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Navigating the Hydro Market in Latin America

Fortnightly Magazine - March 15 1995

accounts placed in order, there is every reason to expect utilities to become excellent targets for development lending once again.

Upon approaching a utility to discuss capacity expansion plans, the private power developer often finds the utility ignorant of the commercial perspective (sometimes deliberately so). In many cases, the utility may have been trying for years to obtain independence from political manipulation and from the often dismal salary scales of the public sector in order to operate efficiently (em the very benefits its government grants to a competitive private power industry. Feelings of embitterment can be dispelled when the private developer, government, and the power utility realize that they can all share in the benefits of a secure market for privately developed thermal power. To achieve this, private power developers must back their strategies with serious analyses of the power system that address:

s The Rationale for a Balanced Generation Mix. While it would not be wise to completely abandon the principle of economic efficiency at the national level, a plan consistent with private-sector development must include guidelines for price signals that make the mix feasible to the private sector. In other words, private developers seeking a more thermal mix than that calculated to optimize the economic use of resources must provide a mechanism that offers private hydro developers a proportionally higher return. The optimum mix should probably be adjusted if both the electricity consumer and the country as a whole are to share the responsibility for a private power industry compatible with national interests.

s Maximizing the Hydro-Thermal Coordination. Thermal power adds value to hydroelectric systems. The optimum use of hydroelectric reservoir storage requires a compromise among conflicting objectives: maximize hydraulic head by keeping the reservoir high, minimize spill by keeping it down, and maximize strategic firm power supplies by keeping abundant storage at all times. Thermal power can provide flexibility, allowing the reservoirs to be drawn farther down if less spilled water compensates for lower heads, without being as severely constrained by firm energy storage objectives.

s Firming Up Hydroelectric Power for Export. In the existing cross-border power markets of Central America and their potential South American counterparts, the ability to firm up secondary hydroelectric power with thermal reserves can offer commercial rewards. This concept is no stranger to the commercial transactions of hydroelectric utilities in the United States.

s The Risk and Value of Resource Development. Hydroelectric power development entails the front-end cost and risk of building major civil works to obtain the hydraulic head and storage that will then yield low-cost energy. In several cases, private power requires the development of gas fields or other nontraditional resources, opening up new economic possibilities. The economic value of such development must be properly assessed; its risk can be compensated through a dispatch priority comparable to that of hydro.

As long as the generation mix is well balanced and unfair competition is ruled out, the national utility and the private developer should be able to coexist peacefully and provide the consumer with near-optimum-cost power supplies. But the utility must see some