2006 Pand E Ambiente y Energía-Suramérica

32 IEEE power & energy magazine July/August 20061540-7977/06/$20.002006 IEEE

PHOTO DISC, DIGITAL STOCK

SSOUTH AMERICA IS LOOKING FOR WAYS TO HARMONIZE POWER SUPPLYexpansion with growing environmental concerns as electricity demand increases at a fast pace.While South America contributed little to the worlds total pollutant emissions, societies areincreasingly becoming aware of the impact that new hydropower plants or fossil-burning ther-mal generators have. And the not in my backyard syndrome, typical of developed countries, isalso gaining strength in the region. Private investors leading key investment decisions in thereformed South American power sectors are facing organized opposition to the building of newplants. Brazil and Chile provide two examples of how countries are trying to reconcile the needfor abundant energy supply with environmental constraints.

Electricity Markets and Environmental Challenges

Electricity Markets in South AmericaSouth Americas electricity consumption is growing at an important pace, with countrieshaving growth rates over 6% that require doubling installing capacity every ten years (Fig-

ure 1). This is born from lowper capita electricity con-sumption levels (around2,000 kWh compared to12,000 in the United Statesand 6,000 in Europe) com-bined with high economicand population growth. Nev-ertheless, electricity marketswithin the region are veryheterogeneous, with con-sumptions of 3,525 kWh per

capita for Venezuela and 470 kWh for Bolivia (2000 figures).The countries of South America have plentiful energy resources, including natural gas, oil,

coal, biomass, wind, geothermal, and other renewable resources as well as a significanthydropower potential. However, the most important reserves are highly concentrated in a fewcountries and often away from major consumption centers. While Venezuela has the largest oiland natural gas reserves in the region, hydropower potential is more evenly distributed, withBrazil having the largest share (Figure 2). This has meant that the share of hydroelectric powerin generation of electricity is well over 50% in most countries (Figure 3).

The electric energy industry in South America faced a profound transformation in the late1980s and early 1990s, with no parallel worldwide. New electric sector regulations were set inChile in 1982, Argentina in 1992, Peru in 1993, and Bolivia and Colombia in 1994, with Braziljoining the group later on. In 1997, the reform also extended to the Central American countries.Challenges that gave birth to the process were diverse in the region, but all countries requiredhigh investment to respond to very large growth of demand. With governments urged to focuson more basic problemseducation and healthcreating competitive energy markets to incor-porate the private sector was seen as a necessity for further economic development. Thus, mostcountries in the region completed the institutional transition from a state-owned centrallyplanned power sector to competitive markets based on private investment.

July/August 2006 IEEE power & energy magazine 33

Decisions on the sector reform model did not take intoaccount explicitly any environmental restrictions and leftinvestment and operational decisions to private players andmarket interactions. For example, decisions on the type, theopportunity, or the location of new generation investments areleft to private players and their priorities. Countries such asChile regularly elaborate an indicative generation investmentplan, but the plan relies on orientation by private investors.

Power system operational policies are based exclusivelyon direct variable costs with more efficient technologies dis-patched first, with no environmental variables involved. Secu-rity of operation is also a main obligation of the independentsystem dispatchers but that does not consider environmentalimpacts in the analysis either.

Most recently, the region went into a second generation ofreforms, with the implementation of competitive auctions by

private distribution companies forcontracting capacity to ensure effi-cient system expansion. In Brazil, 23average GW (energy, not peak) havebeen contracted since December 2004(more than US$40 billion in contractswere awarded) with Chile startingauctions in 2006.

The reform processes, includingthese recent auctions, have aimed atcreating conditions to respond togrowing demand with economicinvestment and operation but with keydecisions made by private actors and alimited role being played by centralgovernments. The priorities of the pri-vate actors are essentially business ori-ented, responding to their strategiesand their risk assumptions. The waytheir decisions affect the environmentis also left to their assessment, restrict-ed only by existing environmentallaws, not necessarily made coherentwith the electric market laws and reg-ulations. While Chile has kept a mar-ket laissez-faire approach, leavingenvironmental licensing separate fromenergy supply processes, the Braziliangovernment, facing difficulties withhydro approval deadlocks, decided tointerfere to facilitate private actions.

Environmental ChallengesAssessments made worldwide sug-gest that the Earths climate haswarmed over the past century, in whatis named the greenhouse effect. Ener-gy consumption and electricity pro-duction, among other human

activities, are important driving factors in the production ofgreenhouse gases. CO2, originating from burning fossil fuels,is the greenhouse gas that contributes most to the warmingeffects. Latin America with 8% of the world population con-tributed only 5.5% of the worlds total 2002 CO2 emissions(excluding that which originated from deforestation and for-est burning) while the United States contributed almost 34%with 4.5% of the world population. Emissions of CO2 frompower generation in the region are very low if comparedworldwide, mainly due to the high hydropower component inelectricity generation (Figure 4).

Only one country in South America, Brazil, is in the top20 highest fossil fuel CO2-emitting countries. While Brazilemitted more than 85.5 million metric tons (t) of carbon in2002, Argentina emitted 36.3, Venezuela 29.5, Colombia15.6, and Chile 15.6. Liquid fuels account for over 60% of

34 IEEE power & energy magazine July/August 2006

figure 1. Growth of per capita consumption of electric energy.

0500

1985 1990 2000

4,0003,5003,0002,5002,0001,5001,000

kWh

1980 1995Year

VenezuelaChileArgentinaBrazilColombiaPeruBolivia

figure 2. Estimates of economically exploitable hydroelectric potential (MW),2000.

