Breaking barriers: Latin America’s hydropower potential

The combination of highlands, the central lowlands, the extensive river networks and numerous watersheds make Latin America a region with huge potential to develop a highly qualitative water supply system.

However, only less than 10% of the available water resources are currently being harvested and managed for human activities, according to data from the Global Water Initiative (GWI), leaving many communities with insufficient access to water – be it for sanitation, agricultural usage or the production of electricity.

In recent years, increasingly more global companies have settled in Latin America to tackle the issue and improve water usage and supply, and the region’s hydropower sector has developed to become a thriving industry.

Now, huge potential is seen in the production of electricity through small and micro hydro projects: easily fitted as run-of-river projects into the landscape, these miniature power plants could generate enough energy to feed the growing electricity demand without mitigating water supply for industry and agriculture.

The difficult political and economical climate that is predominant in some of the nations however is still hampering the wider implementation of small-scale power plants. Moreover, a great level of misinformation regarding their construction and effects on the environment has led to disapproval among large parts of society.

One of the companies actively working in the region is South Pole Carbon Asset Management, a global firm specialised in reducing greenhouse gases and the development of carbon strategies. Speaking at the Arena International Small Hydro Latin America in Panama City in December 2011, South Pole was one of numerous groups to promote the exploitation of the massive hydro potential.

Here, the firm’s project implementation manager Ana Terroba Estrada talks about the barriers that small hydro developers have to break down in order to unlock the untapped potential of Latin America.

Elisabeth Fischer: What are the biggest barriers for small hydro projects in Latin America?

Ana Terroba Estrada: It seems that in the last decade the participation of fossil fuels in the electricity generation sector has increased. This pattern strongly suggests that technological know-how and expertise has been oriented toward non-renewable fossil fuel plants.

Thermal power plants are predominant in the region and the hydroelectric sector struggles with a lack of experience and credibility. This lack of experience in the private sector has made small-scale hydro projects uncommon.

In addition, the professional capacity in civil, electrical, mechanical and hydraulic engineering for the design, construction, installation, operation and maintenance of power plants is limited. The available information related to hydroelectric development is dispersed and standardised regulations or technical specifications for the design, operation, maintenance and administration of hydroelectric projects either don’t exist or contain several gaps.

I also think communities located near hydroelectric projects may lack necessary facilities such as banks and the capacity to respond to national disasters, which are important given the high vulnerability of the region to extreme weather events such as floods, droughts and hurricanes.

EF: Why are thermal plants seen as a ‘better’ investment than small hydro?

ATE: Thermal power plants are predominant in the power sector, supported by the vast experience with this technology. Several countries are interested in incentivising the implementation of renewable energy.

However, the trend is to offer better incentives to large thermal projects or to develop large-scale renewable energy projects. In some countries thermal plants count with fiscal exemptions over import of fossil fuels, which in some cases is subsidised by the state.

EF: Are there any government initiatives in place to change the situation?

ATE: Latin America has several legal and regulatory initiatives that promote the development of renewable energy projects. However, the financial incentives for the implementation of projects are too low.

The main obstacle for small hydro and energy efficiency projects is they require a high amount of investment entailing an important advance payment for the commissioning of projects, even though operating costs are relatively low.

The growing concern about greenhouse gas emissions reduction and the assurance of the sustainable development has contributed to the adoption of a series of policies and legal reforms worldwide. However, there are still several doubts about the implementation of such policies in Latin America.

EF: How could financial incentives improve the situation?

ATE: Developers of renewable small-scale projects are facing strong investment barriers compared to the relatively low initial investment cost for non-renewable energy projects such as fuel oil.

They also have to comply with the same technological, environmental and legal requirements that large projects have to comply with. These fixed costs increase the total investment per productive unit (MW) and compromise the feasibility of small projects.

In some countries the contribution of the project developer will be a considerable percentage of the total investment amount. For example, in Guatemala the banks require no less than 30% and in El Salvador the contribution of the project developer must be at least 25%.

The growth of small-scale projects is limited by the insufficient capacity of some developers to cover the share of the capital requested by the financial institutions.

Even though some countries have expressed their interest in incentivising the implementation of smaller renewable energy projects, the tendency is to offer better incentives for large thermal projects, or develop large-scale renewable energy projects. Financial institutions also tend to consider the attributes of the project developer in the analysis of the financing proposal. If the project developer lacks previous experience, which is often the case with small projects, the possibility to fulfil the financial requirements decreases.

In some countries the commercial banking system also lacks experience in financing energy projects, especially small-scale renewable energy.

In general, bankers agree that given the complexity and the associated risks, these type of projects should be promoted by corporate groups that have demonstrated capacity of execution and the financial resources to provide the required equity to cover unexpected costs and can guarantee repaying the funds.

EF: What is one example of a successful small hydro project in Latin America?

ATE: I’d say the Coronado and Babilonia Hydroelectric projects in Honduras, as their main purpose is to generate electricity through sustainable means only using small hydropower resources, then selling the generated output to the state-owned National Electric Energy Company.

The operation of these projects does not only support the interconnected system, but it improves the frequency and voltage required and the continuity and reliability of the provision of the service in the area.

Located in a quite mountainous area with no direct access roads, the construction was carried out by simple means using animal drawn vehicles, human labour and a cable car to move the materials to the construction area. Moreover, the projects brought several benefits to the communities, providing new jobs during the construction and operation phase as well as a culture of preserving natural resources.

In addition to their inherent contribution to climate change mitigation, the operation of the small hydro plants brings environmental benefits for the country’s air, soil and water resources, as well as also increasing the share of renewable energy generation in Honduras, making a contribution to avoid the construction of new fossil fuel fired power plants.

Plus, a reforestation programme on several hundred hectares with native species has been carried out by the project developers. I believe it could have a multiplying effect for other projects in Honduras, Central America, or any other region under similar circumstances.

EF: In your opinion, what is the future potential of small hydro in Latin America?

ATE: Considering the numbers showed by the ICA, and the potential found in the region, it can be inferred that small hydro represents an important share to satisfy future energy demand. However, other renewable energy sources must be exploited, and fossil-fuel based power plant must be considered to fully feed the growing energy demand.

Even though the potential of small-hydro is considerable, it will not suffice to satisfy the future energy demand by its own.