Abundant renewable resources in South America — including solar, wind, geothermal, biomass, sugar-based ethanol and hydro — offer many countries in the region the possibility to utilize domestic natural resources for the production of clean electricity. In an effort to meet the growing demand for energy, enhance energy security and address climate change, many South American countries are beginning to focus their attention on the research and exploration of energy sources that are renewable. In the past, the greatest risks for private investments in renewable energy were political uncertainty and commercial hazards involved in the exploration and development of renewable resources. Today the sustainable development of renewable energy in South America depends on economic, financial and political factors. Economic changes are needed so the region can achieve a competitive position in a liberalized energy market. Financial changes by governments in the region need to be made to enable private financial agents or state enterprises to invest in renewable energy resources and to establish a clear and stable market mechanism designed to reduce investment risk. Finally, renewable energy needs to be recognized in the region as a political priority.
Although some sources such as solar are still not entirely competitive in terms of cost and efficiency, others such as wind power and biomass are experiencing substantial base growth across the region. Government incentives and programs are the main market drivers in the region. In addition, the need for enhanced energy security, rural electrification and energy diversification have also contributed to the most recent growth of renewable energy in South America. Brazil is the most prominent market in the region, while Argentina, Chile and Peru are a few of the countries that have recently begun to implement energy efficiency and renewable energy measures so they can boost their installed renewable energy capacity.
Renewable energy deployment, in particular from wind and solar, is regarded as one of Argentina’s priorities vis-à-vis energy generation to meet increasing energy demands. Argentina has promoted the use of renewable energies since 1998 with the enactment of Law No. 25.019, the National Wind and Solar Energies Program, which was later regulated by Decree No. 1597 of 1999. In brief, the program establishes that projects developed in connection with the generation of electricity from wind and solar power can be developed only by individuals or legal entities registered in the Republic of Argentina, which, in turn, do not require any special authorization from the federal government. In addition, the law also provides for the following tax benefits:
(i) VAT payments in connection with investments in wind or solar power plants or machinery are deferred for 15 years; and
(ii) a 15-year tax stability with regard to taxes in force at the time the feasibility report is submitted, meaning that the aggregate tax burden upon the beneficiaries cannot be increased as a consequence of increases or the enactment of any new federal taxes, duties or charges.
In 2006, the federal government enacted Law No. 26.190, which supplemented Law No. 25.019 and was promulgated to achieve two primary goals: first, to ensure that within 10 years, 8 percent of the total electricity consumption in Argentina will come from renewable energy sources; and second, to stimulate new investments related to electricity projects via renewable energy sources.
There currently exist a number of companies that, supported by local governments, municipalities and the programs enacted by the national government, engage in the construction of large wind farms in, for example, Patagonia and the southern region of Buenos Aires.
After a decade of reforms and privatizations, Brazil is currently reevaluating its plans to meet growing energy needs. The country’s energy use is expected to continue to climb in the coming years, and, as a result, a restructuring of its energy sector is inevitable. It is estimated that the renewable energy market in Brazil will be worth $25 billion (the following renewable commodities are included in that number: small hydro power, biomass, solar and wind energy), so business opportunities are limitless. However, government resources alone cannot meet the demand for off-grid energy, and the need for private investment is great.
Brazil’s Renewable Energy Incentive Program (PROINFA)
Thanks to policies adopted during the past three decades, Brazil has a structure of primary energy use with an important renewable component. Accordingly, more than 40 percent of Brazil’s primary energy comes from renewable sources. The combination of favorable natural conditions — such as climate, geographic space availability and good-quality soil — and economic growth provides a prolific environment for alternative energy initiatives and sources, ranging from hydroelectric plants and thermal electric projects to the great potential for biomass, solar and wind power generation.
As a result of the high dependency on hydroelectric power generation and a long dry season, Brazil faced a power shortage in 2001. To avoid future power crises, the Brazilian government began encouraging renewable power generation. To that end, a groundbreaking moment for the promotion and usage of renewable energy sources (other than hydropower and geothermal) in Brazil was the passage of Federal Law No. 10438 in April 2002. The law was responsible for the creation of the Renewable Energy Incentive Program (“Programa de Incentivo às Fontes Alternativas de Energia Elétrica” or “PROINFA”).
The PROINFA program was aimed at increasing the share of wind power, biomass energy and small hydroelectric projects (“SHP” — hydroelectric plants with less than 30 MW capacity) in the Brazilian grid system supply. The first phase of the program has guaranteed power purchase agreements totaling 3,300 MW (685.2 MW biomass, 1,422.9 MW wind power and 1,191.2 MW SHP) through financed projects. The second phase — which is designed to ensure that within 20 years 10 percent of the total electricity in Brazil will come from biomass, SHP, wind power and biofuels — is planned to start right after completion of phase one, and a larger amount of renewable energy is expected to be contracted. The program was also designed to attract financing of capital costs and overall investments in biofuels.
Notably, Brazil was fortunate to have adopted PROINFA during a period when the global trend of supporting clean energies in response to the Kyoto Protocol was ramping up drastically. In that connection, an interesting facet of the renewable energy market in Brazil relates to the interplay between the United Nations Clean Development Mechanism (“CDM”) and the PROINFA program. While projects approved under the PROINFA program can be registered as CDM, and project developers are offered a guaranteed price for the offtake of electricity that is generated under the scheme, the PROINFA regime presents barriers to ownership of carbon credits by CDM project developers in that the credits generated from such PROINFA schemes belong, by law, to Eletrobrás, the state-owned utility company that manages PROINFA.
“Light for All” Program
Approximately 20 million Brazilians living in remote communities have no access to reliable electrical power, and yet demand for energy continues to rise in Brazil. While the majority of these underserved reside in Brazil’s northeast, the remainder dwell all over the country — even in the welldeveloped states of the south and southeast regions.