Colombia 93,085

Brazil 143,380

Ecuador 22,000

Chile 26,046

Bolivia 39,850

Argentina 44,500

Venezuela 50,000

Peru 61,832

July/August 2006 IEEE power & energy magazine

the regional emissions, with coal burn-ing accounting for only 7.3% of CO2emissions. Per capita emissions ofCO2 are small, Argentina with 0.96 tof carbon per person per year, Chilewith 1 t, and Brazil with 0.49 t, wellbelow the global average per capitarate of 1.12 t of carbon. Nevertheless,even with those low figures, the con-cern is that the emissions in LatinAmerica increased more than theworld average between 1990 and2000. Energy consumption, economicdevelopments, and CO2 emissions areclosely tied to each other in the region(Figure 5), and efforts to decouplethem through a more efficient use of energy have been weak.Nonetheless, it is in forest management, more that in energyefficiency improvements, that there are opportunities forreducing CO2 emissions in the region. The destruction of therain forest in the region was responsible for 30% of theworlds total CO2 emissions from the change of land use.

With those conditions, the actions in pollution control inelectricity production in South America, with emissionsmuch lower than those from transport and industry, areessentially driven by a population that is concerned morewith their health impact than with the greenhouse effects.General environmental laws being implemented throughoutthe region are creating conditions for local communities ineach country to limit CO2 emissions and other pollutants.Often, farmers and environmentalists join efforts to chal-lenge new coal- or gas-fired thermal power plants that they

argue would be harmful for people and for the agriculturalsector. In a region where agricultural export products signifi-cantly contribute to economic development, this can be a rel-evant barrier for new fuel-fired plants.

However, with the significant hydro potential of the region,a more important area of conflict for electricity supply expan-sion over recent years has arisen with the development ofhydro resources. Risks of flooding tropical rainforest, floodingof scarcely populated areas (but having an indigenous popula-tion), and water use conflicts are making life harder for hydrodevelopers. International environmental action groups arejoining opposition to these projects in the region; RobertKennedy Jr. is leading public actions against them.

An avenue to achieve clean and cheap energies for thefuture was seen in the use of abundant regional natural gasresources, both for industrial applications and electricity

35

figure 3. Share of hydroelectric power in generation of electricity.

0102030405060708090

100

1985 1990

%

BrazilPeruVenezuelaColombiaChileBoliviaArgentina

200019951980Year

figure 4. 1995 emissions of CO2 from power generation, United Nations Environment Program (2005). (Source: TheGEO Data Portal: http://geodata.grid.unep.ch.)

Source : UNEP/DEWA/GRID-Geneva, GEO Data Portal

generation, in this last case making use of the major techno-logical breakthroughs achieved with the development of com-bined-cycle gas turbines. This technology not only provided alow-emission fossil fuel but also raised average thermal ener-gy efficiency to almost 60%. Another important fact for thecountries of the region, some with small power systems, isthat these efficiency gains occur even for plants as small as150 MW, eliminating economy-of-scale conditions. The

process was facilitated with the development of an interna-tional network of gas pipelines throughout South America,transporting resources available in Venezuela, Bolivia,Argentina, and Peru. Proved significant gas reserves in thosecountries, plus extensive drilling for natural gas rather thanoil, was to be the main objective in this avenue, reducing therelative share of oil byproducts and hydropower. This clean,cheap fuel process, plus the energy integration development,


figure 5. Energy consumption, economic development, and CO2 emissions in selected Latin American countries.(Source: World Resource Institute.)

Index 100 in 1971Index 100 in 1971

Index 100 in 1971Index 100 in 1971

Mexico Brazil

CO2

CO2

Energy

Energy

Energy

Energy

CO2

CO2

Economy

Economy

Economy Economy

ArgentinaVenezuela

2000199019801971 2000199019801971

350

300

250

200

150

100

200019901980

United Nations Environment Programme/GRO Arocdel

1971

350

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1002000199019801971

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100


came to a halt with the economic and political crisis ofArgentina and Bolivia, which limited gas exports to neigh-boring countries. With the high prices of liquefied naturalgas, countries like Chile were back to considering coal andhydro as the avenues for electricity generation, with the envi-ronmental barriers already mentioned.

Renewable generation is argued as an alternative to keep aclean environment in the region. However, apart fromhydropower, in the region there are no renewable sources thatcould be competitive on a significant scale. Abundant geo-thermal energy is a risky business for private investors, giventhe high exploration costs involved. Renewable small-scalesources of energy are competitive only in isolated remoterural areas; only wind surfacing is a competitive alternative ininterconnected systems with high marginal costs. Neverthe-less, countries are looking for alternatives, such as the sugar-cane cogeneration plants in Brazil and the incentive to buildsmall renewable plants in Chile.

An interesting development in South America that linkselectricity generation and environmental control is the oppor-tunity provided by the World Bankon behalf of a numberof countries and private companies (mainly in the northernhemisphere)to local private investors to generate green-house gas emission reductions through the Kyoto Protocol.The first Clean Development Mechanism project in Chile isbeing followed by others in Brazil, Ecuador, Colombia, Peru,and Argentina. These emission reductions are paid to theinvestors and can make marginal projects in energy moreattractive for them.

Environmental Regulations

The Case of BrazilEnvironmental regulation in Brazil dates from the early 1980s,where a National Policy for Environmental Issues was launchedand established that construction, installation, and functioning ofactivities that use environmental resources depend on theapproval of licenses from environmental bodies. A NationalCouncil for Environment (CONAMA), a high-level cabinet withan advisory role on the countrys environmental actions andstandards, was created as well as the first federal and state envi-ronmental licensing agencies. Later on, the 1998 Brazilian Con-stitution devoted a chapter towards the formulation of anenvironmental policy for the country, and the creation of theBrazilian Institute of Environment (IBAMA) in 1989 consolidat-ed the Brazilian environmental guidelines. IBAMA is the maingovernmental body for environmental issues, responsible forcoordinating, formulating, inspecting, and enforcing the NationalPolicy of Environmental Issues for a rational use of the naturalresources. Finally, in 1992 the Ministry of Environment was cre-ated and became the main government body responsible (jointlywith IBAMA) to plan the countrys environmental guidelines.

