How would you describe the South American photovoltaic market at present?
There isnt one South American PV market. It is rather a group of markets divided into the different countries. Each market has its own unique features. The common characteristic is that all of them are relatively nascent still. They are not mature at all.
What is the main driver for PV development amongst the different countries?
The most common characteristic is grid parity. So potentially all countries are now realizing that there are many situations where PV is already competitive with other alternatives.
Is it true that not all countries of South America are at the same place in terms of PV grid parity?
Absolutely. And we should speak about Latin American and not just South America, so from Mexico down to Chile including countries like Panama, Costa Rica and Mexico. What we can say is that there are some situations where grid parity is beginning to appear.
The most obvious one is Mexico. For residential consumers with high electricity consumption, electricity rates are currently very high. In that situation, grid parity for PV systems is very evident. But there are other situations in Mexico where PPAs can be closed with some consumers. Also in the north of Chile, there are some mining companies that need energy under certain conditions of cost and reliability and in some cases PV is able to offer that.
Grid parity is combined with the fact that all of these markets are showing economic growth and all of them need more installed generating capacity, because they need more energy. PV is then appearing as a feasible alternative because it is already competitive on price.
All the governments are then starting to think about how to regulate these new technologies coming to the market and they are organizing their regulative frameworks to facilitate PV development.
Are there major obstacles in the regulatory frameworks in Latin America standing in the way of PV competing with other electricity source?
Well of course there could be many obstacles! A facilitating regulatory framework is needed and Im not talking about net metering only. In some cases a PPA, based on pure self consumption, could be enough. Net metering is still very important though.
There are several countries that are introducing net metering. In Mexico there are a couple of mechanisms that work as a net metering system. In Brazil a net metering system was approved last year and it is already up and running, but there is little activity on the market at the moment. In Chile there is a net metering system that is also generating small volumes. All of these are an important regulatory basis to create a healthy market.
Would you say that PV is generally supported within governments and also in the business community in Latin America?
From the political point of view, PV is supported as long as it is economically competitive. I dont think in Latin America we are going see to generous economic support measures for PV. There will be support for PV in the form of favourable legislation and maybe some tax advantages. There may be certain generation quotas for renewables, but I doubt that were going to see large FIT programs as we have seen in Europe.
We have seen some tariff programs in some countries, but they are limited in time and in volumes. As I said before; the main driver in Latin America is grid parity.
Is there room for the soft costs of PV installations to be reduced, through removing regulations in some countries?
Latin American countries traditionally are quite bureaucratic, so I wouldn't expect very lean and easy administrative processes. I believe governments could make an effort to reduce the potential administrative problems, but I wouldnt expect it to be a fast process.
We've seen a huge pipeline of projects get approved by environmental authorities in Chile, something like 4 GW. How realistic do you think that that will actually be realized?
It's hard to know exactly. But its worth noting that although the environmental permit is one of the most important steps in the process, it is not the most important one. The most difficult step is the signing of a PPA with an offtaker. This is the critical milestone and I doubt that these 4 GW have a proper PPA in place.
Also it is important to take into account that Chile is a relatively small country, with 16 or 17 million people. The installed capacity of the country is around 15 or 20 GW. So I doubt that 4 GW will be realized only in PV.
So taking those things into consideration, we can expect something like 1 GW to 1.5 GW of pipeline to be built over the next three years, in terms of large projects.
So with these large scale projects, is it right that PV developers are looking to get the environmental approvals before speaking to the mining companies or the offtakers, with whom they would sign a PPA?
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Maybe the developers are in discussions, but they don't have the PPA closed.
How difficult is it for PV to compete economically with the diesel-generated electricity for these Chilean mining operations?
