Argentina - El Chocon Power Project

Z-JAA) 7- ;,g S pY ~R EST R ICTE D Report No. PU-la This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ARGENT INA APPRAISAL OF THE EL CHOCON PROJECT HIDROELECTRICA NORPATAGONICA S. A. December 2, 1968 Public Utilities Projects Department  ARGENTINA APPRAISAL OF THE EL CHOCON PRGJECT HIDROELECTRICA NORPATAGONICA S.A. Table of Contents Page No. SUMMARY i 1. INTRODUCTION 1 2. BACKGROUND 3 3. EXPANSION PROGRAM FOR THE BUENOS AIRES-LITORAL SYSTEa 4 4. THE EL CHOCON-CERROS COLORADOS COMPLEX 5 Stage I 6 Stage II 7 Cost Estimate 7 Engineering and Construction 9 Procurement & Disbursement 9 5. JUSTIFICATION OF THE COMPLEX 11 Previous Studies 11 The Gibb Economic Evaluation 11 The Bank/Jacoby Evaluation 12 The Non-Power Benefits 12 Justification 12 6. THE BORROW3ER 13 Management 13 Present Status of Organization 14 Concession 14 7. FINANCIAL ASPECTS 16 Present Financial Position 16 Share Capital 17 Financing Plan 18 Forecast of Operating Results 22 Future Financial Position 23 8. CONCLUSIONS 24 The authors of this report are Messrs. R.H. Sheehan and F. Rydell; Annex 5 was written by Messrs. G. P. de Brichambaut and K. E, Snelson and Miss A. N. Eid of the FAO/IBRD cooperative program.  LIST OF ANNEXES ANNEX 1 - Greater Buenos Aires-Litoral System Projected Demand and Capacity ANNEX 2 - Demand and Capacity Diagram ANNEX 3 - Physical Data and Reservoir Cperation AME\X 4 - Estimated Foreign and Local Costs of the Project ANNEX 5 - Appraisal of Agricultural & Flood Control Benefits A.NNEX 6 - Actual and Forecast Balance Sheets, 1967-1978 AINEX 7 - Forecast Source and Application of Funds Statements 1969-1978 ANNEX 8 - Expected Buyer Credits - Proposed Terms ANNEX 9 - Forecast Income Statements, 1973-1978 ANNEX 10 - Data Used in Economic Evaluations MAP  ARGENTINA APPRAISAL OF THE EL CHOCON PROJECT HIDROEILECTRICA NORPATAGONICA S.A. SUMMARY i. The Government of Argentina has applied to the Bank for a loan to finance part of the foreign exchange costs of the El Chocon Project. This Project is part of the first stage of the Chocon-Cerros Colorados multi-purpose development (CCC) for the upper Rio Negro valley. The Project consists of: a dam on the Rio Limay; a power station with an initial capacity of 600 Mw; and a 500 kv transmission line to Buenos Aires. ii. The Borrower would be Hidroelectrica Norpatagonica S.A. (Hidro- nor) a corporation recently established to carry out CCC. The Government must at all times hold the majority of shares; no shares have yet been sold to the public. iii. The estimated total cost of the Project, including interest during construction, is US$325 million equivalent of which about US$145 million is foreign exchange. The total cost of the CCC complex is estima- ted at US$544 million equivalent. The proposed Bank loan would cover about 60% of the foreign cost of the Project. iv. The CCC complex is well planned and would meet the forecast power growth of the Buenos Aires area from 1973 through 1978. In addition to electric power benefits, the complex would provide immediate flood control of the Rio Negro, and in later years small irrigation benefits. v. The financing plan is satisfactory, but is dependent on the success in obtaining buyer credits from several foreign countries. Letters of intent have already been received from nine countries expressing their willingness to participate in the financing. The Government will provide all the required local funds and also whatever additional funds may be needed if any part of the expected financing from foreign countries does not materialize. vi. Under its concession, Hidronor is entitled to earn an 8% return on the sum of: (a) its gross fixed assets in operation; and (b) 4% of (a) for working capital requirements. This return would assure Eidronor suf- ficient revenues to meet its financial obligations. The forecasts show that Hidronor should be able to maintain a satisfactory financial condition in the future. vii. Hidronor would be a suitable Borrower for a Bank loan of US$82.0 million equivalent with a term of twenty-five years, including a grace period of six years. The loan would not be effective until the conditions listed in paragraph 8.06 are met.  ARGENTINA APPRA!SAL OF THE EL CEOCON PROJECT HIDROELECTRICA NORPATAGONICA S.A. 1. INTRODUJCTION 1.01 The Government of Argentina has decided to construct a multi- purpose development in the Patagonia on the two main tributaries of the Rio Negro (see map), and has asked the Bank to assist in financing part of the foreign exchange cost. The development is called the El Chocon - Cerros Colorados Complex (CCC) of' which the El Chocon Project would be built first. The complex would take nine years to complete and is estimated to cost about US$544 million equivalent, including interest during construc- tion. The El Chocon Project, with half of its ultimate generating capacity installed, is estimated to cost about US$325 million equivalent with a foreign exchange component of some