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03 Pa Po 3 3 PDF
03 Pa Po 3 3 PDF
03 Pa Po 3 3 PDF
Introduction
The concept of convergence of gas and electricity has emerged in recent years, mainly as a result of the increasing use of gas for power generation and the perception of growing inter-dependencies between gas and power markets. This concept has remained somewhat ill-defined and is widely used in many different contexts and in multiple meanings. A useful distinction can be made between convergence at the commodity level, referring to interdependencies between gas production and power generation activities, and convergence at the retail level, referring to inter-dependencies between gas and power supply to final customers. This paper will only focus on the first level of convergence, since convergence at the retail level has remained limited in the Southern Cone so far. The first section of this paper gives an overview of the current use of gas for power in the Southern Cone of Latin America, and of prospects for the coming years. Gas and power network development issues are addressed in section two. Last, section three focuses on the implications of convergence for wholesale electricity prices.
Convergence in Southern Cone gas and power markets Overview of Southern Cone natural gas markets
The Southern Cone of Latin America (comprising Argentina, Bolivia, the Southern, Southwestern and Midwestern states of Brazil, Chile, Paraguay and Uruguay) is a region with an aggregate population of about 240 million people, which has enjoyed a dynamic economic expansion over the last decade, with an average real GDP growth of 3.3% per year. Although Argentina is currently facing a severe economic crisis, the Southern Cone region is generally believed to be poised for a sustained long term growth. The Southern Cone is endowed with large and diversified energy resources. Natural gas reserves are very comfortable, and are mainly found in Argentina and in Bolivia, where substantial new discoveries have been made recently. The region also has a large hydropower potential, and Southern Cone countries have been historically relying on hydroelectricity for a significant part of their power supply. Southern Cone gas markets are at very different stages of development, as shown in Figure 1 below. The great variations in gas use across countries reflect both gas reserve positions and national energy policies.
03_PA_PO_3_3
Argentina is one of the most gas-intensive countries in the world, with natural gas accounting for nearly 50% of its primary energy consumption. This intensity is the result of a large gas resource base, a successful restructuring and privatization of the gas industry in 1992 that led to a dynamic investment process in all segments (production, transportation and distribution), and price levels that have ensured the competitiveness of gas for power generation and in the industrial sector while enabling the development of new reserves while ensuring. The Chilean gas market has been historically constrained by the limited domestic gas reserves and their location in the far south, but the picture has changed fundamentally in the end 1990s with the construction of several pipelines crossing the Andes mountains and delivering natural gas from Argentina to power generators, but also to the industrial, residential and commercial markets. As a result, the share of natural gas in Chile's primary energy consumption surged from 10% in 1995 to 23% in 2000. The Brazilian gas market is at an early stage of development, with natural gas representing only 3% of the countrys primary energy consumption, but has a significant growth potential. In recent years, Brazil has engaged in a major effort to promote natural gas, in order to offset its growing dependence on oil products and diversify its power generation mix, which is currently 95% hydrobased. A milestone in the development of the Brazilian gas market has been the completion of the Bolivia-Brazil pipeline, linking Bolivian gas reserves to Southern, Southeastern and Midwestern Brazil since 1999. Gas demand is expected to increase at a steady pace in these areas, with the rapid expansion of distribution networks and the development of gas-fired power generation under the thermal priority program set up by the Brazilian government.
60% 50% 40% Natural gas share in primary energy 30% consumption 20% 10% 0% Argentina
Sources : SE (Argentina), CNE (Chile), MME (Brazil)
1990
1995
2000
Chile
Brazil
Figure 1 Natural gas share in primary energy consumption in Southern Cone countries. Total natural gas consumption in the Southern Cone was 118 Mm3/d in 2000. The Argentine market currently accounts for the bulk of the gas demand, with a consumption of 85 Mm3/d in 2000. Demand for gas in the Southern Cone is projected to increase at an average annual growth rate of 7% over the next decade, to approximately 225 Mm3/d by 2010. The market of Southern, Southeastern and Midwestern Brazil accounts for nearly 60% of the total expected demand growth by 2010, while Chile accounts for 20%, the more mature Argentine gas market for 15%, and other Southern Cone countries (Bolivia, Uruguay, Paraguay) for the remaining.
