Energy Policy 108 (2017) 312–321

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Energy Policy

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Energy transitions and emerging economies: A multi-criteria analysis of MARK policy options for hydropower surplus utilization in Paraguay ⁎ G. Blanco , R. Amarilla, A. Martinez, C. Llamosas, V. Oxilia

Polytechnic Faculty, National University of Asunción, Paraguay

ARTICLE INFO ABSTRACT

Keywords: In the context of increasing global efforts to migrate towards more sustainable energy systems, Paraguay is Analytic Hierarchy Process (AHP) notable for boosting a power system based entirely on renewable sources. Paradoxically it has one of the lowest Emerging economies rates of electricity consumption in Latin America. Hence, a carefully crafted energy transition policy aimed at Energy transitions maximizing its energy resources could be the cornerstone of the country's long-term development strategy. The Public policy under uncertainty process of crafting public policy, particularly for emerging countries, entails an intricate decision problem Multi-Criteria Decision Analysis (MCDA) involving several policy options with the potential to influence the country's welfare and all dimensions of socio- economic development. Thus, we present a policy-making tool applied to the multi-criteria decision energy policy problem in Paraguay, based on an Analytic Hierarchy Process model, which can aid in the crafting of more nuanced decisions. Here, four policy options are considered based on economic, technical, social, environmental and political criteria. Our findings are significant for the on-going policy debate on the “surplus question” in Paraguay and suggest that, considering the model employed, a policy oriented at directing the surplus to leverage the industrial cluster development is the best option. Additionally, we believe the proposed model could benefit other emerging economies for addressing similar policy dilemmas.

1. Introduction electric power generators in the world, getting its energy from hydro- electric plants built in association with Brazil (Itaipu) and Argentina Because of the need to migrate to increasingly renewable and (Yacyreta) holding a 50% share in each project. Itaipu has an installed cleaner energy systems on the face of the widely acknowledged non- capacity of 14000 MW, with an annual average production of sustainability of the global energy systems, countries all over the world 98,287 GWh and Yacyreta has an installed capacity of 3200 MW, with have been increasing their efforts to secure long-run energy security an annual average production of 20,867 GWh (Sauer et al., 2015); based on sustainable energy sources. Among the tasks which must be however, the country's consumption levels are very low. The World addressed to attain these goals, are the energy mixes’ diversification to Bank estimates Paraguay's domestic consumption per capita at reduce the systems’ vulnerability, and the improvement of the employ- 1400 kWh/year, equivalent to one third of the consumption levels of ment of existing energetic resources to maximize their utility. To effect Brazil and Chile (World Bank, 2014). these tasks, governance and decision-making processes at government Furthermore, the country's indigenous primary energy production level play a prominent role (Markard et al., 2012). While the call for an is based wholly on renewable energy sources: hydropower and biomass. Energy Transition is a global issue, the task of re-steering national In contrast, its consumption mix is made up primarily of fossil fuels policies to achieve the necessary transformations rests predominantly (38%) -the transport sector being the largest user- and unsustainable in the hands of domestic governments. biomass (44%) -used mainly by households for cooking and heating, Paraguay presents an interesting case of study, highlighting a and by the industry (Ministry of Public Works, 2015). Although it is possible transition from an unsustainable biomass-burning running one of the largest exporters of hydropower in the world, electricity economy towards an increased use of the already available clean and makes barely 18% of its final consumption mix. The significant sustainable electricity. The country's Energy Sector is a very particular participation of unsustainable biomass -largely extracted from unma- case amongst other emerging economies. For instance, given the sharp naged forests, contributing to the country´s already high deforestation divergence between its hydropower installed capacity and the average rates - and of imported fossil fuels, could be reverted by taking full electric consumption Paraguay is one of the largest per capita hydro- advantage of its hydroelectricity surplus.

⁎ Correspondence to: Facultad Politécnica, Universidad Nacional de Asunción. Campus Universitario San Lorenzo, San Lorenzo 2111, Paraguay. E-mail address: [email protected] (G. Blanco). http://dx.doi.org/10.1016/j.enpol.2017.06.003 Received 17 October 2016; Received in revised form 29 May 2017; Accepted 1 June 2017 0301-4215/ © 2017 Elsevier Ltd. All rights reserved. G. Blanco et al. Energy Policy 108 (2017) 312–321

