São Paulo, Brazil

Large Dams and their Alternatives: Future Energy Trends

• Small hydro as an energy option for rural areas
  Snr. Teodoro Sanchez
• The evolution of the hydropower industry in Brazil – the regulatory and institutional aspects
  Snr. Alfonso Henriques Moreira Santos
• The Challenge and Limits of Large Dams in Brazil
  Mr. Alan Poole
• The Future Of Large Dams In Latin America and the Caribbean: IDB's Energy Strategy for the Region
  Dr. Jaime Millan

Small hydro as an energy option for rural areas
Teodoro Sanchez
Intermediate Technology Development Group - ITDG
PERU

Small hydro is an environmentally clean and friendly energy option, used extensively in the past for applications of shaft power or to provide electricity to small towns. Lately however, due to the low cost of fossil fuels and the economics of scale of large hydro energy schemes and the massive quantities of energy required by the utilities, small hydro schemes have been partially abandoned. Even for isolated towns where fuel supply is difficult and could be expensive, planers do prefer to install diesel units or grid connection instead of small hydro, the main argument is "The large investment costs" required by small hydro schemes. This argument could be partially true when the implementation methods and the standards used are not the appropriate as those currently used by large utilities and Government agencies, however when the technology, methods and standards of small hydro are the appropriate ones, small hydro energy can be competitive with other options, but with the advantage that it is a clean, and environmentally friendly energy option, where no CO2 emissions are present, no big dams are needed and no big complementary civil works are needed (civil works like: access roads just to transport big machinery, settlements for construction of the scheme. Also it will not need to affect the social and cultural patterns of the zone where a small hydro is installed.

ITDG (Intermediate Technology Development Group) has been doing important research work during the last two decades on the development of appropriate technologies and methodologies to reduce implementation and running costs of small hydro energy schemes, and disseminating them in order make cost effective energy option, and competitive with other options. Also it is looking at other issues like organisation for a correct, cheap and sustainable operation maintenance and administration of small hydro schemes.

The present paper intends to make a tied summary of the main activities developed by the Energy team of ITDG Peru in the field of small hydro since 1985. Promoting small hydro energy as a reliable and sustainable energy option and contributing to the development of the small isolated villages in rural areas. Although small hydro according to the USA and European standards covers the range up to 10 MW and for OLADE (The Latin American Organisation of Energy) small hydro energy schemes covers the range up to 5 MW. In this paper we will refer to a smaller range, that is up to 250 kW where ITDG is currently concentrating more effort.

The small hydro schemes that ITDG promotes are normally run off river type, in contrast to large hydro which need the construction of dams to store water during the dry season, affecting the environment and the social an cultural life of rural communities, wild life and ecosystems.

The technically feasible hydro energy potential in Peru is estimated in around 65,000 MW mainly counting the rivers of the Andean and the Upper Jungle regions. Although there are no figures about the potential for small hydro schemes, both in the Andes and in the upper jungle there are a large number of small rivers and streams which offer a large number of opportunities for small scale energy generation schemes.

Peru is a large and centralised country, with nearly 1.3 Million Km2 of area, 24 Million inhabitants, 70% of them living in the urban areas and the remaining 30% in the rural areas. Lima its capital alone concentrates 30% of the total population, other 20% live in medium and small towns along the Pacific Ocean (the coast region), 35% live in the Andean region and the remaining 15% in the Jungle.

Part of the rural population live in small villages and the rest scattered on there own farms. According to the Government Authorities 80% of them have no access to electricity, i.e. about 6 Million people (more than one million families). During the last 6 years there has been an important effort put by the Government on rising the rural electricity coefficient, large budgets have been spent yearly on grid extension projects and in diesel units, much less in small hydro schemes, Nevertheless in Peru small hydro can play a very important role in the rural electrification, and especially in the Andean and in the upper jungle areas where most of the rural population is concentrated.

The components of a small hydro scheme can be seen in the following sketch

Although the work to cut costs is related to all parts of the small hydro schemes i.e. civil works, electromechanical equipment, grid and wiring. The present article will refer only to civil works and electromechanical equipment. The work done to cut costs on the grid and the electrical wiring is also applicable to other energy options, therefore will not be covered in this article.

ITDG has also developed a variety of activities related to the promotion of small hydro: Pilot plants, technology transfer, training dissemination of information, run courses, workshops and others.

This section will cover two main activities: the implementation of revolving fund and the development of an organisation model for the operation, maintenance and management of the scheme in a sustainable way.

This section will include the lessons learned by ITDG in relation of small hydro energy schemes as a reliable and sustainable energy option for rural electrification in Peru.

