Fitch Believes Argentine Gas Price Increases & Normal Hydrology Key To Chilean Power Sector

by C-BW@CLARI.NET (NY FITCH RATINGS/CHILEAN VIA BIZWIRE) on 2004-04-30 12:10:07

CHICAGO--(BUSINESS WIRE)--April 30, 2004--Fitch Ratings believes
the risks of a material, prolonged disruption of gas and the potential
effect on the Chilean power sector to be manageable under normal
hydrological conditions. The severity of future interruptions of
natural gas supply from Argentina is still uncertain. Gas supply
interruptions are likely to worsen this winter before an improvement
is seen.
The scope of the interruptions depends on a number of factors such
as: the amount of rainfall and temperatures in Argentina and Chile;
the implementation of the announced 4 million cubic meters per day gas
supply contract between Bolivia and Argentina; the level of
electricity imported from Brazil to Argentina; and the increases of
gas and electricity tariffs that could reduce demand growth in
Argentina and Chile.
Recently, the Argentinean government announced an agreement with
the gas producers to establish a series of tariff increases applicable
during the next fifteen months, starting in May. This agreement opens
the door to support new investments required to meet future demand.
These increases will not be a solution in the short-run given the lead
times for the development of additional gas production and
transportation capacity.
Gas supply to Chile has already been reduced by as much as 20%-40%
(in the central and northern regions, respectively). This reduction
has been achieved by: 1) reducing gas supply to some thermo electric
generation companies and industrial gas consumers with interruptible
contracts, 2) suspending permits in process and 3) restricting gas
supply to the same volumes consumed by each user between January and
September 2003. The volume restriction will more negatively affect new
generation plants, whose production levels were relatively lower
during the January to September 2003 period.
In Chile's SIC (Central Interconnected System) approximately 22%
of demand is served by natural gas-fired generation plants with an
installed capacity of 1,700 MW. These plants generally set the spot
price at around US$15 per MWh under normal conditions. Without natural
gas, it is estimated that approximately 930 MW of coal-fired
generation will become dispatched, at approximately US$20-$22 per MWh.
Remaining demand is then expected to be met by the combined cycle
units after the switch to fuel oil at a price of approximately
US$50-$60 per MWh. These estimates assume normal dispatch of
hydroelectric generation and the addition of the new capacity of 570
MW from Endesa-Chile's Ralco hydro plant in July or August. As of
April, the average reservoir levels are normal. The rainy season has
just begun and it is too early to determine if the rest of the year
will be wetter or dryer than normal.
In Chile's SING (Norte Grande Interconnected System), gas supply
restrictions have intensified to levels of around 40%-50%, as winter
is arriving and gas demand is rising in Argentina. However,
restrictions have not affected electricity supply. Given the
overcapacity situation, the operations of coal and diesel thermal
generators can support the demand, albeit at a higher marginal cost.
Coal-fired generation capacity of 1205 MW is expected to supply a
large part of the 1365 MW of demand. The higher production costs are
expected to be borne by the generators, as 90% of the energy demand in
the SING is sold through fixed price contracts without price
indexation clauses. Most of the region's generators have been affected
to some degree. Termoandes is facing gas restrictions between 40%-50%
decreasing production to 120 MW or half of normal production. Gas
Atacama's production has been restricted to 165 MW. ElectroAndina and
Edelnor's gas restrictions have been as much as 50% resulting in a
reduction in the combined cycle generation to 160 MW and 130 MW,
respectively. In the SING, coal has continued setting the marginal
price at a US$25-$28 MWh.
Separately in Chile, the monomic price of the node in Chile was
recently set for the semiannual period ending October 2004. In the SIC
the node price rose 18.8% in dollar terms to US$42.04 per MWh. This
increase should help generators offset the potential negative
financial effects of the natural gas restrictions. Some of the
variables that affected the price were: a 50% increase in coal prices,
a 10% increase in oil prices, higher than previously projected demand
growth, and the modification of the CNE's (National Commission of
Energy) generation investment plan to reflect the new reality of gas
restrictions from Argentina. In the SING, the node price decreased
6.7% in peso terms, mainly due to the effect of the new Short Law band
reduction to 5% between regulated and free negotiated market prices.
Generators are unlikely to be affected by the change in node prices
since 90% of demand is from unregulated customers under negotiated
contracts.