Making the Latin American connection

Akbar Nemati
Credit: Akbar Nemati

Latin America has ambitions to establish a fully-integrated electricity market, but creating such a market is notoriously difficult. Ivan Castano looks at the progress so far and asks what is a realistic time-scale for this rapidly-developing region.

It is one thing to talk the talk – quite another to walk the walk. Energy experts cite this popular refrain when asked how long it will take for Latin America to build a fully-integrated power market.

They stress many governments are enthusiastic about pursuing such project but have to negotiate an incredibly complex political roadmap.

“In industry forums, politicians always talk about the need for integration and brotherhood in Latin America but in practice, that goal is much more complicated to achieve,” says Isaac Castillo, an independent energy consultant who has worked on several regional integration projects.

Echoing other observers, Castillo says a basic electricity market is unlikely to be ready until 2025, mainly due to technical and political obstacles.

Maria del Carmen Tovar, a Lima-based lawyer who oversees electricity grid connections in Latin America for Baker & McKenzie, agrees. “Finding more ways to interconnect the power markets is an important objective for Latin America,” she says. “All the administrations have it on the agenda but they don’t prioritise it. I see this moving slowly with no significant progress until ten years from now.”

According to observers, a string of international accords, technical co-ordination and studies to help governments understand the economic gains that can stem from integration are crucial to create a regional and wholesale power market – something that will not happen overnight.

Integration benefits questioned

That said, some countries are working to link-up their electricity networks and have made progress. Castillo cites Colombia and Ecuador as notable examples. The two neighbouring nations boast the Andean Community’s (Comunidad Andina, CAN) largest interconnected network, exchanging up to 500 MW through two 230 kV transmission lines. Ecuadorian power firm Centro Nacional de Control de Energia and Colombian counterpart XM trade electricity through bilateral agreements.

“The connection between Ecuador and Colombia has helped resolve supply deficits in Ecuador and enabled Colombia to sell big surpluses,” Castillo says.

In turn, Venezuela and Colombia are also expected to increase electricity trade, due to big supply deficits in southern Venezuela. In 2012, Colombia sold 478.4 GW to Venezuela, up 92.3 per cent from 2011, say analysts.

The growing Colombia-Venezuela, Colombia-Ecuador trade “shows there is huge exchange potential in the region,” Castillo says. “However, in the long term, we are looking at big territories and countries that have very different energy requirements and for which the benefits of integration are not equitable.”

Mexico to Colombia

Currently, Mexico and Guatemala swap 200 MW through a network connecting their southern and northern borders. Mexican state-owned power supplier CFE (Comision Federal de Electricidad) and its Guatemalan peer Inde (Instituto Nacional de Electrificacion) trade through a bilateral agreement via which Guatemala buys most of the power.

According to Castillo, the CFE wants to expand that exchange to gain access to Central America’s largely integrated and promising power market. However, Guatemala has resisted such a move, arguing that the Mexican connection should remain bilateral and not regional. Panama and Colombia are caught in a similar situation, with Panama saying it does not want Central American power firms to meddle in highly-complex negotiations to merge their power markets.

Guatemala is also blocking Belize’s efforts to access the Central American market. Currently, Belize and Mexico exchange some 80 MW of power. “These countries have to lift their barriers for integration to take place,”‘ Castillo says. “There is going to have to be a lot of talking and patience needed to convince politicians that regional integration is better than bilateral.”

Bogata
Bogata: Colombia has made progress in trying to establish electricity links
Credit: David Knox

Panama-Colombia stalemate

Investors looking to participate in a long-planned, yet highly problematic, 600 km line to link Panama and Colombia’s electricity grids will also need patience.

The $500 million undertaking, which could see both countries share up to 300 MW, is frozen because of a political impasse.

Experts say Panama does not view the project – which will require a high-voltage line across the dense Darien forest that virtually blocks road access to Colombia – as a priority, not does it want to bankroll it.

However, there are talks for a third and fourth investment partner to join the initiative, which initially called for Panama and Colombia to equally share construction costs. However, in light of Panama’s reaction, several Colombian and international investors have expressed strong interest to help finance the line.

