Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Navigating the Hydro Market in Latin America

Fortnightly Magazine - March 15 1995

are very different.

Power planning by national utilities in Latin America and much of the developing world still follows the planning guidelines set out by multilateral institutions, which demand a perspective of economic efficiency at the national level quite independent from the power utility's financial performance. This uncoupling of economic and financial objectives was most evident in the lenient attitude of development lenders toward subsidized electricity rates, which precipitated a debt crisis in the region and ultimately triggered de-monopolization and other reforms. Curiously, the reform debate has not even addressed the validity of this planning perspective, let alone attempted to define new guidelines that would render planning more consistent with a private power development policy.

The persistence of some hydroelectric projects in many utilities' official plans is at odds with government's stated commitment to private power. Some of the projects are very large relative to their systems (em such as Coca Codo Sinclair in Ecuador and Copalar in Nicaragua). Others present peculiar development complexities (em such as the need for binational agreement in the Upper Uruguay hydropower developments between Argentina and Brazil (em or thorny environmental issues. These same reasons render those projects difficult to finance through development bank loans.

In most cases, feasibility or prefeasibility studies demonstrate the benefits of these projects, if only from the perspective of national economic efficiency and sovereign finance (that is, using discount rates of 10 to 12 percent and other favorable assumptions). Deliberately or not, but certainly in its best interest, the utility uses these elements of analysis to retain hydroelectric projects in their plans. Yet from the private developer's perspective, high capital cost, long development times, and high risk make hydropower projects unattractive. Private investors' lack of interest, like the impossibility of obtaining the development financing, is bound to keep pushing these hydro projects forward in time.

Charting the Cross-Currents

The government's stance may be viewed as a harmless ploy to defuse controversy over the scope of reform, which it does. It also reflects a country's legitimate interest in pursuing a private power policy without subverting the right of the consumer to least-cost power. However, it can have some unfortunate side effects.

The very existence of hydro projects on paper, however improbable, can have important implications for market assessments of the more modest thermal projects that attract foreign investors. The negligible variable costs ensure that all available hydro resources will be used to their maximum potential, thus reducing the load of thermal resources. Unable to expose the implausible aspects of the official capacity expansion plan, the potential private power developer can often be unnecessarily discouraged by the perception of a slow-growing or shrinking market for thermal generation.

This negative perception can be mitigated by official acknowledgement that a market-driven power sector involves no official plans, merely guidelines. However, as long as hydro projects are considered candidates for development loans, the private sector needs assurances that the government will not unfairly compete against it with the advantage of sovereign financing and higher risk tolerance. After all, once existing assets are sold, tariffs modernized, and utility