IANAS WorkshopToward a sustainable energy future”

Basic Energy Needs of Low – Income Populations: Sustainable Solutions

Eduardo Guerra

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Air, Water & Food

• Despite the problems to effectively measure happiness, it is a well-known fact how difficult is to achieve a good standard of living when physiological needs are not properly satisfied.

• Air, water and food are the most elemental of such needs.

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Air & Energy

• In modern societies, air quality is strongly correlated with the energy balance.

• An energy matrix highly dependant on fossil fuels endangers the conditions for a healthy life.

• What’s more, in low income countries (LICs), where energy solutions are guided by a chronic lack of financial resources, management capacity and proper environmental regulations, the impact on air quality is very clear.

• The cost-benefit ratio of improvement is better in the low-income countries than in the high-income ones, which have better regulations, more efficient energy systems and better organized management.

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Water & Energy

• Tap water availability depends on the ability to build and operate a proper infrastructure at a minimum rate for the final consumers.

• Energy, particularly electricity, is an important “raw material” in this process.

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Food & Energy

• Finally, energy is needed to produce food.

• Because of such dependence, the price of food is strongly correlated with the energy price indicators.

• It would seem that the age of cheap Oil & Gas has ended.

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0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1992 1994 1996 1998 2000 2002 2004 2006 2008

Food Energy Commodities CPI GDP

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Energy availability at minimum economical and ecological costs is crucial to satisfy the most basic needs of man.

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Low – Income Countries

• At present, almost 1.3 billion people live in low-income countries.

• According to the World Bank:

GNI per capita in high-income countries is 24 times higher than in low-income countries;

life expectancy is 22 years higher;

and the infant mortality rate is 19 times lower.

• It is possible to continue listing the differences that created the profound gap between rich and poor, but with just a few indicators, it is easy to understand the real meaning of this problem.

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Renewable Energy

• In terms of energy, a major contribution would be to find an environmentally friendly way to produce energy at the lowest possible cost.

• Hydro, wind and solar energy resources offer a solution to energy needs without affecting air quality and, moreover, at the lowest operation and maintenance costs.

• The reliability, efficiency and sustainability of these technologies and the release from the heavy burden and dependence on fuels, make them the first options to be considered.

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Through renewable resources we save...

Using gas…

US$ 55 / MWh

0.390 tn CO2/MWh

Using diesel…

US$ 227 / MWh

0.720 tn CO2/MWh

Using Coal…

US$ 43 / MWh

0.970 tn CO2/MWh

Fuente: EXXON MobilFuente: EXXON Mobil

Double Biofuels growththrough cellulosic ethanol

Double rate of improvementof new car efficiency

Replace ½ of coal Growth withrenewable / nuclear / CCS

Retire coal plants at 40 yearsand replace with renewable / nuclear / CCS

Source: IMPSA

Source: Exxon Mobil

Pollution, smog, acid rain and carbon emissions.

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The main obstacle

• On the other hand, the main obstacle to choosing them is investment costs.

• But hydropower and wind have improved price and delivery time as well, compared with thermal generation.

• At present, two-thirds of the economically feasible hydro and 99% of wind energy remain untapped, and most of them are located in the less developed areas of the world.

Distribution of Hydro Energy Potential

Europe9%

South America19%

North & Central America

12%

Oceania1%

Africa13% Asia

46% Total Hydro Energy

Potential: 8.500 TWh

Distribution of Wind Energy Potential

Western Europe

9%

Latin America10%

North America26%

Australia6%

Africa20%

Eastern Europe and former

USSR 20%

Asia (rest)9%

Total Wind Energy

Potential: 53.000 TWhFuente BTM

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Environmentally Friendly

• Because of the investment costs and of the management capabilities required, the most difficult part of rendering hydro and wind solutions feasible is the financial engineering.

• The challenge lies in finding a creative way to do it.

• Perhaps one of the main environmental advantages of this kind of energy sources is that they do not produce carbon emissions, which is a great opportunity to seize.

• Global warming is a critical phenomenon that affects all mankind, and probably the most affected by its consequences will be people in low-income countries.

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The Mechanism

• An effective and simple financial and management mechanism, especially designed for low-income countries, should be implemented to foster development of renewable energy projects.

• Participation of Multilateral Credit Agencies (MLAs) is a must to guarantee transparency, transfer management capabilities and earn support for the initiatives to be successful.

• In the case of countries with no renewable resources, such mechanism should contribute to the modernization and replacement of thermal power generation facilities so that they comply with state-of-the-art standards. In this way, efficiency, pollution, and carbon emissions could be improved.

• The projects could be developed by means of PPP (Public, Private Partnership) and concessional loans issued by MLAs.

• The local energy authority or the utility should be the borrower of the loan.

• The return of the private equity is secured with the sales of the CERs, especially designed for this kind of projects.

• All the investment resources should be deposited in a trust fund which would be used to pay for the certification of the EPC (Engineering Procurement and Construction) contract as soon as the contractor gets the approval of the Independent Engineer hired by the MLA to control the progress of the project.

• A significant part of the EPC contract could remain in the country.

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Structure

ENGINEERING EQUIPMENTCIVIL

WORKS

OWNER’S ENGINEER

EXPERT PANEL

EPC CONTRACTOR

Utility

TRUST FUND Power Generation

SPC Special Purpose Company

PPP

Government Contribution

Equity INDEPENDENT ENGINEER

Local Energy Authority

Private Investor

MLAs

PPA

Special CERs

Rights

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Normal finance requirements for Hydro and Wind Projects

• Interest Rate = Libor + (1 – 5)%

• IRR (Internal Rate of Return) = 15 – 20%

• ROI (Return on Investment) = 20 - 25%

• DSCR (Debt-Service Coverage Ratio): 1,25 - 2.

• Debt : Equity = 70:30 / 50:50

• Maximum allowable long term equity ratio = 2

• Minimum Current ratio = 1.33

• Minimum interest cover ratio = 2

• Minimum fixed asset coverage ratio = 1.25

• Normal grace and maturity period = 4 / 12 years

financiamiento / fuentes

Renewable energy are not feasible

for LICs

Special conditions have to

be designed

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Conclusion

Poverty and global warming could be the opportunity to create a positive synergy to help third-world countries attain a better

quality of life

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