Drivers of Coordination Effects

According to the rationale of coordination effects, they are producing efficiency gains from rule-guided behavior that can be anticipated, making them attractive for others to adopt and follow the very same institution (e.g. targets, limits, standards). Since the 1950s, different actors adopted and applied laws and norms to develop the country’s national energy resources with a national welfare goal. To the private sector and the future institutional orientation of the energy system, liberalization reforms increased private competencies and prompted side-effects on energy decisions through new laws and regulations.

Subsequent to liberalization reforms, coordination effects altered individual accounts for electricity production through three rule-guided norms that can be clustered into market regulation, environmental impact assessments, and carbon mitigation incentives. These norms came into effect more or less simultaneously and began shifting energy decisions after the 1990s. Evidence of these effects provides possible justifications for the reinforcement of hydroelectric projects, as well as for advances in wind parks, and initial steps in solar energy at larger scales.

New laws regarding liberalization of the electricity sector in the country authorized the ICE to buy electricity from private companies “whose primary energy sources are hydropower, geothermal, wind or another non-conventional renewable source” (Law 7200).¹⁰³ However, during this decade private hydroelectric installations continued growing faster than other alternative renewable energy projects. Nearly 27 hydroelectric plants of small and medium capacities were built under co-generation Laws 7200 (1990) and 7508 (1995) (Cartagena, 2010) versus three private wind parks, built between 1990 and 2000.

In terms of market orientation, the new approach of electrical regulation was assumed by the Regulatory Authority for Public Services (ARESEP). According to the methodology initially

103 In this Law, a non-conventional renewable source includes sources that use any basic element, except fossil fuels, mineral carbon or water for energy production (Law 7200, Art.4).

125 established by the ARESEP, the cost of private generation should be lower to that of the ICE (i.e. principle of avoided cost). However, this approach is limited in providing incentives for improving efficiency and reducing costs (Dixit et al., 2014).

In addition to market regulations that stimulated hydroelectric projects, another group of norms started to deal with the environmental impacts of these projects. Formal regulations, on Environmental Impacts Assessment studies, were initiated in 1995 with the creation of the National Technical Secretariat Office of the Environment (SETENA). Moreover, state and private developers started to adjust their behavior to this norm through informal channels of diffusion as well.

Environmental regulations were also in line with the growing importance of Corporate Social Responsibility (CSR) that emerged as a form of corporate self-regulation to deal with environmental impacts and legitimacy problems. According to previous studies, since the 1990s, Costa Rica experienced a second phase of CSR strategies, by the hand of multinationals that included CSR within their corporate policies (Empresarial, RIDRS, 2005).¹⁰⁴ This was also confirmed during interviews at the ICE.

The ICE’s planning department managers refer to internal processes of reengineering taking place, in the 1990s, that gave birth to the systematic incorporation of the socio-environmental variable (Interview 4L, 2013). As a result, the ICE created the Environmental Planning department and special attention was given to new methodologies of environmental impact assessment at projects’ initial stages. Since then, these issues gained relevance in the Institute’s agenda.

While private and state investors directed their attention to projects’ local effects, another group of instruments started to gain relevance in attention to impacts, at a global scale, from reducing carbon dioxide (CO2) emissions. In the 1990s, the Costa Rican government and the Ministry of Environment became active partaking in joint implementation strategies (JI) and clean development mechanisms (CDM). Furthermore, the country also developed similar instruments, at the national level, in the 1990s, through the Payments for Ecosystem Services (PES) and in the late 2000s, in the promotion of carbon neutrality by 2021.

Carbon mitigation incentives created a rule-guided behavior that encouraged decisions on renewable energy sources, applicable to private and state investors. Two considerations, from a calculus approach, help to explain their adoption from national actors’ perspective. First, the innovative mechanism of a global carbon market coincided with the oil price shock, in the early

104 The first phase was during the 1930s when foreign companies invested in infrastructure in isolated areas. (Empresarial, RIDRS, 2005).

126 1990s, and the oil price speculation again in the late 1990s, which increased oil prices and attracted interest on alternative renewable sources worldwide. Second, global climate change and national security concerns facilitated communication channels between governments, corporations from industrialized countries, electricity investors at the national level, and non-governmental organizations (Interview 4H, 2013).

The first consideration points out to individual accounts and profit motivations in decisions towards alternative renewable sources. The second refers to more systemic accounts discussed in the next sections. At any rate, all three private wind projects that went online in this period became part of the JI strategies issued by the UNFCCC.¹⁰⁵

Similarly, during the 2000s decade, all private wind and biomass projects, as well as the ICE wind park were registered at OCIC (Landreau, 2006). Project reports from these initiatives remarked the displacement of fossil fuel electricity units and the subsequent reduction of CO2

emissions. However, the number of projects implemented jointly in Costa Rica was relatively small (i.e. around 10), and most of them were on forest conservation, rather than renewable energy projects.