In an attempt to solve that problem, the Brazilian government launched in November 2003 a program called “Luz Para Todos” (“Light for All”), which is aimed at improving rural electrification through network expansion and distributed generating systems with isolated networks or individual plants. By the end of 2008, the goal is for a total of 1.7 million non-electrified households to have access to electricity.
Solar power appears prominently under the program, since some locations are not likely to be reached by the grid or supplied by other sources such as wind power. To that end, it is estimated that the use of approximately 130,000 photovoltaic (PV) systems is the most economically efficient option for about 17,500 localities with small populations in the Amazon territory. A further 2,300 villages with about 110,000 buildings could be equipped with a mini-grid based on PV or biomass sources. In addition, 680 medium-sized communities could be supplied on the basis of hybrid systems, and 10 larger communities could be provided with power generation based on conventional diesel generators or hybrid systems.
By the end of 2006, six applications for schemes using renewable energy were approved within the program, all of them solar home systems (SHS), totaling 3,071 installations.
In sum, the prominent position that Brazil holds in the renewable energy arena, which was made possible by government policies that created steadily growing markets for renewable energy, undoubtedly makes the country a foreign investment magnet. In effect, it places Brazil in a unique position vis-à-vis allowing investment flow into renewable energy, which, as a consequence, expands the use of existing clean technologies, funds the development of new and improved ones and brings alternative sources of energy and necessary infrastructure to the market considerably faster.
Chile is making significant investment in renewable energy due to a continuing energy crisis and the continual reduction of natural gas available from Argentina. In March of this year, the Chilean government passed a law that requires electric utilities to invest in and supply non-conventional energy sources. The law is an attempt to diversify the country’s energy supply and mandates that at least 10 percent of the energy supplied by Chile’s electric utilities in 2024 be derived from renewable or non-conventional energy resources, whether self-generated or purchased from third parties.
By the end of 2009, Chile is looking to almost double the size of its renewable sector, from 347 MW to 647 MW. Among the projects in development are two biomass plants for a total of 32 MW, eight mini-hydro projects for a total of 95.7 MW and four wind farms for a total of 169.2 MW. According to the Ministry of Energy, an additional 41 projects with a combined total of almost 1.3 GW of capacity have been approved or are under evaluation by regional environmental authorities. Wind power is likely to be one of the biggest areas of investment. A number of feasibility studies have been carried out over the past few years and a string of projects are planned by companies such as Pacific Hydro of Australia, Meridian Gold of Canada, Endesa of Spain and Lahmeyer of Germany. The level of interest in wind power is highlighted by the change in the type of renewable projects backed by the government’s economic development agency, known as CORFO. Wind farms represent 29 out of the 50 projects that CORFO is now supporting. By the end of 2007, CORFO had approved financial support for almost 140 renewable energy projects, bringing together $1.5 billion in total investments that would generate 800 MW of capacity.
Most energy experts agree that solar energy is the answer to the energy shortage in northern Chile, where energyintensive mining is the dominant industry. Northern Chile — particularly Regions II and III — is home to the Atacama Desert, one of the sunniest spots on earth, and several solar projects are currently under way near Copiapó. Technology promoter Fundación Chile is targeting the region to be a solar energy hub within three years.
Peru generates the majority of its electricity through hydro power and has considerable natural gas reserves. Peru is now looking to diversify its energy resources, and earlier this year the government passed a new decree with incentives for the development of renewable energy sources intended to generate electricity. The decree declares renewable generation of national interest and public necessity and aims to ensure that 5 percent of electricity generation comes from renewable energy over the next five years. In addition, the decree guarantees a 12 percent internal rate of return, provides for a guaranteed price for the electricity and allows renewable power projects to benefit from accelerated depreciation to offset payments under Peru’s profits tax, equivalent to no more than 20 percent of the company’s total tax burden. The annual accelerated-depreciation rate of 20 percent is applicable to machinery, equipment and civil construction works required to install and operate renewable electricity projects. The Energy and Mining Investment Supervising Agency (Osinergmin) has been tasked with the maintenance of a website (www.osinerg.gob.pe) to centralize information on all renewable energy requests for proposal, including tenders and auctions. Osinergmin will also establish a system of information and registries to continually monitor renewable energy generation with a breakdown by type of technology.
Earlier this year, Peru presented 35 renewable energy projects, including 11 wind energy projects, to an energy working group at the Asia-Pacific Economic Cooperation. Most recently, the Peruvian-Spanish alternative energy consortium Iberoperuana Inversiones S.A.C. has commenced construction on a 240-MW wind energy farm near the city of Ica and it has been awarded seven temporary concessions to make feasibility studies for future wind farms in the country. Peru Energía Renovable, Petrolera Monterrico and NorWind have also been granted temporary concessions to conduct wind generation studies in Peru. In addition, the Ministry of Energy and Mines has issued 28 temporary concessions for wind energy generation studies to date, while 12 more are awaiting approval. The ministry’s stated goal is to reach 2011 with one-third of the country’s energy needs supplied by oil, one-third by natural gas and the last third by renewables (primarily hydro and wind).
In August of this year, Peru and the United States signed a memorandum of understanding on deepening bilateral cooperation in the development of renewable energy. The main goal is to improve the bilateral exchange in renewable energy research and to stimulate private investment in the sector.
South America is on its way to providing itself with energy sources that are secure, efficient and renewable. Renewable energy resources have the potential to significantly reduce the amount of fossil fuels that are consumed in South America. As explained above, various countries have started policy and regulatory reforms to help level the playing field and promote renewable energy. South America is enjoying steady GDP growth, and saturated energy markets, such as wind in Europe and elsewhere, are encouraging investors and international developers to finally take notice and explore the region.