ENERGY: FUELING THE AMERICAS GROWTH

Transcription

1 ENERGY: FUELING THE AMERICAS GROWTH DOCUMENTS PREPARED BY THE INTER-AMERICAN DEVELOPMENT BANK S VICE PRESIDENCY OF SECTORS AND KNOWLEDGE

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3 KEY STATISTICS While Latin America and the Caribbean (LAC) represent only 8.5% of the world population and 8.7% of the GDP, the countries in this region account for 20.4% of the world s hydroelectricity production, as well as 13.2% of crude oil and 6.6% of natural gas production. Due to population growth and improved quality of life, LAC will need to double its installed power generation capacity to 600 GW by 2030, at a cost that will involve investments in the order of USD 430 billion. The improvements in energy efficiency may bring about benefits such as an increase in GDP of between 0.25% and 1.11% per year. In 2013, 96% of LAC households had electricity. Countries with inadequate energy systems could lose 1-2% of annual growth due to power cuts, over-investment in backup generators, subsidies, losses, and/or inefficient use of energy. INTRODUCTION This document discusses the main opportunities in the energy sector of Latin America and the Caribbean (LAC) and the role that the private sector should play. Some of the main opportunities are: promoting energy efficiency, providing access to quality and reliable sources of modern energy at affordable prices to all households, diversifying the energy matrix, deepening regional energy integration, and achieving financial, environmental, and social sustainability. For its part, the private sector will provide the key inputs for progress towards meeting the identified challenges, by employing and/or training qualified human capital, creating financial products tailored to the reality of the region, identifying and transferring more efficient technologies, and designing innovative business models. DIAGNOSTIC AND TRENDS The UN General Assembly declared the Decade of Sustainable Energy for All and acknowledged that energy is the golden thread that connects economic growth, increased social equity and an environment that allows the world to thrive I. It is estimated that, due to population growth and the improved quality of life of its inhabitants, the GDP of LAC will grow by 3% per year in the near future. This means that LAC will need to double its installed power generation capacity to 600 GW by 2030, at a cost that will involve investments in the order of USD 430 billion. II Similarly, based on IDB internal estimates, the oil sector will need investments in the order of 550 billion dollars in the period to maintain current production levels III. The abundance of natural resources in LAC countries means that the region has considerable potential for the production of primary energy sources. While LAC represents only 8.5% of the global population and 8.7% of the GDP, the countries in this region account for 20.4% of the world s hydroelectric power production, as well as

4 13.2% of crude oil and 6.6% of natural gas production IV. In fact, the energy matrix of LAC has the largest participation of renewable energy sources namely 57% ; hence, the regional matrix of electricity generation is one of the cleanest in the planet in terms of carbon emissions. In LAC, each person emits only 2.1 kg of carbon dioxide per year (only South Asia and Sub-Saharan Africa have lower levels of CO2 emissions per capita), and as little as 0.5 kg are emitted per unit of GDP the world s lowest level V. However, for the energy sector to fulfill its role as an engine for economic development and contribute to increasing productivity and competitiveness in LAC, it will have to face the abovementioned production and investment challenges, which are presented in further detail below: 1 ENERGY EFFICIENCY The International Energy Agency (IEA) estimates that improvements in energy efficiency can bring about benefits which include increased sustainability of the sector, growth of GDP by % per year, improved trade balance, stronger industrial productivity and job creation, greater disposable household income, reduced local pollution, and deferral of investments needed for energy supply. Many LAC governments have implemented programs for the promotion of energy efficiency. As a result of these new policies in LAC, the IEA estimates that, by 2035, an investment in the order of USD 135 billion will be necessary, of which USD 105 billion will be for the industrial sector, USD 195 billion for the transport sector, and USD 69 billion for the construction sector VI. 2 ACCESS TO QUALITY AND RELIABLE ENERGY SOURCES AT AFFORDABLE PRICES It is estimated that the costs of rural electrification are substantially outweighed by its benefits, which include: a greater number of waking hours, increased study time, access to modern sources of information, and improvements in the productivity of households and businesses VII. Likewise, it is worth noting that countries with deficient energy systems may lose 1-2% of their annual growth due to power cuts, over-investment in backup generators, subsidies, losses, and/or inefficient use of energy VIII. According to the figures of the IDB energy access database, 96% of LAC households had electricity in Therefore, 26 million people did not have access to energy that year, mainly in Haiti (7 million), Peru (3 million), Argentina (2.4 million), Brazil (2 million), and Bolivia, Colombia and Guatemala (1.7 million each). Furthermore, 85 million people used traditional energy sources for cooking which makes up around 15% of the population. It is also possible to improve the supply of the electricity service in LAC, which suffers from significant losses (the difference between the electricity that enters the grid and the electricity that is delivered to the final consumer) affecting the financial stability and sustainability of the electricity system. On average, LAC has a percentage of losses that reaches 17%, considering technical and non-technical losses in transmission and distribution IX. This percentage is higher than that of Africa, Eurasia, the Middle East, Asia, Oceania, Europe, and North America (exclusive of Mexico).