US$145 million equivalent. The proposed Bank loan of US$82 million would be applied only to the El Chocon Project and would cover about 60% of its foreign cost. 1.02 The CCC complex is located about 1000 km southwest of Buenos Aires in the Comahue region. The complex is divided into two separate but complementary projects - the El Chocon Dam and Power Station on the Rio Limay and the Cerros Colorados Project on the Rio Neuquen. The complex has been designed to utilize the water of the Rio Negro system for electric power production while at the same time reducing the magnitude of floods in the valley. In later years, should the demand for irrigation water exceed the normal flows, the complex will also provide some additional small agri- cultural benefit. El Chocon will have an initial installation of 600 Mw of generating capacity with provision for an ultimate capacity of 1200 Mw; Cerros Colorados is planned to have 450 Mw of capacity. A high voltage transmission system will transmit the power to the Buenos Aires market. Power from El Chocon is expected to be available to meet the winter peak load in 1973. 1.03 Present plans call for the complex to be constructed in two stages. The first stage comprises (a) the 600 Mw El Chocon Project, including the transmission system and (b) the Portezuelo Grande diversion works which would be the first part of Cerros Colorados. The second stage of the complex consists of the installation of a further 600 Mw of capacity at El Chocon and the construction of a 450 Mw powerhouse on the Neuquen at Planicie Banderita which would utilize the water diverted by the Portezuelo Grande works. The Government of Argentina has not yet taken a final deci- sion on the construction of the Planicie Banderita powerhouse. An alterna- tive to Planicie Banderita, presently under consideration, is a gas-fired thermal plant. The choice would be made by 1970 depending upon the quanti- ties of natural gas which can be proven by the present exploration program in the area.  - 2 - 1.0i The ?1 Chocon 3roject has been under active investigation by Argentina for more than a decade. Several geological, hydrological and energy availability studies of the Rio Negro and its branches have been made over the years, wqhich resulted in attention being focused on the El Chocon site of the Rio Neuquen for combined power and flood control pur- poses. A few years after Argentina joined the Bank, the United Nations Special Fund, in 1959, sponsored a power study of Argentina for which the Bank acted as the executing agency. One of the conclusions of this study was that m5 Chocon could not be economically justified before about 1969, unless a substantial part of its cost could be charged to irrigation and flood control. During the period since then, further studies were carried out by a consulting group consisting of Italconsult of Italy and Sofrelec of France in association with the U.S. firm of Harza, wqhich resulted in 1965 in the presentation of a design for El Chocon essentially the same as now being carried out, but in addition enlarged the scope of the earlier plans by including the Cerros Colorados project on the Neuquen. 1.05 Hidroelectrica Norpatagonica (Hidronor) wjas created in 1967 for the primary purpose of constructing and operating the CCC complex. The final design and supervision of construction of the complex has been en- trusted to the British consulting ftrm,Sir Alexander Gibb and Partners. Constructicn of the El Chocon Project has commenced. 1.06 In addition to the proposed Bank loan, foreign exchange required to coimllete the financing of the complex is expected to be forthcoming in the form of buyer credits from Belgium, Canada, France, Germany, Italy, Spain , SwTeden, Switzerland, the United Kingdom, and the United States. The proceeds of these credits would be applied to contracts for the electrical and mechanical equipment of the El Chocon powerhouse and the transmission system. Tendering for these contracts would be on a multilateral basis among suppliers from the countries listed above; the tender documents and tender analyses would be submitted to the Bank for review. 1.07 The Bank has made two loans in the Argentine power sector, both to Servicos Electricos del Gran Buenos Aires S.A. (SEGBA). The first loan (308 AR) for US$95 million was made in January 1962 to complete a 600 Mtw thermal generating plant plus transmission and distribution. The second loan (525-AR) for US,o55 million was made in January 1968 to help finance SEGBA's continuing generation, transmission and distribution program. 1.08 This appraisal report is based in part upon Bank reviewTs of the various engineering and economic studies made by Argentine Government agencies and their consulting engineers, an independent cost estimate of the complex made for the Bank by Jacobs Associates of California, and an economic analysis performed by Dr. Henry D. Jacoby of the Harvard University WpJater Program. Additional information was obtained by a mission which visited Argentina in August 1968 consisting of: Messrs. R. H. Sheehan and F. Rydell of the Bank, and Mr. G. P. de Brichambaut, Mr. K. E. Snelson, and Miss A. 14. Eid of the FAO/IBRD Cooperative Program.  