Such investors include Colombian generators ISA and Endesa Colombia, says Castillo, who is confident Panama will eventually take part in the project “to avoid looking bad politically” as investors continue to pressure the government to flex its muscles.

Siepac nears completion

Despite their interest, Colombian generators will have to wait before the Central American market is big enough to turn a profit.

The $494 million Siepac (Sistema de Interconexion Electrica de Paises de America Central) network links Guatemala and Panama through an 1800 km line starting in Guatemala and passing through El Salvador, Honduras, Nicaragua and Costa Rica. It is set to have a trading capacity of 300 MW through the gradual creation of a regional market.

Guatemala
Guatemala: the country currently swaps 200 MW with Mexico
Credit: Jose A. Warletta

The network is almost finished except for a 10 km portion between the towns of Parrita and Palmar Norte in Southern Costa Rica because of land-owner restrictions. However, an alternative route is being studied and the entire circuit is expected to be completed in late 2014, observers say.

Interconnection is already taking place, however, albeit at a tiny rate. Analysts say the six countries share less than 1 per cent of generation due to a lack of excess capacity.

They say Central American countries are not investing enough to expand output for export and that more co-ordination is needed to boost interconnection rates. For this reason, they do not expect the line will reach full capacity until 2018. The little power traded in Central America is being done through short-term bilateral contracts and a spot market in San Salvador. In the dry season, electricity can sell for as much as $200/MWh.

Tim Stephure, a Latin America energy consultant at IHS Global Insight, says linking Central America will be difficult. “All of these countries have different regulations and tariff regimes so there needs to be a stronger regulatory framework and tariff mechanism put into place. There are also a lot of power cost discrepancies between the countries and they need to figure out how this cost will be shared between them.”

Colombia-Chile study

In South America, an ambitious, $1.8 billion project to connect Colombia to power-starved Chile, dubbed Proyecto de Interconexion Electrica Andina, is also on the cards.

According to Alejandro Bellorini, a senior partner at Sigla Consultancy in Buenos Aires, a regulatory harmonisation and infrastructure study is underway and scheduled to be completed in mid-2014.

The initiative will link Colombia with Ecuador, Peru, Bolivia and Chile (an associated CAN member) by expanding the existing Andean electricity interconnection system (Sinea) and striking a series of bilateral agreements between the five countries.

Last September, CAN energy ministers agreed to back the project in a meeting in Santiago de Chile. The summit was led by the Andean electricity regulation committee (Canrel), which will be in charge of setting up a regulatory, legal and commercial framework to eventually operate an Andean power market. As part of the meeting, the ministers also agreed to launch working groups to help pursue and monitor the project.

“This is a very clear integration project that will benefit, once achieved, all the countries’ quality of life and improve their competitiveness and productivity,” says Peru’s former foreign relations minister and chancellor, Jose Antonio Garcia Belaunde.

“All the countries involved are taking this project with seriousness, responsibility and with their eyes on the future,” Garcia adds.

Meanwhile, Gabriel Salazar, electricity co-ordinator at the Latin American Energy Organization in Quito, Ecuador, says current interconnection infrastructure between Colombia, Ecuador and Peru should help the Andean project gain traction. Apart from Colombia and Ecuador, Peru and Ecuador exchange as much as 100 MW, he adds. “We have much of the infrastructure. What we need to do now is establish the political and commercial framework to make this possible.”

He adds several multilateral agreements within the CAN and between the CAN and Chile will need to be hammered out before the Interconexion Andina can take off. “There is political interest to increase interconnections between these countries. There are also power stations being built in Colombia, Peru and Ecuador to partly help Chile meet its growing power demand.”

Ecuador and Peru’s exchange will also need to be bolstered, Salazar says. More important, however, will be the linking of Peru and Chile, something currently on the table.

According to Tobar, Peru is negotiating interconnection deals with both Brazil and Chile. However, she says a Chilean agreement will likely come first because of the country’s rising energy needs. Bereft of oil and natural gas resources, fast-growing Chile is highly dependent on Argentinian gas and other energy imports. Tobar does not expect a Peru-Chile accord soon, however. “There is political will but very little push,” she explains.

Regarding Interconexion Andina, she adds South American nations are prioritising self-supply projects to meet soaring demand so this goal could delay the project.

