Summary: Ecuador is rich in natural resources harnessable into clean energy. But unless it becomes more consistent in it policymaking, moves a little more quickly, and reduces energy subsidies, it will remain dependent on outside assistance, just like the Galapagos tortoise. [Our thoughts and prayers are with the 22 Ecuadorean soldiers that died this weekend in a plane crash as well as the hundreds in the earthquake. †]
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He co-founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and publishes the Latin American Energy Review in his free time.
He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida in October 2016, to which Ecuador’s energy minister has been invited to speak.
In 2006 Ecuador established a bold target of expanding hydro energy to replace fossil fuel-based thermal electricity generation; at the time thermal represented 53% and hydro 46% of the electricity matrix.
And “bold” is an understatement: the goal was to have 90% of electricity come from hydro sources by 2016. That’s how good hydro resource potential is in Ecuador — and how unconcerned the government seems to be in the face of erratic climate change, where droughts are increasingly common.
But by 2014 the split remained the same: 51% thermal, 47% hydro, but with 2% of renewables in the mix – and most of that on the Galapagos Islands, home of the famous tortoise of the same name. In other words, nothing had really changed.
Natural resources are abundant:
- Solar radiation is good: peak sun hours of 4575 Wh/m2/day, with pockets in the south reaching 5748 Wh/m2/day and overall pretty consistent throughout the year.
- Wind potential may be a bit better: the government estimates that some 500 MW of wind capacity can be installed in areas where it consistently exceeds 8 meters/second.
- But because of its climate and topography, Ecuador’s clear competitive advantage is in hydro: the potential is for over 21 gigawatts of capacity – a potential exporter of green energy to neighboring countries. This helps explain why they sought such a hydro-centric energy matrix.
In 2011 and with the support of the new Ministry of Electricity and Renewable Energy, government regulation #04/11 established that investors could submit proposals for renewable energy projects and if accepted, sign 15-year power purchase agreements (PPAs) with the government utility. The pre-established prices by technology on a per megawatt-hour (MWh) basis were set as follows:
- Solar photovoltaic: $400/MWh
- Biomass and biogas: $130/MWh
- Wind: $91/MWh
- Small hydro (up to 50 MW): $71/MWh
A simple enough solution, even if the approval process was lacking in transparency. And the accompanying fiscal incentives are good. But the pricing, while seemingly attractive in absolute terms, did not adequately take into consideration cost of capital issues, nor the very tangible cost of gaining access to the transmission grid in a mountainous country, or the lack of long term bank financing available in the market.
But there was a clearly favored technology and developers jumped on it: by 2013 seventeen solar projects were announced totaling 272 megawatts (MW) at a cost of $700 million. All were scheduled to begin generating by 2015.
Caught in a bad romance
Yet none of those 17 solar projects was built. A year later the government had quietly lowered the price for solar to $160/MWh and promptly lost credibility and the investors. Also, technical norms and standards remain undefined.
But interestingly enough that wasn’t what actually killed off investment. If you stand back, a clearer picture emerges.
Investors are notoriously hard to persuade, always looking for evidence of predictability in their possible investments. Ecuador doesn’t offer that. The unilaterally lowered solar price confirmed to the already hesitant investors the need to pull the plug, but the decisions were based on the country’s inability to be consistent in its policymaking.
In 2000, in the midst of a financial meltdown, Ecuador abandoned its own currency (the sucre) in favor of the United States dollar: it gave up control of its monetary policy to another country. The only other real faucet it had left to stimulate the economy was fiscal policy, i.e., debt issuance. But they opened the floodgates and just a few years later had to default on their sovereign debt. And then promptly bought it back at a large discount in 2009. Since then Ecuador’s debt ratios have trended upwards yet again, from a 16% debt-to-GDP to an estimated 30% ratio in 2015. This is head-spinning stuff.
Additionally, Ecuador has the second highest energy subsidies in Latin America, as outlined in this analysis showing how it detracts from investment. As an oil-rich nation with high levels of poverty it was an obvious candidate for populism: oil represents about half of total exports and almost as much of government revenues.
Left-leaning President Correa used these revenues to transfer wealth and provided much-needed basic human services like education and health care, and to subsidize energy during the years of high oil prices. But he didn’t establish any reserve for the future. Needless to say, as government spending now declines so does his popularity: the economy is expected to contract this year. Correa now finds himself in the awkward position of having to court the International Monetary Fund, which he had previously disparaged greatly (most recently by stating that the organization is “… more lost than Santa in June”, a memorable put-down even if it doesn’t really make sense).
Don’t be like the turtles, dude
Charles Darwin used the Galapagos Islands tortoise as an example of proof of his theory of evolution. They had evolved differently on the various islands over millennia, some acquiring longer necks, others stronger legs, each adapting to their individual island environment. But they all shared one trait: they had no natural predators. Their senses became dulled.
Since the arrival of humans in recent centuries they are at constant risk of extinction. They survive thanks to the protection and largesse of large multilateral institutions concerned for their wellbeing. But unless they adapt and learn to use their senses they will never flourish and forever be dependent on outsiders. Perhaps there’s a lesson here for the country as a whole.
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, a financial advisory firm focused on renewables in emerging markets. Carlos co-founded the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first President until 2011; is a board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); is the founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.