The environmental licensing process is the instrument forthe development of environmentally sustainable projects; itinvolves a systematic evaluation of the environmental conse-

quences of a planned (or under development) activity. Thelicensing process of any project comprises three phases (andlicenses): 1) prior license (PL) is granted in the planning phaseof the project and approves its siting, conception, and environ-mental feasibility (the implementation of additional environ-mental compensation programs may be demanded during thisphase); 2) an installation license (IL) authorizes the installa-tion of the project, in accordance with the specifications of theapproved environmental programs, including the additionalimplementations established with the issuance of the PL; 3) anoperating license (OL), after verifying the execution of allrequirements of previous licenses, effectively authorizes theoperation of a project. PL, IL, and OL, are valid for at mostfive, six, and ten years, respectively. Studies of environmentalimpact assessment (EIA) are required to launch the licensingprocess. Depending on the localization of the project, thisprocess may involve a complex relationship among severalenvironmental agencies, including IBAMA, state agencies,and municipalities bodies, all of them with the power todemand the implementation of additional compensation pro-grams or socioenvironmental management systems to complywith the national environment standards. Public hearings arealso mandatory and carried out during the licensing process.The licenses are finally issued by IBAMA or by a stateagency, depending on the location of the project.

In the context of the energy sector, under the old regime thevertically integrated utility established technical guidelines forhandling the environmental impact of new power projects. Incooperation with companies, it conducted technical reviews andstudies before submissions were made to the licensing agencies.The privatization and restructuring of the electricity industry in1996 forced a major change in this process. Concessions ofhydro resources started to be granted by bidding in public auc-tions, and projects to be auctioned were chosen from inventorystudies prepared from the old regime. Winning investors thenwould become responsible for the licensing of their hydro proj-ects, conducting the needed engineering and environmentalstudies. The licensing process (phase 13) started to be appliedon a project-by-project basis, following interactions betweenlicensing agencies and investors. The same licensing procedure(phase 13) applies to thermal power plants (which are directlyauthorized to investors) and transmission lines (with concessioncontracts also granted through auctions). On one hand, thelicensing of thermal and transmission projects became veryconcentrated in specific issues, such as conflict for water use ordecisions on the best environmental routes. There is no need ofa populations reallocation, and, overall, atmospheric pollutionis still not saturated in Brazil. On the other hand, the complexityof evaluations of the impacts on the physical, biotic, socioeco-nomic, and cultural systems of regions where projects are builthave made the licensing of hydropower plants a strict and time-consuming process. As will be discussed next, this strict processhas resulted in environmental cost overruns and delays in theconstruction of several hydro projects in the country. In turn,licensing thermals proved to be easier, faster, and more effective.

37

The implementation of the second stage of the countryspower sector reform in 2004 aimed to ease the environmen-tal licensing process to investors through three actions: 1)force all projects to have PL as a requisite to become candi-date expansion options in the auctions for new generation(this task aims at reducing the environmental risk on the laterdevelopment of these projects); 2) in the case of hydropowerplants, make the government responsible for obtaining thePL; and 3) use the recently created body for planning studies(EPE) to carry out an integrated environmental assessmentof hydro projects, inventory studies, and feasibility studies,which form the basis of EIA analyses.

These actions indicate that the government is taking onthe responsibility of approving the first licensing for hydroplants and, therefore, is significantly reducing the investorsrisk of obtaining a concession that is environmentally infeasi-ble. However, as shown next, deadlocks are still frequent andthis process still has not fully succeeded.

The Case of ChileThe Chilean electricity law does not treat two relevant issuesfrom an environmental perspective: investment in new powerplants, including plant location and technology, and powerplant dispatch. There is full freedom for investment in the elec-tricity sector, with minimal requirements for the installation ofhydro plants and transmission lines. Private investors developprojects that, with the tariffs and costs identified, produce adesired rate of return, while responding to their strategic inter-ests. These interests do not always coincide with the socialappraisal of fuel costs, investments, return rates, and, of course,environmental considerations.

The 1980 Chilean Constitution grants all citizens the rightto live in an environment free of pollution. It further providesthat other constitutional rights may be limited in order to pro-tect the environment. The electricity companies that operatein Chile are subject to the Law 19300 (the Chilean Environ-mental Law), which was enacted in 1994. Law 19300 recog-nizes the existing legal and technical competitions in thedifferent services of the state and the necessity to coordinatethe joint environmental management with each one of them.The law requires companies to conduct environmental impactstudies of any future projects or activities that may affect theenvironment and the review of such studies by a state agency,CONAMA. It also requires an evaluation of environmentalimpact by the Chilean government and authorizes the relevantministries to establish emission standards.

The System for Environmental Impact Evaluation (SEIA)is the vehicle that allows the environmental dimension to beintroduced into the design and execution of projects or activi-ties realized in Chile. This system attempts to insure that ini-tiatives in the public and private sector are environmentallysustainable and to certify that they comply with environmen-tal regulations that may be applicable.

The Chilean Environmental Law and the regulations ofthe SEIA of CONAMA establish that investment projects in

Chile must be evaluated before their execution. Various cate-gories of projects are defined that must be evaluated. Theprojects concerning the electricity sector that must be submit-ted to the SEIA include generation plants larger than 3 MWand high-voltage transmission lines and their substations.

