The shift of Latin America into an energy economy

The dawn of the 21st Century signals a shift in Latin America to an "Energy Economy". However, the pathway to the new economy is plagued with potholes in the form of political unrest, decades of poor planning, hydroelectric projects on the verge of drying up, on again-off again deregulation efforts, and impending gloom in some power sectors.
In spite of many headlines pronouncing doom and gloom there are many bright spots on Latin America's energy horizon. As the old saying goes "there are many roses among the thorns". Not the least of those roses is the sector's abundant oil and gas reserves, estimated at some 137 bn barrel and 280 tcf. However years of poor political and economic policies have left Latin America without sufficient capital to finance development and, as a result, average annual production remains small relative to the size of the resource.

Perhaps the biggest trouble spot, and the one offering the most opportunity is Brazil. The country of 170 mm people is facing its worse energy crises in over three decades and is being forced to make some tough decisions about how to spend and attract money into its energy generation sector.
The worst drought in 70 years has uncovered decades of poor planning and meagre investment, and the fallacy of betting the farm on an hydroelectric network that powers over 90 % of the country, equivalent in size to the continental United States. This has prompted President Fernando H. Cardoso's administration to launch an emergency energy-rationing plan calling for 32.5 mm Brazilian homes to reduce energy consumption by 20 % and mandating that industry and commerce make similar energy cuts.
As a result, economists fear power rationing is likely to drag Brazil's 2001 economic growth to below 3 % from initial estimates of 4 % to 4.5 %. It is also expected to spark layoffs and slash foreign investment.

Brazil is by far the largest power market in the region with an installed generating capacity of 74,000 MW and estimated demand for an additional 25,000 MW during the next five years, according to Secretary of Industries, Mining and Energy Jose Jorge de Vasconcellos. The Secretary went on to explain that the success of these hydroelectric factories will be subject to climate phenomenon, such as the rain gauge, the most important "Achilles Heel" of the energy supply program in the country during these last years.
Dozens of foreign investors have lined up to tap the growing market, building new power plants to be fed largely by Bolivian natural gas through a new pipeline. Yet, regulatory uncertainty has kept many of the projects on hold. The principal stumbling block, power generators say, is a ceiling on retail tariffs which does not allow for increases of dollars-denominated costs, such as the imported natural gas.
There's nothing like a crisis to spur development of renewable energy sources. Electrical shortages on top of high petroleum prices threaten to obstruct Brazil's economic growth, leading policy makers to look for alternative energy supplies.
"Times like this stimulate interest in sustainable options, which generally are ignored during healthier economic periods," observed Alexandre Pereira, a researcher at the Brazilian Wind Energy Centre (CBEE), associated with the Federal University of Pernambuco. To that end the government has promised to encourage the development of wind energy, improve utilization of biomass and build small hydroelectric plants in order to complement the national energy system, 90 % of which is currently supplied by mega-hydroelectric installations.

In sharp contrast to Brazil's spotty deregulation efforts, Argentina has created the region's most efficient power market, posting a new surplus capacity in the neighbourhood of 6,000 MW. Since privatisation efforts began 6 years ago, Argentina has seen the price of electricity drop from $ 60 per MWh to around $ 20 per MWh, and there is still no end in sight as investors work to bring new natural gas projects online prompting analysts to predict an additional capacity of up to 3,000 MW over the next three years. The excess production is destined to neighbouring Brazil.
The most open power market in Latin America appears to be Chile, which was the first to move toward deregulation. Since 1982 the country has seen a dramatic fall in rates, and since bringing new capacity online in the 1990s is enjoying a healthy electrical environment.
However, even as the region continues to post a 7 % annual growth, analysts say the country will require an additional 400 MW or so if it is to avoid shortages. AES of the United States and Spanish giant Endesa appear set to provide the additional requirements, provided they get the necessary assurances from the government. All eyes in the region are now on Mexico and its President Vicente Fox.

Despite Fox's efforts to move the country toward liberalization in the energy sector, gas and power remain firmly in the clutches of the state as high natural gas prices and uncertain supply stream as well as subsidized electric rates, are seen as stumbling blocks to reform. Currently the bulk of new power generation is expected to come from the Comision Federal de Electricidad (CFE), the state power generator that has announced plans to build plants with a total capacity of 9,900 MW worth $ 6.6 bn by 2004.
While this initiative has been hailed in some quarters, detractors are quick to point out that it still will fall far short of the estimated annual growth expected in the range of 6.6 % through 2009. In spite of its troubles, Latin America's energy markets are expected to continue opening to private capital as privatisation takes hold and will offer some of the most consistent growth rates in the world.
Over the past few years, Latin America and the Caribbean has become one of the most attractive regions for energy sector investments. Its high potential, along with the dynamic reforms that have been carried out in this sector, with clear, transparent rules, has stimulated public and private investment in the different stages of the energy chain.

The region has a very high renewable energy potential and has the possibility of economically using small-scale renewable sources of energy, such as mini hydropower plants, wind energy, and photovoltaic energy to meet the needs of a high percentage of its rural population.
Much of the population of Latin America and the Caribbean lives in rural villages, and does not have access to electricity. For example, Mexico has 70,000 villages without access to the utility grid, and Brazil has 4 mm unelectrified rural households. In Latin America and the Caribbean, the fraction of the population that lives in villages varies from 20 to 90 % in different nations; most of these communities are located too far from cities to access utility electric power in the foreseeable future.
Even in cities, demand is growing greatly and electric utilities cannot always provide sufficient power to meet increasing demands. Power blackouts are a significant problem in many countries, especially inBelize, where electricity is typically unavailable 20 % of the time, and in Honduras, which has blackouts ten to twelve hours a day.

Latin America and the Caribbean are undergoing major changes in the ownership, structuring and regulation of the electric utility industry, and these changes, along with other government policies, have important bearing on the economics of renewable energy sources. Whether renewables appear cost-effective or cost-competitive depends on whether one takes the perspective of governments deciding on societal policies, of utilities operating under given regulatory frameworks, or of individual firms and households faced with specific tariffs for utility-grid-delivered electricity.
The economics of renewable generating investments also differ depending on whether these technologies are applied in the form of utility central stations or as distributed generators located on the premises of individual users. Depending on the perspective, a series of other issues need to be taken into account, ranging from technical questions about the reliability of electric service, to the influence of government programs on the costs of renewables, the longer-term economic.
More than most emerging markets, Latin American infrastructure investment requires a deft touch. Periodic economic and political waves crash over the region, generally from outside sweeping away previously applauded economic and constitutional initiatives.

Latin America emerged from what has been called the "lost decade" of the 1980s, a period marked by state controlled economic development, debt crises, hyperinflation and limited access to international capital markets. The sector moved rapidly into an era of reform in the 1990s with a shift toward market-based reforms, deregulation, privatisation, trade integration, increased fiscal discipline, and greater political openness among Latin American countries. That, in turn, has generated significant access to international capital markets.
As the new millennium unfoldsthe sector is still plagued by low domestic savings, large public sector deficits, large external borrowing, and large development needs that adversely impact sovereign credit ratings. To compete for investment dollars Latin America must deepen its structural reforms, institutionalise democracy, curb corruption, and reduce its vulnerability to external shocks.
If Latin America as a whole is to move forward it will have to throw off the shackles of state controlled monopolies in the oil and power sectors and embrace privatisation in order to attract the hard currency so vital for its growth.