Vertical and horizontal integration: regional and sectoral integrated energy development
As a result of the turbulent decade of the 1970s, the critical role that energy plays in virtually all human activities has been widely acknowledged. Without a reliable and affordable source of energy, governments, institutions and individuals realized that everyday activities and future aspirations could be difficult or even impossible to accomplish. Of course, the issue was not new; the importance of energy in improving human welfare has been long-recognized by planners, especially those in poor or poorly-resource-endowed countries.
In the flurry of activities in the energy sector during the 70s, as many new approaches as new problems were identified. Energy issues (and energy specialists) emerged everywhere, some focusing on specific "new" technologies-photovoltaics, wind, synthetic fuels; others taking a sectoral approach-the role of energy in agriculture, utilization of forest resources, and literally dozens more. Energy problems frequently were magnified in developing countries because of a lack of resources, both natural and financial, so that many of these new ideas came to bear on the Third World.
With 15 years of experience in integrated regional development activities in Latin America and the Caribbean, the Department of Regional Development (DRD) of the Economic and Social Secretariat of the Organization of American States (OAS) had been well aware of the importance of energy in development planning. When the 31 member states of the OAS General Secretariat mandated an intensified emphasis on the energy sector in 1979, the DRD was assigned this responsibility.
In addition to regular technical cooperation activities requested by member countries and multi-lateral energy programs coordinated with other development agencies, the OAS established a plurinational program in energy called the Integrated Energy Program for Economic and Social Development. Drawing on the department's philosophy of integrated regional development planning, the method that has evolved for energy development has been distinct from, although often complementary to, the numerous approaches that were initiated in the 1970s.
Instead of defining a specific sector or a single technology as a priority, the DRD has viewed energy as one component in development, albeit a catalytic one. The emphasis centers not on supplying energy or on providing a new technology; instead, it analyzes how energy relates to the development process, searching for ways that these interconnections can be strengthened to promote economic and social development.
This methodology, integrating improved energy inputs with other components of development, results in synergism. In other words, separate inputs, acting simultaneously and in coordination, can have a greater total effect than the sum of the individual components. The concept of synergism is central to the integrated energy development approach. This report will attempt to define the synergism which integrated energy development projects strive to create.
Before beginning the discussion of the various facets of integrated energy development, the results of one such project are presented. This project, part of the Bolivian Energy Regionalization program, captures the essence of synergy within integrated energy development (see Case Highlight 1).
As described in the case of Monteagudo, integrated energy development projects go beyond the traditional supply-side approach to energy development. Simply improving the supply of energy to an underdeveloped area like Monteagudo can enhance the quality of life of the residents, providing more hours of electricity per day for lighting and home appliances, for example. But, when improvements in the energy supply are combined with the introduction of economically productive activities, contributions to both improved quality of life and economic development can be made. Identifying opportunities to use energy as a catalytic force to bring about both social and economic development is the underlying goal of the integrated energy development approach.
Case Highlight 1
Synergism, the Integration of Energy and Development: Monteagudo, Bolivia
Monteagudo, the provincial capital of Hernando Siles Province, Chuquisaca Department in southern Bolivia, exemplifies the energy/development problems and opportunities facing many remote areas of Latin America.
The area is rich in natural resources, with a hydroelectric potential, developed natural gas wells, and good arable land. Yet the hydro potential is untapped, pipelines carry all of the natural gas produced out of the region (mainly for export from the country) and very little income is generated from agriculture.
The 6000 residents of Monteagudo have virtually no services. A small diesel generator operates only occasionally, due to high costs of diesel and demand levels limited to domestic lighting. The majority of the people of the province are farmers, raising livestock and crops, and some agricultural products are exported to other towns in the department. Extremely poor roads result in extensive losses on the raw produce and live animals during transportation, rendering little economic return for the farmers.
The technical assistance project team recognized that agroindustrial activities were the key for Monteagudo's continued development. Processing locally grown goods could transform the region's basically subsistence-level farming into a high-value-added economic activity, producing goods with a high value-to-weight ratio and reduced perishability. At the same time, it was recognized that any industrial activity would require a reliable, reasonably priced source of energy. The nature of Monteagudo's underdevelopment problems, common to many regions in the developing world, is evident: potential economic activities would not commence without a reliable and reasonably priced energy supply, yet without increased levels of demand generated by productive activities, new energy supplies could not be justified.
If viewed from a supply-side approach, the existing diesel system basically met the current minimal demand, limited mainly to a few hours of household electricity in the evenings. But if viewed from an integrated energy development perspective, the provision of a larger-scale, reliable energy source in coordination with new agroindustrial activities could spur economic and social development in Monteagudo and surrounding areas.
