Abstract

Around the world, the growing use of natural gas for electric power generation is leading to an increasing inter-dependency between gas and power markets. This phenomenon, generally known as convergence, has tremendous implications for governments, regulatory agencies, energy companies and consumers.

Countries of the Southern Cone of Latin America, which have been precursors in creating competitive electricity markets and opening their power sector to private investments, and which are increasingly relying on natural gas to expand their power generation base, provide a valuable example of how the gas-power convergence process develops in a deregulated environment, with a beneficial impact for the consumer.

This paper provides an overview of the convergence process between the gas and power markets in the Southern Cone of Latin America, and addresses the challenges and opportunities arising from this process.

Introduction

The concept of convergence of gas and electricity has emerged in recent years, mainly as a result of the increasing use of gas for power generation and the perception of growing inter-dependencies between gas and power markets. This concept has remained somewhat ill-defined and is widely used in many different contexts and in multiple meanings.

A useful distinction can be made between convergence at the "commodity" level, referring to interdependencies between gas production and power generation activities, and convergence at the "retail" level, referring to inter-dependencies between gas and power supply to final customers. This paper will only focus on the first level of convergence, since convergence at the retail level has remained limited in the Southern Cone so far.

The first section of this paper gives an overview of the current use of gas for power in the Southern Cone of Latin America, and of prospects for the coming years. Gas and power network development issues are addressed in section two. Last, section three focuses on the implications of convergence for wholesale electricity prices.

Convergence in Overview of Southern Cone natural gas markets Southern Cone gas and power markets The Southern Cone of Latin America (comprising Argentina, Bolivia, the Southern, Southwestern and Midwestern states of Brazil, Chile, Paraguay and Uruguay) is a region with an aggregate population of about 240 million people, which has enjoyed a dynamic economic expansion over the last decade, with an average real GDP growth of 3.3% per year. Although Argentina is currently facing a severe economic crisis, the Southern Cone region is generally believed to be poised for a sustained long term growth.

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CONVERGENCE OF GAS AND ELECTRICITY MARKETS IN THE SOUTHERN CONE OF LATIN AMERICA

The Southern Cone is endowed with large and diversified energy resources. Natural gas reserves are

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