The country's already existing large hydro power surplus opens up a compensation in accordance with the Treaty which stipulates that the real possibility to enable a transition towards a more sustainable surplus not consumed by one of the parties, in this case Paraguay, shall energy system, provided that the solutions proposed by the policy be transferred to the other contracting party, Brazil, limiting the chance makers are aligned with the goal of making the most out of the to sell the energy to third-parties. Annex C of the treaty containing this country's surplus hydropower for the benefit of the society. Hence, provision is due to be revised in 2023. taking Paraguay as a case study, the goal of this paper is to contribute Despite of being one of the largest exporters of hydroelectric power with the use of an AHP-based tool to support decision making in in the world, almost half of its domestic energy consumption is made emerging and developing economies in the context of energy transi- up of biomass with a 44% participation of this energy carrier. tions. Additionally, more than a third of its energy consumption basket In this work, we consider Paraguay's decision making problem by corresponds to oil fuels at 38% (MOPC, 2015; Amarilla et al., 2015) looking at four hypothetical policy options: Continue with the current while electricity, its second top export (Center for International situation by continuing to cede hydropower surplus to Brazil (continu- Development at Harvard University, 2016), constitutes barely around ing with the normal course of operation) (A1); Selling hydropower 18% of its final energy demand. Not taking full advantage of its surplus at the Brazilian wholesale power market (A2); Installing an electricity surplus, plus the significant participation of non-sustainable electro-intensive aluminum factory (A3), and; Incentivizing the devel- biomass and oil-based energy sources is a clear imbalance detrimental opment of small industrial parks with an accumulated electricity to the country's energy security, the environment and the population's demand of 1100 MW (A4). To carry out the assessment, we present a quality of life therefore touching upon all fronts: social, economic, and multi-criteria decision analysis (MCDA), based on an Analytic environmental. Hierarchy Process (AHP) model under five criteria: economic, techni- On a positive note, the country's already existing large hydropower cal, social, environmental, and political feasibility. Even more, we posit surplus opens up a real possibility to make feasible an energy transition that the use of MCDA/AHP in emerging economies can help by with relative ease through the redirection of the country's Energy providing a more holistic and multilateral view to decision making Policy guided by a willful decision to encourage the spread of hydro- processes and allow a more balanced approach to energy policy power in its energy consumption basket. Fostering increased consump- making. tion of indigenous hydroelectricity entails encouraging a transition This paper is organized as follows. After a short background on the from other less sustainable energy sources and an increased use of country's energy issues, a brief account of state-of-the-art literature on modern energy sources, such as electricity as opposed to unsustainable Energy Transitions and decision making in public policy is made in the biomass and imported fossil fuels. Moreover, it could benefit the next subsection. In Section 2, we present the methods MCDA and AHP population and mitigate negative environmental impacts while redu- in general and, later, in the specific case of energy planning. In this cing the biomass and oil dependency of the energy sector and therefore vein, we propose a specific methodology for fitting the energy problem improving its balance of payment and energy security. In this sense, a space in Paraguay. The scenarios are introduced and we describe the hydropower based Energy Transition must constitute the cornerstone criteria chosen and their indicators. In Section 3, we show the results of Paraguay's development by supporting and accompanying the and discussion of our analysis, including the sensitivity analysis of the consolidation of the important economic growth the country has been model. In Section 4, the conclusions and policy implications of our displaying in the past years. work are presented. 1.1.1. Policy debate surrounding “the surplus question” 1.1. Country background and energy issues As awareness on the existence of large hydropower surplus and the hydroelectricity sovereignty discourse became widespread among the Unique features make Paraguay worthy of closer attention as a general public after 2009 (Folch, 2015), discussions regarding the re- subject of study for the relatively straightforward and almost immedi- negotiation of the bi-national treaties as well as on how best to employ ately visible benefits it could derive from an energy transition. Macro- the power surplus for society's overall welfare have been going on since economically, Paraguay has made significant progress in fiscal and then. In 2011, former president Fernando Lugo, during his adminis- monetary aspects, and with the onset of major social reforms (World tration, started pre-negotiations for the potential installation of an Bank, 2014) with a GDP which has been growing steadily, having energy-intensive aluminum smelter by Rio Tinto Alcan (RTA)which reached its peak in 2013, when the GDP expanded to 13.6% —highest proposed the production of 670000 MT of aluminum a year, with a rate of growth in Latin America in that year. On a similar note, the yearly projected consumption of 1100 MW.1 American investor service Moody's upgraded Paraguay's government Following these events, two reports were written at the bond rating to B(A1) from B(A2), and changed the Paraguayan outlook Government's request on the assessment of the installation of RTA in to stable from positive (Moody’s Investor Services, 2015). Paraguay and other alternatives for the utilization of the hydropower As already described above, Paraguay's Energy Sector is character- surplus. The first report was written by London based CRU Strategies ized by the high disparity between its hydropower capacity and electric Ltd, and recommended either the installation of RTA starting in 2016 consumption. The country has a very large hydroelectric power or to continue ceding hydroelectricity to Brazil (MIC, 2011; Congreso potential per capita. With a population of around seven million people, Nacional-Sala Bicameral, 2011). Two years later, Jeffrey Sachs’ lead it has been estimated to have the resources to produce 68 TWh/year of Columbia Center on Sustainable Development —formerly Vale hydroelectric power, of which 64 TWh/year are thought to be econom- Columbia Center on Sustainable Development— issued a second ically exploitable (Toledano and Maennling, 2013). For instance, the report, hereafter referred to as the “Sachs Report” recommending to generated electricity in 2011 was ~55 TWh and the domestic electricity sell the electricity surplus to the regional market and to use the demand ~7.5 TWh —barely 13% of the generated electricity (Toledano financial resources in order to invest in the country's infrastructure and Maennling, 2013). and health system, advising against the installation of RTA's aluminum The main source of surplus is the Itaipu Dam, built as a binational smelter (Toledano and Maennling, 2013). project since 1973 on the basis of a treaty between Paraguay and Brazil Neither of the reports provided a complete analysis taking full for the development and exploitation of Parana River's hydroelectric account of all relevant aspects. For instance, during the Public potential. The Itaipu Dam alone produces about 90,000 GWh/year, of Hearings, it was established that CRU´s Analysis was on a Cost- which 50% correspond to Paraguay. Since Paraguay only consumes about 10% of its total share (Amarilla et al., 2015), the hydropower surplus of its share is ceded to Brazil in exchange for a fi xed monetary 1 Compare to a peak demand of 3.026MW registered in February 2017.