The evolution of the hydropower industry in Brazil – the regulatory and institutional aspects.
Afonso Henriques Moreira Santos
José Guilherme Antloga do Nascimento
Brazilian Eletrctricity Regulatory Agency – ANEEL
BRAZIL

Brazil provides an example of a largely economy an advance stage of deregulation where, at the time of liberalization of the power sector, the installed hydro capacity was already about 60,000 MW. Hydro sources more than 95% of national electricity production.

From 1971-93 tariffs were set by the federal Government in a manner, which gave the publicity, owned state little incentive to reduce cost or increases efficiency. By the early 1990s the power sector was virtually bankrupt, and face with a loan growth of 7% per year the government had little alternative but to embark on a major reform of the industry.

In 1995 he "Concession Law" (n. 8987) established the principle that private parties may supply public services, and set out the conditions. In parallel the "Independent Power Producer Law" (n. 9074) set out the terms under which IPP concessions are awarded through a public bidding process for a maximum of 35 years.

The process of reform continues wit the Decree 2003 (1995) which is aimed to provide more transparency in the regulatory and tariff setting process for independent power producers and self-producers. The Law n. 9648 of May 27, 1998 and Decree n. 2655 of July 2, 1998, created the wholesale energy market (MAE) and the independent system operator (ONS). In 1999 the indicative planning process was established by Minister Act, and was created the Coordinating Committee of the Planning of the Expansion of the Electric Systems (CCPE) whose presidency is exercised by the Secretary of Energy of the Ministry of Mines and Energy.

In the Brazilian case, a wholesale energy market (WEM) was created but some particularities made it not similar to the general approach of other countries. The spot price is not determined by a generation bidding process but by the simulation of a hydrothermal optimization program. One big reason for this is that 95% of the generation sources are hydro plants, which need to be coordinated otherwise the risk of deficit, can be very high. As a sub-product of this simulation, the dispatch and the exchanges between the generation companies are also determined. The freedom is only found in the bilateral contracts, which is a way to avoid the exposure of the agents to the volatile spot prices. It may be considered as a forward market. The market rules are currently under revision, but the main guidelines are:

Power purchase and sale transactions accomplished through the WEM using Market Agreement signed among the agents

The Market Agreement contemplates:

Obligation to buy and sell all energy through WEM;

Registration of bilateral contracts;

Rules for commercialization, accountancy and settlement;

Financial warranty related to the amounts marketed in WEM;

Mediation of subjects among the members

Contract of independent auditing to do inspections in the operation of the market

Rules for the treatment of the hydrological risks

The procedure for awarding a hydro concession is regulated by ANEEL and hinges around the granting of a licence to develop the site. It is not linked in any way to the energy sales arrangements which are a private matter between the developer and the offtaker who can be either one of the utilities or an individual consumer (subject to a minimum of 3 MW or 10 MW for hydro projects above 30 MW, and 500 kW for small producers).

The procedure for granting the site licence depends upon the size of the project. For projects above 30 MW a competitive bidding process is required. A private company undertaking the feasibility study at its own cost and making an underpriced application to ANEEL for site licence initiates it. ANEEL then publicly solicit offers from other developers, and after a public release process, the feasibility study is made available to them. All parties, including the original proponent, are given it months in which to prepare bids for the site. The winner is the one that offers the highest premium, in form of annual payment, for the right to develop the site. In the event of the original proponent not securing the concession, he is repaid the cost to the feasibility study by the winner.

Site licences are granted for periods of 30 to 35 years, after which they are renewable, by agreement with ANEEL. There is no provision for the transfer of the project back to the state.

Since 1995 ANEEL was made 13 biddings with success, the total capacity of these hydro power plants is 3,634 MW. In its majority the winners was utilities and great consumers.

Until May of 1998 the concept of Small Hydropower Plant - SHP was:

Any hydropower plants with capacity until 10 MW;

with each power generators until 5 MW.

The Law 9648, change the concept about SHP, raised the limit from the previous level of 10 MW to 30 MW of installed capacity. However the law settle that the hydro power stations needs to have the area of the reservoir limited to 3 km2, to be called SHP.

The Law 9648 created the following main incentives for plants up to 30 MW, which can be classified as SHP:

can sell energy directly to any consumers with load over 500 kW;

can use the transmission and distribution system with discount of at least 50% in the transmission and distribution charges;

can use a special funds (called CCC) to produce energy in isolated systems, mainly in the north of Brazil.

This paper will show the evolution of the hydropower industry framework in Brazil, the institutional arrangement to concession process, the perspectives and dificulties to the Hydropower Industry.

