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Water for Energy in LAC: Issues, Investments and Policies

Water for Energy in LAC: Issues, Investments and Policies. Fernando Navajas Chief Economist & Director FIEL, Argentina. Bi-regional North America and Latin America and the Caribbean WEC Forum. Mexico City, 4th November 2008. Water Resources. Relative abundance/scarcity in LAC.

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Water for Energy in LAC: Issues, Investments and Policies

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  1. Water for Energy in LAC: Issues, Investments and Policies Fernando Navajas Chief Economist & Director FIEL, Argentina Bi-regional North America and Latin America and the Caribbean WEC Forum Mexico City, 4th November 2008

  2. Water Resources. Relative abundance/scarcity in LAC m3 per person per year

  3. Hydro-electric generation in LAC • Stylized fact 1: High share on aggregate and on average • Stylized fact 2: Different stories of abundance and scarcity • Stylized fact 3: Down-cycle of share in the late 90s and early 00s, again on average

  4. High share on aggregate OECD LAC

  5. Visible at World Scale

  6. But not a unique or common pattern

  7. Distribution of shares

  8. Down cycle in LAC and in ABCM

  9. Down-cycle of hydro-generation share in the late 90s and early 00s • Reform-cum-low oil/natural gas prices hypothesis • Hydro was state-owned and is “high fixed (sunk) – low variable costs” • Reform (Privatization) biased selection against hydro for two main reasons • Cost effectiveness (cheaper available hydrocarbons and new technologies) • Contractual Governance (Fear to “sunk” investments) • Results: Efficiency with vulnerability (to future shocks)

  10. The outlook ahead: investment needed • Back-of-the-envelope estimate from • Power demand growth • Above 3% per year (over many years) • Future share of hydro-generation • A bit down in BRA and more in MEX to accommodate natural gas and LNG; the opposite in ARG • Costs • Investment needed about 0.5% of GDP steady • But ranging from 0.3% to 0.7% of GDP for countries. • Jumps due to lumpiness of projects (e.g. the Madeira river dams in BRA is about 10% (6%) of capacity)

  11. Electricity Capacity Growth in LAC

  12. Hydro-generation capacity in GW

  13. Issues for sustainable investment and private participation • Old trouble: Macro-cum-Policy volatility in LAC • Demand effects • Capacity-to-repay sunk investments • Willingness-to-repay sunk investments • ...It boils down to cost of capital and pricing (cost recovery): “(,P)-equilibrium” • New Trouble: Regulatory (environmental) problems ahead, given “missing markets” for water use.

  14. New issues ahead: tighter environmental regulation • Is hydro-generation “low variable” cost? • Broader issue (also for bio-fuels): water is in a “missing market” that will be somehow priced in the future • Even more serious: global warming effects on water availability and regulation • Investments may become “stranded-assets” after major regulatory limits to water use

  15. Public Policies: general • Recognize structural change • Consider missing markets, set shadow prices • Avoid cycles or selection bias problems • Watch out the “(,P)-equilibrium” • Given so, bring in private capital, if you can, but consider the requirements to avert failure • if not possible bring in private management.

  16. Public Policies: more specific • Two dimensions: Regulatory and Fiscal • Regulatory: not a unique recipe, but consider… • Improve risk allocation through contracts design • Provide incentives for efficient water management • Improve price and tariff mechanisms • Fiscal: avoid soft budgets but consider… • Tax incentives for investment in renewables • Green taxation on electricity cum a reallocation fund

  17. Water for Energy in LAC: Issues, Investments and Policies Fernando Navajas Chief Economist & Director FIEL, Argentina Bi-regional North America and Latin America and the Caribbean WEC Forum Mexico City, 4th November 2008

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