BARRIERS TO ENERGY BARRIERS TO ENERGY DEVELOPMENT IN SOUTH DEVELOPMENT IN SOUTH

AMERICAAMERICAPresentation byPresentation by

Sergio Ugarte, Northeastern University, Former Sergio Ugarte, Northeastern University, Former Vice Minister of Energy Of PeruVice Minister of Energy Of Peru

South America: Promoting Regional IntegrationSouth America: Promoting Regional Integration

CLAI, George Washington University - OASCLAI, George Washington University - OAS

March - 2002March - 2002

03-19-20022

South America - Heart of Darkness ?

03-19-20023

Energy Sector PoliciesEnergy Sector PoliciesRegional ObjectivesRegional Objectives

• To transform To transform South America South America into a developed into a developed Region, with Region, with standards of living standards of living which reflect the which reflect the wealth of the land wealth of the land and the potential and the potential of its populationof its population

03-19-20024

Energy Policy: The Value of EnergyEnergy Policy: The Value of Energy• A necessary condition, A necessary condition,

although not enough although not enough for social and economic for social and economic developmentdevelopment

• Factor in Factor in competitiveness for the competitiveness for the cost of goods and cost of goods and servicesservices

• ImpactImpact on on BBalanalancece of of PaymentsPayments

03-19-20025

Sustainable Development TrilogySustainable Development Trilogy

ENERGY

ECONOMY ENVIRONMENT

03-19-20026

Energy Policies: The ChallengesEnergy Policies: The Challenges

• StrategicStrategic::

• EconEconomicomic::

• SocialSocial::

• Reduce the regulatory, thecnical and Reduce the regulatory, thecnical and institutional restrictions that limit the institutional restrictions that limit the development of efficient interconnectionsdevelopment of efficient interconnections

• Design of a Regional Energy Market Design of a Regional Energy Market

• Improve overall efficiency to final userImprove overall efficiency to final user

• Design features of a Regional Transmission Design features of a Regional Transmission and Exchange Systemand Exchange System

• Enormous differences: in order to Enormous differences: in order to understand the Region, dispersions are just understand the Region, dispersions are just as important as median valuesas important as median values..

03-19-20027

The sufficient and The sufficient and economic energy economic energy

supply is part of the supply is part of the Region Security.Region Security.

03-19-20028

Power : How far are we?Power : How far are we?

Electrification Factor

Uruguay 97.9%Argentina 95.2%Chile 94.1%Brasil 93.0%Venezuela 91.4%Perú 72.2%Bolivia 55.8%

03-19-20029

Current Situation:Current Situation:

• Until the 80’s, strong influence and participation Until the 80’s, strong influence and participation of the state.of the state.

• Last decade marked by profound reforms in Last decade marked by profound reforms in almost all the region (decentralization, almost all the region (decentralization, deregulation and privatization)deregulation and privatization)

• Mature and well established energy sectors, Mature and well established energy sectors, independent regulatory institutions, mostly independent regulatory institutions, mostly privately power companies.privately power companies.

• Interconnections are happening…but slowlyInterconnections are happening…but slowly

03-19-200210

Current Situation (continuation):Current Situation (continuation):

Two well differentiated sub-regions in South America:Two well differentiated sub-regions in South America:

• Southern Sub-Region (Argentina, Bolivia, Brazil, Chile, Southern Sub-Region (Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay) with increased degree of Paraguay and Uruguay) with increased degree of integration.integration.

• Northern Sub-Region (Ecuador, Colombia, Peru and Northern Sub-Region (Ecuador, Colombia, Peru and Venezuela), that must perfect their interconnection Venezuela), that must perfect their interconnection agreements.agreements.

Peru and Bolivia are the natural hub for the whole Peru and Bolivia are the natural hub for the whole regional integration. Their alliance and partnership is regional integration. Their alliance and partnership is needed.needed.

03-19-200211

Current Situation (continuation):Current Situation (continuation):• Balance between energy sourcesBalance between energy sources

• Power generation: 80% from hydro sourcesPower generation: 80% from hydro sources

• Hydropower complementarity throughout the region.Hydropower complementarity throughout the region.