The Challenge and Limits of Large Dams in Brazil
Allan Poole
National Institute for Energy Efficiency - INEE
BRAZIL

Whether large dams can be built in Brazil over the next few years is a moot point. This is due to the predominantly private sources for financing and the current status of the energy sector`s profound restructuring – which creates many uncertainties and risks for investors. In fact, today it is proving difficult to implement almost any kind of new supply capacity. This period of deep institutional transition (shock?) is likely to go on several years at least, while the implications and impacts of the new model will occur over many years.

All this adds difficulty for projects with multi billion $ invstments and long lead times. The world over it is hard to attract private capital for large hydro (though hydro of less than 100 MW is another matter).

Nevertheless, large dams are a prominent source of projected power supply in Brazil`s Plano Decenal de Expansão: 1999-2008. For the period from 2000, thirteen projects of more than 500 MW (the rather arbitrary lower limit chosen) are forecast to enter operation. Their total capacity would be 27.7 GW.

Over most of the planning horizon, large dam development would be concentrated in two basins: the Uruguai in the Southern Region (5.7 GW in 5 new dams); and the Tocantins (5.5 GW in 5 new dams + 4.1 GW in Tucuruí expansion), in the Center-West and Northern Regions. These projects would basically exhaust the potential for large scale hydro outside of the humid Amazonian Region.

Dates are not the key point here. Almost verything is delayed excpt the nuclear power plant Angra-II (which is ironic). The overall thrust of the plan shows, however, that large hydro is considered in important institutions of the power sector to be a key factor in expansion in the medium and longer term. The large importation of natural gas for a significant share of power generation expansion is considered to be transitory.

It is not our intention to argue the merits of this case. We believe a number of factors will slow down the projected pace of large dam expansion over the next decade, almost independent of the merit of the projects – as emphasized at the outset. Some projects will be substantially more difficult to realize than others.

We believe that a substantial shortfalls in the rate new large hydro construction, relative to the plan`s projections, can be compensated by other sources over the next decade. There is for example the potential of distributed generation – especially smaller hydro and cogeneration is substantial and little developed. Difficulties have been experienced in bringing these projects to the market which the government would have to address.

On the longer horizon the choices become starker. On the thermal side dirtier fossil fuels or nuclear may weigh more in the mix. On the hydro side, the focus begins to shift to Amazônia, where most of the remeining large hydro potential is. That strategic option is sketched in the Plano Decenal.

It begins with Belo Monte, on the Xingú River. Among the dams presented in the plan`s ten year horizon it is in a class by itself in terms of capacity. It would be the first large dam to be built in humid Amazônia for the national grid since Tucuruí.

In a less detailed extension of the planning horizon, to 2013, the Plano Decenal proposes three more large plants, of which two are in Amazonia: Altamira on the Xingú river upstream of Belo Monte and Santa Isabel on the lower Araguaia.

The Belo Monte plant is an attractive hydro scheme. It is a plant with a very small reservoir relative to its output (reduced by almost 2/3 since it was last presented in a ten-year expansion plan), sited in an area that has already been heavily altered Of all the remaining large hydro projects in Brazil, it also has the lowest investment per firm kW of capacity (though transmission investments will be about as large as the generation). In terms of CO₂ emissions analysis it will be marvelous, if the collateral effects of the labor constructing it and of the transmission lines transmitting it`s output can be minimized.

However, it must be remembered that with the name Kararaô, the project was an early flashpoint of the environmental and forest peolples` movements in Brazil in 1987-91. Given the nervousness of private investors with hydro in general, and of environmentalists with Amazônia and hydro in general, Belo Monte`s viabilization is not a foregone conclusion.

Once again, we`re not concerned with exact dates. Most of those proposed in the Plano Decenal will be delayed and some projects (both of hydro of all sizes and central station natural gas combined-cycle plants) may never happen. The question is whether Belo Monte will be built sometime in the next 10-20 years. If it can`t be built, then probably nothing can be built.

The project will have to be very well presented if it is to succeed. My personal view is that it is being poorly presented in various ways:

The Plano Decenal introduced Belo Monte without any greater discussion, as though it were just one more plant in a series of dozens of hydro & thermal plants. It is necessary and normal for indicative plans to emphasize and discuss strategic turning points.

Seeking to reduce transmission investment costs (from an engineering point of view), a new transmission corridor has been planned. The socio-environmental impacts of this new corridor are probably about as big as those of the dam itself, as are the investments. It is urgent to review this configuration. Using the existing transmission corridor (expanding the right of way if necessary), could be cheaper when all the transaction costs are evaluated.

The elegant Belo Monte plant is being presented implicitly as a platform for the subsequent construction of the ugly Altamira plant, in a repetition of the posture of the Plano 2010 back in 1986. This linkage of the two projects contributed significicantly to intensifying fierce resistance against Kararaô.

