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Privatization in Latin America opens the market to competition

Privatization in Latin America opens the market to competition

Douglas J. Smith

Managing Editor

This issue of Power Engineering International focuses on Latin America which is second to Asia in the need to construct more electric capacity. The cover story by Ann Chambers, Associate Editor, reviews the many changes and market opportunities now taking place in Latin America. With the need for thousands of megawatts of new capacity, the electric power industry throughout Latin America is being privatized and deregulated.

Privatization of the Latin America power industry has been under way since 1982 when Chile opened its industry to privatization. At that time, Chile unbundled the generation, transmission and distribution of its electric power industry. Under Chile`s deregulated system, the generator supplying the least cost electricity is dispatched first.

As we entered the 1990s, we saw one of the area`s worst power sectors, Argentina, being privatized. Under privatization, Argentina has opened the wholesale electric power market to true competition. Today in Argentina, generating companies have open access to the country`s transmission system and by law they are required to participate in economic load dispatching. Payment for the energy supplied is based on a rate that is calculated hourly.

With deregulation and privatization of its industry, Argentina has reduced the number of power outages dramatically and reduced costs to the consumer. According to industry experts, Argentina`s electricity is currently half of what it cost in 1992, and in addition the supply is more reliable.

Currently, Brazil is in the process of privatizing its government-owned electric utilities. Under Brazil`s Federal Constitution of 1988, all public-related concessions had to be put out to competitive bidding. However, in July 1995 Brazil passed a law establishing the right of independent power producers (IPP) to generate electricity for sale to public-owned electric utilities and to consumers with a demand greater than 10 MW. Industrial customers who already receive steam from an IPP and any consumers who can demonstrate that the local electric utility cannot assure them a supply can also purchase their electric power requirements from IPPs.

Demand for new electricity capacity in Latin America is projected at 4 to 5 percent annually, and there is a need to add more than 30,000 MW in the region by the year 2000 and an additional 35,000 from the year 2000 to 2005. Brazil and Mexico are currently the market leaders with both countries having a need to add thousands of megawatts of new electric capacity by 2005. Brazil is currently adding 2,000 to 3,000 MW of new capacity annually while Mexico is expected to add around 1,500 MW annually.

Prior to opening the electric sector in Latin America to competition, this area suffered severe electric outages and some of the world`s most costly electricity. With privatization, and a free market system, consumers throughout Latin America are now starting to reap the benefits of a free market economy. Today, electric utility profits depend upon how efficient the company operates, which is the way it should be. The days when electric utilities were monopolies receiving a guaranteed rate of return with an obligation to serve are going the way of the dodo bird. Whether the new unregulated electric industry will be able to supply a reliable and competitive product to all of its customers is still uncertain and only time will tell.

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