2. BACKGROUND 2.01 Argentina has an area of 2.8 million ki2, a population of about 23.5 million, and a gross domestic product (GDP) of about US$16 billion equivalent. GDP on a per capita basis was estimated by the Bank in 1967 at US$760. Industry represents the largest sector of the economy contri- buting about 30% of the GDP, but little industrial production is sold abroad because high import protection has led to high costs. The next largest sector of the economy, about half the size of industry, is agriculture. The prin- cipal exports are meat, grains, and vegetable oils. The domestic market ab- sorbs most of the wine, fruit, vegetables, sugar, cotton and tobacco which are produced. Over the past fifteen years the per capita GDP has been growing at a real rate of only about 1%; during the same period, the production of power increased at an average rate of only 6%, although in the last few years the demand has been growing somewhat faster. The relatively slow rate of growth of electricity production is in part a reflection of the performance of the Argentine economy. Conversely,the power shortages which existed from the early 1950's to the early 1960's and which compelled industry to resort to the installation of its own plants for the generation of electricity, undoubt- edly had some bearing on the slow economic growth. For the next decade the annual rate of increase of electric power production is expected to average about 7% on the assumption there will be a somewhat more rapid overall economic growth than in the past (see Economic Report WH 182a, July 16, 1968). 2.02 The electric power sector in Argentina at the present time has a total installed generating capacity of some 5,720 Mw, including 1,670 Mw of "captive" industrial plant; the total generation in 1967 was about 16,700 Gwh, of which more than 90% was by thermal plants. The principal entities in the electric power sector in Argentina are: the federal water and power authority - Agua y Energia Electrica (AyEE); Servicios Electricos del Gran Buenos Aires (SEGBA), a government-owned corporation; Compania Italo-Argentina de Alectricidad S. A. (Italo), a privately owned corporation controlled by Swiss interests; Empresa Provincial de &iergia de Cordoba (EPEC), a provincial government enter- prise, and Direccion de la Energia - Buenos Aires (DEBA), a provincial government department. These organizations account for about 95% of the total electric power investment in Argentina w-hich is available for public supply. The book value of the assets in the public sector is shown at about M$N350 billion. However, since much of the investment has been made over the past ten years, a period of rapid inflation, it is difficult to estimate the value in dollars. As a rough approximation, the total public sector power assets may be considered to have an order of magnitude value of, say, US$2 billion. Over the next five years the annual investment in the electric power sector, including the El Chocon Project, is expected to average about US$280 million equivalent, or somewhat less than 2% of present GDP. 2.03 The Gran Buenos Aires-Litoral system, which is by far the most im- portant in the country because of the large concentration of population and industry in and around Buenos Aires, will receive the power from El Chocon. The system is now supplied by the three largest entities in the power sector with the following amounts of installed capacity, all of which is thermal: AyEE 502 Mw SEGBA 1,573 Mw Italo 367 Mw 2d,72 Mw  The total number of customers connected to the system exceeds 2.3 million. Since January 1, 1968, all of the generating plants in the system are con- trolled by a central dispatch office. In the federal capital and in four of the surrounding municipalities, there is some overlapping and duplica- tion of distribution facilities by SEGBA and Italo, but the two companies are now coordinating all phases of planning and operation in order to im- prove the situation. Eventually, a consolidation or merger of the two com- panies may be effected, but in the meantime the present arrangements are acceptable (for further details see Report No. TO-606a on the appraisal of SEGBA's expansion program). 