• Expectance in new natural gas fields in the regionExpectance in new natural gas fields in the region

• Gas supply is rigid, due to the existence of Gas supply is rigid, due to the existence of oligopolies or natural monopolies and its demand is oligopolies or natural monopolies and its demand is not yet well developed.not yet well developed.

• Gas infrastructure is modest in the region.Gas infrastructure is modest in the region.

03-19-200212

POTENCIALHIDRO

CONSUMOCONSUMOELECTRICOELECTRICO

Hydropower complementarity adds enormous value to the interconnections

03-19-200213

Expectance in new natural gas fields

03-19-200214

EXISTING GAS PIPELINES

03-19-200215

Potential of the RegionPotential of the Region

• Potential to enlarge economies if power market Potential to enlarge economies if power market were fully integrated.were fully integrated.

• Economic benefits of huge magnitudes by inter-Economic benefits of huge magnitudes by inter-fuel substitution and complementary fuel substitution and complementary characteristics of isolated systems as compared characteristics of isolated systems as compared with the integrated system.with the integrated system.

03-19-200216

What do we lack?What do we lack?

• Interconnection infrastructure facilities are weak where Interconnection infrastructure facilities are weak where existent.existent.

• International trade agreements are not consistent, International trade agreements are not consistent, limiting severely the market integration.limiting severely the market integration.

• Lack of incentives for interconnection expansion during Lack of incentives for interconnection expansion during initial stages.initial stages.

• Unclear regulatory definitions of firm transmission Unclear regulatory definitions of firm transmission capacities.capacities.

• Regulatory and institutional barriers that discriminate Regulatory and institutional barriers that discriminate against international exchanges with regard to the against international exchanges with regard to the national marketnational market

03-19-200217

The economy of the region doesn’t grow

03-19-200218

…and our infrastructure is deficient

03-19-200219

How do we revert the situation?How do we revert the situation?

• First, it is not just a technical problem, it is mainly First, it is not just a technical problem, it is mainly political.political.

• Market itself and improved regulations is NOT enough to Market itself and improved regulations is NOT enough to break inertia of an almost a non-growth situation.break inertia of an almost a non-growth situation.

• States MUST help to build the new infrastructure. Private States MUST help to build the new infrastructure. Private sector cannot meet acceptable discount rates for some sector cannot meet acceptable discount rates for some needed interconnections.needed interconnections.

• FIRM POLITICAL WILL FOR FIRM POLITICAL WILL FOR INTEGRATION IS NEEDEDINTEGRATION IS NEEDED

03-19-200220

This political decision means:This political decision means:• Acceptance that even under “critical conditions” energy Acceptance that even under “critical conditions” energy

supply could depend form generation abroad.supply could depend form generation abroad.

• Leave border conflicts behind.Leave border conflicts behind.

• Allow international exchanges.Allow international exchanges.

• Guaranteeing non-discrimination and reciprocity in Guaranteeing non-discrimination and reciprocity in dealing with demand and supply from other countries.dealing with demand and supply from other countries.

• Promoting efficiency in the use of resources.Promoting efficiency in the use of resources.

• Allowing open access to national transmission systems.Allowing open access to national transmission systems.

03-19-200221

Developing a network scheme in South America

• Interconnections = Transport

• No difference between concepts of transport systems for goods, energy or communications

03-19-200222

Problems to be addressed:Problems to be addressed:• Define properly firm transmission concepts.Define properly firm transmission concepts.

• Establish short-term gas market in each regional hub (Sao Establish short-term gas market in each regional hub (Sao Pablo – Buenos Aires).Pablo – Buenos Aires).

• Organize a spot market for mandatory sales of surpluses and Organize a spot market for mandatory sales of surpluses and deficitsdeficits

• Promotion of an interruptible gas marketPromotion of an interruptible gas market

• Remove asymmetries in gas and power regulatory systems.Remove asymmetries in gas and power regulatory systems.

• Higher regulatory risks for investors in an integrated regional Higher regulatory risks for investors in an integrated regional power and gas scheme.power and gas scheme.

• Integrated regulation for all businesses that converge with the Integrated regulation for all businesses that converge with the use of same infrastructure.use of same infrastructure.

