginning of this year, the Colombian government sold
its 57.6% stake in local generator Isagen for US$2.2 billion to a consortium led by Canada's Brookfield
Asset Management. In November, there were press reports that Brazilian firms BTG Pactual and
Equatorial Energia had made a 1 billion-reais (US$294 million) offer for the local transmission assets of
Spanish construction company Abengoa, which filed for bankruptcy last year.

These deals have also created more space for Chinese power utilities to continue expanding their presence
in Latin America, particularly in Brazil. China Three Gorges Corp agreed to buy Duke's Brazilian
operations in the above October deal and swept a November auction for concessions to operate 5GW of
hydro plants in Brazil. Compatriot firm State Grid is pursuing a takeover of CPFL Energia, one of Brazil's
largest private power companies, and is reportedly among the parties eyeing Abengoa's transmission assets.

In 2017, "I think we are likely to see more strategic M&A, with companies consolidating or restructuring
their operations in Latin America," says Sainz de Aja, of Chadbourne. "Some asset prices are down, which
will make acquisitions more attractive to certain investors. However, these lower asset prices are generally
coupled with a lower rate of return, which won't be attractive to investors that are looking for higher
returns."

Brazilian federal utility Eletrobras, one of the largest power companies in Latin America, is experiencing
the worst financial crisis in its 54-year history and is also entangled in the wide-ranging Lava Jato
corruption probe. In the midst of a major restructuring, the state utility is also shedding distribution
assets while it focuses on the power generation and transmission businesses. To this end, it plans to
auction off the Goiás state distributor Celg-D in December and to sell six other distribution companies in
the northeast during 2017.

Other struggling firms with operations in Latin America include the aforementioned Abengoa, Spanish
construction firm Isolux Corsán, and US renewables developer SunEdison, which has canceled several
acquisitions in the region and is selling off assets, after filing for bankruptcy protection in April.

Italian energy giant Enel recently completed the first phase of a major restructuring of its Latin American
business, intended to streamline and simplify the group's operations across the region. The company now
plans to continue the simplification process at a country-by-country level, reducing the number of its
companies in the region by 55%.
Enel has also been aggressively pursuing organic growth opportunities in Latin America, particularly in the
renewables sector. Its subsidiary Enel Green Power has successfully bid new renewable projects at
auctions in Peru, Mexico, Brazil and Chile over the last few years.

The Italian company is currently evaluating an "optional pipeline" with some 21GW of potential renewable
projects globally, 48% of which are located in Latin America, according to its 2017-19 strategic plan. By
2019, Enel expects to add nearly 2GW of new renewable capacity in the region, while its renewables
business accounts for 48% of the 4.8 billion euro (US$5.1 billion) that the company plans to spend on
growth in Latin America over 2017-19. Grid networks comprise the second largest share of regional growth
capex at 43%.

Firms such as JinkoSolar of China, Canadian Solar, Spain's Acciona Energía, and German wind developer
WPD have all secured contracts in recent auctions as well. Ireland's Mainstream RP won 27% of the
supply blocks on offer in the latest Chilean auction and plans to spend an estimated US$1.6 billion on
seven wind farms over the next five years.

The liberalized Mexican power market has also created new opportunities for companies to participate in the
construction of transmission lines and new gas-fired power plants. Spanish energy firm Iberdrola, for
example, plans to expand its installed capacity in Mexico to nearly 10GW by 2020 by building some 4GW
of mostly combined-cycle plants. The company expects its electricity production in Mexico will exceed that
of its home market in Spain by 2019.
State Grid Corporation, the world's largest utility, is courting shareholders of Brazilian energy company CPFL
in a takeover bid. The Chinese firm, which is state-owned, is also building a US$2.1 billion transmission line
to connect the Belo Monte hydro complex with southeastern Brazil. (SOURCE: AFP)
Argentina
During his first year in power, Argentine President Mauricio Macri has taken on the difficult task of reviving
an ailing local economy and taming inflation while also removing the currency controls and energy
subsidies kept in place by the previous administration.

For the power sector, this has entailed the gradual raising of electricity rates, which had been essentially
frozen since 2005. While the prices that Argentineans pay for electricity, particularly in the capital city of
Buenos Aires, are clearly unsustainable and burdensome for the federal government to keep in place, making
the case for rate hikes has proven difficult.

