A market in deficit

CONSTRUCTION of the 30MW Sabanilla hydro power project is due to start in October 2004 in Ecuador, a country of 260,000km² with a population of 12.5 million inhabitants, in northwestern South America.

The project is located near the Sabanilla river in the southeast of the country, in the vicinity (but outside) Podocarpus National Park, within which approximately 70% of the project drainage basin is located. Project works, however, will occupy already intervened areas, thus keeping environmental impact to a minimum. A paved road connecting the provincial capital cities of Loja and Zamora provides access to the project area.

Being a conventional run-of-river facility, the Sabanilla project is to include: a diversion structure and intake works; silt basin; pressure tank; low pressure tunnel and underground surge tank; followed by a penstock, power house and tailrace, all built on the surface.

The power and energy produced is to be used by the Mirador copper mining exploitation, property of Ecuacorriente (a subsidiary of Corriente Resources Inc. of Canada), through a 100km long 138kV transmission line. It is estimated that the construction period will last approximately 22 months, including tests and start-up of the power plant.

Electricity in Ecuador

The current cost of electricity in Ecuador, while not the highest, is above average for the 26 countries constituting the Latin American Energy Organization (OLADE) and is higher than the prevailing values in the international market, including neighbouring countries of Colombia and Perú. This situation arose in Ecuador more than a decade ago for various reasons – mainly the existence of an obsolete and inefficient generation infrastructure using non-competitive fuels; which could not be replaced under the model in effect until 1996, given the lack of public funding and the absence of credit lines for the vertical monopoly of the state’s electricity sector. On 10 October 1996, the Electrical Sector Law ( LRSE) was passed in Ecuador as a response to the need to attract private investment. LRSE establishes free competition for the generation segment, and regulated monopolies for the transmission and distribution segments of the electricity sector.

Ecuador has little or no low-cost thermal generation sources, such as coal or natural gas. Instead it has an immense potential for hydroelectric generation that would permit competition with other markets in the region.

The theoretical hydroelectric potential at national level has been identified as 93GW, from which only 3% is operational in the year 2004. Projects with a combined 22GW of power have been identified but there is a lack of funding for studies as they are both time consuming and expensive. Energy demand in Ecuador is growing at an annual rate in the order of 4%. This growth has recently been covered by both thermo electric generation and energy imported from neighboring countries (Colombia and, in the near future, Perú). Substantial investments in generation are required in order to avoid blackouts and stagnation of national development. After LRSE was passed, several private firms became interested in supplying this high price demand market and requested from the regulating agency, the National Council of Electricity (CONELEC), the corresponding permits for construction and operation of one or several hydroelectric or thermoelectric projects.

More than 50 permission certificates were granted, but as time went by, the majority of certificates were revoked by CONELEC as proposed projects were not showing any progress, either in their studies nor in financing schemes for their construction.

Current situation

A rational outcome has not taken place in Ecuador because, although the appropriate legal framework exists, a competitive market is not fully in force due to several reasons:

• Lack of medium and long term vision from the state.

• Political dependencies in the people comprising the directorate of CONELEC.

• High tariff subsidies, assumed by the state when financial debacle arrived to its distribution companies.

• Political influences in the administration of some of the state’s distribution, transmission and generation companies.

• Inefficiency and corruption in some distribution companies.

• Several failed attempts to privatise distribution companies.

Project developer

Hidrelgen (owned by Ecuadorian stockholders) decided to develop a hydroelectric project when LRSE was passed, assuming that the law was to come into effect immediately. As time passed, there was little incentive for investment, mainly because the state – the principal purchaser of energy through its off taker companies – was paying only partially for the energy purchased and managing deficiently those companies. As a result, most future generators acted cautiously and decided to wait.

This was not the case with Hidrelgen, which decided to take risks but proceed slowly, hoping that the Ecuadorian electric sector would soon improve. The company saw that success was to be achieved only if a profitable project with few natural risks, and with access to infrastructure and to the electrical market, was chosen. Success also depended on substantial investment in engineering studies being taken, considering the time it takes to raise technical knowledge about specific hydroelectric projects.

Project management

Hidrelgen decided to enter into a service agreement with consulting company CAMINOSCA to define (based on the catalogue of medium-capacity hydroelectric power facilities available in the country) and study a project with the most favourable technical and economic characteristics, to be developed in the near future.

