Latin American governments are turning to closer integration as a means to overcome energy crises and power shortfalls brought about by drought and overdependence on imports. Chris Webb reports.

Chris Webb

A fter a faltering start in the 1990s, co-operation is emerging as a key driver in the power markets of Latin America. Or at least that is the message that political leaders want to spread in their efforts to reverse two decades of shambolic restructuring, which has left vast swathes of the region stumbling from one energy crisis to another.

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Bilateral and, in some cases, multi-lateral deals could set a trend for greater competition in the region. There are long overdue signs that power companies are taking seriously the worldwide trend towards a ‘Smart Grid’ vision for the future. They want a slice of the action that brings with it the promise of leveraging new infrastructure to improve asset management and optimize resource planning.

Utilities, regulators, consultants and vendors alike are becoming sensitized to the huge changes taking place globally in utilities’ power delivery and metering markets; they are beginning to understand the future impact these changes will have both nationally and within the region. Smart grids could mean better revenue protection, improved maintenance of the network, optimized resource planning and improved energy management overall.

Chile is one country where smart grids would make a lot of sense. Over the past decade, Chile has privatized 100 per cent of its electricity industry and unbundled the national generation, transmission, and distribution systems. Empresa Nacional de Electricidad (Endesa-Chile) is Chile’s largest electricity producer, producing over 50 per cent of the country’s power.

Hydropower problems

Today, almost two-thirds of Chile’s electricity comes from hydroelectric plants, the remainder being provided by plants fired by natural gas imported from neighbouring Argentina. But here lies a problem. Faced with a unique set of difficulties of its own, Argentina has cut gas supplies to Chile at a time when hydroelectric reservoir levels have fallen perilously low as a result of scant rainfall.

The drought is especially unwelcome at a time when Chilean energy demand has been growing rapidly, averaging more than seven per cent annually since 1992. A significant portion of this growth has come from increased power demand by the mining sector, the country’s single largest industry, and by large urban areas such as Santiago, which alone contains almost 40 per cent of Chile’s population. The increased demand, combined with few fossil fuel resources, make Chile a net importer of energy.

Hydropower has historically been Chile’s single largest power source, but the spectre of drought has never been far away, periodically curtailing hydropower production, causing supply shortfalls and blackouts. In 2007, Chile suffered one of the driest years in 50 years and the final figures for 2008 are not looking much better.

In response, the Chilean government began in the 1990s to diversify its energy mix to become less reliant on hydropower, mainly by building natural gas fired power plants.

Conventional thermal sources, especially natural gas fired, have become increasingly important to Chile’s electricity supply as a way to reduce susceptibility to hydroelectricity’s seasonal fluctuations. However, due to the Argentine natural gas crisis, coal fired power plants have begun to receive renewed attention. Chile has two existing coal fired facilities, the 340 MW Ventanas and the Guacolda plant.

Chile calls for coal

In early 2006, Guacolda a company majority-owned by AES of the United States, received environmental approval for a 200 MW addition at the facility. AES also received environmental approval in August 2006 for a 250 MW expansion at the Ventanas facility. Other companies that have stated interest in building new coal fired capacity include BHP Billiton (300 MW), Endesa (350 MW) and Suez (400 MW).

So desperate has the situation become that in March Chile passed a law requiring electricity companies to invest in non-conventional energy sources (NCES), or alternative sources including wind, solar and geothermal. Initially, utilities were under orders to supply at least five per cent of their electricity sourced from NCES by 2010, rising to 10 per cent by 2024.

Chile’s government now plans to raise stakes considerably, and the proportion of non-conventional renewable energy to 15 per cent of installed power plant capacity by 2010. It is a significant challenge, yet it is hoped the initiative will spur a diversification in its supplies as the country strives to satisfy a booming industrial sector.

Laguna Verde is Mexico’s sole nuclear plant, located in the municipality of Alto Lucero, Veracruz
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Utilities are coming round to the prospect that Smart Grids could offer part of the solution to the need to modernize networks. They could be a means to better manage the network, limit electricity losses, reduce carbon emissions, prevent outages, and provide customers with information and tools to better manage their own energy use. There are now clear signs that an initiative, begun in the 1990s when broadband power line solutions first looked promising, will be revived.

