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Latin America’s Energy Choice

Could the region lead the world in energy efficiency?


Imagine what would happen if scientists discovered a new source of energy that could meet 20 percent of global electricity demand at virtually no cost, and with no negative environmental impacts.

Such a breakthrough would free up hundreds of billions of dollars per year in energy expenditures, allowing governments, companies and individuals to focus on other priorities. It would sharply reduce the quantity of fossil fuels used to generate electricity, leading to a significant reduction in the emission of greenhouse gases.

In fact, this new source of energy was developed seven years ago—in Brazil. And it has nothing to do with ethanol. In 2001 Brazil was hit by severe droughts that crippled the hydroelectric facilities that were supplying 87 percent of its electricity. Faced with the prospect of mass blackouts, the government implemented an innovative energy efficiency plan that offered financial rewards to consumers who cut back on electricity consumption—and expensive penalties to those who didn’t.


The results exceeded all expectations. Brazil reduced its electricity consumption by a stunning 20 percent in a little more than a month, according to a study by the International Energy Agency and others. This was a far larger reduction than what fully industrialized countries have been able to achieve when forced to quickly reduce electricity consumption during an emergency (see chart on the right). And the reductions were accomplished without causing serious disruptions to the economy.

But an even bigger surprise awaited policymakers in 2002, after the drought ended and the government discontinued the incentives and penalties. Contrary to expectations, electricity consumption did not shoot back up to previous levels. In fact, it took almost four years for Brazil’s electricity consumption to grow back to its pre-2000 levels.

“People discovered that they could use less electricity and still live comfortably, so they chose to continue saving” says Arnaldo Vieira de Carvalho, a renewable energy expert at the IDB. In essence, Brazil proved that voluntary changes in behavior, combined with modest investments in energy-saving equipment, can produce huge savings without compromising human welfare or economic growth. (See Start with the motion sensors).


Ironically, while Brazil’s ethanol industry is celebrated as the world’s most successful biofuels program, its achievements in electricity conservation are rarely mentioned by the media.

This is partly because energy efficiency has always had an image problem. Voters associate efficiency programs with energy shortages and rationing, so politicians prefer to avoid the subject. In public debates, efficiency is often dismissed as a timid answer to a problem that requires bold solutions. Faced with a choice between building a new power plant and promoting reduced energy consumption, leaders will almost always choose the former—regardless of which is most effective.

That may be about to change.

With oil trading at more than US$100 per barrel, natural gas in short supply, and a new wave of droughts threatening hydroelectricity production, several Latin American countries are once again facing the possibility of energy shortages. Brazil, Chile and Argentina are under particular pressure to ensure that overstretched electricity and gas supplies will meet demand during the coming winter months.

In contrast to shortages in the past, which were blamed on short-term factors, many analysts now believe that energy scarcity will be a long-term problem. The two fundamental reasons are the demand driven by sustained economic growth in emerging economies and the difficulty of obtaining new sources of fossil fuel.

The countries of Latin America and the Caribbean exemplify both these trends. Energy demand has been growing a record rate for the last five years. In Chile, for example, it expanded 7 percent in 2007 alone.

But with the exception of Brazil, which recently discovered significant offshore deposits, oil and gas production in the region is either stagnant or declining. Current spending on exploration and new fossil fuel infrastructure is far below what is needed to meet anticipated demand, according to most analysts. Though the region has considerable untapped hydroelectricity potential, dams are expensive, take a long time to build, and are increasingly opposed by environmentalists. Renewable sources like biofuels, solar and wind power are growing, but they can supply only a tiny slice of the region’s total energy needs.

Meanwhile, soaring energy costs are sapping the strength of the region’s economies—particularly in countries that import the bulk of their energy. In Central America, which is almost completely dependent on fossil fuel imports, the “oil bill” doubled between 1998 and 2004, measured as a percentage of the region’s GDP. No industry or service is immune. The public water and sanitation provider in Nicaragua, for example, is being crippled by the soaring cost of the electricity it uses to run pumps (See Quenching a thirst for electricity). Food prices everywhere are rising because of the higher energy costs associated with transportation, fertilizer and processing.


All this is forcing the region’s governments to consider both emergency measures and long-term solutions to curbing energy demand.

The good news, as Brazil discovered, is that such measures can yield a much bigger payoff than expected. Last year the McKinsey Global Institute, a private think tank, made headlines with an in-depth study entitled “Curbing Energy Demand Growth: The Global Energy Productivity Opportunity.” The report offered a simple but stunning conclusion. Its authors calculated that growth in energy demand can be cut in half, without compromising economic growth, simply by increasing “energy productivity” through comprehensive conservation measures that include widespread adoption of existing technologies.

This finding has enormous implications for Latin America. In Mexico, for example, electricity demand will expand at an estimated 5.6 percent per year between now and 2013—significantly faster than predicted economic growth. The IDB estimates that merely to keep up with that demand, Mexico will need to invest US$5.5 billion per year in new energy production capacity. If the McKinsey study’s recommendations were adopted in Mexico, the country could save more than US$2 billion per year in new capacity expenditures.

Mexican authorities have been convinced of this reality for some time. The government created a National Energy Saving Commission for Energy (CONAE, for its acronym in Spanish) in 1989, and a year later it established a Trust Fund to Support Energy Efficiency in the Electricity Sector (FIDE) to carry out concrete programs in specific sectors such as lighting and industrial machinery.

In 1997 the IDB approved a US$23 million loan to help FIDE carry out a ground-breaking program to improve energy efficiency in the industrial and commercial sectors. The program used a rebate system to encourage retailers of electrical motors, compressors and lighting to market efficient models, and it financed a variety of regulatory measures such as the development of efficiency standards and product labels for such equipment. Though it was essentially a pilot project, the program yielded impressive results: during its first six years of operation, it saved an estimated 5,274 gigawatt hours of electricity—enough to supply more than 2 million households with electricity for a year. The project also avoided the emission of around 4 million tons of CO2 during the same period.

Brazil and Chile also have well-established energy conservation programs with proven track records. And now, countries including Argentine and Uruguay are ramping up plans to promote the use of compact fluorescent light bulbs and other energy-saving technologies.

“The alternatives are pretty clear,” says the IDB’s Vieira de Carvalho. “You can spend a lot trying to increase energy supply in order to avoid blackouts, or you can spend very little to get the same result through greater efficiency.”

Brazil has already proven that a developing country can use sophisticated conservation measures to avoid an energy crisis. The question now is whether the region will use similar measures to achieve long-term energy security.

Republished with permission from IDBAmerica, the magazine of the Inter-American Development Bank.


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