The Ministry of Economy, advised by the Superintendence ofElectricity and Fuels, needs to grant definitive concessions for theconstruction of a hydro plant and the building of the associatedtransmission lines (the building of thermal plants does not requireconcessions under the electricity law). The hydro plant must ownthe required water rights for the project, water rights that aregranted by the General Water Authority, a part of the Ministry ofPublic Works. CONAMA needs to grant the plant an authoriza-tion that it meets environmental restrictions, with an impact studyto be submitted by the plant owners. In indigenous lands, otherregulations intervene. An important restriction arises as articles ofthe Indigenous Law prohibit forcing inhabitants to sell their land.

Brazil: Environment, Hydropower,Generation Auctions, and Clean-Energy ProgramsBrazil has an installed capacity of 95 GW (2005)hydropower accounts for 85%with a peak and energydemand near 54 GW and 44 GW, respectively. The hydrosystem is composed of several large reservoirs, capable ofmultiyear regulation, organized in a complex topology overseveral basins. Thermal generation includes nuclear, naturalgas, coal, and diesel plants. In order to couple the develop-ment of hydro generation and to benefit from hydrologicalcomplementarities, the country became fully interconnectedat the bulk power level by an 83,000-km meshed high-voltagetransmission network. However, less than 30% of itshydropower potential is currently used. As shown in Figure6, the country still has an undeveloped hydro potential ofmore than 150,000 MW, most of it located in the environ-mentally sensitive Amazon region, far from load centers andwhere mega hydro resources such as the Madeira river com-plex (7,000 MW) and Belo Monte project (5,500 MW) arebeing considered as expansion options (location and distanceto main load centers highlighted in Figure 6). Although inthe future the energy matrix composition should becomemore diversified (including cogeneration, local coal, andgas), hydropower is currently still the cheapest supplyexpansion option and will drive the systems expansion fornext years. Predicted annual energy load growth rate runs at5%, requiring about an average of 3,500 MW per year andaround US$4 billion/year of investments in generation.Hence, the main challenge for the country is to promote aclean and economically efficient energy growth. In thissense, hydro generation has an important role.

Hydro Development and EnvironmentalConstraints with the Sector ReformFrom 19962002, about 20,000 MW of new concessionrights for hydro development were granted to local and foreign



investors. The underlying projects were expected to comeonline from 2000 onwards. Investors were supposed to gothrough the standard licensing scheme previously described.However, the process proved to be strict and complex: theproject-by-project environmental analysis was shown to beinadequate, since environmental impacts of a hydro projectare synergic and cumulative with other plants in the basin andsubbasins and, therefore, cannot be locally assessed. In thissense, studies of inventories that had not been made on anintegrated basis with the environmental dimension (only theeconomic assessment was taken into account) demanded longand complex discussions by federal and state environmentaloffices, delaying the projects construction schedule.Although inventory studies are not in the scope of environ-mental licensing, they are fundamental to ensure that projectslocated in the same basin can meet the requirements of theenvironmental legislation. The inadequacy of some of thesestudies (gathered with other poor related specific analysis)also resulted in demands for additional environmental com-pensation programs for the projects, which is implied in envi-ronmental costs overruns.

These deadlocks have made hydropower plants increasinglymore expensive. For example, the environmental costs of theLuis Eduardo Magalhes hydro plant (900 MW located at theTocantins River, auctioned in 1996 and started operation in2001) reached about 22% of the projects total budget, resultingin a cost overrun of about 500% of the projects planned envi-ronmental total budget. Another emblematic case is the licens-ing of Barra Grande project, a 690-MW hydro whose OL wasonce suspended due to inadequate studies on vegetation impactinvestigated just before the filling of the reservoir. This alsoresulted in high costs and negative impacts on the power sector.

Delays on the construction schedules of hydro plants havealso become frequent due to difficulties in obtaining thelicenses. Figure 7 presents the planned incremental capacityadditions of hydro plants for the next five years according tothe original operation schedules set on the concession con-tracts. The figure is stacked according to the existing obsta-cles to allow the projects to start operation. Environmentaldifficulties form the majority of these obstacles. Althoughthis list is updated quarterly, it can be observed that there areobstacles (environmental difficulties) for the majority of

39

figure 6. Brazil: hydro potential and environmental issues in hydro development. [Source: Eletrobras, 2004, and S.Helena Pires (a Course on Environmental Issues in Brazil, FGV, 2005).]

Risk of Flooding Tropical RainforestWater Use Conflicts: Navigation,Agriculture, Native/Indigene Lands and Biodiversity

Cross-Border RiversWater Use Conflicts: Agriculture, Tourism,and Navigation

Total Hydro Potential: 260 GWOperation/Under Construction: 24% Studied: 38%Estimated: 38%Location of Planned Large Hydro Projects

Flooding and Agro Industrial Pollution,Cross-Border RiversWater Use Conflicts: Agriculture, Tourism and Supply

Rivers with Severe Pollution Problems,Focused Scarcity DifficultiesWater Use Conflicts: Supply, Sanitation,Navigation, Tourism

Scarcity of Available ResourcesWater Use Conflicts: Agriculture,Irrigation

26 GW11%

43 GW16%

2.600 km

2.800 km

36 GW14%

113 GW43%

42 GW16%

projects planned to come online in 2007, which will result infurther delays and can affect the security of electricity supply.Examples include hydro plants Estreito (1,087 MW) andSerra do Faco (212 MW), which are facing severe difficul-ties with their environmental licensing process, the latter withconstruction already started. Thermal projects, on the con-trary, started to come online without major deadlocks in thelicensing process. In order to avoid this deadlock and to easethe licensing of hydro plants for investors, the governmentinterfered to obtain the PL for hydro projects before the auc-tions for concession rights are carried out. The first experi-ence under this new scheme was carried out in December2005, which is described next.

