The rapidly shifting and challenging environment for the energy sector in Latin America offers an unprecedented opportunity for the region to rethink how it can better coordinate its energy sector and look toward building a comprehensive, integrated energy matrix. On July 1, all eyes will be on the leaders of Chile, Colombia, Mexico, and Peru – the founding member states of the Pacific Alliance – to see how the ambitious goal of energy integration can be advanced on the sidelines of the 11th annual Summit.
With 42 observer countries from South Korea to Sweden signed up and two—Costa Rica and Panama—pending ascension, the grouping has become a hot commodity. That is partly due to an outstanding record of achievement: the alliance has already integrated four national stock markets, erased a vast range of tariffs, introduced visa-free travel, and organized joint international trade missions.
However, there are still areas for greater cooperation and integration. As argued in our new report “Pacific Alliance 2.0”, authored by the Atlantic Council and Bertelsmann Foundation, the energy sector remains one of the most promising areas to benefit from increased collaboration among member states.
By building a more sustainable common energy strategy and transitioning to an inter-connected energy matrix, the Pacific Alliance has the potential to deliver powerful economic, environmental, and energy security benefits not only to member states, but to Latin America at large.
The needs are fairly clear. Chile, for example, has experienced an almost 200 percent increase in the cost of electricity over the past ten years, and faces frequent power supply risks. Total energy use in Latin America and the Caribbean is projected to expand by more than 80 percent through 2040, accompanying the region’s economic growth and its rising middle class.
The energy-rich members of the Alliance have an opportunity to take on new leadership roles as suppliers, while at the same time offsetting risk from the decaying of Venezuela’s Petrocaribe presence in Central America and the Caribbean. Most importantly, stronger energy integration will help the Pacific Alliance take on the role as a key supplier to the Asia-Pacific region – a core aspect of the pact’s strategic value.
The question then is, what must be done to accomplish such a challenging goal?
1. Harmonize energy projects. Energy projects, from production to generation, should be better coordinated among member states. Policy harmonization is essential to establish clear rules and mechanisms to manage pricing. Subsidies must continue to be eliminated or replaced with price stabilization mechanisms that are not costly for public coffers. A good way for the Pacific Alliance to get started on policy harmonization would be to form an energy council or working group to draw up plans for physical electrical interconnection of grids across borders.
2. Private sector participation.Once a predictable regulatory environment is in order, private sector participation must be coordinated. Public-private partnerships and joint ventures in electricity, gas, liquefied natural gas (LNG), and oil should be explored and harmonized—Latin America needs roughly $305 billion for electricity generation alone from 2015 to 2025. As the region transitions from its reliance on hydroelectric plants toward non-conventional renewables, investors will require long-term contracts and favorable conditions in order to have competition and efficient prices.
3. Capitalize on Mexico-U.S. gas integration. The Pacific Alliance must also take advantage of the trickledown effect from Mexico’s integration with the U.S. gas market. Mexico can export gas not just to Central America but also to the greater Pacific region. This will change the energy landscape in the Pacific, where Colombia also has the potential to be a net exporter. Both Colombia and Mexico can shift from conventional thermal gas-powered generation, to combined cycle generation and other technologies. Furthermore, as the Caribbean shifts away from high-cost, high-carbon fuels toward more natural gas, the Alliance can benefit from its geographical proximity.
4. Clean Energy.The lowest-hanging fruit for the Pacific Alliance is clean energy. Solar, wind, and wave power in Latin America and the Caribbean saw an average growth rate of 34 percent in the past decade, but these sources still represent only 0.9 percent of total regional power generation. The Alliance could benefit enormously from non-conventional renewables, helping them move toward export diversification.
With more than 4,000 miles of separation, there are certainly challenges to overcome for energy integration in the Pacific Alliance, but the rewards are well worth the effort in the long term, and the Alliance has a proven track record of success.