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Sustainable Water Policies for Energy: Insights from LAC

Delve into the dynamics of water resources for energy in Latin America and the Caribbean, analyzing investments, scarcity, regulatory challenges, and sustainable policies. Learn from the experiences in hydro-electric generation and the need for public-private partnerships.

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Sustainable Water Policies for Energy: Insights from LAC

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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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