Current Situation with the Second MarketReform: Deadlock Between Developers and Environmental AgenciesAs part of the revisited set of power market rules, in Decem-ber 2005 the Brazilian distribution companies carried out thefirst competitive auction for contracting new (greenfield)generation to ensure an efficient system expansion. Fifteen-year financial forward energy contracts and energy calloptions for delivery in 2008, 2009, and 2010 were offeredfor investors on the basis of the lowest bid. Candidate proj-ects comprised hydro plants studied by the government(whose concessions were also granted in the auction) and

thermal plants suggested by investors. Following the newrules, only projects with prior environmental license can beauctioned, and the responsibility of getting these licenses forhydro projects belongs to the government. Observe that theissuance of the licenses has a great impact on the total candi-date supply in the auction and, thus, in the increase of com-petition and tariff adequacy.

However, after almost two years of direct effort by theMinistry of Energy and other officials, the result was disap-pointing. From an initial target of offering 17 new hydroprojects in the auction, totaling about 2,800 MW, only fiveprojects (totaling about 800 MW) were licensed in time forthe energy auction. Besides facing a strict and time-consum-ing licensing process, some projects also faced legal injunc-tions from local courts, based on (sometimes poor andinadequate) information on the project impacts and on com-plaints from local inhabitants that would be directly affectedby the filling of the reservoir. Two other competitive hydroprojects (that could add 650 MW of additional capacity)were forbidden to participate in the auction due to injunc-tions issued on the day before. In parallel, several investorsof thermal generation (gas, coal, oil, diesel, and biomass)were able to get their licenses in time.

The auction resulted in the contracting of a total of 3,300average MW (energy, not peak), involving a transaction ofUS$27 billion. Contracted generation included a mix of


figure 7. Incremental capacity additions of hydro plants and environmental status. [Source: ANEEL (Electricity Regula-tor); http://www.aneel.gov.br (March 2006).]

0

00 0

There are no obstacles (construction of environment) for the operation.There are some obstacles for the operation (civil work not yet started,delays in the environmental licensing).There are severe obstacles for the operation (suspension of theenvironmental licensing, injunctions, environmental infeasibility).

Incr

emen

tal I

nsta

lled

Capa

city

(MW

)

12,000

10,000

8,000

6,000

4,000

2,000

2006

179

4,098

2007

405268183

2008

523295187

2009

1,531214

2010

1,027992

Total(2006-2010)

3,6641,7694,468

Severe ObstaclesThere Are Some ObstaclesNo Obstacles


technologies from all candidate suppliers. In particular, 35%of the new energy contracted came from hydro generation atan average price of US$45/MWh, while 56% came fromthermal generation at an average price of US$50/MWh (9%of the new energy contracted came from sugarcane biomassplants, to be discussed next). A sim-plistic calculation shows that if, forexample, 500 average MW (energy)of hydro generation replaced thesame amount of thermals, the yearlynet reduction on consumers con-tract payment would be aboutUS$22 million, which could beused, for example, to reduce thesocial inequality of the country. Insummary, the concern with thesocial-environmental impacts isabsolutely legitimate but makes thelicensing process for hydro verycomplex and long, which has result-ed in the construction of moreexpensive equipment for the countryand, ironically, pollutants.

Solution Perspective:Integrated Environmental AssessmentThe main approach that is beingadopted to solve this deadlock is anintegrated environmental assessment(IEA) of inventories and planning ofhydro plants, looking at the cumula-tive and synergic environmentalimpacts in the whole basin instead ofon a project-by-project basis. Themethodology takes into accountimpacts on biodiversity, water quali-ty, sustainable development, andsocial aspects (i.e., stronger partici-pation of the society through work-shops and seminars amonginstitutions, investors, and the popu-lation). By identifying the proper orfragile areas through the environmentpoint of view, a multicriteriaapproach of evaluating the systemexpansion alternatives both economi-cally and environmentally can be car-ried out. The IEA will be the firststep before the issuance of EIA andPL and will ease the whole licensingprocess. It will be carried out foreither the greenfield hydro projectsand redone for the projects whoseconcessions were already granted in

the past but still have no license. In both cases, the objectiveis to ease the full licensing procedure with robust EIA studiesand the active participation of several sectors of society.Inventory studies are also part of this framework, which willalso review inventories of other basins studied in the past.

41

figure 9. Brazil: Location of sugarcane biomass cogen plants.

1:2,500,000

Sugarcane CropAreas (Area of NewCogen Projects) Main ElectricityLoad Centers

Major ElectricityLoad Centers

New Projects

Minas Gerais

GoiasDistrito Federal

Distrito Federal

Parana

Sao Paulo Rio de Janeiro

Mato Grosso do Sul

Harvest Area : 3.8 Million ha

Mato Grosso

figure 8. Brazil: Hydro basins with cascaded hydros and selected basins for IEA.

Amazonas

TocantinsAtlantic (N and NE)

Atlantic (Southeast)

So Francisco

Atlantic (East)Paran

Uruguai

A Hydro Basin(Cascaded Hydros)

Ten basins (Tocantins and Uruguai) andsubbasins (Parnaba, Paranaba, Doce,

Paraba do Sul, Tapajs, Araguaia, Tibagi,Iguau) are being inventoried; expansionoptions will become available from 2008

The IEA is being carried out by EPE (Figure 8). Tenbasins, totaling more than 10,000 MW are being inventoried,and the IEA and hydropower options resulting from thosestudies should become available again by 2008 (starting oper-ation in 2013).

Other Actions and Clean Electricity Programs:The Bioelectricity Initiative Brazil has also been searching for alternative clean energydevelopments besides medium-large hydro plants. A programbased on classic subsidies was created to contract 3,300 MW ofrenewable energy (equally shared among small hydro, wind,and biomass) for delivery in 2008, but it has been criticized onthe grounds of its economic rationale and lack of economicsignals for efficiency and technological improvement.

