Incentives for electricity generation in a green economy: effective frameworks from Latin America

Incentives for electricity generation in a green economy: effective frameworks from Latin America

Latin American countries are implementing innovative policy and market mechanisms to catalyse the development of nonconventional renewable energy sources. This Brief presents some of the region’s success stories.

In 2008, for the first time in history, global investment in renewable energy generation (US$140 billion) overtook fossil fuel generation (US$110 billion). Developing countries were responsible for driving this trend over the tipping point, even as many markets in the West waivered under financial crisis. In fact, developing country investments in renewable energy have grown year on year since 2005, chipping away at substantial leads held by Europe, the US and Japan. In 2012, 5% of Latin America’s electricity came from “non-conventional renewables”, referring primarily to small hydropower (under 30 MW), solar photovoltaic, biomass, geothermal, and wind. Latin American countries are now setting ambitious targets that aim to dramatically increase the share of non-conventional renewables in national energy portfolios. This shift in development of energy resources relies on incentives, policies, and institutions that support their expansion.

In this Brief, incentive systems developed in Brazil, Chile and Peru are analysed, with renewable energy policy frameworks emerging as the overarching driver behind the region’s growth.

Key Lessons:

  • most Latin American countries use frameworks – a combination of aligned policies and programmes – to encourage the generation of renewable energy, mixing mechanisms such as national targets, feed-in tariffs, reserve auctions, special financing, complimentary tax incentives, net metering, and renewable portfolio standards, depending on specific country circumstances
  • feed-in mechanisms are currently the most common type of incentive used in Latin America because they are flexible and based on market principles, guaranteeing minimum energy prices, while also demonstrating governments’ long-term commitment to renewables
  • although the percentage of people with electricity in Latin America is substantially higher than other developing countries, it continues to develop innovative solutions to reach the rural poor, specifically via green microfinance loans
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