electricity markets in latin america: costs, prices and

Hugh Rudnick, IEE-IEEE Lecture, London, April 5, 2000

1

Hugh RudnickIEEE PES Distinguished Lecturer

IEE- IEEELondon, UK, April 5, 2000

ELECTRICITY MARKETS INLATIN AMERICA:

COSTS, PRICES ANDQUALITY OF SERVICE

Pontificia Universidad Católica de ChileSchool of Engineering

500 km.1700 km

Chile (main system)

England & Wales


2

Structure of the presentation

Latinamerican power sectorPower market reformMarket design - generation, transmission, distributionSuccessesProblems and challenges

LATINAMERICALATINAMERICA a region in transition and growth a region in transition and growth

* Open economies and democratic governments

* End of the debt crisis

* Economic reforms with market economies encouraging economic growth

* Geopolitics reasons increase worldwide interest in the region - the place for investment

* Increasing regional commercial exchanges are creating new conditions for economic development


3

The AmericanElectricit y Market

CANADA & UNITED STATES

• Market of 765000 MW• 1-2% annual growth = 7650 - 15300 MW a year

LATINAMERICA

• Market of 190000 MW• 5% annual growth = 9500 MW a year

Growth in GDP

Growth in electricity demand

Argentina

Bolivia

Brazil

Chile

Peru

2%

4%

6%

8%

10%

12%

14%

0% 1% 2% 3% 4% 5% 6% 7% 8%

1990-97


4

GDP vs. electricity demandGDP vs. electricity demand

United States

FranceGermany

JapanAustralia

Singapore

ItalyUnited KingdomHong Kong

SpainTaiwan

GreecePortugal

S. Korea

Venezuela

PeruMexico

BrazilArgentina

Chile0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

0 5.000 10.000 15.000 20.000 25.000

GDP per capita (US$)

KWh per capita

Source: CNE Chile 1997

90% and above

70-90%

50-70%

below 50%

Latinamerican electrification, 1997


5

Hydro71.8%

Nuclear1.2% Thermal

23.2%

Others3.8%

Southamerica: installed capacity pertechnology (1997)

Total Capacity: 141.451 MWSource: Cier 1998

30% 35% 40% 45% 50% 55% 60% 65% 70%Load factor

Brazil

Mexico

ArgentinaColombia

ChilePeru

0

50

100

150

200

250

300

350

Gen

erat

ion

(TW

h)

Hydro

Other

Thermal

Electricity generation by type, 1997

MarketLine, 1998


6

Western Europe

Eastern Europe

North America

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Asia

Latin America

No interest

Low importance

Important

Very importantAreas of interest for future power investment

(MarketLine, 1998)


Latinamerican power sectorPower market reformMarket design - generation, transmission., distributionSuccessesProblems and challenges


7

ELECTRICAL SECTOR- historicaldevelopment in Latinamerica

Initial private developments

Government action - vertically integrated utilities(Endesa, Electroperú, Ende, Eletrobras, ISA,Edelca, CFE)

Limited private participation

ELECTRICAL SECTOR main problems in Latinamerica

Financial & economic crisisTariffs problems and cross subsidies

Management problemsInfrastructure deteriorationHigh levels of losses

Overstaffing


8

Drivers of deregulation and privatization

- sustain investment with high demand growth- price reductions (not necessarily)

- political reasons - open market ideology- fiscal deficit- need to sell State assets

International “trend”-World Bank initiatives

-not technological changes-minimum quality levels

COLOMBIA1994

PERU1993

BOLIVIA

1994

CHILE1982

ARGENTINA

1992

BRAZIL

1998

Pioneering regulatory changes in the electrical sector

MEXICO

1999

CENTRAL AMERICA & PANAMA1997-9


9



ELECTRICITY MARKET REFORMS

*wholesale market deregulation (unregulated prices for large consumers)

*competition at generation level with centralized generation dispatch

*short term marginal cost based schemes


10

ELECTRICITY MARKET REFORMS

*regulation in transmission and distribution

*transmission open access regulation, base for competition, global allocation of network costs

