The Southern Cone of South America Experiences and Recent evolution

1. The Southern Cone of South AmericaExperiences and Recent evolution Juan Luchilo – CAMMESA APEx Conference October 2004 Leipzig - Germany

2. South America - Experiences and Recent evolution • Global Information – Markets and Systems • Energy integration – gas & electricity • Argentina Crisis – Impact • Expectations - Concerns

3. Deregulation of the Electric Sector BOLIVIA 1996 BRAZIL 1998 PARAGUAY ? URUGUAY 200? CHILE 1982 ARGENTINA 1992

4. Regional Market - Basic Data Regional Market, 6 countries: (Argentina, Bolivia, Brazil, Chile, Paraguay, Uruguay) Population: about 250 M Installed Capacity:  125 TW Annual Energy Consumption:  500 TWh

5. Energy Consumption

6. Integration - Situation • Different resources in each country (Brazil, Uruguay, Paraguay mostly hydro; Argentina, Chile, Bolivia, hydrothermal) and level of deregulation • Long distances between main loads and from resources to load; • Barriers between countries • natural (mountains, rivers) • political => openness to integrate markets • technical and economical viability=> distances, electrical issues • Opportunities => complementarity of demand and hydro availability, gas and electricity integration

7. Energy Integration - Evolution • Before 1997 => Integration related with binational hydro power plants; agreement between countries • Argentina – Uruguay - Salto Grande (1890 MW) • Brazil – Paraguay – Itaipú (12600 MW) • Argentina – Paraguay - Yacyreta (1800 MW) • Only small gas pipelines linking countries

8. Energy Integration - Evolution • After 1997=> Integration related with market opportunities=> • competitive market, gas availability and new capacity in Argentina • generation needs at northern Chile • complementarity with Brazil and Uruguay (firm capacity for dry hydro years) • Bolivia as a major gas player

9. Electricity or/and Gas? • As well as electricity, gas has also become a product exchange in the south cone: • Brazil imports from Argentina and Bolivia, and transform part locally in electricity • Chile imports from Argentina, to fuel its new generation plants • Uruguay is on the same way soon • Argentina began to import from Bolivia in 2004 • There’s a competition whether to transport gas and transform it afterwards in electricity or to produce electricity and then transport it through wires; economic viability is related with volume requirement and scale

10. High Loads Hydro Resources Gas Resources Gasoducto Bolivia-Brasil 30 GasoductoAtacama y Norandino Gasoducto Gasandes 7-8 Gasoducto del Pacífico 1.5-9 Energy Links – Gas & Electricity Electroducto Argentina Chile Electricity link Argentina-Brazil Electricity link Argentina-Paraguay Electricity link Argentina-Uruguay

11. Impacts (Argentina – Brazil) • Resources Optimization • Share reserves (seasonal, hourly) • Increase reliability, quality Some Benefits It requires adequate technical coordination between the interconnected systems

12. Macroeconomic Changes • Austral summer 2002 => devaluation and political crisis • Since July 2002 => conditions begin to stabilize; relative normalization of the behaviour of economy • 2003/4 => strong economy recovery Evolution of exchange rate=> Increase of industrial demand due to greater competitiveness to export and import substitution Jan02-oct04 Exchange rate => 200% Inflation => about 50%

13. Electricity Sector Scenario • Tariffs to end consumers => social impossibility to increase tariffs due to economic crisis and people impoverishment • Pesification of natural gas, energy and capacity prices on the WEM • Increase of imported fuel and maintenance costs • Uncertainty related with exchange rate evolution and expected performance of the generation units • After 2003 =>increase in demand (+8%)

14. % GDP vs Demand

15. Variation - Annual Demand vs. GDP 15% 2003 vs 2002 10% 5% Estimated 2004 vs 2003 % Annual Demand 0% -15% -10% -5% 0% 5% 10% -5% 2002 vs 2001 => -2% var Dem para -10% -11 % var GDP -15% % GDP annual % GDP vs Demand

16. Annual Peak Demand EXP = 2200 MW Local = 5700 MW

17. Installed Generation Capacity WEM capacity: 1992 = 13267 MW 2004 = 23284 MW  ~70% Increase – Gen => 9700 MW

18. Electricity Sector Scenario • This scenario led to severe difficulties, as regards: • Lack of gas availability for power plants • Unusual alternative fuels requirement => increase of operative costs • Inability to cover the energy costs with the defined tariffs • Risk of energy crisis in 2004 => due mainly to fuel availability combined with a hydro dry year

19. Crisis - Decisions Some decisions • Additional payments for generators that commit their availability with natural gas • Agreement with Brazil to import energy during winter • Agreement with Venezuela to import a large amount of Fuel Oil to replace the lack of natural gas • Cuts on gas exports (Chile) if needed in order to avoid restrictions to the local demand • Gas imports from Bolivia • Gradual increases in gas prices (from 0.4 to 1.0 u$s/MBtu (may 04-jul05)) • Slight increase in WEM tariffs only to industrial consumers; no increases to residential consumers

20. Results -Argentina – Brazil link Brazil crisis Argentina crisis

21. ENERGY PRICE EVOLUTION

22. Energy Price Evolution Competitiveness of the market and efficiency of generation units provoked a fall in spot prices of about 50%  48.8 $/MWh1992 to 23.3$/MWh2002; increase in M&O costs and use of liquid fuel and gas costs => 54.0 $/MWh2004

23. Results • Winter was managed, operating the system in fairly good supply conditions ….. but winter was mild and hydrology wasn’t so bad • Operation costs soared due to increase of natural gas price and usage of liquid fuel and imports • Stabilization fund exhausted since jul-03; debt of the fund with generators of about 1200 M$ (6 months of payment). • Operative inefficiency due to unavailability of natural gas • Due to Argentina’s role in the region, the situation affected the operation in Chile and Uruguay generating stress between governments in the peak of the crisis (march-may)

24. Expectations - Concerns • Macroeconomic issues (like devaluation) affect parties => requires dynamic adaptation to maintain in the short term operability and in long term commercial viability • Increase of tariffs required to gradually normalize situation. The whole situation seems very difficult to handle politically • Demand increase along with default of the stabilization fund may lead to a significant increase of the deficit of supply risk • Medium and long term viability and the lack of new investments in generation is then one of the major concerns, until the regulatory framework may be adapted and political solutions adopted.

25. Next steps From CAMMESA’s point of view • Be flexible enough to implement changes on rules and keep on running the system and the Market, in a delicate environment. • Study and analyse scenarios to identify and anticipate risks, in order to help in the search of solutions.

26. Quality, Technology & Transparency For an Electrical Market without frontiers ¡Thanks for your attention!Leipzig, October 2004 • Doubts =>jluchilo@cammesa.com.arMore info =>www.cammesa.com.ar