Power Moves: How China’s Energy Investments Provide Durable Influence in South America

Undeterred by allegations of debt traps and U.S. and regional criticism, China continues to play a major role in boosting power generation in South America. The PRC’s massive industrial capacity for solar panels had been especially attractive for countries looking to hedge against increasingly unreliable hydropower projects while preserving a green energy mix. In 2021, for instance, 98 percent of Brazil’s solar panel imports came from China. Argentina, meanwhile, signed an $8 billion agreement in 2022 for China to construct the country’s third commercial nuclear power plant. While progress on this initiative has been slow, it underscores China’s own willingness to pursue an “all of the above” cooperation strategy in a region with diverse energy needs.

Even more notable has been China’s transition from simply building power generation infrastructure in South America to acquiring a stake in the operation and transmission of electricity in several countries. According to Boston University’s Global Development Center, 71 percent of all acquisitions by Chinese firms in Latin America between 2017 and 2021 were in the power sector. As previously mentioned, Chinese companies collectively manage the entire distribution of energy to Peru’s capital city and have dramatically increased their presence in Chilean electricity utilities. In Brazil, by far the largest energy market on the continent, Chinese companies now control an estimated 12 percent of all electricity transmission and distribution.

From the PRC’s perspective, this makes sound financial sense. Having already paid the high fixed costs of building out energy generation capacity, its companies can now transition into the more lucrative market of buying and selling electricity. Especially as China’s domestic economic growth flags, Beijing can no longer afford to spend hundreds of billions on megaprojects with little hope of being paid back. Entering the transmission and distribution game now provides one way to ensure future investments yield solid returns.

But this model carries significant risks for host countries, which can find themselves not only with the PRC in control of key power plants but also paying for Chinese firms to distribute that power to their citizens and businesses.

Power Corrupts

Ecuador is particularly illustrative of the way courting the PRC for energy investment can undermine national sovereignty and crimp strategic autonomy. Beginning in 2009, then-President Rafael Correa agreed to a $1 billion loan from China to be secured against Ecuador’s oil industry. This loan would be the first of many that Correa would sign, leveraging China’s demand for oil in exchange for development financing. Indeed, just one year later, Ecuador would take out another $1.7 billion from the China Import-Export Bank to help finance the construction of the Coca Codo Sinclair hydroelectric dam. Intended to be a legacy-defining project for Correa and deliver massive returns to the Ecuadorian economy in the form of cheap, plentiful, clean energy, the project has turned into a boondoggle and symbol of failed PRC megaprojects in the region.

Even at the time of its construction, concerns about the dam were widespread. Independent reviews by experts cited inconsistent water levels, meaning that the advertised 1,500 megawatts of installed generation capacity could only be achieved under certain conditions. The dam’s location, near the active Reventador volcano, meant it would come under significant geological stress, which could potentially trigger a collapse of the structure if poorly designed. Since coming online in 2016, the dam has vindicated these criticisms and more. It has operated at closer to 59 percent of capacity since an initial full-power test compromised Ecuador’s electrical grid. Shoddy construction coupled with geological activity has led to more than 17,000 cracks in the dam being reported, leading experts to deem the facility a “time bomb.” Finally, the $3 billion final price tag of the project, and $19 billion in total loans taken from China under the Correa government, have saddled Ecuador with an unsustainable debt burden and birthed still-simmering corruption scandals.

Despite the sordid history of Ecuador’s engagement with China, Beijing’s influence over the South American country persists. Since Correa, three successive governments have continued to sell oil at discounted rates to the PRC as part of the country’s debt service. According to a 2022 report from the National Assembly, this arrangement caused Ecuador to forgo some $5 billion in oil revenues had it been able to sell at market prices instead. Meanwhile, Chinese oil companies Sinopec and China National Petroleum Corporation obtained licenses to drill on Ecuadorian territory in 2021 and 2022, respectively. Most recently, the government of President Daniel Noboa announced it had reached an agreement with state-owned electricity company PowerChina to assume control of operations at Coca Codo Sinclair. As part of the deal, PowerChina would invest an additional $400 million in Ecuador’s energy sector, focused on renewable power generation and storage.

In Peru as well, China Three Gorges has acquired a dominant position in both the generation and transmission sectors, with potentially harmful consequences for consumers in the country. In 2018, it purchased the Chaglla hydroelectric dam from embattled Brazilian company Odebrecht. Then, in 2020, it took a majority stake in Luz del Sur, an electrical utility responsible for the majority of power distribution to Lima. Peruvian regulators and civil society at the time feared this concentration could prejudice competition, allowing China Three Gorges to essentially buy power from itself, letting it manipulate rates at will. Accordingly, Luz del Sur was prohibited from buying power from generators owned by China Three Gorges without a bidding process. When CSGI acquired Italian electrical utility Enel’s infrastructure in Peru in 2023, a similar stipulation was imposed. However, according to one analysis, these provisions may merely forestall the inevitable, as they will expire in 2030, at which point, both China Three Gorges and CSGI will be well-positioned to squeeze remaining competitors out of the Peruvian market.