On the other hand, Brazil is an important sugar andethanol producer, and cogeneration (cogen) plants using sug-arcane waste (biomass) started to be a remarkable generationoption. Currently, there are 2,800 MW of sugarcane biomasscogen in the country, where 600 MW are commercializedwith distribution companies (DISCOs), and the rest is usedfor self-consumption. Motivated by opportunities in the inter-national (export prices for sugarcane and ethanol) and domes-tic (development of bi-fuel vehicles, the rise of ethanol mix ingasoline) markets for sugar and ethanol, Brazil will expand

its sugarcane production area by 50% in the next five years.Once cogen cost is the incremental investment in larger/moreefficient boilers, this results in a window of opportunity fordeveloping a competitive and clean energy source, with noenvironmental impact and the ability to mitigate greenhousegases, thus easing significantly the environmental licensing.In addition, gains in transmission investments and losses areobserved, since these plants are located closer to the mainload centers (see Figure 9).

Hence, a joint initiative of sugarcane producers, cogenassociations, and equipment manufacturers was launched,with the objectives of increasing the participation of biomasscogen in the energy sector. Instead of subsidized mandatoryprograms, this so-called bioelectricity initiative relies 100%on private investment and aims at competing with othersources on the same footing. Electricity regulation has beenadjusted to account for the specificity of such plants, andabout 200 MW of biomass cogen were already offered andcontracted in the new energy auction of December 2005through competitive prices and in a straight economic compe-tition against all other generation options, such as hydro,coal, and natural gas. The bioelectricity initiative is planningto organize a more aggressive bid in the next auctions for newgeneration (the first and second semester of 2006, for energydelivery in 2009 and 2011, respectively) by offering from


figure 10. Energy reserve of hydro reservoirs in the Chilean main system.

Energy Reserve of Reservoirs SIC

6,000

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4,000

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gy (G

Wh)

3,000

2,000

1,000

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p 19

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1,0003,000 MW in additional biomass cogen projects. Inaddition, the revenue stream from long-term electricity con-tracts can be used as collateral for private financing of addi-tional ethanol/sugar production capacity (leverage ofinvestment), which in turn will produce more electricity andcan allow a higher participation of these plants in the sys-tems expansion. Finally, bioelectricity plants can qualify forcarbon credits (cuts in greenhouse gas emissions generatedby these projects would count against the investors ownemissions reduction commitments), which can provide addi-tional revenue streams to leverage investment in clean energy.The bioelectricity alternative has become a win-win situationfor consumers and environment, relying on private invest-ment and competition. In schemes such as this, the govern-ment has an essential role as regulator and promoter ofefficiency and technological advances.

Energy and Environment in Chile: Lack of Energy Resources, Hydroelectricity,and Imported CoalChile has abundant hydraulic energy resources but isdevoid of fossil resources, such as coal, petroleum, or natu-ral gas, which are necessary for the complementariness ofthe Chilean energy matrix. This implies the necessity toimport important volumes of petroleum for effects ofindustrial consumption and transport and coal for electricalgeneration. In the context described, it was very attractiveto begin the import of natural gas from Argentina for theChilean central zone in 1997 and for the north of the coun-try in 1999. Chile took advantage of a very low priceresource that was thought to be abundant and reliable. TheArgentine natural gas import derived from investments of

approximately US$4,000 million dollars, including theconstruction of four new gas pipelines along with severalcombined-cycle generators. The arrival of Argentinean nat-ural gas implied a turn in the Chilean energy matrix, reduc-ing the power generation with coal, allowing acomplementariness with the dammed hydraulic resourcesand an important diminution of the costs of the electricalenergy in Chile as well as of emissions.

Nevertheless, in the last ten years, Chile has undergonetwo major crises of its two main supplies for electricity gen-eration. First, crises occurred in 19971999 in the mainelectricity system, the SIC (Figure 10), the product of anextreme and prolonged drought, which implied a drasticdiminution in the capacity of hydroelectric generation. Thesecond episode, which has been in effect since April 2004,corresponds to the imposition of restrictions by the Argen-tinean government to the exports of natural gas to Chile.These restrictions affect seriously the provision required inChile, which presently imports from Argentina all of thenatural gas used for generation by means of combined-cycleplants (Figure 11).

This last event has implied a greater use of hydraulic energyalong with thermal generation on the basis of coal and dieselpetroleum, fuels that coincidently show a sustained rise ofprices worldwide, which translates into high generation costsand the obvious higher impact on the environment, hencecausing a heated discussion on the subject in Chile.

Hydro Development and Environmental Constraints The true challenge for Chile is that it must obtain its powerdiversification and sustainability in the scheme of a competitive

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figure 11. Natural gas restrictions from Argentina to the main Chilean system.

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market and with limited state intervention. Chile was a pio-neer in liberalizing the electrical generation segment in1982, introducing a competitive and private market, wherethe entrance of new agents depends on the economic signalsthat the investors gather from the market. Therefore, inChile, the decision regarding what technologies to developessentially relies in the private capital investment evalua-tion. The government is solely limited to generate the con-ditions so that it is possible to reach economic efficiency.

The process of liberalization and deregulation of the elec-tricity market was accompanied by the privatization of theexisting state-owned electrical companies. Currently, the gov-ernments influence in the sector is limited mainly to regula-tory function, elaboration of indicative expansion plans, andfixing of electrical tariffs for regulated clients. Objectivessuch as the diversification of the power matrix and environ-mental sustainability conform to a secondary level, where thegovernment has limited tools to intervene. The developmentof the generation segment has occurred within the frameworkof technological neutrality, as far as the technologies andfuels used, having all types of energies to compete in similarconditions of quality and price.

