IDBAmérica: Renewable energy already represents a larger slice of the energy matrix in Latin America than in many other parts of the world. Is there room for additional growth, and which particular types of renewable energy are most promising?

Vellutini: While their overall share of the energy matrix won’t change substantially in the future, renewable sources are expected to grow rapidly to keep up with energy demand. Today almost 70 percent of Latin America’s electricity comes from hydropower, and according to the OECD’s latest World Energy Outlook, the region’s hydroelectric capacity will nearly double between now and 2030. A new generation of small-scale, run-of-the-river hydro projects will be an important part of the mix.

Though it barely registers today, wind power is forecast to grow faster than any other source, especially if equipment costs keep declining. In fact, the IDB is helping to finance a wind resource survey in Costa Rica and feasibility studies for specific private wind projects in Panama and Nicaragua.

The OECD estimates that biofuel production in the region could grow at more than 5 percent per year during the same period. Brazil alone is forecast to double its ethanol production over the next decade, thanks to ample land resources and a huge internal market. With the right government policies and substantial investment, some Central American and Caribbean countries could replace as much as 50 percent of their domestic transport fuel with sugarcane ethanol in the years ahead.

IDBAmérica: Most of the capital for renewable energy projects is coming from private sources, but the IDB lends primarily to governments. Are you making direct investment in this sector?

Vellutini: Yes, and we are doing so primarily through partnerships with the private sector. Although the IDB is known for supporting governments, over the past decade our private sector lending has flourished. The Bank’s private sector portfolio includes more than 90 operations in 17 countries and two regional funds. The Bank has supported $22.7 billion in private investment through $4.2 billion in direct financing and guarantees and $3.2 billion in syndicated/placed participations with more than 90 banks and institutional participants.

Renewable energy is one of the fastest-growing segments of this portfolio. In Brazil, our pipeline includes several ethanol and biodiesel projects. Depending on the country, we are able to provide direct loans for up to 25 or 40 percent of the total cost of a project up to $200 million, or $400 million in exceptional circumstances. For expansion projects, we can finance directly up to 50 percent. The balance of the financing is provided by commercial banks and equity from private investors.

Outside of Brazil, we are also considering private ethanol, biodiesel, wind, solar, hydroelectricity and tidal energy projects in countries including Colombia, Peru, El Salvador, Guatemala, Panama, Nicaragua and Honduras. And we have launched a $300 million Green Energy Program that will specifically target smaller-scale projects in the smaller countries of the region and will support private and public-private investments in renewable energy, energy efficiency and biofuels.

The capacity of Brazilian ethanol processing facilities, like this plant in Sao Paulo state, is expected to double over the next decade.

IDBAmérica: In the last few years ethanol ventures in Brazil have been flooded with capital. Why is the IDB also investing there, and what added value do you bring to your partnerships?

Vellutini: The IDB has been investing in Brazil’s renewable energy sector since the 1970s, first at the request of the Brazilian government and more recently in response to demand from the private sector. The IDB as a whole has extensive experience in Brazil in areas including large-scale energy and transport infrastructure. Although a lot of equity capital has come to Brazil in the ethanol sector, we complement private equity capital by offering lending and guarantee products with enhanced terms and conditions that may not be available from the commercial debt market without our involvement. We also complement the other primary source of debt capital available in the Brazilian market through BNDES. In addition, we provide unparalleled knowledge of local conditions and a very deep network of relationships with key government officials. Our participation also gives a project a certain amount of legitimacy, because people know that our environmental and social requirements are very rigorous.

IDBAmérica: ADM, the world’s top producer of corn-based ethanol, recently announced plans to diversify into sugarcane ethanol in Brazil. What does this tell you about how the market for ethanol will evolve in the years ahead?

Vellutini: This is another sign that biofuels are turning into global commodities. As demand rises, biofuel consumers will seek to diversify their sources of supply, and the markets will reward the most efficient producers. Tropical countries have optimum conditions for producing biofuels at lower cost, so it makes sense for multinationals in both agriculture and energy to invest in Brazil and other countries in Latin America, Africa and Asia. This will also lead to consolidation, as small-scale farming operations, cooperatives, and family-owned businesses either merge or are purchased by larger companies.

IDBAmérica: What do you see as the principal obstacles faced by smaller countries that are trying to launch renewable energy programs, and what is the IDB doing to help?

Vellutini: The most immediate need is for the country-focused research and technical expertise that enables governments to make informed decisions about renewable sources. The IDB is working with the public sector on this kind of assistance in a dozen countries throughout the region in addition to Brazil. We are financing feasibility studies and economic analyses to determine where exactly it makes sense to invest in renewable energy, with what kinds of technology or feedstock and for what markets. We are also helping them to prepare long-term renewable energy strategies and draft laws and regulations that will create clear ground-rules and incentives for private investors.

For private investors—who will fund the vast majority of investment in renewables—the IDB offers technical assistance to facilitate upstream feasibility studies, environmental impact studies, as well as market and economic studies through various grant facilities. As I referred to earlier, the IDB also offers debt products including senior and subordinated loans, as well as guarantees to private sector projects.

IDBAmérica: Where does the IDB stand on the food-versus-fuel debate?

Vellutini: We think it’s essential to make an objective assessment of the sustainability and the social impacts of any energy investment. The question of food supply is obviously crucial, as are concerns about the environmental impacts of biofuels. We are helping individual governments to get reliable answers to these questions before they decide to change their policies. We’ve also commissioned the International Food Policy Research Institute to carry out the first large-scale study of the food impacts of biofuels throughout Latin America and the Caribbean.

Each country—and each investor—will need to make decisions based on the facts that emerge from these studies, but the early indications are that there are substantial opportunities to produce biofuels on lands that are not used for food cultivation and are not ecologically sensitive.

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