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

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.