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Benefit Analysis (CBA) which, although it mentioned them, did not technical approach to transitions by focusing on the technological include environmental and social issues in the calculation of net aspects of transitions and their costs (Miller et al., 2015). To contribute present value of the considered project. Whereby, the CBA considered to these goals, we propose the use of MCDA methods to the case of a discount rate of 8% for developing countries when dealing with Paraguay and consider four hypothetical -but already discussed- policy environmental and social issues, while it has been established that a options for allowing a sustainable energy transition in the country. discount rate of 10–12% is recommended (Markandya et al., 2001). Further, as it was mentioned that the CRU Analysis is based on a CBA, 1.2.2. Decision making in energy policy making it is important to mention some weaknesses inherent to CBA assess- In the past decade or two, various decision-making approaches ments. Such assessments generally present severe limitations when have been used to scientifically inform policy on the feasibility of assessing mega-projects that can compromise the natural endowments specific strategic transition paths, among which MCDA has gained of a country and create serious conflicts among different political, considerable relevance (Ren and Sovacool, 2015; Stein, 2013). When social, economic, technical and environmental objectives and may lead many different objectives that conflict with each other are at stake, to many inaccuracies that prevent an improvement in Pareto and MCDA seems to be a suitable tool for decision making under Kaldor-Hicks efficiency. This is so mainly because of an overreliance on uncertainty. In the case of how best to incentivize energy transitions, data from past projects; the use of subjective impressions by assess- the requirement of simultaneously meeting multiple criteria —econom- ment team members, the inappropriate use of heuristics to derive ic, political, technical, social and environmental—is a pressing chal- money cost of intangible elements, and, a confirmation bias among lenge for energy policy makers who need to articulate plans according project supporters, here it is to be added, that it is not uncommon for to multiple objective functions that incorporate the most important interest groups to attempt to include or exclude significant costs from possible tradeoffs and conflicts among multiple viewpoints. Within this an analysis to influence the outcome (Huesemann and Huesemann, context, MCDA has been widely used in order to support policy 2011). decision making to complex energy planning problems and has the Neither analysis offered a systematic formal technique of assessing advantage of offering tools for the better understanding of intrinsic the different ways of dealing with the issue of decision making under characteristics of the decision problem, encourage the role of partici- uncertainty and neither of them tackles the imbalance of the energy pants in the decision making process, enable compromise and collec- matrix and how to encourage an energy transition that could simulta- tive decisions, and provide transparency to the insights of the model neously generate opportunities for Paraguay's predominantly young and analysis. In words of Pohekar and Ramachandran (2004), MCDA population through job creation—social criterion, and ease the envir- can support policy makers in order to enhance the decision quality by onmental pressure by cutting down the deforestation and biomass allowing them to be more explicit, rational, and efficient. In turn, AHP burning emission rates,the environmental criterion. Regarding the is probably the most widely-used of the MCDA methods. This paper considered options, neither of the reports considered the possibilities presents a MCDA, based on an AHP model, of the sustainable use of of selling the electricity surplus at market prices in the region or hydropower surplus for society's overall welfare in Paraguay that would allowing the installation of other industries. Such options were widely make possible such a transition. AHP is a structured technique for discussed among experts and debated publicly. organizing and analyzing complex decisions. Developed by Thomas L. Saaty in the decade of 1970, it has been widely employed and 1.2. Energy transitions and decision-making in public policy developed since then. AHP addresses the issue on how to determine the relative importance of a set of activities in a multi-criteria decision 1.2.1. Energy transitions problem. This method is based on three principles: (1) structure of the The goal to secure long-run energy supply and demand based on model; (2), comparative judgment of the alternatives and the criteria; sustainable energy systems can only be achieved through a system- and (3) synthesis of the priorities (Saaty, 1994). Thus, the method wide energy transition, which should be an inherent component of the allows combining complex information for decomposing alternatives public agenda. We believe that in order to improve energy pathways and relevant information into a hierarchy structure of criteria. Rather within the country, the political momentum can be used as a leverage, than prescribing an "optimal" decision, AHP supports decision makers as fuel price fluctuations, environmental concerns, aspects of techno- to find an alternative that best fits an overall goal and their under- logical changes, and the democratization of energy access are currently standing of the problem. It provides a comprehensive and rational part of the political agenda (Araújo, 2014). Energy Transitions framework for arranging a decision problem, for representing and generally involve a change in an energy system, either from a particular quantifying its elements, for relating those elements to overall goals, source, a technology or a "prime mover” (Miller et al., 2015). Araújo and for evaluating alternative solutions. A detailed description on how (2014) employed a cross-cutting definition to avoid the confusion that to structure and pursue an AHP for decision making is found in Saaty entails relying on different definitions, defining Energy Transitions as (1994) . We posit that the use of MCDA/AHP in emerging and being a “shift in the nature or pattern of how energy is utilized within a developing economies, such as in Paraguay, can help democratize system”. Given the fundamental uncertainties that transitions entail, and allow a more inclusive approach to energy policy making. the definition of policy problems, the decision for a specific approach or Especially in countries like Paraguay with a long story of exclusivist strategy and the formulation are ambiguous and contested and —as opposed to participative— practices encouraged by the author- fundamentally value-laden (Kern and Howlett, 2009; Markard et al., itative tradition of its political structure. In our view, the proposed 2016). Even more so, since energy systems are embedded in a myriad methodology can render more adequate results when dealing with of intricate patterns of social, economic, and political life and organiza- complex decisions for policy making, than for instance CBA-based tion. In order to allow positive and significant changes in energy approaches. systems, these should be accompanied by social, economic, and political shifts. Therefore, energy policy is a problem of socio-energy 2. Methodology system design and requires a multi-faceted approach to energy related problems (Miller et al., 2015). 2.1. Applications of MCDA/AHP in energy policy and planning On account of this high complexity, decision making for energy policy should be backed with participative, systematic, and holistic MCDA methods have been extendedly applied in energy policy and methods that take account of the relationships between different planning. For instance ENE-MCA is an interactive policy analysis tool stakeholders and the cross-cutting nature of energy issues that are developed at the International Institute for Applied System Analysis ubiquitous within any society, and refrain from adopting an excessively (IIASA), which purpose is to aid decision makers in their assessments

