Finance 663 - International Finance
TermProject: HidroAysen
Background:
HidroAysen (HA) is a $10 billion hydroelectric project located in the Chilean Patagonia. It entails the construction of 5 dams and a 2,000 kilometer (1,250 miles) direct current transmission line. HA is owned by Endesa and Colbun (51% and 49%, respectively), two of Chile’s largest power generators.
HA would generate 2,750 MW with a plant factor of 75% (to generate a total of 18,500 GWh/year) by flooding 5,900 hectares, convertingHA in one of the world’s most efficient hydroelectric projects in terms of GWh/flooded hectare. Given that HA is located in the pristine Patagonia, it has endured fierce rejection from the environmentalists and politicians of the area.
Chile has enjoyed two decades of steady growth and impressive stability (for Latin American standards) that is now been threatened by energy shortage. In the past few years environmentalists have stopped more than 5,000 MW (not counting HA) in energy projects putting Chile in a difficult supply/demand position as its energy intensive mining industry and domestic consumption grows. This, in turn have pushed energy prices up to levels of ~200 US$/MWh, approximately three times those of Peru or the US. Several mining projects have been cancelled or delayed and a number of energy intensive industries have moved to Peru.
Long time disagreements and outstanding conflicts prevent Chile from importing electricity or gas from neighbor countries (Peru, Argentina and Bolivia), and Chile’s two top-five largest earthquakes in the world makes nuclear energy an undesirable technology. Renewables such as wind or solar are not enough to close the gap.
The problem:
Until today, Endesa and Colbun have invested more than $300 million dollars in development costs. Even though the dams have been environmentally approved, the transmission line has not. There is still no political consensus in moving the project forward and both companies are reluctant to keep spending.
If constructed, HA could access energy contracts in the ~100-130 US$/MWh range and a ‘firm-capacity’ payment of approximately 10 US$/kW-month.
Daniel Fernandez, HA’s CEO appointed by Endesa and Colbun, has to make a tough decision. He has just learned that Colbun is planning to halt funding for the project and make its decision public after the next board meeting. Mr. Fernandez knows that Colbun’s decision is a way to both put pressure to the government and lower their cash needs due to increased energy prices*. He also knows that Colbun’s decision may backfire as the most likely following government would be presided by Michelle Bachelet, a public detractor of HA.
* Colbun is Chile’s third largest power generator. It is controlled by the Matte family, a renowned family with interests in the energy, forestry and banking industry, and a total net worth of over $4bn. Colbun has an important portion of its available energy coming from hydroelectric sources. Colbun’s commercial strategy was to fully contract their available energy in fixed-priced take-or-pay agreements. After a couple of dry years, Colbun has been forced to go to the spot market to buy energy at high prices that would allow them to attend their contracts which were executed at low prices.