By Rafael Ferreira and Luiz A. Barroso
Latin America is an important emerging market for smart grid solutions, due to its size and fast growth rates. A common feature in the region is the need to improve technical and commercial energy loss levels and enhance reliability and quality of service. This helps building the case for smart grids and results in advanced metering infrastructure and network automation technologies being under the spotlight. However, Latin American countries are far from uniform regarding their technological needs. Though many countries already have smart grid deployment road maps, the levels of actual investments also vary significantly in Latin America, and understanding the specific regulatory context of each country is a requirement for investments interested in the region.
With a yearly annual electricity consumption of over 1,250 Terrawatt-hours (TWh), Latin America represents an important emerging market for smart grid (SG) technologies and solutions.
Investors and manufacturers looking at the region are faced with high electricity demand growth rates: Figures exceeded 4 percent per annum in the last decade and, despite a recent slowdown in large markets such as Brazil, are expected to be sustained at high levels in the coming years. Moreover, the maturing of the regulatory and policy frameworks in important markets (including Brazil, Chile, Colombia and Peru) that initiated their power sector reforms in the 1980s and 1990s helps build confidence for investments. Also, the recent sector reorganization in Mexico consolidates opportunities in the second largest electricity market in the region.
Drivers for smart grid development and particularities of technological focus in Latin America
While the figures above suggest that large investments are needed in the power sector, a closer look at the particular circumstances of Latin America is needed to understand the potentially important role of SG solutions. The list of drivers below is not exhaustive, but the items are listed in their perceived importance for the region.
First, the power sectors in the region exhibit some of the higher transmission and distribution loss levels in the world. As shown in recent studies from the Inter-American Development Bank, average technical and commercial losses levels in Latin America have been oscillating at levels above 15 percent for quite some time, exceeding even figures seen in other predominantly developing regions. The estimated costs of these losses can be significant – for instance, IADB estimated them at 1.7 percent and 0.96 percent of the GDP, respectively for Honduras and Nicaragua, in 2012.
Also, though most Latin American countries have seen important improvements in distribution services, reliability and quality indicators after the reforms of the 1990s, many of the improvements in these indices stagnated or even worsened since the early 2000s. (In some countries, deterioration of average reliability indicators has been seen concomitantly with improvement of electricity access in rural or isolated areas.)
The potential impacts of SG solutions – mainly these relating to advanced network automation (ANA) and advanced metering infrastructure (AMI) – over technical/commercial losses and service reliability/quality are already a very relevant driver for technology roll-out in the region. Similarly, though electrification rates increased significantly in recent decades, reaching levels well above 90 percent in most countries, there are still pockets of isolated populations, for which microgrid solutions can play an important role.
Hydroelectric power accounts for a large share of the generation matrix in many Latin American countries; for instance, in 2013 it accounted for more than 50 percent of total generation in Brazil, Colombia, Costa Rica, Panama, Paraguay, Peru, Uruguay and Venezuela. This puts the role of reductions of greenhouse gas emissions from fossil fuel thermal generation in perspective for the region.
Yet, the deployment of distributed energy resources (DER, including distributed renewable generation and storage) has an important role to play even in hydro-dominated countries. Such an important role is associated with:
- Diversification of energy matrices and reduction of exposure to hydrology risks
- Overcoming hurdles with environmental licensing of new dams or transmission that constrain system expansion.
These factors contribute to the policies of most of the countries listed above, which have aggressive renewable support policies, including support for distributed renewable generation. For the same reasons, SG solution families other than DER, including demand response (DR), also play a role in the region.
While the above drivers are important in many Latin American countries, there are important differences at national and even sub-national levels. For instance, the differences in losses levels vary significantly between Paraguay and Venezuela (the higher end of the scale) and Chile and Peru (the lower end). And there are countries in the region with significant levels of generation fired by liquid fuels, such as Ecuador, Honduras and Nicaragua, for which DER and DR solutions also reduce the impacts of oil imports on trade balances, increasing energy independence and reducing emissions.
