Energy, Climate Change & Extractive Industries

The Inter-American Dialogue’s Energy, Climate Change & Extractive Industries Program seeks to improve understanding and communication on energy and climate policy issues in Latin America through research, public events, and roundtable discussions. By producing balanced analysis and convening policymakers, corporate leaders, and industry experts, we inform and shape policies that promote energy security and climate change mitigation while encouraging economically, socially, and environmentally responsible development of natural resources.


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Caribbean Covid-19 power sector renewable energy

What Does Covid-19 Mean for Caribbean Energy?

The economic damage wrought by Covid-19 in the Caribbean will have numerous implications for the energy sector. In this Q&A, Jed Bailey, managing director of Energy Narrative, discusses impacts for renewables, resilience, utilities, and more.

˙Jed Bailey

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Tomorrow, April 22, on the 51st Earth Day, US President Joe Biden will kick off what promises to be a signature campaign of his presidency: a mission to rally nations around the world to unprecedented climate action. At a virtual Leaders Summit on Climate, Biden will mark the return of the United States to the Paris Agreement with what is expected to be a bold new Nationally Determined Contribution. He will appeal to other countries to raise their ambitions as well, and push for greater support for vulnerable countries to adapt to the mounting impacts of climate change.

Just as Biden tackles one of his greatest foreign policy challenges, his administration is also grappling with one of its most vexing and urgent domestic issues: an immigration system gravely overextended by an increase in migrants at the southern border. More than 170,000 migrants arrived in March, the highest number since 2006. They have largely originated in the Central American region often referred to as the Northern Triangle (El Salvador, Guatemala, and Honduras), fleeing a complex mix of gang violence, poverty, inequality, corruption, weak rule of law, and other factors. Covid-19 has amplified the effects of some of these problems. And though they are by no means the leading drivers of migration, disasters, hunger, and economic insecurity fueled by the impacts of climate change (to which Central America is particularly vulnerable) are increasingly important and expected to accelerate.

Thus, making climate change a central theme of a renewed US focus on the root causes of migration from the Northern Triangle presents an opportunity for the Biden administration to address its border dilemma while simultaneously advancing its climate-related foreign policy goals. 

Climate-related Migration from the Northern Triangle

Climate change contributes to Central American migration in many ways, and largely through its intersection with other structural factors that push people to leave. The easiest to visualize is the devastation wrought by extreme weather events such as 2020’s Hurricanes Eta and Iota. Scientists have linked warming oceans to stronger storms and described the striking of these Category 4 storms just two weeks apart as unprecedented. Their impacts were harrowing. According to USAID, they affected nearly 9 million people in Guatemala, Honduras, and Nicaragua, displacing hundreds of thousands from their homes and exacerbating preexisting humanitarian and economic crises. At least 230 people perished. In Honduras, where nearly half the population was affected, the World Bank preliminarily estimated economic losses of $2.8 billion (GDP was $25.1 billion in 2019) and damage to 85,000 homes. The destruction of 800,000 acres of crops and the disruption of the sowing cycle have raised the specter of famine this year.

In addition to increasingly calamitous individual weather events, Central Americans are also threatened by a more pernicious general growth in both flooding and drought in the agriculture-dependent Dry Corridor, the majority of which is located in the Northern Triangle and Nicaragua. Agriculture employs a large share of the workforces of these countries—more than 30 percent in Guatemala and Honduras. According to the Migration Policy Institute, floods and droughts, often hard to forecast and linked to the increasingly frequent and intense El Niño phenomenon, combine with factors such as poverty, low access to health care and financial services, damage to rural infrastructure by disasters, deforestation, and lower fish stocks during El Niño years to produce extreme rural food insecurity. The UN’s World Food Program (WFP) USA states that of 2.2 million people currently affected in the Dry Corridor, 82 percent are resorting to “crisis-level coping strategies, including selling agricultural tools and animals, skipping meals, and eating less nutritious food.” A 2019 survey by the UN Food and Agriculture Organization and WFP found that 8 percent of families in the region intended to migrate due to the conditions.

