Unlocking The Energy Transition In The Americas: Three Regional Perspectives

Authored by David Brown Director, Energy Transition Practice at Wood Mackenzie

The Americas have seen a surge of interest and activity directed towards the energy transition over the past 12 months. While a common goal of a net zero future is shared within the region, implementation pathways will vary, as demonstrated by three unique approaches in the US, Canada, and Latin America.

California should tighten the LCFS market

Launched in 2011, the California Air Resource Board's Low Carbon Fuel Standard (LCFS) created a credit system to encourage investment in low-carbon transport. Carbon intensity (CI) standards were defined for more than 600 fuels and carbon abatement technologies. Credits and deficits can be generated depending on whether a fuel's CI is higher or lower than an annual benchmark.

Between 2015 and 2020 high demand saw credit prices surge from US$25 per tonne to US$200 per tonne. As a result, investment in liquid and gas biofuels and electric vehicle (EV) infrastructure soared. However, as new projects have become operational and supply increased, prices fell to five-year lows in early 2023.

LCFS annual credit generation

Recent price volatility in LCFS is a serious challenge to emerging technology investments. While there are numerous aspects to financing low carbon hydrogen and CCUS projects, which range from gas supply prices, tax credits under the Inflation Reduction Act (IRA), and zero carbon supply prices in the power sector, incorporating LCFS revenue is key to many projects. Price uncertainty for LCFS credits could also limit the impact of the IRA and the 2021 Infrastructure Bill. Depending on the project, the recent price range in LCFS prices could lower overall returns even after ‘stacking’ LCFS with the IRA's 45Q, 45V, or 45Z. This could result in a lower investment pool than envisioned within the IRA.

CARB has been clear that it wants LCFS to provide "strong and steady" price signals. Increasing the 2030 emissions reduction target from 20% to 30-35%, from 2016 levels, would be the optimal policy response. CARB could also build in additional increases to the goal if decarbonization accelerates faster than expected; California has a track record of meeting goals faster than expected.

What to watch next? CARB's updated LCFS guidance in Q3 2023.

Canada's 2023 budget: a positive sign for minerals supply

Diversifying the global supply chain for low carbon energies is top of mind for governments and companies around the world. Enter Canada – the fifth largest supplier of graphite and nickel globally, and a key supplier of uranium.

Canada's Free Trade Agreement (FTA) with the United States qualifies mineral supply from Canada for incentives in the IRA – a potential boon for Canada's industry. To maximise the opportunity, in late 2022 Canada launched its Critical Minerals Strategy. This includes a 30% tax credit for mineral exploration applicable to nickel, lithium, cobalt, graphite, copper, rare earths, vanadium and uranium. The Strategy was boosted in Canada's 2023 budget by the announcement of an aligned 30% Clean Technology Manufacturing Investment Tax Credit. The government expects the tax credit to cost $11.1 billion dollars over 2023-2035.

While the Strategy and 2023 Budget are positive signs, implementation rests on several areas. Permitting timelines will be a perennial challenge; mining projects are typically permitted within a range of 5-7 years. To speed up permitting, the government and industry will need to engage with indigenous populations early in the project development process.

Less clear is the corporate landscape. Glencore's bid for Teck Resources could spur consolidation in Canada's mining sector. While industry M&A signals investor appetite for growth, the reality is consolidation may constrain advancement of the project pipeline. In addition, Canada's suspension of Chinese ownership of TSX-listed mining companies and heavy barriers to foreign ownership of larger companies could be an obstacle to faster development of new capacity.

What to watch next? The next wave of project announcements following on from the Strategy and the 2023 Budget.

Colombia's net zero strategy needs to consider upstream and refining

President Gustavo Petro's goal of net zero emissions has shifted priorities from oil production and exploration to new energies. Ecopetrol, the country's National Oil Company, has new leadership in Ricardo Roa Barragan who is now tasked with implementing the President's vision. But for Colombia, reaching net zero will require a balance between upstream, refining and new energies.

Our base case outlook expects that transport will be a challenge to electrify. Out of the 3.8 million vehicles in Colombia, 80% of are fuelled by gasoline currently. With per capita GDP at ~$6,800 dollars, one of the lowest in the region, consumers will opt for vehicles they can afford. By 2040, gasoline's share in the transport mix will be stubbornly high at 72%.

Expanding e-fuels investment is a critical part of Colombia's hydrogen and net zero strategies. E-fuels, produced from green hydrogen, can provide a carbon neutral supply source that can be blended with gasoline engines. Colombia's wind and solar potential can enable an expansion of green hydrogen supply according to Wood Mackenzie's Lens Power platform.

However, e-fuels will be a small part of the transport market and gasoline will meet the lion's share of transport demand. The domestic market will need to maintain enough upstream production to refine liquids for the domestic market. This suggests a ‘floor’ of production of around 1 mb/d.

What to watch next? The pace of additional e fuels capacity in and around Cartagena and policy towards upstream, exploration, and refining.