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Argentine Power Sector Market operation - facing stress situations

CAMMESA

Compañía Administradora del Mercado Mayorista Eléctrico

APEX Conference

October 2006Seoul, Korea

WEM – Basic Rules - Global Figures – Key Indicators

Macroeconomic changes - Impacts

Fuel SupplyPre financing MaintenanceExpectations - Concerns

Outline

Market established in 1992 Spot Market (80%)

• SHORT-TERM MARGINAL-COST BASED• STABILISED SEASONAL PRICES FOR

DISTRIBUTORS (regulated)• HOURLY PRICES IN SPOT MARKET (capped to

gas prices)• ADDITIONAL PAYMENT FOR CAPACITY (12

$/Mwh; 90 hours per week)• REMUNERATION FOR ANCILLIARY SERVICES

Contract Market (20%)• CONDITIONS AGREED BETWEEN PARTIES

Basic Market Operating Basic Market Operating RulesRules

Installed Capacity 24 GWPeak LOAD 18 GWGeneration 2005 98 TWh500 kV 9.100 km220/132 kV 12.000 km

WEM - ParticipantsGenerators 53Distributors 63Large Consumers Ma 302Large Consumers Mi 2006Transmission COs 10Traders 4

Wholesale Electrical Market -Wholesale Electrical Market - 2005 2005

CUYO

COMAHUE

CENTRO

NOANEA

LITORAL

BUENOS AIRES

GBA

PATAGONICO

Hydro52%

Thermal41%

Nuclear7%

79%

21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Spot Contract

Dic 2001 => political crisis with deep recession in economy led to the fall of the government; social instability

Austral summer 2002 New transition governmentDebt default; end of the fixed

exchange rate (1$=1u$S) and devaluationeconomic emergency law => pesification of economyProfound economic crisis; inflation

Macroeconomic Changes

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

May 2003 => new elected government

Macroeconomic Changes

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u$s/

MW

h

$/u$s

Evolution of exchange rate=>

Increase of industrial demand due to greater competitiveness to export and import substitution Exchange rate => 200%Inflation => about 80%

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

Electricity Sector Scenario - Transition

% GDP vs DemandAnnual Variation GDP vs Electricity Demand

-15%

-10%

-5%

0%

5%

10%

15%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

GDP Demand

exchange rate 1$/u$sexchange rate 1$/u$sabout 3 $/u$sabout 3 $/u$s

% GDP vs DemandAnnual Variation GDP vs Electricity Demand

-15%

-10%

-5%

0%

5%

10%

15%

-12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

% annual GDP

% A

nn

ua

l De

ma

nd

2002 vs 2001 => -2% Dem var with

-11 % GDP var

2003 20041997

2005

Estimated 2006 vs 2005

Strong recovery – four years in a row (03/06) with GDP rates above 8%

Fiscal Surplus due to the increase of economic activity and a high exchange rate

Meaningful decrease of unemployment rate (from 20% to 11%)

Gain of political power and support

Economics

Political => less confidence in markets; energy as an strategic sector => more state participation

WEM Energy Prices => Maintain short term marginal cost system, with a cap price related with gas cost (less than 100 $/MWh (30 u$s/MWh). Differences recovered through uplift costs.

WEM tariffs => average below cost; residential and small consumers subsidised; industrial consumers adjusted partially

Electricity Sector – Scenario - Decisions

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u$s

/MW

h

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Monomial $

Monomial u$s

$ / u$s

Distributors

Spot Price Evolution

Definanciation Definanciation of stabilization of stabilization

fundfund

GDP - Strong recovery => demand increase

Focus => security of supply

Usage of thermal reserves => fuel supply (liquid) and maintenance (older plants)

Short term => cover the increasing demand => extensive use of thermal plants – increase of liquid fuel consumption

Additional problem => dramatic change in oil cost (from 30 to 60 U$S/bbl) and uncertainty

Electricity Sector – Situation

Annual Liquid Fuel Consumption (Mton) vs $WTI (U$S/bbl)

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2003 2004 2005 2006

Mill

on

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Fuel (Mton)

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Liq Fuel WTI

Annual Fuel Consumption - NGas Mm3/d - Gas & Alternative Fuel

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GAS Alt Fuel

Fuel Consumption

Thermal Dispatch – older plants

GENERATION OF OLDER THERMAL POWER PLANTS - STEAM TURBINES - avg MW/month

0

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Ene-98 Ene-99 Ene-00 Ene-01 Ene-02 Ene-03 Ene-04 Ene-05 Ene-06

After three years without dispatch, need to use older plants extensively => increase of maintenance requirements and fuel supply

Marginal signals smoothed & uncertainty related with evolution of oil price

Main problem => financing => fuel supply & maintenance

Mechanisms adopted – Fuel Supply direct fuel oil supply (agreement with

Venezuela +contracts) through CAMMESA. Centralised coordination of fuel supply

anticipation of money to the generators Total consumption Fuel Oil =>

2003 => 0,1 M ton; 2006 => 1,6 Mton => more than 60 shipment

Electricity Sector Scenario

Annual - Fuel Oil Consumption - Mton

00.20.40.60.8

11.21.41.61.8

1999

2000

2001

2002

2003

2004

2005

2006

FO Mton

Mechanisms adopted – Maintenance Anticipation of money to the generators to

finance major maintenances Generators require the amount of money

related with the maintenance cost CAMMESA evaluates the cost – benefit relation

(impact in operation costs of losing the group during a year) and informs to the Energy Secretariat

In case the amount required is authorised, CAMMESA anticipates the money to Genco

Genco gives it back in 12/24 months, beginning 1 year after the finishing of the maintenance

Electricity Sector Scenario

Short term => cover the increasing demand => ensure availability of thermal capacity and fuel; optimise the use of hydro plants to minimise the risk of supply

new generation => an agreement was reached where the Treasure ensures payments of variable costs (including capacity) and 35 % of marginal rent; rest of it => derived to a Fund (FONINVEMEM) created to finance the installation of new generation. Recent tender=> Siemens will provide 2 x 800 MW CC plants (2008). Gencos will own shares of them.

diversification => increase of fossil fuels costs make hydro/alternative generation more competitive, but require a kick off from national government. The completion of Atucha II (750 MW nuclear) and of the level of Yacyretá reservoir (+700 MW hydro) to be available by 2009/11

Demand side management, energy savings and emergency imports as resources to diminish supply risks.

Expectations – Concerns

¡Thanks for your attention!

Seoul, November 2006

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

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