Energy risk in Latin America: the growing challenges

Transcription

1 Universidad Católica de Chile Department of Electrical Engineering Energy risk in Latin America: the growing challenges Hugh Rudnick IEE International Conference on Energy Trading and Risk Management November 2005, City University, London If there is one thing that is characteristic of electricity markets worldwide, it is a rising awareness of risk. While electricity markets worldwide are becoming increasingly competitive, risks associated with rising fuel prices, fuel availability, economic and political changes, among others, are confronting those markets. Utilities and their customers are recognizing the need to develop risk management skills to compete in the marketplace. The Latin America energy marketplace led the world with its deregulation reforms, but is confronting new risks that are challenging its market structures and imposing new competitive arrangements, with transactions being based more and more on prices set by market forces rather than regulation.

2 Contents Energy markets in Latin America- gas and electricity Deregulation processes advances and recessions Risks involved in energy markets Assessment and management of risks The Latin America markets Central America 610 KWh/inhabit KWh/inhabit Several countries, with low energy consumption, being integrated to achieve adequate scale. Andean Community Countries with abundant energy resources that could be better used KWh/inhabit Mercosur Countries with higher energy consumption than rest of region. Abundant energy resources (hydro and natural gas) Population (millions inhabit). Electrical consumption (TWh).

3 The gas and electricity markets -one of the most dynamic regions of interaction between electricity and natural gas -important natural gas reserves and hydro potential capacity, coupled to high demand growth -need to diversify energy resources -economic reforms opened space for private investment in energy -development of an infrastructure of gas and electricity interconnections -macro economic and political difficulties in some countries giving origin to regional energy crisis Latin America global vision CENTRAL AMERICA MW 45%H;55%T Sector reform MEXICO MW 23%H;67%T COLOMBIA MW 64%H;36%T BRAZIL MW 90%H;10%T CHILE MW 40%H;60%T ARGENTINA MW 36%H;64%T Total Installed Capacity (2001) 221 GW (57%H, 43%T) Source: Olade, EIA

4 The economic growth LATIN AMERICA & THE CARIBEAN GDP annual growth rate GDP Per capita GDP (index 1997=100) Per capita GDP Source: Cepal, 2005 High electricity demand growth % 9% Consumption [GWh] Chile - projection of demand growth over 6% 8% 7% 6% 5% 4% 3% Growth rate [%]

5 Demand growth correlated to GDP Growth rate [%] Mexico Potential hydro resources Colombia 93,09 GW 20,3% 10,9% Venezuela 50,00 GW Peru 61,83 GW 13,5% 31,3% Brazil 143,38 GW 8,7% Bolivia 38,85 GW 9,7% Argentina 44,50 GW Chile 26,05 GW 5,7% Source: Olade

6 Natural gas reserves Colombia 0,2 TCM (7,2 TCF) 3% 60% Venezuela 4,1 TCM (147 TCF) Peru 0,2 TCM (8,7 TCF) Bolivia 0,7 TCM (23,9 TCF) Chile 0,05 TCM (1,6 TCF) 4% 1% 10% 11% 3% Brazil (w/o Santos) 0,2 TCM (7,8 TCF) With Santos Basin 22,8 TCF Argentina 0,7 TCM (25,8 TCF) TCM: Trillions Cubic Meters TCF: Trillions Cubic Feet Important load Natural gas reserve Hydro reserve

7 CHILE Increasing gas exchanges PERU CAMISEA BOLIVIA LA PAZ SANTA CRUZ CUIABA BELO HORIZONTE SAO MATEUS TOCOPILLA 8 CORNEJO MEJILLONES RIO DE JANEIRO SAN PABLO TUCUMAN ARGENTINA URUGUAIANA PARANA PORTO SANTIAGO SAN ALEGRE JERONIMO PAYSANDU 14 RANCAGUA 9 MONTEVIDEO In Operation 6 33 BUENOS Under Construction CONCEPCION 30 AIRES Projected 3 15 BAHIA BLANCA LOMA Under Evaluation LA LATA (MMm 3 /día) Transportation Capacity 19 2,5 PARAGUAi BRAZIL Under Study, LNG Projects 5 EL CONDOR METHANEX SAN SEBASTIAN Source:Repsol 2004 Contents Energy markets in Latin America- gas and electricity Deregulation processes advances and recessions Risks involved in energy markets Assessment and management of risks

8 Advances and Recessions The 80 s and 90 s the great leap forward The start of reforms in the 80 s Chile Argentina The natural continuation in the 90 s Peru, Colombia, Bolivia, Central America The incomplete experiments Brazil Trajectories Electrical Reform Processes Private property Vertical segmentation with restrictions on functions Vertical integration allowed Mixed property or partial private participation Exclusive state property Central control Integrated & regulated Single buyer Open market Future probable trajectories Source: Cepal, 2003

