Every country needs the basic infra-structure of electric power-generating facilities and transmission lines because industrial and commercial sectors as well as a rising standard of living depend on the availability of electricity.

      During the 1990s, Latin America represented one of the regions of most rapidly expanding electricity demand and, consequently, an attractive market for the equipment that generates and transmits this energy. Beginning in 2001, a series of developments dimmed the short-term prospects for the power generation projects in Latin America . Nevertheless, long-term prospects in the market look promising.

      Despite recent economic and fiscal constraints, Latin America is expected by industry observers to remain an expanding market for power generation and transmission equipment as the electricity resources of the region feel strain under unprecedented demand growth. Until recently, for example, a rapid rise in manufacturing and increased commercial and residential consumption in Monterrey, N.L., contributed to a 10- to 12-percent annual growth rate for electricity demand in that city. In 2002, a downturn in the economy of Me xico has resulted in a more moderate growth rate of 4 to 5 percent.

      Until 2002, Me xico presented an example of the successful expansion of a Latin American power generation system where, over the last 40 years, the government has increased capacity by as much as 10 percent annually. As a result, the share of the population of Me xico that has access to electricity grew from 50 percent in 1960 to 95 percent by 2001. Over the next five years, it is anticipated that investments to augment power generation capacity in Me xico will require up to $120 billion. However, economic and political constraints may delay these investments.

      Aging power generation and transmission lines are also a factor. In Me xico , about 40 percent of the power generating facilities are more than 30 years old. Industry observers note that transmission and distribution losses are considered excessive by international standards, and approximately 35 percent of all electricity transmitted is reportedly lost due to equipment inefficiencies and pilferage. Me xico estimates that about 13 gigawatts (GW) of new capacity is needed at a cost of $25 billion through 2006.

Trends in the Latin American market

      To meet the anticipated growth in electricity demand, the trend in Latin America has been toward privatization of state-owned electrical utilities, interconnection of electrical grids between countries, and a shift away from a traditional reliance on hydropower. Until recent years, most investment in power generation facilities in Latin America was directed towards hydroelectric complexes: dams, hydraulic turbines, and associated power plants. The United States does not produce large hydroelectric turbines, so producers in Europe and Japan supplied most of this equipment.

      The current market for power generation equipment in Latin America, however, is moving predominately towards power plants in which gas turbines (with, in certain cases, steam turbine supplements) are the principal method of generation. This is due in large part to the emerging supplies of natural gas in the region, as well as to the relative speed with which these facilities can be brought into operation.

      As a result of privatization, foreign capital has flowed into the power generation sector in Latin America . For example, until this year liberal interpretation of laws governing foreign participation in the electricity generation sector paved the way for foreign direct investment in power plants in Me xico . Prominent among foreign investors are a number of U.S. electric utilities as well as some non-U.S. foreign utilities. Leading investors in the region are Hydro Quebec, Chilectra, Spanish Endesa, Tractabel, Iberdrola, Electricite de France (EdF), and Applied Energy Services (AES).

      The shift away from hydroelectric power as the primary method of generating electricity has also altered the market in Latin America by creating more demand for equipment used in gas- and coal-fired facilities. This development was predicated upon the fact that most of the major, easily dammed rivers in the region already have been developed; that severe cyclical droughts in the region occasionally have compromised the reliability of hydropower generation; and that new hydroelectric projects take many years to bring online and thus are not readily responsive to rapid changes in demand for electric power. The most significant complement to hydroelectric resources has been the use of newly developed natural-gas resources to fuel electricity generation plants. Natural gas, long ignored in some parts of Latin America , is emerging as a significant source of many nations’ energy mix. Argentina , Bolivia , Brazil , Chile , Me xico , and Peru have led the development of generation resources fueled by natural gas.

      Another significant shift within the Latin American power generation sector has been a rebound in the number of interconnection projects underway throughout the region as countries determine that linking their electrical grids captures the synergies from the varying strengths of their respective generating assets. As part of Me xico ’s Plan Puebla program, a pipeline will be built from Campeche to Guatemala that will supply natural gas to new co-generation plants providing electricity to the integrated Central American power grid.