Belo Monte does not need Altamira to be a successful project. Much to the contrary, Altamira is an albatross on Belo Monte`s neck. It really is a very problematic dam..

There is an alternative approach to increasing Belo Monte`s firm energy, if that is desired, which would fewer impacts – "inter-hemispheric hydro complementation."

This strategy results from the hemispheric inversion of large peak river flow regimes in sites <3000 kim apart. The Xingú, Tocantins and other southern tributeries of the Amazon have hydrological cycles which are seasonally opposite to basins in Venezuela, Colombia etc, which are in the northern hemisphere. Yet these basins are part of, or near the Amazônian region. When you have dams at both ends of > 10 GW long distance transfers of this scvale become feasible.

The first step to this large transmission interconnection has already been taken, with Guri (Venezuela) supplying Roraima and Manaus.

In Amazon large reservoirs are exceptionally problematic. (including methane...). With this strategy reservoir impacts would be drastically reduced. Approach couldd effect dam strategies throughout the region.

Garabi is a binational plant. In these tables the dimensions of the full plant are given. Normally data are for the 50% which is Brazilian.

Investment values are in Reais of mid-1998; exclude interest during construction

Electricity cost at busbar in Reais of mid-1998; includes interest during construction (assumed 10%)

The Future Of Large Dams In Latin America and the Caribbean: IDB's Energy Strategy for the Region
Jaime Millan
Interamerican Development Bank - IDB
USA / COLOMBIA

Latin America and the Caribbean (LAC) has been unique among regions because of its high reliance on hydropower in meeting electricity generation needs. Although this has resulted in cheap electricity and significant lower emissions of greenhouse gasses (GHG) it has also impacted the local environment, in ways not always for the good. The region has learned a lot since the sixties and seventies when it entered into a dash for hydro as a solution to rising oil prices. At the dawn of the new century the region has found in natural gas a cheaper alternative to hydropower for electricity generation. However, rising concerns for GHG emissions, associated with thermal generation, may put a premium on hydropower as the only available source with the potential to make significant contributions to diminish emissions in the short term.

This paper addresses the question of what the future role for hydro might be in meeting the electricity needs of LAC, what issues are involved and what actions the IDB could take to support these developments. Section 2 of the paper summarizes energy resources production and use in the LAC region, including associated environmental impacts. Section 3 discusses the energy outlook for the medium term in the region, highlighting the critical role of natural gas as a bridge to the new energies of the future, the roles of energy efficiency, renewables and hydropower. Section 4 provides a brief description of IDB involvement in Large Dams and section 5 outline the Bank’s intended strategy for the next ten years. Finally, section 6 provides a summary and conclusions.

The countries of Latin America and the Caribbean have abundant and varied energy resources, including oil (13% of world reserves), natural gas (5.4%), coal (1.6%), biomass and other renewable resources, as well as great hydropower potential (22%). This apparent abundance of reserves in the region can be misleading, however, because they are highly concentrated in a few countries and there are other factors that limit the extent to which they can be developed at competitive prices. Venezuela and Mexico have the largest oil (88%) and gas (77%) reserves in the region. The economically feasible hydropower potential is more evenly distributed, but relative costs and/or local environmental problems mean that hydropower generation will only play a significant role in a handful of countries over the next few years. Other countries have considerable potential for unconventional renewable energy sources (solar, wind-powered, and geothermal energy), but their development is limited for geographical reasons and the high cost of technologies involved. 

Despite the limitations, there is an enormous potential for trade in energy in the region. Currently, intraregional trade is dominated by exports of crude oil and its byproducts, but there are promising, albeit still incipient, prospects for integrated energy markets using integrated grid, for natural gas and electricity, for instance. For the time being the integration of gas and electricity markets has made the most progress in South America, where major international gas pipelines and electricity interconnecting grids already exist or are being built. However, eventually the SIEPAC power interconnection project and a possible gas pipeline from Mexico and/or Colombia will make it possible to integrate the electricity and natural gas markets of Central America with those countries.

Spurred by economic development and the population growth, the demand for energy in the region has been increasing at rates substantially above those in OECD countries.  Nevertheless, per capita energy consumption in the region, and electricity consumption in particular, will continue to be far below that of developed countries (2,300 kilowatt-hours in LAC compared with 12,000 kilowatt-hours in the United States and 6,000 kilowatt-hours in Europe). Within the region, markets are far from homogeneous. Four countries, Mexico, Venezuela, Brazil and Argentina, consume 73% of energy and 79% of electricity.