9 Trajectories Gas Reform Processes Private property Mixed property or partial private participation Exclusive state property Central control Integrated regulated Open market Source: Cepal, 2003 Welcome private investment Electricity Gas Brazil Argentina Chile Colombia Peru (*) Total (*) Until 2004 in gas 1990/2002, millions US$ Source: Gas Atacama

10 Advances and Recessions The 00 s the break Continuing reforms (the Pacific) Colombia Chile Peru The recession (the Atlantic) Argentina - the economic crisis -abandoning the path Brazil rationing and the new regulatory search Bolivia the political crisis Advances and Recessions The great recession The macroeconomic and political crisis The State intervenes the political action Despising regulations and contracts Negotiations and power balance as the development tool The privilege of the short term Political action versus regulation An unwarranted path for the long term

11 Required private investment Brazil Argentina Chile Colombia Per Total Electricity Gas Required 2004/2008, millions US$ Source: Gas Atacama Contents Energy markets in Latin America- gas and electricity Deregulation processes advances and recessions Risks involved in energy markets Assessment and management of risks

12 Markets brought uncertainty and risks Deregulation, segmentation and privatisation of the electricity industry in Latin America brought about uncertainty and the need to face risk by all involved, changing the way decisions are made by the different agents. Risk may be defined as the potential harm that may arise from some present process or decision or from some future event, the hazard to which we are exposed because of uncertainty. Harm can take different forms in the electricity industry, whether one is an investor in generation, a sale organization, or an end-user. Markets brought uncertainty and risks Electricity price (volatility) Fuel price Fuel availability (uncertain availability) Economic conditions (economic upheaval, inflation, floating exchange rates, interest rates) Volume (uncertain ability to balance supply and demand of electricity) Financial risk (credit, settlement, liquidity and operational risks)

13 Markets brought uncertainty and risks Weather load dependence Hydrological conditions Environmental constraints Transmission restrictions Technology changes Regulatory conditions (consistency and stability of regulations, transparency) Political decisions (political tariff setting) Demand growth uncertainty Growth rate [%] 15% 10% Electricity Consumption 5% GDP 0% % -10% Brazil: GDP correlation, but affected by crisis

14 Demand growth uncertainty Brazil: the expectations of load growth in early 2001 for the next years were ~4,5% because of the 2001 power crisis and rationing, projections revised downwards, with an increase in uncertainty. challenge is to assure supply adequacy under uncertainty Fuel price volatility WTI crude oil 60 Forecast 50 Dollars per Barrel Jan- 01 Jul- 01 Jan- 02 Jul- 02 Jan- 03 Jul- 03 Jan- 04 Jul- 04 Jan- 05 Jul- 05 Jan- 06 Jul- 06 Source: EIA, Febr. 2005

15 Fuel price volatility gas prices Source: Fuel price uncertainty gas prices Source: National Petroleum Council (2005)

16 Uncertainty in hydrology Stored hydraulic energy in central Chile GIGAWATTS HORA (GWh) Ene-94 May-94 Sep-94 Ene-95 May-95 Sep-95 Ene-96 May-96 Sep-96 Ene-97 May-97 Sep-97 Ene-98 May-98 Sep-98 Ene-99 May-99 Sep-99 Ene-00 May-00 Sep-00 Ene-01 May-01 Sep-01 Ene-02 May-02 Sep-02 Ene-03 May-03 Sep-03 Ene-04 May-04 Sep-04 Ene-05 May-05 Sep-05 RAPEL INVERNADA COLBUN CHAPO RALCO LAJA Uncertainty in hydrology Condition common to Latin American markets Predominance of volatile hydroelectricity generation The Chilean case In an average year, about 80% can be supplied with hydro generation in the main system In a rainy year, such as or , nearly 100% of energy requirements can be supplied with hydro generation. During an extreme drought such as those of or , hydro generation cannot supply more than 40%

17 Price volatility Spot Prices (US$/MWh) US$/MWh Aug-95 Jan-96 Jun-96 Nov-96 Apr-97 Sep-97 Feb-98 Jul-98 Dec-98 May-99 Oct-99 Mar-00 Aug-00 Jan-01 Jun-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Mar-03 Apr-03 Brazilian Southeast Region spot prices Price volatility R$/MWh Energy Rationing Gas supply difficulties Aug-95 Dec-95 Apr-96 Aug-96 Dec-96 Apr-97 Aug-97 Dec-97 Apr-98 Aug-98 Dec-98 Apr-99 Aug-99 Dec-99 Apr-00 Aug-00 Dec-00 Apr-01 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Brazilian Northeast Region spot prices Exchange rate: 1 USD = 2,6 R$

18 Price volatility Thermal Hydro CMg Monthly generation (GWh) Marginal cost (US$/MWh) Chilean main system spot prices coupled to hydrology Fuel availability the gas dependence Argentinean natural gas exports to Chile