The PRC’s increasing investments in transmission infrastructure could also pave the way for further dominance of South America’s digital domain. China is a major supplier of smart meters, providing some 600,000 meters to Uruguay in 2021. This technology is vital for the region, where power loss, energy that is generated but never makes it to the consumer, is as high as 15 percent. Smart meters can prevent power loss by monitoring electricity use in real time and relaying that information back to distributors who can reroute power to correct inefficiencies. But smart meters also create new cybersecurity vulnerabilities, particularly when, as in the case of Uruguay, they are connected to and routed through national telecommunications networks. Petty criminals already hack smart meters to dodge fees, and Russia-linked hackers have targeted power grids in Ukraine and Lithuania with cyberattacks, underscoring the importance of shoring up digital defenses for this critical infrastructure. Research from Oregon State University has further shown how a cyberattack could exploit smart meters themselves to simulate oscillations in the grid, causing power shut-offs. These risks are further magnified when the malicious actor is not a criminal group, but rather the supplier of the meters, who could have access to zero-day vulnerabilities.

Reenergizing Competition

Whether along the Panama Canal or Mexican car imports, the United States is increasingly applying pressure against Latin American governments to minimize their ties to China and has shown itself willing to use hard power threats and tariffs to do so. While China is working diligently to minimize its own exposure to U.S. economic sanctions, it also appears to be seeking to build its own system of physical infrastructure sanctions. Energy infrastructure, along with ports, railways, and telecommunications, all constitute elements of this physical sanctions network. Countries that have come to depend on Chinese companies to move goods, illuminate their cities, and provide internet to their people will likely be loath to turn against the PRC for fear of losing its support in these essential functions.

While the PRC is already well-entrenched in South America’s energy sector, it is not immovably so. More canny commercial diplomacy and capacity-building could go a long way to defang China’s infrastructure dominance strategy in the Americas. In doing so, the United States, alongside partner governments, should strive to employ “insulation” strategies, not seeking to extirpate Chinese influence entirely, but rather to minimize the potential that the PRC could leverage its position to coerce governments.

To begin, the United States should seek to boost the ability of South American regulators to spot and prevent problematic investments in their energy infrastructure. The Committee on Foreign Investment in the United States (CFIUS) serves to review foreign investments in the United States and ensure these do not leave a potential malign actor in control of critical infrastructure. No South American government possesses an equivalent to CFIUS, and while many countries have regulatory bodies that exist to prevent harmful concentration in a given sector, these entities often lack the tools to identify and respond to China’s opaque business practices. The United States should consider connecting CFIUS representatives to countries in the region to highlight best practices and help countries stand up their own equivalents, either as independent agencies or constituent bodies of regulators. All of this can be done in the name of bolstering national sovereignty and preserving strategic autonomy—goals that should strongly resonate with Latin American countries as great power competition increases.

The United States can also employ “competition” strategies aimed at encouraging U.S. and allied power companies to return to South America. While China has gained ground in recent years, Western companies like Sempra, Bechtel, and Enel all have a current or recent history in the region and remain globally competitive players. Brazil may be a promising first step in this regard, as the country is currently facing challenges integrating new wind and solar projects into its grid. These energy sources have high intermittency, meaning they fluctuate significantly over the course of the day in terms of how much power is produced, and are difficult to integrate into legacy transmission infrastructure. Recent reports have found that some Brazilian states, like Bahia, may need to intentionally reduce solar and wind production by as much as 30 percent below full capacity to keep the grid stable. While China dominates in selling wind and solar equipment, the United States has a qualitative management in the kinds of advanced grid technologies and data management platforms Brazil needs to effectively modernize its energy supply. The Department of Commerce, in partnership with U.S. embassies in the region, can identify upcoming tenders for strategic energy projects and bring delegations of U.S. companies to encourage them to bid on these.

Finally, financial institutions, especially the U.S. International Development Finance Corporation (DFC), Export-Import Bank, and Inter-American Development Bank, can play an enabling role in supporting U.S. bids for energy generation and transmission infrastructure. Particularly as the DFC heads towards reauthorization in the U.S. Congress, bolstering its authorities to work in South America should be a priority for any America-first development strategy.

Henry Ziemer is an associate fellow with the Americas Program at the Center for Strategic and International Studies in Washington, D.C.