03-19-200223

Problems to be addressed (cont)Problems to be addressed (cont)• National regulations compatible with regional integrationNational regulations compatible with regional integration

• Coordination between national transmission planning Coordination between national transmission planning and the development of interconnectionsand the development of interconnections

• Legal fairness and protectionLegal fairness and protection

• Assurances of fair assignment of revenues between Assurances of fair assignment of revenues between national investors and regional ones.national investors and regional ones.

• Elimination of market price regulations which may distort Elimination of market price regulations which may distort the signals of efficient prices.the signals of efficient prices.

• Creation of suitable regional institutionsCreation of suitable regional institutions

• Homologizing the performance criteria of every national Homologizing the performance criteria of every national systemsystem

03-19-200224

Regional Integration will prevent:

03-19-200225

CALIFORNIA’S DISASTER. CALIFORNIA’S DISASTER. LESSONS:LESSONS:

We cannot pretend “Bueno, We cannot pretend “Bueno, Bonito y Barato” (Good, Nice Bonito y Barato” (Good, Nice and Cheap)and Cheap)

03-19-200226

ECUADORCOLOMBIA

BRASIL

BO

LIV

IA

CHILE

LimaLima

PERU

Acre

Titicaca LakeLEGENDLEGEND

GAS PIPELINEGAS PIPELINE

LIQUIDS PIPELINELIQUIDS PIPELINE

Cryogenic Cryogenic PlantPlant

Liquid Fractioning Liquid Fractioning

GA

SG

AS

LIQUIDSLIQUIDS

CamiseaCamisea

EXPORT OF EXPORT OF CONDENSATESCONDENSATES

EXPORT OF LPGEXPORT OF LPG

LPGLPG

UPSTREAMUPSTREAM Camisea Gas FieldsCamisea Gas Fields

Cryogenic Separation plant Cryogenic Separation plant in Camiseain Camisea

Fractioning of condensates Fractioning of condensates on the coaston the coast

Gas Pipeline: Camisea - City Gas Pipeline: Camisea - City Gate in LimaGate in Lima

Liquids Pipeline - Camisea- Liquids Pipeline - Camisea- CoastCoast

Gas distribution network in Gas distribution network in Lima and CallaoLima and Callao

TRANSPORT & TRANSPORT & DISTRIBUTIONDISTRIBUTION

DEVELOPMENT OF GAS MARKET IN PERU: THE CAMISEA PROJECT

03-19-200227

Why natural gas massification?Why natural gas massification?Reasons: Fuel PricesReasons: Fuel Prices

4

8

12

16

20

24

28

32

US

$ / 1

06 B

TU

30

1613

5

Electricity LPG Kerosene Natural Gas

Gas 1.8

T&DAP 1.8

DBP 0.7

IGV 0.7

Lima – Commercial Clients / Small Industry

January 2001

14

Diesel

03-19-200228

LONG TERM VISION OF GAS FORLONG TERM VISION OF GAS FOR PERÚPERÚ

Cuzco

Ayacucho

HuancayoOroya

Lima

IcaMarcona

MoqueguaIlo

Puno

Trujillo

All the stages

Chimbote

Arequipa

Apurimac

Tacna

Nerve center“Concentrator”

TalaraAguaytía

Camisea

Piura

Chiclayo

03-19-200229

Energy Policy: The ResourcesEnergy Policy: The Resources

Mantaro(840 MW)

