The Southern Cone of South America Experiences and Recent evolution Juan Luchilo – CAMMESA APEx Conference October 2004 Leipzig - 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 1982 URUGUAY 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

Different resources in each country (Brazil, Uruguay, Paraguay mostly hydro; Argentina, Chile, Bolivia, hydrothermal) and level of deregulation Long distances between main loads and from resources to load; Barriers between countries natural (mountains, rivers) political => openness to integrate markets technical 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 countries Argentina – Uruguay - Salto Grande (1890 MW) Brazil – Paraguay – Itaipú (12600 MW) Argentina – Paraguay - Yacyreta (1800 MW) Only small gas pipelines linking countries

Energy Integration - Evolution After 1997=> Integration related with market opportunities=>  competitive market, gas availability and new capacity in Argentina  generation needs at northern Chile  complementarity with Brazil and Uruguay (firm capacity for dry hydro years)  Bolivia as a major gas player

Energy Integration - Evolution Argentina – Chile => new 345 kV link from Salta to Northern Chile; thermal generation built specifically for that purpose; isolated Argentina - Brazil (2000 MW); 2 back to back DC converters (50/60 HZ) built – firm capacity contracts Argentina – Uruguay – firm capacity contracts (400 MW) using existing link Gas pipelines from Argentina to Chile, Brazil and Uruguay Gas pipelines from Bolivia to Brazil and Argentina

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 electricity Chile imports from Argentina, to fuel its new generation plants Uruguay is on the same way soon Argentina 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 Gasoducto Atacama y Norandino Gasoducto Gasandes 7-8 Gasoducto del Pacífico 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 Evolution of exchange rate=> Increase of industrial demand due to greater competitiveness to export and import substitution Jan02-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

% GDP vs Demand

Variation - Annual Demand vs. GDP -15% -10% -5% 0% 5% 10% 15% -15%-10%-5%0%5%10% % GDP annual % Annual Demand 2002 vs 2001 => -2% var Dem para -11 % var GDP 2003 vs 2002 Estimated 2004 vs 2003 % GDP vs Demand

Local = 5700 MW Annual Peak Demand EXP = 2200 MW

Installed Generation Capacity WEM capacity:1992 = MW 2004 = 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

Results -Argentina – Brazil link Brazil crisis Argentina crisis

ENERGY PRICE EVOLUTION

Energy Price Evolution Competitiveness of the market and efficiency of generation units provoked a fall in spot prices of about 50%  48.8 $/MWh 1992 to 23.3$/MWh 2002 ; increase in M&O costs and use of liquid fuel and gas costs => 54.0 $/MWh 2004

Liquid Fuel Consumption

Tariffs and Costs - Funds

 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 & Transparency For an Electrical Market without frontiers ¡Thanks for your attention! Leipzig, October 2004 Doubts => More info =>