Access to modern energy services is essential for economic growth and human development [1,2]. The importance of energy for Paraguay is reflected in the government's ambitions to meet core goals in their national energy plans such as energy security, energy equity and environmental sustainability [3,4].
This study focuses on pathways for the development of the national electricity system of Paraguay. Concerning electricity production, the country has certain unique features. It is the country with the highest percentage of renewable energy per capita in the world, the largest net electricity exporter in South America (85% of all electricity generated is exported) and one of the largest net electricity exporters in the world [5,6]. Its domestic primary energy supply is based on hydropower (67%) and biomass (33%) [5]. Electricity production is almost entirely (99.7%) from hydropower, primarily from two large hydro projects, on Yacyreta (3.2 GW) and Itaipu (14 GW) dams [5]. These power plants are co-owned (50% shared installed capacity) between Argentina and Brazil, respectively. Despite this, 75% of the total electricity produced (55,282 GWh, [5]) in Paraguay from these plants is exported to the same two countries. The electricity imports from Itaipu constitute approximately one-fifth of Brazil’s final electricity consumption [7]. The two hydropower plants have a significant contribution to the country's economy, owing to their size as well as the scale of electricity trade between the nations.
The paradox is that Paraguay has one of the lowest electricity consumption per capita values in South America, almost 1563 kWh in 2014 (2nd lowest after Bolivia). The energy service satisfaction level is very low and one-third of the population lives in extreme poverty [8]. The very low electricity tariffs and the high losses in the transmission (4%) and distribution (17%) network of the country make it difficult to increase access due to the poor financial returns, exacerbated by the inefficiency of the transmission and distribution system. Nevertheless, the national electric power distributor ANDE aims to improve the efficiency of the local grid for the period 2016–2025 [7]. Another challenge is the uncertainty of the electricity export prices in the coming years and the domestic revenues generated by those as the power purchase agreement for electricity exports for one of the two projects is due for renegotiation in 2023. Explicitly, Annex C of the Itaipu treaty specifies the electricity export price (45.2 USD/MWh) between Paraguay and Brazil. Brazil pays to Itaipu Binacional, the cost of producing the electricity and a compensation rate of about 9 USD/MWh to Paraguay for using the part of the Paraguayan share of the electricity produced [9],10. The electricity generated by Itaipu belongs equally to Paraguay and Brazil. Since Paraguay cannot use all the energy that is entitled to, by treaty, it must cede what it does not use to Brazil, which pays Paraguay a fixed cession rate in addition to the generation cost. The Annex C was signed in April 1973 and will be renegotiated in 2023. The result of the negotiations will affect the country´s future economic and social development. One of this paper's objectives is to model aspects of this electricity export price uncertainty and assess its impact on all the other energy decision-making needed to meet the domestic electricity demands (under different scenarios) until 2040. The three demand scenarios based on different electricity growth (Reference, Medium, High) for the analyses have been selected given the dynamic nature of a developing economy like Paraguay's.
Paraguay faces particular other challenges related to its overall energy consumption. The country doesn´t have any domestic fossil fuel reserves and relies entirely on imports for the different sectors (e.g., the transport sector) [7]. Also, for residential energy use, the consumption of traditional biomass is significantly high, a contributing cause to deforestation [5].
Long-term energy modeling and tools can explore dynamics and associated risks in undertaking large-long term investments in the power sector (e.g., use of energy reserves, affordability, energy security, finances, capacity investments) to meet a nation´s domestic growing demand in the future. There are various modeling tools for energy planning [11,12,13,14,15,16]. Two wide-spread modeling approaches are also categorized in top-down and bottom-up, and there are existing studies that integrate those two modeling approaches [17,18,19,20,21,22,23,24]. The top-down models focus on the broader economy and the macro-economic relationship of the system´s components with the energy sector and incorporate feedback effects between different markets, considering changes in prices and incomes. The bottom-up models focus primarily on the energy system (e.g., energy supply processes, conversion technologies, end-use demand patterns) and are technology-specific, framing around mathematical programming problems. They do not account for price distortion or economy-wide interactions and income effects [25],26.
To address the challenges mentioned above, this study focuses primarily on Paraguay’s electricity supply system. It provides insights for strategic planning by producing cost-optimal development pathways for the electricity system. Under different electricity demand scenarios, it provides a cost-optimal power generation mix to meet plausible future local/regional electricity demands. Identifying a cost-optimal generation mix, may help Paraguay address the question of how to better use its hydropower electricity for the country´s socio-economic development. Analyzing the implications of the demand risk for the government of Paraguay and Itaipu dam under the different demand and electricity export prices scenarios is essential for long term energy planning. As the Itaipu debt is expected to be paid by 2023, the future development of the electricity export price of Itaipu will affect the balance of electricity exports to other countries and the total revenues for the government would be beneficial to be examined. The study uses an open-source cost-optimization tool for medium to long-term energy planning (OSeMOSYS).