In August, a judge blocked the first set of rate increase in Buenos Aires province, following a petition by
opposition lawmakers. The Supreme Court later lifted the lower court's injunction, allowing the new rates to
stand, but has yet to reach a final decision on the case. The government is now holding public hearings on
the rate increases, which could help preempt any further legal challenges. A similar consultation process for
gas tariffs is also underway.

Rate hikes are never popular, although the political opposition has yet to consolidate into a fully unified
front to challenge Macri. An economic recovery could perhaps provide the government with just enough
political capital to carry out the planned increases, which are necessary for the struggling distribution
sector to carry out much needed grid repairs and upgrades. The administration's macroeconomic
adjustments have had a more adverse impact than anticipated, although analysts expect the economy to
rebound by next year.

The interest in the first two renewables auctions would seem to indicate a positive outlook among energy
investors. The first call received bids for more than six times the capacity on offer, while the follow-up
round was four times oversubscribed and tendered twice as much capacity as originally planned. On the
other hand, absent from the list of winning bidders were many of the big international renewable energy
players who are active elsewhere in Latin America.

Argentina recently passed Law 27.191, which establishes an ambitious series of renewable power supply
mandates, with the eventual goal of reaching 20% by 2025, compared to around 1% currently. The first
mandate of 8% comes into force at end-2017, giving the power sector precious little time to prepare. The
government estimates that around 3,000MW of new renewable capacity and US$5 billion of investment are
needed to hit the first target.
Figure: Renewables Goals

Renewable Supply Mandates in Argentina


The targets, from Ley 27.191, apply to distributors and large electricity users (>300kW)
25

20

15
%

10

0
2017 2019 2021 2023 2025

Share of national electricity consumption


Source: Ministry of Energy and Mines
Brazil
Brazil's power industry has been caught in a perfect storm of economic and political disarray. A deep
recession is causing electricity demand to fall, the local energy and construction sectors are engulfed in
the largest corruption scandal in the country's history, and a political crisis has tarnished the reputations of
most established parties in the government.

The latter crisis culminated in the impeachment of President Dilma Rousseff in August this year. She was
replaced by her former vice president, Michel Temer, who is perhaps equally if not more unpopular than
Rousseff. In addition, he and his PMDB party are implicated in numerous corruption scandals. The dust is
far from settled in Brazilian politics, to say the least.

The new administration has focused on implementing austerity measures and privatizing state enterprises, in
an effort to close a massive budget hole and attract private capital. In November, Temer signed off on a law
that allows Eletrobras to fast-track the sale of the seven distribution units it is looking to offload.

The ongoing Lava Jato corruption probe has ensnared some of Eletrobras' flagship generation projects,
including the Belo Monte hydro complex and the Angra 3 nuclear power plant. The latter project is now
expected to miss its 2021 completion deadline.

Flagging demand, accumulated tariff distortions from recent government intervention in the market, and the
lingering effects of an intense dry season, among other factors, have put significant financial strain on many
Brazilian power companies. A growing number of electricity consumers are migrating to the unregulated
market, where prices are lower, causing problems for distributors (who supply the regulated captive market).

The economic crisis has also reduced the lending capacity of BNDES and other state development banks,
which have been a major source of financing for the energy sector during the past decade. On the other
hand, BNDES has said it will prioritize renewable energy lending - good news for the numerous wind and
solar projects that Brazil has tendered in the last few years.

As Latin America's no. 1 economy, Brazil still has tremendous long-term potential, but given the above
challenges in the power sector, combined with the unresolved political crisis and corruption scandals, the
outlook for 2017 is uncertain.

Brazilian President Michel Temer at a press conference earlier this year in the federal capital, Brasília.
(SOURCE: AFP)
Chile
In October, Chile's influential energy minister Máximo Pacheco resigned from his post to manage the
presidential campaign of Ricardo Lagos for next year's election.

Pacheco was one of the architects of the Chilean power sector's recent transformation, which has included,
among other things, a revitalization of the distributor supply auction system, an ongoing investment boom
in renewable energy, and a major overhaul of the transmission sector's regulatory framework.

In the second half of 2017, the long-awaited interconnection of Chile's two main power grids - the
northern SING and central-southern SIC - is scheduled to come online, along with the separate but related
Cardones-Polpaico line on the SIC. These two projects will link up generators on both grids to new
demand centers and ease congestion and bottlenecks, benefitting wind and solar plants in particular.