With this approach in mind, an integrated development plan was outlined. Agroindustrial plants for slaughtering and processing meats, producing orange juice concentrate and processing vegetable oil appeared viable with local resources, given an upgraded supply of energy. In turn, the large amount of base-load electricity demanded by such activities would lower energy costs for both commercial and domestic users.
Grid extension and upgrading the diesel system were evaluated, but the extension of the natural gas pipeline 30 km to Monteagudo proved most economical, given the projected levels of demand generated by the new processing plants. The project suggested the construction of a gas-driven cogeneration system and a water treatment plant and pumping station, and the addition of a 10-truck fleet to transport the finished products to market. Potential economic and social benefits for the residents of Monteagudo are numerous. The high levels of electricity and water demanded by the new industrial activities would lower the costs and improve the reliability of both crucial services for the town of Monteagudo. In addition to the benefits to farmers, nearly 100 jobs would be created.
The emphasis on the demand side of the energy equation is essential in integrated energy development. Traditionally, energy companies worldwide, both public and private, receive projections of demand, and attempt to supply these needs. Energy infrastructure - power plants, transmission systems, refineries, etc. - is built; demand is often met.
Under this traditional, supply-side approach, significant inroads have been made throughout Latin America and the Caribbean. Strong, permanent organizations like national electric companies and national oil companies have acquired the technical and institutional capacity to deliver energy to a large percentage of the residents of the region. Energy planning institutions, working parallel to energy supply companies, effectively prepare nationwide energy balances of current and future energy needs.
Yet this traditional, sectoral approach has caused imbalances in energy development. Some areas, especially urban or industrial centers, have access to energy sources at an acceptable quality and price, while many isolated areas are denied this access. Likewise, numerous existing opportunities for improving the overall energy situation, in areas such as transportation, alternative energy development, energy conservation, etc., are neglected because they are not within the traditional spheres of activity of existing institutions. A strictly sectoral approach to energy has difficulty identifying energy development opportunities outside of the conventional areas of action.
By contrast, the integrated energy development approach views energy not as a static good to be estimated and supplied, but as a dynamic input capable of catalyzing economic and social development. Through these means, integrated energy development attempts to incorporate the geographic and subject areas excluded under traditional energy and development planning. The supply-side approach compounds centralization, one of the most pervasive issues in Latin America and in many developing countries. Traditional energy development, by its very nature, encourages centralization.
Centralization allows for organization and management on a national level, which has its advantages and drawbacks. On the positive side, a centralized system for supplying energy lowers unit costs and improves reliability. For example, grid extensions usually provide electricity at far lower costs than small, isolated systems; building many small natural gas pipelines to reach peripheral areas is much more expensive than constructing major pipelines to urban or industrial areas; costs of petroleum products, whether transported by pipeline, truck, rail, boat or animal, depend on distances and surface infrastructure-again encouraging supply to demand centers.
Despite a government's desire to provide an affordable source of energy to all citizens, economic realities often force difficult choices between areas for allocation of scarce resources. Priority is logically placed on satisfying the needs of the largest number of people. Areas with a large population and a developed demand can be supplied with energy at a reasonable price, due to strong economies of scale prevalent in traditional energy sources. In sparsely populated rural areas, on the other hand, the following economic obstacles discourage energy extension:
· the high fixed costs of building the energy infrastructure to reach isolated rural areas;
· the high marginal costs of supplying energy to areas with low load factors;
· the lack of economic resources of the rural poor to pay high energy tariffs.
The current moderation of petroleum prices does not eliminate these economic obstacles; instead they are being compounded by the extremely poor financial conditions of national energy institutions throughout Latin America.
The supply-side approach looks for the least-cost means to overcome these obstacles in isolated rural areas. Grid extension vs. diesel power generation is inevitably weighed; perhaps small-scale hydro or wind potentials are analyzed. Regardless of the system which is identified as having lowest costs, for many remote areas in Latin America and the Caribbean even these costs are exorbitant due to limited demand levels and geographical isolation.
These negative cost aspects have become especially evident in rural electrification projects. Low demand levels, difficult terrain and long distances mean isolated rural areas are the last priority for electrification. Basic electricity economics encourage provision of energy to easily accessible areas with relatively high demands. Patterns of electrification show a progression from centers of population to the periphery. For most countries, budgetary limits are reached before the national territory is electrified.
