LATAM electric markets: old problems, new business
<a href=www.energypulse.net>Energy Pulse 4.2.03 Jose Luis Gambande, President, Andrews SA
Not all things are worsening in Latin America economy and, particularly, in energy markets. Technology is opening new businesses niche, if you have an aggresive vision and a ground knowledge.
Scenario The old problems of the Latin-American economies have not disappeared. Even, some of them seem to have aggravated with the problems of American economy and some hard changes in Brazil and Argentina, including unstable politics in Venezuela and Bolivia.
But, in the last decade, some progress were made in public services. The liberal wave left better de-regulated markets in almost all countries, most of them in the electric wholesale market.
In the 90´s, continuing and copying the models of Chile and Argentina, almost all the countries adopted electrical markets of similar characteristics, among which the most importants were:
- Self-regulated Markets
- Authority independent rules
- Marginal Pricing
- Prohibition of vertical integration
- Prohibition of generators and distributors concentration(monopoly)
- Incentives for the private investment
- Free access to the transmission grid
Strictly speaking, many of these criteria were not applied in all countries in the same way, but each one adopted restrictions imposed by its internal economic most powerful actors. (perhaps Argentina could be the more close example to the ideal market in electric energy related business)
Old problems All these efforts to modernize the electrical energy market have been faced to the old and classical regional problems. And there were exactly these problems the ones that have braked the development of these markets.
The strong dependence on foreign capital is one of them. This kind of capital only moves on with gigantic transactions and projects, often executed by governments itself far beyond its management skills, and with an implicit trend to excite the structural corruption. This dependence was clear in all privatization processes in Latam.
Failure to create serious and independent control and regulation agencies, conducted by expert and honest professionals, and provided with sufficient resources. These agencies are the guarantee of market transparency and its poor performance elevates notably the risk of any investment, more in the energy business where the ROI requires constant settings during many years.
Today Now the governments are not able to face new great generation plants like in the past. They have to wait international capitals to enter the game, but private funds are looking at recession indexes, establishing an impasse before enter in new projects. But in the future, with new and great projects on the way, prices will not move downwards as it were in the past. Market works.
In spite of the fact that markets have been submitted to strong tensions, as the originated by the devaluations of the local currency (Brazil, Argentina), the political difficulties (Venezuela) and the macroeconomic changes (Ecuador), they are still operating within its rules. This is a good signal.
Renewal energies, in special hydro, are plentiful in Latam. And technology is breaking down the prices of turbines and governors, achieving costs /kW that in the past were proper of big machinery. A new and realistic option for the region. And another fact: Nevertheless the energy continues being a strategic commodity and of great profit in the majority of the countries of the region. Self-regulated markets, working at international price level with few exceptions, are a big chance.
New business South America is not the promised land. But it has opportunities for all people that have certain intelligence and know how to avoid the traps that the underdevelopment imposes.
The model of CSHP (Coordinated Small Hydro Projects), for instance, offers a new vision of the energy generation business in the region. Its fundamental premises are based on identification, evaluation and assembly design of small hydro generation plants with the paradigm of construction and operation costs reduction through design.
These hydroelectric plants (typ 2 to 10MW each, qty 3 to 6), designed as a whole system, will achieve a very much lower cost per Kw installed than any of them separately.
We all heard about hydro plants that they are always different each from another. But we ask: what is “different”? And the answer is not so easy. It requires a new approach from the point of view of what “different” means from the cost´s point of view.. The fact that many components are not ´on the shelves´ does not mean, necessarily, that it has different manufacturing costs.
The model requires a modelling of possible universe of plants in a specific region, to choose the better granularity and the possibilities of expansion in the time, that reduce investment and, therefore, increase IRR.
To date, we have the technology to do perform that. Specialized programming tools, better and wider insights in to the manufacturing process, and innovative thoughts, are the key. And we are moving forward.
Utilizing criteria of modularity and standarisation, the expected reduction of different elements (generators, governors, controls, etc.) conducts to very optimized costs. On the other hand, programming joint or scheduled manufacturing already causes reductions in the final price of various components.
The careful selection of the location of the plants contributes to diminish the climatic risk, permitting a diversified income that assures a balanced cash flow. So, investments are more stable in time inside a same country. Technology offers today systems to perform O&M of plants located far away.
Even in civil design works, different designs can be carried out with a minimum investment if you know and program the complete set of work to do. In addition, local costs are diminishing in all Latam countries compared with developed ones and measured in USD.
And there are more advantages: An adequate design of the facilities of O&M will do also improve the operational conditions. And the ROI, of course.
The majority of the markets of the region permits the sale of energy blocks, some with the figure of the trader, or by means of contracts to term that enable the sale of a block of energy and/or power. The greater availability of these blocks do them more attractive for the industries that are so called electro-intensive. Though this increase the transmission toll, only the reduction of operational cost will over compensate this greater cost. Looking at the future, even the simultaneous and joint undertaking in various countries will improve the necessary forecasts of political risk, for instance.
CSHP is applicable in greater or smaller measure in almost all the countries of the area. In some of them it is still necessary to remove some regulatory obstacles and in other the practical incentives to renewal uses is still negligible.
Figures The total volume of hydro energy composed by SHP (< 10MW) that can be mobilized in Latam is of 2400 TWh/yr, based on expert estimations of 1999.
Not all of these sources can be implemented, not even studied inside CSHP framework. Considerations must be made regarding site conditions, grid conditions, isolated systems, and restrictions that could be operative in each one. The modelling process often begins with a complete projects database feeding an expert system that moves forward and backward looking for the proper project´s suit
As one of various simulation processes showed, following a conservative calculation, a case modelled on the base of 5 x 10MW in a small market like Ecuador, presents rates of ROI of 25%+ in optimistic conditions of evolution of prices, and 18% in the pessimistic (worst) case.
Conclusions All the facts showed above are of common sense, you can say, but difficult to implement. Think it twice. We did. CSHP coud be a good option for small and medium size investors who are now looking for diversified risks with a creative mind. All you need is knowledge of what and where.
And CSHP is an example, too, of the opportunities that the Latin-American market, in spite of its distortions and ambiguity, has to offer to smart investors. The only condition is to challenge those things that are called “impossible”.