5 3 DIVERSIFICATION OF THE ENERGY MATRIX A diversified energy matrix should combine a variety of energy sources that make good use of, and adjust to, local and regional potentialities, technological advances, and existing opportunities in international markets. Therefore, an adequately diversified energy matrix provides energy security to countries by lowering the impact on the prices of energy products, reducing environmental and social vulnerabilities, facilitating the adjustment to technological changes, and maximizing the potential for energy production with local sources. In terms of energy matrix diversification, there are significant differences among LAC sub-regions. The majority of Central American and Caribbean countries depend largely on petroleum products imports, especially for the generation of electricity. On the other hand, countries such as Brazil, Colombia or Paraguay have high hydropower generation capacity more than 60% of the installed capacity in each country. In spite of this, the region has made important achievements in terms of energy matrix diversification. Today, LAC uses a wide variety of energy sources, including traditional sources, such as hydropower and petroleum products, as well as other non-traditional sources for the region (coal, biofuels, nuclear energy, geothermal energy, solar energy, and wind power). It is important to point out that the significance of traditional sources is not stark, and this is partly because of the growing use of natural gas for electricity generation and domestic purposes, and the diversification efforts involving non-conventional energy sources by the countries of the region. 4 ENHANCED REGIONAL ENERGY INTEGRATION Energy integration makes it possible for countries to overcome their deficiencies and/or boost their comparative advantages through binational or regional cooperation mechanisms. Regional integration in the energy sector is a positive trend, as it leads to aggregate markets, and this is particularly important in a sector where the feasibility of projects is extremely sensitive to economies of scale. There are several experiences of integration in LAC, such as the Central American Integrated System Project (SIEPAC), which connects all Central American countries, from Panama to Guatemala, to a single electricity grid and led to the creation, thanks to regulatory developments, of the Regional Electricity Market, which complements national electricity markets. In bilateral terms, various agreements have been entered into, such as the Bolivia-Brazil and the Colombia-Venezuela pipelines or the electrical interconnection systems of Colombia-Ecuador, Venezuela-Brazil, Mexico-Guatemala, and Paraguay-Brazil, among others, which have contributed to supplying energy to hard-to-access areas in the recipient country. Some of the existing regional integration initiatives, such as the SINEA (Andean Electrical Interconnection System) and the Northern Arc Project in South America, or the expansion of the SIEPAC and the Colombia-Panama interconnection in Central America, are still in the inception phase and further efforts are needed for their development. Challenges and opportunities for progress on these initiatives include: greater investment in physical infrastructure, the harmonization of regulations, improved technical knowledge, access to financing, and the development of designs for sustainable models.

6 5 FINANCIAL SUSTAINABILITY The financial sustainability of the energy sectors of the countries in the region depends, among other things, on their ability to attract investments to the most competitive activities, to reach higher efficiency levels in the distribution chain of energy products, and to maintain and/or establish final price formation mechanisms that adequately reflect the costs of the supply chain. These are three key conditions for ensuring the viability of the sector over time. In recent years, a transition has taken place towards models that encourage competitive markets that make it possible to better manage the operation of the services, reduce costs, and promote the long-term sustainability of the sector. 6 ENVIRONMENTAL AND SOCIAL SUSTAINABILITY An estimated two thirds of greenhouse emissions result from the activities of the energy sector X. These make intensive use of natural resources, and therefore the long-term sustainability of the sector depends largely on the capacity to harmonize its development with the preservation of the environment. In view of this, LAC should maximize the efficient use of its non-traditional renewable natural resources, maintain the energy production capacity of its traditional sources, and accelerate the replacement of fossil fuels with less contaminating alternatives. THE ROLE OF THE PRIVATE SECTOR Currently, the majority of LAC countries have regulatory and institutional frameworks for the energy sector which have overcome, or are making progress towards overcoming, the challenges inherent in the process of change that has taken place over the last two decades. In response to this, the private sector has taken advantage of the opportunities provided. This has been reflected in an industrial organization that evidences an increasingly relevant participation of private actors in a number of activities, especially in the electricity sub-sector. As a consequence, the increased deepening and sophistication of energy markets in the countries, coupled with the expectations of a rise in demand, indicates that the participation of the private sector will continue to consolidate in the future. The energy efficiency programs and policies proposed by the countries, which should be accompanied by the actions of private companies, will promote the adoption of innovative technologies and require specialized human capital that could be provided by the private sector. The energy matrix diversification process, through the promotion of the exploitation of non-conventional renewable energy sources which generally do not involve large-scale projects creates opportunities for investment in projects of various sizes, stimulates technological transfer, fosters job creation, and encourages innovation, among other things. As households without electricity gain increasing access to modern energy sources, new markets are created with potential for the development of alternative and innovative business models. The electrification of households in isolated communities through the use of renewable energy systems will require the supply of specific equipment and technical capacities that could be offered by the private sector.