Most of these migrants are not initially bound for the United States. Instead, they head to nearby towns or to cities, which “quickly grow overcrowded...stretch[ing] infrastructure, resources, and services to their limits,” according to a 2020 New York Times/ProPublica report. Urban migrants from rural areas often become concentrated in “slumlike suburbs” of cities like San Salvador, where public services, good jobs, and the state are practically absent and gang violence proliferates. In a process known as “stepwise migration,” migrants gradually take greater risks and move farther from home in pursuit of opportunity. Some eventually arrive at the southern border of the United States. The report’s model suggests that if governments take only “modest action” to reduce emissions, 680,000 migrants driven primarily by climate (5% of migrants are projected to fall in this category) will reach the US from Central America and Mexico between now and 2050. Unchecked, climate change could produce over a million such migrants—excluding undocumented immigrants, who could number twice as many.

US and Northern Triangle Climate Goals

As the consequences of climate change build in Central America and elsewhere, Biden is carving out a central role for climate change in his presidency. One week after taking office, he signed a sweeping executive order that, among many other measures, mandated the infusion of climate change into all aspects of US foreign policy. Biden wants the United States to reach net-zero emissions by 2050 and to urge other countries to step up as well. At this week’s summit, the White House aims to keep the more ambitious of the Paris Agreement’s targets (an increase of less than 1.5 degrees Celsius above pre-industrial levels) within reach and drum up financial support for at-risk countries to adapt to climate impacts. Of the 40 countries invited to the summit, 17 account for roughly 80 percent of global emissions. Vulnerable countries, including Antigua and Barbuda, a Caribbean nation whose smaller island (Barbuda) was decimated by Hurricane Irma in 2017, are also represented, though no Central American countries are included. 

Despite their low greenhouse gas emissions per capita relative to countries like the United States, Northern Triangle countries are taking steps to do their part. Guatemala aims for a reduction of 11.2 percent (22.6 percent with international support) of its total greenhouse gas emissions by 2030 (relative to a business-as-usual (BAU) scenario with 2005 as a base year). El Salvador has a goal of reducing its energy sector emissions by 46 percent relative to BAU by 2025. And Honduras hopes to reduce its emissions by 15 percent (relative to BAU and conditioned on international support) and reforest 1 million hectares of forest coverage by 2030.

Aid from the Biden administration can support progress toward these goals while enhancing opportunity and prosperity for would-be migrants and stemming migration’s root causes. Three key officials that Biden has appointed to respond to the strain on America’s immigration system—Vice President Kamala Harris, Coordinator for the Southern Border Roberta Jacobson (who is stepping down at the end of April), and Special Envoy for the Northern Triangle Ricardo Zúñiga—have already been involved in climate-related conversations, largely focused on adaptation and resilience.

On April 9, the White House requested $861 million from Congress for the Northern Triangle as part of Biden’s first budget proposal. Using some of these funds to advance climate change mitigation and adaptation efforts could directly contribute to development and alleviate both climate-related and non-climate drivers of migration. Notably, the $4 billion four-year Northern Triangle aid package mooted by the Biden campaign contemplates grid modernization, a transition to clean energy, and doubling the capacity of the Central American Electrical Interconnection System (SIEPAC by its Spanish initials) in addition to adaptation and resilience measures. Some of these objectives carry over from Biden’s leading role in Central America energy assistance as vice president.

Opportunities for Development Driven by Climate Action

Investment in renewable energy is one area with potential to yield benefits beyond climate change mitigation. Paired with investment in technical education and training, it could create higher-value jobs and reduce dependence on agriculture and manufacturing. Increasing the supply of affordable and reliable energy could also catalyze economic development. Electricity in Central America is expensive—in September 2020, six of the seven Latin American countries with the highest business electricity prices were in Central America, according to one database. In 2019, two thirds of the Northern Triangle’s electricity was generated by fossil fuels, which are largely imported and have volatile prices, or hydropower, which is threatened by droughts. Parts of Guatemala (> 5 percent of the population) and Honduras (> 8 percent) remained without electricity at all as of 2018. 

