RENEWABLE ENERGY: Rich pickings
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Emerging Markets

RENEWABLE ENERGY: Rich pickings

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Latin America’s much-vaunted renewable energy sector is poised finally to get the boost it has long lacked

When Chile’s national airline LAN flew its first ever commercial flight using biofuel earlier this month, the symbolism for the region was hard to miss.

The airline was quick to promote the flight – South America’s first with the fuel – as a major milestone for Latin’s America’s alternative energy industry.

Although the LAN flight used biofuel from the US, the region’s potential as a source of biorenewable energy has never been in doubt, given its climate, natural resources and abundant cheap land. But a series of factors – among them the sustained high oil price, growing concern over energy security and the proliferation of new technologies – is now combining to allow the industry to take off.

Latin America is emerging as the region of choice for renewable energy investment – more than $1 billion in new investments are planned this year alone.

Both the public and private sector are providing the momentum. The most traditional sector, ethanol, received a fillip when the US congress failed to renew tariffs and subsidies at the end of last year. A hefty $0.54 per gallon tariff on imported ethanol, levied since the 1980s, was eliminated, and a $0.45 subsidy per gallon of ethanol mixed into gasoline to US producers worth $6 billion per year lapsed.

Investors are also focusing on petrochemical applications as prices have decoupled from petroleum prices: the price of asphalt has nearly doubled in the last 10 years, says Tristan Brown, researcher at the Bioeconomy Institute at Iowa State University.

Enter the US

That has fired up determination at the US Department of Energy to look at all biorenewable sources for transport solutions. There’s an awareness that Latin America will have a role to play here, even if there’s some reluctance to put all the eggs in one basket: “Although Brazil is seen more favourably by the US than many of the oil producers, such as Saudi Arabia, there’s still a strong desire to see much of this get done at home,” says Brown.

Local governments have been quick to spot the opportunity presented by the US opening. The Brazilian government launched an ethanol programme, Prorenova, with a budget of R$4 billion this year to stimulate the renewal and expansion of sugar cane in the country and reverse flagging ethanol output. The money could result in 1 million additional hectares coming into production and boosting output by between 2–4 billion litres through to 2014.

The recent past for ethanol in Brazil shows many of the difficulties: a very strong real has made the still fragmented and largely family-owned industry uncompetitive. Brazilian production had been falling, with a drop of some 12% between the 2008/09 harvest and the 2011/12 harvest. Marcelo Junqueira, founder of Agrop, an agricultural service provider to the sugar industry based in Orlândia in São Paulo state, says it could take as long as five years for plantations to recuperate.

Yet Luiz Felipe Monteiro, assistant professor in the management department at The Wharton School of the University of Philadelphia, argues that significant foreign investment is putting the industry on a more sustainable footing, with planned investments helping to create a truly global market.

Trailblazers are already showing their willingness to make such significant investments, says Monteiro. The $12 billion joint venture between oil giant Shell and Cosan, Brazil’s largest ethanol producer and a key distributor of fuels, has opened the path for the other oil majors. BP followed suit, signing a $680 million deal last year to acquire 83% of Companhia Nacional de Açúcar e Álcool (CNAA).

Investment is coming from non-traditional investors in Brazil too. India’s Shree Renuka Sugars took over troubled São Paulo-based producer Equipav in 2010, paying some $330 million for a controlling stake and promising a further $120 million in investments.

That has encouraged Petrobras to step up its investments. Brazil’s national oil firm has bought a 49% stake in publicly listed Açúcar Guarani for $920 million. All this is building the momentum for the emergence of ethanol as a recognized global fuel, creating, says Monteiro, an irreversible process.

The rapid emergence of secondary players in the region is helping the industry gain the political clout it needs too. Colombia has been particularly active in building a domestic sugar cane industry, with aggressive targets for ethanol blends into gasoline, while Peru is also building its capacity, and central America benefits from its free trade agreement with the US. Colombian ethanol capacity alone is set to increase by 200,000 litres per day from 2011 levels of an estimated 300 million litres.

At the same time, a host of new US biorenewable-dedicated companies is investing heavily in the region. For ethanol, they tend to pick Brazil, but other countries have their niches too. Argentina is the focus for much biodiesel production, thanks to high levels of soya production and spare refining capacity, while much work on algae fuels is taking place in Mexico, says Brown.

Such private-sector investments are in a number of fields and spread across the region. US firm Amyris, which is producing renewable diesel from ethanol, has a pilot programme where it is testing its product on a small part of the bus fleet in São Paulo. LS9 is working on biodiesel technology in the region while Solazyme is seeking to ramp up production of algae-based fuels, partly in Mexico and Brazil. BioAmber, an industrial biotechnology company that converts feedstocks into chemical applications, has just raised $30 million and is planning a $150 million IPO (initial public offering).

The bewildering number of initiatives and bets on alternative fuel types will ensure plenty of failures in the years to come: the embarrassing collapse of US government-supported solar panels manufacturer Solyndra all too painfully shows the immaturity of parts of the industry. Moreover, interest waxes and wanes in line with the price of petroleum and petrochemicals products. But the increasing momentum for Latin American biofuels seems unstoppable.

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