Likewise, the national environmental strategy of the PES had focused on the conservation of watersheds and natural areas for carbon mitigation goals (i.e. offset carbon emissions at a global level). Over the years, the number of projects at the OCIC did not increase much (i.e. around 17 in 2015). Nevertheless, carbon mitigation incentives applied to all wind projects built in the country, in the 1990s, and most of the new ones, as well as to biomass energy projects (OCIC, 2015).

Nonetheless, the question remains why private and state developers choose wind or biomass energy projects, instead of opting for solar energy or other alternatives. Asked about this inquiry, non –governmental organization and international cooperation partners in Costa Rica and Central America indicated that their focus was on the promotion of a range of ‘commercial’

energy sources.¹⁰⁶ According to them, their role was as facilitators doing local capacity building and taking advantage of “non-oil, domestic, indigenous, and commercial energy sources”

(Interview 4H, 2013).

105 Wind parks were the Plantas Eólicas S.A Wind Facility; the Tierras Morenas Wind Park Project and the Aeroenergía S.A. Wind Facility, financed partly by investors and international cooperation, such as the US International Development Agency.

106 The term ‘commercial’ energy sources is based on the nature of their transaction in the market, it excludes energy sources like firewood, biomass and animal dung. (Clasificacion of Energy Sources.

(n.a.). Retrieved April, 01, 2014, from

http://www.ces.iisc.ernet.in/energy/paper/alternative/classification.html)

127 Further, responses from private and state investors reported that wind energy was, at that time, already an established technology and its selection was also motivated by the opportunity presented from international players in the wind industry (Interview 5D; Interview 1A;

Interview 1P; Interview 1G, 2013). As pointed out by a project manager, at the time, “wind resources were not only abundant, but the technology also had the support of international partners” (Interview 5D, 2013).

Solar energy systems (i.e. thermal and off-grid photovoltaic applications) were sold on the national market, by few small private businesses, since the late 1990s. However, the systems were at micro, and much smaller scales as compared to projects included in the JI and CDM schemes with installed capacities of over 3.4 MW.¹⁰⁷ In the interviews carried out, solar energy entrepreneurs repeatedly referred their interest in benefiting carbon mitigation instruments, but the lack of information and cost were considered the main barriers (Interview 5N, 2013).

According to the ICE’s solar energy project managers, given the size of solar installations it is not worth applying for CDM mechanisms (Interview 1Q, 2013). Therefore, solar energy remained outside the scope of the carbon mitigation rule-guided system. In addition, as late as 2010, employees in charge of those solar energy projects, within the ICE, refer to the need for technology research before further steps in larger applications. However, the situation started to change in the same year, given the interest from international partners of the solar energy industry (Interview 1Q; Interview 5H, 2013).

The first solar energy park, at a larger scale (i.e. the Miravalles Solar Park, 1MW) began operations in 2012, chiefly due to the interest of foreign partners. This park was designed as a demonstrative project donated by the Japanese government. For the government of Japan, the project was not only an opportunity to introduce solar electricity, as a clean energy option for Costa Rica, but also to promote Japanese technology and employment (Interview 3J, 2013).

Further steps on solar technology at larger scales have been cautiously taken. From the electricity producers’ standpoint (i.e. state and private investors and electricity distributors), this precautionary position is not completely misguided due a regulatory framework that is still at its initial steps. In interviews with private investors and academia respondents, they refer to some

“gray areas” of solar technology that still need to be clarified. They include the need for basic research at larger scales and other ambiguities in terms of socio-environmental impacts (Interview 3L; Interview 1A; Interview 1P; Interview 2C; Interview 2H, 2013).

107 ICE. (2007, June). Energía solar. Retrieved from

http://www.grupoice.com/esp/cencon/gral/energ/info/nuevas_fuentes.htm

128 A stable and predictable regulatory framework is crucial for the effective operation of any business (i.e. coordination effects). This is acknowledged by several players in the electricity market who initiated actions in this direction. They include the government, the regulatory authority, state and private investors and technology advocacy groups.

In the past few years, the promotion of alternative renewable sources, clearly evidenced in the case of solar energy, is taking advantage of the same rule-guided norms created in the 1990s.

During interviews with ARESEP officials in 2013, they pointed out that, currently, the regulatory authority is working on a new tariff methodology for solar energy electricity plants.

Similarly, they are working with SETENA to develop specific criteria for environmental impact assessments that includes specific aspects of solar energy installations. Until now, the Office has been using the methodology for hydroelectric projects (Interview 2F; Interview 3F, 2013;

Interview 2I; Interview 4B, 2013).

