Grupo de Economia da Energia

Energy integration in South America: motivations, obstacles and achievements

In energy on 24/05/2010 at 01:00

 

By Renato Queiroz and Thaís Vilela (*)

Motivations and Difficulties

Despite several bilateral agreements executed over the years, the energy integration process in South America develops gradually. The overcoming of certain barriers to be outlined later is the basis for achieving a fully integrated market. It is important to mention that the issue raised is the energy integration among countries of a continent, involving strategic, political and economic issues. Thus, there is no relation with energy interconnection, which is an energy transmission from one country to another one. The first concept corresponds to a complex process, since it is subject to factors related to international relations.

The integration experiences in Europe have shown that the development of regional energy integration is subject to lengthy multidimensional processes and under complexity often unpredictable, because there are several players involved in decision-making that often impact the integration process. Indeed, governments, regional and international energy companies, non-governmental organizations, multilateral lending institutions, regional bodies, among others, with their powers, influence the results of decisions.

However, we consider that energy is a vector suitable for integration between continents and has characteristics that promote agreements for the rational utilization of natural resources. It also creates opportunities to reduce inequality in the countries involved, contributes to the economic and social development in the region and, above all, provides greater energy security because it favors the consumer countries to achieve diversification of energy sources through imports.

In fact, in forums promoted by the energy sector more often in recent years, it is observed that the discussions on assessments of energy infrastructure projects are being intensified. Within this context, there is a consensus of possible exceptional gains, mainly due to: (i) the complementarity of energy resources by taking advantage, for example, of the hydrological diversity among countries, (ii) the applicability of the most competitive rates, and (iii) mainly, the gain of the diversification related to countries’ energy matrix, following not only geopolitical interests, but also searching for energy security.

However, despite these benefits, there are many obstacles along the way. Initially, the institutional conditions in the region still have a major influence over the technical, commercial and contractual relations in the integration process, so that, at certain events, such as result of crises, agreements are not fulfilled, thus causing a discredit regarding the contractual environment. To illustrate this situation: (i) The change in the trading of gas from Bolivia in 2006, (ii) the interruption of supplying 2,000 MW from Argentina in 2007, (iii) the renegotiation of the HPP Itaipu agreement requested by Paraguay, (iv) rationing power in Venezuela with consequences for energy supply in Roraima, and (v) drastic reduction by Argentina for supplying natural gas to Chile. [1] Therefore, it is crucial that the region enhances the institutional framework, aiming at creating solutions for the fulfillment of agreements under energy crisis specific for each country. An outline of the regulatory framework, however, should be well prepared to meet the interests of all.

In this sense, an effort for integrated regional energy planning could be structured and its analysis should be developed in an environment of total transparency where the structural issues that hinder the arrangements for implementing projects can be discussed by work groups. There must be recognition that countries have different corporate cultures, diversity of cultural standards, and also historical events that left hard feelings in the countries of the region. The chances of process advances may occur in a cooperative environment where the major premise is the energy integration of the region and not only the interests in projects for each country.

And there are many debate forums to address the issue. There are even several regional organizations, agreements and treaties signed by governments in the region. There are important experiences for the development of regional infrastructure integration, for example, CIER studies – Comisión de Integracion Electrica Regional [2], IIRSA projects – Initiative for the Integration of Regional Infrastructure in South America [3] and establishment of Union of South American Nations – UNASUR [4], which tries to reflect European Union practices.

Energy Integration via Electricity and Natural Gas – Achievements

According to Oxilia & Fagá (2006), the energy integration process in South America can be divided into two stages, by considering the level of State’s interests. The first stage, from the 70’s to the 80’s, is characterized by strong State’s interests in projects related to energy sector activities. The second stage, from the 90’s, is characterized by a higher interest of private investment in the sector.

During the 90s, several initiatives toward greater energy integration in South America were made, such as CAN Decision 536 / 2002, in the Andean Region and the CMC [5] 10, 1998, Mercosur. CAN Decision establishes the legal framework for energy trading between member countries “aiming at consolidating an integrated market, optimizing resources in a market with general benefit criteria, prioritizing short-term transactions, ensuring free access to international links and creating a common market for trading with other markets. Pursuing this goal, Council of Ministers of Energy, Electricity, Hydrocarbons and Mining of the Andean Community was established, through Decision 557 / 2003. The other significant aspect of this process lies in the Minutes of Santa Cruz de la Sierra (signed on January 30, 2002 by the Andean Presidential Council) which underlines the growing strategic importance of the energy issue” [6].

Finally, we should follow the recent process of internationalization of ELETROBRAS [7] that is associated with an energy integration project that the company is intended to promote in Latin America.

Via Electricity

Electricity and natural gas industries have characteristics of network industries that promote the integration process in the regions [8]. In the case of integration via electricity, electrical interconnections may be motivated by the implementation of bi-national hydroelectric power plant, via exchanges that take advantage of differences in marginal costs between two interconnected systems and solid energy trading between countries.