But Chile is not yet ready to turn its back on traditional methods. As recently as August, electricity generator AES Gener said it would invest more than $3 billion up to 2011 to build seven new, mainly coal fired, power stations. Luis Felipe Ceron, AES Gener’s general manager, said the plants would have a combined capacity of nearly 1500 MW. The move is most welcome in Chile, where the crippling energy squeeze has forced companies to rely on expensive diesel generators.

The drought-induced shortages are already affecting lucrative mining operations in the north of the country, where around a third of the world’s copper is produced, and where ambitious expansion plans are coming under threat. Construction is already under way on the first of the seven plants that will come into production over the next four years.

But if Chile’s plans for new coal fired capacity have met with opposition from environmentalists, so too have the intentions of Endesa Chile, a subsidiary of the Spanish transnational corporation of the same name, to build four large hydroelectric plants at Patagonia, some 2000 km south of Santiago. The $3 billion Aysén hydroelectric project will involve the construction of dams on the Baker and Pascua Rivers, flooding an estimated 10000 hectares of land while, it is claimed, destroying a number of wetlands and the habitats of endangered species.

Environmental groups would prefer to see more wind farms and have backed plans to invest $47 million in a facility at Punta Curaumilla in Laguna Verde. It will have 12 wind turbines each with a capacity of 2 MW capacity, providing enough power for 10 000 homes and businesses in the Valparaíso region. The power supplied will feed into an energy grid of the Interconnected Central System via a substation in central Laguna Verde and then distributed throughout the region.

Peru’s enviable position

Peru already enjoys an enviable position in Latin America, having a surplus of electricity and proven gas reserves of 380 billion m3. It is four years since the inauguration of Peru’s flagship Camisea natural gas project, which will ultimately see liquefied natural gas exported to the west coast of the USA and Mexico. Upon completion, the Camisea project is expected to transform Peru’s economy, catalyze national development and turn Peru into a net energy exporter.

Currently, Peru’s installed capacity is evenly divided between hydroelectricity and conventional thermal generating plants. The country’s largest hydroelectric facility is the Mantaro complex in southern Peru, operated by state-owned Electroperu.

Mission: Integration

In South America as a whole there are signs of deeper energy integration starting to become a reality. Earlier this year the presidents of Venezuela and Brazil pledged to accelerate efforts of their two countries to present a unified front to tackle their energy woes.

Energy integration is nothing new to Latin America and closer energy interdependence between Brazil, Bolivia, Argentina and Chile over the last decade may, in the minds of some observers, actually have worsened the region’s current energy crisis. They say that unorthodox policies in Argentina and the nationalization of gas reserves in Bolivia have created a unique set of problems. Argentina cut off power to Brazil and ended natural gas supplies to Chile because of its own energy rationing arising from what its critics view as unwise energy policies that have turned off foreign investment.

Nevertheless in March, Brazil’s president Luiz Inacio Lula da Silva and his Venezuelan counterpart, Hugo Chavez, sought to advance talks on building a joint gas pipeline straddling the Amazon region and spanning thousands of miles of Brazil’s interior, and other countries. It would connect Venezuela, which has Latin America’s largest gas reserves, to Argentina. But the scheme is expected to face daunting logistic and bureaucratic challenges.

Brazil’s electricity generation by type, 2006 Source: Energy Balance 2006, Ministry of Mines and Energy
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Elsewhere in the region, Argentina and Ecuador signed an agreement aimed at promoting a joint venture company, Coca-Codo-Sinclair, for the construction of a hydroelectric plant. It will be the largest hydroelectric power plant to be built in Ecuador since the Paute hydroelectric project. With an investment of $2 billion, the 1600 MW plant will be located in the Amazonian region of the country and its construction will take five years.

Argentina has a long tradition of exporting fossil fuel, especially petroleum, being the first South American country to discover significant petroleum deposits. Electricity is generated by both hydropower and thermal plants, but Argentina is also one of only three countries in the region – along with Mexico and Brazil – having nuclear power. Additionally, Argentina has energy network interconnections with neighbouring countries, forming strong energy integration in the region.

