Reviving Latin America's energy transition requires wind and solar
Executive summary
Latin America is a frontrunner in the energy transition. It has the cleanest electricity mix in the world. But it is mainly focusing on hydropower, which is susceptible to altering rain cycles. The region has huge potential in other sources of green energy, such as sun, wind and geothermal generation. To remain a leader in clean electricity and achieve net zero emissions in 2050 it needs to step up investments in these sectors. Financing will be challenging, particularly for many higher indebted Caribbean countries. Their economies are the most vulnerable to economic and financial shocks and climate change, and are the least able to adapt. Some countries in the Latin American region have shown to be innovators in climate finance. This offers hope for the rest of the region to finance investments in climate mitigation and adaptation measures, including the energy transition. Absent such investments, the region risks de-greening its energy mix and even weaker productivity and economic growth.
In 2022, Latin America region will return to the meagre economic growth path it had prior to the Covid-19 pandemic. With a forecasted 2.1 and 2.2% aggregate GDP growth in 2022 and 2023, the region will once again be the slowest growing in the world, aside from conflict hit Eastern Europe. This reflects a less supportive external environment, strong inflationary pressures, monetary tightening, and political uncertainty. Russia’s invasion in Ukraine in February 2022 will aggravate these factors. This is particularly true for commodity importing countries in the Caribbean and to a somewhat lesser extent in Central America. Meanwhile, commodity exporting countries in particularly South America will be impacted less by the Russia-Ukraine conflict. However, the events are still unfolding while risks to the outlook for Latin America are mainly on the downside (see for our central global scenario the Atradius Interim Economic Outlook of April 2022).
Key points
- Latin America experienced an unexpectedly strong - albeit uneven - rebound from the deep Covid-19 induced contraction. Among the world’s highest vaccination rates contributed to this.
- However, going forward, economic growth will return to its slow growth path. This reflects most of all structural impediments that keep productivity low. This underscores the need for structural reforms. However, political uncertainty in many countries makes the outlook for such reforms over the forecast period unfavourable.
- Vulnerability to climate change adds to the challenges the region is facing. More extreme weather events, such as hurricanes, floods and droughts, already impact the region’s infrastructure, - export generating - agriculture and tourism, and power generation, and as such the region’s economic activity.
- The region is a frontrunner in the energy transition, mainly focusing on hydro power. But Latin America’s energy transition is losing momentum as the region’s largest countries are moving into the opposite direction. The region needs to step up investments in other green energy sources such as wind and solar, to achieve net zero emissions in 2050 and prevent an even weaker growth path.
