Speeches

Nov 28, 2006

Sustainable Energy and Climate Change Conference

Almost exactly twenty-seven years ago, Antonio Ortiz Mena, the IDB’s second president, gave the opening speech at an energy conference here in Washington. At that time the world was still feeling the aftershocks of the oil crisis of 1970s. The price of petroleum was near its historic peak, and Ortiz Mena spoke about a “world energy crisis” that threatened to paralyze development in Latin America.

He warned that Latin America was far too dependent on hydrocarbons, and he urged the region to invest aggressively in biofuels, solar power, wind, and hydroelectricity. In short, he said much of what I am going to say today.

Not long after Ortiz Mena give his speech, the price of oil dropped sharply and stayed low for many years. Interest in renewable energy dried up, and many critics dismissed they whole concept as a waste of money.

I think it’s important to ask ourselves: Do we stand at a similar point today? Renewable energy has been a hot topic for the last couple of years. Rising oil and gas prices and tensions over reliability of supply have forced governments everywhere to look for alternative sources. But now oil prices are falling again. And a few Wall Street analysts are already predicting that this green energy boom will also turn into a bust.

I don’t like to make forecasts, but I think those analysts will turn out to be wrong. In fact, I believe we may have reached a tipping point regarding renewable energy, thanks to two fundamental factors that were not in play when Ortiz Mena gave his speech 27 years ago.

1. The first factor is a technological revolution that is making alternative energy much more efficient. In recent years these advances have radically narrowed the cost gap between conventional and renewable sources of energy.

• Consider solar power:  The first solar cells cost around $200 dollars per watt of generating power. Today they cost less than $3 dollars per watt. This means that solar can now compete with conventional sources of electricity in several parts of the world. In Japan, for example, the government phased out subsidies for solar power last year. But people there are continuing to buy new solar systems for their homes.
• Wind power also used to be heavily dependent on subsidies. But new materials and turbine designs have slashed the cost per watt. So now, wind is emerging as an attractive alternative in places that could never have considered it a few years ago.
• Most people don’t think of ethanol as a high-tech energy source. But in Brazil, years of research on sugar cane hybrids and distillation technology have made it possible to nearly triple the amount of fuel extracted from each hectare of sugar cane. The newest ethanol distilleries are so efficient that they produce a surplus of electricity that can be sold to the national grid.

These efficiency gains are likely to continue, thanks to market incentives and venture capital that is now pouring into this sector. The International Energy Agency estimates that one trillion dollars will be invested in non-hydro renewable energy by 2030. A significant fraction of that money will go to research and development.

2. The second fundamental factor that was not apparent 27 years ago is the emergence of a broad consensus regarding the threat of global warming. Of course, we continue to debate the causes and appropriate responses. But today nearly everyone agrees that climate change could turn into the central economic and environmental challenge of the 21^st century.

Poll after poll shows that people are concerned about climate change—and that they want their leaders to take action now. The release of the Stern report in London last month only added to the sense of urgency surrounding this issue.

Public pressure is driving regulatory and commercial trends that also bode well for renewable energy. Most industrialized countries have already adopted targets to reduce their carbon emissions and their dependence on fossil fuels. Many developing countries—including nearly a dozen in Latin America and the Caribbean—have adopted or are planning biofuel targets. In Europe, commitments stemming from Kyoto have produced a thriving market in emissions credits—a market that is now spreading around the world.

Taken together, these factors are creating a stable and sustainable demand for renewable energy.  More importantly, this demand should be relatively immune to fluctuations in the price of oil.

3. This is good news for Latin America, because the region can no longer afford to postpone the expansion of its alternative energy sources:

• Some estimates suggest that Latin America and Caribbean countries should be spending 2 per cent of their GDP a year to expand and maintain energy supply, or about US$ 40 billion a year.
• The International Energy Agency forecasts that energy demand in Latin America and the Caribbean will grow 75% by 2030. To meet these requirements, the region’s electricity generating capacity will have to increase by 144 percent.

Even assuming an aggressive development of new hydrocarbon extraction and processing capacity, Latin America will be hard-pressed to meet its energy needs without a vast expansion of renewal energy sources.

