ALTERNATIVE ENERGY DEVELOPMENT IN LATIN AMERICA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 3A
ALTERNATIVE ENERGY DEVELOPMENT IN LATIN AMERICA
Ali Shakhtur
ENAP Sipetrol S.A.
Santiago

ALI SHAKHTUR is the Legal Manager for E&P and Business Development at ENAP and Enap Sipetrol S.A. Before being appointed in his current position Mr. Shakhtur was Legal Director of ENAP E&P and Enap Sipetrol S.A. He also worked for Sipetrol (UK) Limited in London as Head of Legal Affairs for the MENA region. Ali Shakhtur holds an LL.B from Universidad Gabriela Mistral (Chile), an LL.M in Commercial and Corporate Law from the London School of Economics and Political Science (U.K.) and an MSc in Management from Universidad Alcala de Henares (Spain). He is the founder of the Centre for International Commercial Studies- Chile (CECINT) and has been speaker in seminars and events on various topics such as Renewable Energy, Oil & Gas and Negotiation.

1. Introduction

Alternative energy simply means energy that is produced from sources other than our primary energy supply: fossil fuels. Coal, oil and natural gas are the three kinds of fossil fuels that we have mostly depended on for our energy needs, from home heating and electricity to fuel for our automobiles and mass transportation. The problem is, fossil fuels are non-renewable.¹

The importance of renewable energy is indisputable. Developed countries and even oil & gas based economies are focusing and evidencing its importance. An example of this was the commitment reached by the G-20 leaders in 2009 (Pittsburgh Meeting) to rationalize and phase out over the medium term inefficient fossil-fuel subsidies that encourage wasteful consumption (these subsidies totalized US$ 312 billion in 2009).² Well known is also the commitment declared by the European Union to reach a 100 percent renewable energy supply by 2050.

In Latin America, renewable energy use raises to an impressive 30 percent of the total primary energy supply in comparison with the 6 percent share of renewables in the OECD countries (and the less than 1 percent in Middle East). But the numbers are not as good as they seem as generation is mostly dominated by large hydro generation plants and bio-fuel: the first heavily depending on the changing water levels (and particularly affected by droughts due to climate changes) and the second highly criticized due to its failure in reducing greenhouse gases.

Latin America is in a state of continuing progress in the investment and use of renewable energy. From a very timid start we can now see various renewable projects which would soon provide more sources of energy to our countries. The technology and know-how has also been imported to Latin America and we can now see agreements with more advanced countries (in this particular field) like the one entered into between Portugal and Venezuela and the United Kingdom with Cuba.

However, the market of alternative energies is far from perfection. There are a number of barriers and difficulties to overcome and therefore there is still work to be done. In this context, we will analyze other realities and some examples and cases in Latin American countries. We will finally, examine the coexistence between renewable projects, mining and

[Page 3A-2]

hydrocarbons where their relationship is sometimes pacific and collaborative and-in some occasions-hostile and conflicting.

2. The Use Alternative Energies and Growth of Energy Requirements Worldwide

According to a recent study prepared by the US Energy Information Administration,³ the use of all energy sources will raise importantly in the short and medium term (2010-2035). It is also anticipated that the world oil prices will remain relatively high through most of the projection period as liquid fuels and other petroleum will continue to be the world's slowest-growing sources of energy. Accordingly, the expected consumption of liquid hydrocarbons will increase at an average annual rate of 0.9 percent from 2007 to 2035, whereas total energy demand should increase by 1.4 percent per year.

The above must be contrasted to the case of renewables, which are the fastest-growing source of world energy, with consumption increasing by 2.6 percent per year. Today, it is estimated that fossil fuels and nuclear constitute 93% of the world energy resources, whilst renewables amount just to 7%.

Consequently, the projected oil prices, as well as the widespread concern about the environmental impact of fossil fuel use and the increasingly strong government incentives to enhance the use of renewable energy in many countries around the world, improve the prospects for renewable energy sources worldwide in the outlook. If we add to this the phase-out of subsidies for fossil sources in Europe and some states in the U.S., then the future is quite promising for renewables.

As we can see in the figure below (which we believe rather conservative), by 2035 renewable will double nuclear and reach an important level of consumption worldwide. As to hydrocarbon source fuels, they will continue with the same trend. The point here is that the world demand is growing but increasingly supplied by other sources of energy.

Yet, the world challenge for transforming the energy grid from fossils to renewables must overcome many obstacles.

[Page 3A-3]

Figure 16. World marketed energy use by fuel type, 1990-2035 quadrillion Stu

3. Barriers, Risks, Incentives and Challenges.

As indicated above, renewable projects are still subject to restrictions. The slow adaptation of domestic legal systems to consider real incentives to the development of renewable energies have made things harder than they should have been. Unfortunately, there is a natural inclination to compare these projects as equal to mining and even to oil & gas, where they should be analyzed considering other motives and factors.

Moreover, the abundance and progress in the development of resources such as oil, gas and hydro makes their exploitation easier and less costly. Therefore, alternative energy projects are usually much more expensive comparing cost, risk and expected benefit making the existence of public incentives so important for their viability. For example, geothermal power-a resource with an outstanding capacity factor of 85 to 95 percent-requires large exploration expenditures that normally private investors are trying to transfer or at least share with the states or public entities.

[Page 3A-4]

With the above in mind, we can be sure that the future of renewable hinges critically on strong government support.⁴ The role of governments is decisive to make altemative energies cost competitive.

As to the perspective for renewable energies, according to the studies made by the International Energy Agency (consistent with other available studies), the most significant increase will come from the power generation sector. In effect, it is estimated that by 2035 the electricity generated by renewable will reach approximately 33 percent of the total generation. Such increase will mainly come from hydropower and wind followed by solar which -although increasing rapidly-will only amount to a 2 percent of the total power generation.

The growth evidenced by renewable energies in the last decade is mainly due to specific incentives implemented in the European Union (EU) and the United States of America (US). We will see those incentives in very general terms and -with a bit of more detail-in Latin America.

The European Union.

Europe is definitely leading the renewable energy development. A demonstration of this is the promotion of the use of energy from renewable sources through the adoption of a Directive⁵ as part of the "Climate & Energy Legislative Package" which includes several regulations that re-launched the renewable energy policy in the EU.

The Directive not only sets the objective of reaching 20 percent of the EU's energy consumption from renewable energy sources by 2020, but it includes a 20 percent reduction in primary energy use and 20 percent reduction of greenhouse gases compared to 1990 levels. In addition, in all three sectors (electricity, heating-cooling and transport) the EU states are formulating Renewable Energy Action Plans as well as a mandatory share of 10 percent renewable energy source in transport for each such member state. Forecast disclosed by EU member countries indicates that EU could reach and overtake the 20% target by 2020.

The early implementation...