19 CHILE Fuel availability the gas dependence MMm3 5 90% 80% 4 70% % 50% 40% 30% 20% % restriction 10% 0 0% 05/ / / / / / / / / / / / / / / / /2005 Restrictions of Argentinean natural gas exports to Chile PERU BOLÍVIA BRASIL CUIABA Argentina 31 Tcf Uruguai TOCOPILLA MEJILLONES PARAGUAi SAO PAULO SANTIAGO ARGENTINA PORTO ALEGRE URUGUAI MONTEVIDEO 5 CONCEPCION BAHIA BLANCA EL CONDOR

20 The country risk Base points Riesgo país Latin Brasil Chile México Perú /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/ /06/2004 Puntos base 01/07/ /08/ /09/ /10/2004 Source: Cepal, 2004 The political risk Argentina Emergency law of 2002 new political leaders fighting for survival distribution and transport concession contracts are dismissed gas tariffs are frozen, stimulating distorted growth of gas consumption. negative returns on investments investments frozen leading to export rationing

21 Short political cycles scare investors Political cycles (4 to 6 years) Unstable political cycles (indefinite duration) Investment cycles (15 to 30 years) Source: Cambridge Energy Research Associates. Contents Energy markets in Latin America- gas and electricity Deregulation processes advances and recessions Risks involved in energy markets Assessment and management of risks

22 Risk management Risk management is the process of assessing risk and then developing strategies to manage the risk. Important in the development of the energy infrastructure. Energy infrastructure characteristics Long construction periods Long term investment Minimum plant sizes, given economies of scale Large sunk costs within large investments Indivisibility of equipment and technical discontinuity require supply ahead of demand Demand fluctuation forces significant idle capacity Need to adequately assess and manage risk

23 Decision making in generation investment Decisions taken by generator investors, whose objective is to maximize company value Market provides important signals to investments High levels of uncertainty and risk Companies take decisions based on strategic perspective Traditional planning/optimization is not sufficient Present trend is to asses investments based on risk assessment and risk management models, using different methodologies Supply uncertainty and risks- approaches Obligation to supply With pass through of contracts With reference price Low risk for invest. High cost transferred to consumers Depends on reference price. Some problems Market driven Pass through of benchmark merchant plants Merchant plants Risk for investors and suppliers Sensitive to country risk High risk for investors. Sensitive to country risk

24 Methodology scheme in decision making of generation capacity investment Strategic decision Identify/Quantify uncertainty and risk Competitive Strategy Scenario Simulation Qualitative Behavior Analysis Manage soft variables Investment Decision Decision Analysis Business Dynamics Optimization/ Planning Analysis Analysis of market future states Optimization models benchmark/ data input Real Options Real Options w/game Theory Financing/ Economic based Analysis Investment analysis methodologies Development level and electricity markets applications Methodology Competitive Strategy Scenario Simulation Decision Analysis Business Dynamics Real Options (RO) RO w/game Theory Development level High Medium High Medium High Low EM applications Theoretical Real Real Theoretical Theoretical/Real In research stage

25 Investment analysis methodologies Qualitative Behavior analysis Competitive Strategy Scenario Simulation Industry analysis Identify uncertainties and risks for the Genco Evaluated competitive advantages, positioning and sustentation of the Genco Create consistent and reasonable histories" of the future A method to think about the long term where uncertainty is too great Scenarios are used to evaluate strategies, planning and policies of organizations Investment analysis methodologies Planning/Optimization analysis Decision Analysis Trade/Off risk analysis The concept is hedging to adverse scenarios Min-max regret approach Tried to avoid a solution that may have a bad performance in the future Business Dynamics Long term behavioural simulation modeling The underlying concept is learning and the recognition of feedback and time lags Models the dynamic evolution of the market and the logic of relationships among their components

26 Investment analysis methodologies Financing/Economic based analysis Real Options Real Options w/game Theory Measure value of the flexibility of decisions Models the uncertainty of contingent variables (costs of fuels, electrical prices, demand, etc.) through state variables that follow stochastic processes Define the optimal timing of investment, the choice of technology, valuation of capacity expansion Generation market is an oligopoly (generally) Strategy interaction affects decision making Basically trade-off between the value of waiting for the appropriate timing of investment and the strategic value to act before the competitors Game theory line include preemptive games and war of attrition games Let the market manage risk Brazil and Chilean approaches through auctions New auction schemes replace regulated price calculations Brazil regulated pool as a a kind of single buyer intermediary to purchase power via auctions that blend cheaper hydro power with more expensive thermal generation and offers a single price for distributors. Chile to implement auction process where distributors offer 15 year contracts to generator investors in uncertain gas supply environment. Load s willingness to contract drives system expansion The importance of auction design to face market power

27 Let the market manage risk - Brazil Demand Existing energy New energy 2 auction 02/04/2005 Auctions 1 auction 07/12/2004 Old contracts Let the market manage risk - Chile (GWh) 35,000 30,000 Energy blocks without contracts by ,000 20,000 15,000 10,000 5, ,4% Year

28 Hugh Rudnick Department of Electrical Engineering Universidad Católica de Chile Santiago, Chile Final version: