Guacolda wants higher nodes to finance power independence

Chile's node price must rise 10-15% to provide an incentive for companies to invest in coal-fired generation in the next few years and reduce the country's dependence on gas imports from Argentina, the CEO of coal-fired Chilean generator Guacolda, Sergio del Campo, told reporters Tuesday. "The government has to give concrete signals to favor those fuels which are independent of political and hydrological risk to give the country energy security, which means coal-fired plants," he said. The government is expected to announce in July its comprehensive energy strategy for the next few years, including incentives for coal-fired generation, del Campo said. PRICE SIGNALS To provide incentives for coal-fired generation, price signals are needed. These boil down to higher capacity payments for coal-fired plants and higher node prices, the prices distributors pay generators for power, del Campo said. Regulated clients currently pay an average of about US$40/MWh for power in Chile, which includes US$30/MWh for the power itself and US$10/MWh capacity payment. However, the average price should increase US$5/MWh to US$35/MWh in order to compensate investors for the higher cost of coal-fired generation, bringing the total cost of power to US$45/MWh, del Campo said. Electricity prices increased about 2.8% in Chile from May, which is a "step in the right direction," del Campo said. Prices need to keep increasing to attract investors in new coal-fired plants. However, there is a legal cap of 5% on the amount that node prices can increase biannually above the average non-regulated price, which means it would take at least until October 2005 to increase node prices 15%. Coal plants take about 30-36 months to build and start operations, del Campo said, which means it is imperative the government moves quickly to give the "right" signs, so that new coal-fired plants come online about 2007-2008. OTHER GENERATION OPTIONS Chile's demand is growing about 300MW a year and over 50% of new installed capacity in the next 10 years should be coal-fired, del Campo said. Natural gas and hydroelectric power are not the solution to Chile's growing energy demand, because in the first case supplies from Argentina are too uncertain and in the second case, hydro capacity is seasonal and plants take too long to build. "The country needs a solution that is independent of geopolitical and hydrological risk," del Campo said. The government's proposed liquefied natural gas (LNG) project, being studied by state oil company Enap, would be "complementary" to coal-fired generation, but LNG is about twice as expensive as coal and would therefore be unfeasible as a source of fuel for power generation, del Campo said. GUACOLDA AND COAL SUPPLIES Unlike gas, there is no risk of coal supplies being interrupted by political events because coal can be imported from a number of countries. In addition, coal has the advantage that it can be stored cheaply and for long periods of time, he said. Guacolda "could study" new coal-fired generation projects, either expanding its existing plant or building a new plant, del Campo said. However, the company is waiting for "clear signs" from the government that coal-fired generation will be rewarded with higher prices. Coal currently sells at US$65-70/tonne on the international spot market and Guacolda currently pays about US$60/tonne under its contracts, del Campo said. International coal prices are expected to drop as China increases its exports. ENVIRONMENTAL CONCERNS Under Chile's new power sector law, new coal plants in Chile would have to be located between Charrúa (in Region VIII) and Quillota (Region V) to be economically feasible, del Campo said. "We have to do a cost benefit analysis for the country and we have to try and do the least damage possible to the environment, so the location of the plant is very important," del Campo said. Coal generation is dirtier than gas-fired generation, but del Campo argues that the technology available today "is pretty advanced" and would mean that new plants could comply with Chile's existing environmental norms. "You can control a project environmentally and require certain kinds of technology to lower the emissions," he said. Guacolda is controlled by local generator AES Gener.