As for consumption by sector, industry (34%) and transportation (31%) are the biggest energy users, as they serve the most highly urbanized region in the developing world. The transportation sector accounts for 55% of all petroleum products consumed in the region, and the amount it consumes is growing at 3.5% a year. Energy consumption in rural areas is dominated by the use of biomass for cooking.

Demand for electricity, which accounts for close to 20% of the total demand for energy, grew at an annual rate of 5% between 1990 and 1995,  and it is expected to continue growing at that pace in the years to come. Primary energy used to generate electricity mainly comes from renewable sources (69% hydro and 1% geothermal), followed by thermal generation (14% oil products, 11% natural gas, and 3% coal, 2% nuclear). The industrial and household sectors consume most of the electricity (46% and 31%, respectively), although the distribution varies significantly from one country to another.

LAC has the highest electricity coverage (84%) of any region in the developing world. This high electricity service coverage disguises the fact that approximately 75 million people still lack it, mostly in the countryside. Indeed, about 60% of the rural population has no access to electricity. Much of the energy consumed in the countryside is still "traditional" (mainly burning of biomass materials in cooking). These traditional practices, which involve unsustainable consumption of resources, not only do cause major damage to the environment by reducing vegetation and forest cover; but also cause severe respiratory health problems, particularly in women and children. Despite the fact that the rural population without access to electricity has been dropping in absolute terms over the past 20 years in Latin America, the shift to modern forms of energy is not occurring as rapidly as it should. There is also a strong correlation between levels of development and electric power coverage. The countries in the region with the lowest levels of access to electricity are the least urbanized countries: Honduras, Haiti, Bolivia, El Salvador, Guatemala, Nicaragua, and Peru, for instance, where less than 20% of rural households have electricity.

Although there is no thorough and exact assessment of energy efficiency, most studies indicate that there is great potential for investment to improve it in the region, especially in the transportation sector. The use of renewable forms of energy from new sources (other than hydropower and geothermal sources) is still incipient in the region, as in the rest of the world.

The local environmental impact of energy use is dominated by atmospheric emissins from the transportation sector. Small particle emissions, known as PL₁₀ (particles of less than 10 microns in diameter) and sulfur dioxide emissions are responsible for thousands of premature deaths every year. As regards global climate change problems, greenhouse gas emissions in the region are significantly below those of the OECD countries and of the rest of the developing world, mainly due to the high hydropower component in the energy basket for electricity generation. The Intergovernmental Panel on Climate Change estimated that in 1990 emissions from Latin America and the Caribbean accounted for 4.8% of global gas emissions. The transportation sector is also the main source of CO₂ emissions (35%), followed by industry (22%).

Driven by economic development and demographic growth, demand for energy in the region will continue to increase over the next decade. The demand for oil, which grew at an average annual rate of 3.5% over the past decade as a result of the use of cars, will increase at an even faster pace due to urbanization and improved living standards. Demand for power is also growing (at an average annual rate of around 5%), although the pace of growth is beginning to slow as a result of eventual market saturation and greater efficiency in end-usage. In 1997 we estimated around 80 GW of new installed capacity will be needed in the decade ending in year 2006. However, owing to the abundance of natural gas and the marked decline in costs following the introduction of new combined cycle gas turbines (CCGT), environmental considerations, and other reasons, the relative share of primary sources in meeting this demand may change considerably. Thus, the share of generation capacity based on natural gas will double by 2006 while the oil-fired capacity share will fall to half its current level. Coal’s share will stay the same and renewable energy will decrease some four percentage points.

Natural gas will become the bridge fuel toward the clean and cheap energies of the future, and will call for major investments, especially in gas pipelines. The share of natural gas in the basket of primary sources for power generation will increase, reducing the relative share of oil byproducts and hydropower

Trade in natural gas will grow at a substantially faster pace to cover demand, with Mexico importing in the short term, and Brazil and Chile in the long term. For the first time there will be extensive drilling for natural gas, rather than oil, as the main objective.

The new investments in electricity will be less capital-intensive than in the past and so will be total investment (US$15 billion per year compared to an estimated US$24.5 billion in 1991). Nonetheless, investment needs in the region will continue to be dominated by the drilling and production of oil and gas and power generation.

The percentage of greenhouse gas emissions from power generation will continue to be very low, compared to other regions of the world. Nevertheless, urbanization will accelerate the increase in the number of cars, which in turn will lead to an increase in fuel consumption, traffic congestion, and environmental degradation.

Natural gas has become the fashionable turn-of-the-century fuel, not only in Latin America but also throughout the world, even in countries that do not have reserves. This spectacular promotion of natural gas can be attributed to technological change in power generation, the fact that natural gas is the cleanest fossil fuel, deregulation of power and fuels markets, and regional economic integration.