*incentive based regulation in distribution (yard stick competition, price cap)

Change of paradigma

Vertically integratedcompany

-public service company

-obligation to serve

-protection and rates


11

Change of paradigma

Generation

-competition

-no public service

-no obligation to serve

-no protection

Change of paradigma

Distribution

-franchised monopoly

-obligation to serve

Transmission

-open access obligation


12



Investment in the Chilean Central System

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

1.997 1.998 1.999 2.000 2.001 2.002 2.003 2.004 2.005 2.006

YEAR

DE

MA

ND

(M

W)

DEMAND SUPPLY

PANGUE

LOMA ALTASES

PETROPOWERNEHUENCO

PEUCHENMAMPIL

SAN ISIDRORUCUE

CORTADERAL

RALCOTHERM. 332,4

THERM. 332,42 X THERM.

332,4

Source: CNE Chile


13

PERU- ELECTRICITY COVERAGE

Ene-

94

Jun-

94

Ene-

95

Jun-

95

Dic-9

5

Jun-

96

Dic-9

6

Dic-9

7

83% 83% 86% 87% 90% 90%

91%100%

0%

20%

40%

60%

80%

100%

39% 42% 46% 50% 54%

0%

20%

40%

60%19

87

1992

1993

1994

1995

National Edelnor- Lima

WHOLESALE ARGENTINE MARKETAVERAGE MONTHLY PRICE

0

10

20

30

40

50

60

70

80

jan-

92

apr-

92

Jul-9

2

Oct

-92

jan-

93

apr-

93

Jul-9

3

Oct

-93

jan-

94

apr-

94

Jul-9

4

Oct

-94

jan-

95

apr-

95

Jul-9

5

Oct

-95

jan-

96

$/M

Wh


14

Energy prices SIC - SING(Oct.1999 values)

0.00

10.0020.00

30.0040.00

50.0060.00

70.0080.00

90.00

AB

RIL 1983

AB

RIL 1984

AB

RIL 1985

AB

RIL 1986

AB

RIL 1987

AB

RIL 1988

AB

RIL 1989

AB

RIL 1990

AB

RIL 1991

AB

RIL 1992

AB

RIL 1993

AB

RIL 1994

AB

RIL 1995

AB

RIL 1996

AB

RIL 1997

AB

RIL 1998

AB

RIL 1999

$/kW

h

SIC (Alto Jahuel) SING(Antofagasta)

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

1992 1996

FIRM

REGULATOR

RESULT

VALUE ADDED COST - high voltage distribution


15

Energy losses in distribution systems in Perú(1990-1999)

11.8%12.4%

14.6%17.1%

19.7%20.6%21.8%

13.9% 15.4%18.2%

0%

5%

10%

15%

20%

25%

90 91 92 93 94 95 96 97 98 99

E. Zolezzi, CTE, Oct. 99

6,6496,609

8,52110,022

10,62711,277 11,783

12,898

2,980 2,833 2,445 2,347 2,088 1,970 1,998 1,692

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

89 90 91 92 93 94 95 96

N° Employees

Production (GWh)

ENDESA productivity increase:production (GWh) versus number of employees in Chile


16

Clients per Worker

509582

795

1036

1.994 1.995 1.996 1.997 GWh per Worker

2.3 2.5

3.2

4.2

1.994 1.995 1.996 1.997

PRODUCTIVITY INCREASES AT DISTRIBUTION COMPANY EDELNOR- PERU

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1988 1989 1990 1991 1992 1993 1994

Average time for emergency service

Hrs.

