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Policy Reform for Sustainable Energy in Latin America and the Caribbean

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POLICY SERIES, NUMBER 5 — Policy Reform for Sustainable Energy ORGANIZATION OF AMERICAN STATES INTRODUCTION Reliable and affordable energy services are essential to the modern world. Secure access to these services and the stability of their prices are key concerns for policymakers worldwide. For countries that are predominantly dependant on imported fossil fuels for their electricity generation, there are many associated long term risks in this regard, including the potential economic disruptions due to petroleum prices volatility, the vulnerability of fuel shipping and storage systems to terrorism and climate change impacts (i.e. increased strength and propensity of hurricanes), and negative environmental impacts associated with fuel combustion. However, there exist viable alternatives to the current patterns of fossil fuel consumption. Modern renewable energy technologies have seen dramatic decreases in costs, coupled with increased efficiency and reliability over the past two decades. The tables below illustrate the cost reductions that have been achieved since 1980 and offers projections for further reductions through 2020. Abundant renewable resources, including solar, wind, geothermal, biomass, and hydro may be found throughout Latin America and the Caribbean offering many countries of the region the possibility to utilize domestic natural resources for the produc- tion of clean electricity. In fact, renewable energy technologies can help meet the surging growth in electric power demand - both on and off-grid - throughout the region. Additionally, when coupled with the implementation of energy efficiency improvements significant reductions in fossil fuel use for power generation can be achieved. POLICY SERIES, NUMBER 5 — December 2004 Conventional energy systems struggle to reach isolated, low-density rural populations, whereas, renewable energy systems such as solar and wind power can often provide electricity and hot water where power lines cannot reach. The policy challenges for off-grid applications are different than grid- connected needs, but are also crucial in creat- ing a receptive invest- ment environment for renewable energy tech- nologies. Since renew- ables already have sig- nificant cost advantages in many off-grid applications, the policy focus is not so much on energy portfolios and financial transfers, but rather in ensuring that utilities continue to make investments in rural areas where populations may be dispersed and sparse. As rural electrification offers lower returns due to its intrinsic characteristics - mainly a widely scattered market - it is generally not attractive to private capital. A first step toward the development of a successful rural electrification strategy is a commit- ment, at the national level, to furthering the electrification process. Often this means continued financial obligations - subsidies - on the part of the government to reach the nations poorest citizens. Additionally, strategies to break the model of centralized generation combined with grid-exten- sion, and accepting that distributed generation may be less costly and tech- nologically attractive are often successful in rural areas. Policy options in this regard include: I Rural Concessions. Argentina has designed an innovative rural electrifi- cation policy, with the support of the Global Environment Facility (GEF) and the World Bank, which gives exclusive power provision con- cessions for specified rural areas, combined with a uniform kWh subsidy. Franchise rights for rural concession areas are given to the private sector entities that require the lowest subsidy to provide electric services to rural households and community centers. I Provide Direct Subsidies for Rural Electrification. The state may provide direct subsidies for investments in rural electrification, where the market conditions are not otherwise attractive for rural cooperatives or private utilities. It is advisable that such subsidies be direct, and targeted at the investment costs for the projects. In Chile, through its National Rural Electrification Project, the State provides subsidies of 60%-70% of the initial investment costs for off-grid rural electrification projects. I Subsidy Repackaging. Many rural energy needs have traditionally been assisted through subsidies on the conventional fuels being used, includ- ing diesel and kerosene. Since renewable costs do not generally require fuel expenditures, but rather in the initial capital investments, it is important to restructure rural energy subsidies so that they can also apply to renewable technologies. This is being practiced in Brazil where the CCC Fund (Conto de Consumo de Combustiveis - Diesel Subsidy Fund) may be utilized to invest in solar, wind, and biomass energy where these technologies are more appropriate. CONCLUSION Sustainable energy technologies, including renewables and energy efficien- cy have the potential to significantly reduce the amount fossil fuels that are consumed for the production of electricity in Latin America and the Caribbean. It is clear that there are many benefits to be accrued by diver- sifying power generation resources to include these technologies. While the benefits - including power system price stability, infrastructure security, environmental protection, and rural economic development - may be con- vincing, policy and regulatory reform is required to help level the playing field with regard to conventional fossil fueled systems. The outlook for clean energy in Latin America and the Caribbean is more promising today than ever before. The fusion of a heightened interest in and appreciation for renewable energy and energy efficiency benefits, combined with increasingly competitive modern technologies has led to a situation in which these systems can provide the most economically sound, long-term investment in the growing power needs of the hemisphere. For further information please review the webpage for the Office For Sustainable Development and Environment of the General Secretariat of the Organization of American States (OAS/USDE; http://www.oas.org/usde). This USDE Policy Brief series provides a forum for discussion on issues pertaining to sustainable development to help transfer good practices and lessons learned from project design and implementation. This is the fifth in a series that includes topics on: — Water Resources Management — Transboundary Aquifers — Biodiversity Conservation — Trade and Economic Integration — Natural Hazard Mitigation Policy Reform for Sustainable Energy in Latin America and the Caribbean BENEFITS OF RENEWABLE ENERGY Large-scale renewable energy systems, such as wind farms, biomass electricity, hydropower, and geothermal, offer considerable economic, environmental, and energy security benefits that may be considered by policymakers when considering reforms that will diversify the electricity generation portfolio. These benefits include: I Long-term competitive price stability I Reduced vulnerability to fuel supply disruptions I Flexibility to delivery distributed and household energy to peri-urban and rural populations I Minimal emissions of greenhouse gases - climate change I Minimal local pollutants - including air and water emissions I Attracts investment for domestic infrastructure projects I High tech job creation I Many systems are modular and can be expanded as demand grows 4 PRINTED ON POST-CONSUMER RECYCLED CONTENT PAPER 1 Unit for Sustainable Development & Environment www.oas.org/usde Despite the technological advancements of sustainable energy technologies and the growing concerns for energy security and the global environment, widespread use of renewable energy systems for power generation and substantial energy efficiency measures in Latin America and the Caribbean is not expected without key changes in energy markets. Utility investment decisions regarding grid-tied power and off-grid energy services are largely driven by rate of return expectations for private power projects. Financial arrangements for electricity utilities favor low upfront costs and continued fuel costs (fossil fuel) over high upfront costs and low fuel costs (renewable energy). The same reticence to high up-front costs is hindering the widespread deployment of energy efficiency technologies. In addition to the basic structure of the market, other factors may favor conventional fossil fuel power systems including: I Fuel subsidies offered by many countries I Fuel storage and delivery infrastructure costs born by the public I Petroleum exploration tax (and other economic) incentives I Availability of low cost project finance I The absence of charges for environmental impacts UNIT FOR SUSTAINABLE DEVELOPMENT & ENVIRONMENT

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