Moreover, parts of the Northern Triangle are rich in renewable energy potential, particularly solar and geothermal. Auctions for renewable energy across Latin America, including in El Salvador, have yielded competitive prices. Diversifying generation sources will reduce vulnerability to oil price spikes and droughts, and decentralization of generation and implementation of energy storage could increase resilience to disasters. The creation of solar microgrids with battery storage could bring electrification to the region’s remaining non-electrified rural areas without expensive transmission investments. Greater clean energy usage could also improve health in Central American cities. Guatemala and El Salvador are two of the top four countries in Latin America with the highest proportion of deaths associated with air pollution from burning fossil fuels (9.2 percent and 9.1 percent, respectively).

Despite the possibility of renewable energy jobs in the future, dependence on agriculture is likely to continue in the near term due to the current skills and education of the labor force. This means adaptation will be paramount in rural areas. Nature-based solutions such as reforestation could create alternative sources of income and food to agriculture, making rural families less vulnerable to the destruction of their prospects by a weak harvest or a hurricane. Reforestation could also reduce net emissions and mitigate climate impacts like erosion and flooding. The region’s forests have been razed by illegal cattle ranching, oil palm plantations, and cocaine trafficking—three of Central America’s largest forests were reduced in size by more than 23 percent from 2002 to 2017. Bolstering forest protections and rooting out the illicit activities driving deforestation would make communities safer. And financially empowering indigenous groups to be forest stewards and strengthening indigenous land rights, which studies have shown to be a highly effective conservation strategy, would resonate with the values of indigenous communities. Proactive engagement with local communities and existing civil society infrastructure is essential to the success of these measures.

Finally, the Northern Triangle’s weak institutional capacity and rule of law have long been leading drivers of migration, and their strengthening would bring clear benefits for mitigating and adapting to climate change. Transparency is needed for the proliferation of high-value contracts necessary to expand renewable energy. City planning must involve broadening access to housing outside of disaster-prone areas while limiting housing within them. Emergency response capabilities need to be scaled up. As discussed, the rule of law must be established in the region’s forests. A more educated workforce, particularly in the skills that clean industries demand, would help diversify the economy. 

These problems are nothing new and anything but simple, but the reengagement of the United States with the Northern Triangle to address them is an important step. Biden’s high-level envoys to the region suggest he understands the gravity of the situation, and this week’s Earth Day summit is a chance to further demonstrate the same on climate. The question is whether he and his team will capitalize on the chance to respond to both climate change and migration in Central America in one fell swoop.



Biden's Central America Plan: Perspectives from the Region (Event summary)

Central American Migration: Current Changes and Development Implications (Report)

Let's Work With Latin America to Fight Climate Change (Op-ed)

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An interview with Jed Bailey, managing director of Energy Narrative

Nate Graham (Program Associate, Energy, Climate Change & Extractive Industries): For more than two months, Covid-19 and the measures implemented to slow its spread have had a devastating effect on the global economy, with activity ceasing almost entirely in some sectors. The virtual disappearance of international travel has hit Caribbean economies particularly hard, decimating the tourism sector on which they greatly depend, and which is expected to lag in its recovery as consumers continue to be wary of travel and have less disposable income in their pockets. The current economic adversity in the Caribbean, and that on the horizon, will have numerous implications for the region’s energy sector and raises many questions.

Prior to Covid-19, the Caribbean was a burgeoning market for renewable energy investment with abundant untapped potential, especially in solar power. Additionally, in recent years, catastrophic storms have shined a light on the need for more modern and resilient grids in many islands. How will Covid-19 and recovery spending affect ongoing efforts to invest in these areas? Renewable energy development to date has been driven in part by the regional power sector’s high dependence on imported oil, which has been volatile and often costly, but oil prices have recently reached record lows and may remain depressed for a sustained period. Will islands hit the brakes on renewable energy? And as economic activity languishes due to stay-at-home measures, the region’s utilities are facing an unprecedented power demand crisis. How is Covid-19 affecting them? Finally, how are governments reacting to all these disruptions in the energy sector?