Investment experiences and regulatory framework
Investments in SG solutions and technologies have been going on for some time in Latin America. Some countries, like Brazil, started their first pilots more than five years ago, resulting in an accumulated experience by utilities and regulators. Other countries, such as Argentina and Uruguay, have more aggressively moved towards SG pilots in the last couple of years. Common sources of financing for these pilots have included concessional loans from multilateral financing institutions, and sectorial funds targeted specifically at research and development. An example of the former is Paraguay, which recently accessed funding from the World Bank for the installation advanced automation in the 220 kV and 66 kV networks, with the possibility of financing for the whole project for up to $ 1.1 billion. Brazilian utilities extensively used sectorial funds for R&D, related to a legal obligation to invest a fixed percentage or gross revenues in research and development, to implement pilots.
Access to low-cost debt may be subject, depending on the country, to technology indigenization mechanisms. For instance, the rules for a research, development and innovation funding initiative initiated in Brazil in 2013, which allowed access of developers of SG projects to a fund of 3 billion Brazilian Real, explicitly included a preference for projects creating manufacturing capacity in the country.
But wider SG deployment initiatives, not constrained to pilots, are now starting to appear. Funding strategies for these generally include more traditional approaches, with costs passed-through to end-user tariffs. Recent examples include: an aggressive program for rolling-out smart meters in Mexico, for which several international tenders have already been executed; and projects for roll-out of ANA by utilities in the densely-populated Brazilian Southwest. The use of tenders for the procurement of meters in Mexico, under the highly organized PIDIREGAS scheme, results in transparency facilitating the incorporation of costs to end-use tariffs.
Finally, a few words on the regulatory framework for SG in Latin America. The cases for technology roll-out are becoming more and more clear for utilities and regulators, which has resulted in several countries (including Brazil, Mexico, Peru and Colombia) non-binding road maps for SG development. Also, many countries have already issued regulations targeted at specific SG solutions, notably distributed generation. Yet, regulatory frameworks in the region are usually not yet entirely conductive to technological change.
For instance, commonly used remuneration mechanisms for distribution utilities (including price cap approaches with ex post inclusions to the asset base and prudency evaluation) and tariffing (bundled and volumetric tariffs for retail consumers), which have served the region reasonably well until now, may require adjusting to enable investments in AMI, ADA and DER. The first experiences with SG-conductive T&D and retailing regulation are starting to appear in the region, for instance with regulatory proposals or already issued regulation in Colombia and Brazil.
A similar situation is verified for the regulation of generation and wholesale markets. Current items of the regulation and market design, for instance on items related to participation of demand response on wholesale markets or remuneration of ancillary services, can be seen as a deterrence for SG development, but discussions on changes are starting to appear.
Rafael de Sá Ferreira is an electrical engineer with more than 10 years of experience in the electricity industry in Latin America and other developing countries around the globe. His interests include power system regulations, economics, and operations. He is currently with the Brazilian Energy Planning Enterprise, the governmental body in charge of planning of the energy sector in the country. Before this, he was a partner in the Brazilian consultancy company PSR and worked as a consultant from multilateral institutions such as the World Bank and IRENA.
Luiz Augusto Barroso, IEEE Senior Member, has a D.Sc. degree in operations research and more than 15 years of experience in the electricity industry. Luiz has extensive experience in energy markets in Brazil and in other countries around the globe. He currently presides the Brazilian Energy Planning Company, the governmental body in charge of planning of the energy sector in the country. Before this, he was an executive director in the Brazilian consultancy company PSR, where he worked for 18 years, and has also worked extensively as a consultant from multilateral institutions such as the World Bank, IADB, CAF and IRENA. He is the Vice Chair of the Power Systems Operations Planning and Economics Committee and was the recipient in 2010 of the IEEE Power & Energy Society's Outstanding Young Engineer Award. He is also an associated researcher of Comillas University in Spain and he lectures in the Florence School of Regulation.