Gas and power convergence in the Southern Cone : the current picture
The following figure shows, for Argentina, Chile and Brazil, the proportion of electric power generated from natural gas and the proportion of natural gas used in the electric power sector. A comparison is also made with Europe and the United States.
Proportion of power generation from gas (2000) Proportion of gas used for power generation (2000)
Figure 2 Inter-dependency between gas and power in the Southern Cone in 2000. Argentina has reached a very high degree of convergence between gas and power, as a result of its large gas resource base and because electricity generators have largely privileged the construction of combined cycle gas-fired plants to expand their capacity since the liberalization of the Argentine power market in 1992. Gas-fired power generation accounts for nearly 50% of the total electricity supply, while hydropower accounts for most of the remaining. Interestingly, the proportion of gas used for power generation is somewhat lower than the proportion of power generated from gas, reflecting the well-developed industrial, residential and commercial gas markets. In Chile, power generation accounts for about 30% of the total gas consumption, but this percentage rises to 55% when excluding gas use in methanol plants. Chile has two main electricity grids : the central interconnected system (SIC), which serves over 90% of the countrys population, has been historically relying predominantly on hydropower, while the northern interconnected system (SING), covering the northern mining regions, is entirely based on thermal power. In both systems, the main electricity generators simultaneously decided to build several gas-fired power combined cycle plants in the end 1990s, with gas supplied from Argentina through several cross-border pipelines. As a result, the proportion of power generated from gas, which was zero until 1997, surged to 20% in the SIC and 42% in the SING in 2000. In Brazil, power supply is currently 95% hydro-based, with gas-fired power generation representing a marginal share. Although gas and power convergence has not occurred yet, it is a major challenge for the coming years, as discussed below.
Due to the combination of these factors, a large share of new electricity generation capacity in the Southern Cone is expected to be gas-fired. The increasing demand of gas by electricity generators is expected to account for two-thirds of the total gas consumption growth in the Southern Cone over the 2000-2010 period, and the proportion of gas used for power generation in this region is subsequently projected to rise from 35% in 2000 to approximately 50% by 2010. In Southern, Southeastern and Midwestern Brazil, future electricity generation capacity additions are expected to be divided mainly between hydropower and gas (a limited number of coal-fired units are also planned). Despite initial delays in the implementation of the "thermal priority program" launched by Brazilian authorities, the power generation sector is projected to account for approximately 70% of the incremental gas demand by 2010. One challenge for Brazil is to ensure an economically viable operation of gas-fired power plants in an hydropower dominated system, where both electricity prices and thermal dispatch strongly depend on rainfall conditions. The reform of the Brazilian wholesale power market announced in early 2002 tends to indicate that this question is in good place amongst the concerns of Brazilian public authorities. In Argentina, power generation capacity additions are likely to remain limited in the short term, due to the current supply surplus, the impact of the economic crisis on electricity demand, and the climate of uncertainty that investors are facing. However, looking beyond the crisis, the proportion of power generated from natural gas, which is already very high, is projected to continue increasing by 2010, as the incremental demand is expected to be met primarily though higher load factors of existing gasfired combined cycle plants, conversion of existing open-cycle gas turbines into combined cycle configuration, and through new gas-fired combined cycle plants in the long run. In Chile, gas-fired units are expected to dominate future electricity generation capacity additions. In the central interconnected system (SIC), the progressive exploitation of available hydroelectric resources and the increasing environmental difficulties involved in the construction of large dams will limit the development of new hydropower plants. Due to their lower marginal cost of production, combined cycle natural gas-fired plants provide a competitive alternative to other types of thermoelectric plants. In addition, air pollution problems in the Santiago metropolitan region have led to strict environmental regulations, which encourage the conversion to natural gas of existing coaland oil-fired units. The Chilean National Energy Commission (CNE) periodically prepares projections of electricity demand and supply in the SIC and an indicative plan for the construction of new generating facilities, designed to ensure that the supply of electricity is sufficient to meet the projected demand. In its most recent indicative plan, the CNE has projected that gas-fired combined cycle plants would make 72% of the additional capacity required in the SIC by 2010.