314 G. Blanco et al. Energy Policy 108 (2017) 312–321 of future policy choices and how those choices impact the multiple consider the aluminum smelter as a policy option, as it has been in the dimensions of energy sustainability. Browne et al. (2010) describe the public agenda and considering that the government has shown interest use of MCDA to explore alternative domestic and electricity policy in it. Additionally, it was considered based on the fact that there are scenarios in Ireland. Tsoutsos et al. (2009), apply MCDA methods for updated and well backed studies on its potential with updated analyzing sustainable energy planning in Crete and Klein and Whalley information on the project. Some caveats were already pointed out in (2015), compare the sustainability of U.S electricity options through the Sachs Report, warning that worldwide only about one third of the MCDA. There are a number of specific methods of MCDA used in large aluminum smelters process 50% or more domestically (Toledano energy planning: PROMETHEE, (Goumas and Lygerou, 2000), and Maennling, 2013). Where this is the case, smelters benefit from ELECTRE (Beccali et al., 2003), MAUT (Voropai and Ivanova, 2002), strong government intervention and the host countries are relatively and fuzzy methods and decision support systems or DSS (Skikos and rich like Saudi Arabia, Oman, Brazil, and Canada (Toledano and Machias, 1992). However, for our purposes, AHP seems to best fit our Maennling, 2013). In our point of view, option A4 has the potential problem space given its capacity of converting a complex problem into to unleash the technological and associated institutional/organizational a simple hierarchy, its flexibility, intuitive appeal, and its ability to mix transformations in energy end-use that are recognized as fundamental qualitative as well as quantitative attributes in the same decision drivers of historical energy transitions. A transition to electricity wide- making exercise (Pohekar and Ramachandran, 2004). Likewise, use could expand the demand for electricity and give rise to a transition MCDA/AHP have been extendedly used in relevant research fields in energy services so new technological combinations can enable new such as renewable energy (Ramanathan and Ganesh, 1995; Ren and and/or improve services at greater efficiency and decreasing costs Sovacool, 2015), energy resource allocation (Hobbs and Horn, 1997); (Grubler, 2012). Even more, option A4 is a realistic option in the case transport energy (Yedla and Shrestha, 2003);and energy utility plan- of Paraguay, specially bearing the fact that developing countries ning (Stein, 2013). generally experience energy-related transitions at lower levels of income, with faster rates of change in conditions over time, and tend 2.2. Proposed methodology for assessing alternatives of the to use less energy per capita than developed countries at lower hydropower surplus utilization based on AHP systematic environmental impact per capita (Marcotullio and Schulz, 2007). We present a Multi-Criteria Decision Analysis (MCDA) based on an Analytic Hierarchy Process (AHP) applied to energy policy options and 2.3. Criteria and indicators of evaluation consider multiple criteria under uncertainty. Under the lenses of ff MCDA/AHP, we analyze di erent energy policy options for the use of The policy options, or alternatives, were evaluated according to hydropower surplus. In the context of two workshops held in the years economic, technical, environmental, political feasibility, and social 2015 and 2016 with local stakeholders, the goal society's overall criteria. In our view, these decision criteria belong to the fundamental welfare was chosen and the relevant criteria were elucidated. Each of aspects that are central to this particular policy decision making the presented options are meant to be considered as hypothetical process, and are crucial when elucidating and justifying preferences courses of action that decision makers might or might not choose to of a society. Adequate criteria selection constitutes an essential stage in take. The options were generated on the basis of results of a consulta- this process. An inadequate approach can lead to poor results or can tion among stakeholders, at the same time they are realistic and even invalidate the entire decision-making process. The criteria set can relevant given that some of them are already included in the political always change according to the point of view of the policy maker and agenda, with options A1, A2 and A3 already being considered in the the problem to be analyzed so they are not fixed. However, the criteria CRU and Sachs Analyses. On the other hand, A4 is a policy option should be understandable and measurable so they can actually express which has not yet been seriously considered in the policy agenda until the fulfillment of the objective. Correspondingly, a known scale has to fi now. Furthermore, the ve criteria (economic, technical, social, en- be associated to each criterion either through obtaining a probability vironmental, and political feasibility) were categorized according to distribution of the different levels of the attributes for every alternative their degree of importance based on the results of a survey conducted or through the assignation of an order of preferences. The attributes among 80 stakeholders to collect information on their cardinal need to embody properties like completeness, (the attributes are preferences of the criteria in a scale from 1 to 9. adequate), decomposability (attributes allow the simplification of the The policy options considered are: evaluation process in a piecemeal approach), no redundancy (no double entries), and minimalist (small is smart and beautiful). On (A1): Continue with normal course of operations: Paraguay re- the basis of this, once the criteria were defined, we proceeded to mains ceding its electricity surplus to Brazil (i.e. Business as Usual construct their hierarchy. The hierarchy allows analyzing the problem “ ” or BaU ). in-depth so it can be represented in the most complete and global way, (A2): High hydropower export level: Electricity is sold in the considering the environment of the problem and identifying the Brazilian wholesale power market at market prices, generating a attributes that contribute to the solution while taking the stakeholders net rent of around 50USD/MWh (CCEE, 2015; Toledano and into consideration. Maennling, 2013). Keeping all the above exposed in mind, Fig. 1 below shows the (A3): High electro-intensive industry penetration level: a factory hierarchy of the energy policy decision we have configured. In the next resembling Aluminum Smelter RTA of 1100 MW is installed in the paragraphs, we link the criteria with their indicators. country. (A4): High development of small industry: Many small industries 2.3.1. Economic criterion are installed. Industrial clusters of 180 MW are established at the this criterion takes account of the general dimensions that con- baseline scenario and reach up an accumulated demand of tribute to services and goods creation in a country. The indicator for 1100 MW. this criterion is the average GDP growth rate over the analyzed horizon. Firstly, we prove the causality of the industrial electric consumption on Policy options A1 and A2 could potentially exhort and keep the GDP by a Granger causality test, where historic time series (period perpetuating rent-seeking behavior, as some powerful stakeholders in 1991–2011) are analyzed .2 This allows us to accurately articulate the Paraguay can expend resources on political activity to increase their share of the existing wealth arising from the sale or cession of hydropower surplus. Regarding option A3 we particularly chose to 2 Dataset of the economic criteria can be found at: https://goo.gl/SXSVKd

