Embracing the gas turbine
The power industry in Latin America has undergone huge change in the past few years and the region has emerged as possibly the world`s most competitive market for power equipment supplies. Growing economies, liberalization and an over-reliance on hydropower have given rise to a booming gas turbine market which shows no sign of slowing.
With already huge growth in the installed base of gas turbines in Europe, Asia and North America, the gas turbine is now making a big impact on Latin America, changing the structure of its power industry.
The gas turbine market in Latin America has benefitted from the rapid growth of gas infrastructure, and the keenness of governments in the region to move away from dependence on hydropower technology – which can be unreliable and expensive to construct. In addition, the liberalization of generation markets has been a fundamental driving force to change. By opening markets up to independent power producers (IPPs), and by freeing utilities through privatization, market economics have boosted the rapid deployment of gas-fired power.
Although somewhat eclipsed by the huge growth in the North American market, healthy orders of 6 GW during 1998 matched the performance of the gas-fired power plant market over the last few years. Combined cycle power accounted for the bulk of orders (59 per cent), although simple cycle gas-fired plants also performed relatively well in 1998, accounting for 32 per cent of orders.
Due to its huge potential, a lack of local suppliers and a downturn in the post-crisis Asian market, Latin America has emerged as the world`s most competitive region for power plant suppliers. In North America and Europe, local suppliers continue to dominate the market – for example in the USA, GE and Siemens Westinghouse made up 90 per cent of orders in 1998, and market concentration is similar in Europe, where Siemens Westinghouse, Alstom and ABB dominate. In contrast four of the top five global equipment suppliers enjoyed shares of over 20 per cent of orders in Latin America in 1998, with little to choose between them.
However, an analysis of orders by country between 1993 and 1998 highlights the strong position of Siemens Westinghouse. Through the original Siemens and Westinghouse operations, a substantial number of orders have been won across a range of countries – only in Chile is the company not a market leader. The fact that in 1998, GE won the most orders overall shows the importance of Argentina – where no IPP orders were placed in 1998 – to Siemens Westinghouse.
From water to gas
Until the 1990s, Latin America was primarily a hydroelectric power plant market. This is reflected in its installed base, with only Chile, Argentina and Mexico having more than half of their installed capacity as thermal and nuclear power. The average split for the region is 58 per cent hydropower and 42 per cent thermal and nuclear – the only region in the world with such a heavy emphasis on hydropower. During the early 1990s the deployment of hydropower continued, with orders placed for the 3270 MW, $3.5 billion Xingó and the 1450 MW, $1.4 billion Itá plants in Brazil, and the 2160 MW, $2.1 billion Caruachi plant in Venezuela. None of these projects are yet complete, and hydro orders are now drying up, being replaced by gas-turbine plant.
There are several reasons for this switch from hydro to gas-fired power:
• Project finance: international finance prefers gas-fired power to hydropower. CCGT plant is fast to build, so that a return on investment is quicker, and is also far less expensive per kW than hydropower. A lower short-term investment is a more important advantage than the low fuel costs of a hydropower plant. Hydro projects also tend to be a more risky venture. Project outlay is higher, and returns are uncertain – with a gas-fired plant the developer can be far more sure about what kind of return can be obtained and how quickly.
• Deregulated electricity market: one drawback with hydro plant is that its output is less secure and can be dependent on factors outside the control of the plant owner, particularly rainfall. Strategy in a competitive electricity market is based around power plant availability. This can be guaranteed in a gas-fired power plant with a service and maintenance contract, and will reach levels of over 95 per cent. This cannot be guaranteed with a hydro plant.
• Environmental benefits: although hydroelectric power produces no emissions it does have environmental disadvantages: whole areas need to be flooded by reservoirs, water quality can be affected, and there is uncertainty as to the effect of a large hydro station on the surrounding ecosystem. Although gas-fired power does produce carbon and nitrogen based pollutants, these can be minimised by abatement technology. Latin America also has far less fossil-fired plant than other regions in the world, although air pollution does remain a major problem for some areas in the region.
• Planning: hydroelectric power plant planning can be extremely complex, as more than one plant can be planned for the same river, or interconnected rivers. Because of this, the performance of an existing plant can be affected by the construction of another. As hydro potential is used up in a particular country this problem is magnified.
• The entrance of IPPs: with the entrance of IPPs and foreign utilities into the market, firstly through privatizations, and more lately through greenfield projects, gas-fired generation has mushroomed. The leading IPP in the Latin American market, Endesa, has over 3 GW of gas-fired power already in operation in the region and plans for more. As a larger share of the new-build power plant market is taken by IPPs, so the share of gas-fired power plants will increase.
During early 1999, Datamonitor conducted a survey of the leading IPPs in the Latin America region. The companies surveyed represented 74 per cent of installed IPP capacity in the region, and gave a clear indication that Argentina is seen as the most important region for IPP investment over the next 10-20 years. This was due to Argentina`s consistent attractiveness across all the variables that IPPs were asked to consider, rather than a strong performance in one or two of the most important variables. Argentina was considered to have the best planning and approval process, investment risk profile and the best potential for IPP licences.
Being ranked first also belied a weak year for Argentina in 1998, when no IPP orders were recorded. Chile and Mexico were the best performing countries in terms of orders, with volumes of 2.6 GW and 2.3 GW, respectively.