If a political priority has been placed on nationwide electrification, plans might proceed despite the enormous drain placed on the entire economy. In countries that decide to follow the developed world's model of nationwide electrification regardless of economics, load factors remain low in underdeveloped areas. Demand is often limited to a few hours of household lighting nightly, as in Monteagudo. While this makes some contribution to an improved quality of life for the residents, it brings, at best, only negligible economic development.
This centralized, supply-side approach views energy as simply one of the infrastructural components necessary before productive activities commence - much like roads and bridges. Under the infrastructural approach, national electricity companies provide energy based on existing or forecasted demand figures. This can bring significant economic gains to the recipients with the previously unmet demand, but in areas with little existing need for electricity, energy does not necessarily catalyze new economic development. These projects have neglected to simultaneously promote economically based activities, which can increase demand, lower unit costs and, ultimately, result in socio-economic development.
A conventional alternative to extending the grid to rural areas has been to install small diesel generators. National electric companies often provide diesel systems, sometimes charging uniform national electricity tariffs for the energy supplied and increasing unit costs for electricity nationwide; in other cases, passing to the local community the responsibility for securing diesel, operating the system, and setting tariffs. Under either situation, fuel and/or electricity costs are too high for many rural residents and the system runs only a few hours a day. On the average, diesel-generated electricity costs between two and seven times more than grid electricity, even with today's lower fuel prices. Breakdowns are frequent; unreliable energy supplies discourage new economic activities.
While small-scale diesel power generation does provide an example of a decentralized approach to supplying energy to rural areas, the deficiencies are numerous. The reliance on petroleum-based fuels, to meet other energy needs as well as power generation, results from a "petroleum mentality." Despite difficult access, high costs and unreliable supplies, many isolated rural communities rely on petroleum products, frequently neglecting alternative energy sources that exist locally.
The institutions supplying energy do not have the authority or responsibility to attempt to influence demand except by encouraging conservation, nor do they have extensive experience in implementing small-scale energy projects in rural areas based on local resources. Historically, energy organizations have operated on a subsectoral basis (petroleum, power/hydroelectricity, etc.) and their responsibility has focused on planning and implementing large scale, centralized projects. The various energy supply organizations have had little basis for cooperation among themselves or with regional and national planning agencies. For these reasons, opportunities for demand generation and small-scale indigenous resource use at the local level are often neglected.
The circular nature of the problems resulting from the supply-side approach becomes obvious: an area lacking economic development - and therefore energy demand - is a very low priority for energy suppliers, yet the very absence of energy is one of the key factors retarding economic development.
On the other hand, the integrated energy development approach looks for interconnections between improving energy supplies and increasing development opportunities. As the Monteagudo example illustrates, the increased agroindustrial activities justified the introduction of a new supply of energy, simultaneously catalyzing development opportunities that might otherwise have remained dormant. Increased demand for energy will lower unit costs, potentially enticing additional productive operations and continuing to improve the quality of life for the residents of the area. Instead of continuing the lack-of-development-lack-of-energy cycle, integrated energy projects can promote a sustainable and progressively higher level of socio-economic development.
Another weakness in a supply-side approach is the "technology focus." The search for areas to apply a solar collector, a biogas digester or a minihydro center, etc. - whether due to a vested interest or merely a strong belief in the merits of a particular technology - often overlooks opportunities to solve development problems by some more appropriate approach. A technology should be supplied on the basis on development needs, not vice versa. The integrated energy development approach begins with the matching of the development needs and opportunities with the available energy resources and then searching for the most appropriate technology.
Similarly, the integrated energy development focus does not carry any generalized notions about which type of energy supply is preferable. Despite the popularity of non-traditional "new" energy technologies, conventional energy supplies can still be the best choice in some circumstances. At the same time, new and renewable energy sources, including biomass, hydro, geothermal, wind and solar, have appeared frequently as components of integrated energy development projects, especially those in isolated rural areas. This results not from a bias against conventional energy, but from four characteristics which favor renewable energy common in these areas: 1) low population density and long distances between demand centers; 2) extremely difficult physiography; 3) the abundance of these non-conventional resources; 4) the increased labor generation from the use of local energy resources.
When international oil prices were increasing rapidly, the replacement of imported petroleum products with alternative fuels became a priority for energy planning. The precipitous drop in oil prices has pushed import substitution out of the spotlight. Because the integrated energy development approach is technology-neutral and does not consider petroleum import substitution a primary aim, the need for integrated energy development programs has not abated with lower oil prices. The constant goal is to provide a reliable and affordable energy source to meet productive needs in isolated regions or to expose the interconnections between energy and an important economic sector promoting integrated planning.