315 G. Blanco et al. Energy Policy 108 (2017) 312–321

Society’s Overall Welfare

Political Economic Social Environmental Opportunity feasibility

Continuing to cede Selling hydropower Installing an Incentivizing the hydropower surplus surplus at the electro-intensive development of small to Brazil Brazilian wholesale aluminum factory industrial parks power market

Fig. 1. Hierarchy of the energy decision. evolution of GDP in terms of the industrial electric consumption. Thus, Hearings organized in 2011 to discuss the potential installation of Rio we define a linear function in order to forecast the temporal evolution Tinto Alcan in Paraguay. It is estimated that the establishment of the of the GDP as function of the industrial electricity demand in Paraguay aluminum smelter would translate in the creation of 7000 direct job (Eq. (3)) based on the Paraguayan GDP (Banco Central del Paraguay, opportunities (Ministerio de Industria y Comercio, 2011; Congreso 2011) and electric consumption (Amarilla et al., 2015) historical time Nacional - Sala Bicameral, 2011). For option A4, the employment series: creation value is obtained by a function which links the number of jobs generated and the electricity consumption. This function is fitted based GDP()=558+13.5∙ t ED () t (1) on data of employment generation by industries in Paraguay during the where GDP(t) is GDP in thousand million of PYG at the year t and period 2007–2011 and the corresponding electricity consumption of ED(t) is the industrial Paraguayan electricity consumption in GWh at this sector (Eq. (1)). The regression equation is: the year t (Eq. (2)). Under this context, each alternative has a particular EGt( ) = 45945 + 327 ∙EDt ( ) − 21155 ∙ t (2) treatment regarding its marginal contribution to the GDP. For A1, the trend of these variables is estimated based on these functions in order where EG(t) is the total number of generated jobs and ED (t) the to estimate the average GDP growth. In the case of A2, we added to the industrial electricity demand (GWh) in year t. The coefficient of 2 GDP the income generated by the sale of electricity at a rent equal to determination, R (R-square) of the proposed regression is 92.1%. 50 USD/MWh, assuming that Paraguay sells about 9504 GWh each Additionally, we estimate a lineal regression of the industrial year starting in 2017. Likewise, for A3 the contribution of the RTA's electricity consumption of Paraguay (Eq. (2)) based on historical data Aluminum Smelter is added to the GDP. These values are obtained and defined in the following way: from the CRU analysis (Ministerio de Industria y Comercio, 2011, EDt( ) = 1216. 36 + 69.7 ∙ t (3) Congreso Nacional – Sala Bicameral, 2011). Finally, in the case of A4, 2 the average GDP growth is estimated by adding to the electricity In this case, the R is 95.1%, so this entails the significant goodness consumption corresponding to the installation of the new industries of fit of the model. (1037 GWh per year in an arithmetic progression). 2.3.3. Political feasibility criterion Within this criterion, we propose to summarize the feasibility of the 2.3.2. Social criterion policy options given the political and institutional landscape through a this criterion takes account of a fundamental aspect that contri- ranking based on the likelihood of implementation of the analyzed butes to the social welfare: job creation (Wang et al., 2009). We have policy options, by trying to measure the risk of effective implementa- chosen job creation as an indicator, among other potential indicators, tion, based on an expert panel consultation. We assume that A1 has the mainly given the relevance of the creation of long-term jobs not lowest risk since this scenario is already running. Under A3, the risk associated with transfers subject to royalties which are transitory, level is relatively low, since negotiations are done solely with a single dependency-producing and of a handout-approach nature that will agent, which in turn reduces the process’ complexity. Conversely, always depend on the existence of a surplus on the short term. In the under A2, Paraguay would have to firstly negotiate with Brazil in order specific case of Paraguay, the importance of job creation as a social to be allowed to enter the Brazilian wholesale market. For this option, criterion is paramount given the high levels of sub-employment and an additional negotiation stage is necessary as others agents of the informal jobs (ILO, 2014) and the fact that it would allow to empower market have to be approached in order to obtain a Power Purchase sectors of the population which would otherwise rely on handout Agreement (PPA) under convenient conditions. This process can be approach programs, given that the welfare system (unemployment quite challenging; therefore, the implementation of A2 is relatively services) is not very strong in Paraguay, as is the case of advanced risky. Finally, the riskiest alternative under this criterion is A4. This is welfare states (such as in Scandinavia or central European countries). so mainly because it entails a complete change of the paradigm in the We estimate the number of jobs either by means of projections based Paraguayan energy and productive sector, which could be quite on historical data3 or specific additional studies depending on the cumbersome given the existing political and institutional constraints. option which is being analyzed. Whereas for the alternatives A1 and A2 Moreover, under A4, a massive installation of industries must be they do not entail new direct job creation, employment generation incentivized and negotiations with several parties are required. In values for A3 were obtained from data provided during the Public addition, significant infrastructure investments, including in the power system and other basic infrastructure such as internal roads and water 3 Dataset used in the social criteria can be found at: https://goo.gl/9Sf2ad provision infrastructure, telecommunication networks, among others,

