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LATIN AMERICA – Conquistadors return

Iberdrola is expanding its presence in Mexico and Brazil, with emphasis on natural gas and renewable energy projects. PEi examines the Spanish company’s objectives in the region.

Rafael A. Junquera, Editor, Potencia, USA

Spanish companies have always shown interest in doing business in what was once the most important part of their short-lived, but prosperous empire. Cultural proximity and a common language have always given them an edge in this diverse chunk of the American continent.

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However, energy companies such as Iberdrola have behaved differently, approaching only those markets that presented opportunities aligned with their global objectives.

Iberdrola, a powerhouse in the energy sector, but also with assets in other sectors such as real estate, has found fertile ground in only a handful of markets where it operates. The most notable are Mexico and Brazil because of their emphasis on promoting the development of natural gas power plants and renewable energy. The company also has a presence in Guatemala and Bolivia.

Chile, the most stable and presenting the most appropriate climate for foreign investment, is not quite out of the picture for new investment. Iberdrola is present in Chile through its subsidiary, Iberoamericana de Energàƒ­a (Ibener). However, Chile’s overdependence on natural gas imports from Argentina, the resulting crisis and the lack of programmes to assist the development of renewable energy such as wind seem to be limiting Iberdrola’s expansion in this market. The company has not signalled intentions to enter other markets within the next four years.

Mexico: a key market

Despite the fact that Iberdrola only operates in a few markets in Latin America, its revenues coming from that region reached €2.3 billion in 2006, contributing 18.2 per cent of the gross profit and 19.4 per cent of the net profit of the group’s total global profits.

Mexico is by far the largest contributor. Iberdrola combines Mexico and Guatemala, and these two markets represented 58.5 per cent of total revenue from Latin America in 2006. Gross profits here increased by 13.5 per cent in 2006 compared with the previous year.

Iberdrola is the largest independent power producer (IPP) and the largest foreign generator in the country, with 36 per cent of total installed capacity. Following the entry into service in 2006 of the Altamira V combined-cycle plant, with 1121 MW, Iberdrola now has six combined-cycle plants in operation in Mexico, with a total capacity of 3815 MW, which have generated 20 327 million kWh, 25 per cent more than in the previous fiscal year. This figure accounts for more than eight per cent of the total energy generated in Mexico.

On top of that, Iberdrola is building a new combined-cycle power planet named Tamazunchale, which is starting operations in the second half of this year. In the next two years, Iberdrola aims at consolidating its leading position in this market by reaching a total of 5500 MW of installed capacity.

However, investment for the next two years will decrease compared with 2004-2006. In that period investment reached €875 million, while expected investment in 2007-2009 is €825 million. Despite this decline, Iberdrola expects to generate 40 000 GWh in 2009, more than doubling the 16 320 GWh generated in Mexico in 2005.

Despite the fact that Mexico is not open to competition in its energy market, foreign companies can operate under the IPP scheme for either self-supply purposes – selling the excess to the national grid – and through direct contracts with Comision Federal de Electricidad (CFE), the state monopoly that controls most of the energy sector in the country.

However, other factors make this a favourable country for investment in the energy sector. First, contracts are denominated in dollars, eliminating the need to hedge against local currency fluctuations.

Most importantly Mexico needs to expand its generation capacity to keep up with economic growth and energy demand. CFE estimates that the country has to add 18 000 MW of new capacity from now to 2014. The growth potential therefore is strong and most of it will have to be carried out by the private sector.

Unlike other markets in the region, natural gas supply seems to be secure for power plants using it to generate electricity. The country is expanding its gas infrastructure to ensure it can diversify its natural gas supply through pipelines or liquefied natural gas terminals (LNG).

The rest of Latin America

In the rest of Latin America, Iberdrola faces several scenarios in the countries where it already operates, and does not seem to be considering expansion into new markets at present.

In its current markets, Brazil offers the highest possibility for the company. Iberdrola is the largest energy distributor in the northeast area of Brazil, with its Neoenergua holding that owns a 39 per cent stake in Companhia de Electricidade do Estado da Bahàƒ­a (Coelba), Companhia Energética de Pernambuco (Celpe) and Companhia Energética do Ràƒ­o Grande do Norte (Cosern). These distributors serve 7.7 million users.

