Energy is a key part of the social and economic development of a country. If you don’t believe me, just look at countries with a high dependence on petroleum-based fuels for energy consumption. For example, in Central America and the Caribbean where there are high penetrations of petroleum products for electricity generation, countries face high prices for electricity generation when oil prices are high. And this can have a direct impact on their development.
2013 Electricity Prices in LAC (ClimateScope, 2014)
No country seeks to become dependent on expensive fuels, but because of many factors, like the quick installation and small upfront costs of petroleum powered plants, these options are a sort of Band-Aid. It was a quick fix for island nations and countries with stretched finances, and it was a decent option while it was affordable. However, once there was a rise in oil prices, the general public had to deal with the very high corresponding electricity prices passed onto them and they sometimes faced brownouts and blackouts. This situation translated into problems for a country’s balance of payments, its energy security, and it even had a direct and negative impact on local business. High energy prices typically correspond with low growth, such as in Haiti, Guyana, and Jamaica.
For countries in this situation, the drop in oil prices is a welcome relief. It also presents an important opportunity to right-size a country’s energy policy in ways that better benefit that country. A January 2015 article in The Economist argued that the plunge in oil prices, combined with improvements in clean energy and conservation, allows policy makers “the chance to rationalise energy policy” by removing energy subsidies. The article concluded that, “a cheaper, greener and more reliable energy future could be within reach” with the use of such policies, made economically viable due to the drop in oil prices. So my question is: how can a country take advantage of the situation in a way that invests in renewable energy and brings a strong return to that country?
Here are three things a government can do while oil prices are low:
- Structure incentives such as production tax credits, VAT exceptions for renewable energy project materials, or policies for accelerated asset depreciation. With these, countries can cheaply and quickly encourage new construction for electricity that will not be impacted by the next spike in oil prices. This will help to move towards investing into new plants with lower long-term costs like wind and different solar technologies.
- Provide new transport options such as infrastructure for electric and flex-fuel cars or new mass transit options like Bus Rapid Transit (BRT) systems to get people into more efficient transport options and get cars off the road.
- For those with the political capital, use the change in market prices to raise revenue and create a rainy day energy fund. By now, many people are used to high gas prices, so a tax on consumption will be felt less given that it might be the same as it was at the pre-drop level. The revenue the country raises could, at least in in part, be invested into long-term sustainable energy options.
In July 2013, Inter-American Development Bank (IDB) President Luis Alberto Moreno argued that although, “Latin America uses more renewable energy than any other region in the world, it faces difficult choices as it seeks to generate the electricity it needs to grow without harming the environment,” and reminded us that, “renewables are becoming a viable and attractive option that needs to be explored.” This shift to invest in renewables in a sustainable way is in line with the work of Sustainable Energy for All (SE4All). The initiative works globally to promote the achievement of the following three goals by 2030: 1) Providing universal access to modern energy services 2) Doubling the global rate of improvement in energy efficiency 3) Doubling the share of renewable energy in the global energy mix. The IDB, via the SE4All Americas Hub, promotes these goals in Latin American and the Caribbean.
The drop in oil prices is an opportunity to shift investments, infrastructure, and regulations to sustainable energy options. Do you have a specific policy you think should be considered in your country? If so, share your thoughts with sustainable energy here, and let us know how you think it will shape the future.