Gas and power network development Gas-fired power projects are key to the expansion of gas infrastructure
Since natural gas reserves in the Southern Cone are fairly remote from the main consumption centers, the construction of gas transportation infrastructure connecting production and consumption centers is essential for the development of the regions gas markets. Until the mid 1990s, gas infrastructure in the Southern Cone was mainly in place to serve the Argentine market. However, the picture has changed dramatically over the last 5 years, with the completion of a number of large cross-border gas pipelines, as shown in Figure 3 below.
Cuiaba
BRAZIL
PARAGUAY
Asuncin ARGENTINA
TSB project
Porto Alegre
TGN
URUGUAY
TGM (2000)
Gas pipelines existing before 1995 Gas pipelines completed since 1995 (with completion date) Methanex (1997)
Tierra del Fuego
Figure 3 Development of natural gas pipelines in the Southern Cone The large capital expenditures required for the construction of new gas pipelines make it necessary to secure significant transportation volumes in order to make pipeline projects economically feasible with competitive transportation tariffs. In the Southern Cone, gas-fired power generation projects have in many cases provided the critical volumes needed to make new gas pipelines feasible, and have been key to the development of gas transmission networks, simultaneously allowing the supply of gas to new industrial, commercial and residential customers at attractive prices. In Central Chile, natural gas was introduced in 1997 with the completion of the 463-km GasAndes pipeline, linking the Neuqun basin of Argentina to the Santiago area. The construction of the pipeline was largely based on transportation contracts secured with Chiles three main electricity generators (Endesa, Gener and Colbun) for combined cycle power plants they had decided to build, in addition to the transportation capacity reserved for by Metrogas, the gas distribution company serving the Santiago area. In addition, an extension of the GasAndes pipeline to Valparaiso was completed in 1998 by two power generating companies to feed their combined cycle power plants in the Chilean V Region, subsequently allowing the supply of gas by newly formed distribution companies in this area. Another extension of the GasAndes pipeline to Region VI, south of Santiago is currently being developed, and is mainly justified by the expected development of gas-fired power projects in this area. The GasAtacama and Norandino gas pipelines linking northwestern Argentina with northern Chile were also developed primarily to supply gas-fired power plants in Chiles northern interconnected electricity system, simultaneously providing natural gas to industrial customers in this important copper mining region. Indeed, the GasAtacama project was developed by Endesa and CMS as an integrated pipeline and power project, including the construction of the GasAtacama pipeline and of a 720 MW gas-fired combined cycle power plant. By far the largest gas infrastructure achievement in the Southern Cone, the 3,100-km Bolivia-Brazil pipeline, running from Santa Cruz to So Paulo and Porto Alegre, was completed in 1999 for a total
investment of around US$ 2.1 billion. Although the development of the pipeline was not specifically tied to gas-fired power generation projects (it more generally aimed at diversifying the Brazilian energy matrix and reducing Brazils increasing dependence on liquid fuels, and the pipelines capacity was fully contracted for by Petrobras), it has become clear that the development of gas-fired power plants along the route of the pipeline, under Brazils thermal priority program, will be key for ensuring a rapid utilization of the pipelines design capacity and will largely influence the pace of future capacity expansions. Last, between Argentina and Brazil, construction of the Transportadora de Gas de Mercosur (TGM) pipeline connecting the Argentine gas transmission network to the Brazilian border was completed in 1999 and started to supply a 600 MW combined cycle power plant in Uruguaiana. The Transportadora Sul Brasileira de Gas (TSB) pipeline project, which will extend TGM to Porto Alegre and interconnect there with the Bolivia-to-Brazil pipeline, is also based primarily on gas-fired power projects in Southern Brazil. At the same time, this project will bring strategic benefits, since it will increase the reliability of the whole gas transportation system to Brazil and allow a diversification of supply sources. Finally, in the vast majority of cases, the development of gas-fired power generation facilities has been a key factor for the feasibility of pipelines delivering gas to the key markets in the Southern Cone.