Energy balances, the centerpiece of traditional energy planning, become only one factor in the integrated planning. While they are useful for determining how energy is used, they rarely provide insight into how the energy situation can be improved. In integrated energy planning, cultural, social and institutional factors are weighed, geographical vagrancies, productive capacities and resources are examined. More importantly, interconnections between the various development criteria are highlighted.
By placing current and forecasted energy supply and demand within the context of integrated energy development, energy planning can avoid the limitations of the supply-side approach. Moreover, energy planning can also look for economically productive activities that might be catalyzed through the provision of a reliable energy source.
By viewing energy development with a demand-oriented perspective, integrated energy development projects attempt to address regions and sectors that fall outside the traditional mandate of existing institutions.
Many OAS energy projects have adopted a geographically based focus. These projects, such as the Bolivian Energy Regionalization program, of which the Monteagudo project was one component, are aimed at improving the energy and development situation within a specific region. Similar programs have been carried out in over half of the 31 OAS member states. While the size of these projects and their goals have varied widely, a characteristic common throughout is a spatial orientation, that is, defining geographical areas on the basis of energy and development problems and potentials. These programs, which will be the central focus of this paper, will be referred to as regional integrated energy development projects.
Other energy activities function on a national scale, emphasizing the interconnections between energy and a critical sector of a country's economy. These programs are known as sectoral integrated energy development projects.
While these sectoral activities comprise an important part of the OAS work, and many promising opportunities have been identified, the vast majority of the projects have focused on geographical regions, especially isolated areas with special development needs. A brief discussion of both sectoral and regional projects follows.
Regional Integrated Energy Development
National energy offices, a relatively new development in non-oil, producing Latin American and Caribbean countries, have grown quite proficient in macro energy planning. Energy balances have been prepared for every country in the region. In the search for reduced dependency on imported oil, conservation projects and alternate energy plans have been examined and sometimes implemented. These offices have often taken a supply-side approach, attracting technicians in the various areas of energy supply - solar, wind, biomass, etc.
This centralized global focus, while valuable for directing national policies, frequently bypasses important regional development opportunities, especially in peripheral regions.
This is not to suggest that the problems of centralization have been ignored in Latin America; regional development organizations have been created in many countries to address the issue. In some countries, these groups are large and well organized, with a defined mandate to promote development activities on the regional level. In other countries, similar organizations have an in-depth understanding of rural development problems, but frequently lack the financial resources or political mandate to translate this awareness into concrete projects.
Energy regionalization incorporates the assumption that spatial disaggregation facilitates development planning. Integrated energy programs carried out in the Dominican Republic, Bolivia and Ecuador, among others, have been extremely successful using this method. (It is important to note that regional development offices are playing very important roles in the Energy Geography Program of Ecuador and the Bolivian Energy Regionalization project.)
As the rural electrification discussion demonstrates, national approaches radiate from the center outward, often bypassing isolated areas. With little economic activity, these areas do not attract energy projects. The Monteagudo case graphically illustrated this point: large volumes of natural gas were exported from the region (mostly out of the country) overlooking opportunities for developing demand near the source. In many countries similar situations can be discovered, as very little spatial integration between energy supply and demand occurs.
Energy geography, the characterization of areas by the nature of the energy problems and opportunities, as well as political, institutional and economic factors, serves as the basis for this regional disaggregation. The process of geographic disaggregation spatially defines an area for considering energy and development issues. Carefully selecting and analyzing a geographical area can generate unique insights into combinations of energy and other investment opportunities.
A two-phased process was used in nationwide energy regionalization projects in Bolivia and Ecuador. Other programs, such as the Central American Energy Program and the Energy in the Regional Development of the Frontier Zone of the Dominican Republic, began on a regional rather than national base, although the stages were similar.
In Bolivia and Ecuador, the first phase was a general analysis of energy and development relationships in various regions of the country. This analysis relied heavily on cartography, flagging similar resources as well as searching for commonalities in development needs and opportunities. In Bolivia, this process was facilitated by the development of a computerized data management system.
On the basis of this analysis, the aggregate project area was divided into subregions. These regions were prioritized according to their likelihood of deriving benefits from a program of integrated energy development. From this prioritization, a pilot region was selected for in-depth analysis and investment project identification.
