Policymakers play a critical role in establishing a credible, stable environment to facilitate the global energy transition. Public policies provide the necessary framework, incentives, and guidance to ensure diverse stakeholders move toward common objectives. Public policies also ensure country-level priorities and strategies are adequately considered, incorporated, and ultimately implemented to ensure an equitable move to a cleaner power sector.
Country priorities range from the deployment of renewable energies to reducing public debt due to high levels of subsidies. As the price of renewable energy has fallen and energy security has become a greater concern for many political leaders, new policies and country strategies are emerging to drive electricity sector decarbonization. These spotlights demonstrate that robust public policy not only leads to power sector decarbonization, but can also catalyze new economic opportunities to ensure a just transition for all.
These spotlights are part of RMI’s Global Energy Transformation Guide.
Related Spotlights
Fossil Fuel Subsidy Reform in Morocco
Uruguay’s Transformational Energy Policy
Fossil Fuel Subsidy Reform in Morocco
This spotlight primarily advances the priority outcomes highlighted below. These outcomes are further described in the complementary Points of Progress report and in the Fossil Fuel Transition Strategies report.
Exhibit 1: Priority Outcomes for Global Energy Transformation
Fossil fuel subsidies are government policies that reduce the cost of producing or consuming fossil fuels, such as coal, fossil gas, fuel oil, diesel, petrol, or liquified petroleum gas (like propane or butane, or simply LPG). Often, these take the form of price controls set by government authorities that are sourced from public funds. By keeping the retail costs below the production or market price, subsidies are frequently intended to support consumers and alleviate energy cost burdens.
Since subsidies often have wide popular support, they can be used as political tools to support elected or fragile governments. However, when volatile fossil fuel prices rise, they can represent significant contributors to public spending and debt. The IEA estimates that 2022 saw record-high direct fossil fuel subsidies globally, exceeding $1 trillion. Exhibit 2 shows the large increase in 2022, mainly as a result of rising fossil fuel prices in light of Russia’s war in Ukraine and other supply uncertainties.
These estimates also fail to account for the social costs associated with fossil fuel subsidies through externalities like pollution, climate change, or foregone tax revenue. When these are incorporated, the International Monetary Fund (IMF) estimates that fossil fuel subsidies may account for nearly $6 trillion, or 6.8 percent of global GDP. The implication of this is that reforming fossil fuel subsidies is critically important to both macroeconomic stability of individual countries, as well as meeting climate objectives by ensuring consumer costs are realistically reflecting market pricing.
Despite the substantial and continued challenges of fossil fuel subsidy reform, there have been some cases of success. For example, in Morocco, subsidies have been in place since World War II. The country also has limited domestic production of fossil fuels, meaning many of the resources needed to meet its energy requirements are imported. Despite these challenges, strong stakeholder engagement and support allowed a rapid phaseout of many fossil fuel subsidies. Additionally, the government took steps to protect the country’s most vulnerable citizens during this transition. While further work still needs to be done, Morocco is still collecting dividends from these policy interventions to phase out subsidies nearly a decade past the initiation of these efforts.
Insights
- Fossil fuel subsidy reform is a particularly challenging political issue, but Morocco has demonstrated that a managed, thoughtful approach with significant stakeholder engagement is a viable pathway for economies in similar circumstances.
- Consideration of the most vulnerable populations, especially those reliant on butane gas for cooking, ensured greater public support as Morocco considers other potential paths forward, such as renewables for butane subsidy swaps.
- Though fossil fuel subsidy reform covered the entire energy sector, accompanied power sector reforms and support strategies helped to insulate customers from shocks though new regulation and growth in less expensive renewable and distributed energy resources.
Fossil Fuel Subsidies in Morocco
The North African country of Morocco has relatively limited supply of fossil fuels and has been dependent on imports. As shown in Exhibit 3, the World Bank estimates that Morocco spends nearly $5 billion on fuel imports annually — a significant level of spending that Morocco has been focused on reducing since at least its 2009 National Energy Strategy.
Morocco began subsidies in 1941 to support price stabilization on a larger basket of retail products in the wake of volatility during World War II. These prices were gradually liberalized through the 1990s, including an attempt to tie fossil fuels to an indexing system in 1995 (that was subsequently suspended in 2000). Despite attempts to reform the country’s fossil fuel subsidies, a number of fossil fuel products and uses still remained subsidized (gasoline, diesel, fuel oil, LPG, and others).