provide a strong incentive for generators to locate their units close to the main load center. In addition, existing mechanisms for the expansion of the Argentine power grid have failed to provide adequate incentives to build new transmission lines, resulting in prolonged capacity constraints in the 500 kV transmission corridor linking the Comahue region (where Neuqun gas fields are located and which also concentrates 50% of Argentinas installed hydropower capacity) with Buenos Aires, and in delays in the implementation of the NOA-NEA line connecting northwestern Argentina (a gas-rich region, close to the large Bolivian gas fields) to the Argentine 500 kV grid. On the other hand, the Argentine gas transportation network has experienced a sustained capacity expansion process and has been able to keep up with increased requirements for power generating facilities in the Buenos Aires area. Gas transportation has also been the privileged option between Argentina and Chile so far, with the construction of several cross-border gas pipelines in the end-1990s and the development of gas-fired power generation facilities close to the main demand centers in central and northern Chile. In the Chilean northern interconnected system (SING), one exception is the 632 MW TermoAndes combined cycle power plant, built in the Salta province of Argentina and exporting electricity to the SING through the 269-km, 345 kV InterAndes transmission line. This plant is directly competing with combined cycle plants located in the SING and supplied with gas from Argentina through the GasAtacama and Norandino pipeline. In the Chilean central interconnected system (SIC), it is expected that the future growth in electricity demand will be met primarily by the installation of new gas-fired power plants close to the Santiago region, with capacity expansions of the GasAndes pipeline to accommodate the increasing gas transportation requirements. However, the Chilean and Argentine governments have also entered into an agreement to investigate the possibility of linking the Argentine power grid to the SIC, which would allow for power exports from Argentina to Chile. In addition, there are plans to interconnect the SIC and the SING, to enable gas-fired power from the SING (where there is a current oversupply, as a result of the nearly simultaneous construction of the GasAtacama and Norandino gas pipelines and of the InterAndes power transmission line) to be delivered into the SIC. Between Argentina and Brazil, both gas transportation and power transmission projects have been developed. Gas is being transported through the TGM pipeline to a 600 MW combined cycle power plant in Uruguaiana, within the borders of Brazil, and will be further transported through the projected TSB pipeline to Porto Alegre to supply new power generation facilities. Simultaneously, power is being supplied from Argentina to southern Brazil through a 1,000 MW transmission line completed in 2000, and a second transmission line is to be completed in 2002. In the future, the construction of the NOANEA line in Argentina should open the door for gas-by-wire exports from northwestern Argentina to southern Brazil.
fired power plants contribute to improve the overall gas load factor and the operational security of supply for industrial, residential and commercial customers.
100% 80% 60% 40% 20% 0% j-92 j-93 j-94 j-95 j-96 j-97 j-98 j-99 j-00 j-01 Share of gas in fossil fuels used for power generation (left scale) Wholesale electricity price - energy component (right scale)
50 40 USD/MWh 30 20 10 0
Chile
Chile provides another example of the impact of gas-fired power generation on electricity prices. In the Chilean wholesale power market, sales from generators to distributors are based on regulated node prices. Set every 6 months by Chiles national energy commission, node prices include an energy component based on the marginal cost of generation expected on average over a 4-year time horizon, and a capacity component based on the required reserve margin for the power system and the capital cost of a gas turbine. In both the central interconnected system (SIC) and in northern system (SING), significant decreases in node prices have been registered as a result of the introduction of natural gasfired combined cycle plants, as illustrated below. It can be observed that price decreases have actually been anticipating the introduction of natural gas, as prices are based on expected generation costs.
90 80 70 USD/MWh 60 50 40 30 20 10 avr-90 avr-91 avr-92 avr-93 avr-94 avr-95 avr-96 avr-97 avr-98 avr-99 avr-00 SIC (Santiago) SING (Antofagasta)