Over the years, hydro plants seemed to lose advantageover fossil-fueled plants, particularly when abundant Argen-tine gas was available at a low price, such as combinedcycles, but now they have been revisited under the currentcrisis situation. There are still important unexploitedresources in the country; however, these resources are locat-ed either in indigenous populated areas, in regions with a

high tourist potential, or in unexploitednatural forest reserves. Some recent exam-ples are the Ralco plant commissioned in2004 and the Aysen project, which is cur-rently under study.

Ralco was built in the high Bio Biobasin (Figure 12), the basin with the highestenergy potential in the country (onlyPangue and Ralco, 467 MW and 690 MWplants, respectively, are in operation, withthe potential in the basin being 2,900 MW).Ralco, the plant commissioned in 2004,faced important opposition, led by environ-mentalists that questioned its environmentalimpact and its social impact on Pehuenchecommunities living in the area because itwould flood an area of 35 km2. The Ralcoproject was complicated by many factors.Strong opposition by environmental groupsdeveloped and were even supported byinternational groups (such as InternationalRivers Network). CONAMA initially didnot accept the Environmental Impact Studysubmitted by the project owner, but a newstudy was presented and accepted.Although not directly involved in the con-

cession process, the National Corporation of IndigenousDevelopment (CONADI) rejected the building of the plant.This occurred because, although most Pehuenche families liv-ing in the Ralco area agreed to sell their lands to the ownersand accepted relocation elsewhere, a few families refused tosell. Even the judicial courts intervened. Furthermore, theWorld Bank also intervened; its IFC branch complained to theChilean government that there were environmental require-ments agreed to under a financing package that were not beingfulfilled by the Pangue and Ralco plants. The discussions werenot limited to legalistic or social terms; the parties involveddeveloped technical and economic studies to demonstrate thatthe Ralco plant was or was not the best solution for electricenergy supply in the country. However, differences arose onhow to quantitatively measure the environmental impact, asregulations in place do not provide for a method to quantify it.It is important to highlight that the energy regulatory agency,the National Energy Commission, had no tools to intervene.

Nobody in Chile has remained indifferent to the discus-sion on the construction of hydroelectric power stations inthe Baker and Pascua rivers, located in the extreme south ofChile in the Aysen region (Figure 13). The project ownerhas announced that the project consists of the constructionfrom 20092018 of four hydroelectric power stations with ajoint installed capacity of 2,430 MW. In addition, the proj-ect involves the construction of a transmission line in directcurrent of 2,000 km to unite the power stations directly toChiles capital, Santiago, the largest demand center. Theproject involves an investment superior to US$4,000 million


figure 12. The Bio Bio basin, indicating existing and projected plants andindigenous communities.

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dollars. These power plants will allow the access to energyof clean production in great volumes, energy of a domesticorigin that will contribute to reduce the foreign fuel depend-ency. These projects will also allow, during their construc-tion, an important economic contribution to the zones wherethey will be located. It is important also to recognize thatthese power stations will be inserted in zones of great natu-ral beauty, not spoiled by man. Its construction, without adoubt, will cause alterations to the ecosystems of the zone,with a total flooded surface of 93 km2.

The development that finally achieves the Aysen projectwill be a test of maturity for the Chilean model and the abilityof the deregulated electricity markets to satisfy the interestsof the country. As never before, Chile will need a long-termvision that sees far beyond short-term interests or necessities.The benefits or costs that the construction of these hydraulicpower plants will bring to Chile will remain for generationsof Chileans to come.

Natural Gas Being Replaced by Coal and LNGGiven the natural gas import restrictions, the National Petro-leum Company (ENAP) was given the task of leading a poolof large natural gas consumers who have grouped an attrac-tive demand, which through an international bid hired BritishGas to invest in a regasification terminal located in centralChile, along with the supply of LNG. Nevertheless, the highworld prices exhibited by LNG anticipate that this one singlealternative will have a backup function, more than a sourcefor generation expansion. This project has already been givenenvironmental licensing, which was pursued by ENAP priorto the international bidding.

With those restrictions, coal-fired plants are again beingconsidered in the country as a tool for development. They arebeing planned equipped with pollution controls like circulatedfluidized bed or pulverized coal with additional pollution fil-ters, with the added costs of emissions mitigation equipmentnegatively impacting their economical assessment. Environ-mental opposition to thermal plants in the central part of thecountry is growing strong in the country, and current projectsunder study have faced long environmental licensing.

Other Paths: Renewables, Clean Technologies,Energy Efficiency, and Demand ManagementAlthough the environmental preoccupation is to remain acentral issue in the economic development of Chile, there isconsensus that the energy supply of the country as a wholemust not be neglected, differences arising on what path to fol-low. Principles for the establishment of a power policy mustconsider economic efficiency, energy supply security, andsocial and environmental sustainability. It must be remem-bered that substitute projects for hydroelectricity, in the vol-umes required for the development of Chile, are generationplants burning fossil fuels (coal, natural gas, or diesel) andeven nuclear energy. Nonconventional energy, such as renew-ables, will contribute to the power supply but not in the vol-

umes that Chile requires for its economic growth. Similarly,power efficiency is a path that must be pursued but will notbe a complement to the necessary power generation invest-ments. Nonetheless, other initiatives have been undertaken inorder to deliver environmentally friendly development forChile, some of which are discussed in the following.