Datamonitor believes that Brazil was kept from the number one spot in the survey largely by the recent economic problems of the country, as is shown by survey responses to the `investment risk profile` category. Brazil also scored poorly in terms of regulation and energy policy according to the IPPs, behind Chile, Mexico, Colombia, Argentina and Ecuador.
Argentina: Between April 1992 and June 1995, over 25 state-operated electric power companies were privatized, making Argentina one of the first countries in the region to reform its electricity sector. Separate markets have been created for generation, transmission and distribution. The administration of the wholesale market is carried out by Cammesa, a non-profit institution whose capital stock is shared equally among the generators, carriers, distributors, major users and the Energy Secretariat, which represents retail customers.
By 1998, most of the country`s generation and distribution assets had been sold, although several power plants have still to be privatized. Perhaps the most significant sale will be of the country`s three nuclear plants, which will in effect place the entire Argentine nuclear industry in the private sector.
Privatization of the generation sector saw over 50 companies sold, and prices, which were previously regulated by the government, are now agreed between the generators, distributors and major consumers. The power pool, administered by Cammesa, attempts to provide electricity at the lowest possible price by deciding which plants will be dispatched to meet demand. The cost of generators is reached by bids submitted to Cammesa, with the thermal generators submitting bids based on their marginal costs and hydroelectric generators bidding on opportunity costs. The highest bid needed to satisfy demand determines the competitive market price.
The bids are obtained through a bidding process with thermal generators providing fuel costs and heat rate as a measure of their fuel efficiency. This allows Cammesa to calculate the marginal cost of each generator. Hydropower bids are done slightly differently with a split between plants with large water reservoirs and those with limited storage capacities. The former submit bids every six months, while the latter submit monthly bids. These bids inform Cammesa of the capacity the hydro plants are willing to commit at different price levels. The generators prepare their bids by using electricity demand and hydrological forecasts.
Brazil: Like Argentina, Brazil has also privatized much of its power assets. Approximately 60 per cent of the power generated in Brazil comes from Eletrobras subsidiaries and the 12 600 MW Itaipu hydroelectric facility. Figures quoted for the country often include only half of Itaipu`s output, in order to reflect the plant`s joint ownership by Paraguay, despite the fact that over 95 per cent of the energy generated by the company is supplied to the Brazilian system. The majority of the remaining 40 per cent of power generated is produced by companies controlled by state and municipal governments, the main ones being Cesp (São Paulo, installed capacity of 10 129 MW), Cemig (Minas Gerais, installed capacity of 4962 MW) and Copel (Paraná, installed capacity of 3329 MW).
As well as greenfield IPP projects, foreign capital has found its way into pipeline and transmission investments as well. The Bolivia-Brazil pipeline consortium is headed by Petrobras, but also includes foreign names such as Enron, British Gas, and Royal Dutch Shell. Operation is expected to begin in 1999, and some expect the $2 billion pipeline to have a flow of 1.1 bn cubic feet (31.1 million m3) daily by 2019.
On the transmission front, Chilgener, for example, is developing a 264 km transmission line that will make it possible to export its gas-fired combined cycle power from Argentina`s Salta province to northern Chile. ABB has also won a contract to install a 1000 MW, 500 km AC transmission line running from a substation in northern Argentina to southern Brazil. The project is to be built on a BO basis and is pegged to cost $280 million, with the completion date set for some time around early 2000. This transmission line is intended to allow Argentina and Brazil to utilise their electricity resources more efficiently and cost-effectively and should help Brazil in its bid to increase electricity supply within the country.
Chile: Chile continues to be the model for privatizing the electricity industry and unbundling the generation, transmission and distribution systems. As early as 1990, less than ten per cent of Chile`s electricity sector was owned by the government, and the last government controlled electricity utility, Empresa Electrica de Aysen (Edelaysen), is up for privatization. Other countries, such as the UK and Argentina, have used Chile as a model for their own privatization processes.
Chile has one of the most robust economies in Latin America. This strength is reflected in the country`s demand for electricity, which grew 23.3 per cent to 33.3 TWh in 1996 alone. Underpinning this growth is a high order level for gas-fired plant. Total thermal capacity in the country was just 2.6 GW in 1997, the same amount that was ordered by IPPs in 1998, indicating the rapid growth of private money in Chile`s electricity system.
Mexico: Mexico is the second largest economy in the region and appears to have recovered from the recession triggered by the 1994 peso crisis. Mexico has actually faced a number of difficulties in opening up its energy market to investors, despite being among the five largest Latin American markets. In December 1992, the Electric Power Public Service Law was amended in order to permit greater participation by the private sector in the electricity industry. As a result of this, the private sector has been allowed to participate in the electricity industry in activities not considered part of the public service.
Mexico`s difficult political and financial problems, however, have created wariness among potential foreign investors which has resulted in a decline in new projects, despite progress towards a more liberalized energy market. The transmission, transformation and distribution of electricity is still reserved for the public sector.The country also received 2.3 GW of IPP gas-fired power plant orders during 1998 from leading companies including EDF, AES and Sithe Energies.
Datamonitor is an independent market analysis firm specialising in the global power equipment and energy industries. Datamonitor publishes a wide variety of market information reports on the power generation, transmission & distribution equipment industries based upon primary research and significant expertise in the area. Datamonitor can offer a tailored research & analysis programme to meet your strategic information needs.
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Figure 1. Share of the Latin American power plant order volume by lead equipment supplier, 1998
Figure 2. Country-by- country positioning for IPP market attractiveness in Latin America