Morocco’s subsidies were structured to set a fixed price for customers, while government spending filled in the gap between the sale price and international market price. Due to the volatility of international commodity markets, however, this structure placed a major constraint on fiscal planning, as the country could never be sure exactly how much subsidy spending would be needed on an annual basis.
These issues came to a head in the early 2010s when a combination of turbulent regional political events and rising global commodity prices caused a rapid increase in public debt that threatened Morocco’s macroeconomic stability. At its peak in 2012, the World Bank estimates that Morocco was spending 6.6 percent of its GDP on subsidies (with 70 percent of that on energy), and arrears on supplier payments began threatening the country’s ability to import fuel. As a result, Morocco explored options to reform subsidies in order to both reduce subsidy spending and create a more stable planning environment, as well as explore options to achieve climate goals. It is also worth noting that the subsidies as implemented were fairly regressive, mainly supporting those in the highest income brackets.
Phasing In Subsidy Reforms
In the wake of these macroeconomic and structural challenges, Morocco launched a subsidy reform effort in 2012 as part of a $6.2 billion line of credit extended by the IMF, as well as a number of other fiscal consolidation measures, such as hiring and wage freezes for civil servants and tax collection reforms.
Exhibit 4 shows the timeline of the reforms, initially taking effect in late 2013. The first phase of fossil fuel subsidy changes began with the reinstatement of a subsidy price indexation system on liquid fuels, similar to earlier program pilots. In this policy, the subsidy was capped, such that the remaining difference, if any, between the price a customer paid and the market price was passed through to the customer. It should be noted that at this time, fuel oils were included in the reform, which made up a large portion of Morocco’s electricity generation mix.
Exhibit 4: Timeline of Fossil Fuel Subsidy Reforms in Morocco
(Source: Adapted from Verme and Adbelkrim, 2017)
By February 2014, the government removed all price supports for gasoline and industrial fuel oils (though still officially administering prices through a running two-month average with the indexation system). Diesel faced a similar, albeit slower phaseout, with a gradual reduction of subsidies over the course of 2014, until they finally ended in 2015. While the country continued regulating prices through the indexation process though 2014, by November 2015, the indexation system was terminated, and all liquid petroleum began competing in the competitive market.
The electricity sector was particularly impacted by these reforms. It is estimated that the National Electricity and Water Company (ONEE) only paid around 40 percent of market price for fuel when subsidy reform began. When price supports were removed from fuel oil used for electricity generation in May 2014, Morocco developed a new system in which the subsidy was replaced by a one-time direct cash transfer to ONEE to support tariff adjustments across three years. This coincided with a gradual rise in regulated electricity tariffs, except for those in the lowest consumption bracket (<100 kWh per month). Still, when electricity prices began to rise in 2015, protests precipitated the development of a regulatory authority that set prices, providing some fiscal challenges to ONEE because prices were not necessarily linked to ONEE’s cost of service.
As part of a broader series of power sector reforms, ONEE has begun to at least recover energy costs (though not all capital costs), improving financial stability. Additionally, as part of its 2009 National Energy Strategy, the Government of Morocco set up the Moroccan Agency for Sustainability Energy (MASEN) that does planning and interconnection, in consultation with ONEE. This new entity created a parallel pathway to cleaner energy through better and more efficient operation of the existing system, as well as deployment of newer, cheaper sources of renewable energy without legacy challenges.
In the wake of subsidy reform, Morocco has managed to achieve universal electricity access through a rural electrification initiative. Given Morocco’s continued dependence on imported fossil fuels, energy security has also been prioritized in planning, starting with a 2009 National Energy Strategy that sought to secure 42 percent of its power capacity from renewables by 2020 and 52 percent by 2030. Unfortunately, this target has so far been missed, with at least 60 percent of its energy production still from coal, oil, or fossil gas, though there has been substantial growth nonetheless.
Equity and Stakeholder-Driven Approaches
Subsidy reforms are particularly challenging policy objectives because of their direct impact to country constituents. Especially in light of regional political tensions, Morocco approached subsidy reforms slowly. They were phased in over the course of a number of years, rather than all at once, to ensure families and consumers had time to adjust.