In this process, advocacy groups, such as ACESOLAR, became relevant actors in making solar energy visible and reaching massive commercialization. According to market regulation norms, the organization started working together with the Costa Rican Technical Standards Institute (INTECO) for the harmonization of solar components in the national market. In the same manner, it worked with ARESEP in the new tariff methodology and with SETENA to develop specific criteria for the environmental impact assessment of solar projects (Interview 2I;

Interview 4B, 2013).

In addition, ACESOLAR has supported technical studies regarding solar energy application in Costa Rica, as well as providing answers to main barriers ascribed to the technology. They include issues such as high cost, low efficiency, high variability, low load factor and lack of storage system. These are the industry’s areas of major concerns. However, from ACESOLAR and other solar energy advocators’ perspective, some of these concerns are considered “the myths of solar energy” limiting further progress on the domestic market (Interview 2I; Interview 4B, 2013). The term was used by ACESOLAR members, who refer to studies that indeed suggest that the technology is competitive and efficient in the country (Interview 2I, 2013). ¹⁰⁸ In the same direction, the government brought support to the ICE’s new Net Metering Pilot Plan or distributed electricity generation (DEG). ICE project developers remark that the implementation of the DEG plan has not only been positive from the perspective of users’

acceptance (one of their indicators), but also because solar energy is leading among the implemented technologies (Interview 2A, 2013).¹⁰⁹ Although, this plan is not yet defined nor

108 Results of this study are further discussed in Chapter 9.

109 From total installations, 95% have been for solar systems (107), the rest are combining solar and wind power applications (2), solar and hydro (1), wind (1), biomass (1) and hydro (1). By consumption sector,

129 regulated within the national legislation, it has been linked to new policy instruments that make reference to solar energy targets by 2020 (e.g. MINAE Directive 14-2011; VI National Energy Plan 2012-2030) (Interview 4G, 2013).¹¹⁰

After launching the carbon neutrality initiative in 2008, the Ministry of Environment followed a similar approach for the JI, CDM and PES incentives, largely based on carbon sequestration through reforestation and forest conservation practices. In 2012, the Ministry included a new strategy with the formalization of the “Carbon Neutrality Country Program for Costa Rica” (i.e.

Program País Carbono Neutralidad) (Acuerdo -36-2012 – MINAET). The program targets energy users, mainly local companies, which could compensate their carbon emissions by means of alternative renewable energies (e.g. co-generation, wind energy, solar energy). As part of the program, the Ministry created a carbon neutral certification system awarded to those who comply with the established standards.¹¹¹

In the period under review, individual accounts of energy decisions were triggered by coordination effects of ruled-guided behavior from market regulations (e.g. standards, tariffs), environmental impact assessments and carbon mitigation incentives. All of these instruments reinforced hydroelectric projects, especially the RORs. In this sense, environmental impact assessments similar to carbon mitigation and the PES program were also a useful instrument for investors to gain recognition in the national or global market.

In the case of carbon mitigation instruments (e.g. CDM), it is possible that initially similar reactions to the new incentive did not anticipate further commitments with alternative renewable energy, in the country, explaining the reduced number of projects. This also concurs with Landreau’s (2006) observation, which referred to the fact that the reduced number of projects registered before the OCIC is largely explained by a national energy system predominantly based on low carbon energy sources such as hydroelectricity. However, in the case of wind energy, the carbon mitigation instrument has played a role as an incentive to opt for this technology and develop wind parks together with foreign partners.

Following this argument, private and state developers choose wind energy or biomass projects, instead of solar energy, because the latter lacks the aforementioned coordination effects (i.e.

market regulation, environmental impact assessments and carbon mitigation incentives). The same also applies to other efficiency drivers, at individual level (i.e. learning effects and scale most of the systems are for residential consumption (83%), followed by general (14%) and industrial (3%).

110 The VI National Energy Plan 2012-2030 included the specific goal “to equip 10% of households with distributed generation from solar energy by 2020” (DSE, 2011).

111 This is the INTE 12-01-06 (“Sistema de gestión para demostrar la carbono neutralidad”), the single norm recognized by the government to demonstrate carbon neutrality.

130 economies). Interests on larger scale solar applications were just recently triggered by global industry developments.

More recently, the ACESOLAR, ARESEP, SETENA’s efforts, among other regulatory agencies, to incorporate specific criteria for alternative renewable sources, in particular, solar energy, illustrate the relevance of rule-guided behavior. Their actions began to have initial escalating effects, including solar energy targets, energy policies and plans in 2011. The same drivers operate at the ICE’s DEG and in the carbon neutral certification system.