Jed Bailey is the managing director of Energy Narrative, which in addition to its analysis and advisory services, publishes a weekly brief on the latest energy news in the Greater Caribbean. I asked him how he sees the region’s energy sector now and in the post-pandemic world.


Nate Graham: In general, what do you see as the effect of Covid-19 on ongoing efforts to drive renewable energy development and bolster grid resilience in the Caribbean? Is the idea of using fiscal stimulus measures during the Covid-19 recovery to accelerate renewable energy development, grid modernization, and thus economic diversification being discussed, as it is in some other regions?

Jed Bailey: The Covid-19 crisis strikes on the back of five years of rapid growth in renewable energy capacity across the region and threatens to stall the momentum that has been built. Between 2015 and 2019, the Caribbean region increased renewable energy capacity by 50 percent, growing from 2.3 GW to 3.4 GW. Of this total, solar power has grown the fastest, almost tripling from 330 MW in 2015 to 950 MW in 2019. Although most new capacity additions are now renewable energy technologies, renewables are still a relatively small share of the total installed capacity in most countries. Jamaica was an early leader, installing the first privately owned wind power project in 2004, but today renewables still account for just 17 percent of the total electricity generation capacity. Barbados has committed to 100 percent renewable energy by 2030, but currently has just 25 MW of renewable capacity, roughly 9 percent of the island’s total generation park. For most countries, the majority of their power comes from thermal generators burning imported fuel oil and diesel. A few of the larger jurisdictions have access to natural gas for utility scale electricity generation, notably Trinidad & Tobago, Jamaica, the Dominican Republic, and Puerto Rico.

Resiliency is also a major concern for the region. Recent major hurricane strikes in the Bahamas, Puerto Rico, Dominica, Barbuda, and others destroyed power lines and damaged wind turbines and solar power panels. Microgrids are only just now being developed as countries in the region grapple with how to balance investment in resiliency and redundancy with the need to keep electricity tariffs and government spending at sustainable levels.

However, overall, Covid-19 has been a very difficult external shock for the Caribbean region and other priorities are likely to supersede continued efforts in renewable energy and resilience. In addition to the direct human toll and pressure on the region’s health care systems from Covid-19, the collapse in income from tourism and remittances has been deeper and faster than during the global financial crisis of 2008-2009.

Thus, the initial discussions of what comes next that have taken place have focused on reducing economic dependence on tourism, given the expected slow recovery of the sector. Tourism accounts for just over 5 percent of GDP on average in the Caribbean, but many countries are far more reliant on it—in Aruba tourism directly contributes one third of the country’s GDP, in six other Caribbean nations it accounts for a fifth or more of the total, and in a further seven countries it has a share greater than 10 percent. Remittances are also an important source of income for many countries, totaling more than 30 percent of GDP in Haiti, 16 percent in Jamaica, 9 percent in Dominica, and 8 percent in the Dominican Republic. With tourism in freefall and remittances projected to fall 20 percent this year, most countries are focused on simply surviving the near-term shock.

Economic stimulus packages have likewise been focused on near term needs. The IMF, IDB, World Bank, and other multilateral groups have already enacted several support packages for countries in the region aimed at macroeconomic stability, supporting health care systems, and providing cash transfers and other income support to the unemployed. Increasing local production of food and critical manufacturing capabilities are also a priority as global supply chains look vulnerable to Covid-19 related disruptions.

Regarding the possibility of renewable energy stimulus, countries currently have more than enough electricity generation capacity to meet demand given the sudden economic slowdown and the fact that hotels and restaurants remain empty. In addition, most renewable energy and microgrid technologies are imported, and so these projects provide less stimulus to the local economy than investment with greater local content. Overall, for most countries, economic diversification in the energy sector is much lower on the priority list than other sectors, at least for the time being.


Nate Graham: How have past price fluctuations in the price of oil affected political will to pursue renewables and natural gas? Will current oil prices threaten expansion of renewables, or has the Caribbean been burned by oil price spikes too many times? 