The government also embarked on a robust communication campaign, helping to explain the need for this reform broadly. Surveys identified the need for parallel support programs, like public transportation and social welfare programs to ease the burden on vulnerable populations. Potentially more impactful, however, was the fact that oil prices were low, making the subsidy reforms well-timed, which caused fairly limited impact to the ordinary consumer when they were instituted.
Finally, butane gas, an important fuel to many Moroccans in the form of 12 kg cylinders, was excluded from subsidy reform. This decision was partly driven by the disproportionate impact it would have on poor, rural, and agricultural users. To drive the country’s transition away from butane, the Morocco Agency for Development of Renewable Energy and Energy Efficiency (ADEREE) has tried to displace butane use with solar water heaters and agricultural pumps.
Some organizations have identified butane subsidy swaps to support these more climate-friendly programs as a high potential opportunity, though Morocco has not yet made progress in fully removing butane. Currently, butane subsidies make up around 4 percent of Morocco’s total budget, a number that is only growing in light of recent supply shocks. Reform of the subsidies without some type of replacement risks driving poor and rural residents into a significant energy deficit and may drive a return to biomass fuels. Morocco’s 2023 budget, however, indicates that butane subsidies will be removed by 2025, and will instead be replaced with direct cash transfers to qualifying families as a way to also support social assistance goals.
Conclusion
In the wake of these broader reforms, the Moroccan government has announced ambitious plans to increase investment in the renewable energy sector, such as the $9 billion Moroccan Solar Plan, though the nature of this plan, which focuses on megaprojects, has slowed its implementation. Professor of physics and Moroccan energy expert Dr. Amin Bennouna notes: “We are not at the 2020 milestone target of 42 percent and the biggest delay is the realization of the Solar Plan.” In a recently published paper, he identifies observed growth through distributed energy resources in Morocco, namely energy efficiency and distributed solar PV, which the government has more difficulty accounting for in official statistics.
Despite these challenges, Morocco’s subsidy reform efforts have provided an important lighthouse example in a region rife with direct fossil subsidies, showing a human-centered reform effort is possible with limited impact to citizens. Commitments by the government signal strong interest in growing renewable generation, even as demand grows. The successful efforts to reform fossil subsidies in Morocco provides much needed credibility to these commitments that are lacking in many other places.
Meeting Uruguay’s Growing Demand Through Renewable Capacity
Exhibit 1: Priority Outcomes for Global Energy Transformation
In 2008, the government of Uruguay approved an ambitious national energy policy that, by 2020, led to carbon-free generation reaching 94 percent of generation on the grid. Importantly, not only did this reduce the need for imported oil, it also diversified Uruguay’s generation mix, historically dominated by hydroelectric generation, to include significant wind and solar capacity, shown in Exhibit 2.
The broad consensus laid out in the Politíca Energética 2005-2030 (Energy Policy 2005-2030) highlights the complex challenges Uruguay needed to solve: energy security in light of limited petroleum resources, technological changes, demand growth, the need for renewables to preserve economic development and environmental quality, and ensuring continued access to energy to meet social needs.
Built on the back of crisis, the policy itself resulted in emissions falling by more than 20 percent since their peak in 2012, while enabling Uruguay to achieve remarkable levels of human, social, and economic development that stand as a model for inclusive public policies to enable climate-forward growth.
Key Insights
- Uruguay’s comprehensive energy policy laid out a long-term vision that helped align policy objectives to national needs, creating space and certainty for a variety of public and private market actors to increase clean energy deployment.
- Long-term certainty accelerated renewable deployment utilizing components such as fixed long-term prices for power generated, bonuses for resources deployed quickly, and requirements for the state-owned utility to purchase power, all of which created a low-risk investment environment that quickly attracted investors.
- The Uruguay government achieved near unanimous support for the policy through critical coalition building among political parties and other groups like unions; robust stakeholder engagement; and attractive incentives.