Over the coming years, the energy sector and renewables in particular are expected to become a prominent
source of new investment in Chile, especially as depressed metal prices hinder growth in the local mining
industry. Chile has roughly tripled its installed renewable capacity (excluding large hydro) over the last
three years to just over 3GW by mid-2016. This build-out should continue into 2017. The current
government estimates that renewable plants will make up one-quarter of Chile's installed capacity by 2018,
compared to around 12.5% currently.

In addition, it remains to be seen if and how the government modifies the bidding rules of the
upcoming supply auctions. Some in the local industry have called for changes to ensure that new
conventional hydro and natural gas-fired projects can enter the market, as both were shut out by renewable
projects in the latest auction.
Figure: Construction

Renewable Project Pipeline


PV Solar Plants Make Up More Than Half of the Current Buildout
4k

3k
MW

2k

1k

0k
End-2012 End-2013 End-2014 End-2015 Jun-16

Operational or Ramping Up Under Construction


Source: BNamericas.com with data from Cifes
Colombia
Earlier this year, Colombia was on the verge of rationing electricity as droughts caused by the El Niño
weather phenomenon crippled its hydro-dependent grid. To control demand, regulators authorized temporary
rate hikes and incentives for self-supply generation, while the government implemented a nationwide energy
savings campaign. By midyear, the droughts had abated, although lingering energy saving habits among
Colombian consumers have caused electricity demand to grow more slowly than expected.

During droughts in Colombia, thermoelectric plants ramp up their output to offset the shortfall in
hydropower. This, in turn, disrupts the local supply of natural gas, which is the most common fuel in the
power sector. Domestic gas production is not expected to cover demand for much longer, and the country is
already developing alternative sources. Work is nearly finished on Colombia's first LNG import terminal,
due to come online by year's end.

Authorities are already pushing for the construction of another LNG facility. Other options include gas
imports from Venezuela and increased reliance on coal power, although each comes with its own set of
problems.

Yet another alternative is renewable energy. Like Argentina, Colombia has lagged behind the rest of Latin
America in incorporating non-hydro renewable sources into its electricity matrix, with just 18MW of wind
and 94MW of biomass capacity presently installed on the 16,530MW grid.

In 2014, the country passed a renewable energy integration law intended to jumpstart the local sector,
mainly through tax breaks. At present, the government is still writing and implementing rules and
regulations for the law.

In the last year, energy regulator CREG has also issued decrees to promote distributed generation, a
potential growth area for renewables. More recently, the regulator has started to evaluate proposed
changes in the wholesale electricity market that would facilitate the incorporation of renewables. The
current market model prioritizes plants that can provide reliable firm capacity, which is problematic for
intermittent sources like wind and solar.

A dried swamp in the normally humid La Mojana region of northern Colombia on March 12, 2016, during the
peak of the El Niño-caused droughts. (SOURCE: AFP)
Mexico
Mexico has continued to implement new components of the wide-sweeping power market reforms that were
passed in December 2013.

As noted above (see "Renewables" section), the country held its first two clean energy supply tenders this
year, awarding contracts that entail a combined US$6.6 billion of new investments in renewable power. A
brand new wholesale electricity market became operational during January and February, and Mexican
regulators plan to roll out additional market mechanisms and instruments over the next year or so.

Federal power utility CFE is implementing a major overhaul of its corporate structure, in order to become
an independent productive state enterprise. The company is also converting its older thermal plants to
natural gas and has put out to tender numerous construction projects, including combined-cycle plants,
T&D upgrades and gas pipelines.

Mexico's power market should continue to stand out among its regional peers during 2017. After all, it is
Latin America's second largest economy and is the last of the major regional power markets to undergo
liberalization.

Further opportunities should arise as the new market and its mechanisms mature. For example, regulators
expect the number of offtakers in the unregulated market (known as the qualified service) to grow in 2017
as large private consumers migrate to the new regime and power trading and marketing firms begin
operating and registering their clients.

The 2017 outlook for Mexico comes with one giant asterisk: President-elect Trump. The Republican
candidate's campaign included, among other things, pointed criticism of the NAFTA trade agreement
between the US, Canada and Mexico. For now, it is unclear whether he will follow through on his promise to
withdraw from the accord. Were he to do so, it would likely have serious repercussions for the Mexican
economy, given that the US is its largest trading partner by far.

