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A Review of the Hot Hydro Market in Latin America

Latin America continues to attract major investments for new hydroelectric projects, despite a challenging economic environment. Demand for electricity in the region is projected to grow more than 4 percent a year over the next decade, with hydro meeting a significant portion of the demand.

By Russell W. Ray
HRW's associate editor

Total hydropower capacity in Latin America is about 140,000 MW, which accounts for 60 percent of the region's electricity consumption.

But the potential for new hydropower capacity in Latin America is even larger, said Ricardo Dell'Agnola, commercial director for Industrias Metalurgicas Pescarmona (IMPSA), a hydropower equipment manufacturer in Argentina.

"It has feasible hydro potential of about 4.5 times that," Dell'Agnola said. "Latin America is one of the most important markets in the hydro field."

Jean Binquet, business development director for engineering company Coyne et Bellier, headquartered in France, agrees. He says about a third of the contracts his company has won to date in 2009 have been for work in Latin America. "The potential for hydropower development in this region is tremendous," Binquet says. "And, the region is ‘hydropower friendly,' making doing business there attractive to us."

According to Marcos Costa, head of power for Alstom Brazil, more than half of new generation built in Latin America will come from new hydroelectric plants. "In the energy market in Latin America, hydro is the most important source of energy," Costa said. "It was in the past and will remain in the future."

Alstom has supplied turbines, generators, and other hydropower equipment to more than a third of the new hydro projects built in Latin America in the last decade, Costa said.

"Latin America is the second most important market worldwide behind China," Costa said. "We strongly believe this region will remain the second most important in the hydro business at least for the next ten years."

Potential project development comes in all shapes and sizes, from Brazil's 11,200-MW Belo Monte project on the Xingu River to 8.5-MW El Encanto on the Veracruz River in Costa Rica.

A sampling of some of the project development activity in Brazil, Ecuador, Venezuela, Peru, and Panama gives a glimpse of the hydro potential being pursued throughout Latin America.

Brazil

Hydropower accounts for 80 percent of Brazil's power generation, says Felipe Pinel, Brookfield Renewable Power Inc.'s senior vice president of Renewable Power Development in Latin America. Latin America's largest country has the expertise and know-how to build large hydroelectric plants, he said.

"In Brazil, we have the knowledge to build, develop, and operate hydro facilities," he said. "We are well positioned to tap into these immense hydro resources that the country has."

Several major hydroelectric projects are under construction or in some stage of development in Brazil, including on the Xingu, Madeira, Tapajos, and Tocantins rivers, tributaries of the Amazon River. Altogether, Brazil is building or planning more than 25,000 MW of new hydropower capacity.

Brazil is the third largest hydropower-producing country in the world and home to the giant 14,000-MW Itaipu hydroelectric complex on the Parana River. Latin America's largest country has 64,000 MW of hydropower capacity and produces more than 280 gigawatt-hours annually. But Pinel says Brazil will need much more capacity to meet the energy needs of a growing middle class.

"Almost 50 percent of the population of Brazil is 25 years old or younger," Pinel said. "You can just imagine what will happen to the consumption of goods in that country when that population reaches the workforce.

"Load is expected to grow approximately 20 percent over GDP (gross domestic product)," he said. "This means Brazil will need 50,000 MW of new installed capacity over the next ten years. That alone shows the huge need for investments in power generation."

Coyne et Bellier's Binquet credits the use of a private-public partnership (PPP) development model to the success of current hydro development in the country. The objective of the PPP model is to achieve an acceptable balance of risks and rewards between private companies and publicly owned entities.

In the model, a private company owns the project and gets access to a share of its revenues for a specified period of time, with an acceptable level or risk. The public sector achieves debt reduction, which puts it in a better position to control issues of national interest — such as safety, water rights, and resettlement. The public sector also gets full ownership of a relative new hydro facility at the end of the concession period.1

Binquet says the successful use of the PPP development approach in Brazil proves it's an ideal model to use in all emerging countries.

Click to Enlarge

Brazil, home to the giant 14,000-MW Itaipu hydroelectric complex, is the third largest hydropower-producing country in the world and is building or planning more than 25,000 MW of new hydropower capacity.

The largest hydroelectric development being proposed in Brazil — 11,000-MW Belo Monte in northern Brazil — is scheduled to begin commercial operations by 2014 and will be Brazil's second largest power station behind Itaipu. The 18.9 billion reais (US$11 billion) project will be built in the state of Para and is expected to improve the reliability of Brazil's power system.

Construction of another large hydro development, 3,150-MW Santo Antonio, is under way on the Madeira River in Rondonia State. Andritz is supplying 12 turbines and generators, while Alstom Hydro is supplying 19 turbines, 22 generators, and approximately half the project's hydro-mechanical and lifting equipment. The plant is expected to be on line by mid-2012.

To better supply hydroelectric projects in northern Brazil, Alstom joined forces with Bardella, a Brazilian capital-goods company, to build a manufacturing plant in Rondonia. The 50/50 joint venture known as Industria Metalurgica e Mecanica da Amazonia (IMMA) spent 35 million euros (US$52.3 million) to build the plant, which is expected to open by the end of 2009.

Ecuador

In Ecuador, the 1,500-MW Coca Codo Sinclair project is expected to supply about 70 percent of the country's electricity needs. Right now, Ecuador relies heavily on imported electricity from Colombia and Peru to meet demand and spends more than US$2 million a day on imported power, said Jorge Diaz Silveira, an attorney for Washington, D.C.-based Hogan & Hartson, the law firm that developed the bid documents for Coca Codo. Sinohydro, China's largest dam builder, signed a contract in early October 2009 to build the project and brought with it a $1.7 billion, 15-year loan from the Export-Import Bank of China.

