Gaining certainty in uncertain times: the impact of renewables on energy-intensive industries in Latin America

There is no doubt that the first half of 2020 didn’t play out quite as planned. However, while the current global economic situation has stressed industries to unimaginable extents, today’s low energy price scenario provides large corporate energy users with an unprecedented opportunity to lock in reduced costs, shore up their business model, and hedge against future uncertainty. Here’s why.

Gaining control over costs

The financial impact of the Covid-19 crisis on Latin America’s companies has been widespread. In aggregate, Latin American stocks fell by 35%^[1] in the first six months of this year, compared with a loss of 10.4%^[2] for the emerging markets as a whole.

With so much uncertainty still ahead, long-term scenario planning is all but impossible. But gaining control over energy costs can be a means to free up working capital, strengthen the balance sheet, and gain long-term visibility.

This is the first time in recent history that the energy price environment is so favorable, and no-one can predict how long this will last. And in most markets in Latin America, renewable energy is competitive with conventional sources, or in many cases even less expensive. Large energy users today have an unprecedented opportunity to negotiate the best long-term deal, and they cannot afford to miss this chance.

Why renewables?

Recently, we have seen the speed and scale of what can be achieved by social justice movements around the world, as consumers vote with their wallets to reward responsible actors. Environmental activism is no different. Companies that recognize this and transform their business models away from polluting power sources are ensuring a successful future, responding to their consumers and readapting their strategy, sourcing, and logistics to the world of tomorrow.

We’re already seeing a growing trend by financial markets to move towards companies with solid climate policies in place, making capital scarcer and more expensive for those who don’t. In January this year, BlackRock, the world’s largest money manager, said it will exit investments with high environmental risks, and we believe this is just the beginning.

With both Fitch and S&P Global Ratings reporting that credit conditions in Latin America are worsening amid the Covid-19 outbreak, energy-intensive industries across the region are seeking to shore up their power requirements to weather the storm in the financial markets. One way of doing this is by bringing power purchasing decisions in-house in order to control the attributes of the product and services they’re buying.

In effect, having a sound energy strategy has become as important to many companies as having a sound financial strategy. Consumers and shareholders alike now want to see proof of a companies’ green credentials, whether it shows that their renewable energy sources have substituted a traditional source, or that their energy comes from a producer with a sound community relationship and social program strategy. All of these factors can be meaningfully controlled if the purchase is brought in-house.

Partnering for good

The good news is that large energy users don’t need to build their own renewable energy generation plants in order to access all of these benefits. Through the power purchase agreement (PPA) structure, corporate energy consumers across the region can take advantage of better strategic energy sourcing decisions with the assistance of a knowledgeable partner. This is the perfect opportunity to reduce risks – be that backlash from clients and financial markets related to power sourcing, or the execution risk of the projects that are needed to supply them with power.

Renewable energy projects are fast and relatively simple to execute and have modularity to them that allow them to easily adapt to the corporate energy purchaser’s size. What’s more, they can be leveraged by the corporate purchaser to demonstrate their sustainability commitments, providing a visible signal to customers and investors alike that they are on the right side of the climate equation.

Energy-intensive industries: the backbone of the Latin American economy

In resource-rich Latin America, the energy-intensive extractive and chemical industries make up a large portion of the economy and export basket. 

But it isn’t only the large miners and chemical producers who can take advantage of the current situation. The region is home to a wide range of big energy users, from agribusiness to the pharmaceutical and healthcare industry, mining processing, water desalination, the technology sector, and even retailers. International companies operating in Chile, Peru, Brazil, and Mexico have been early movers in this respect – from Anglo American to multinational company Dow.

A window of opportunity has opened to transition from conventional energy sourcing to renewables. It is hard to know how long this downturn will last, how soon the recovery will be, and more importantly, what other black swan events may push energy costs in the opposite direction.

If these last months have taught us anything, it is that factoring in extreme events needs to be a part of risk models going forward. We believe bilateral power purchase agreements for renewable energy are a vital tool in building resilient energy-intensive businesses for the new normal, post-pandemic. Not only do they offer long-term price agreements at attractive rates, but allow companies to align themselves with customer expectations.

SOURCES COMPILATION

https://www.iea.org/reports/renewable-energy-market-update/challenges-and-opportunities-beyond-2021
https://www.gartner.com/smarterwithgartner/9-future-of-work-trends-post-covid-19/
https://gwec.net/gwec-and-olade-team-up-to-drive-the-energy-transition-in-latin-america/
https://www.fsb-tcfd.org/supportive-quotes/

^[1] Source: Reuters MSCI https://www.reuters.com/article/emerging-markets-latam/emerging-markets-latam-fx-stocks-fall-on-spike-in-virus-cases-dour-growth-forecast-idUSL1N2E11WA
^[2] Source: Hargreaves Lansdo
wn https://www.hl.co.uk/news/articles/how-are-stock-markets-in-latin-america-coping-with-coronavirus-turbulence