In terms of generation, Iberdrola has 479 MW of installed capacity. Most of this installed capacity comes from a combined-cycle plant (Termopernanbuco) and hydro power plant (Itapebàƒ­). Iberdrola also has assets in small hydro plants and 93 MW in cogeneration plants through its subsidiary Energy Works Brazil. In 2006, Iberdrola kept its investing pace in the country and got concessions to build additional plants that would add 398 MW of capacity to its portfolio, divided into two hydroelectric projects, Dardanelos with 261 MW and Corumbàƒ¡ III with 94 MW.

Iberdrola has a small percentage of the generation business in Brazil, but during 2007-2009 it is expected to invest a total of €725 million, of which €394 million has been allocated to increase its generation capacity in the country. The remainder is being allocated to its distribution business with €204 million and €127 million in transmission to build 500 km of new lines.

Brazil is the largest energy producer in Latin America and market reforms in the electricity sector have created a more favourable investment environment. For Iberdrola, these include incentives for the development of new renewable power plants through a programme called Proinfa and the development of biofuels in which Brazil is taking a clear lead, not only in the Latam region but also on a global basis.

Iberdrola is the leading electricity supplier in Guatemala and the second-largest transmission com-pany through Eléctrica de Guatemala, S.A. (EEGSA) and Trelec, S.A., in which the company has a 39 per cent interest.

Chilean dreams

In Chile, the company has assets in the generation business through its subsidiary Ibener, in which it holds a 95 per cent interest. In 2006, the two hydroelectric plants, Peuchén (75 MW) and Mampil (49 MW), generated 506 million kWh (up 3.7 per cent) and posted sales of€21 million, up 17 per cent compared with the previous year.

Chile could be an interesting market for Iberdrola, since it needs to expand its generation capacity and has a very favourable regulatory environment. However, the situation in Argentina has greatly affected Chile, which relies entirely on its neighbour for its gas supply. In 2004, Argentina started cutting exports of natural gas to Chile, thus breaching the natural gas export contracts. Although gas supply has been increasing in recent months, it has still not reached the levels prior to the Argentinean crisis, and there are no guarantees that imports will not decline unexpectedly once again. A new LNG terminal is being built by BG Group and should start operations in 2009, but until then uncertainty prevents companies like Iberdrola from expanding.

On the other hand, Chile needs to develop a framework to promote the usage of renewable energy in the country. Wind energy is almost non-existent and there are not yet incentives to attract private investors to study Chile’s wind potential. With such incentives Iberdrola could be one of the companies interested in developing such projects.

Bolivian backwater

In Bolivia, Iberdrola is involved in the distribution business. In 2006, the two supply companies Electropaz and Elfeo, in which the Spanish company has stakes of 57 per cent and 59 per cent respectively, provided 429 901 users with 1354 million kWh.

At year-end, sales for both companies came to €65 million. The company has not announced any new investment in Bolivia so far, which could be due to the new political environment since Evo Morales was elected president.

Strangely enough, Bolivia is the poorest country in South America although one most blessed with natural resources, including the second largest natural gas reserves in the region after Venezuela.

Why not other markets?

It seems clear that Iberdrola is concentrating on natural gas power plants and renewable sources of energy – wind and small hydro.

Although these ways of producing energy would make it seem that there is room for expansion in Latin America, only a few markets offer the right conditions; the rest present too many uncertainties.

Many countries in Latin America have access to natural gas, like Bolivia and Venezuela, either from their own, well-established reserves, or, like Peru and Brazil, from recently discovered sources, or from pipelines connecting Brazil, Argentina and Chile. LNG terminals are also being built in Chile and Mexico.

Wind resources abound in Latin America, but exploiting them faces several barriers, such as competition with other sources, especially gas and hydropower. Without government incentives or using mechanisms such as carbon credits, wind is not generally viable even in locations with ideal wind conditions. But if this trend is reversed, Iberdrola will be among the first to show interest, since it helps them meet their carbon obligations in other markets.

Iberdrola sees future growth coming from its international operations. It expects energy demand in Mexico and Brazil, to increase by 5.2 per cent in 2007-2009.