Energy Security in South America: The role of Brazil

South America has vast energy resources, both renewable and non-renewable. A net energy exporter, the region will play an important role in achieving global energy security over the next decades. Despite this, at present, the countries in the region are not able to guarantee adequate energy security for their domestic markets.

This report explores Brazil's role in the quest for energy security in South America. So far, the regional energy trade has been organized around bilateral agreements to export countries' energy surpluses to their neighbours when necessary. The infrastructure needed to support these trade agreements was put in place in the 1990s, but there have been few advances in regional regulation systems and the pricing mechanisms needed to support the energy trade. The risk of cuts in the energy flows imported from neighbouring countries emerged in the new political and energy context of the 2000s. The perception that energy security is a matter to be dealt with in the domestic context has gained favour among governments in the region, despite the fact that the economic cost of this approach is high. Brazil, due to its central geographical position, the size of its energy market and the availability of both renewable and non-renewable domestic energy resources, has a decisive role to play in the promotion of regional energy flows in order to provide regional energy security.

Key points:

• The risk of opportunistic behaviour in the regional energy trade increases the transaction costs of energy projects. Lower-cost solutions for energy supplies are ignored because of the perceived danger of supply cuts, and higher-cost solutions that eliminate such risks are adopted instead. Low-cost energy resources remain unexploited and infrastructure to facilitate the regional energy trade is lying idle.

• The liberalization of the South American energy markets opened an important window of opportunity for economic efficiency gains largely associated with the convergence between energy and fuel markets in the energy systems of the region. Energy integration is a necessary mechanism for exploring these opportunities, as large natural gas reserves are located in the region's economies with lower levels of industrialization and urbanization.

• The regional diversities in hydrology and consumer behaviour offer good opportunities to explore the economic benefits of the cooperative use of power plants. The cost of electricity is reduced, the environment suffers lower impacts and the risk of power shortages diminishes. Unfortunately, however, energy integration faces political forces that do not recognize these economic benefits.

• Due to its abundance of fossil fuels and its leadership in renewable energy, Brazil is well placed to smooth the transition to a low-carbon economy. Its central geographical position and market size would allow it to extend these attributes to the rest of South America through regional energy integration.

• South America's position in the global process of energy transition will be largely determined by its capacity to secure the region's energy supplies and to offer safe energy supplies to energy-importing countries outside South America. Access to consumer markets in these countries will create a favourable economic environment for attracting investments to the region, thus adding value to its vast energy resources, whether renewable or non-renewable.

Key recommendations:

• In Brazil, in an attempt to contain the escalation in energy costs brought about by the search for energy security, the government has offered subsidies and is studying a proposal to renew hydropower plant concessions at prices much lower than their opportunity costs. These approaches will cause distortions in energy prices without solving the structural problem of energy supply security, and should therefore be abandoned.

• Energy integration offers the opportunity for all the countries in the region to improve their energy security and their access to the Brazilian market for energy resources that would otherwise remain idle, as well as the opportunity to participate in the articulation of a productive chain for the energy system of the twenty-first century that is being established in Brazil.

• The diversity of the energy situations and regulation regimes in the countries of the region requires integration to take place in stages. Access to neighbouring countries' reserves in situations of energy supply insecurity should be the initial stage of the process. A treaty that provides the legal basis for contracts for the use of the Multilateral Energy Security Reserve (RMSE) can remove the risks associated with energy imports in these situations.

• The RMSE treaty should lay down the economic and technical conditions that will allow free access to the required infrastructure and reserves needed to overcome energy supply insecurity in any country in the region whenever necessary. Economic access to the energy resources of the RMSE (energy price) and the necessary transport logistics (tariffs for the use of networks) should be based on the long-term supply costs of the various domestic markets. Brazil's active participation in the formulation of the RMSE treaty is essential for the achievement of South American energy security and successful energy integration. Its central geographical position, its market size, its oil resources and its leadership in the renewable energy field make it the best candidate to manage the coordination of the competitive, secure integration of the South American energy market.

• Energy integration faces significant obstacles, the greatest of which is the lack of a legal basis for private investment in the energy industry. The European Energy Charter sought to solve this problem by providing conditions and protection for private investments. This charter has not been accepted in South America, mostly because the dispute settlement system would be based outside the region. Since it is essential to have an institutional mechanism to settle regional disputes, the RMSE treaty needs to address this question.