316 G. Blanco et al. Energy Policy 108 (2017) 312–321 are needed in order to follow the industrial development adequately. 2.3.5. Environmental criterion Hence, when all these factors related to the negotiation costs of the The indicator of this criterion is the average growth rate of the policy option implementation such as those mentioned above are emission of greenhouse gases (GHG), which is estimated by a projec- considered, plus the efforts needed to boost the coordination and tion including the energy consumption as an exogenous variable. The promotion of local and foreign direct investment, A4 is the riskiest of time series analysis is performed based on historical data of CO2 all policy options. emissions .5 For scenarios A1 and A2, we obtain the relationship between of GHG emission (metric tons per capita) and consumption of 2.3.4. Technical criterion energy in Paraguay (all energy sources). The following regression 2 We choose as indicator of this criterion the Expected Cost of Energy (R =81.5%) is obtained based on historical data: − Not Supplied  (CENS). This indicator attempts to measure the GHG( t ) = − 0.92 + 0. 0190 ∙t + 0. 000106 ∙TED ( t) (6) impact of a given alternative on the electric energy security of the country. where GHG(t) are the greenhouse gases emitted in Paraguay at year t, We represent the Paraguayan power system in a Direct Current and TED(t) is the Total Energy Demand (including all the energy (DC) model of 94 buses. The parameters of transmission lines, sources) at year t. The evolution of the TED is estimated based on its generation units, and loads are carefully selected based on the database historical growth rate. A3 adds to the baseline the GHG emitted by the of the Paraguayan electric utility (ANDE) 4 for the existing system as Aluminum Smelter's emissions of greenhouse gases.. Finally, A4 adds well as its expansion in the future. In this sense, Optimal Power Flow to the baseline scenario the amount of greenhouse gases caused by the (OPF) calculations in the Paraguayan power system are conducted in installation of blocks of industries of 180 MW. The corresponding TED order to determine the minimum  (CENS) under the execution of each for this scenario is estimated by considering that the electric demand is alternative. Thus, the optimization problem is formulated as following: equal to about 23% of the total energy in Paraguay. ⎡ ⎤ ⎢ i ⎥ min⎢∑∑(()+(CENS)) Cg Pg  ⎥ 3. Results and discussion ⎣ iq ⎦ The relative importance of each decision criterion was established. ⎧ ∑ PPi− ∑ i − ∑ Fi =0 ff ⎪ g g d d l l Pair-wise comparisons between the di erent criteria were conducted st..⎨ PPPimin,,≤≤i imax according to their importance in achieving the goal. In this sense, ⎪ g g g ⎪ surveys were conducted in order to gather the opinions of 80 significant ⎩ FFFmin ≤≤max l l l (4) stakeholders of the economic, technical, environmental, social and i i political sectors of Paraguay. Based on these findings, a comparison where Cg is the supplier bid curve and Pg and Pd are the power generated and demanded by unit g and customer d respectively at node matrix of criteria was constructed. In this case, the cardinal preferences i. The flow in all lines connected to node i is denoted by Fl. The of the surveyed agents are characterized from an absolute scale, where iminmax,, operation limits of each generator unit are stated by Pg and the several comparison were taken into account, and each opinion was min, max network constraints are set by Fl . aggregated by using the geometric mean in order to derive a group Since the future energy security relies mainly on the electric function (see Table 1). In this sense, the absolute cardinal preference demand growth, which in Paraguay is quite volatile, we consider the relation related to a pair wise judgment relation was the principal demand growth as an uncertain variable in order to cover all the eigenvector of the matrix of pair wise comparison of the stakeholders’ possible future scenarios. Hence, the stochastic evolution of the power opinions (Saaty and Vargas, 2013). Thus, this eigenvector helped to market model taken as a basis in this work can be characterized as a establish the relative weight between each criterion obtained by bottom-up model, where the annual generation costs are directly calculating the arithmetic mean of all criteria. The result was that the influenced by the long-term stochastic movements of the electric sum of all values in the vector is always equal to one (see Table 1). demand and the system topology. Then, the stochastic model of the It is important to remark that the group function derived by using fi demand growth rate dRi, along an interval dt, can be represented by a the geometric mean satis es Arrow's conditions (Arrowvian social generalized Brownian Motion according to the following expression: welfare), both when the judgments of each individual are consistent and when they are not consistent. Thus, the consistency in the dRt()= μ ∙ dt + σ ∙ dz Li Li (5) judgments of the survey participants is tested based on the calculation of the Consistency Ratio (CR), which results equal to 0.3%. Following where μLi is the estimated unconditional mean load growth rate for the 2 this procedure, the performance of each alternative is estimated under year t, σLi the estimated unconditional variance for this time interval and dz the Wiener process. each criterion based on the indicators stated in the Section 2.4. Results Under these conditions, an N-1 contingency analysis is performed according to each criterion and a ranking of feasibility are presented in in each realization. The DC-OPF is calculated using the MATLAB-based Table 2 below. power system simulation toolkit Matpower 3.2©. In the case of the Based on these results, we used the ratio between estimations of scenarios A1 and A2, we consider the baseline ANDE system at the year average growth rates in order to find the weights of the environmental 2017, in which we model demand growth with uncertainty according to and economic indicators. On the other hand, under the technical and the proposed stochastic process. Scenario A3 considers the additional social criteria, the weights were estimated based on the ratios between installation of a unique factory of 1100 MW. Likewise, within scenario the values of the –(CENS) and employment number respectively. If A4, it is considered an additional increment of demand of 180 MW per the calculated ratio is greater than nine, then the weight is set equal to year until 1100 MW. In all cases, under energy deficit scenarios, the nine. Likewise, if the result is a decimal number between one and nine, marginal price is set equals to the value of VOLL (Value of Lost Load) the weight is set equal to the immediate superior integer. Table 3 shows at the bus with load curtailment, which has been assumed to be the pair-wise comparison matrices and the weights assumed for each 483 USD/MWh. 1000 Monte Carlo simulations are performed under criterion on each scenario. In turn, the calculations of the priority each scenario, year, and contingency respectively in order to estimate vector of each scenario are performed based on each criterion. These the Expected Cost of Energy Not Supplied-(CENS). last results are presented in Table 4. The results suggest that under the technical criterion, the strategy

4 Dataset of the Power system model, demand and generation patterns can be found at: https://goo.gl/RmCKVM 5 Dataset of Environmental parameters can be found at: https://goo.gl/g6bAF5

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Table 1 Table 5 Composite priorities of criteria. Composite priority vector.

