Opportunities and challenges in a changing context
Regional energy integration is a hotly debated topic in Latin America, with some stakeholders pointing to huge untapped potential, while others are notably skeptical. In order to encourage debate and the promotion of knowledge on the theme, CEBRI’s Energy Center and KAS-EKLA signed a partnership to explore the theme. This discussion benefited from a debate promoted on September 3, 2020, which counted on the valuable inputs of Décio Oddone, former General Director of the National Agency for Oil, Gas and Biofuels – ANP and with extensive experience in different countries in the region, Thiago Barral, president of the Energy Research Company – EPE, and Marta Jara – member of the Wilson Center’s Latin American Program Advisory Board. The debate also included comments by Jorge Camargo, vice president of the Board of Trustees of CEBRI, and Nicole Stopfer, Director of KAS-EKLA. The session was moderated by Clarissa Lins, CEBRI’s Senior Fellow and founding partner at Catavento.
The paper written by Catavento in order to consolidate and deepen points discussed at the event can be downloaded here (available only in Portuguese). Through the analysis of technical publications, data and facts, we sought to evaluate the region’s past experiences with regard to energy integration, reflect on lessons learned and analyze the future potential for greater integration in light of the future of the energy that unfolds from global macro trends. We highlight some key takeaways below:
Latin America today has a thriving energy sector, with ample potential for expansion. In 2018, the primary energy supply in the region totaled 841 Mtoe, with an electrical generation of 1617 TWh . Still, the region is home to relevant fossil fuel reserves, with 18.7% of the proven global oil reserves, notably located in Venezuela (17.5% of global reserves ) and Brazil (12.7 billion barrels), and 4% of global natural gas reserves . Besides that, in the context of the energy transition, the region already has a high share of renewable sources, especially hydro, with emphasis on Brazil, in addition to the vast potential for renewables such as solar, wind and biofuels. However, energy resources are unevenly distributed across the continent, which further strengthens the relevance of the debate on complementarity and regional integration.
The rationale behind energy integration lies on the potential positive effects related to greater energy security, systemic efficiency, lower costs, expansion of markets and positive socio-environmental impacts. That said, the integration process can be classified into different stages of maturity , making it clear that effective regional integration would not be limited to the existence, for example, of a transmission line between two countries. Initially, interconnections are used in order to enable the variable trade of electricity between the countries, potentially evolving to longer-term energy contracts between countries, with the signing of bilateral agreements or even the construction of binational power plants. The final phase is characterized by market coupling, which requires regulatory harmonization with respect to the volumes of energy sold and price formation, as well as shared energy planning .
The history of energy integration in Latin America has been marked by high expectations, followed by often frustrating results, both in the electricity sector and in the natural gas sector. The analysis of this historical context allows us to draw some lessons learned, such as: (i) the need for a stable political-economic environment, (ii) the importance of regulatory harmonization between countries, in addition to a solid institutional and governance framework, (iii) and the recognition of the fragility of private agents in the face of energy integration projects, due to the importance of government entities for their effective profitability.
Still, based on the historical context and lessons learned, it is necessary to reflect on how a discussion on regional energy integration in Latin America is inserted in the context of macro trends that are redesigning the future of energy . In the present study, we do it from the perspective of 4 transformations underway in the energy sector: (i) climate change, (ii) energy transition and greater penetration of new renewables, (iii) new technologies and digitalization and (iv) the new geopolitical orientation. Below, we seek to summarize how each of these macro trends impact the energy sector and encourage regional integration:
The study also explores the Brazilian potential to lead a regional integration process. The country currently represents 43% of the primary energy supply in Central and South America (285 Mtoe), and 45% of electricity generation on the continent (593 TWh) . In view of this relevance, any effective regional integration process depends fundamentally on Brazilian engagement . The country shares borders with 10 of the 12 countries in South America, has good commercial and diplomatic relations with most of its neighbors, solid institutions in the energy sector and experience in the construction, planning and operation of long-distance energy systems .
On the other hand, what would be the effective interest of Brazil in promoting energy integration? The country, through its high level of diversity of energy sources unevenly spread throughout the territory, already benefits from diversification of sources and complementarity within national limits. In addition, the physical barriers that separate Brazil from its neighbors, such as the Amazon Forest and the Andes, in addition to the great distance between the borders and the centers of energy consumption in the Southeast, are additional barriers that could generate a significant increase in energy costs. integration projects . In this scenario, despite being a key player for effective energy integration in Latin America, Brazil does not seem to have adequate incentives to exercise such leadership.
Finally, the authors conclude that energy integration must mean complementarity and not dependence. History gives the Latin American continent lessons to avoid making the same mistakes as in the past. In the quest to rebuild lost confidence and in the midst of an energy sector in transition, it is necessary to reflect on the real incentives that countries have to promote integration. Compared to the scenario of the 1980s and 1990s, or even the challenges faced in the 2000s, today a new world is opening up, and it is necessary to be prepared to look at regional integration from the perspective of the future of energy. Much of the logic of energy integration in Latin America, with large infrastructure, hydroelectric and gas pipeline projects, seems to belong in the past.
In this context, and after what was exposed throughout the study, it is evident that the opportunities for greater integration are marginal in the electricity sector, limited to border regions, but existing in view of the potential gains in flexibility and energy security. In the natural gas sector, on the other hand, they are certainly more timid, mainly in view of the transition to a low carbon economy, competition with national reserves and with LNG traded globally.
A necessary, though not sufficient, condition would be to start by re-establishing the bonds of trust between countries, which have been severely shaken by interventionist episodes. And, yet to be verified, the efficiency stimulus brought by integration in an energy context towards a decentralized, decarbonized and digital future.
To download the full version of the study, click here (available only in Portuguese).