U.S. trade

      Although U.S. exports to many markets in Latin America have followed a boom and bust cycle, particularly due to shipments in conjunction with the construction of major power projects, U.S. exports to Me xico during 1996-2001 have been fairly consistent. This, in part, reflects the strong growth of annual expansion of generating capacity from 1996-2001, the proximity of U.S. suppliers to Me xican customers, and Me xico’s greater use of thermal power sources in contrast to some other Latin American countries.

      To bolster investor confidence, host governments are taking a stronger role in directing the appropriate types of facilities to be built by private firms. The Ministry of Energy in Me xico has designated $2.3 billion towards renewable energy projects through 2010. Despite the Me xican government’s historic resistance to private participation in the energy sector, the Ministry granted permission to a Me xican company to construct a wind power generation plant near Me xico City with five more such projects currently under consideration.

Me xico market

      Me xico is the largest market for U.S. exports of power generation and transmission equipment in Latin America . To meet a projected 4- to 5-percent average annual growth in electric power demand during this decade, the Me xican power sector will require $70 billion in investment, with $50 billion from foreign sources. Forty percent of the power generating facilities are more than 30 years old and need to be replaced.

      Unlike other leading markets in Latin America , the electric power utilities in Me xico have not been privatized. Further, Me xico is the most reliant on thermal-based power generation plants for electricity, giving U.S. equipment suppliers an advantage over European and Japanese equipment producers.

      Expansion of the electric power system has increased the share of Me xico ’s population that has access to electricity from 50 percent in 1960 to 95 percent in 2001. Industrial users account for 60 percent of demand, whereas residential demand accounts for less than one-quarter of total demand.

      In 2001, total investment in electric energy projects in Me xico amounted to $4.5 billion, up 8.3 percent from 2000. Of this amount, $2.5 billion was derived from private industry, a 34-percent increase over 2000 electric power investment, and the first time in five years that private investment had outstripped investment by Comisión Federal de Electricidad (CFE), Me xico ’s principal state-owned electricity utility.

      Me xico ’s power generating capacity was 43 gigawatts (GW) in 2001, but CFE estimates that the country will need 13 GW of additional capacity by 2006 at a cost of $25 billion.

      Rapid industrial development associated with the cross-border integration of manufacturing in North America led to sustained GDP growth in Me xico and rising demand for electricity during 1996-2000. Increasing labor costs in Me xico and the slowdown of the U.S. economy, however, resulted in minimal growth of the Me xican economy in 2001 and 2002. These recent developments have not altered the urgency that the Me xican government places on the development of additional generation resources and the modernization of the aging electricity transmission network.

      The electric power system is burdened by inefficiencies and other growing impediments. Transmission and distribution losses are considered excessive by international standards. Approximately 25 percent of all electricity transmitted is reportedly lost to pilferage, technical problems, and poor accounting management.

      In recent years, escalating electricity costs have begun to reduce the international competitiveness of goods produced in Me xico . The absence of an open electric power market, coupled with discounted rates on electricity to agricultural and residential consumers, have created electricity rates for industrial customers that are above international averages.

Privatization and foreign participation

      The Me xican Constitution mandates that all electricity be owned and distributed by two vertically integrated state-owned companies, CFE and Luz y Fuerza del Centro (LYF).Foreign firms are not permitted to participate in the transmission or distribution of electricity to national grid customers. However, the private sector may engage in electrical power generation by participating in the CFE’s bidding process, “inside-the-fence” bids, and evaluating or developing small power-generation projects.

      In 1992, Me xico amended its electrical energy law to permit private investors, such as independent power producers, to build and own power generating facilities. Power from these facilities can be purchased by Me xican industrial companies or sold under long-term contracts to CFE in wholesale transactions. Electric power also may be exported or imported by large users or groups of users after rerouting the electricity through the public transmission grid.