6.5 TWh/yr

325 TWh in 50 yrs

= 5.8

Camisea

13 TCF Gas =

1,870 TWh

03-19-200230

Energy Policy:The ResourcesEnergy Policy:The Resources

Camisea 13 TCFGas

= 1,870 TWh of Electrical

Energy

=10

Hydroelectric Potential

60 GW =

360 TWh/yr18,000 TWh in

50 yrs

Paita

M. Aguila

Caraz

San Nicolás

Cajamarca

Sullana

Arenal

Ayacucho

Huanta

Aguaytía

Paragsha II

Cahua YaupiCarhuamayo

Huánuco

Tingo María

Zorritos

Cotaruse

Piura Oeste

Chiclayo Oeste

Trujillo Norte

C.H. Carhuaquero

Guadalupe

Chimbote

Talara

Zapallal

ChavarríaVentanilla

Paramonga

Marcona

San Juan

OroyaPachachaca

Huayucachi

Mantaro

Ica

Matucana

Huancavelica

HuampaníSanta Rosa

Independencia

MoyopampaHuincoPomacocha

Callahuanca

Restitución

San Gaban

Quillabamba

Andahuaylas

Machu Picchu

Tintaya

Juliaca

Puno

Quencoro

Cachimayo

Abancay

Dolores Pata

Combapata

Azangaro

TomasiriTacna

Cerro VerdeBotiflaca

Charc.VI Charc.V

Aricota 2

La Yarada

CT.Ilo

Ilo

Aricota 1

Chilina

LocumbaToquepala

Ref.Ilo

Socabaya

Charc.IV

Moquegua

Pucallpa

Huaraz

Ticapampa

Carhuaz

Der. Antamina

Machala

Ecuador Colombia

Brasil

Chile

Bol

iviaOcéano

Pacífico

Línea de 220 kV

Línea de 138 kV

Línea de 66 kV

Aucayacu

Tocache

Chachapoyas Moyobamba

Tarapoto

Bellavista

C. Del Pato

Zarumilla

Puerto

Maldonado

Iñapari

03-19-200232

Coming Up : Peru-Ecuador Coming Up : Peru-Ecuador connectionconnection

CENTRAL TERMOELECTRICA

LINEA 138 kV.

CENTRAL HIDRAULICA

LINEAS 220 kV.SUBESTACIONES

SISTEMA DE TRANSMISION

ESCENARIO MODERADO

AÑO 2004ECUADOR - PERU

NATIONAL GRIDS / ECUADOR - PERU - YEAR 2003NATIONAL GRIDS / ECUADOR - PERU - YEAR 2003

03-19-200233

03-19-200234

COLOMBIA – ECUADOR INTERCONEXION

03-19-200235

03-19-200236

Are we clear in our vision of Are we clear in our vision of Regional Interconnection?Regional Interconnection?• Interconnections are NOT “Passage ways”. They Interconnections are NOT “Passage ways”. They

are Axis for Progressare Axis for Progress

• They converge different network businesses: Gas, They converge different network businesses: Gas, power and telecommunications.power and telecommunications.

• The evolution of the regulation must take real The evolution of the regulation must take real advantage of this reality and it is not.advantage of this reality and it is not.

• Meaning of Progress Meaning of Progress 70’s = Access to energy70’s = Access to energy90’s = Access to Internet90’s = Access to InternetBut we are in the 21But we are in the 21stst Century now! Century now!

03-19-200237

Convergence:

-Power

-Gas

- Telecommunications

NATIONAL AND CORPORATE STRATEGIC

PERSPECTIVE

03-19-200238

03-19-200239

03-19-200240

03-19-200241

03-19-200242

DIVERSIFICATION OF TRANSMISSION DIVERSIFICATION OF TRANSMISSION

AND DISTRIBUTION BUSINESSAND DISTRIBUTION BUSINESSCompetitiveness and mass marketing of the Competitiveness and mass marketing of the

telecommunications business by use of the power telecommunications business by use of the power

transmission and distribution infrastructuretransmission and distribution infrastructure

State’s Role:To promote awareness of the value and State’s Role:To promote awareness of the value and

potential of the transmission and distribution potential of the transmission and distribution

infratsructure and its contribution to the diversification infratsructure and its contribution to the diversification

of businessof business

03-19-200243

Convergence Convergence Power - TelecommunicationsPower - Telecommunications

GENERALIZED USEOF OPTICAL FIBERS

DIGITALIZATION OF TELECOMMUNICATIONS

PARTICIPATION OF POWER SECTOR IN

TELECOMMUNICATIONS

USE OF TRANSMISSION AND DISTRIBUTION SYSTEMS

(INFRASTRUCTURE AND RIGHTS-OF -WAY)

Europe: End of ‘ 80sLatin America: Recent experience

03-19-200244

New Tariff SystemNew Tariff System

GASGAS

POWERPOWER

NETWORKSNETWORKS

SSYYSSTTEEMMSS

03-19-200245

THE END