Jed Bailey: The Caribbean has certainly had several trips on the oil price rollercoaster. During the period of high oil prices in the early 2010s, electricity rates soared, as did inflation, as oil imports are the single greatest use of foreign currency for many islands, accounting for roughly 13 percent of GDP. Some islands softened the economic blow by subsidizing electricity tariffs, while others, such as Jamaica, developed infrastructure to import natural gas and diversify their power generation fuels. The 2013-2014 oil price collapse in turn put proposed natural gas infrastructure projects in Barbados, the Bahamas, Puerto Rico, and the Dominican Republic on hold. Although oil prices soon rose again, rapidly falling costs for renewables and, more recently, battery storage, made these technologies increasingly attractive relative to major investments in natural gas infrastructure. Barbados, for example, is no longer pursuing natural gas imports for utility scale power generation as it focuses on increasing renewable generation. The current return to very low oil prices will further reduce the attractiveness of natural gas for those islands that do not already have the required infrastructure in place, potentially once again stalling the Bahamas’ plans to switch the main generation station on Nassau to natural gas, for instance.

Political support for renewables will remain, but the dip in electricity demand from the economic recession will slow the need for new electricity generation capacity. The ongoing financial drain on governments and utilities will also force most countries to continue to rely on their current electricity generation capacity, as funds will not be available to prematurely retire thermal generators in favor of new renewable capacity.


Nate Graham: Has Covid-19 exposed any particular weaknesses in the Caribbean’s energy sector?

Jed Bailey: The most important weakness is in the financial standing of some of the region’s utilities. The reduction in utility income from falling electricity demand (especially from the commercial and hotel sectors, which constitute the most reliable and lucrative customers for most utilities in the region) will more than offset their reduction in fuel costs. This means that countries that subsidized electricity tariffs in the past, such as and Trinidad and Tobago, have little room to reduce tariffs now to help support the future economic recovery.

The exact situation varies by company. Most of the privately-owned utilities in the region, including BL&P in Barbados, Lucelec in St. Lucia, and JPS in Jamaica, had a relatively strong financial position prior to the crisis. On the other hand, many state-owned utilities, including BPL in the Bahamas and PREPA in Puerto Rico, already had high levels of debt (often from subsidizing electricity tariffs) and have limited ability to raise additional funds without external support.


Nate Graham: Conversely, have there been any bright spots?

Jed Bailey: Although investment in new renewable energy will likely be delayed, the decline in electricity consumption means that renewable energy capacity that is already installed is now providing a larger share of the total energy supply than ever. Because renewable energy sources have nearly zero marginal cost and are generally non-dispatchable (particularly solar and wind, which are most prevalent in the Caribbean), these technologies will continue to be used first, with the lion’s share of the reduction in demand cutting into supply from thermal generators. This reduced call on thermal generators, along with the dramatic fall in liquid fuel prices, will greatly reduce the amount of money spent on fuel imports. For many countries in the region this is one of the largest drains on foreign currency reserves, representing 28 percent of GDP in Turks and Caicos, 23 pecent of GDP in Barbados, and 22 pecent of GDP in Dominica. This should be a welcome respite for Caribbean countries that rely on tourism as a source of foreign currency and will further burnish the region’s already strong trust in and support for renewable energy.


Nate Graham: How have Caribbean governments thus far managed the balance between continuity of electricity services and the health of power companies’ finances, with many consumers out of work and unable to pay their bills? What measures have been taken across the region in terms of subsidized rates, waiving or postponing bill payments, etc., and in which islands are power companies bearing the greatest cost?

Jed Bailey: As in many parts of the world, Caribbean utilities are suspending electricity disconnections for non-payment. In most countries, new electricity subsidies are not being considered, although the fall in the cost of liquid fuels will have much the same effect as electricity prices closely mirror oil prices. In many countries, fuel costs are separated from other utility costs and are passed through directly to the consumer. This can be a substantial share of the total—in Barbados, for example, the March fuel charge represented roughly 60 percent of the total electricity bill for a typical residential customer. When the drop in liquid fuel prices in April is factored in, that country’s electricity customers could see as much as a one-third reduction in the cost per kWh for their May bill. Even so, delinquencies are expected to rise as businesses across the region that depend on tourism see their revenue collapse and workers lose their jobs.

