Smart Grid: How the Smart Grid Is Opening Up Latin American Opportunities - Smart Grid News

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How the Smart Grid Is Opening Up Latin American Opportunities
By Alex Yu Zheng
Jun 17, 2008 - 11:17:41 AM

With the Smart Grid boom fully underway in North America and Europe, forward thinking vendors and investors are already looking for the next frontiers of opportunity. Some of the greatest possibilities may lie in Latin America... provided you understand that region's special issues. And to understand the Latin American electric power industry, you must first see it in the larger context of the overall energy sector.

Historic Challenges

Despite vast resources, many Latin American countries have not been able to develop secure, self-sustaining energy industries. Many of them have struggled to set policy that effectively regulates resource extraction and distributes funds for development. The problems generally fall into two categories:

· Insufficient incentives for exploration and production – In countries such as Mexico and Bolivia, private firms are not allowed to participate in at-risk contracts, limiting them to fees for services. At the same time, nationalized companies are often drained of resources needed to make further capital investments, resulting in a lack of continued development.

· Insufficient development of domestic demand – Policymakers in developing countries often overlook the need to develop domestic markets. The temptation to orient energy industries towards the export market (and thus to neglect domestic institutions) eventually undermines the foundations of the nation. Growth in production, therefore, needs to be paired with consumption growth. Doing so provides a consistent market for research and development and decreases the need for price controls or price manipulation.

These traps bring severe price manipulation, both internally and by external actors. This is disruptive to market operations, especially when consistent long-term pricing is needed to justify the financing of high-capital projects.

Needed: Policies That Recognize Market Realities

Remedying the shortcomings requires revamping policy to accommodate the realities of a market system. Successful Latin American examples include Brazil and Trinidad and Tobago. Many developing countries are now embarking on a similar transition, especially in the electric power sector. Attributes of these successful policies include:

· Transparency and fairness throughout the system – Developing transparency and limiting corruption are essential to secure the much-needed large, long-term investments.

· Little or no price manipulation – Excessive price manipulation distorts the supply and demand balance, which only forces the government to make more interventions elsewhere. Venezuela, for example, still sells gasoline domestically for 19 cents a gallon. Many Latin American countries place artificial prices on their domestic markets. This will eventually undermine either domestic production or consumption. Only a market-determined price can provide returns in a sustainable manner for both producers and consumers.

· High rates of bill collection – Bill collection is fundamental to building a self-sustaining system.

· Low rates of energy theft – Energy theft reduces efficiency and breaks down the legitimacy of the energy system.

· Limited litigation and guarantees against expropriation – Foreign private investors look for this as a key element in their willingness to step into new markets.

Special Challenges Facing the Latin American Electricity Sector

The electricity sector differs from the natural gas and oil sector in a variety of ways. For one, it is harder to export electricity, as there is no world market, international regulation, or in many places even interconnection between countries. The ability to store and transport electricity is extremely limited. Therefore, the development of a robust, responsive domestic market and cooperation with nearby neighbors are key. Developing countries, many of which still have low electrification rates, maintain a degree of demand elasticity because energy-intensive industries generally utilize their own sources of power instead of relying on the grid. Power reliability can be extremely poor in these countries. This serves as a major barrier to demand-side growth, a barrier that must be addressed.

At the same time, as supply grows more reliable, the degree of demand elasticity is important to maintain, since supply is generally never as reliable as industry needs. The ability to measure loads, distinguish between important and unimportant loads, and to price electricity dynamically are all benefits of a Smart Grid that can drastically improve the ability of developing countries to manage demand growth, maintaining the level of demand elasticity that they need to operate the grid effectively. A Smart Grid also provides reliable power, helping businesses make the jump to electrification and digital systems. This not only improves the quality of life in developing countries, but also provides more opportunities for business for foreign firms.

Current Plans for Large Scale Infrastructure Integration in Latin America

A variety of major plans exist for large-scale infrastructure integration in Latin America. One of the major ones is the Central America Electrical Interconnection System (SIEPAC), developed under the Plan Puebla Panama (PPP). This plan would bring $590M in new transmission investments, with the goal of attracting more foreign investment in generation assets for the area. The plan would also establish a single regional electricity market for Central America and a regional system operator.

Another major infrastructure investment plan is the Initiative for Regional Infrastructure Integration in South America (IIRSA), which spans beyond electricity integration to every area of major infrastructure. IIRSA would also harmonize regulatory frameworks and introduce new financing models. This creates hope for a common electricity market in South America.

Smart Grid Technologies Could Open New Markets

Even in the preliminary stages of SIEPAC and IIRSA, reservations have been expressed about engaging foreign investors in the development of new power plants, transmission resources, and other assets. These countries clearly want foreign investors, as they usually do not have the capital or expertise necessary. The major concern is the ability for Central and Southern American countries to effectively manage a market-based electric power system, especially in light of California’s inability to manage its own. If they do not feel that they can effectively manage this system, they will likely limit the role of foreign investors to minor contracts. The more transparent, self-regulating, and reliable this infrastructure is, the more likely foreign firms are to be involved.

Smart Grid technology, therefore, opens the door to more foreign investment in this area, providing great opportunities in what would otherwise be a closed system. Building transparency and reliability into this system through Smart Grid technologies will secure long-term investment opportunities for foreign firms in Central and South America. (For more information about Latin America’s efforts for regional integration, see links below.)

This article was written by Alex Zheng, a graduate student of Civil and Environmental Engineering at Stanford University. Alex also consults to utilities and national laboratories as part of Horizon Energy Group.

Email Alex Zheng

IEEE presentation on SIEPAC (PDF)

Overview on SIEPAC/PPP Energy Integration Initiative (PDF)

Homepage of the IIRSA initiative

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