Enhancing energy security and efficiency through a regional integration policy: The case of the Southern Cone

Juan Martinez Alvarez, Simon Fernandez-Vazquez, Sebastian Vargas Macedo and Adrian Ortega-Andrade

Energy Policy, 2024, vol. 195, issue C

Abstract: This paper addresses the knowledge gap concerning foreign exchange risk in energy transactions within the Regional Initiative Energy Integration System of the Southern Cone Countries (SIESUR) of the Latin American region. Focusing on the cross-border electricity, it investigates the impact of exchange rate fluctuations on the transaction model in SIESUR: US dollar-denominated cross-border energy contracts with a time lag between invoicing and payment. The objective of this paper is to estimate foreign exchange risk exposure and propose mitigation solutions. Analyzing foreign exchange risk of energy trading among SIESUR member countries reveals substantial financial costs hindering electricity integration. Energy importing countries, facing greater exposure of their local currencies and weakened bargaining power, are particularly vulnerable. A Monte Carlo simulation model, using historical exchange rate data, highlights significant currency volatility, emphasizing the substantial foreign exchange risk exposure within SIESUR. Notably, cost overruns of energy imports due to foreign exchange risk exposure can reach 12.6% of transaction value. Through a global analysis, potential strategies for risk management are explored to foster electricity exchange expansion. Efforts to mitigate foreign exchange risk are crucial for advancing electricity integration within the SIESUR region. This study underscores policy implications for enhancing regional energy security and promoting sustainable development.

Keywords: Foreign exchange rate; SIESUR; Monte Carlo; Risk management (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S030142152400404X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:195:y:2024:i:c:s030142152400404x

DOI: 10.1016/j.enpol.2024.114384

Access Statistics for this article

Energy Policy is currently edited by N. France

More articles in Energy Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().