Energy Transition in Latin America and the Caribbean

Boosting the Energy Transition in the Latin American and Caribbean Region

In the last decade, Latin American and Caribbean countries have implemented efforts to reduce their emissions. Between 2015 and 2022, the region increased its renewable capacity by 51%, reaching 64% generation from renewable sources in 2022. However, the pace must be accelerated. As population and economic growth, electricity demand is projected to increase an annual average of 2.3% from 2022 to 2050.

Without significant changes in energy matrices and expansion plans, Latin America and the Caribbean will not reach the goal of net zero emissions by 2050.

Latin America and the Caribbean have a historic opportunity to achieve universal access to electricity in a fair and inclusive manner, especially if we consider that 16.2 million people in the region still lack this access.

Some proposed solutions are:

Decarbonize various sectors of the economy, including the electricity, heating, transportation, industrial and construction sectors. As the electrification of these sectors proceeds, it is imperative that the region has energy generated from renewable sources.

Therefore, it is crucial to develop regulatory frameworks that facilitate this transition in countries, promoting investment in renewable energies. In addition, it is necessary to improve energy efficiency and adopt policies to reduce energy demand. As well as developing emerging technologies, such as green hydrogen and storage systems.

Prioritizing a just energy transition is another cornerstone. This involves supporting strategies that promote the reduction of greenhouse gas emissions and strengthen climate resilience, ensuring that the derived costs and benefits are shared equitably.

What is the IDB doing:

The IDB acts as Technical Secretariat of the “Renewables in Latin America and the Caribbean” (RELAC) initiative, which brings together 16 countries in the region. By 2030, member countries have committed to accelerate the transition towards carbon-neutral electricity systems in Latin America and the Caribbean (LAC), ensuring that at least 80% of electricity generation is derived from renewable sources.

The IDB has invested $1,068 million in the construction of 425 MW and the modernization of 5,209 MW of hydroelectric plants in the region. In addition, it has supported the modernization of regulatory frameworks to facilitate private investment in renewable energy. The bank has also promoted the development of emerging technologies, such as energy storage and green hydrogen.

The development of critical minerals for the energy transition represents a significant development opportunity. In this area, the IDB has collaborated in strengthening institutional frameworks for the mining sector, optimizing processes in 11 governments.

In the electromobility sector, the bank has provided support to governments to develop regulatory frameworks that facilitate the adoption of electric vehicles. This includes assistance to 14 cities in designing business models for the implementation of electric buses.

Between 2016 and 2021, the IDB has financed government programs that have provided access to energy, for the first time or improving its quality, to 2.7 million people.

Promotion of Energy Integration

Climate change, lack of investment in the energy sector and peaks in electricity demand are generating energy deficits. As a result, scheduled blackouts are frequently used to manage shortages, disproportionately impacting the most vulnerable households. Electrical integration is a strategic solution, allowing the exchange of energy between countries, where those with surpluses can meet the needs of those facing shortages.

The integration of regional electricity markets will transform the generation, distribution and consumption of electricity, taking advantage of economies of scale, promoting large energy projects and improving access to cheaper energy. By sharing reserves and increasing the electricity supply, peaks will be managed more effectively demand, stimulating competition and favoring the most efficient plants, which will displace the most expensive and polluting ones. However, the success of this integration will require overcoming challenges such as harmonizing national regulations and optimizing the use of energy resources. A complete integration will promote the exchange of surplus clean energy, reducing dependence on fossil fuels and contributing significantly to the reduction of CO2 emissions.

Some proposed solutions are:

Currently, electrical interconnection in Latin America is advancing through bilateral connections and subregional efforts. An example is the Electrical Interconnection System of the Central American Countries (SIEPAC), which achieves the integration of six Central American countries through 1,800 km of transmission lines.

In addition, initiatives that aim to deepen regional electrical interconnection are highlighted. Among them, the Andean Electrical Interconnection System (SINEA), which seeks to connect Bolivia, Colombia, Chile, Ecuador and Peru; the Energy Integration System of the Southern Cone (SIESUR), which includes Argentina, Brazil, Chile, Paraguay and Uruguay; and the Northern Arc, which connects Guyana, Suriname, French Guiana with Brazil. These initiatives are fundamental for the consolidation of an integrated regional energy market, promoting efficiency, energy security and sustainable development through the shared use of energy resources.

If the regional network is integrated with 80% of renewable energies, $23 billion and 0.7 Gigatons of CO2e can be saved by 2030 (IDB, 2017[LSVF1]).

What is the IDB doing:

The Inter-American Development Bank (IDB) plays a crucial role in promoting energy integration in Latin America, providing technical and financial support to key initiatives such as the Andean Electrical Interconnection System (SINEA), the Southern Cone Energy Integration System (SIESUR), the Northern Arc and the Electrical Interconnection System of the Central American Countries (SIEPAC). These collaborative systems between countries are designed to build electrical infrastructure capable of sharing surplus clean energy generation, thus mitigating possible supply failures, and strengthening regional energy security. 

The IDB provides essential technical assistance to advance the implementation of normative, regulatory, technical and institutional actions, fundamental for the success of these electrical integration initiatives.

The Inter-American Development Bank (IDB) approved a $125 million loan for a 500 kilovolt power line that will help Ecuador and Peru connect their electrical networks. The European Investment Bank is expected to contribute an additional $125 million to the project. The 544-kilometer very high voltage line between both countries will help strengthen regional energy integration and advance the Andean Electrical Interconnection System initiative. 

Financing Resilient Infrastructure

Climate change, the definitive consequence of the accumulation of greenhouse gases in the atmosphere due to dependence on fossil fuels, is altering the weather patterns experienced historically. This alteration is reflected in a 1.1 °C increase in the temperature of the earth's surface and the increase in the intensity and frequency of extreme phenomena, such as droughts, fires, storms, floods and hurricanes.