Criterion Eigenvector Alternatives (A1) (A2) (A3) (A4)

Economic 0.24 Priority 0,24 0,20 0,27 0,29 Technical 0.21 Social 0.20 Political 0.18 Environmental 0.17 relevance of a multi-criteria approach can be assimilated, due to the

λmax = 5.01, CI = 0.003, CR = 0.003 fact that different solutions arise according to different point of views. This issue, in emerging economies such as Paraguay, might constitute Table 2 one of the biggest barriers that the policy makers should cope with in Results of the assessment of each criterion under each alternative. order to promote an inclusive public policy based on a holistic view. Based on the results of Table 1 and Table 4, the composite priority CRITERION/ALTERNATIVES (A1) (A2) (A3) (A4) vector is estimated (see Table 5) and A4 has the highest priority, Technical (MUSD) 29.47 29.47 12.81 32.27 followed very closely by A3. Therefore, the best alternative for Paraguay Environmental (%) 3.95 3.95 5.85 6.03 -from this approach-is to use its hydropower surplus to promote a large Economic (%) 3.8 4.31 4 6.8 industrial development, generating labor demand through the high Social (Number of jobs) 0 0 7000 152339 development of industrial parks of around 180 MW which can sum up Political (Risk level) 4 2 3 1 to reach an accumulated demand of 1100 MW.

Table 3 The pair-wise comparison matrices and the weights for each criterion and alternative.

Technical Environmental Economic Social Political

A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4

A1 1 1 1/2 3 1 1 2 3 1 1/2 1/2 1/3 1 1 1/5 1/9 1 2 2 4 A2 1 1 1/2 2 1 1 2 3 2 1 1/2 1/2 1 1 1/5 1/9 1/2 1 1/2 2 A3 2 2 1 3 1/2 ½ 1 2 2 2 1 1/2 5 5 1 1/7 1/2 2 1 3 A4 1/3 1/2 1/3 1 1/3 1/3 1/2 1 3 2 2 1 9 9 7 1 1/4 1/2 1/3 1

Table 4 Priority vector and consistency ratio of alternatives under each criterion.

Alternatives/ Criterion Technical Environmental Economic Social Political

(A1) 0,25 0,35 0,12 0,05 0,43 (A2) 0,22 0,35 0,19 0,05 0,18 (A3) 0,42 0,19 0,27 0,19 0,29 (A4) 0,11 0,11 0,42 0,70 0,10 Consistency Ratio 0.02 0.004 0.03 0.09 0.02

A3 has the highest priority. This fact can be explained by considering 3.1. Sensitivity analysis that the network interconnection (needed in order to supply electricity to the Aluminum smelter) helps to reduce the congestion in the We believe that an analysis of implications of possible perturbations transmission grid and consequently the (CENS). We assume that on the prioritization by the decision-makers of the different criteria is this transmission reinforcement is conducted by the Aluminum of paramount importance. It is important to bear in mind that, even Company as a part of its facility investment. though the criterion ranking presented in Section 3 was estimated From Table 4, A1 and A2 have the highest priority under the based on a weighted preference of the stakeholders, the final decision environmental criterion. Under these alternatives, there are no con- in a policy making process is usually made by a single political tributions to the baseline GHG emission; therefore, they show the best authority, which may or may not take into consideration the integral performance according to this indicator. Conversely, A4 presents a vision of the main stakeholders of the sector. significant better performance under the social and economic criteria In this vein, we conducted a sensitivity analysis 6 by systematically due to the fact that this scenario encourages GDP growth by generating exploring all the possible combinations for prioritizing criteria .7 In this more jobs (see Table 2). way, we analyzed the performance of the policy strategies under Finally, when highlighting the criterion political feasibility, A1 has scenarios where different criteria are prioritized and others where a the highest priority. This could partially help explain the historical evolution of the policy development in the past. Historically in Paraguay, the A1 alternative was the dominant policy, from where is 6 A document containing an exhaustive sensitivity analysis can be found at: possible to infer that the prevalent criteria among the policy-makers goo.gl/ntdEUt was the “Political Feasibility”. In addition, the consistency ratios are 7 The 41 possible combinations for prioritizing criteria were extensively analyzed. shown in Table 5. It can be seen that none of the criterion has a Firstly taking a one by one criterion to be prioritized, then two by two, three by three and consistency ratio above the threshold of 10%. so on. The pairwise comparison of the prioritized criteria with the remainders, in each case, was increased in a level of three (moderate importance). Additionally, scenarios As aforementioned, according to different criterion, different stra- where only a mono criteria analysis was conducted were analyzed. Likewise a four- tegies have the highest priority level. At this point, the importance and criteria analysis, where a single criteria was excluded under each scenario, was considered.

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Fig. 2. Sensitivity analysis – Strategy map.

T: Technical, S: Social, En: Environmental, Ec: Economic, P: Political

Labels Description

T-S-En-Ec-P Labels that represent the evaluation criteria, which do not carry the symbols (*) or (**), indicate that there is a greater preference for the mentioned criteria T-S-En without excluding any. Example: If T-S appears on the label then the Technical and Social criteria have a higher preference (Weight = 3) than the rest (Weight = T 1). This happens in the same way for all other combinations that do not contain (*) or (**). T-S-En-Ec- In the case where the labels, which represent the evaluation criteria, bear the symbol (**), they indicate that they represent the results of the 4-criteria evaluations. P** This evaluation excludes criteria that do not appear on the label. Example: T-S-En-Ec-P** represents an AHP evaluation, which only takes into account the Technical, Social, Environmental and Political Feasibility criteria, excluding the economic criterion of the study. T* Labels containing the symbol (*) indicate that a single-criterion analysis was performed. This analysis excludes all other alternatives. Example: The T* label indicates that an analysis was made based only on the Technical criterion, excluding the other criteria. given criteria is excluded of the analysis. Likewise, the results for a Hence, Fig. 2 portrays a map of efficient policies according to the mono-criteria analysis are shown. The Fig. 2 exposes the results of possible vision orientations of the decision-maker authority. Thus, it these analyses and it can be understood as following: considering; for can be seen, that A4 is the most predominant option for most of the example, taking the “T-P” scenario (Technical and the Political scenarios. In second place, A3 is the policy alternative with better criterion), A3 turns out to be the best strategy. On the other hand, if performance under most of the scenarios where Technical criterion is we consider, for instance, as priority the “En-Ec-P” scenario prioritized. Finally, A1 is the most convenient strategy just under few (Environmental, Economic and Political criteria) then A1 turns out to scenarios where the Political criterion is considered as relevant. In be the best alternative. A similar analysis can be done for any order to quantify the magnitude among the alternatives, the area of combination of prioritized criteria, resulting in a given strategy for each strategy is presented in the map (Table 6). each case. In this sense, both A4 and A3 can make the most of the hydropower Likewise, the labels, which represent the evaluation criteria, bear surplus in order to balance the energy matrix and develop the the symbol (**), they indicate that they represent the results for 4- industrial sector of Paraguay. A4 and A3 can drive a positive energy criteria evaluations. This evaluation excludes criteria that do not transition in Paraguay by allowing deep and wide technological and appear on the label, i.e. for instance “T-S-En-P**” represents an AHP institutional transformations in energy end-use. The only case where evaluation, which only takes into account the Technical, Social,

