In a region comprising 47 countries ranging from small Caribbean islands to continent-sized nations such as Brazil, each country presents very particular challenges related to its resources, geographical conditions and electricity needs. Some countries are heavily reliant on fossil fuel to feed their industrial development whereas others are excelling in taking advantage of renewable resources.
In this editorial, we analyse the implications for the telecom industry and outline an ideal scenario for regional telecom operators and towercos to succeed in reducing their energy consumption and streamlining their operational expenditure.
South America has excelled in the utilisation of its natural resources compared to other emerging markets and currently produces two-third of its electricity thanks to renewable hydropower. Respectively 99.3% and 98% of the Brazilian and Mexican population have access to electricity and almost every country in continental Latin America reaches fairly high (80%+) electrification rates.
That said, Central America and the Caribbean have a very carbon intense electricity production compared to South America, reported to be higher than North America and Europe. In a recent inter-governmental meeting, seven out of the thirteen Caribbean island nations - including St. Lucia, the British Virgin Isles, Turks & Caicos and Dominica, have committed to generate at least 75% of their electricity from renewable energy sources in an effort to reduce their carbon footprint.
However, it doesn’t come as a surprise that other Caribbean Islands and Central America haven’t committed to any green shift yet. In fact, countries like Haiti, Cuba, the Dominican Republic, Honduras, Suriname and Venezuela are all part of Petrocaribe, an organisation of eighteen countries which was originated by late Hugo Chávez back in 2000.
Under the agreement, Venezuela offers relatively cheap oil - based on a quota of barrels per day - to member countries which in return, must pay 60% of the bill within the first three months with the remaining 40% to be financed over a period of as many as twenty-five years at 1% interest rate. In exchange for oil, countries can also repay with goods such as food and raw material. With low priced oil and convenient repayment terms, it will take some time for these eighteen countries to commit to a green shift and lower their carbon footprint and dependance on diesel.
With over 93% of its electricity produced using renewable resources, 76% of it from hydroelectric generation, Costa Rica represents an exception and is currently working towards meeting its goal to become completely carbon neutral by 2021.
98% of LatAm population has a mobile signal
On the telecom side, the World Bank reports that 98% of the population in Latin America has mobile signal and 84% of households subscribe to some type of mobile service. A clear sign that substantial progress has been made over the past few years to reach out beyond metropolitan areas and start serving remote rural areas throughout the region, often with both electricity and telecom services.
However, according to the Inter-American Development Bank (IDB) there are still as many as 34 million people lacking access to modern electricity services, mainly concentrated in remote areas such as the Amazons, rural Peru and the Caribbean. Although representing a small percentage of the population, reaching out to remote areas is key to ensure countries develop to their full potential and economic growth is ensured at all levels.
Rural electrification represents a challenge for most countries in the region and local governments - Chile, Peru and Brazil to name a few - have developed several action plans to extend the national grid system or install renewable solutions (mainly solar) in remote areas.
The status of electricity transmission infrastructure is another key problem, with a distribution loss rate of 15.5% - among the highest in the world - due to theft and power outages. The rate of smart grid investments has been constantly accelerating over the past few years and many countries - from Colombia to Ecuador - are deeply involved in the development of smart city pilot projects.
A great driver for the change is represented by the need to keep the pace with the expansion of various industrial sectors and their specific power needs. What is the role of the telecom sector in bringing along the change and what alternatives do telecom companies have when reaching out to off-grid areas?
3G and 4G auctions and the expansion of - green - rural connectivity
Over the past few years, several governments have issued 3G and 4G spectrum auctions inclusive of license conditions requiring operators to extend their networks.
As an example, when awarding 4G wireless frequencies back in 2012, the Brazilian government set a specific rollout timetable to deliver services in certain rural parts of Paraná, Santa Catarina, Rio de Janeiro and Espirito Santo with the goal of full coverage by December 2015. A rural area is identified by the Brazilian telecom regulator Anatel as a site at least 30 Km from any municipality.
Historically relying on diesel fuel to provide power in remote regions, telecom operators - even before the entrance of towercos in the region - started to look at renewable energy systems due to a combination of rising diesel costs, declining solar and battery costs and to limit the financial losses caused by diesel theft. Energy opex represents one of the costliest line items on a telecom company financial statement and the average power and fuel expenditure is reported between 30-40% of its overall OPEX. A figure that can go above 50% in remote areas where transportation costs, theft and labour all add up.
PV solar or other green solutions used to be deployed selectively at key off-grid sites as the required initial capex didn’t justify the investment for sites with low tenancy ratios that would need a very long payback period. However, in recent years, the trend has shifted and many greenfield sites in remote areas are being built with the use of a combination of deep-cycle batteries and PV solar, rather than diesel.
The entrance of towercos in the global telecom scenario has created an incentive for all parties to look for alternative energy solutions in an effort to reduce network opex. However, whereas this is true in regions like Africa and India, where operators often pay an ‘all-in’ price for a tenancy inclusive of both space and power, the same cannot be said for Latin America.
Mobile operators in Latin America retain ownership of energy equipment and retain responsibility for refuelling and maintenance costs, hence not creating the same incentive to towercos to reduce energy opex. The opportunity to reduce energy opex may not be as great as in markets with unreliable grids and low electrification rates, but some sites in Latin America have as many as three diesel generators installed, one for each tenant, and the opportunities to create efficiencies through shared power solutions in such contexts is obvious.
Financial consequences of poor upfront investments
A growing trend worldwide is for tenants to push tower operators to provide fixed power and fuel costs, an ‘all-in’ price as applies in many markets in Africa, hence exposing towercos to fuel price volatility and to risks related to diesel theft. In such scenarios, towercos have greater financial motivations to streamline their operations, reduce O&M costs and seek alternative solutions such as renewable energy to improve site level profitability.
Such dynamics aren’t very common in Latin America, where local telecom regulators monitor quality of service very closely, and have previously handed out fines to mobile operators for bad connections and dropped calls. Such strict conditions have created additional disincentive for towercos to get involved in the energy game.
For example, Brazilian watchdog Anatel has in the past forced three mobile operators to stop selling new plans in certain states in light of growing complaints by customers over poor service, dropped calls and unreliable coverage. According to Anatel “a growing client base needs to be accompanied by more investments” and power losses are a typical cause of sites going down in remote rural areas. Investments in more reliable, yet capex intensive, renewable energy solutions could change the way rural sites operate and ensure higher customer satisfaction and quality of service.
There is great potential for towercos to have an active role in the energy game, create greater operational efficiencies by eliminating parallel energy infrastructure, and create value by improving site level profitability. However, this would require towercos to take on many risks related to the quality of service regulators expect. At present, LatAm towercos remain risk-averse and few have any interest in managing power – could this create opportunities for niche towercos targeting off-grid and unreliable grid LatAm regions?