Certain regions have been more affected than others by these disruptions. Regions with a high dependence on hydroelectric energy have seen rainfall patterns and the availability of this resource altered. Other regions are dealing with desertification processes and increasingly intense heat, imposing an increasing load on electrical systems to provide air conditioning and refrigeration to people and products.

Regions susceptible to tropical storms and hurricanes have seen increasing damage to their infrastructure and loss of basic services for days and sometimes weeks.

Between 2000 and 2019 alone, 330 storms were recorded in the Caribbean, of which 181 evolved into hurricanes that impacted the lives of 34 million people. According to the United Nations, the Caribbean has infrastructure losses due to natural disasters (hurricanes, earthquakes, tsunamis and floods) worth 12.5 billion dollars each year.

The limited fiscal space and the multiple citizen demands that exist in the regions and countries that are most affected by climate change make it difficult to invest in infrastructure and measures to address these extreme climate events. Even more so when resilient infrastructure, capable of withstanding more intense temperatures, winds, and water courses, is even more expensive.

Some proposed solutions are:

To confront extreme weather events and other risks associated with climate change, it is key to invest in resilient physical and digital infrastructure, which will reduce the negative impacts of climate change on the population. While investing in this type of infrastructure can lead to higher investment costs, its social and economic benefits more than offset its higher cost.

Increasing building resilience is economically viable for high-risk Caribbean islands, generating long-term savings and increasing infrastructure preparedness for the impacts of climate change.

Building more expensive but resilient energy infrastructure in the Caribbean could deliver net benefits of $4.3 billion over more than 20 years, primarily due to savings in reconstruction costs.

What is the IDB doing:

In the Bahamas, the IDB approved a contingent loan for $100 million, of which $16 million will finance resilient energy infrastructure.

In Nicaragua, the Bank has been innovative in providing financing for new technologies. In this case, the installation of resilient mini-grids is being financed with 6 million dollars.

In Honduras, the IDB approved a loan for 179 million dollars with the objective of strengthening the national transmission system by financing priority works. Additionally, it is expected to strengthen the interconnection capacity with the regional electricity market, in order to take full advantage of the Interconnection System.

Electricity of Central America (SIEPAC), improve financial sustainability and institutional capacity, improve the quality of transmission by making the electric service more reliable, and facilitate the transportation of electricity generated with renewable energy projects.

Energy Storage / Technology

The expansion of intermittent renewable energies, such as solar and wind energy, which have grown at rates of 123% and 39% annually in the last 10 years, and have supported the decarbonization of the electricity sector. However, they have also increased pressure on it, demanding greater flexibility to maintain the continuous balance between generation and electricity demand in real time.

The increase in demand for electricity makes it necessary not only to increase generation, but also to increase energy storage technologies that provide balance to the system. These technologies require capital to implement them and the necessary regulatory frameworks to make business models and, therefore, investments in energy storage attractive.

In Latin America and the Caribbean, some energy storage projects have already been developed that have not required major regulatory adjustments, such as the case of some applications in what is known as behind the meter, in Colombia, Chile, the Dominican Republic and Peru. However, the use of this technology requires regulatory frameworks that adjust to the realities of the electricity markets of each country.

Multiple regulatory barriers in electricity markets make the implementation of energy storage technologies difficult: (i) lack of a clear definition, inadequate pricing and tariff schemes, and lack of markets for auxiliary services.

Some proposed solutions are:

Energy storage plays a very important role, thanks to the fact that they can act as a load or as a source of electricity alternately, and thus compensate for variations in electricity generation and demand quickly. In addition, energy storage systems can alleviate congestion problems in electricity energy transmission networks and hold off investments not only in these but also in distribution networks.

Realizing the benefits of energy storage will depend on the definition of regulatory frameworks that encourage the development of attractive business models for using storage technologies. In particular, it is key to clearly define energy storage within legislation, establish access and connectivity conditions to the network, specify the permits and authorizations necessary for these projects, calculate the tolls and network charges to which these services will be affected, and define the payment structure that energy storage systems will receive, including payments for energy arbitration, capacity, and balance.

Additionally, it is important to provide financing and incentives that reduce the risk of investing in these technologies, whose attractiveness has not yet materialized in different countries for private sector investors.

What is the IDB doing:

The Inter-American Development Bank developed the publication “Incorporation of energy storage in electrical systems” (available in Spanish only). In it, the regulatory frameworks of different countries that have more experience in the implementation and investment in energy storage technologies are reviewed. This publication provides important conclusions to define adequate regulatory frameworks for the implementation of energy storage.

The Bank has worked with the governments of Barbados, Bahamas, Bolivia, Haiti, Nicaragua, and Suriname in the development of regulatory frameworks, tariff schemes, and implementation of mini grids to encourage the implementation of energy storage technologies.

The IDB has supported the Bahamas with the financing of 14.98 million dollars for two types of storage i) Support to stabilize the network, reducing the rolling reserve, as well as consumption of fossil fuels (installed capacity 25MW and 27MWh dispatch), and ii ) Development of microgrids (300kW to 2.5 MW capacity).

In Barbados, the Bank has provided 75,180 dollars for the hiring of consultants for i) the design of feed-in tariffs for battery implementation; ii) the development of a national strategy for the implementation of batteries by public companies in the country; and iii) support for the development of bidding documents for battery/storage projects.

In Chile, the IDB has supported the carrying out of a flexibility study to incorporate more renewables into the energy matrix. In addition, the development of the regulatory and legal framework for storage in Chile is being supported through a comparative study of best practices in 5 countries.

In Uruguay, the IDB has approved $1 million in technical cooperation to support the design and implementation of the first pilot project for the integration of batteries into the electricity distribution system.