The major technological breakthroughs in power generation in the past 50 years have occurred in the past decade, with the development of gas turbines and the so-called combined cycle gas turbines (CCGT). This technology, which applies developments in aviation turbines to electricity generation, has raised average energy efficiency from 22% with the gas turbines of the 1980s to close to 50% for simple cycle turbines and 60% for CCGT. At the same time, costs per installed kW have fallen to almost US$350 (today), less than 40% of the cost in 1985 constant dollars.

Even more important is the fact that these gains occur even for plants as small as 150 MW, much smaller than those previously envisaged, thereby practically eliminating the economy of scale problem that other generating technologies face. In addition, because less time is needed to make a plant operational (now approximately a quarter of the time needed for conventional thermal plants), expansion can be carried out module by module, more closely following demand and thereby fostering competition in the power generation market. In places where natural gas is available, the cost per kilowatt-hour of generating with CCGT has fallen to at least half the cost of the closest competing source. This progress in terms of efficiency, combined with the fact that natural gas is much cleaner than other hydrocarbons per unit heating values, means that atmospheric emissions per kilowatt-hour are substantially lower than with any other type of generation, except hydropower, renewable sources, and nuclear energy.

The liberalization of the natural gas industry, first in the United States and then in the United Kingdom, led oil companies to begin developing numerous fields that had been dormant and, for the first time, drilling for natural gas rather than oil became their main objective. In other words, the interaction of supply and demand broke through the vicious circle: no drilling for gas because there is no demand for it, and vice-versa. Since deregulation of the oil and gas market in Argentina, demand has increased considerably without this leading to a fall in reserves that could jeopardize meeting demand; indeed, Argentina has become the principal exporter of gas in the region. Recognition of the dynamic nature of the relationship between reserves and output means that the old static notion is no longer relevant as a measure of reserves. As a result of economic reforms and the opening up of economies in most of the world, the natural gas trade has grown tremendously, making it possible for many countries to import the resource and use it to transform their own energy sectors.

Known as the "dash for gas", this phenomenon spread very quickly from the United States and England to the Latin American and Caribbean region. Thus, in the 1980s, the only country where gas played a significant part in the energy matrix was Argentina. Today Argentina has raised the share of gas to around 51% of total energy use and exports natural gas to neighboring Chile, Uruguay, and Brazil. Brazil is aiming to increase the share of gas, from its own output and imports from Bolivia and Argentina, to 16% by the year 2006; while almost all new electricity generation in Mexico, Peru, and Colombia will use natural gas. Colombia has an aggressive drilling program aimed at increasing its natural gas reserves to serve possible markets in Central America and Ecuador. At the same time, it has actively deepened the natural gas market in such a way that by the end of the century approximately 60% of the country’s population will have direct natural gas pipe connections. Venezuela has substituted gas for oil fuels in all its generating plants, and only exceptionally low-cost projects like the hydropower plants on the Bajo Caroní can compete with gas-fired generation projects. Ecuador is drilling for natural gas in the Gulf of Guayaquil and Central American countries are studying the feasibility of a gas pipeline that would allow them to import natural gas from Mexico or Colombia. If this trend were to continue, it would revolutionize energy sectors throughout the isthmus, since the gas would replace hydropower and coal-based thermal plants (which are expensive and environmentally problematic), and natural gas would replace electricity for cooking. In addition, it would contribute to the liberalization of oil and gas markets by getting rid of the inefficient, protected local refining industry.

In short, if current trends continue, new investment in electricity generation will be dominated by natural gas in the vast majority of countries in the region, except in the Caribbean island countries, which have no gas, and in Brazil, whose huge needs and abundant hydropower resources imply natural gas will play a relatively moderate role.

Efficient use of energy by end-users and the utilization of renewable sources to generate power are the core options put forward at the Kyoto conference to combat climate change. Many authors consider that these sources would be competitive and would be adopted by the market were it not for the existence of rules of the game that discriminate in favor of investing in conventional energy supply options, in addition to other barriers and market flaws.  To overcome such barriers, over the past two decades electricity regulatory agencies in the United States and other developed countries have promoted instruments such as Demand Side Management (DSM) and Integrated Resource Planning (IRP) in the vertically integrated power monopolies in their countries. NGOs and some governments have lobbied in the 1990s for multilateral organizations to promote the adoption of such measures in developing countries as well. However, with market deregulation, both DSM and IRP have lost ground and countries are faced with the need to seek effective alternatives to foster the use of renewable sources and efficiency in end-usage in the new competitive environment. 