"A requirement of the bid was that the proposed contractor come with financing," Silveira said.

In a bad economy, more governments are looking for help to get financing for power plant projects, Silveira said. The Chinese bank agreed to finance 85 percent of the Coca Codo project while the government of Ecuador will fund the remaining 15 percent.

For Sinohydro, the Coca Codo project represents a major milestone in the company's history. "It is their first venture ever into the Americas," Silveira said. "I think it's indicative of the enormous appetite that the Chinese have to do projects in the Americas."

Ecuador plans to double its use of hydropower over the next decade, according to senior government officials. The country wants 86 percent of its electricity needs to be covered by hydropower by 2020, up from 43 percent now. The Coca Codo project is expected to begin commercial production by 2015.

Binquet says the country has a "strong political will" to develop hydropower.

Coyne et Bellier has a strong presence in Ecuador, working as the owner's assistant on the Coca Codo Sinclair project, providing construction supervision for the 162.6-MW Mazur project, and participating in feasibility studies and preparation of tender documents for 11 hydro developments totaling 1,670 MW in the Guayllabamba River system.

Venezuela

In Venezuela, more than 70 percent of the country's generation is produced by hydroelectric plants with most of that power coming from three plants on the Caroni River. The construction of additional hydropower capacity is crucial to satisfying Venezuela's growing demand, said Fabiola Padron, manager in charge of hydro development for CVG Electrificacion del Caroni CA.

"What is really important for us is how we are going to face future requirements," Padron said. "It is estimated that the electric system needs more than 1,000 MW of new installed capacity per year for the next ten years to meet demand."

At least 11 hydroelectric projects are in some form of development in Venezuela, she said.

In October, the Inter-American Development Bank loaned Venezuela 3.76 billion bolivars (US$1.75 billion) to complete the construction of the 2,320-MW Manuel Piar project (previously named Tacoma) on the Caroni River. "It is the largest credit contribution that the IDB is giving to any country," said Venezuelan Finance Minister Ali Rodriguez.

Utility CVG Electrificacion del Caroni (Edelca) is the owner of the US$4.3 billion (9.2 billion bolivars) project, which includes a 300-meter-long, 82-meter-tall concrete dam and hydropower station. The project is expected to begin commercial production by 2012.

Peru

Eletrobras, Latin America's largest electric utility, said it is studying the feasibility of a US$4.8 billion (13.9 billion nuevo soles) hydroelectric project comprised of six plants with a combined capacity of 9,000 MW in northern Peru.

The Corina project calls for pumping water through a mountain tunnel from the Amazon's Maranon River. It would be Peru's largest hydropower facility.

"Corina could irrigate half of Peru's desert," said Eletrobras Regional President Cesar Alvarez.

Eletrobras is the government-owned electric utility of Brazil. Peru and Brazil are considering several new hydro projects with an investment outlay of more than 43.4 billion nuevo soles (US$15 billion).

Also in Peru, Norwegian energy company SN Power is building the 168-MW Cheves hydroelectric project on Rio Huaura, about 81 miles north of Lima. Under the 15-year supply contract, Peru will purchase 109 MW from the project, the Peruvian government said. Cheves is scheduled to be online in 2014.

"Peru, with its continued prosperity and growth potential, is an important market for SN Power," said Oistein Andresen, chief executive officer of SN Power.

Panama

Panama's utility regulator predicts the nation will add 31 hydroelectric projects totaling 1,047 MW through 2013. Autoridad Nacional de los Servicios Publicos (Asep) said 15 of the projects are under construction "with a healthy rate of progress," while the other 16 are in final design. The agency said the projects represent investment of US$2 billion, giving a strong boost to the Panama economy.

"This gives peace of mind that the market is growing because they can meet demand in coming years," Asep said.

Panama's current installed capacity is 1,663 MW, compared to peak demand of 1,120 MW, Asep said. Demand is expected to total 1,373 MW by 2013.

Barring unforeseen setbacks, Asep predicts that three projects of 15 MW would come on line in 2009, seven of 97 MW in 2010, eight of 364 MW in 2011, 11 of 538 MW in 2012, and two of 33 MW in 2013.

Among Panama's recent hydropower activity, the European Investment Bank in October 2009 approved a US$211 million (142 million euros) loan for the construction of three hydroelectric plants in Panama. The loan will help fund the construction by Suez Energy Central America of the Dos Mares hydroelectric complex on the Chiriqui River in western Panama (consisting of 26-MW Gualaca, 34.8-MW Lorena, and 57.4-MW).

The three new plants will be tied into the existing hydroelectric system, which includes the Fortuna and Canjilones plants. Such investments are vital for "ensuring the local population's security of supply while limiting the climate change impact," said EIB Vice President Carlos da Silva Costa.

The loan was approved under EIB's Sustainable Energy and Security of Supply Facility.

In other activity, Russian equipment supplier Energomashexport Corp. LLC is supplying electromechanical equipment for the 85-MW Baitun project on the Chiriqui Viejo River, while Generadora Pedregalito S.A. is constructing the 20-MW Pedregalito hydroelectric project on the Chico River.

Note

1Devernay, Jean-Michel,"Combining Public and Private Funds: The PPP Approach," HRW, May 2009, pages 15-21.

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