The Southern Cone of South

AmericaExperiences and Recent evolution

Juan Luchilo – CAMMESAAPEx Conference

October 2004Leipzig - Germany

South America - Experiences and Recent evolution

Global Information – Markets and Systems

Energy integration – gas & electricity

Argentina Crisis – Impact

Expectations - Concerns

Deregulation of the Electric Sector

BRAZIL 1998

ARGENTINA 1992

PARAGUAY ?

CHILE 1982URUGUAY 200?

BOLIVIA 1996

Regional Market - Basic Data

Regional Market, 6 countries:

(Argentina, Bolivia, Brazil, Chile, Paraguay, Uruguay)

Population: about 250 M

Installed Capacity: 125 TW

Annual Energy Consumption: 500 TWh

Energy Consumption

Bolivia0.7%

Argentina18.5%

Brazil73%

Chile8.4%

Paraguay0.5%

Uruguay1.4%

Different resources in each country (Brazil, Uruguay, Paraguay mostly hydro; Argentina, Chile, Bolivia, hydrothermal) and level of deregulationLong distances between main loads and from resources to load; Barriers between countries

natural (mountains, rivers) political => openness to integrate marketstechnical and economical viability=> distances, electrical issues

Opportunities => complementarity of demand and hydro availability, gas and electricity integration

Integration - Situation

Energy Integration - Evolution

Before 1997 => Integration related with binational hydro power plants; agreement between countriesArgentina – Uruguay - Salto Grande (1890 MW)Brazil – Paraguay – Itaipú (12600 MW)Argentina – Paraguay - Yacyreta (1800 MW)

Only small gas pipelines linking countries

Energy Integration - EvolutionAfter 1997=> Integration related with market opportunities=>

competitive market, gas availability and new capacity in Argentinageneration needs at northern Chile complementarity with Brazil and Uruguay (firm capacity for dry hydro years)Bolivia as a major gas player

Electricity or/and Gas?As well as electricity, gas has also become a product exchange in the south cone:

Brazil imports from Argentina and Bolivia, and transform part locally in electricityChile imports from Argentina, to fuel its new generation plantsUruguay is on the same way soonArgentina began to import from Bolivia in 2004

There’s a competition whether to transport gas and transform it afterwards in electricity or to produce electricity and then transport it through wires; economic viability is related with volume requirement and scale

High Loads

Hydro Resources

Gas Resources

Energy Links – Gas & Electricity

Electroducto Argentina Chile

Electricity link Argentina-Brazil

Electricity link Argentina-Uruguay

GasoductoAtacama y Norandino

Gasoducto Gasandes 7-8

Gasoducto del Pacífico 1.5-9

Gasoducto Bolivia-Brasil 30

Electricity link Argentina-Paraguay

Resources Optimization

Share reserves (seasonal,

hourly)

Increase reliability,

quality

Impacts (Argentina – Brazil)

Some Benefits

It requires adequate technical coordination between the interconnected systems

Austral summer 2002 => devaluation and political crisis

Since July 2002 => conditions begin to stabilize; relative normalization of the behaviour of economy

2003/4 => strong economy recovery

Macroeconomic Changes

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u$s

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Evolution of exchange rate=>Increase of industrial demand due to greater competitiveness to export and import substitutionJan02-oct04 Exchange rate => 200%Inflation => about 50%

Tariffs to end consumers => social impossibility to increase tariffs due to economic crisis and people impoverishment

Pesification of natural gas, energy and capacity prices on the WEM

Increase of imported fuel and maintenance costs

Uncertainty related with exchange rate evolution and expected performance of the generation units

After 2003 =>increase in demand (+8%)

Electricity Sector Scenario

Variación % PBI anual vs. Demanda

-15%

-10%

-5%

0%

5%

10%

15%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

PBI Demanda

% GDP vs Demand

Variation - Annual Demand vs. GDP

-15%

-10%

-5%

0%

5%

10%

15%

-15% -10% -5% 0% 5% 10%

% GDP annual

% A

nn

ual

Dem

and

2002 vs 2001 => -2% var Dem para

-11 % var GDP

2003 vs 2002

Estimated 2004 vs 2003

% GDP vs Demand

Ev de la potencia máxima registrada anual

9035 93251010410213

112431177612269127301375414061

134811435914732

10501050 2200

22002200

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

MW

Local = 5700 MW

Annual Peak Demand

EXP = 2200 MW

Installed Generation Capacity

Potencia Instalada MEM

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

MW

HI

CC

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WEM capacity: 1992 = 13267 MW

2004 = 23284 MW ~70% Increase – Gen => 9700 MW

This scenario led to severe difficulties, as regards:

Lack of gas availability for power plants

Unusual alternative fuels requirement => increase of operative costs

Inability to cover the energy costs with the defined tariffs

Risk of energy crisis in 2004 => due mainly to fuel availability combined with a hydro dry year

Electricity Sector Scenario

Some decisions Additional payments for generators that

commit their availability with natural gas Agreement with Brazil to import energy

during winter Agreement with Venezuela to import a large

amount of Fuel Oil to replace the lack of natural gas

Cuts on gas exports (Chile) if needed in order to avoid restrictions to the local demand

Gas imports from Bolivia Gradual increases in gas prices (from 0.4 to 1.0

u$s/MBtu (may 04-jul05))

Slight increase in WEM tariffs only to industrial consumers; no increases to residential consumers

Crisis - Decisions

Exchanges Brazil - Argentina - MW avg

-600

-400

-200

-

200

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600

800

1,000

1,200

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EXPIMP

Results -Argentina – Brazil link

Brazil crisis

Argentina crisis

ENERGY PRICE EVOLUTIONENERGY PRICE EVOLUTION

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Monomial $

Monomial u$s

rate $ / u$s

Energy Price EvolutionEnergy Price Evolution

Wem Average Monomial Prices

48.8

35.731.8

29.7 28.625.3 24.4 26.1 27.6

23.4

28.9

38.7

54.0

63.0

12.918.0 21.0

10.8

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70.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

$/M

Wh

Competitiveness of the market and efficiency of generation units provoked a fall in spot prices of about 50% 48.8 $/MWh1992 to 23.3$/MWh2002; increase in M&O costs and use of liquid fuel and gas costs => 54.0 $/MWh2004

Winter was managed, operating the system in fairly good supply conditions ….. but winter was mild and hydrology wasn’t so bad

Operation costs soared due to increase of natural gas price and usage of liquid fuel and imports

Stabilization fund exhausted since jul-03; debt of the fund with generators of about 1200 M$ (6 months of payment).

Operative inefficiency due to unavailability of natural gas

Due to Argentina’s role in the region, the situation affected the operation in Chile and Uruguay generating stress between governments in the peak of the crisis (march-

may)

Results

Macroeconomic issues (like devaluation) affect parties => requires dynamic adaptation to maintain in the short term operability and in long term commercial viability

Increase of tariffs required to gradually normalize situation. The whole situation seems very difficult to handle politically

Demand increase along with default of the stabilization fund may lead to a significant increase of the deficit of supply risk

Medium and long term viability and the lack of new investments in generation is then one of the major concerns, until the regulatory framework may be adapted and political solutions adopted.

Expectations - Concerns

From CAMMESA’s point of view

Be flexible enough to implement changes on rules and keep on running the system and the Market, in a delicate environment.

Study and analyse scenarios to identify and anticipate risks, in order to help in the search of solutions.

Next steps

Quality, Technology & TransparencyFor an Electrical Market without frontiers

¡Thanks for your attention!

Leipzig, October 2004

Doubts => jluchilo@cammesa.com.ar More info => www.cammesa.com.ar