CAMINOSCA performed analyses for about 50 medium-capacity (10–50MW) hydroelectric projects. Technical and economic considerations and field visits were made to the most promising sites to evaluate: project infrastructure and accessibility; distance to the site of interconnection to the National Transmission System (SNT), flow constancy in the river to be utilised; topographic conditions of the project zone; geological characteristics of the sites where the works will be located; environmental impact; and profitability for the investor.

Four projects were identified from which Sabanilla was selected for feasibility studies and for designs aimed for construction tendering. While at identification level, a 20MW installed power capacity was deemed appropriate; during feasibility studies this value was changed to 30MW as a result of optimisation of both water resources and site topographic conditions.

Once the project to be developed was identified, Hidrelgen commissioned CAMINOSCA for the management of the Sabanilla hydroelectric project with the following responsibilities: performing studies and designs preliminary to the construction stage; obtaining permits and licenses; financial structuring for project construction; contracting of construction companies and suppliers; and administration and supervision of these contracts.

Permits and licenses

The National Council for Water Resources (CNRH) granted Hidrelgen the permit to utilise the waters of Sabanilla river. CONELEC granted Hidrelgen the permit certificate for project construction and operation. The Ministry of the Environment granted the corresponding Environmental License based on the Definitive Environmental Impact Assessment (EIAD) approved by CONELEC.CAMINOSCA is currently in the process of acquisition of the land where works are to be constructed.

Studies performed

A brief description of the studies performed by CAMINOSCA, which started with identification of the project, follows:

Pre-feasibility studies

At this stage in the studies, emphasis was given to the hydrologic final study: flows from Sabanilla river that could be used for energy generation were defined, estimations were made for flood flows and for volume of sediments carried by the river, which must be considered for dimensioning of both diversion and intake works.

Additionally, the following activities were performed: preliminary topography measurements in order to confirm net available head; regional geological studies; laying out of various alternative schemes for project development; pre-dimensioning of the works for the purpose of quantifying work volumes and estimating construction costs; financial evaluation for determining profitability indexes; and market and project competitiveness studies.

Feasibility studies and tendering designs

Studies included:

• Field and laboratory activities such as a detailed topographic survey at 1 : 1000 scale for all sites where works are to be located; detailed geological and geotechnical surveys for works, quarries and dumpsites; geotechnical investigations such as refractive seismology, vertical electrical soundings, rotational borings and soundings; and laboratory tests for soils, rocks, aggregates and water.

• Detailed design of civil works and definition of characteristics for the electrical and mechanical equipment in the powerhouse.

• Final environmental impact assessment.

• Works quantification, unit price analysis, reference estimate for construction, construction schedule and disbursement schedule.

• Analysis and structuring of corporate finances.

Project sponsor

In mid 2003, Hidrelgen made a seven-digit US$ investment to gain answers to questions that will arise when seeking project sponsor and financial closure. A project memorandum, a teaser and other documents were prepared to summarise project issues as technical aspects, environment, market and competition, risks mitigation and conclusions of financial analysis to be used for this purpose.

In the meantime, Ecuacorriente was studying its concession area for copper exploitation at Mirador (located 100km northeast of Sabanilla, at the Ecuadorian-Peruvian border), and was looking for the best alternatives to satisfy its demand for electricity. Among several supply possibilities, Ecuacorriente considered entering into a joint venture with Hidrelgen and becoming a self energy producer. Priority was given to this alternative mainly because detailed and reliable engineering studies will avoid almost two years of development if compared with other hydro possibilities.

Ecuacorriente undertook the project’s due diligence process with the assistance of Knight Piesold, a Canadian company specialising in hydro power. The process proved that procedures and methodologies of studies used the best practices of hydroelectric engineering, and that products delivered (drawings, reports, calculation memories, technical specifications, and other documents) showed an important level of detail and coherence that allowed in-depth knowledge of problems identified and of solutions provided thereof.

Hidrelgen and Ecuacorriente have entered into a joint venture for the construction and operation of the Sabanilla hydroelectric project. The agreement nominated Ecuacorriente and its parent company Corriente Resources to be responsible for financial closure.