7 In this context, the key question is: what role can the private sector play in the development of an energy sector that responds to opportunities in the region? The private sector, as a mobilizer of resources, plays a key role in meeting the identified challenges as it provides the region with the essential inputs for the achievement of its goals, such as: Identification and financing of activities offering meaningful competitive advantages Investments in improvements to the production and supply chains of energy products in order to reduce inefficiencies Employment and/or training of qualified human capital Creation of financial products tailored to the reality of the region Identification and transfer of more efficient technologies Design of innovative business models (public-private partnerships, for instance). ACTIVE PARTICIPATION IN REGIONAL ENERGY INTEGRATION INITIATIVES a) Central America and the Caribbean The process of overcoming regional challenges offers specific areas for the participation of the private sector. Increased energy integration in the Caribbean or Central America, for instance, offers the possibility of creating new aggregate markets that facilitate the introduction of infrastructure for the provision of natural gas, enabling an efficient use of the benefits of this hydrocarbon for electricity generation, compared to other fossil fuels. Likewise, the introduction of natural gas in these regions would enable countries to benefit from the low selling prices of this fuel due to the exploitation of Shale Gas, mainly in the US. In Central America in particular there are projects, such as the expansion of a second grid of the SIEPAC, followed by the strengthening and consolidation of the Regional Electricity Market and the Colombia-Panama interconnection that will generate investment opportunities in various activities of the region s energy sector. b) South America In addition, the aggregation of markets resulting from the Northern Arc Project, whose goal is to achieve the electricity interconnection of Guyana, Suriname, and French Guiana with the North of Brazil, will make it possible to build large-scale electricity generation projects that would reduce electricity costs, thus boosting the competitiveness of those countries. In South America, progress is being made towards the completion of the SINEA project, which will connect Bolivia, Chile, Colombia, Ecuador, and Peru with electricity transmission grids, creating investment opportunities related in direct and indirect ways to the project. In conclusion, the private sector will play a key role in meeting the current challenges of the energy sector in LAC, as it will provide the necessary inputs to stimulate modernization and guarantee that the comparative advantages of each of the countries in the region are exploited.

8 APPENDICES LATIN AMERICAN AND THE CARIBBEAN ENERGY MATRIX 2012 LATIN AMERICAN AND THE CARIBBEAN ELECTRICITY MATRIX 2012

9 Evolution of Household Electricity Access and Remaining Deficit I United Nations General Assembly. (2013). Report of the Secretary General, United Nations Decade of Sustainable Energy for All. New York. II Yépez-García, R. A., Johnson, T. M., & Andrés, L. A. (2010). Meeting the electricity supply/demand balance in Latin America & the Caribbean. Washington, DC: The World Bank. III IDB estimates are based on the historical growth rate of crude oil production in producing nations; hence, they are an adjustment to official figures. Official estimates by the countries anticipate a growth rate of 53% by 2019, projecting a very fast rate of growth for Based on these estimates, additional investments in the order of 1 billion dollars will be needed. IV World Bank estimates. V World Bank estimates. VI International Energy Agency (IEA). (2014e). World Energy Investment Outlook. Paris. VII World Bank Independent Evaluation Group. (2008). The Welfare Impact of Rural Electrification: a Reassessment of the Costs and Benefits. Washington, D.C. VIII World Bank. (2009). Africa s infrastructure, a time for transformation. World Bank Africa Infrastructure Country Diagnostic. Washington, D.C. IX Jiménez, R., Serebrisky, T., Mercado, J. (2014). Power Lost: Sizing Electricity Losses in Transmission and Distribution Systems in Latin America and the Caribbean. Inter-American Development Bank, Washington, D.C. X Intergovernmental Panel on Climate Change (IPCC). (2014a). Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment. Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. Cambridge and New York.