The second phase focused on the selected sub-region. In-depth analyses were performed in order to define "lines of action," that is, categories of potential energy and development activities. At this stage, all available economic and social indicators were examined, field visits and interviews conducted. From this information, numerous project ideas were generated. These ideas were rapidly evaluated by the project team-some discarded, others set aside temporarily, and several selected for further analysis. This analysis formed the basis for the final stage: the identification of specific integrated energy development projects. The Monteagudo project and other projects described in this report, resulted from this basic sequence.
This very brief summary of the stages in energy regionalization is included here only to provide the framework of action typically followed by the OAS in integrated energy development programs. (The methodology is described in detail in Chapter 3). It should be understood that this process can take anywhere from under a year to several years, depending on the goals of the project, financial constraints, and the specific methodology of the project team.
Sectoral Integrated Energy Development
Energy has a large impact on the development of transportation, agriculture, mining, etc. Sectoral integrated energy projects have attempted to investigate how energy relates to a specific sector and to identify investment projects and policy changes that can result in improved energy utilization.
In the English-speaking nations of the Eastern Caribbean, an OAS project in technical assistance focused on the relationship of energy to the life and development of small human settlements on these islands. This program identified as the most critical of these relationships, that of the communities and their local forests. These forests provide the fuelwood and charcoal used for domestic cooking. Although this program began with a geographical perspective, it eventually centered on the integration of energy and its planning institutions with the forestry and natural resource sector and its institutions. As a result, the descriptions of the lessons learned from this program have been included in the sectoral integrated energy chapter.
In Costa Rica and Panama, as in many other countries of the region, future economic growth is largely dependent on the agricultural and agroindustrial sectors. The economy of each country is also extremely dependent on imported oil. The importance of these two dependencies became increasingly obvious recently as the combination of low international commodity prices and high world oil prices caused a serious deterioration in the terms of trade for the majority of Latin American countries.
While international oil and agricultural prices are largely out of the control of Costa Rica and Panama, very little attention was given to internal policies that could affect this balance, specifically the role of energy within the food sector. Special technical assistance missions studied the interconnections between energy and food sectors, identifying numerous opportunities for improvements.
Similarly, the OAS has assisted its member countries in analysis of the role of energy in the transportation sector, one of the most complex sectors of many Latin American countries. Projects in Colombia, Uruguay and El Salvador have revealed numerous opportunities for energy conservation, substitution and rationalization and are contributing to important cooperation between the many institutions involved in the sector.
While these sectoral projects attempt to integrate energy policy with the target sector - natural resources, food, transportation, etc. - many have expanded to involve additional sectors of the economy. For example, the Energy Rationalization in Transportation Project for Colombia included an analysis of the options in the refining sector, ultimately recommending against construction of a new refinery. In Costa Rica and Panama, analyses of energy in the food sector expanded to incorporate the critical role of transportation, and offered suggestions to rationalize food transport.
The integrated nature of sectoral activities also extends to the institutional structure of the projects. Because of the multi-sectoral nature of energy and transportation, the involvement of many institutions was required, as the example from Uruguay shows.
Case Highlight 2
The Role of Institutional Coordination: Energy and Transportation in Uruguay
Energy in Transportation is an extremely complex issue in most countries of the world, involving literally dozens of institutional actors. Partially because of this complexity, few countries have attempted large-scale projects to improve the use of energy in the transportation sector.
Therefore, when a technical assistance program called "Rational Use of Energy in Transportation" began in Uruguay, coordination between the many organizations involved in transportation on national, regional and local levels was essential. Working closely with the National Energy Office, the program established cross-institutional support from the following organizations:
· Ministry of Transportation
The OAS and the National Energy Office agreed that the success of the program, eventually measured in terms of actual improvements to the transportation system of Uruguay, would depend on balanced input and participation from each of these organizations on a technical as well as a political basis. Therefore, a working committee to assist in the operation of the project was constituted of technical representatives from each of these organizations. This type of technical action committee was an extremely effective organization to tackle the complex, integrated nature of transportation problems.
As a result of the program, and the support of this committee, 15 opportunities for energy savings were identified. Of the projects and policies identified, an analysis showed that a renovation and rationalization of the urban transport system in Montevideo would have the greatest impact on the country. The program found that, considering only the values of energy savings attained, a comprehensive new and efficient transportation system for Montevideo could be paid for within four years of its implementation. The project was assigned top priority by the Uruguayan government and efforts to design and implement it are under way.
The effectiveness of this type of working committee resulted in a careful analysis of the specific needs and constraints in the transportation sector of Uruguay. While it is not directly replicable for programs in other countries, it demonstrates the benefits that can be derived from flexibly establishing the institutional structure of an integrated energy program to meet the needs of a specific project.