The paper is organized as follows. In Sects. 1.1 and 1.2, there is a brief introduction to the country´s economic context and its energy-related issues and policies and later a literature review on decision analysis and energy planning for reforming national policies. The methodology of the model development and the different demand scenarios analyzed are presented in Sect. 2. In Sect. 3, the results are investigated and discussed, and in Sect. 4, the conclusions and policy implications of this study are presented.
Country background and energy issues
Paraguay is a land-locked country located in South America. It shares a border to the east with Brazil, to the south-west with Argentina and to the north with Bolivia.
The economy of Paraguay has experienced a steady growth with an average GDP growth rate of 5% for the period 2010–2017 [8]. Nevertheless, it is still the second poorest nation in South America after Bolivia [8]. The service sector represents most of the country´s economy, 48% of the GDP in 2018. Table 1 presents the profile of the country.
The total primary energy supply of Paraguay was 295 PJ in 2017, with hydro constituting around 20%, biofuels and waste 44%, oil products 36% and coal less than 1%. In that year, electricity exports accounted for approximately 53% of the country´s total energy supply, presenting an average annual increase of 1% the period 2010–2017, while the charcoal exports around 1%. During that period, the domestic electricity supply increased with an average growth rate of 6% while the share of the electricity exports out of the domestic electricity supply decreased with an average rate of 5%. Paraguay´s imports were 105 PJ in 2017, of which the oil product’s share was 99.96% and charcoal´s share 0.04%. The total final consumption was 266 PJ in 2017 with the transport sector to account for most of it (40%), followed by the residential (28%), industrial (25%) and commercial and other (7%) sectors. In the transport sector, the country has started using biofuels with E25 as a blending mix for bio-ethanol and 1% for biodiesel to decrease fossil fuel emissions by 20% by 2030 [5,27,28].
The total installed capacity of the country was 8844 MW in 2017, with hydro constituting the majority (99.7%). The electricity system of Paraguay is mainly powered by two binational (Itaipu, Yacyreta) and one national (Rio Acaray) hydropower plant. The Parana River, located in the Southeastern area of the country, is responsible for most of this hydroelectric generation potential. The Itaipu Binacional hydroelectric dam is the 2nd largest operational hydroelectric energy producer in the world and a cornerstone of the country´s energy system [29]. The guaranteed electricity production in Itaipu is 75 million MWh, but the average production is around 90 million MWh. According to the Itaipu Annual report, the production exceeds the nominal capacity of generating units mainly because of its operation and maintenance care. In 2019, one of the driest years since the beginning of the operation, Itaipu produced a total of 79,444,510 MWh. In 2016, the production reached a total of 103,098,366 MWh, a new world record in the annual generation. Its previous record was reached in 2013, with 98,630,035 MWh [30].
The participation of Itaipu electricity in the Paraguayan market has been increased from 73% in 2012 to almost 90% in 2019. This gradual increase emphasizes the importance of Itaipu´s electricity supply to the Paraguayan electricity market. However, Itaipu´s supply in the Brazilian market has been decreasing throughout the years due to the rise of the Brazilian demand and the increase in the use of Paraguayan electricity [30].
The large and continuous flow of the Parana River, and the good maintenance and operation records of the enterprise, makes it possible for Itaipu to supply over 10% of the Brazilian electricity demand and 80% of the Paraguayan demand all year round. The decrease in generation during the winter months corresponds to the decline in demand [30].
The hydropower production is reflected in the very low electricity tariffs in the country (0.054–0.076 USD/kWh) [31]. The total electricity demand was 11,560 GWh in 2017. The residential sector was the primary electricity consumer (43%), followed by commercial and public services (37%), and industry (20%) one [8].
Despite Paraguay having an available hydroelectric surplus and an estimated hydropower potential of 56 GW the western region of Paraguay often has difficulty in accessing electricity due to the geographical location of the electricity generating plants in this part of the country [32]. The population in this region must burn fossil fuels, or look for other ways, to satisfy the demand for electricity despite the availability of solar and wind energy potential [33, 34]. The country could also invest in renewable energy sources other than hydropower. However, several times throughout the year, solar and wind energy is limited, so the population in this region must proceed to the burning of petroleum derivatives, or other sources, which leads to the emission of CO2. This issue, along with indoor air pollution, often prevents improving the quality of life of society in that area of the country.