      By Presidential Decree on May 24, 2001 , Me xico authorized self suppliers (companies with specified off the grid customers) to sell up to 50 percent of their excess electricity to the CFE; previously CFE could buy no more than 20 MW from any one self supplier. Companies using more efficient co-generation technology could supply all of the electricity they generated to the national grid.

      In late May 2002, the Me xican Supreme Court ruled that Me xican law permits private companies to sell minimal amounts of excess production after meeting captive consumption, but dismissed the Fox administration interpretation of the law that would have permitted IPPs with self-supply permits to sell large amounts of power to the CFE. The ruling places an estimated $9.29 billion in power generation investments from 1994-2002 in legal limbo and permits the Me xican Congress to annul all private sector investments in the power generation sector, potentially forcing CFE to buy back all foreign investments in the power generation sector.

      In response, the Fox administration proposed new electric industry reform legislation in July 2002. The bill would have permitted the publicly owned electrical utilities to contract out generation services to privately owned power plants and would have allowed certain industrial customers the choice of purchasing electricity from the two government monopolies or from private distributors. The bill would have provided transparent regulations and incentives to private operators to minimize operating costs and to expand the generation and distribution system, but did not include the privatization of either CFE or LYF. The Me xican Congress, however, adjourned in December 2002 without acting on the proposal.

      Because of the Me xican government’s shortage of resources to invest in power plants, the CFE has been awarding contracts to private investors to undertake most of the needed power generation expansion. CFE’s contracts with IPPs for these projects typically have a maximum duration of 25 years. As of February 2001, 12 IPP permits had been issued for a total investment of $3 billion. The IPP projects are expected to add an estimated 13,529 MW of capacity by 2005.

Other factors

      CFE is responsible for overseeing 183 generating plants and 75,000 employees. CFE plans to invest $50 billion over the period 2001-10 to increase its generating capacity by another 27 GW, using predominantly conventional fuel sources. According to government officials, 20.5 GW of the total 26-GW increase would be provided by 47 combined-cycle natural gas plants, with coal power generation plants adding another 1.9 GW. Other future power generation projects include six diesel plants (166 MW), three geothermic (115 MW), five turbogas (517 MW), and five hydroelectric sites (3.2 GW).

      Me xico ’s interconnected national electric transmission grid (32,250 km) is controlled and managed by CFE. In the southeast and northeast, the grids are over extended such that new power generation cannot be added without bolstering the transmission network.

      Since 1997, numerous major international companies, such as Electricite de France, Iberdrola and Union Fenosa of Spain, Transalta of Canada, Tractebel of Belgium, and AES and InterGen of the United States , have made major power generation investments in Me xico ’s electrical industry. All of the facilities put in place by the IPPs have been powered by gas, steam, or combined cycle. Me xico ’s investment in thermal powered facilities rather than hydroelectric plants affords U.S. companies a better chance to compete for equipment sales.

      U.S. firms have traditionally maintained a strong presence in the Me xican power generation market, particularly in the supply of turbines and generators. Major turbine and generator competitors in Me xico typically provide CFE with long-term competitive financing, exceptional after-sales service, and competitive pricing.

      A recent shortage of natural gas and electricity in the U.S. market and the collapse of the U.S. power trading market likely have contributed to the low level of interest by U.S. companies in new projects offered by CFE. Of the 12 IPP projects in progress, 10 are in northern Me xico ; five of these are totally dependent on natural gas imported from the United States , whereas the other five are partially dependent on U.S. imports.

      To address the issue of reliance on relatively high-priced natural gas from the United States in most of Me xico’s newest power generation facilities, three groups of investors are seeking approval from Me xico to build separate port facilities in Baja California to receive liquid natural gas (LNG) from Indonesia and Ecuador, and to construct pipelines to supply natural gas to power plants that would furnish electricity to customers in both the United States and Me xico. In addition, CFE plans to build an LNG terminal along Me xico ’s Gulf Coast in the state of Tamaulipas to supply natural gas to its power generation plants by 2006.

Excerpted from Industry Trade and Technology Review, a publication of the U.S. International Trade Commission.