Environmental and Political Feasibility criteria, but excluding the Table 6 Economic criterion of the study. Finally, labels containing the symbol Composite priority vector. (*) indicate that a mono-criterion analysis was performed. This analysis excludes all other alternatives, i.e. the “T*” label indicates that an Alternatives (A1) (A2) (A3) (A4) analysis was made based only on the Technical criterion, excluding the Area strategy map 0,23 0,16 0,28 0,33 other criteria.

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A1 could make sense would be where political criterion is the most fuel demand is dominated by the transport sector -and to an extent the relevant, or in other words, where decision-makers pursue an alter- industry sector which has specific characteristic and complexities native which tends to minimize the political risk of the energy policy. which were not addressed in-depth in this project as it is mainly Finally, a very important finding of this work is that the electricity focused on the reutilization of the hydropower surplus. A project in the export policy A2 is not the best option under any prioritization lines of the paper by Shakya and Shrestha (2011), based for instance on criterion at the analyzed price. Thus, this strategy is dominated by the work conducted by Sauer et al. (2015) could be an interesting the others alternatives and should not be selected under the electricity approach for this. In fact, the work of Sauer et al. (2015) even suggests price considered in this study. an interesting potential sector for regional productive integration and industry policy incentives, as the electric car industry –using resources 4. Conclusions and policy implications 8 from Bolivia and Paraguay in the case of study, could generate a positive loop encouraging job creation and replacement of the tradi- Of the four policy options under consideration, we found that both tional fossil fuelled-based car fleet. A4 and A3 have the potential to unleash a positive and sustainable Taking the AHP/MCDA approach as starting point has advantages change in the energy matrix and are likely to drive a positive energy such as its simplicity, which makes it easier to explain to policy-makers transition in Paraguay by allowing deep and wide technological and and for them to employ it. In this sense, we believe the chosen model institutional transformations in energy end-use. In this sense, A4 is the boosts a balanced complexity-performance trade-off. By considering best option, followed by A3. Regarding A4, the results of our work some more complex hypotheses, although the results would have been suggest that the high development of relative small industrial clusters more adjusted to real life situations, we believe there would have been a can generate positive spillovers for the overall society. As Paraguay has large trade-off between the model's complexity and the usefulness of made significant progress in the macroeconomic front, A4 is a realistic the model as an accessible and practical tool to employ in policy option as for instance, emerging economies generally experience making settings. However, we are working on the thoroughness of our energy-related transitions at lower levels of income, with faster rates model, and believe it represents a promising path for further works. As of change in conditions over time, and tend to use less energy per part of a larger research program, we are currently trying to answer the capita than developed countries at lower systematic environmental same question on the decision problem regarding the use of hydro- impact per capita. Even more, the sensitivity analysis implies that power surplus in Paraguay by means of an Analytic Network Process option A4 is the most robust, as it creates more job opportunities and (ANP) (Saaty and Vargas, 2013). Further research could explore, contributes the most to the creation of wealth, even considering the among others, which industrial clusters should be developed in potential negative or unfavorable implications this choice carries with Paraguay in order to make the most of the industrial policy, for it. On the basis of these results, we conclude that A4 is a viable policy instance by looking into concepts such as economic complexity and option which can allow a sustainable energy transition in Paraguay. product space (Hidalgo et al., 2007). Furthermore, on account of the Also, A4 might enable the country to avoid the rent-seeking trap, as relevance of the political feasibility criteria for policy making in opposed to options A1 and A2 which would perpetuate this behavior. emerging economies, looking at the “politics of policy” in detail Furthermore, based on other experiences in emerging economies, it is (Meadowcroft, 2009, 2011; Normann, 2015) could help shed light on highly likable that, by choosing A3, the country could be compromising the factors which in the end play a very prominent role in the success of most of its hydropower surplus to an industrial enclave that is not the implementation of policy decisions. known for allowing the installation of downstream industries. Furthermore, we argue that the combination of MCDA/AHP can Acknowledgement help governments in emerging economies as they face increasing pressures to deal with rising social, economic, and environmental The authors are very grateful to the Paraguayan National Council of problems. Even more, we argue that the combination of MCDA/AHP in Science and Technology (CONACyT) for financial support through the the specific case of Paraguay can help policy makers make informed projects 14-INV-290, 14-POS-032 and the PRONII program. Likewise, decisions for sustainable energy use that are more inclusive and make the authors acknowledge fruitful contribution of Horacio Ojeda, better use of its surplus of hydropower. Finally yet importantly, this Manuel García, Tanja Sinozic and Arturo Gonzalez during the devel- approach makes for a very relevant tool for revealing the policy maker´ opment of this work. Finally, gratitude is also extended to one s hierarchy of criteria through the policy formulation process. anonymous reviewer for her/his comments and suggestions, which were very helpful to improve this article. 5. Critical review of the proposed model and further research References

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