Securing Public Policy Support
Uruguay’s public policy achievements came as the result of two separate, but ultimately unifying, circumstances. The first was a string of power crises that struck Uruguay as a result of diminished hydropower production during a series of droughts from 1997–2007. In the early 2000s, nearly all power produced in the country came from hydroelectric generation. By 2005, just before Uruguay’s national energy policy was established, Uruguay had to import fossil fuels to meet 30 percent of demand. This was exacerbated by further droughts, forcing the government and state-owned power company Administración Nacional de Usinas y Trasmisiones Eléctricas (UTE) to purchase $450 million in climate insurance to hedge against oil import pricing. During Uruguay’s peak oil use in 2012, this additional fuel cost nearly $1.4 billion, requiring both state aid and resulting in rate hikes for customers.
The second major circumstance was a fundamental change in political power dynamics in Uruguay. In the shadow of a major economic crisis with its roots in Argentina, the people of Uruguay elected the center-left third party Frente Amplio (FA) into power with a majority government, which upset the then-dominant two party system and opened up the possibility for broader economic reforms. FA, led by President Tabaré Vázquez, articulated a new vision in light of the recent economic and then-ongoing energy crisis — the party saw energy as a strategic asset for the people of Uruguay, as opposed to simply an economic input.
In 2008, these circumstances came together, leading to Uruguay’s Energy Policy 2005-2030. It is an ambitious plan to decarbonize Uruguay, reduce overall consumption, and importantly, create a homegrown renewable energy industry. To achieve the long-term certainty needed to execute the policy, President Vázquez convened the Multiparty Energy Commission, which secured political buy-in for most related major legislative initiatives and ensured, even with political turnover, the policies would remain.
Implementing a National Energy Policy
Though approved in 2008, the national energy policy set a range of goals for 2030, reflecting a long-term commitment to transforming Uruguay’s power sector. Principally, the policy sought to diversify the existing energy mix away from imported fuels and hydroelectric towards more robust renewable technologies like solar and wind. The first major target was to achieve 50 percent of local renewable energy within the primary energy mix by 2015, which Uruguay exceeded by 7 percent. Other near-term activities focused on achieving 100 percent electricity access for all Uruguayans and a targeted effort to expand energy efficiency programs through new regulations.
Uruguay’s energy policy precipitated a number of new reforms to shore up and encourage investment in the renewable energy space. Similar to many countries, Uruguay found success in using auctions with guaranteed Power Purchase Agreements (PPAs) to secure privately-financed but low-cost wind generation, and even allowed for guaranteed offtakes for excess renewable capacity from industrial self-generation by the grid operator. Though not originally in-scope, Uruguay allowed solar PV to participate in auctions starting in 2013; they also developed net-metering protocols for small generation (e.g. small wind/solar, mini-hydro systems). Starting in 2010, Uruguay encouraged biomass generation (especially through waste and residuals) through feed-in tariffs to further support diversification.
Public-Private Sectoral Transformation
A major feature of Uruguay’s initiatives included a focus on economic and social development, leveraging strong public-private partnerships. Uruguay’s electricity sector is primarily managed by the state-owned UTE, which runs all transmission and distribution in the country. In 2012, during Uruguay’s peak emissions period, only 5 percent of the power generated in the country was from private sources. Estimates show that new generation is now closer to 60 percent private now.
Policy makers recognized early the need for outside investment and expertise and provided generous incentives for investors. Many renewable technologies, for example, are exempt from Value-Added Tax (VAT). A dedicated Wind Energy Programme saw the deployment of large scale renewable auctions to drive cost-effective private development, as well as long term (20 year) PPAs to provide investor certainty. UTE acts as the market buyer for all electricity. Roadshows by Uruguay’s National Directorate of Energy helped drum of support for international investors that saw more than $8 billion flow into the country’s renewable sector in the last decade. Additionally, UTE offered to pay higher prices if renewable projects were online before 2015, incentivizing developers to move quickly.
Realizing the Energy Policy’s Objectives
In 2018, Uruguay completed a “Voluntary National Review” of the UN Sustainable Development Goals. In this report, the government identified that:
- 99.7 percent of the population has access to electricity
- 97 percent of the electric energy mix is renewable
- Wind resources grew from 0 percent of the generation in 2008 to 30 percent in 2017
- Energy efficiency measures resulted in savings equivalent to 1.3 percent of national energy demand per year
Perhaps the most impressive results in Uruguay’s electricity sector focus on wind capacity, highlighted in Exhibit 3. By 2021, Uruguay had more than 1,525 MW of installed wind capacity representing 30 percent of the country’s total electricity generation. From 2010 to 2019, wind generation increased 68-fold, a massive jump that enabled Uruguay to reach its clean energy goals. Many factors contributed to this growth; however, cost was a primary driver. Wind has been much more cost-competitive than solar, biomass, and mini-hydro for both investors and UTE, especially with additional incentives to get the resources built quickly.
