The impressive growth of Latin America’s coal consumption in recent decades reflects three key factors: the region’s expanding economy, its failure to integrate neighboring electricity markets, and a tendency to depend heavily on one power source.

There is no reason Latin America should be looking overseas for fuel supplies, since the region has an abundance of hydro potential, natural gas, uranium, and oil. But coal – both imported, and to a lesser extent, regionally mined – is playing an increasingly important role in the region’s energy sector and will continue to expand. That coal use reflects the region’s soaring electricity demand. In 2007 alone, electric power use jumped by 3.5 percent, nearly three times the growth rate in Europe and far more than North America’s 2.4 percent increase.

Of course, hydropower will continue to be a dominant power generation source in the region, thanks to relatively low development and operating costs. But major Latin American economies such as Brazil and Colombia have learned that the region’s abundance of hydropower can be a curse. The two countries built up generation networks that were highly dependent on hydroelectricity, only to suffer the consequences during droughts.

As a result, Argentina, Brazil, and Chile turned to natural gas as an abundant, clean, and relatively cheap way to supply power when hydro reservoirs run low. But over the past three years, major producers like Bolivia and Peru have failed to supply the region’s natural gas needs, forcing countries to cut power consumption and develop regasification terminals for highpriced imports. So planners are looking to coal, which is relatively inexpensive, easy to source, and quick to put on the grid.

Indeed, the U.S. Energy Information Agency’s E.I.A. International Energy Outlook 2008 is bullish on coal’s future in the region. It reports that annual coal consumption in 200530 will average a 2.6 percent growth in Central and South America, and a 0.5 percent growth in Mexico, which has recently favored natural gas due to its vast reserves.

Coal consumption will grow especially fast in hydrodependent countries hit hardest by natural gas shortages, such as Brazil and Chile. Concerns about global warming will increase pressure on them to offset their carbon dioxide emissions, in turn catalyzing the growth of renewable generation sources, nuclear power, and carbon credit trading.

Although Brazil is often dubbed the Saudi Arabia of hydropower due to its vast installed capacity and potential, the power rationing of 200102 is fresh in the minds of planners who want to quickly develop thermo sources. The government has begun diversifying its generation matrix in its longterm power supply auctions, which in general promote coal, hydro, and natural gas plants.

But the potential of natural gas could be limited. Brazil’s total natural gas consumption is due to reach 4.7 billion cubic feet a day by 2012 compared to 1.6 Bcf/d in 2006, forcing the country to import the fuel. In fact, nearly half of the projected consumption in 2012 will come from abroad, evenly divided between unreliable piped imports from Bolivia and highcost LNG.

Those developments will make coal even more attractive. Already companies and state governments are developing aggressive plans to build coal plants. The states of Santa Catarina and Rio Grande do Sul in southern Brazil are particularly bullish on the fossil fuel, as their region houses the majority of the country’s reserves. Experts say coal production there could double by 2013 from last year’s 11.7 million tons as investments increase in the sector. Uruguay is talking of building coalfired generators in Rio Grande do Sul to meet its own power needs.

Meanwhile a number of companies are leading the increase of coalbased generation, including Tractebel Energia, a division of Europe’s Suez Energias do Brasil E.D.B., controlled by Portugal’s E.D.P. and M.P.X. Energia, a new company owned by Brazilian tycoon Eike Batista.

Consistent with Batista’s strategies in the mining and oil and gas industries, M.P.X. is leading an aggressive charge to develop coalfired capacity in the region. M.P.X. plans to have more than 2.6 gigawatts of capacity online by 2011 from the Porto do Pecém and Porto de Itaqui plants. Separately, the company aims to build the 1.4 GW UTE Castilla plant in northern Chile.

Batista is right to target Chile, which has arguably been hit harder than other countries by the region’s inability to integrate its energy markets. Gasrich Bolivia and Peru refuse to export to Chile due to historical grudges, while Argentina has cut exports to a trickle.

Based on promises of cheap, reliable natural gas supplies from neighboring Argentina, in the late 1990s and early this decade Chile built up new gasfired capacity quickly as a means to supply the northern grid, which is in a desert mining region, and the central grid, which is hydro dependent. And although Chile has started construction on two LNG import terminals to fuel existing generators, it has no plans for new natural gasfired plants. Instead, Chilean generators are looking to hydro, abundant and largely untapped down south, and coal, a reliable way to quickly expand capacity.

In fact Chile aims to add 10 GW total to the two grids by 2016, increasing capacity by 75 percent in the central region and 70 percent in the north. In the central grid, coal capacity will expand by 2.6 GW – a 150 percent increase from current levels. Up north, 1.9 GW of capacity will be added to the grid through a 153 percent increase in coalfired capacity, according to a July report from Santander Bank, which does not include M.P.X.’s project in its forecast.

A.E.S. Gener, controlled by U.S.based A.E.S., will lead much of the growth in coalfired capacity. The company plans to expand by 2.5 GW through 2012, thanks in part to the 260 MW Nueva Ventanas, 270 MW Campiche, 750 MW Los Robles, and 600 MW Angamos coal projects. Locallyowned generator Colbun is building the 350 MW Coronel coalfired generator, while Endesa Chile, controlled by Spain’s Endesa group, is developing the 350 MW Bocamina II.

But Chile’s former president, Ricardo Lagos, now the United Nations special envoy on climate change, is concerned that coal’s popularity could have profound consequences on the region’s export markets. European consumers could set up a “green” barrier against Latin American exports due to their carbon footprint, favoring locally produced goods instead.

Experts agree there’s a threat. Arturo Brandt, a senior project manager with Germany’s First Climate Group a carbon credit company believes the green barrier could impact premium products such as wine, olive oil, and cheese. Arturo Errázuriz, South American Pacific director for carbon credits firm EcoSecurities, refers to a British friend who no longer eats Chilean fruit because of the greenhouse gases from shipping. However, Brandt sees the problem as a potential opportunity, since vineyards, for example, could offset emissions by buying carbon credits. Advertising a product’s carbon neutrality could become a strong marketing tool.

In the medium to long term, however, green barriers could be put up against commodities – the lifeblood of Latin American economies, Errázuriz said. That will force companies and governments to consider the environmental impact of their businesses.

Forwardthinking governments in Brazil, Chile, and Peru have already acted, passing legislation that forces generators to develop renewable projects or provides incentives to do so. Meanwhile the debate is giving renewed impetus to nuclear energy, and that cleaner technology is on the drawing board in Argentina, Chile, and Mexico. Brazil is mulling plans to more than double its nuclear capacity.

It seems that Latin America has learned its lesson about depending too heavily on one power source. That undoubtedly will mean big increases in coal use, which will be used to complement natural gas, renewables, nuclear, and of course, hydro.