CHILE- PRODUCTIVITY INCREASES AT DISTRIBUTION COMPANY CHILECTRA


17

M. Pereira, 1999

Growingelectricinterconections

Colombia

Ecuador

Perú-SICN

Perú-SISUR

Bolivia

Chile-SING

Chile-SIC

ArgentinaMercado

ArgentinaComahue

Paraguay

Uruguay

Brasil-N

Brasil-NE

Brasil-SE

Brasil-Sur

Venezuela

Growinggasinterconections

CIER, 1996


18

Non served energy January 88 - Dec 95 (GWh) - Argentina




19

PROBLEMS AND CHALLENGES INMARKET DESIGN

-independent operator(Chile)

-transmission open access(Argentina, Bolivia, Colombia,Chile, Perú)

-distribution pricing (Bolivia,Chile, Perú)

-blackout crisis (Argentina, Chile)

-regional energy market

GOVERNANCE OF THE POOL

Generation

-problems with pool governance-spot price calculations-capacity payments-reliability control


20

Assumptions

-a central dispatch is needed for competing generators-governance better achieved by agreement among allparticipants-with perfect competition, prices will be marginal costs

-central dispatch needed to clear the wholesale market(Adam Smith role)

GOVERNANCE OF THE POOL

Market design-central dispatch as a single system irrespective ofownership-marginal cost based dispatch (traditional pool)-large generators form a club that acts as an independentoperator-agreements to be achieved unanimously, otherwiseregulator intervenes

Market reality-competition on cost of supply (efficiencies increased, newtechnologies introduced- CCGT) and on commercialactions (contract portfolios)-club scheme operates well for over 10 years (outsidecriticism by parties that are not able to participate)


21

-as competition increases and prices decrease, unanimousagreements become the exception (disagreements ondetermination of spot price, dispatch models, transmissionmodeling, operation security strategies)-governing difficulties-regulator essentially directing the actions of the pool, withno interest to do so-reliability endangered by disagreements

Divergences within the pool(CDEC-SIC)

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

0

2

4

6

8

10

12

14

16

Num

ber

of

dive

rgen

ces

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

Year


22

TRANSMISSION PRICING

Transmission

-problems with open access tariffs-lack of expansion signals-congestion

Assumptions- agents that cause transmission expansion must pay for use- generators and consumers- differences among countries

Market design-transmission payments based on natural economic use oflines, no relation with commercial use and contracts-natural use measured as incremental use under economicdispatch-peak capacity use or energy use

TRANSMISSION PRICING


23

Market reality

-weak definition of natural use-disputes on how to measure natural use-incremental measure dependent on marginal bus location

-no clear definition on handling of network restrictions andeconomic decoupling of areas of the system

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Peak block Single bus Block single bus Block variable bus

Method

Pay

men

ts [%

]

A PC/PD

A A

A G

G G

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Peak block Single bus Block single bus Block variable bus

Method

Pay

men

ts [%

]

A PC/PD

A A

A G

G G

Generators

Consumers


24

DISTRIBUTION PRICING

Distribution

-conflicts in tariff calculations

-quality of service

Assumptions

-economies of scope give place to monopolistic activity-geographic franchised activity subject to regulation-strategic objective for pricing is to avoid welfare lossesfrom monopoly pricing, provide signal for economicefficiency (investment and operation), with symmetry ofrisk and opportunities for regulated firm

-obligation to serve (only one in electricity chain)-competition by comparison (benchmarking) reducesasymmetry of information about the firm´s costs


25

Market design

-prices based on cost comparison against an efficient modelfirm-value added cost of distribution based on hypotethicalmodel distribution firms-standardized costs, optimally sized firms and optimalbusiness management-typical standardized distribution areas-independent studies by consultant requested by regulatorand firms-preliminary prices determined and coherency check forrevenue of the whole distribution industry

0

200

400

600

800

1000

1200

1400

1600

1800

0 50 100 150 200

Maximum demand (MW)

Tot

al c

ost

(MU

S$/

Mon

th)

Total monthly cost for area 2 (Chile, 1988)

Average value 10,2 US$/kW/month


26

Market reality (Chile, 1996)

-complete study bases issued by regulator for 39 distributioncompanies, 5 typical distribution areas-differences in criteria between regulator and firms-unclear definition on treatment of unregulated consumers,economies of scope, stand-alone firm or shared-costs firm,criteria for optimal installation expansion, technologicalupdating, useful life for installations-extended legal battles

1988

1992

1996

Differences among value added costs asdetermined by regulator and companiesDifferences among value added costs asdetermined by regulator and companies

High voltage distribution Low voltage distribution

64

21 23

118123

60

44

73

-17-20

0

20

40

60

80

100

120

140

High Average

Distribution density

% d

e va

riaci

ón

Low

53

37

49

97

137

62

40

64

10

0

20

40

60

80

100

120

140

Distribution density

% d

e va

riaci

ón

High Average Low


27

BLACKOUT CRISIS

Generation

-unsupplied energy

Regulator intervention for adequacy

*capacity payments

*regulated tariffs for small consumers


28

System operator and security

*freedom to compete?