Furthermore, the solar and wind energy potential could be used as alternatives technologies for electricity exports to other countries [6,17,32]. However, the main challenge is sourcing foreign investment, given the low financial returns (low regulated electricity tariffs).
Large hydropower projects as the backbone of energy systems
Investments in large hydropower projects are associated with socio-economic impacts and environmental benefits and risks [35,36,37]. Investing in large hydropower projects for regional development through cross-border electricity interconnection projects can offer opportunities as well as risks. A risk associated with undertaking large long-term investments in the country´s energy policy plan is the implication of sudden shifts to other potential technologies to meet the country´s domestic growing demand in the future.
Yet, much is to be gained from the exploitation of hydropower. In the case of Paraguay, countries relying on large hydropower projects face particular vulnerabilities concerning energy security, socio-economic development and geopolitical relationships (Itaipu Treaty, [9]). In the case of Brazil, the country generates around 80% of its electricity from hydropower (83 GW) [5] and, in its energy expansion plan for 2011–2020, planned to increase this capacity by around 20 GW, investing in 30 additional large dams in the Legal Amazon region. However, several of those plants will be financed and built by Brazil in Peru, Bolivia, Ecuador and Guyana without taking into consideration environmental (water availability in river basins) and social impact in the Amazonia region [38].
In Paraguay, the main source of electricity has been and will continue to be that of hydropower. Besides, there is potential that has not been exploited yet with Argentina [39]. Indeed, the hydroelectric energy generated by Itaipu, the part corresponding to Paraguay, could be used to promote national development but from a different approach than the traditional one [40]. The energy transition is being promoted to replace oil derivatives with renewable resources.
Quantitative studies using optimization modeling have been used to investigate the issues above (socio-economic viability, environmental concerns) for energy development and provide insights for long-term planning, electricity trades and policy implications [14]. One of those is the South America Model Base (SAMBA) developed in OSeMOSYS [41]. The analysis examined the transformation of the overall generation mix in the continent under different electricity trade scenarios taking into consideration strategic large hydropower plants. Also, the study highlighted the cross-border potential electricity trade that Bolivia could have with neighboring countries by investing in large hydropower power plants [42]. The analysis above does not include the annual revenues from the respective countries' electricity exports, which could be used by each government to finance the upcoming power plant projects. Also, the SAMBA model could be soft-linked with a project finance input–output model to estimate the potential annual payments for each government from electricity exports of a specific hydroelectric power plant. Both of those concepts are analyzed in our study. A continental electricity trading scheme such as the SAMBA one could complement our research to identify electricity trades with other countries except for the ones to Argentina and Brazil. Moreover, in our study, the SAMBA study's techno-economic assumptions for Paraguay and the list of power plants considered are updated with the latest ones.
Another study investigated the local socio-economic impacts (GDP, public revenues) of large hydropower plant development in a developing country (Brazil as a case study) using an econometric approach [43]. Based on this research, the country will boost its economy in the short-term during the construction of the hydropower plants. However, in the long-term, the effect will be low, with little to no improvement in socio-economic conditions. Besides, investing in small hydropower plants was reported to have a more favorable local impact than larger plants, especially for agricultural GDP. This paper focuses only on the local effects of site construction and does not evaluate the overall effects of the electricity transmitted to other parts of the Brazilian economy [43]. A similar study could be conducted for Paraguay, which is missing from the current literature and linked with our research outcomes, specifically the future identified hydropower plants and the transmitted electricity.
Another study applied a Multi-Criteria Decision Analysis based on the Analytic Hierarchy Process considering four policy options for Paraguay to investigate the most promising ones from economic, technical, political, social and environmental points of view [44]. An outcome of this study was that the most promising policy options to affect the society of Paraguay positively are the establishment of small industries and allow for high electro-intensive industry penetration levels. Also, since the power system of the country is mainly based on the two-large binational hydropower plants (Yacyreta, Itaipu), it makes it difficult for the state to diversify its power generation mix at the future. However, this study only focused on which policy option could be the most favorable one to exploit the excess electricity to Brazil. As in our research, a cost-optimization modeling approach was used to identify any potential cost-optimal future implementation of new power plants and how, through different electricity export regimes, the generation from Itaipu could shift to either cover domestic electricity demand or increase electricity exports. An integrated study of those two could better understand the most promising policy option considering the specific annual levels of surplus electricity among a framework of scenarios with changes in electricity demand and export prices.
