By Rafael A, Junquera, Editor, Potencia magazine

The list of reasons in favour of the development of renewable projects in Latin America is as long and diverse as the region’s geography and resources. However, only favourable government incentives can provide the necessary impetus to renewable energy development.

Policy makers in Latin America have been showing increasing concern about the environment. Those “concerns” alone, however, have proven insufficient to increase the number of renewable projects being developed in the region. “Economics, not the environment, has proven more important in energy decision making,” notes Arthur John Armstrong, a lawyer involved in several renewable projects in Latin America and the United States.

Despite the well-recognized social benefits of renewable sources of energy, the main driver for the development of these types of projects, or indeed any type, is their financial viability. Norbert Dwenger, managing director of Nordex Energy Iberica SA, argues, “in many instances it is not a matter of producing clean energy, but producing the cheapest energy, period.”

Market liberalization and privatization have not helped to promote renewable projects in Latin America. This is because some traditional barriers associated with these types of projects have not only failed to be overcome, but, in many instances, have become greater due to the short-sighted approach the private sector brings in liberalized markets.

Positive framework

According to industry personnel, government intervention through the creation of rules that favour renewable projects is the single most important factor to establish a growing renewable industry. With the right framework, the myth that renewables are not as competitive as fossil fuels, is dispelled, says Dwenger.

Brazil’s 2002 installed generation fuel mix (source: MME)
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Because government incentives are the main factor contributing to the development of renewable projects, companies interested in developing such projects need to take a country-by-country approach when assessing where good opportunities lie. Since each Latin American administration is creating its own scheme, the region cannot be treated as a single entity, because the systems have different approaches that may support some type of renewable sources over others.

Leading initiatives

The majority of countries are trying to come up with initiatives to promote the use of renewables. Governments in Latin America have concluded that there is a real need to diversify their sources of energy to avoid risks associated with the price of imported fuels. Not only that, but volatile currency fluctuations between local currencies and the US dollar – in which payments are made for fossil fuels – create a further uncertainty. New technological developments and the richness of resources in many parts in the region, have been powerful drivers for governments to gradually start taking action in supporting renewables.

It is estimated that over 70 million people in Latin America are not connected to any national power grid. Large sections of some countries are not even close to the national grid and the prospects of it being expanded to such locations are as remote as the places that need to be reached.

Nicaragua exemplifies this situation. The grid divides the country in almost two equal sides. The Pacific coast, where the majority of the population lives, is covered with a fairly complete grid. Meanwhile, on the Atlantic coast, the population is scattered and it is not connected to the grid. However, the non-grid areas of Nicaragua are rich in renewable sources, especially for the development of small hydro projects.

These areas of Nicaragua, and other remote areas of Latin America, are particularly blessed with natural resources for the development of a variety of renewable energy projects. These areas, with their scattered populations and very low income per capita, are ideal candidates since it is more expensive and risky to extend the grid there, than to build generation plants utilizing fuels replenished by mother nature.

Still, such projects encounter their own obstacles. For example, Julie Smith Galvin, director of project planning at ENEL’s Latin America subsidiary Energía Global International (EGI), argues that it is hard to find financial institutions willing to fund projects that range from half a million dollars to two million. “There is a hole. But there have been certain efforts to try to confront that,” she says.

Other risks associated with off-grid projects include the fact that infrastructure in general tends to be very poor. The lack of an established electrical company to guarantee a buyer for the power produced creates too much uncertainty that can only be overcome with government intervention.

Make-up of renewable generation in Mexico (Source: CRE)
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There is a willingness among policymakers not only to foster the development of off-grid projects to serve rural and remote areas, but also, and more importantly, to change the generation mix to take advantage of local resources to generate on-grid energy while reducing the risk of fossil fuel price fluctuations.

“Nicaragua wishes to stress the use of these resources in order to balance the energy matrix, which at present is heavily [75 per cent] weighted towards thermal projects. This emphasis is being introduced in the National Energy Policy,” said Raúl M. Solórzano, president of Nicaragua’s National Commission of Energy during CBI’s Renewable Energy in Latin America conference. He went further telling financiers not to be “chickens” and to give renewables in Nicaragua a chance.

Larger countries

It is not only the smaller countries in Central America that are pursuing this strategy. Brazil and Mexico are promoting, through the enactment of new laws and schemes, the development of renewable projects. According to Alejandro Peraza, director of general electricity at the Regulatory Commission of Energy (CRE), since the creation in 2001 of the Sustainable Energy Policy, Mexico has been promoting the build up of renewable projects with “very strong incentives for their development”. How strong? They “make projects possible in many instances,” he answers.

Although greenhouse gas emissions are a concern in Mexico, the move towards a scheme promoting renewables was based on economic factors. “We were interested in introducing renewables because of resources [available in the country], diversification and fuel price fluctuations,” said Peraza. It is calculated that there is the potential of adding 17 000 MW with renewable resources, and the current administration intends to implement at least ten per cent of that by 2006.

Because of the Mexican market structure, where only generation is somewhat open for independent self-sufficient producers, renewables have the opportunity to serve the needs of large industrial consumers. “There is attractiveness for private investment since the Comisión Federal de Electricidad is not interested in 30 or 40 MW projects,” Peraza says.

The new legislation in Mexico has yet to yield direct positive results. Peraza attributes this to the fact that the law is still too recent and investors are studying it, “which takes some time”.

Nevertheless, Peraza emphasizes that without the current rules there would not be much interest in developing new renewable projects. “We are seeing a lot of interest and we are also close to seeing the signature of some projects,” he says. Current regulation does not provide any type of subsidies, but it removes barriers to the entry of renewable technologies into the Mexican power sector. The proof that barriers are to an extent being overcome is the construction of La Ventosa, the first private wind farm in the country with a 67.5 MW generating capacity.

Brazil’s intentions are very ambitious with a plan to make renewable energy the primary source of production for energy during the course of this century.

Proinfa, the Brazilian renewable incentive programme, was created under Brazilian law in 2002 to increase the participation of renewables produced by Independent Autonomous Producers for the nation’s grid-connected energy matrix. During the first phase, Eletrobrás is to sign contracts for the implementation of 3300 MW divided equally among biomass, wind and small hydro sources for the duration of 15 years.

As in the Mexican case, although Proinfa has contributed through the creation of 150 000 jobs and $1.5 billion in equipment orders, the driver behind the initiative was the economic risks of depending heavily on fuel exports, says Marcelo Kahled Poppe, Secretary of the Secretariat for Energy Development at the Ministry of Mines and Energy (MME).

An additional boost

Since the signing of the Kyoto Protocol, renewable energy is seen differently, not only because it is environmentally friendly, but also because it can provide additional revenue through carbon trading and financing. Nonetheless, this potential new source of revenue is not the panacea, or at least not today. However, the potential and implications of future developments are a major driving force.

“At this point, when a few countries are just participating on a voluntary basis, the value of carbon is pretty low. When more countries opt-in and it becomes an international trading system the value goes up,” argues Mark Lambrides, programme manager, renewable energy Americas, Organization of American States.

There are many positive factors that advocate the development of renewable projects, such as a more environmentally conscious society, the beneficial social impact, avoiding dependence on fuel exports and their price fluctuations, the need to bring electricity to rural areas where the grid will not deliver, technology maturity, and carbon financing and trading. But ultimately, these projects will only see the daylight if legislation and regulation provide the incentives to make them economically sound. Fortunately, governments have found enough incentives themselves to start schemes attractive enough to warrant serious interest from the investment community.