Energy Transition: How and When, That is the Question

Fossil fuels are a bit like sugar: We all know that excessive consumption is harmful to our health, but it is very difficult to live without it. Awareness of its effects on our bodies has gradually increased, and new sources are being explored to replace while preserving its essence. The same applies to the energy transition for the planet’s sustainability, but with the aggravating factor that in Latin America and the Caribbean fossil fuels also represent a major source of income through exports, which funds social programs.

The challenge is to achieve an economy based on energy sources with low Greenhouse Gas (GHG) emissions. There is a general consensus on that front, and the region is ahead of the curve. Latin America boasts the greenest electricity generation matrix in the world; it has some of the best areas on the planet for solar and wind energy production; it contributes only about 8% of all GHG emissions worldwide; and it has improved power supply coverage to the population (97%).

“The region has made significant strides, but it needs to find a good balance between financing energy transition and the other economic development and social mobility needs such as education, healthcare and poverty, which are today largely funded by fossil fuels, in order to achieve comprehensive progress that is sustainable from both an energy and social perspective,” said Alejandro Werner, head of Georgetown University’s Institute of the Americas.

The pandemic exacerbated this challenge, leaving countries with more indebted economies, and thus, less able to finance the investments needed for energy transition. Meanwhile, the war between Russia and Ukraine raised the prices of fossil fuels, which means extra funds for the region. But we must not neglect the design of a low-carbon development model.

"This is the time for difficult discussions because we have opportunities, but also many costs, which must be borne by us, together. And that is where public policies are critical to reaching consensus and attaining the goal of a sustainable planet with more opportunities for development and jobs,” explained Tomás González, head of the Regional Center for Energy Studies and former Colombian Minister of Mines and Energy.

Achieving an affordable, reliable, low-emission, climate-resilient energy supply requires technological innovation, up-to-date regulatory frameworks, and mechanisms that promote joint public-private sector participation. It is a long road to travel, but it can be done. Uruguay is successfully navigating this challenge with its wind farm policy.

“We currently have 48 wind farms that supply more than a thousand megabytes of demand combined. The key factor for the success of this initiative was the public-private integration and the commitment assumed by all parties to achieve this transition to wind energy,” said Silvana Romero, President of Uruguay’s Energy and Water Services Regulatory Unit.

According to experts’ estimates, the remaining challenges—mainly intermittency and high storage costs—suggest that changes in the energy matrix and the transition to efficient and clean transport systems will take around 20 years for the region. CAF—development bank of Latin America—, as the green bank of the region, with its history, experience and performance in the energy sector, is working to become the main strategic partner for the region’s energy transition.

"CAF must and is playing a pivotal role in energy transition with technical cooperation to review with each country the technical, regulatory and public policy framework to advance this transition, and second, its financial arm can become a key player in funding infrastructure projects on the adaptation side, and in the infrastructure projects needed to achieve the transition to renewable energy,” added Werner.

The glass half full. We are seeing visible progress and challenges that require coordinated action in the region to boost productivity, competitiveness and inclusive development, much needed by the economies of the region to improve the quality of life and take the leap towards development. The goal is clear. Now the challenge is to build the agreements for the how and the when.