Attempts to make energy consumption more efficient have not had much success in the region for various reasons; only Mexico and Brazil show significant energy savings. Apart from hydropower and geothermal energy, at the moment there are no renewable sources in the region that could be competitive on a significant scale. Renewable small-scale sources of energy are only competitive in certain niches, such as remote rural areas unconnected to the network, and as support for distribution networks in certain cases (what is known as distributed energy).

While the modernization of the region’s economies, the shift toward services, and the incorporation of new, more energy efficient industrial equipment will reduce their energy intensity, countries wishing to promote the rational use of energy still face the challenge of overcoming barriers to energy-saving measures and the introduction of efficient appliances. In competitive markets, the main incentive for efficiency is the price signal, although the presence of barriers and market flaws slanted against it may argue a "provide a rational for" for careful market interventions to reduce anti-efficiency bias. These interventions range from the adoption of labeling and minimum efficiency standards for appliances and building codes; strategic partnerships with equipment suppliers through government incentives that reward the introduction into the market of more efficient models and/ or discourage imports of inefficient equipment; coordination with financial institutions and other market players in devising mechanisms to foster the establishment of energy service companies and/or other forms of reducing transaction costs for industrial clients; for instance, offering them a comprehensive package of services that raises their productivity and helps to improve their competitiveness; and supporting the creation of renewable energy markets in niches that may be price-competitive.

Traditionally, rural electrification programs have been centrally planned with somewhat limited objectives. They involved large, often poorly targeted subsidies, and lacked sufficient community support and participation. The existence of State monopolies in electricity distribution meant that many countries in the region carried out expensive and inefficient expansions of their rural distribution networks, with goals that often had little to do with the sector itself. Yet this "hidden competition" in the form of a possible expansion of the network through generous subsidies constitutes a major barrier to the entry of other players that could supply electricity using alternative sources of energy at competitive prices.

Although the region as a whole has the highest electricity service coverage of any region in the developing world, it is also true that there are countries where less than half the population has access to those services and countries in which the expansion of electric power to rural areas was done inefficiently and at the expense of large subsidies that cannot possibly be continued. With restructuring, countries have the opportunity to correct these mistakes by taking advantage of the new arrangements and technologies available in decentralized markets. Nevertheless, such countries also run the risk that political pressures may lead to a perpetuation of subsidies for the network in some less than transparent form, which would restrict opportunities for other more efficient means of service delivery in these areas, such as decentralized systems based on renewable forms of energy. Ingenious ways have to be found to make access to electricity affordable to the poor without distorting the utility tariff signal. One such way might be to direct the subsidy toward the purchase of energy efficient (household and other) electrical appliances by low-income consumers.

Hydropower is not longer what it used to be during the golden seventies when the whole region was engaged in dash for hydro. Most of the best sites have already been developed and new sites face environmental restrictions so the long run marginal cost of hydropower has increased relative to other alternatives. Today hydro faces stiffer competition from thermal power as the high oil prices forecasted a couple of decades ago never materialized. Furthermore, the already mentioned technological change in gas-fired power generation technology has made a difficult case even worse. A key feature of investments in hydroelectric power generation projects is that they require long term loans with extensive grace periods because they are capital-intensive, have a long construction phase with significant risks and have a long useful life. Long term finance is a scarce commodity nowadays, no wonder new private developers prefer thermal plants. It is not only the environment that is conspiring against hydro development.

Nevertheless, there remain many instances in which hydro alternatives still may be the most economic way to produce power. As mentioned before, hydropower will most likely constitute the main source for Brazilian electricity for at least a decade, Venezuela still has not completed its development of the lower Caroní River Basin and may have interesting sites in the upper basin, and there are other countries, such as Peru and Ecuador, which may either experience some delays in joining the dash for gas or may have important and competitive hydro developments available. While there are still some old faces in the pipeline of potential projects involving large dams, (some cheap and relatively problem- free like Corpus in the Paraná River, some more questionable like Boruca in Costa Rica), there are new sites like Cheves, a 520 MW high head project in the Huaura river in Perú, which for one reason or another didn’t figure prominently in the old expansion plans of the golden age. Also, neglected by the earlier inventories are small and medium size sites or even scaled down versions of old projects. The development by the private sector of smaller, 25 MW, high head and relatively environmentally sound projects in Colombia and Costa Rica is an indication of what may lie ahead.

Furthermore, because of the still important role that hydropower may play in meeting some countries’ needs it is clear that there is wide scope for using various instruments to support the development of the region's hydroelectric potential in ways that are both economical and sensitive to local environmental and social impact. The Clean Development Mechanisms of the Kyoto Protocol may well enlarge the list of hydro projects that could be competitive in the new energy markets of the LAC region.

