By Carlos Javier Perez-
Currently, Ecuador’s energy demands are met primarily by renewable sources. In fact, according to ARCONEL, the country’s energy regulator, 64.88% of power generation in 2019 came from renewable sources. The primary source is hydraulic energy, contributing 62.51% of the total energy produced. The remaining 35.12% of non-renewable energy generated comes primarily from internal combustion engines. In the last 9 years, due to the production of new hydraulic plants, Ecuador’s energy grid has seen a significant reduction in its reliance on fossil fuels. In 2010, 235 million kgal of fuel oil was used for the production of electricity. As of 2019, that figure has decreased by over 40% to 134 kgal. The use of diesel for energy production also decreased by 59% in the same period. Although the use of crude oil doubled in the last 9 years, it remains a small portion of the fuel powering the energy plants.
The reason Ecuador has witnessed such a shift to renewable energy consumption in its electricity grid is the new constitution that was introduced under President Correa in 2008. The constitution established that the government must promote the use of clean and renewable energy sources as well as promote energy efficiency and preserve the environment. The constitution incited the movement towards cleaner energy and, under the government of Lenin Moreno, the National Plan for Energy Efficiency 2016 - 2035 was implemented. With the support of the Interamerican Development Bank, the plan aims to end the dependence on imported fossil fuels and oil derivatives. This plan encapsulates all energy consumption with a particular aim to reduce the dependency of transport on oil derivatives, which is important as the sector represents the largest share of energy consumption in the country at 42%. Having made strides to clean its energy production, the nation’s next challenge lies in ensuring the longevity of the renewable plants and reducing the carbon emission from drivers.
Implementing new sources of renewable energy, however, incurs significant set-up costs which, following the unprecedented government spending resulting from the COVID-19 pandemic, are not readily available. Nonetheless, given that the current constitution clearly states that renewable energy sources must be developed and prioritised, there is little the newly elected government can do to change the momentum towards renewable energy. In the short term, President Lasso can explore methods to increase the efficiency of existing oil wells which can lead to a reduction in their environmental impact. In addition, the current government might look into ways of creating public-private partnerships to alleviate the burden that new hydro energy plants have on the government’s finances. Comparable measures have already been introduced by Lasso who signed a decree that will seek for a re-evaluation of existing oil wells managed by the state including their related contracts, with the intent to renegotiate and potentially offload their management to the private sector.
Having said this, Lasso has also stated that he aims to double the daily output of oil from 493,000 barrels up to 1 million which is of course environmentally counterproductive but will allow for a significant increase in income for Ecuador. Part of the revenue will serve to finance a fund whose goal is to battle malnutrition in the nation as well as other issues faced by the vulnerable population. With this in mind, the fund resembles Norway’s Pension Fund Global which collects surplus revenue from oil activities to counteract the imminent decline in the country’s revenue from oil by investing in international markets. As over 50% of Ecuador’s exports are oil and oil-based products (~$7 Billion USD) with the potential of doubling given the measures announced, it is in the country’s best interest to emulate Norway’s “oil fund” and invest, not necessarily in international markets, but in the development of other industries to replace oil revenue.
However, given it’s Lasso’s first term in office, it seems likely he is only looking for short term gains with rapid impacts that will enable him to secure the votes necessary for re-election in 2025. If he wins the next election his government may implement more ambitious legislation regarding the purpose of the fund, how much the government can use it, and what the fund can invest in. In the meantime, the fund can serve to alleviate the economic burden assumed by the government in its battle against the COVID-19 pandemic. Given the current crisis, environmental concerns are likely to be put to the side as decisions will be taken with the absolute monetary benefit at the forefront. This means it is likely the government will give vague statements or over-emphasize their environmental work (green-washing their agenda) until they extract the extra half a million barrels of oil, and reap the benefits from this.