Latin America energy transition: Where distribution investment is needed

Research commissioned by Latin American distribution association Adelat and conducted by consultancy Grupo Mercados Energéticos found US$431 billion in sector investment would be needed through 2040 under an “effective transition” scenario.

The seven countries where Adelat has members – Argentina, Brazil, Chile, Colombia, Ecuador, Guatemala and Peru – were analyzed. 

Adelat’s effective transition scenario is based on objectives established in a study conducted by professional services firm Deloitte for European countries for 2030. 

A second scenario, branded “partial” transition, is based on around half of the objectives being achieved.

Adelat executive director Alessandra Amaral outlined to BNamericas the headline investment figures obtained.

“The results show that, in the effective energy transition scenario, a total investment of US$289bn is required in addition to trend growth of US$143bn, making a total of US$431bn for the distributors in the seven countries analyzed over a period of 17 years,” Amaral said. 

“In the partial energy transition scenario, the additional investments amount to US$174bn, which, when combined with the US$133bn in trend growth, totals US$307bn.”

Under the effective transition scenario, for example, electromobility penetration is 20%, distributed generation accounts for 20% of consumption and advanced metering infrastructure is fully deployed.

"The study also assesses the operational, economic, social, and environmental benefits derived from these investments, which translate into expected reductions in the investments and operational costs currently incurred," Amaral said. "These benefits will be quantified in a second phase of the work."

Findings form an Adelat policy paper called Sin inversión no hay transición: el futuro de la distribución eléctrica en América Latina (Without investment there’s no transition: The future of electricity distribution in Latin America).

A big part of the jigsaw puzzle concerns who eventually foots the bill for the work, a topic that is a politically sensitive one, for example, in Chile, aiming to achieve carbon neutrality by 2050. In Chile, regulated end-user power rates climbed steeply this year, and the government plans to subsidize the bills of 4.7 million users. 

An original attempt at a smart meter rollout was made during the previous administration, around 2018, when the strategy of directly charging billpayers sparked opposition and halted the process. Nevertheless, smart meters and time-of-use electricity rates are seen as ways to help homes and business better manage electricity costs as well as make better use of daytime supply of renewable power. As things stand, distributors in Chile are paid chiefly to ensure a steady power supply and maintain infrastructure, and lack regulatory incentives to invest. 

During a recent presentation of the study findings, Danilo Zurita, head of Chilean national energy commission CNE’s electricity division, said: “We need to modify our distribution regulatory framework to provide certainty and benefits to all stakeholders, recognizing the local realities of each company and incorporating new technologies.”

Distribution reform is seen among energy sector legislative priorities in Chile.

An executive review of the policy paper refers to the financial aspect.

“Remuneration schemes play a crucial role,” it states. “In a price cap regulation scheme, regulators set a maximum limit on the rates that distribution system operators (DSOs) can charge, incentivizing companies to improve their efficiency to increase their profits. This model can encourage cost containment, but if the price caps are set too low, it may discourage the necessary investments.”

An executive review of the policy paper provides recommendations for the public sector, distributors and regulatory authorities, with planning, financing and remuneration schemes among the areas covered.

“The results of the investment model show that the magnitude of the investments needed for an effective energy transition is significant, and countries in the region will need to mobilize considerable resources to modernize their electrical infrastructures,” it states. “This necessitates overcoming challenges arising from financial limitations, regulatory uncertainty, resistance to change from certain stakeholders, and the need to develop technical and operational capacities in distribution system operators (DSOs). Overcoming these challenges will require a coordinated and strategic approach, as well as ongoing support from public policies that favor the transition.”

Vectors

Adelat’s research was focused on multiple vectors deemed vital to the energy transition: electrification of new uses, electromobility, connection to distributed generation, digitalization and automation, advanced metering infrastructure, service quality, resilience, grid updates, batteries, loss normalization and universal service.

Breaking down the US$431bn effective transition investment pie

Researchers outlined what proportion of the total each area requires. 

- Investment needed related to business as usual: 33%

- Grid updates (replacing aging infrastructure): 17%

- Advanced metering infrastructure: 12%

- Electrification of new uses (new residential and business demand): 10%

- Connection to distributed generation assets: 6%

- Service quality: 6%

- Digitalization and automation: 4%

- Electromobility: 4%

- Battery storage (associated with distributed generation penetration): 4%

- Universal service: 3%

- Loss normalization: 2%