Is a renewable energy future possible? A look at Uruguay’s renewable energy story may make you a believer that clean energy is only a few well-placed policies away.
Beyond Uruguay’s impressive performance in economy, democracy, human development, and equity, the country has another remarkable area: the recent structural transformation of its energy sector. Rather than relying on fossil fuels, Uruguay has committed to and moved toward a future powered by renewable energy.
Thanks to Uruguay’s efforts, more than 90 percent of the country’s electricity generation came from clean energy sources in 2014, including from hydropower, biomass, and wind energy. (See Figure 1.) In 2015, this share jumped to nearly 95 percent.
Figure 1. Electricity Generation in Uruguay by Energy Source, 2014
Source: IEA, 2016
Hydropower tends to dominate Uruguay’s electricity generation, accounting for around 80 percent of generation (annual variations reflect water availability; see Figure 2). Uruguay has not added any new hydropower plants for two decades, so the country’s renewables growth is mainly a result of development of other renewable energy sources. The share of wind power has increased rapidly, from 0 percent to more than 5 percent in the power sector since 2009.
Figure 2. Electricity Generation in Uruguay by Energy Source, 1990–2014
Source: IEA, 2016
Why the Shift to Renewables?
Uruguay has prioritized ramping up renewable energy in its fuel mix in order to reduce threats from drought, bypass oil price volatility, and tackle climate change.
Although the country has substantial natural resources, including hydro, wind, solar, and biomass, it lacks natural gas, petroleum, and coal reserves. Because Uruguay cannot meet its energy needs through domestic fossil fuels, its electricity supply depends strongly on hydropower and imported oil.
However, the stability of the hydroelectricity supply is tied to rainfall levels, and droughts related to climate change threaten the availability of this supply. Uruguay’s oil imports are affected by global oil prices, which are highly dependent on geopolitics and on growth in the gross domestic product (GDP).
Furthermore, carbon dioxide emissions from power generation accounted for more than one-quarter (25.9 percent) of Uruguay’s carbon emissions in 2013 and are the second largest source of domestic emissions after transportation.
Uruguay’s energy transition toward renewables cannot be achieved without delivering concrete policy solutions to support the transition and increase access to financing resources.
Uruguay’s National Energy Policy, designed in 2008 and implemented in 2010, is the foundation of the country’s energy revolution. It lays out the primary targets that the government aims to achieve in different sectors and stages, as well as specific policies and strategies that are necessary to fill the gap between current status and future goals.
This policy framework has set the following goals for the period from 2010 to 2030:
- Short term: By 2015, achieve 50 percent of renewables in the primary energy mix, decrease 15 percent of oil consumption in the transportation sector, and reach 100 percent electrification in rural areas of Uruguay.
- Medium term: By 2020, achieve optimal use of renewables and natural gas in energy mix, decrease 20 percent of energy consumption by improving energy efficiency, and provide adequate energy access for all citizens.
- Long term: By 2030, save US$10 million through source substitution and energy efficiency and rank as the top performer in energy intensity globally.
To achieve these goals, the government of Uruguay has put forward a pool of policies under the National Energy Policy and incorporated hybrid policy instruments that stimulate domestic and foreign business interests. These approaches have built a strong base for public-private partnerships to reshape the electricity generation mix. The country has focused on three key policies:
- Auctions: All auctions guarantee 1 percent of the expected 10–30 year income to bidders and require the use of at least 20 percent local content for all projects (that is, 20 percent of intermediate goods used in production processes must be sourced from domestic manufacturers, including local recruitment and a local-based control center). Also, all electricity generated from renewable energy is exempt from paying charges to use the grid during the construction of the project.
- Net metering: Consumers with their own renewable energy micro-generation systems can connect to the grid, deliver surplus energy, and obtain billing credit. Net metering encourages the development of small wind power, biomass, solar, and mini-hydro systems.
- Fiscal incentives: By offering tax credits and exemptions of the value-added tax (VAT, a consumption tax applied to most products bought and sold) on items such as wind turbines and related accessories, Uruguay is successfully mobilizing funding to promote renewable energy and energy efficiency.
Building a Healthy Public-Private Partnership
UTE, the government-owned national electricity company, controls Uruguay’s electricity market. Thus, the company serves as the main driver of the energy transition and plays an important role in implementing the government’s policies.
UTE directly awards bidders auction contracts and is mandated to buy all excess electricity from micro-generation at the retail price. These parameters ensure enforcement of the government’s policies. UTE is also developing its own wind power and solar photovoltaic generation capabilities by working closely with international and regional corporations to develop pilot plants and share advanced knowledge and technologies in the industry.
UTE staff has received government-sponsored training on how to work with renewable energy developers and investors to integrate clean energy into the grid. As a result, UTE conducted effective outreach to these stakeholders and addressed their concerns.
Accessible Finance: Securing Sustainable Development of Renewables
With these attractive policies, domestic and foreign investment in Uruguay’s energy sector increased nearly 70-fold between 2010 and 2014 (see Figure 3), with wind and solar projects attracting the most investment. Uruguay’s total clean energy investment reached some $1.2 billion in 2014, ranking it as one of the top five countries with the largest investment in renewable power and fuels per unit of GDP.
Figure 3. Clean Energy Investment in Uruguay, 2009–2014
The boost of clean energy investments is a result of the sound policies that fostered the development of healthy public-private partnerships. These policies ensure that the profit of a clean energy project is guaranteed, further raising business interests. As a result, competition among energy companies is pushing down costs, resulting in a 30 percent decline in electricity generation costs over the past three years.
Strong public companies, such as UTE, have become reliable partners for private firms and successfully drive investments from within the private sector. Because of their government backing, strategies, and investments, public companies strongly promote the accountability of clean energy investments and create an attractive operating environment for the clean energy industry.
Benefits of the Energy Transformation
Prioritizing renewable energy development enables Uruguay to turn its energy transition into environmental, security, and economic successes.
- Climate benefits: As a result of the ongoing systematic transformation of the power generation mix, an 88 percent cut in carbon emissions will be achieved in the power sector by 2017 compared with the 2005–2009 average. Also, emissions from domestic power generation will be just 17 grams of carbon dioxide per kilowatt-hour (3 percent of the global average for power generation emissions).
- Energy security: Uruguay, a former energy importer, has shifted its role to become a net energy exporter. In 2006, 34 percent of its electricity demand was supplied by neighboring countries such as Argentina. In 2015, 10 percent of electricity generated locally was, instead, exported. Uruguay aims to generate as much as 38 percent of its power from wind by 2017 in order to reduce its dependence on hydropower.
- Economic benefits: By the end of 2015, renewable energy had reduced the cost of electricity by 44 percent in Uruguay. The country’s wind farms are able to produce electricity for about 65 to 70 cents per kWh, which is half the cost of gas-fired electricity generation. In 2015, a total of 11,050 jobs were in the renewable sector (not including the 6,550 jobs in the pubic utility sector). This level of employment was 1.5 times higher than jobs generated by oil refineries and distribution of natural gas combined (7,460 jobs).
Through consistent policies, integrated government systems, key institutional support, and participation of all sectors, a country can build a sustainable energy system. A renewable-rich, diverse energy mix enhances energy security, reduces energy costs, activates national industry, creates jobs from clean energy, and lessens dependence on oil.
Ziyue Zhu is a former research intern at the Worldwatch Institute.
Banner photo: Nico Pereira