A Small Nation, A Big Lesson For The World

Uruguay did what most nations still call impossible: it built a power grid that runs almost entirely on renewables—at half the cost of fossil fuels. The physicist who led that transformation says the same playbook could work anywhere—if governments have the courage to change the rules.

For Ramon Méndez Galain, the energy transition isn’t just about climate—it’s about economics. Uruguay’s shift to renewables, he argues, demonstrated that clean energy can be cheaper, more stable, and create more jobs than fossil fuels. Once the country adjusted the playing field that had long favored oil and gas, renewables outperformed on every front: halving costs, creating 50,000 jobs, and protecting the economy from price shocks.

“If you get the incentives right, the market will do the rest. You don’t need miracles, you need rules that make economic sense,” Méndez Galain told me. I interviewed Uruguay’s former energy minister, who served from 2008 to 2015, at the Mountain Towns 2030 Climate Solutions Summit in Breckenridge, Colorado—a forum that brings together local leaders and sustainability experts to explore pragmatic climate solutions.

When Méndez Galain began thinking about Uruguay’s energy system, the country faced a classic small-nation dilemma: high electricity demand growth, almost no domestic fossil fuel resources, and a rising dependence on imported oil and gas. Hydropower had already been tapped, and blackouts were beginning to creep into both industrial and residential sectors.

Uruguay is a small yet prosperous nation. With a population of 3.5 million, it has a gross domestic product of around $80 billion, and the highest per capita income in Latin America. Its economy relies on agriculture, livestock, forestry, and a growing services sector rather than heavy industry. That makes its renewable pivot even more remarkable: a mid-sized, export-oriented economy proving that clean power can be cheaper, more stable, and job-rich—without relying on massive industrial demand.

By the early 2010s, Uruguay’s government realized that continuing to rely on imported fossil fuels was economically unsustainable. Méndez Galain, then a particle physicist with no formal experience in the energy sector, proposed a bold plan: to build a system that relied almost entirely on domestic renewable resources—wind, solar, and biomass—and do it in a way that was cheaper than fossil fuels.

Could Uruguay’s Model Work Elsewhere?

The results speak for themselves. Today, Uruguay produces nearly 99% of its electricity from renewable sources, with only a small fraction—roughly 1%–3%—coming from flexible thermal plants, such as those powered by natural gas. They are used only when hydroelectric power cannot fully cover periods when wind and solar energy are low. The energy mix is diverse: while hydropower accounts for 45%, wind can contribute up to 35% of total electricity, and biomass—once considered a waste problem—now makes up 15%. Solar fills the gaps.

The economic impact has been profound. The total cost of electricity production decreased by roughly half compared to fossil-fuel alternatives, and the country attracted $6 billion in renewable energy investments over a five-year period—equivalent to 12% of its GDP. About 50,000 new jobs were created in construction, engineering, and operations, roughly 3% of the labor force. Even more striking, Uruguay is no longer subject to the wild swings of global fossil fuel markets.

This transformation was not just technical; it was also regulatory and structural. Uruguay moved to long-term capacity markets, providing investors and utilities with predictability while removing the bias that favored fossil fuels. The government’s adaptive approach, maintained through five administrations, ensured consistency. Instead of making climate the primary focus, policymakers prioritized cost, reliability, and economic benefits; emissions reductions were a valuable bonus.

“We didn’t start with climate targets. We started with the problem of cost and reliability. The environment was a positive side effect, not the reason,” Méndez Galain explains.

Uruguay’s strategy had three elements: regulatory reform, competitive auctions, and diversified domestic resources. The government eliminated longstanding subsidies for fossil fuels and introduced long-term contracts for renewable projects, providing investors with predictable returns. Auctions for wind and solar projects have fostered competition, resulting in lower prices. Customers pay at least 20% less than they did before the transition, while the government has more funds available for education and public services.

Its economy has been growing at 6% to 8% annually, and its poverty rate has fallen from 30% to 8%. That is solid proof that such changes are effective.

“The key is not technology; it is institutions,” Méndez Galain said. “Once the rules are fair and predictable, the system builds itself.”

Economics First, Climate Second

Critics, however, caution against assuming Uruguay’s approach can be copied everywhere. Some argue that the country’s size, political stability, and strong institutional framework make it unusually suited to such a rapid change. Others point out that Uruguay’s electricity demand is modest compared with larger industrial economies, where balancing supply and grid stability can be far more complex.

Méndez Galain acknowledges the differences but pushes back. “Every country has resources—it’s just a matter of designing the rules to use them efficiently. Larger economies need more planning, yes, but the principle is the same.”

Other concerns focus on cost and scalability. While Uruguay’s approach has delivered low prices, some energy analysts worry that replicating the model in countries with higher demand could require costly improvements to transmission infrastructure and significantly more storage. Grid integration of intermittent resources can be challenging at scale, especially in regions with limited hydropower resources.

Méndez Galain is pragmatic. “It is not because we are a small country with lots of hydro. We have average wind and solar. We understood that we must change the rules of the game for renewables to compete. When we eliminate the strong biases that favor fossil fuels, renewables emerge as the clear winner.”

He notes that the International Monetary Fund states fossil fuels get direct subsidies of $1.3 trillion worldwide and indirect ones of $6 trillion annually, giving them the inside track in most places globally.

What makes Uruguay’s example compelling to policymakers is not just environmental performance—it is economic rationale. Méndez Galain repeatedly emphasizes that renewables became dominant because they were cheaper and more stable than imported fossil fuels, not because of carbon targets. That economic lens, he argues, is essential if countries want sustained adoption of clean energy.

“Climate policies fail when they are disconnected from economics. The transition works when it saves money and creates jobs,” he says.

Indeed, Uruguay’s approach has inspired interest across Latin America and beyond. Delegations from Mexico, Chile, and even South Africa have studied the model, exploring auctions, hybrid energy mixes, and flexible market rules. International finance institutions have also taken notice, seeing Uruguay as a low-risk demonstration that renewables can be bankable at scale.

Uruguay demonstrates that small countries can achieve what many consider impossible. By prioritizing economics, ensuring regulatory stability, and leveraging domestic resources, the country created a renewable energy system that is cheaper, more reliable, and job-heavier than fossil fuels. The environmental benefits, though important, are a secondary advantage rather than the main motivation.

For Méndez Galain, the message is simple: “The question is not whether renewables can work. The question is whether governments have the courage to change the rules. If they do, the rest is straightforward.”

The world overlooks Uruguay’s example at its own risk. In fact, renewables are ready, the playbook is in place, and the advantages are tangible. The only missing ingredient is the political will, which is often clouded by self-interest and money.