*mandatory poolco approach

Penalties

Chile

*drought 1998-99

*combined cycle failure

*rotating blackouts


29

RESERVOIR STORED ENERGY

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

1/01

/94

1/04

/94

1/07

/94

1/10

/94

1/01

/95

1/04

/95

1/07

/95

1/10

/95

1/01

/96

1/04

/96

1/07

/96

1/10

/96

1/01

/97

1/04

/97

1/07

/97

1/10

/97

1/01

/98

1/04

/98

1/07

/98

1/10

/98

1/01

/99

1/04

/99

1/07

/99

1/10

/99

1/01

/00

GIG

AW

AT

TS

HO

UR

(GW

h)

RAPEL INVERNADA COLBUN CHAPO LAJA

Chile

*no lack of investment

*decoupled price signals

*contracts do not obligegenerators to serve*weak coordination pool

*low “unsupplied” energy cost

*law changed to impose obligation to serve


30

Argentina

*substation failure

*extended blackout

Argentina

*no lack of investment

*lack of coordination

*low “unsupplied” energy cost

*penalties imposed


31

REGIONAL ENERGY MARKET DEVELOPMEN T

Commercial/market agreements

Gas interconnections

Electricity interconnections

Geographic distribution of consumer loads and energy resources

Important load

Natural gas resources

Hydroelectric resources

BRASIL

URUGUAY

PARAGUAY

BOLIVIAPERU

Asunción•

Lima

Santa Cruz

Sao PauloRio de Janeiro

•

••

•

Concepción

Buenos Aires

•

•

Santiago

Mejillones •

•

NOA

ARGENTINA

ExcedentesHidráulicos

Neuquén

CHILE

Figura 2

Endesa 1999


32

BRASIL

URUGUAY

PARAGUAY

BOLIVIAPERU

Asunción•

Lima

Santa Cruz

Sao PauloRio de Janeiro

•

••

•

Concepción

Buenos Aires

•

•

Santiago

Mejillones •

NOA

Excedentes

Hidráulicos

Neuquén

Asunción

•

Asunción

• Interconexión

Argentina Brasil

Electroducto

Argentina Chile

Gasoducto

Atacama

Interconexión

SING-SIC

Generación Hidro

Sur Austral

Gasoducto del Pacífico

Electroductos

Tucumán - Carrera Pinto

Mendoza - San Isidro

Asunción

•

Electroducto

Alicurá - Osorno

Gasoducto

Gasandes

Carrera Pinto

San Isidro

•

Interconnections and market integration

Endesa 1999

Integration among markets

-price equilibrium among markets

-natural gas grows in importance - large gascompanies join the electricity market

-minimum size of companies changes - expansion toother markets and new economies of scale

-decisions of gas and electricity expansion projectsare linked


33

Technology impact: combined cycle plants

-new plants replacing coal plants

-combined cycle defining long run marginal cost(substantially lower that the historic one)

-combined cycle competing with transmission andchanging investment patterns

Restructuring of the world electricity market

-arrival to Latinamerica of main world energy (gas andelectricity) players looking for regional portfolios

-increase of competition versus increase of verticaland horizontal integration

-prices initially on a downward trend

-regional expansion of transmission

-need for regional common regulatory arrangements


34

Hugh RudnickProfessor

Department of Electrical EngineeringPontificia Universidad Católica de Chile

Santiago, Chile

Email [email protected]://www.ing.puc.cl/power/

electricity markets in latin america: costs, prices and

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