Hydroelectric, Nuclear

Natural Gas Capacity, Construction Gaining Ground in Latin America

Issue 8 and Volume 103.

Natural Gas is Infiltrating the Predominantly Hydro-powered World of Latin American Power generation, and this trend is expected to continue for at least the next decade or so.

“Coupled with the restructuring process, the power sector is experiencing rapid technological change, in particular a trend toward combined-cycle gas turbine (CCGT) technology,” said B.W. Gainey, Gaffney, Cline & Associates senior gas and power consultant. “These plants are cheaper and quicker to build than other plants and they generate electricity at a higher efficiency. Moreover, a smaller plant is possible, which is particularly attractive to private power producers.” Although natural gas is a minor generating fuel in the region, it only became available in Brazil and Chile recently.

Gas production in Latin America is expected to grow from the current 4.2 trillion cubic feet a year to 6.7 trillion cubic feet a year by 2005, with major contributions coming from Mexico, Argentina, Trinidad and Tobago, and Venezuela. The current economic slump has slowed progress and reduced the number of interested participants, but Brazil is still seen as a long-term prize.

It is believed that the initial customers needed to support new natural gas transmission infrastructure will be CCGT power plants. These offer a solid base consumer for a pipeline, and over time, additional gas can penetrate the existing industrial, commercial and residential markets, displacing the original fuels when the economics are right.

The rate of growth for natural gas use in power generation will depend on the economic attractiveness of future gas pipeline or LNG projects. One of the most attractive markets for gas is the south and southeast portion of Brazil. Head-to-head competition is expected in this region, with gas options including:

  • Indigenous gas from Brazil
  • Bolivian pipeline gas,
  • Argentine pipeline gas,
  • Venezuelan LNG,
  • Trinidad and Tobago LNG,
  • Camisea pipeline gas from Peru, and
  • LNG from Argentina.

Studies of interfuel competition between these options indicate that the most competitive supplies in order of attractiveness are indigenous gas, Bolivian pipeline gas, and Argentine gas. The other options are not currently competitive.

“The most significant opportunity for gas-to-power projects in Latin America appears to be in Mexico, followed by Brazil, Argentina, Colombia and Venezuela. More modest opportunities exist in Chile and Peru,” Gainey noted in “The Role of Natural Gas in Latin American Power,” presented at Latin American Power, June 29-July 1 in Miami.

The Latin dependence on hydroelectric power is reflected in the installed base, with only Chile, Argentina and Mexico having more than half of their installed capacity coming from thermal and nuclear power. The average split for the region is 58 percent hydropower and 42 percent thermal and nuclear. This is the only region in the world with such a heavy emphasis on hydropower.

Risks and Opportunities

Unparalleled cooperation between countries is bringing gas accessibility to those that previously did not have the resource. In order to start a new gas market, the supplier needs an anchor load, which is often one or more gas-fired, baseload power plants. “The tendency in Latin America of dispatching hydro plants before thermal facilities is a concern because CCGT power plants must operate sufficiently to be able to honor typical take-or-pay contracts that they will be expected to sign,” Gainey said.

Many of the gas-fired plants slated for construction in Latin America will likely be merchant facilities, which boosts the risk level of the venture. This additional risk level may slow gas-fired generation’s spread throughout the region.

Between 1998 and 2007, the incremental power capacity requirement is 75-137 GW, with gas expected to account for 37-60 GW, about two-thirds of which should be CCGT and about one-third SSGT. Latin America accounted for a healthy 6 GW of natural gas capacity orders in 1998. Due to its huge potential, a lack of local suppliers and a downturn in the Asian market, Latin America has emerged as the world’s most competitive region for power plant suppliers. The massive growth in the North American market over the past year or so has eclipsed the hearty Latin American market, but it is also booming. According to Datamonitor statistics, top equipment providers for the Latin market in 1998 were: General Electric, 26 percent; ABB, 22 percent; Alstom, 21 percent; Siemens Westinghouse, 20 percent; and Nuovo Pignone, 3 percent.

Motivation

There are several reasons for the switch from hydroelectric to gas-fired power, according to Jon Lane of UK-based Datamonitor, an independent market analysis firm. They include:

  • Project finance. The international finance community prefers gas-fired power to hydroelectric. Combined-cycle plants are fast to construct, so a return on investment is seen quicker. Gas-fired plants are also far less expensive per kilowatt than hydroelectric plants. A lower short-term investment is an important advantage over the low fuel costs of a hydropower plant. Hydroelectric projects are seen as more risky because project outlay is higher and returns are uncertain.

  • Deregulated electricity markets. One drawback to hydroelectric generation is that output is less secure and is often dependent on factors outside the control of the plant owner, particularly rainfall. Competitive generation depends on plant availability. Gas-fired plants can guarantee availability through service and maintenance contract at levels exceeding 95 percent. This is not true of hydroelectric facilities.

  • Environmental benefits. Although hydroelectric generation does not produce emissions, it does have environmental problems. Areas must be flooded, water quality can be affected, and dams may endanger water creatures and the area ecosystem. Gas-fired capacity does produce emissions, but they can be minimized through technology.

  • Planning. Hydroelectric power plant planning can be very complex, especially when several plants are sited on one river or on interconnected rivers. Performance of one plant affects the others.

  • IPPs. IPPs and foreign utilities are entering these markets through privatizations and greenfield projects and they are boosting gas-fired plant construction. Endesa, the top IPP in the Latin American market, has more than 3 GW of gas-fired power in operation and plans for more. As greater percentages of new construction are accounted for by IPPs, the gas-fired power plants will also gain share (see table).