In a worst-case scenario, a trade war between the two countries could create obstacles for US power firms
drawn to Mexico by the energy reforms. It is also quite possible that US-Mexico energy cooperation will
suffer under the Trump administration, particularly on clean energy and integration issues. A major
vulnerability is Mexico's dependence on natural gas imports from the US. As mentioned above, Mexico is in
the midst of an oil-to-gas substitution drive in the power sector, while development of its domestic gas
reserves has been slow going.
Figure: Supply Mix Outlook

Government Forecast for Electricity Supply Mix


Combined-cycle plants will continue to displace conventional thermoelectric generators
100

75
% of MWh produced

50

25

0
2015 2021 2030

Bioenergy & Efficient Cogeneration Geothermal & Solar Nuclear


Wind Hydro Other Thermo Combined-Cycle
Source: Energy Ministry (PRODESEN 2016-30)
Peru
Peru's new president, Pedro Pablo Kuczynski, was elected earlier this year on a business-friendly platform,
which included a pledge to unlock some US$25 billion in stalled infrastructure investments. The new
administration is now preparing a package of economic reforms and incentives to spur growth and overhaul
Peru's system for promoting infrastructure projects.

The local power sector is in a er latively comfortable position in terms of supply. The grid has a healthy
reserve margin, and future demand growth should be covered until at least 2024 by the existing generation
projects under construction or ramping up - most of them conventional hydro or thermoelectric plants.

The president's platform for the power sector is thus less concerned with promoting new generation projects,
than it is with fostering consumption. He has pledged to close the electrification gap by 2020, which
entails connecting some 2.6 million Peruvians to the grid, and to expand cross-border
interconnections with Peru's neighbors.

In addition, the infrastructure-acceleration program includes the delayed Sur Peruano pipeline, which,
once completed, will supply natural gas to two combined-cycle plants in Southern Peru that currently burn
diesel.

Peru has a relatively modest renewable generation mandate of 5%, which it should achieve when the
contracted projects from its most recent tender come online in 2018. The prices for wind and solar in that
auction, while historically low, are well above spot prices in the wholesale electricity market, which
averaged US$12.5/MWh in 1Q16. As a result, unless there are changes in Peru's energy policy, or electricity
prices rise substantially, the growth of the local renewable energy sector will likely be constrained in
comparison to its regional peers.
Figure: Reserve Cushion

Power Reserve Margins in Peru


Effective capacity versus annual peak load (2004-2015)
12.5k

10k

7.5k
MW

5k

2.5k

0k
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Effective Capacity Peak Demand


Source: Ministry of Energy and Mines
Conclusion
If all goes as expected, Latin America's economic recovery next year will be an uneven one. However, most
countries will see at least a marginal improvement from 2016, which will be reflected in their electricity
consumption (all other things being equal). Taking the long view, the region's prospects are even brighter.

"Growth projections for the Latin American market have significantly changed in the last year due to the
drop in GDP growth in the region's most important countries - Brazil being first in the list," says Enel's
Bernabei. "However, if you look at governments' efforts to attract new investment, such as tax reforms;
historic achievements like the peace process in Colombia; or if you consider that in Latin America
electricity consumption per capita is still relatively low when compared with OECD countries, we estimate
that in the medium to long term a recovery of the regional economy and power markets is a reasonable
prospect."

Renewables, in particular wind and solar, should continue to gain ground in 2017, especially in Mexico and
Chile. There are challenges in Brazil, but renewable energy appears to be a priority on the energy agenda of
the current government. There are also some positive signs for renewables in Argentina and, to a lesser
degree, Colombia. Conventional hydropower and natural gas should continue to play important roles in the
regional energy matrix as well.

"Latin America continues to be a very attractive market for international investment [in the electricity
business], but the type of investor may change," Sainz de Aja says. "Right now we're seeing lower bid
prices, coupled with more economic and political stability in the region, as compared to years past. The
lower risk profile - and correspondingly lower rates of return on investment - will drive away some investors
that have an appetite of r riskier investments."

The wildcard in 2017 is Donald Trump. It is unlikely that his presidency will have many direct impacts on
countries in the region, apart from possibly Mexico. But a reduction in US cooperation and engagement with
Latin America - on energy issues and in general - would not be inconsequential.

It could, for example, create an opening for China to further expand its economic and political influence
in the region, possibly to countries whose leaders have traditionally leaned toward the US. It could also be
an opportunity for Latin American countries themselves to assume a greater leadership role in global issues
like climate change and renewable energy. Time will tell.
Author Peter de Montmollin

Editor Christopher Lenton

Contact   clenton@bnamericas.com 

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