In collaboration with


Electrified Islands: The Road to E-Mobility in the Caribbean (Report)

Clean Energy Auctions in Latin America and the Caribbean (Report)

[post_title] => What Does Covid-19 Mean for Caribbean Energy? [post_excerpt] => The economic damage wrought by Covid-19 in the Caribbean will have numerous implications for the energy sector. In this Q&A, Jed Bailey, managing director of Energy Narrative, discusses impacts for renewables, resilience, utilities, and more. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => what-does-covid-19-mean-for-caribbean-energy [to_ping] => [pinged] => [post_modified] => 2020-05-22 19:09:25 [post_modified_gmt] => 2020-05-22 19:09:25 [post_content_filtered] => [post_parent] => 0 [guid] => [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [2] => WP_Post Object ( [ID] => 94303 [post_author] => 56 [post_date] => 2020-03-27 09:52:00 [post_date_gmt] => 2020-03-27 09:52:00 [post_content] =>

In recent weeks, global energy markets have been rocked by a perfect storm, buffeted on two fronts by market gusts of historic magnitude. On March 6, a fragile deal of several years between Russia and Saudi Arabia-led OPEC collapsed as the sides failed to reach an agreement on continued supply cuts and instead vowed to raise production in a battle for market share. Meanwhile, as the Covid-19 outbreak reached pandemic proportions, the world entered lockdown and much economic activity skidded to a halt. On March 18, the Brent crude global benchmark dropped below $25 per barrel, its lowest level since 2003. Depending on the length of the price collapse and the pandemic, the effects could be dire for oil-dependent Latin American economies. Meanwhile, the economic contraction will reduce demand for power and limit access to finance for renewable energy projects. 

Following several years of sluggish economic growth and increasing fiscal stress in the region, low crude prices will have immediate consequences on public coffers in Latin America’s oil export-dependent economies. Government budgets depend on projected oil prices that are generally much higher than the current price (see Figure 1). The governments of Venezuela and Ecuador are most vulnerable. Upstream investment will also be curtailed because international oil prices are well below breakeven prices (those required to recover costs of production) across the region (see Figure 2). Most projects that are already producing will not be shut in as a result of temporary low oil prices when the long-term economics are still favorable. However, with companies capital-constrained, investment in exploration will be slashed. Argentina and Brazil have among the highest breakeven prices for their most promising reserves.

Average Oil Price Used in Government Budget

Figure 1: Current oil prices are well below the estimates used to determine government spending across the region. Brent and WTI closing prices for 3/26/20 shown.

Source: News reports

Venezuela will be hardest hit. Already beset by falling production and US sanctions that restrict its potential buyers, state-owned PDVSA has been forced to sell its crude at steep discounts. PDVSA has been selling its flagship Merey heavy crude blend at discounts of as much as $23 below the Brent international benchmark. Venezuela has very low lifting costs— $10-$12/barrel on average, with some fields as low as $5/barrel—but when shipping costs to Asia and royalties are added, PDVSA is making no profit at today’s prices, and production will likely be shut in when storage reaches capacity.

Ecuador, one of the countries in the region most dependent on oil revenues, was already in a fiscal straitjacket before this new blow. The dollarization of its economy deprives the country of monetary policy tools and gives the government little choice but to invoke austerity and seek emergency funding and the understanding of the IMF, with which it is engaged in a $4.2 billion loan program.

In Argentina’s emerging Vaca Muerta shale play, investment was already frozen due to perceived political risk following the election of President Alberto Fernández. With a relatively high breakeven price of $45-50 per barrel, investment there will remain stalled if prices do not recover. The government of Neuquén Province, home to Vaca Muerta, has called on the national government to guarantee a minimum crude price to producers, but it is hard to see that happening when Argentina is seeking to renegotiate debt payments to the IMF and private lenders to avoid default.

