Latin America a potential global energy giant

By Torsten Henzelmann, Martin Hoyer and Pierre Samaties

Latin America can potentially play a global role in the energy transition as a leading supplier of clean energy – provided it achieves greater regional integration and makes exports a strategic priority. These were the key findings of the second Latin America Energy Week, where Roland Berger was knowledge partner.

The latest in the Energy Week conferences, a series of events focused on different geographical regions, brought together industry, political and society leaders from around the world to tackle the increasingly serious challenges in the field of energy. During the conference, participants were asked about the importance of a set of key energy priorities and what progress had been achieved towards the energy transition so far. Based on their responses, Energy Week knowledge partner Roland Berger calculates that Latin America scores just 22 percent in the Energy Transition Readiness Index (see below). This gives it a solid foundation, but much remains to be done in all areas – including systematically implementing the energy priorities in the economy as a matter of urgency.

Energy Transition Readiness Index

Participants in each session at the Energy Week completed a short survey on the session's topic. The Energy Transition Readiness Index is calculated based on responses from up to 530 respondents in each session. Participants were asked for their expert opinion on the respective importance and progress achieved so far on each of 12 energy priorities, from "driving exit strategies for coal" to "resilience of energy systems". The final overall perceived readiness score as regards the energy transition towards net zero in Latin America is 22 percent.

CO2 reduction – perception vs. reality

Latin America accounted for just five percent of global CO2 emissions in 2020. However, emissions grew by some 20 percent between 2005 and 2019, driven by economic growth and expanding energy demand in the region. The survey of conference participants identified a significant gap between perceptions and reality when it came to what has been achieved so far in the area of cutting emissions: Participants estimated that the region's emissions fell by 17 percent on average between 2005 and today, while in fact no reduction has actually been achieved. This gap between perceptions and reality may also be reflected in future ambition levels. Thus, participants expected emission levels to fall by 37 percent by 2030 compared to their 2005 level – a highly optimistic figure.

Ranking energy priorities – and progress so far

Participants considered speeding up the expansion of renewable energy to be the top priority for achieving climate goals. Here, technology is already well advanced and costs are competitive, making implementation relatively straightforward. Other priorities included integrating renewables into the energy system and decarbonizing industry. The resilience of energy systems and achieving a just transition were considered relatively important. To guarantee social acceptance, matters such as fairness of distribution need to be addressed through regulation.

According to participants, current progress on achieving the energy priorities is slow. Most work is still in the planning phase or yet to begin. Substantial action is therefore needed if the 2030 climate targets are to remain within reach. The survey also revealed a number of blind spots for participants. Areas that have a high impact but where progress has been slow so far include implementing energy storage solutions and developing new energy business models.

A future global energy powerhouse?

The energy transition can be a motor for Latin America's economy, attracting investments and creating new job opportunities. Most countries in the region enjoy a natural competitive advantage here in the form of abundant, high-quality wind and solar energy sources. Technologies such as green hydrogen therefore have major potential for countries in the region.

With energy security back on the global agenda, Latin America has an unprecedented opportunity to expand its role in international energy markets. In the short term, it can supply oil and gas to countries affected by the ban on Russian exports; in the longer term, it could become a leading global producer of energy based on renewables and green hydrogen. To achieve this ambition, the region needs to build on its solid foundation by ensuring greater regional integration and making clean energy exports a strategic priority.

Energy priorities

1. Drive exit strategies for coal: Decarbonization requires a step-by-step phase out of power and heat generation from coal. Strategies must manage this while simultaneously ensuring a secure supply of power and heat. Coal's role in the transition to carbon neutrality must be clearly defined within these strategies.
2. Accelerate renewables: The speed of the expansion of renewable energy is strongly linked to the speed of decarbonization. However, technological, societal, and bureaucratic barriers partly impede progress. Lifting these barriers is key to speeding up the roll-out of renewable energy solutions.
3. Drive carbon capture and storage: Carbon capture and storage (CCS) is a technological solution for capturing emissions and storing carbon in a way that lessens its climate impact. Decarbonization strategies must define the role of CCS technologies in the transition towards climate neutrality.
4. Digitize the energy grid: A greater share of intermittent renewable energies makes it more challenging for power grids to maintain a secure power supply. The safe and reliable set up, maintenance and operation of the future energy grid requires new digital solutions.
5. Implement energy storage solutions: The intermittency of renewables necessitates both short-term and long-term energy storage solutions. Technological and economic solutions must be devised to ensure that 100% renewable energy delivers a highly secure supply.
6. Power-to-X solutions: The transformation of power to hydrogen and other fuels enables the storage of otherwise curtailed renewable energy. Additionally, power-to-X fuels can be used in hard-to-abate sectors such as aviation and shipping or high-temperature industrial processes.
7. Decarbonize industry (scope 1, 2, 3): Industrial production can generate significant carbon emissions. These must be reduced across Scopes 1, 2 and 3 in order to move towards a carbon-neutral industry and society. The roll-out of new production processes and energy-efficiency measures must define a pathway to carbon neutrality.
8. Sector coupling to decarbonize end-user sectors: All energy end-user sectors must be decarbonized to create a truly climate-neutral society. With an increased share of renewable power generation, the heating and mobility sectors can be decarbonized via the electrification of end-user appliances.
9. Re-invent energy business models: Energy business models are a key enabler for fostering investment in decarbonization technology, for example, via contracting solutions. Solutions such as PPAs (power purchase agreements) and long-term trading can secure payment streams over the investment period, which makes investments bankable and suitable for low-interest financing.
10. Design emission markets: An overarching regulatory framework must ensure the cost-efficient reduction of carbon emissions wherever possible. Implementation of emission markets and/or carbon pricing mechanisms is crucial in order to align incentives across continents, countries, and sectors.
11. Just energy transition: Social acceptance is an essential component of the energy transition. A fair energy transition further includes affordable energy supply, decent working conditions, as well as diversity and inclusion. Social distortions must be avoided, as well as energy poverty and resistance to renewable energy.
12. Resilience of energy systems: The global events of recent years have led to increased uncertainty and greater stress on the management of organizations. Be it global climate change, energy scarcity, social unrest, failures of cybersecurity or war, the ability to think the unthinkable and prepare scenarios is increasingly important as a competitive factor.

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