It is important to note three bi-national hydroelectric projects on the continent that evidence the integration process via electricity; they are: (I) HPP Salto Grande, between Argentina and Uruguay, built in 1973, in the River Uruguay, between Concordia, Argentina, and Salto, Uruguay. The power plant has been operating since 1979, although its conclusion occurred only in 1982, with total installed capacity to 1,890 MW, (ii) HPP Itaipu, between Brazil and Paraguay, whose construction began along the Parana River occurred in 1974 and was completed in 1982. The installed generation capacity of the power plant is 14 GW, with 20 generating units providing 700 MW each one, and (iii) HPP Yacyretá, between Argentina and Paraguay, built to take advantage of the Parana River potential. On December 3, 1973, governments of Paraguay and Argentina executed the Treaty of Yacyreta regarding the project, but the construction works began only in 1983 and the project started to generate in 1994. The power plant, with installed capacity of 3,100 MW, has 20 units generating 155 MW each.

According to Rudnick et al (2007), in 2004, electricity trading via interconnections represented approximately 0.7% of energy demand in South America. It is estimated that in 2010, the electricity trading between countries in South America will reach 7% of energy generated. In order to achieve it, several transmission system projects were carried out in South America and others are still under study, as shown in Figure 1 below.

Figure 1 – Electricity Transmission Lines in South America

Source: Chipp, Hermes (2009)

Thus, as an example of electric interconnections, we can cite: (i) two electric interconnections with Argentina and Brazil (Uruguaiana and Garabi), both made through back-to-back converters, (ii) between Brazil and Uruguay, and one already under operation (Rivera), also carried out by the back-to-back converter and another one, the San Carlos interconnection, whose studies prepared by both countries were completed in 2007, and (iii) also a interconnection between Brazil and Venezuela that interconnects Boa Vista substation, in Brazil, to Macagua substation, in Venezuela, with 200 MW system capacity.

According to Chipp (2009) [9], “the integration of markets assumes the compatibility of the countries’ electricity markets, mitigation of commercial, tax, regulatory and technical asymmetries, choosing International Treaties and Operating Agreements between System Operators, both solid energy transactions and exchanges of optimization.”

Integration via Natural Gas

By considering the natural gas industry specifically, cooperation between the countries in South America allows the complementarity of the natural resource, technological qualification, and investments in various sectors of the natural gas chain, thus enabling real gains for integrated countries. However, despite these advantages, the natural gas trading was limited between the 60’s and 90’s to Bolivia and Argentina. From 1996, there was an expansion of the gas trading in South America, and several gas pipelines were built by 2002, including: Argentina – Chile, Bolivia – Brazil, Argentina – Brazil, and Argentina – Uruguay

The Southern Cone shows favorable conditions to energy integration via natural gas. In the region, there is already a sort of ring connecting Brazil and Argentina (major consumer countries) to Bolivia (one of the largest gas producers in South America). However, the expansion of the natural gas transportation and production structure faces several obstacles, including the physical distance between producing and consuming centers, involving construction of long and expensive gas pipelines. The Bolivia-Brazil gas pipeline (Gasbol) has, for example, approximately 1,000 km long and it is expected that the Argentina-Bolivia gas pipeline (GNEA) will have 1,600 km long. Investments, such as building pipelines of this size, are high and depend on conditions of long-term financing and means of risk management among those involved. The specific character of the gas pipeline involves a greater risk, since building it causes sunk cost. The nationalization policy, for example, ordered by the president of Bolivia, led Brazil to seek not only alternative energy sources, but also the diversification of the gas suppliers matrix, despite the previous investment to build Gasbol.

Thus, despite the progresses, the energy integration process has been weakened, as outlined in Rudnick et al (2007). These occurred due to: (i) significant increase of international price of natural gas, and (ii) political, economic and institutional instability in some South America countries, mainly in relation to delay of the market liberalization process (e.g., Bolivia). This situation, in some cases, led to the unilateral breach of long-term contracts (e.g., Chile and Bolivia).

With respect to the international price of natural gas, we can emphasize that its unpredictability hinders not only investment decisions but also the contractual purchaser and seller relationship. The increasing in price of gas in recent years contributed to a structural change in industry: the major involvement of States in the revenue.

In addition, the instability of the institutional framework of the sector may hamper the interest for investing in assets resulting in long term pay-back period.

Thus, as mentioned by Ghirardi (2008), natural gas has an important role in the energy integration process in South America. However, as energy resources, including natural gas, have a strategic nature in relation to national security, and that the cooperation between countries depends on a high degree of commercial integration, the integration process energy becomes more complex than the coordination between countries with respect to other types of tradable goods. Regarding the latter, we have to mention that the dilemma between national sovereignty and freedom (autonomy) imposes surely limits on the energy integration process.

Thus, the integration via gas pipeline, although it is beneficial to South America, depends on overcoming primarily this dilemma. Some examples of achievements in the natural gas industry are listed below.