In Brazil’s pre-salt, expected to be one of the world’s largest sources of supply growth in coming years, the breakeven is $35-45 per barrel. Energy consultancy Wood Mackenzie has predicted that 2020 exploration budgets in the country will be slashed by 20 percent. The government was already considering holding off on new bid rounds since so much acreage has been awarded in recent years, so new rounds are now even less likely.

brazil argentina colombia guyana average oil production breakeven price

Figure 2: Current oil prices are below the breakeven prices required for several countries' most promising fields. Brent and WTI closing prices for 3/26/20 shown.

Source: News reports

In Colombia, shale is seen as the best hope of boosting the country’s reserves, which will last for about 7.8 years at current production rates. But a public debate over whether to allow fracking is now compounded by the technique’s higher cost, uneconomical under current prices. As a result, the prospects for developing unconventionals in Colombia have disappeared for the time being.

Mexico will not feel the effects of low oil prices as acutely this year thanks to its annual oil hedge, which covered 2020 government oil revenues by locking in a price of $49/barrel for an undisclosed number of barrels. The greater concern is the health of state oil giant Pemex, which owes $6 billion on maturing bonds this year alone. The company’s Maya crude closed at less than $13 per barrel for shipments to the US Gulf Coast on March 18. It appears increasingly likely that a second ratings agency will downgrade Pemex bonds to junk, as Fitch did in June 2019, which could lead to a firesale. The increasingly ailing Pemex, traditionally the source of a large share of government revenue (around 17 percent this year), will further strain Mexico’s public finances beyond 2020.

Finally, the oil price crash and coronavirus have compounded an inauspicious start to oil production in Guyana, which was previously projected to experience economic growth of 86 percent this year. Fierce controversy over the vote-counting process following the election of March 2 has still not been resolved. The price drop is not expected to affect development of ExxonMobil’s Liza 1 well. However, market uncertainty has caused the government to extend, for the second time, a deadline for companies to submit bids to market the government’s share of oil from the Stabroek block, where Exxon is already producing.

The Covid-19 catastrophe could also have negative impacts on Latin America’s power and renewable energy sector. Electricity demand will decline amid the economic contraction. Governments may delay long-term auctions for renewable energy supply, which are reportedly behind 80 percent of current renewable energy capacity in the region and have led to rapid growth in renewable energy investment at prices competitive with fossil fuel generation. Significant disruptions in global supply chains due to the pandemic will cause delays and some ongoing projects will seek to declare force majeure. Financing may dry up in the short term as future demand is uncertain and investors flee to safer assets. According to our analysis, even before the current crisis, many renewable energy projects in Latin America had been delayed, in many cases due to lack of access to financing. Renewable energy developers face greater risk where power-purchase agreements (PPAs) are priced in local currency or the buyer is a state utility with weak finances. Low oil prices also reduce the cost of oil-fired electricity generation vis-à-vis renewable energy generation. Natural gas prices have also plummeted since November, and could continue to sink. On the other hand, sustained low oil prices may make the rate of return of developing renewable energy projects competitive with that of hydrocarbon development.

Latin America’s energy markets will experience turbulence for as long as low oil prices and Covid-19 persist, and will continue to be jolted by aftereffects even after the storm has abated. The impacts on the energy sector have already begun to bleed over into the economy at large and into politics, and will continue to do so. Oil development will slow and government revenues will suffer as a result, serving as yet another warning of the dangers of overdependence on the region’s natural resources. The only silver lining is the hope that the region will be better prepared when the next storm comes.



Covid-19 in the Americas: The Dialogue's Coronavirus Updates

[post_title] => Pandemic and Price Collapse: Impacts for Energy in Latin America [post_excerpt] => The perfect storm of the plummeting oil price and the Covid-19 pandemic could have dire consequences for oil-dependent Latin American economies, lead to a reduction in upstream investment, and damage the prospects for renewable energy projects. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => pandemic-and-price-collapse-impacts-for-energy-in-latin-america [to_ping] => [pinged] => [post_modified] => 2020-04-02 21:26:50 [post_modified_gmt] => 2020-04-02 21:26:50 [post_content_filtered] => [post_parent] => 0 [guid] => [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) )
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