Since its inception in 1961 the Bank has made loans for dam-related projects of around US$8600 millions. As shown in the table below, most activity (83%) was conducted in hydropower, dwarfing loan activity in other sectors like water supply and irrigation. Close to 75% of the loans for hydroelectric projects were made during the late seventies and early eighties and around 80% of it was concentrated in Argentina, Chile, Brazil, Colombia and Venezuela.

Table 1 Dam Projects Approved by the IDB 1960-1999 (By sector, in millions US$)

Most of the largest projects experienced delays and cost overruns; the Yacireta project in Argentina-Paraguay whose first loan was approved in 1979 is still unfinished. Despite a few big fiascos, like the above-mentioned Yacireta (2400 MW?) and the Guavio project (1000MW) in Colombia, riddled with scandal, cost overruns and many other problems, there were also many successes. The Arenal project in Costa Rica was a model for resettlement; the Playas project (340 MW) in Colombia was completed on time under budget, and without any environmental or social problems. Other projects like La Fortuna in Panama, Salto Grande in Argentina-Uruguay had relatively few environmental problems. The Segredo Project (1200 MW) in Brazil broke the oligopoly of the big Brazilian construction firms, to name just a few. In general, the environmental performance of Bank financed projects has improved with the passage of time, as concerns for the environment and social issues became part of the agenda pushed by NGOs and some governments. The creation of the Environment Division in the Bank in the late 1980s reinforced and consolidated this trend. One clear example could be noticed in the results of the study performed by the Sustainable Development Department of the Bank to evaluate the design and implementation of programs for resettlement of population in 18 Bank financed projects with information available.

The same trend is observed in the implementation of the resettlement plans. Out the twelve projects in the seventies nine were in category 4, which means that serious problems were observed with not actions taken by the borrower, the remaining three were in category 1 or satisfactory implementation. During the eighties only one out of three projects remained in category 4.

During the first half of the nineties lending for hydropower slowed down as many countries privatized their power sectors but loans included the 2200 MW Caruachi project in Venezuela, the 340 MW Porce III project in Colombia and the 1400 MW Segredo project in Brazil. During the second half of the nineties the public window of the Bank didn’t make any loans for hydropower, while the private window made one loan for the Ita project in Brazil and has a couple of others in its lending pipeline.

The Bank has recently completed a new energy strategy to position itself in the new energy markets at the dawn of the new century. The overall challenge facing the Bank is to help countries reform their sectors so that they could be developed in an economically, environmentally, socially and politically sustainable way. The challenges faced by the countries fall into five major areas:

the consolidation of the structural reforms and the new institutional and regulatory frameworks started during the nineties;

the provision of access to modern energy to all citizens;

the development of energy consumption and production patterns compatible with the environment;

the integration of regional energy markets; and

the mobilization of financial resources.

To help countries to meet these challenges the Bank will center its activities around the consolidation of sector reform, seeking to agree with countries requiring its assistance on a specific strategy tailored to their needs but encompassing all five challenges in an integrated manner. Also, the Bank will try to use all its instruments and its activities in energy consuming sectors to help countries not only in the supply side but also in the management of the demand.

In this context the Bank will place special emphasis on addressing the urban transportation needs of the most urbanized region of the developing world, help countries in the development of markets for sustainable energy, energy efficiency and cleaner energy by seeking partnerships with strategic allies for technical cooperation and using its experience with small and microenterprises to foster the creation of energy services companies. Also, the Bank will support the development of decentralized solutions based on renewable energy for rural areas and will seek new ways of providing energy services to the poor. The Bank will continue to support the development of integrated regional energy markets for electricity and natural gas. The Bank will continue to help private developers with the financing of generation projects and will seek new financial instruments that suit better the needs of energy projects, including hydroelectricity and energy efficiency. Finally, the Bank will help countries interested in finding ways to develop hydroelectric projects that are environmentally, socially and economically sustainable.

6. Summary and Conclusions

LAC countries enter the new century in the middle of a tremendous transformation of their energy sectors with new actors, new challenges and new technologies. Better energy efficiency certainly will help, but it is not a panacea and the new renewable energies still are too expensive for massive implementation. While natural gas may provide the bridge to the cleaner and cheaper energies of the future, hydropower still has a role to play in this transition, particularly if the Clean Energy Mechanism becomes a reality. While it may be true that the development of new hydro resources faces many environmental challenges, it is also true that this is not a zero sum game and there are many opportunities for win- win solutions. The IDB’s experience shows steady progress in addressing the local environmental problems of hydro developments. There are still many resources to be tapped, and it is up to the countries and the Bank to cooperate in developing them in ways that are socially and environmentally feasible.