The governments of most Latin American countries have yet to establish clear policies about the future ownership of existing generation assets, but they do expect future capacity to be largely developed by the private sector. This has created friction in some countries between governments, which are eager to limit the role of the state in electric supply, and national utilities, which feel threatened and continue preparing traditional expansion plans. In assessing the region's power markets and preparing a strategy to penetrate them, the private power developer must take a critical look at utility plans, expose their incompatibilities with the government's stated independent power objectives, and build a case for independent power projects. The core problem is the predominance of hydroelectric power in Latin America and its abundant untapped potential.
Hydroelectric power in Latin America grew rapidly between 1960 and 1980. Development banks offered attractive financial terms, and fossil fuel prices were expected to escalate rapidly for a long time. These were the last decades in a long era of intense nationalism and extensive government control of all economic activity. Existing national power utilities were enlarged and new ones created. These became symbols of national independence and economic growth.
Many good and not-so-good projects were built during those years in every country in continental Latin America, including some of the largest in the world (em such as Itaipu, on the border of Brazil and Paraguay, and Guri in Venezuela. Many of the smaller countries built a single hydroelectric project that still accounts for a large portion of the national power supply and thus wields considerable strategic importance: El Cajon in Honduras, Chixoy in Guatemala, Arenal in Costa Rica, and Paute in Ecuador.
Ironically, hydropower has also been a major factor in the public's loss of confidence in the large national power monopolies it helped create. The droughts first experienced in El Salvador and Guatemala, followed by Colombia and more recently Honduras, provoked legislation to de-monopolize energy supplies. Power deficits at Ecuador's Paute hydroelectric project prompted a similar government response, and the corruption scandals surrounding the Yacyreta hydroelectric development on the Argentina-Paraguay border no doubt fueled one of the most sweeping and successful privatizations on the continent.
But most national power utilities in Latin America have not been dismantled or privatized to the extent they were in Argentina and Chile, and many may never be. Private power developers can expect mixed signals from a national utility fighting for survival and converted by a privatizing government into both an unwilling client and regulator of private power activity.
Planning at Cross-Purposes
Because they are based in a country were power has always been largely the domain of the private sector, U.S. investors maybe more apt than their European or Latin American counterparts to underestimate the change in mentality that private power policies, often hastily developed, impose upon these utilities. In some cases the reforms may ultimately become the overseas equivalent of the Public Utility Regulatory Policies Act of 1978. However, the pace of power-sector transformation, the expectations about its scope, and the circumstances of the utilities 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 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 benefit in accepting this shared market. Private power developers who bring to the table a well-researched analysis of the capacity expansion plan appear as less of a competitor and more of a partner willing to share the responsibility for reliable and economic power, thus defusing public criticism of the utility. By providing its vision of a plan with private sector appeal, the utility can more easily carry out the government's mandate while identifying its role for some projects. t
Carlos A. Yermoli is a principal in the international division of RCG/Hagler Bailly in Arlington, VA, specializing in power planning and pricing.
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