The Four Key Issues Shaping Latin

America’s Solar Market

Adam S. James | Analyst, Solar Markets

March, 2015

• Latin America PV Playbook

– Quarterly + Annual Report

• Latin America Pre-Conference: Solar Summit 2015

– April 14th

• Latin America Solar Newsletter

– Weekly

• Solar Summit: Mexico

– January 2016 in Mexico City

• Free White Paper on the Caribbean

– Coauthored with MC Group, released April 1

Also see…

Latin America in the Global

Context

Global Demand (2013-2020)

• Global demand for PV slowed in 2014, as APAC didn’t fully offset the decline in European

markets. However, we expect a rebound in 2015 with 33% growth.

• Emerging markets, including Latin America, will be 15% of all demand growth over the next 5

years

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Global PV Demand (GWdc)Annual and Cumulative

Annual Market Cumulative Market

Latin America (2013-2020)

• The Latin America market is heavily influenced in the 2014-2016 timeframe by the Chilean market,

as you can see by the regional drop in 2017 due to the Chilean market declining from 2016

• What the topline numbers don’t show is that more countries are becoming viable and contributing

to the regional total out to 2018 – which is positive for the market overall

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Latin America Installed PV Demand (MWdc)Annual and Cumulative

Annual Cumulative Annual Growth Rate

• Chile dominant market in 2014 and 2015, declining to 2nd place in 2016-2017, and 3rd in 2018

• Mexico shows steady growth out to 2018, top market for 2016-2018

• Brazil more significant growth in later years, breaking into the top 3 in 2016 and the top 2 in 2018

• Central America also very prominent: Top 5 rankings include El Salvador and Guatemala in near

term, Honduras and Panama in later years

Latin America (2013-2020)

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Latin America PV Demand by Market (MWdc)

Chile Mexico Brazil Rest of South America Central America Caribbean

• The topics reflect key issues shaping the largest markets in Latin

America: Mexico, Chile, Brazil and Central America

• However, the notion that these will be the largest markets are

premised on our Base Case forecasts – which rely on a set of

assumptions

• These markets could under/over perform – so from a risk

perspective it is important to understand why these markets are so

prominent

Choice of Topics?

Mexican Energy Reform

Mexico Forecast & Highlights

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Mexico PV Demand (MWdc)Cumulative and Annual

Annual Cumulative

• While the Mexican market has grown at an incredible pace, the real opportunity lies ahead: 94%

of installed PV capacity by 2018 comes after 2014

• The primary opportunity is in utility-scale development, which amounts to 77% of expected

capacity between 2014 and 2018. Only 4 plants have been installed to date, 2 with fixed-price

PPAs (2012) and 2 with floating-price contracts (2013, 2014).

• The second largest opportunity is in the commercial market, amounting to 11% of installed

capacity between 2014 and 2018

Old Market Structure

<500 kW distributed generation

• Fewer permitting requirements

• Basically unchanged

>500 kW self-supply

• Wheeling rates/energy bank

• Legal workaround to direct sale

• Almost 1 GW of old permits

<30 MW small producer

• >2 GW of old permits

• Basically merchant

• Supported by high diesel prices/transmission constraints in Baja

• Constitutional reform of the energy market (oil, gas, electricity)

• Acronym time: Used to be vertically integrated monopoly (CFE),

transitioning to a competitive wholesale market that includes CFE as

a player, but is managed by CENACE (grid operations unit, formerly

CFE), regulated by CRE, with policy set by SENER

• Nuts and Bolts: Composed of five markets (not incl. transmission)

– Day ahead/real time (Dec 31, 2015)

– Capacity market (Nov, 2015)

– Clean energy certificates market (2018)

– Medium-term energy auction (Oct, 2016)

– Clean energy certificates/capacity auction (Oct 2015 contracts in

2018)

Energy Reform

• Assessing what we know:

– Solar will compete in the open market signing PPAs with unregulated

clients (>3 MW 1 MW, CFE)

– Clean energy certificates/capacity auction/merchant market not likely to

be significant

– No preferential wheeling rates (makes old permits slightly more

attractive)

• Assessing what we don’t know:

– Clean energy certificates load requirement (8.6% of load in 2018

proposed). Not likely to be a good source of revenue, but will create

some demand. Solar competing against co-gen and wind.

– Retail/Wholesale tariffs: Perception vs. reality

– Contractual models for generators

Energy Reform

• 2015

– Distributed generation market growing

– Potential for self-supply projects

– One small producer project, maybe two

• 2016

– Several bilateral PPAs signed. Complications with tariffs, but rationale

more centered on solar as a hedge against volatility & advantage of

siting.