3. EXPANSION PROGRAM FOR THE BUENOS AIRES-LITORAL SYSTEM 3.01 Present plans for additional generating capacity for the Buenos Aires-Litoral system are intended to meet the increase in load growth until the first power from El Chocon becomes available in June 1973. Annex 1 shows the sytem demand projection and the planned capacity for the next ten years. A diagram of the load and capacity is shown in Annex 2. The load is estimated to increase by 9% in 1969 and at 7% annually thereafter. The first new generating unit to be completed will be Italo's 250 Mw base load steam plant in 1969. It will be followed by an almost identical unit of SEGBA in 1970. For the peak of 1971, Italo plans to have two new 17.5 Mw gas turbines in operation. By 1972 the Argentine Atomic Energy Commis- sion hopes to have the first nuclear power plant in Latin America suffi- ciently completed sothat it can help meet the Buenos Aires requirements. This unit is a 313 Mw heavy water moderated,natural uranium plant which was ordered from Siemens of Germany in January 1968. For all practical purposes this will be prototype installation and it is doubtful whether the design, fabrication, and erection can proceed rapidly enough to have the unit in even partial commercial operation by 1972. If the load grows as now pro- jected, and should the nuclear unit in fact fall behind schedule, the Argentine Government will either have to install additional gas turbines or elect to ration over the peak until El Chocon is ready. 3.02 In addition to new generating plant for greater Buenos Aires, both SEGBA and Italo are engaged in an extensive program of new underground transmission lines, new substations and extensions of existing substations, and distribution expansion and rehabilitation. The cost of the combined program is estimated to average about US$90 million equivalent per year. About half of this cost is coming from the internal cash generation of the two entities. Most of the balance is being financed by suppliers credits and the Bank's Loan 525-AR of US$55 million made to SEGBA in January 1968. The Inter-American Development Bank is now considering a loan of US$15 million to Italo which is expected to be made before the end of this year; the IBRD has been asked to consider another loan to SEGBA next year for the continuing transmission and distribution program. 3.03 The first two 200 Mw units at El Chocon are scheduled for commercial operation in time for the winter peak of 1973. The third unit would be completed by January 1974. By that time the Buenos Aires system  - 5 - load is expected to be growing at a rate of over 200 Mw per year, so the remaining units at El Chocon (and the Planicie Banderita units, if a posi- tive decision is taken) will have to be installed at a pace of about one unit every nine months. The entire CCC complex would be completed by June 1978. 3.04 The complex when fully constructed will be essentially a peak load development. During critical, low flow periods the generating units will operate only a few hours a day over the system peak. On the other hand, during times of high flow the units will be able to operate almost continuously. This condition of practically constant operation will also exist during the early years of operation at El Chocon when the first three units by themselves will be able to utilize all the available energy of the Rio Limay. By 1974 the average amount of energy available from El Chocon will represent only about 20% of the Buenos Aires system requirement, hence every kwh would be useable. 3.05 An informal agreement has been reached between SEGBA and Hidronor for the use of El Choconts power. It is no doubt too soon to require a detailed contract spelling out the exact charges and method of payment, especially since both companies are Government owned and any arrangement will be subject to the approval of the Secretariat of Power and Mines. During negotiations assurances were received that SEGBA and Hidronor, through an exchange of letters, would make arrangements so that none of the El Chocon energy would be wasted, that Hidronor would receive payments from SEGBA sufficient to cover its cost of production, and that a contract would be signed by January 1, 1973. A condition of effectiveness of the proposed loan is the satisfactory completion of these arrangements. 3.06 Hidronor has agreed not to undertake any expansion project, not included in the CCC complex, which might jeopardize the carrying out of the complex before CCC is completed. Further, both Hidronor and the Government have agreed to coordinate the expansion of power facilities for the Buenos Aires area to prevent waste of energy, duplication of facilities, and unnecessary investment. 4. THE EL CHOCON - CERROS COLORADOS COMPLEX 4.01 El Chocon is the type of hydro project in which the construction of the dam will create both the head necessary to generate power and the storage needed for regulation. Cerros Colorados, on the other hand, is a unique "off-stream" development where storage is achieved by diverting river flow into two deep and extensive natural depressions. Annex 3 describes the physical characteristics of the Comahue region and the proposed operation of the reservoirs. The principal components of the complex are the following: (a) Preliminary works (b) The El Chocon dam and powerhouse (c) A 500 kv transmission system (d) The Portezuelo Grande diversion works (e) The Planicie Banderita intake and powerhouse  - 6 - Work on the first four of these items is included in Hidronor's initial stage of construction. The Planicie Banderita powerhouse is part of the second stage. The Bank Project is limited to the first three items; the coverage of the proposed Bank loan would be further restricted to only specific contracts as detailed in paragraph 4.17. Stage I 4.02 The preliminary works include all the facilities necessary for a construction camp which will later be used as an operators' village. Included are various types of housing and a civic center with church, schools, stores, social and sports facilities, etc. The village will also have complete water supply, sewage, and electricity systems. 