Latin American countries moving independently toward a cooperative, integrated electrical future
One of the fastest growing markets in the world, Latin America is offering substantial improvements to attract top technology and investors
By Ann Chambers
Latin America has long been touted as a coming player in the global financial community, but the region is really coming into its own, in terms of electric power financing, construction and progress. Privatizations abound in many countries and others are scrambling to establish the regulatory or financial basis for more privatizations in the future. Second only to Asia in terms of skyrocketing demand for power and increasing construction and investment in the industry, Latin America bears watching–by equipment manufacturers, industry professionals and investors alike. An assortment of the industry`s big-name players have already established a foothold in this prospering area, but there should be room for all as we turn the corner on the next century.
Chile was the “success story of the `80s,” but Argentina is becoming the success story of the `90s, according to Carlos Yermoli, Hagler Bailly Consulting director, during the recent “Latin America Power Industry Forum” in Orlando, Fla., USA.
Yermoli said Chile orchestrated a consolidation of the energy market, widespread Latin American investment, rebundling and consolidation of assets to make it the “grandfather” of market reforms in Latin America. Argentina, on the other hand, now shows “competition at its best.” Yermoli said Argentina offers a “true model of sudden privatization,” as it has attracted capital into “one of the worst power sectors in the world.”
Competition has brought pricing down. Peru and Bolivia are laying down the foundations for competition, while Colombia, Central America and the Caribbean are working on the legal frameworks to encourage more independent power activity. Ecuador and Venezuela are fluctuating, taking a few steps forward toward an open market, then backtracking. Mexico announced in the fall of 1996 plans to open its market to full competition.
“Hydroelectric power in Latin America grew rapidly between 1960 and 1980. Many good and not-so-good projects were built during those years in every country in continental Latin America, including some of the largest in the world,” Yermoli said. “Ironically, hydropower has also been a major factor in the public`s loss of confidence in the large national power monopolies it helped create. The droughts in El Salvador, Guatemala, Colombia and Honduras provoked legislation to de-monopolize energy supplies. But most national power utilities in Latin America have not been dismantled or privatized to the extent they were in Argentina and Chile, and many may never be. Private power developers can expect mixed signals from a national utility fighting for survival and converted by a privatizing government into both an unwilling client and regulator of private power activity.”
Yermoli offered predictions for the next five years in Latin American power:
– Hydro revival. Before privatization began, state utilities were planning many large hydro projects and the basic studies for these are complete. When private power entered the markets, these projects became unviable. They are high risk and capital intensive with long construction times, although the fuel is inexpensive. These projects will become more attractive as the markets stabilize and capital financing becomes easier and less expensive. Many of the projects were optimized based on financing costs and fuel prices will need to be redeveloped to meet the needs of the private sector–producing revenue earlier and bringing in higher capacity factors.
– Natural gas. This fuel will have a strong effect on the southern part of the region due to pipelines which are going in.
– Nuclear privatization. Several countries are discussing privatizing their nuclear plants.
– Big new markets. The next few years should reveal the victor in the race to be the next big open power market. Brazil and Mexico are currently neck-and-neck. More than 5,000 MW need to be installed by 2005 in Latin America with 58 percent of that in Brazil and 20 percent in Mexico. Venezuela also looks to be a large market, with predominantly hydro generation.
– Small markets. The Dominican Republic needs 1,600 MW by 2005, Guatemala needs 1,100 MW. Many of the smaller countries which had relied on one large facility for their power needs are now diversifying, adding small hydro or thermal sites and diversifying their mix.
Gregory J. Moroney, Deutsche Morgan Grenfell director and Natural Resources Group head, offered a broad view of the Latin American market during a recent “Latin Energy Finance Conference.”
The period of 1982 to 1989 was difficult for Latin America, as the region experienced a debt crisis, low economic growth, a decline in foreign investment, uncertainty regarding government policies, limited investment and project activity, limited cross-border funding and the emergence of economic adjustment programs in Chile, Mexico, Bolivia and Argentina. The early 1990s brought positive results from the economic adjustment programs, a shift to freer market policies which included privatization, voluntary restructurings to improve external debt profiles, enhanced investor perceptions and a faster economic expansion.
Despite the Mexican peso devaluation, there is now a generally improving political and economic environment with strong project demand due to low levels of investment in both infrastructure and industry. North American, European, Australian and Asian project sponsors are interested in the region. Project size has risen above the capacity of traditional funding sources, but innovative financings blending corporate and project finance techniques are appearing, according to Moroney.
“The Latin American countries have followed privatization and economic development policies, and this has attracted substantial private sector investment,” Moroney said. “Increased demand and liquidity has led to increased competition which has led to multiple sourcing options. Any reasonable project can be structured and funded on favorable terms and at favorable rates.”
Constraints do remain in the market, including the size and availability of political risk coverage, final tenors for pipelines and power plants that are not yet in the 20-year range, cash flow certainty and offtake agreements are difficult, and the stability and experience of the staff of the host governments and their agencies are questionable.