PV is interesting for mining companies under certain conditions, but PPAs are very tough. PPAs signed by mining companies are very demanding. The PPA we know well was signed earlier this year and it required prices below US$0.10 or even US$0.09 per kilowatt hour, which is quite demanding. And also included was very heavy penalties if the electricity was not delivered pursuant of the conditions in the contract. PPAs can also run over a relatively short periods of time. This means that the payback has to be relatively short, otherwise its just not profitable. So signing PPAs with mining companies is certainly not easy.
Looking outside of Chile, weve seen renewable energy auctions in Brazil that PV projects can compete for; how promising do you see that development?
Of course PV is generating a lot of interest in Brazil. Already last year everybody was expecting relatively large parks to be tended. But if you look at what Brazil has done in the past, it has always been relatively technologically agnostic. So the tenders are made and generally the cheapest option is selected. The technology itself is not generally considered.
Maybe in Brazil specific PV tenders will come in, and that would be a good opportunity, but I doubt that will be large volumes. Looking at the most competitive new generating capacity options in Brazil, PV is not very well positioned. Hydropower is relatively cheap and wind is some areas is very interesting as it is relatively windy in the northeast of the country. Brazil also doesnt have a lot of sun; its not the same situation as in the north of Chile or in the north of Mexico.
So I dont think that we are going to see a huge volume of large PV plants built in Brazil in the next few years. However that being said, the net metering system is very interesting and that could generate volumes of small and medium sized systems.
On the cost side of the equation, is there a big potential for cost reductions on a BOS level?
At the moment we know that the market is very immature. This means there are no clear price standards and that the number of companies operating in Brazil is not large, therefore competition is not very intense. This allows for relatively high margins and creates an opportunity to optimize costs to reduce prices.
I think therefore prices for small and medium sized systems can still go down significantly. When we talk about PPAs, there the story is a little bit different. Those prices undergo intense competition and are more difficult to reduce.
We also know that Brazil likes domestic manufacturing. Is there much potential in terms of manufacturers establishing operations there, or perhaps in a country like Chile?
No, I dont really think so. Brazil may be the only exception, as taxes on imports are very high. That represents an opportunity to manufacture PV modules in the country. But I dont know how successful an operation would be.
The manufacture of c-Si modules is something that is very well known and has developed hugely over the last decade. The processes within this have been optimized and companies have a lot of expertise and are manufacturing in very large factories. Costs have also been optimized in these operations, because this has been an absolute must if a company is going to stay in the market.
There are two module-assembling factories in Brazil in the moment, but given the factors I set out before, I doubt whether these companies will achieve competitive prices on the international market. If you do add the taxes for importation into Brazil then it could generate a business case. But still I dont think that its something that will flourish over the next years.
The same message applies to the rest of the region. I think it is relatively inefficient in the next two, three, or four years to establish a new manufacturing facility in Latin America, because the existing ones are already optimized and have excellent economies of scale.
Weve spoken a lot about Mexico, Chile and Brazil, outside of these countries, how much potential is there for PV in Latin America?
Those three are the countries that can deliver volumes. There are some opportunities in Peru, Ecuador, Costa Rica, Dominican Republic and Panama. Specific opportunities may happen, but volumes will be lower and it really wont justify establishing operations in any of these countries. However as grid parity becomes increasingly evident, PV will begin to spread around the area and in a few years some of these countries could develop significant volumes.
What would be your advice for firms looking to develop operations in Latin America, are local partners important or is it about establishing local operations?
For all European companies and that even includes Spain there could be some cultural shock when doing business in Latin America. People think and do business in a different way than we do in Europe. Also, things sometimes dont happen exactly as they should, or rather how things have been stated in the press.
Having an understanding of local specificities or peculiarities is therefore very important. Having partners who understand how things operate in each country is very important. And of course, having someone who understands PV is important. So those two things combines is ideal.
Pérez will be one of the experts speaking at the Investment Workshop Series: PV in…, which takes place Sept. 3-4 in Munich, Germany. He will take part in the workshop ‘PV in Latin America.'
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Jonathan Gifford
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