– Potential small auction for solar (Q4 of 2015, built in 2016)

– Continued distributed generation market, with some national players

beginning to emerge

• 2017-2018

– Continuation of above trends: solar value proposition improves with time

Expectations for the Future

Central American Risk and

Reward

Central America Forecast & Highlights

• Honduras biggest market in 2015, with El Salvador and Panama both significant contributors

• Tender driven market, plus very high tariffs in commercial and some residential markets

• This is the time horizon for utility-projects: likely drop-off after 2018, after which it’s mostly

distributed generation (commercial)

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Central America PV Demand (MWdc)

Costa Rica Belize Nicaragua Guatemala Panama El Salvador Honduras

• Four >1 MW plants built to date

– Costa Rica, 1.2 MW Miravalles

– Panama, 2.4 MW Sarigua

– Guatemala, 5 MW + 50 MW

• Additional tender offerings in Guatemala, El Salvador, Panama and direct

procurement in Honduras

• Tax incentives are key

• Migration of off-grid distributed generation business into the on-grid

segment motivated by interconnection rules

• Enormous amount of developer interest: 1.6 GW pipeline from ~50

companies

PV Industry Highlights To-Date

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Base Case is the most likely forecast given current and expected

trends

Base Case Drivers

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Technological/Environmental

• Solar costs

• High insolation

Resource Diversification

• Hydrological risk: Rainfall levels influence hydropower and biomass

• Fuel prices: Less hydropower and biomass creates heavier dependence on fuel oil

• Solar is a hedge against hydrological risk, as is wind and other RE

Market Forces

• Need for new supply: Growing demand/Capacity retirements

• Increasing electrification

• Shifting from public to private investment, increasing access to capital

The Base Case does include some constraints on market growth

Base Case Constraints

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Fundamentals

• Less developed grid

• Limited total demand/Smaller grid

• Renewable integration

Risks

• Country risk: Corruption, repatriation, currency exchange, violence

• Counterparty risk: Tied with political risk, credit ratings for major utilities

• Others: Legal recourse in some places severely limited. Land titling can also be an issue. Experienced labor.

• What’s the end result? Upwards pressure on the cost of capital – especially non-local equity and commercial debt. Very limited options for financing DG also. Some exceptions: development banks, local equity, private debt (local and regional).

There are upside and downside scenarios for each country

Other Plausible Scenarios?

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Primary Upside Risks• Rate restructuring

• Tenders

• Government programs/financing

• Additional incentives (FiT, net metering, or tax exemptions on income, land, import, or VAT)

• SEIPAC demand (impact complex: pricing vs. demand)

• Global dynamics (supply or demand)

• Access to capital

Primary Downside Risks

• Rate restructuring

• Political instability (in re: to state-backed tenders)

• SEIPAC (see above)

• Reputational risk for solar

• Revoked incentives

Assessment the Future

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Overall, central America is very opportunistic and high risk/high reward

• Honduras/El Salvador/Guatemala as opposed to Panama/Costa Rica/Colombia

There is a ceiling on growth, even in more ambitious upside scenario

• Short term: mostly utility-scale driven by tenders

• Small grids/limited demand

• Long-term DG markets will be core drivers of growth

Likely to be many challenges w/r/t project development

• Pipeline forecasts will frequently be revised

• PPAs: Necessary but not sufficient

• Land access/titling

• Financing: Dev banks commercial lending. Likely to be local players

• Limited off-takers: some in bilateral market, some in regulated market. Symptomatic of larger demand limitations.

Financing for distributed generation will take time

• Credit system

• Watch Mexico

The Future of Chile

• The Chilean market is almost exclusively driven by utility-scale project development (99%)

• In 2015, we expect almost 1 GW to be installed, 50% the total for the Latin America region

• Starting in 2016, we expect most procurement to occur through the auctions with fixed-price

PPAs, although there will still be some bilateral activity

• The primary change is the introduction of new transmission lines between 2016 and 2018, that

eliminate the pricing congestion that has spurred merchant projects and incentivized large

consumers

Chile Forecast & Highlights

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Chile PV Demand (MWdc)Cumulative and Annual

Cumulative Annual

2014 – 2018 CAGR - 41%

• Past growth driven by PPAs and merchant projects

• Assumed certain pricing conditions on the grid

• New transmission will likely have the effect of relieving pricing

congestion on certain points of the grid. While average net prices

may go up slightly, it will eliminate very high points.

• Future growth mostly PPA-driven, including auctions

– Large base of industrial demand, but keep in context of 12.3 GW total

needs out to 2030 (8.7 GW in SIC, 3.6 in SING)

– Auction structure positive for solar

• Potential for increased prices based on hydrological risk and fuel

price volatility

Drivers and Risks

Brazil’s Complexity & Potential

Brazil Forecast & Highlights

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Brazil PV Demand (MWdc)Cumulative and Annual

Annual Cumulative

• The Brazilian market has a mix of growth across all segments, with primary variable being whether

projects with PPAs from either the reserve auction or the unregulated auction move ahead

– We view as very likely in 2016/17 but questionable in 2015 due to lack of off-takers in

unregulated market

• In 2015, we expect almost 85 MW to be installed, making it the fifth largest market

• We expect the residential and commercial markets to grow steadily in the Base Case

• Mainly tender-driven market

– Regulated and unregulated market

– Low PPAs ($80/MWh – $100/MWh)

– High taxes for imported equipment + financing requirements on local content (+

high domestic interest rates, labor taxes)

• Taxes on net electricity consumption hurt the distributed generation market

– State-by-state

• Other factors at play:

– Currency risk

– Political risk

– Drought

• Main upside drivers:

– Tax breaks on PV equipment (or, to a lesser extent, raw materials)

– Re-negotiated PPAs at higher rates

– Access to capital

Drivers and Risks

Thank you!

The data and analysis for this presentation has come from GTM

Research’s special regional report

For content questions, Adam James can be reached at

James@gtmresearch.com

For sales/account questions, please contact Justin Freedman at

Freedman@gtmresearch.com

Thank You!