Stephure agrees. “These [referring to CAN and South America] are fast-growing economies so satisfying domestic demand and electrification is a priority,” he says. “There are large amounts of people in Venezuela, Colombia and Ecuador that don’t have electricity access. Subsidies are also a big issue and sometimes you have historical political disputes that can get in the way.”

Such is the case of Bolivia and Chile. Some analysts expect the two countries’ strained relations – which stem from long-standing territorial disputes – may stall negotiations to create the Interconexion Andina. This is because Bolivia wants to raise the interconnection question with other neighbours such as Brazil and Argentina before Chile, a political stance that may complicate negotiations.

Mercosur expansion

In the Mercosur trading bloc of Brazil, Argentina, Uruguay and Paraguay there are plans to expand Uruguay and Brazil’s 70 MW interconnection grid with a new 500 kV line, with 500 MW of trading capacity. The project faced several regulatory and political challenges, mainly because Uruguay and Paraguay have different power frequencies, says Ramon Mendez, director of Uruguayan electricity network management firm Adme. However, a $200 million converter will help resolve that, with the line expected to be completed early next year.

According to Mendez, Uruguay and Paraguay hope to sign bilateral exchange agreements before their fledgling grid is ready. Uruguay too, hopes to eventually sell power to Brazil and increase trade with Argentina and other Mercosur nations. This is mainly due a major incursion into renewable power. Indeed, the small country, which sits atop Argentina, plans to generate half of its power from renewable sources by 2016, making it Latin America’s most ambitious nation in this regard.

As part of a $5.5 billion clean-energy expansion plan, the government will work to install at least 500 MW of wind power generation capacity and develop solar, biomass, mini-hydro and other microgeneration projects. If all goes well, Uruguay could lead the world in terms of the percentage of electricity it generates from renewable sources.

Meanwhile, a project to build two new hydropower stations (with 2000 MW of transmission capacity) feeding from the Uruguay River straddling Argentina, Brazil and Uruguay aims to increase Argentina and Brazil’s interconnection capacity to 4200 MW.

The scheme calls for the construction of one plant in Panambi and another in Garabi, both Brazil-Argentina border towns. Both countries have signed an agreement to pursue the project but future financing difficulties – probably from the Argentinian side – could delay construction, according Eduardo Lerner, an energy regulation professor at the University of Buenos Aires and independent industry consultant.

Currently, Mercosur is Latin America’s largest power-trading network. Brazil and Argentina share some 2200 MW through a hydropower complex in Garabi that operates two 1100 MW transmission lines connecting the Argentine town of Rincon de Santa Maria with Garabi.

Meanwhile, through Salto Grande, Argentina and Uruguay swap 1900 MW. Brazil and Paraguay also transfer some 3000 MW via the Itaipu hydropower facility. Lastly, Argentina and Paraguay trade 1700 MW through the Yacyreta hydro station and 800 MW via the Clorinda line.

According to Juan Jose Carrasco, executive director of Montevideo-based regional integration commission (Cier), Mercosur members trade electricity through a series of long-running government-to-government bilateral contracts.

However, the exchange is irregular and happens mainly on an “opportunity” basis. This is partly due to Argentina’s decision to stop selling power to other countries during its 2002 recession, which saw its energy supplies dwindled. As a result, other Mercosur members also began concentrating on self-supply. Carrasco says Cier is lobbying for trade to grow though a system of so-called border exchange points that will enable Mercosur countries to sell power through volume and price-based contracts that ensure supply security.

The scheme aims to boost the countries’ confidence in exchanging power and to encourage the signing of firmer medium and long-term trade contracts that will form the basis for a more active regional market and eventually the establishment of wholesale market. That process will take a while, says Mendez. “We share Cier’s vision but we are very far from it,” he notes.

Time is also needed for other initiatives to take off. With so many projects on the table, Stephure echoes other views that merging Latin America’s electricity networks will happen at a snail’s pace.”The idea is to integrate everything but there are many obstacles,” he says. “Cross-border transmission is hard to accomplish and the required investment to make it all work will be huge. Integration will be a slow process.”

Ivan Castano is a freelance journalist, specialising in energy.

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