When it comes to renewable energy generation, the South American country of Uruguay is a huge success story.
The developing nation went from having virtually no wind generation in 2007 to become a double world-record holder in less than a decade. By 2013, it was receiving the largest share of clean energy investment as a percentage of GDP, and in 2014, installed the most wind per capita of any country. By mid-2015, the country had installed 581 megawatts (MW) of wind capacity, providing an average 17 percent of total electricity generation over the year. Wind energy is now cost competitive in the nation, and is displacing the most expensive fossil-fuel generation.
Using Climate Finance in Transformational Ways
Uruguay is at the forefront of a growing movement of countries, communities and individuals who are transforming the way they generate and use energy. Meeting the goal of the Paris Agreement to keep warming well below 2 degrees Celsius (3.6 degrees Fahrenheit) in order to prevent dangerous climate change will require a rapid and deep reduction of emissions. To achieve this countries will, among other things, need to fundamentally transform their energy sectors away from fossil fuels and towards clean, renewable energy.
In our new working paper, Transformational Climate Finance: An Exploration of Low-Carbon Energy, we look at how funding can be used to bring about such large-scale, long-term and rapid changes in the energy sector to boost renewable energy and energy efficiency. In order to understand how climate finance can deliver this “transformational” change, we analyzed case studies covering a variety of geographies, energy sources and degrees of transformation.
Uruguay’s wind sector was one of the most successful cases we found. The way it achieved results provides powerful lessons for other nations looking to transform their energy systems, and for funders such as the Green Climate Fund, whose Board is meeting this week to consider how it can best fulfil its mandate to promote a “paradigm shift towards low-emission and climate-resilient development pathways.”
What Motivated Uruguay’s Energy Change?
Uruguay’s wind development was driven by a desire to increase energy security. The country had relied heavily on hydropower historically. But with a decade of dry years between 1997 and 2007, hydro’s share of electricity generation fell from more than 90 percent to around 50 percent, leading to an increase in fossil-fuel imports (the country has no domestic reserves). By 2007, imported fossil fuels provided a third of generation. In addition to import costs, the increased reliance on fossil fuels added to the fiscal burden of providing residential subsidies. Given the steadily rising electricity demand, the government sought ways to diversify its energy sources.
How Did Uruguay Pursue an Energy Transformation?
In 2007, Uruguay secured an initial grant of $1 million from the Global Environment Facility, delivered through the UN Development Programme, and put up $6 million in co-financing from its national budget. This funded the Uruguay Wind Energy Programme, which ran until 2012 and focused on policy reform and technical capacity building.
The Wind Energy Programme supported the Government of Uruguay in creating an ambitious national policy on renewable energy. This included crafting a competitive bidding mechanism for large-scale renewable energy development and a feed-in tariff for smaller-scale systems, which allowed non-utility power producers to sell renewable energy to the grid at standardized prices. The state-owned utility was required to buy all clean power generated. To encourage early development, producers receive a higher price for electricity generated from projects that came online before 2015.
The government also used funding to train staff at the national electricity utility on how to work with renewable energy sources to integrate them into the grid. With little prior experience in dealing with variable generation, the state utility developed a demonstration wind farm and created a renewable energy technology curriculum at Uruguay’s Universidad de la República to train its staff. The utility also conducted outreach to developers and investors to build their knowledge and address perceptions of risk in the wind sector. Dialogues among stakeholders also helped regional cooperation, with Uruguay now working with the Brazilian utility Eletrobras to develop wind projects along their shared border.
What Does Success Look Like?
Uruguay’s reforms provided the policy stability and technical expertise to kick-start wind investment, with the nation now receiving more than $1 billion a year in investment for clean energy. The country has continuously exceeded its wind targets. The government aimed to have 300 MW of installed wind capacity by 2015, which was increased to 500 MW as development beat expectations. Uruguay now aims to generate 38 percent of its electricity from wind by the end of 2017, more than doubling the current share.
Uruguay demonstrates how using climate finance for smart policy and effective training can have a transformative effect on low-carbon energy development. With a few million dollars in public funding, the country created an enabling environment for renewable energy development that allowed billions of dollars in private investment to flow, resulting in rapid wind power deployment.
Source: WRI. Reproduced with permission.