The study on learning lessons from Paraguay’s productive hydropower system proposed that the country should invest in high consuming energy industries instead of electricity exports [45]. In our analysis, we identify by using a cost-optimization energy systems modelling framework the trade-off between electricity exports and different electricity demand projections and indicate the annual revenues which could be used for different purposes based on governments policy plans (e.g. invest in high consuming energy industries). In that way, in the high electricity demand scenario (HED) that considers the penetration of high electro-intensive industries in the country the government can identify the financial and technical-power generation capacity implications on its future energy transition. Annex C of the Itaipu treaty will be revised in 2023. A study investigated different scenarios related to electricity export prices between Paraguay and Brazil and how those will affect the country´s social and economic conditions [46]. However, in that study, a bottom-up simulation tool for Long-range Energy Alternatives Planning system (LEAP) was used, a version of the tool that is not suitable for financial planning and to identify least-cost policy solutions since is based on demand-driven [47]. The novelty in our analysis is that we applied a cost-optimization tool (OSeMOSYS) [48,49] for long-term energy planning to identify the cost-optimal power generation mix and considered different scenarios related to electricity export prices between Paraguay and Brazil and different electricity demand scenarios to provide a broader understanding of the energy transition.
Among others, a study analyzed the economic, social and environmental impact, which involves reducing the export of hydroelectric energy and influences the need for industrialization in the country, identifying which are the most complex productive sectors according to the theory product space [50]. In this study, the social criterion taken into account corresponds to the number of jobs that could be generated with the implementation of the selected industry. However, for the environmental criterion, the greenhouse gas emission rate (CO2) was considered and for the economic criterion, the Revealed Comparative Advantage (VCR) index was considered. This is not considered in our analysis. Nevertheless, our study can complement the previous one by identifying the future installation of power plants and the associated job creation [51] and the drivers of the electricity demand (e.g., GDP). By identifying the products or sectors that present the most strengths and potential to increase the economic development of Paraguay [50], the government from our analysis could identify the accumulative revenues from electricity exports to Brazil and decide accordingly to use those to boost the economic growth of different sectors.
Another techno-economic analysis focused on providing recommendations for Paraguay on a high level hydro based sustainable development strategy with the following pillars: (1) institutional reform and technical improvements of the domestic electricity sector, (2) drafting an industrial strategy based on Paraguay´s comparative advantages and reliable access to clean energy at competitive prices, (3) more favorable and fairer pricing on Itaipu´s sales to Brazil, (4) devising a plan to transition to a green economy and (5) ensuring that revenue collection and management systems are efficient to fund this strategy. This report primarily focuses on Paraguay's electricity sector and is conducted following a qualitative research method based on historical country data and planning strategies to reach conclusions. It can provide an overview of Paraguay's most critical comparative advantages and the barriers holding back sustainable development [52]. One of those is the problems faced by the electricity sector outlined in the report (e.g. low cost of generation, the tariffs, significant reliability constraints with frequent outages, the relatively high transmission and distribution losses) and the lack of coordination due to institutions during the planning phase for future investments among the stakeholders. The authors also believe that Paraguay has not received a fair price for its exported electricity to Brazil. Our study considers those challenges in the electricity supply system as input parameters in the OSeMOSYS model (Sects. 2.1 and 2.2). It shows the government's implications of different electricity demand scenarios and export prices to Brazil, following both a quantitative and qualitative approach to develop appropriate strategic energy planning.
Our study is a novel application since a similar analysis for Paraguay, using a cost-optimization modeling framework for long-term energy planning (OSeMOSYS) considering different electricity demand projections associated with electricity export prices to Brazil for the period 2018–2040, has not been conducted before. Furthermore, the modeling outputs and specifically the electricity exports from Itaipu to Brazil were soft-linked with an input–output project finance model to identify the annual revenues from electricity exports for each scenario missing from the current literature. The main topics analyzed in our work are the followings:
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Strategic energy planning using a cost-optimization modeling framework for long-term energy planning could help define cost-optimal future power plant investments to cover Paraguay´s future electricity needs.
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What are the implications for Paraguay´s national revenues and security of supply of different hydroelectric power export regimes?
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Insights for Paraguay's government on energy transition (e.g. capacity, generation mix, electricity exports) and comparing the government's revenues by setting specific electricity export prices to Brazil to boost the country´s economy.
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Analysis of trade-offs between electricity demand growth and export prices to Brazil.