4.03 The El Chocon dam will be located on the Rio Limay about 80 km upstream of the confluence with the Rio Neuquen. An access road four km long connects the dam site to the main highway No. 237 which runs between Neuquen and Bariloche. This highway will have to be relocated before the reservoir begins to fill. The dam is an earthfill structure with a maximum height of about 90 m above the river bed and a crest length of about 2,300 m. A con- crete spillway will be located on the right bank; the intake and powerhouse will be on the left bank. The dam will have a total vSlume of about 15 mil- lion m3 of fill. The reservoir will provide 20,170 hm of storage at maximum water level with a surface area of 825 km2 and will extend some 70 km upstream from the dam. 4.04 The El Chocon powerhouse when completed will contain six 200 Mw generators driven by Francis type turbines. The present Project includes only the first three units, although manufacturers are being asked to quote for an optional fourth unit which may be purchased within one year of the signing of the contract. 4.05 The transmission system will consist of two single-circuit, three- phase overhead 500 kv lines about 1,080 km long. The towers will be steel, either self-supporting or guyed. Each phase will have a bundle of four ACSR conductors and each line will have two galvanized steel earth conductors. In addition to a switchyard at El Chocon, there will be two intermediate switch- ing stations located at about one-third and two-thirds of the distance to Buenos Aires. These stations, at Puelches and Henderson, are primarily for system reliability in the event of a fault on one of the lines, but they will also be able to provide local supplies of power through the use of saturable reactors. The terminal arrangements at Buenos Aires are not yet made. Hi- dronor's consultants and SEGBA's consultants, Sofrelec, are jointly studying whether only one step-down substation, or two, would be required. A decision on this matter is expected by January 1969. 4.o6 The Portezuelo Grande diversion works consist of a low earth em- bankment from four to seven m high and about three km long across the Rio Neuquen some 130 km upstream of the confluence with the Rio Limay. The embank- ment will have a concrete spillway section capablQ of passing 3,600 m3/sec. An inlet structure capable of handling about 8,00o m /sec will be located about one km upstream of the embankment. The inlet structure will conduct the water from the Rio Neuquen into the two natural basins of Los Barreales and Mari Menuco. The basins have a combines storage capacity of 43,400 hm at maximum water level and a total surface area of 620 km2.  - 7- Stage II 4.07 The second stage of the complex involves the installation of the last three units at El Chocon and either the construction of the Planicie Banderita powerhouse or an alternative gas-fired thermal plant. Work on the second stage would not start until 1972. 4.08 The Planicie Banderita intake and powerhouse have not yet been finally designed. If constructed, the project will utilize the water diverted at Portezuelo Grande and stored in the two natural basins. It will first be necessary to build two short closure dikes on the rim of the Los Barreales basin and a long closure dike along the southeast edge of the Mari Menuco basin. The power house would be located on the Rio Neuquen about 60 km doiTnstream of Portezuelo Grande. A two km approach channel from the Yari Menuco basin will conduct the water to a forebay from which penstocks will lead to the powerhouse. After passing through the turbines the water would return to the Rio Neuquen. Three generating units of 150 Mw would be installed similar to those of El Chocon. Cost Estimate 4.09 The present total cost estimate of the CCC complex, including interest during construction, is shown in the following table: M$N US$ Equivalent 7m-illions ) Stage I El Chocon Project 92,890 265.4 Portezuelo Grande diversion works 11,026 31.5 Subtotal 103,916 296.9 Stage II El Chocon (completion) 16,,240 46.4 Planicie Banderita 38,395 109.7 Subtotal 54,635 156.1 Interest during construction 31,7h7 90.71/ Administrative assets 188 0.5 Grand Total 190,486 544.2 17 Includes US45h.1 million equivalent of non-cash return on equity funds.  - 8 - 4.10 The estimated annual :Voreign and local costs of the El Chocon Project for the years 1968 throu-h 1