China and investment in electrification in Latin America

Mariana Morales Pérez[1] , OBELA[2]

The need to mitigate climate change has led to a transition to a more sustainable energy future that has triggered a revolution in the global energy landscape. The shift in the energy matrix, driven by growing concern about climate change and the search for cleaner, renewable energy sources, has opened up a range of opportunities for investors. From solar and wind energy to electricity storage and efficiency. Investments in this sector are not only driving technological innovation, but are also reshaping economies globally. This article will review the participation of the Red Dragon in Latin America in the electricity sector on the renewable energy side.

China's growing influence in Latin America has significantly reshaped the regional energy landscape. According to Boston University's China Global Finance database, there were USD 58.4 billion invested from 2000 to 2019. With a voracious demand for natural resources and an ambitious energy transition plan, China has channelled substantial investments into Latin American energy projects. This dynamic has accelerated the change in the region's energy matrix, boosted the exploitation of strategic mineral resources for electric batteries, the construction of energy infrastructure and the promotion of renewable energies. At the same time, growing energy interdependence has generated both opportunities and challenges for Latin American countries, in the context of competition between the US and China. In 2020, according to Bloomberg data, Chinese M&A deals in LA energy reached USD 7.7 billion, which accounted for 25% of total Chinese acquisitions globally. China generally requires projects that receive Chinese funds to buy its materials and equipment.

The governments of Michelle Bachelet and Sebastián Piñera encouraged Chinese foreign direct investment (FDI) in Chile. In 2018, China Southern Power Grid International bought 28% of Transelec, an electricity transmission company, for USD 1.3 billion. In early 2020, State Grid Corporation of China (SGCC) bought Chilquinta for more than USD 2 billion, a local electricity distributor in Valparaíso. In the same year, it announced the purchase of Compañía General de Electricidad (CGE), an electricity distributor, for more than USD 3 billion. This left the Chinese state-owned company as the owner of two of Chile's four electricity distributors, serving 57% of consumers, covering the entire network in the north of the country. 

In Peru, China Southern Power Grid bought Enel in 2023, its distribution business for USD 2.9 billion, together with China Yangtze Power International (CYPI), a company controlled by China Three Gorges (CTG), dominate the market in Lima and have more than 50% share in national electricity distribution. CTG has assets in Colombia, Peru, Ecuador, Bolivia, Chile and Brazil where it is involved in hydro and wind farm operations. 

In 2023, the large Chinese company SGCC won the largest auction in Brazil's history for electricity transmission lines, requiring an investment of more than USD 3.644 billion, according to the Ministry of Mines and Energy. The Chinese company offered a 39.9% discount on the maximum that the ministry had put up for auction to renew the electricity transmission park. In addition, they built 1,513 km of transmission lines in the states of Maranhão (Northeast), Tocantins (North) and Goiás (Centre-West). After the anti-Chinese campaign of former president Jair Bolsonaro, the presence of investment from the Asian country is expected to pick up under Lula da Silva's government, due to its support for the electric car and bus industries. 

Mexico is a special case because of its close relationship with the US, which places it in the middle of the dispute between the great powers. Chinese Ambassador Zhang Run (2024) stated during the seminar New quality productive forces, a key factor for the development of China and Mexico, that "Chinese companies in the energy sector have invested in solar and wind energy projects in Mexico, and throughout the country there are a dozen (projects) with Chinese investment or participation. 

The growing presence of the Asian power was driven by the restrictions imposed by the trade war started by Trump, who saw the opportunity to enter the Latin American market (see Ugarteche and De León C 2022^[3] ). Between 2005-2022 there was an investment of 4.17 billion USD, in the first half of 2024 it was 235.1 million USD of FDI from the Asian country. The Red Dragon has the leading role in Latin America in the advancement of renewable energies to achieve a change in the energy matrix and mitigate climate change, unlike the United States, which promotes hydrocarbons.

Despite significant investments in renewables, final demand is mostly fossil fuels, mainly in the form of hydrocarbons, which represent 45% of the average for the region; in the case of Mexico and Chile it is more than half and in the rest more than two fifths. Electricity consumption is only 20%. In a minimal proportion to solar, wind, and it is not present in all countries as in Argentina and Colombia. The region has a common goal of electrification, regardless of the source.

The change in the electricity matrix requires greater electrification, and this is where renewable energies have a major role to play. Electricity generation comes 68% from clean energy and 32% from conventional sources. Large hydroelectric power plants in Brazil account for around 63% of national electricity generation and only 9% from non-renewable sources, making the Brazilian electricity matrix one of the cleanest in the world. Colombia also generates hydroelectricity with 72%, but does not have the capacity to generate from wind or solar sources. In 2021, renewables accounted for 25% of Colombia's total supply and 29% of final consumption, well above the global IEA average of 14%, and accounted for 75% of electricity generation (compared to the IEA average of 30%). On the other hand, Chile has made the most progress with photovoltaic cells. 

As can be seen in Graph 2, the renewable source that generates the most energy is hydroelectric power, which is a problem in the face of droughts that have caused blackouts, so countries have been forced to reduce their dependence on it. Wind energy has been gaining ground, but in the case of Colombia there are only two wind farms in operation in La Guajira. On the other hand, solar energy, from being insignificant in 2014, managed to gain ground in all countries, where eight of the top ten suppliers are of Chinese origin, headed by Longi, Jinko, Trina and Ja. Among the countries reviewed, only Mexico has geothermal energy and it has declined due to its high costs.

In conclusion, fossil fuels have traditionally been used for energy and electricity generation, such as coal or oil. The problem of climate change and securing the supply of these has turned the attention to renewable energies. Policies were implemented in different countries for the development of renewable energy alternatives. The technologies have faced barriers to their implementation such as high initial investment, weak legal framework or lack of energy policies, lack of financial incentives and poor infrastructure. China sees the energy sector as a key sector, which is why its companies are interested in it from the supply side. That is why they are investing across the region, which already controls electricity distribution. Energy production continues to be based on non-renewable sources; in these countries, oil has been a fundamental asset for their development, which makes it difficult to change the energy matrix. The main LA countries have made progress towards renewable energies, but the change in the energy matrix is still a long way off.