The market in Argentina underwent a transformation, starting in 1991, as a wholesale market began with real open access to new generators, strong competition, open access to the transmission system and privatization of government-owned facilities. The wholesale market includes economical dispatch, with all generators required to participate in the load dispatch, hourly energy price based on dispatched generators and payments for cold reserve. There is a system in place to stabilize the prices to customers for three-month periods, according to Jorge Karacsonyi, a Hagler Bailly consultant.
Prices to final users have been cut to half of the 1992 price–from (US)$50/MWh to $25/MWh. Electricity in Argentina is now cheaper and more reliable.
A variety of new plant developments has sprouted in this stronger market. Now online is 1,600 MW of new generating capacity, including 1,300 MW from gas turbines and 520 MW from combined-cycle facilities. A total of 1,225 MW is under construction, of that 275 MW of gas turbines and 950 MW of combined cycle. Another 3,080 MW is “in study.”
Brazil is adding 2,000 to 3,000 MW annually. Its installed capacity is currently 93 percent hydro. Total installed capacity is 60,000 MW and the nation has 17 plants of more than 1,000 MW capacity. There are 150,000 km of transmission lines and 1.6 million km of distribution network. Energy consumption is 225 Twh.
CERJ, LIGHT, and ESCELSA were privatized in 1995 and 1996. Three other privatizations are in progress.
“A 5 percent annual rate of expansion means a yearly growth of 3,000 MW, and the rate in `94-95 was about 7.6 percent. This means (US)$4.5 billion per year for investments in generation. Investments in transmission and distribution will be a little lower,” stated Jose Guilherme Antloga do Nascimento Darcilio Augusto Gomez, National Department for Water and Electrical Energy, in his overview of the Brazilian power industry during “POWER-GEN International” in December 1996.
“Private participation in power companies will lead to greater care in determining more realistic tariff levels. As long as the government is the only owner, it will be difficult, for political reasons, to recover tariffs adequately,” he said.
The Federal Constitution of 1988 requires that all concessions relating to public services be subject to bidding. In July 1995, another law was approved to supplement regulation, establishing the right of independent power producers (IPP) to produce electric power for sale to public utilities. It also granted choice to consumers with a demand equal to greater than 10 MW, consumers of electricity integrating an industrial or commercial complex to which the IPP also supplies steam from cogeneration, and any consumers demonstrating that the local utility has not ensured their supply.
In September 1995, Decree 2003 was published regulating IPPs and autoproducers. Gomez noted the main points as:
– concessions for hydraulic resources use, depending on size, are granted through bidding;
– thermal power plants need only authorization, no bidding is required;
– authorizations come with rights and obligations emphasized;
– ability to use property and purchase agreements for future revenues can be used as loan guaranties, enabling the project finance framework;
– energy block exchanges are allowed in partnerships; and
– free access to transmission systems.
“The flow of investment to the Brazilian electric sector will be driven by three factors–privatization, new concessions and partnerships. It can be concluded that in Brazil there is a clear trend for increasing participation of the private sector in the electric power industry,” Gomez said.
Brazil`s National Privatization Council had a change of plans in January, deciding to sell small power plants together with the large subsidiaries, instead of taking bids for each individual plant. Eletrobras has four large subsidiaries–Chesf, Eletronorte, Eletrosul and Furnas. Privatization is anticipated this year.
Sao Paulo began privatization in January, with consulting firms submitting proposals for the sale of Companhia Paulista de Forcae Luz (CPFL), Eletropaulo and Cesp. It is estimated that the sales could raise (US)$12 billion. The CPFL auction is tentatively scheduled for August 1997, with Eletropaulo and Cesp going on the block in September 1997.
Mato Grosso, a Brazilian state, plans to sell its electrical power utility Cemat at a privatization auction in October of this year.
The energy sector in Chile is now largely private, according to David W. South, Energy Resources International vice president. There is 2,073 MW of capacity set for operation by 1999 that will be open to private developers. The country has an annual load growth of 6 to 7 percent, and demand is rising by 250 to 350 MW per year. Existing capacity in Chile is 2,028 MW of thermal generation and 3,162 MW of hydroelectric.
The nation has a stable investment climate with no restrictions to foreign participation in energy, and the government is committed to reforms and deregulation.
South noted that Chile has a mature market and a strong grid. On-site power production is an expanding market as facilities are added to meet mining needs in the nation. Multi-fuel technologies are popular, and environment, natural gas and siting are key issues in Chile.
Empresa Nacional de Electricidad S.A. (Endesa), Chile, is now a partner in the Atacama Consortium, which will build and operate an 800 km pipeline transporting natural gas across the Andes Mountains from northern Argentina to northern Chile. Endesa and US-based CMS Energy Corp. have announced that the project will include a natural gas-fueled, 400 MW combined-cycle electric generating plant, to be built in northern Chile.
“The $700 million Atacama project is a world-class energy infrastructure development that will combine CMS Energy`s gas pipeline and power generating experience with Endesa`s expertise in electric generation and its knowledge of Chile`s competitive electric market, so that the energy and environmental needs of the northern Chilean market will be met,” said Victor J. Fryling, CMS Energy president.