As wind costs continued to decline, and as more auctions were held to increase wind development, the auctions became larger and less restrictive for developers.
The mass influx of renewable energy projects created an energy surplus and an opportunity for energy exports to neighboring countries (primarily Brazil and Argentina), which created millions in additional revenue in parallel with reduced fossil fuel spend. 2021 was a record-setting year, with UTE generating $594 million from exported energy. The expansion of this renewables capacity has already paid dividends for Uruguay. For example, the La Plata River Basin had one of the worst droughts since the 1950s between 2019 and 2021, reducing hydropower drastically. In this instance, wind was able to make up the generation shortfall rather than oil.
Focus on a Just Transition
In addition to energy sovereignty and resilience concerns, the government ensured the expansion of renewable energy brought direct benefits to the people of Uruguay. This took the form of a multi-pronged approach, helping to build a diverse workforce while at the same time incentivizing the development of a local supply chain.
For example, early wind auctions required developers to utilize at least 20 percent local content, and maintenance in the first year needed to be at least 80 percent local labor. This policy was coupled with investments in new training programs to build capacity for the Uruguayan labor force — initially in construction, and now more focused on operations and maintenance. The ambitious nature of Uruguay’s energy transformation meant a rapid increase in “green” jobs, boosted by direct investments in programs like wind power technology courses at the Universidad de la República, as well as training facilities to create a local workforce of technicians and support staff.
While job growth itself was important, Uruguay leveraged this new capacity into a drastic reduction in new fossil generation, down to only 811 GWh in 2020, or less than 3 percent of total generation, from its peak of 3,745 GWh in 2012, shown in Exhibit 3. Rapid plant closures around 2012-2014 prompted Uruguay, a country with a history of strong unions, to partner with the International Labor Organization (ILO) to support this transition. ILO provided funding to pilot the implementation of its Guidelines for a just transition towards environmentally sustainable economies and societies for all, allowing for greater research and dialogue on which to base further just transition programs.
Working closely with the unions, Uruguay developed a transition plan for workers and fossil assets. Consensus between the unions, trade organizations, and government allowed some level of planning certainty and funding to be secured to support worker transition — a majority of which was accomplished through financial support for early retirement of workers in the fossil industry.
Conclusion
From a public policy perspective, Uruguay’s rapid transformation has been remarkable. In less than 20 years, Uruguay has achieved the highest penetration of wind and solar in Latin America and ranks among the best in the world in terms of overall renewable electricity generation as a percentage of total. Responding to energy and economic shocks to make a case for action, the newly elected FA was able to coalesce a broad coalition to provide both near- and long-term support for the country’s energy policy that ultimately laid the roadmap for success.
Though inspiring, transformation within the electricity sector has not been without pitfalls. While renewable investments between 2010-2016 were about $5.6 billion, investments between 2016-2021 were only about a tenth of that. This reduction is primarily down to demand not growing significantly as new generation has come online, sometimes requiring curtailment. This risk of oversupply exposes UTE to liabilities in the PPA contracts that allow generators to be compensated in a take-or-pay model. Additionally, Uruguay’s residential rates are two to three times higher than neighboring countries and higher than many countries at similar levels of development, meaning that much of the savings UTE sees in generation is not being passed on to residential customers.
Despite some of these challenges, Uruguay can serve as a model for many middle-income countries looking to transition their electricity system away from fossil fuels. The long-term nature of the country’s energy policy and political stability attracted high levels of investment, while local content requirements ensured that domestic industry could thrive, an important aspect given the strong role of government and unions in Uruguayan history. Since partisan unity may not be achievable in many countries, Uruguay is an instructive case for the use of diverse coalitions to achieve energy policy outcomes, especially in countries that look to renewables to support broader industrialization.