Renewable energy is being incentived in Chile in the formof so-called nonconventional renewable energies, such as minihydraulic generation, wind, geothermal generation, biomass,and biogas, among others. Law 19940, enacted in March 2004,modified the electricity regulatory framework, incorporatingaccess to the generation markets for small generators connect-ed to the grid; in this scope, preferably nonconventional ener-gies and cogeneration projects will develop. The dispositionsare mainly focused on ensuring the right of any generator pro-prietor to sell its energy in the spot market at the instantaneousmarginal cost and its capacity excesses at the regulated price.Also, conditions are created to give greater stability and securi-ty in the remuneration of the energy produced by small genera-tors in addition to the exception of the total or partial paymentof tolls for the use of the main transmission system. In 2005,with the enactment of Law 20018, the access for nonconven-tional renewable energies to the 5% of the annual volume ofenergy bid on by distributors was guaranteed. It is clear thatmore can been done in this matter, especially considering theenormous potentials available in Chile.

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figure 13. The Aysen basin.

Proyecto RoBaker 1

Proyecto RoBaker 2

Proyecto RoPascua 2

Proyecto RoPascua 1

Clean Development Mechanism projects are growing inChile, where they are expected to be an important driverfor clean energy development. The Chacabuquito Project isthe first Clean Development Mechanism project in LatinAmerica and consists of a run-of-the-river power plant of25-MW capacity that utilizes the waters of the AconcaguaRiver. It is located in the 5th Region, about 100 km north-east of Santiago. The total cost of the project is expected tobe US$37 million. The Prototype Carbon Fund (PCF), aprivate-public partnership operated by the World Bank, hascontracted to purchase at least US$3.5 million of emissionsreductions from the project.

Another key aspect in the energy policy of any given coun-try is the incentive in energy efficiency, a concept that must beintegrated into the development of the country as a whole. It isa necessary objective to uncouple the economic growth of thecountry from the growth of energy demand. Chile is working,through a national program called Programa Pais EficienciaEnergetica, in a joint venture of the public and private sectorto generate lines of intervention that will allow the introduc-tion of energy efficiency in the national economic activity.

With the enactment of Law 20018 in 2005, demand-sidemanagement is given as another solution for making theChilean energy growth compatible with limited domesticenergy resources, giving the opportunity for an effectivesolution that has a smaller social and economic impact,than, for example, rationing. The reform implementedallows flexible handling of the demand, where possible,with price incentives to negotiate reductions of consump-tion between generators and regulated clients. Until theenactment of the aforementioned law, only large consumerswere able to receive such incentives.

ChallengesThe primary challenge for South American countries is toensure sufficient capacity and investment to serve their grow-ing economies reliably. Social and environmental impacts arean inherent part of electric markets and cannot be sweptunder the rug. The concern with the environment is absolute-ly legitimate but, in some cases, has resulted in the construc-tion of more expensive equipment. Obviously, the interest ofa local population should be considered and respected, butthe legitimate interest of the society to have energy at thelowest possible cost also should not be ignored.

The most fundamental challenge is to allow the society toknow, through lively participation in the studies and licensingprocess of hydro and thermal plants, that there is no competi-tive energy with no environmental impact. A policy of zeroenvironmental impact has obviously a very high economiccost, and the society must be aware of this tradeoff so that thebest option to reconcile environmental concerns, economicgrowth, and social justice can be chosen.

The challenge for the countries of South America is tobalance requesting extra environmental requirements with theensuing increase in marginal costs and, finally, energy prices.

This is not an easy equation. The authority must determinehow much the reduction of an additional kilogram of a pollut-ing gas is worth to society. Additionally, it must find themechanisms that would allow incorporating this cost intoeach agents decision-making process. The rapid and hardlypredictable changes in the sector, including national andinternational interconnections of the power and gas networks,strategic considerations by firms, availability of fuels, andincreasing public participation, make this a complex task.

AcknowledgmentsThe authors gratefully acknowledge the valuable contribu-tions by Fondecyt and Universidad Catolica de Chile and thevaluable discussions with Mario Pereira from PSR.

For Further ReadingInformation on Latin-American deregulation, [Online].Available: http://www.ing.puc.cl/power

H. Rudnick, L.A. Barroso, C. Skerk, and A. Blanco,South American reform lessons: Twenty years of restructur-ing and reform in Argentina, Brazil, and Chile, IEEE PowerEnergy Mag., vol. 3, no. 4, July/Aug. 2005.

L.A. Barroso, H. Rudnick, and T. Hammons, Secondwave of electricity market reforms in Latin America, to bepresented at IEEE PES Panel Session, IEEE General Meeting2006, Montreal, Canada.

Economic Commission for Latin America and theCaribbean [Online]. Available: http://www.eclac.cl/drni/

BiographiesLuiz A. Barroso is an IEEE Member, has a B.Sc. in mathe-matics, and received the Ph.D. degree in optimization fromCOPPE/UFRJ, Brazil. He is a senior analyst with Power Sys-tems Research (PSR), where he has been providing consult-ing services and research on power systems economics,planning, and operation, focusing on hydrothermal systems.

Sebastian Mocarquer is an IEEE Member and graduated asan industrial electrical engineer from Catholic University ofChile, Santiago. He is the development manager at Systep Engi-neering Consultants, providing consulting services on energyeconomics and regulation and network planning and tariffs.

Hugh Rudnick is an IEEE Fellow. He graduated as anelectrical engineer from the University of Chile, Santiago,Chile. He received the M.Sc. and Ph.D. degrees from the Vic-toria University of Manchester, United Kingdom. He is pro-fessor of engineering at Catholic University of Chile,Santiago, and the director of Systep Engineering Consultants.His research activities focus on the economic operation, plan-ning, and regulation of electric power systems.

Tarcsio Castro has a B.Sc. in civil engineering (hydrologi-cal resources) from the Federal University of Rio de Janeiro,Brazil. He is with Power Systems Research (PSR), and he hasmore than 25 years of experience in hydrological studies andon environmental analysis of generation/transmission permitsprocesses, including integrated environmental planning.


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