The 400 MW plant is scheduled to begin operation in 1999, with gas transportation from the pipeline to begin in February 1999.
The 820 km, 20 inch diameter Atacama Pipeline will originate in Argentina`s Noroeste gas-producing basin, extending westward to Mejillones with the potential to extend laterals to Antofagasta, Tocopilla and Calama in northern Chile.
Colombia has an installed capacity of 10,000 MW for a population of 35 million. The nation had only 8,000 MW in 1991. Demand growth was 40,000 GWh in 1994. Consumption is approximately 40 percent residential, 10 percent commercial and 20 percent industrial.
Law 143, passed in 1994, unbundled power for unregulated consumers who meet certain requirements, enabling them to buy from IPPs. The wholesale market began on July 20, 1995. Generators receive capacity payments of (US)$5.25/kWh per month, effective Dec. 1, 1996.
Projected demand in 1996 was 40,000 GWh, but by 2010 demand should exceed 100,000 GWh, according to Glenn Ayula, America Capital Partners.
Core projects in Colombia between 1995 and 2000 include Las Flores, 100 MW gas; Porce II, 392 MW hydro; Miel I, 372 MW hydro; and Termobarranquilla, 750 MW gas. The government projects consumption will grow by more than 5 percent annually.
Colombia has hydrocarbon reserves of 3.2 billion barrels of proven oil reserves, 7.6 trillion Cf of gas, and the largest coal reserves in Latin America. The current generation mix is 78 percent hydro and 22 percent thermal, but the government plans to increase the thermal share to 40 percent by 2010.
“Consolidating political reform and restoring economic growth in an open economy are the overriding goals of the present Mexican administration,” said Rick A. Bowen, Destec vice president, business development, during last fall`s “Mexico-Power” conference in Monterrey.
“During the last three years, you have been listening about changes that were occurring in the Mexican electric industry and in the Federal Commission of Electricity in particular. The first ones meant modernizing the national electrical sector and allowing the private sector to participate in the expansion of the mentioned sector.”
He noted that the privatization process in Mexico is demonstrated by the conclusion of financing for the Samalayuca II project, the bidding process for the construction of the Merida III project and the approval of a private thermal-power project in Altamira.
“In accordance with the goals that the present government proposed, the program of stabilization and structural reforms was started, which not only have been of economic character but also institutional, social and political, and all now tend to modernize the Mexican state,” Bowen said.
The stated objective of the Mexican government in initiating reforms has been economic stabilization, re-entry into the international financial community, opening to a free competition system and the promotion of private investment.
“Almost 10 years have passed since the installation of the new form of government and since it started applying a program for economic stabilization from which we can already appreciate the fruits,” Bowen said.
The government has implemented a series of amendments designed to regulate the energy sector of the country, including the creation of the Regulatory Commission of Energy as an independent organization; the new Federal Law of Economical Competition; the National Commission for the Saving of Energy; and the new Regulation for Electric Generation.
One of the precedent-setting projects in Mexico is Samalayuca II, a 700 MW combined-cycle natural gas plant, which was the first privately financed project in Mexico. Financing closed in May 1996, construction started immediately thereafter, and the facility is expected to be operational in 1998.
Samalayuca II will have three GE 107FA combined-cycle systems with dry low-NOx combustors. The alternative fuel will be diesel oil. Comision Federal de Electricidad (CFE) is responsible for fuel purchase.
The facility is sited near the Texas, USA, border and a pipeline is under construction. All of the natural gas for the project will be to all the gas to be purchased by PEMEX from the US. Gas will be purchased by PEMEX to supply Samalayuca. The regional electric grid in this area is isolated from the rest of Mexico.
New capacity demand is running at 4.6 percent annually in Mexico, and there is limited infrastructure for importing power from the US.
Samalayuca is a US-Mexican consortium which includes GE Power Systems, GE Capital Services, International Generating Co., El Paso Energy Corp. and ICA, a large Mexican civil contractor. GE owns 42 percent, El Paso 30 percent and ICA 10 percent.
It`s a build-lease-transfer arrangement, in which the consortium will build the facility and lease it to CFE for 20 years, then ownership transfers to CFE at the end of the lease.
The 40 MW, diesel powered Escuintla Energy Center in Escuintla, Guatemala.
Coastal Oil Co.`s Nejapa Power Station is a 91 MW diesel facility near San Salvador, El Salvador. Photos courtesy of Mike McPheeters, Black & Veatch.
The 40 MW Pavana I project in Honduras, developed by a local IPP, Lufuza. Photo courtesy of Stewart & Stevenson.
The 160 MW Ave Fenix Power Plant is one of the first independent power projects in Argentina that is a merchant power station. It entered commercial operation in October 1996. Photo courtesy of Stewart & Stevenson.
Installation of one of nine generator rotors at Itaipu, the world`s largest hydroelectric plant, sited in South America. The plant has four 50 Hz generators each rated at 730 MW and five 50 Hz machines each rated at 700 MW. The rotor pictured weighs almost 2,000 metric tons and has a diameter of approximately 16 meters. Photo courtesy of Siemens AG.