Table 1 – Example of Gas Pipelines Operating in South American 

Bolivia – Brazil Gasbol 3,150 km and capacity of 30 mcm/ d
Bolivia – Argentina Yabog 441 km and capacity of 6 mcm/ d
Argentina – Brazil Paraná – Uruguaiana 440 Km, with 12 mcm/ d
Argentina – Chile Gasoducto del Pacífico 638 km and capacity of 9.7 mcm/ d
Argentina – Uruguay Gasoducto del Litoral 26 km and capacity of 0.7 mcm/ d

Source: IAE (2003)

Conclusions.

The present article aims to present considerations about the energy integration in South America that has occurred with progresses and regresses, since it is a complex process that involves strategic, political and economic issues. Despite the difficulties, several energy projects via electricity and natural gas occurring over the past few years, leading to an integration context.

The energy sector technicians recognize some obstacles and have solutions for them. However, there is slowness in concrete applications of the solutions, because the decisions depend on the political sectors that prioritize, often, their ideological convictions thus acting against the interests of the technical sectors.

However, it is observed that the present is more favorable due to a better understanding between technical sector and political leaders. This understanding is that the energy integration is a vector of social and economic development and certainly it will increase the power of the region worldwide.

Bibliography

Alarcón, LF (2009). Prospects for the interconnection of electrical systems in Latin America. Available at: sg.cier.org.uy.Acesso on April 27, 2010.

BEN. (2009). National Energy Balance. Available at: http://www.mme.gov.br. Accessed: May 2, 2010.

Chipp, H. (2009). International Seminar on Energy Integration Brazil – Peru: Electrical Systems and Power Integration. Presentation of work. Available at: http://www.ons.org.br.Accessed April 27, 2010.

Castro, N; Rosental, R and Gomes Ferreira, V. (2009). The integration of the electricity sector in South America: features and benefits. GESEL – Study Group of the Electricity Sector. A discussion paper by the electric sector n.10.

Ghirardi, Andre. (200). Natural gas in South America: from conflict to integration possible. Le Monde Diplomatique Brazil. Available at: http://diplomatique.uol.com.br.Accessed April 28, 2010.

IAE. (2003). South American Gas: Daring to dap the Bounty. Available at: http://www.iea.org.Accessed May 19, 2010.

INDEC (2009). Instituto Nacional de Estadisticas y Census de la Republica Argentina.Available in http://www.indec.gov.ar. Accessed: April 6, 2010.

Landau, GD (2008). The geopolitics of energy: the view from Latin America. Dossier CEBRI Volume 2, year 7. Available in http://www.cebri.org.br. Accessed: April 29, 2010.

Melo, E. (2009). Specifics of the Electric Sector in Latin America. IV International Seminar on the Power Sector. Presentation of work. Available in http://www.ccee.org.br. Accessed April 29, 2010.

Oxyl, V. and Fagá, MW (2006). The motivations for energy integration in South America based on natural gas. Petro & Química Year XXX, No. 289, pp. 70-74.

Rudnick H, Moreno, R., Tapia, H., and Torres, C. (2007). Natural Gas Supply. Pontificia Universidad Catolica de Chile. Department Ingeniería Eléctrica. Available at: http://web.ing.puc.cl. Accessed: April 30, 2010.

Solomon, L and Malhão, J. (2007). Energy integration process: paths and pitfalls.Legislative Papers, n.3.


[1] on January, 2007, it used to send 15.6 million cubic meters (m3) per day, and in January, 2008, the supply fell to 1.2 million m3/day. Argentina was facing a situation of lack of energy, and due to supply of natural gas to Chile has stopped, it forced the country to implement tough measures to contain the energy crisis

[2] Non-governmental organization established in 1964 involving approximately 220 electric and gas utility companies from Central and South America with the goal of supporting and promoting energy integration among its member countries

[3] Forum which aims to create road, waterway, maritime, energy and communication connections of the continent shared among the twelve countries divided into development axes

[4] UNASUR brings together twelve South America countries and seeks to deepen the integration of the region. It seeks forwarding physical, energy, telecommunications integrations, as well as in scientific and educational areas.

[5] Common Market Council

[6] Suárez, L.; Guerra, S.; e Udaeta, M. (2006). Os fundamentos institucionais na integração energética da América do Sul. In: Annals of V Brazilian Energy Planning Congress – Public Energy Policies: Challenges for the next quadrennium

[7] Act no. 11,651, April 27, 2008 amended article 2, and gave new wording of § 1. of article 15 of Act no. 3,890-A, April 25, 1961, authorizing Federal Government to establish Eletrobrás. The company is authorized directly or through its subsidiaries to join to establish business consortia and participation in companies in Brazil and abroad that are intended to explore directly and indirectly the electricity production and transmission.

[8] The network industries have, among others, characteristics such as: the supply of their products is always available and meets unexpected increases in demand; their products have a basic and essential function to the society’s economy; the economic activities that affect the society as a whole (industrial, commercial, residential sectors, among others); there are significant economies of scale and scope.

[9] Chipp, Hermes (2009)

(*) Associated Researcher at the Energy Economics Group

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