According to data obtained from the study Energy Scenarios to 2018 (Escenarios Energéticos al 2018), published by the Latin American energy organization OLADE, Argentina has interconnection gas pipelines with Bolivia, Chile, Brazil and Uruguay, and could build new interconnections with Paraguay and expand the existing interconnection with Brazil. There is also a gas pipeline project with Venezuela and Brazil that is still under consideration.

Likewise, Argentina has electricity interconnections with Brazil, Chile, Paraguay and Uruguay. In a strong integration scenario, forecasts are that by 2018 Argentina could have interconnections with Bolivia and expand existing interconnections with Brazil. Argentina also has two big hydroelectric power plants – Yacyretá and Salto Grande – which it shares with its two neighbouring countries, Paraguay and Uruguay.

Mexico makes a move

To the north can be seen evidence of a trend that is now gaining momentum in Latin America. Mexico’s electricity generation mix is gradually shifting from oil products to natural gas. Mexico’s state-owned Comision Federal de Electricidad (CFE) is the dominant player in the generation sector, controlling some two-thirds of installed generating capacity.

CFE also commands a monopoly on electricity transmission and distribution outside of Mexico City and some other municipalities, while within those areas state-owned Luz y Fuerza Centro (LFC) has a monopoly on distribution activities.

In 1992, changes to Mexican law opened the generation sector to private participation, yet any company seeking to establish a foothold must first obtain a permit from Mexico’s energy regulatory body, CRE. CFE also operates Mexico’s national transmission grid, which consists of 40 000 km of high voltage lines, a similar length of medium voltage lines, and 500 000 km of low voltage distribution lines.

Natural gas consumption for electricity generation has risen dramatically in recent years, and is now the dominant feedstock, although coal consumption has also risen to some extent.

Mexico has a single nuclear power plant, the 1400 MW Laguna Verde nuclear reactor in Veracruz, operated by CFE. In April 2007, CFE awarded a contract to an international consortium headed by Alstom to modernize the plant and increase generating capacity by 20 per cent.

Not to be left behind in the renewable stakes, Mexico’s CFE operates two wind power facilities, La Venta and Guerrero Negro, with combined capacity of 3 MW. In March 2007, CFE La Venta II came online, adding 83 MW of generating capacity to the wind park. CFE has launched a tender for a third phase of the project, which would add an additional 100 MW of capacity. The Cerro Prieto complex is the largest geothermal facility in Mexico, consisting of four plants with a combined capacity of 720 MW.

Chile power market hots up

To fully grasp the enormity of the problem posed in the region by drought and rising natural gas prices – and indeed rationing – it is necessary to return to Chile, where the government is taking steps to mitigate both shortages and escalating prices. Chile is focusing its attention on projects for research and exploration into a raft of renewable energy sources.

Those such as solar power, wind power and geothermal energy are being developed, yet a further foray into nuclear energy seems unlikely, as Chilean president Michelle Bachelet has flatly ruled out establishing any kind of guidelines for a future nuclear programme.

Nonetheless there is a growing chorus of support for more nuclear power, especially among business leaders and academics who see it as a route to cutting carbon emissions, while ensuring secure homegrown power supplies.

To date, the private sector has invested in renewables only in a few isolated instances, especially since unresolved technical and legal issues have made accessing the electric grid difficult. Then there is the price premium often attached to renewable generation. In the liberalized electricity markets, renewables must also compete economically with conventional energy sources.

The restrictions on natural gas deliveries from Argentina, which began in 2004, have undoubtedly been a catalyst for increasing interest in renewables in Chile, however. And rising energy prices and steadily increasing energy needs are prompting renewed debate among policymakers and the public at large over the security of energy supplies and the sustainability of the energy sector generally.

It is widely recognized that political acceptance and the investment climate for supplying the grid with electricity generated from renewable sources have improved significantly of late. Chile is also wants to remove the structural market constraints that are hindering the expansion of renewables. These include planning constraints and grid access issues.

Ultimately, it is hoped that new guidelines governing renewables, which became effective at the beginning of 2006 and regulate grid access for power plants of up to 20 MW capacity and their integration into the energy market, will create new incentives for investment.

The rest of the Latin American power community is watching Chile’s progress with interest, as efforts to kick-start foreign investment represent an opportunity too good to miss.