Fortunately, the region has a substantial track record in renewable energy. According to ECLAC, approximately 23 percent of Latin America's total primary energy supply already comes from renewable sources. More importantly, both the public and private sectors are already working on the needed expansion. Let me offer some examples:

• Hydropower has long been the leading energy source for electricity generation in many parts of Latin America, a region that holds 21 percent of global hydro-generation capacity. Most of this capacity is currently in the form of large hydroelectric facilities. But now there is growing interest in small-scale hydropower systems that have low up-front costs, minimal environmental impacts, and few of the negative social consequences associated with large dams.
• In biofuels, Brazil is consolidating its leadership by building more than 80 new ethanol distilleries and expanding producing with the goal of doubling exports by 2010. Argentina, Costa Rica, Colombia, El Salvador, Jamaica, Mexico, Nicaragua, Paraguay, Peru, and Venezuela are all preparing serious biofuel programs, and private investors are building ethanol distilleries in several Caribbean countries.
• Our region has emerged as a leading developer of geothermal energy. Mexico is now the world’s third largest producer of geothermal electricity, with an installed capacity that will soon exceed 1000 Megawatts and several new plants in the pipeline. Costa Rica generates 98 percent of its electricity through renewable sources, thanks in part to a growing reliance on geothermal energy. El Salvador generates 22% of its electricity through geothermal sources and could soon double its capacity.
• Wind power is another area where Brazil is emerging as a leader. Last month a consortium based in North Eastern Brazil placed an order for 107 wind turbines from a manufacturer in India. When combined with a large facility that is already under construction in Rio Grande do Sul, this new plant will bring Brazil’s total wind power production to 425 Megawatts. That’s more than twice the total current wind power capacity in all of Latin America, and enough to meet the electricity needs of around 1.5 million Brazilians.
• Finally, thanks to decreasing costs, solar energy is becoming an attractive means of bringing electricity to isolated rural communities in Latin America. And investors in eight of the region’s countries are also planning solar systems that will connect to existing electricity networks at competitive prices.

Clearly, then, governments and private companies throughout Latin America are rising to the challenge of expanding renewable energy. And I’m proud of the fact that the Bank is already financing a number of these efforts.

But we think the IDB can do much more to serve as a catalyst and a strategic partner for the region. Today we are launching this Sustainable Energy and Climate Change Initiative with the goal of focusing our efforts and better serving our customers.

You’ll find a detailed description of the initiative in your folders, but I’d like to briefly touch on the four areas that we plan to work on.

First, we want to help our member countries better exploit opportunities for renewable energy and energy efficiency. In addition to the investment areas I’ve just described, we think there is a huge potential for savings in high-energy consuming municipal sectors. I’m referring to services such as water, sanitation, public transportation, and the lighting and heating of public buildings. These are areas where you can get dramatic energy savings through smarter management and the use of new but affordable technology.

Second, we want to help accelerate the development of new biofuel industries by helping governments with viability studies, policy development, technology adoption and special financing.

Third, we intend to rapidly expand the use of carbon finance. The Clean Development Mechanism under the Kyoto Protocol has opened up an exciting range of opportunities for foreign investment in energy projects in Latin America that can offset greenhouse gas emissions in other countries. The global carbon market is now worth more than $21 billion dollars, and we want the region’s countries to take better advantage of this opportunity. We are especially interested in helping governments to take down the market and policy barriers that still discourage new investment in renewable energy.

Finally, we are going to help our members adapt to the risks posed by climate change. These risks are already endangering industries such as tourism, agriculture and fisheries. Many Latin American countries are especially vulnerable to the impacts of climate change because of their geography and rapid urbanization. At the IDB we have recently determined that a quarter of all our projects could be at risk from climate change. So we want to help our member governments develop comprehensive mitigation and adaptation strategies.

Of course, we are not starting from scratch. Not long after Ortiz Mena gave his speech 27 years ago, the IDB began financing parts of Brazil’s pioneering biofuels program. Altogether the IDB has lent $17 billion to energy projects in Latin America. Most of these have been concentrated in electricity generation, but we have also played an important role in geothermal, wind, and solar energy, along with cleaner production and landfill gas projects.

We’re proud of this legacy, but we’re not satisfied. Building the next generation of renewable energy projects will require more creativity, better cooperation, and a greater willingness to take risks. We hope you will pick apart our proposals during the next two days and help us to draft a better blueprint for our work in this vital area.

We appreciate your interest and your insights, and I look forward to hearing about the outcome of this important event.