China and the Electricity Business in Latin America
Of the companies that China bought, in whole or in part, in Latin America between 2017 and 2021 (for USD 44.4 billion), 71% are from the electricity sector
By Paolo Benza (Latinoamerica21)
HAVANA TIMES – Of all the companies that China bought, entirely or partially, in Latin America between 2017 and 2021 (for $44.4 billion), 71% are in the electricity sector. The number, which speaks for itself, belongs to the Center for Global Development Policy at Boston University (BU). The difference in the interest of corporations from the rest of the countries in this area, which was only 7%, is abysmal.
China’s new bet on this side of the world is clear: to become the owner of electricity. An important part of that road has already been paved thanks to large disbursements because rather than building plants or networks from scratch, the Chinese prefer to enter with consolidated assets. To do so, they have taken advantage of the spaces left by European companies — which now prioritize other markets — and the decline of firms linked to the Lava Jato corruption scandal.
Thus, the Asian power has turned its state-owned companies into voracious buyers. According to the BU database, China has entered the Chilean electricity sector with ten M&A operations; with another ten, in Mexico; with three, in Peru; and with no less than 112, in Brazil. This is only in the generation business (most of them are hydroelectric plants). Another story, a more recent one, is being written in the final link of the chain: distribution.
Electricity business
Electricity distribution is, in simple terms, the business of connecting electricity to the end user. It is carried out by companies that buy energy from generators and then collect the bill from consumers. In Chile, a Chinese state-owned company bought three years ago the operations of Chilquinta Distribución and then of Compañía General de Electricidad (CGE), the main company in the sector in this country. As a result, it came to control more than half of the distribution in the southern market. In Brazil, which has gigantic electricity potential, it is estimated that Chinese participation in transmission and distribution has advanced to 12%.
This strategy, which seems to be applied as a mirror image in different countries of the continent, reached its peak in Peru in April. There, the state-owned China Southern Power Grid announced the purchase of the assets of the Italian Enel Distribución, which means that 100% of the electricity distribution in Metropolitan Lima (10 million inhabitants) and more than half of the country’s territory will be in the hands of companies controlled by the Chinese Communist Party (CCP). The other distributor in the Peruvian capital, Luz del Sur, belongs to the also Chinese state-owned Yangtze Power since 2019.
What is behind this “energy appetite”? First, a smart financial look: in most countries, the business of delivering electricity to households and small businesses (known as the regulated market) is profitable almost by nature. There is no competition for the final sale, because the distribution zones are separated, and the price is set by the supervisory body to ensure a profit margin for the company. People rarely consume less electricity than before.
Energy appetite
So, it makes perfect sense that government-to-government loans (the strategy China has been using to expand its influence in Latin America) have taken a back seat to direct investments in electric utilities. Those offer a more than dubious return outlook. In fact, many countries in the global south are at risk of default and China is their first creditor. On the other hand, in August 2022, the shares of electric companies in Peru were one of the few financial investment alternatives (4 out of 267) that yielded more than inflation.
However, investments in electricity are no mean feat. It takes a lot of money to buy a dam or a distribution company, money that the Chinese state-owned companies have accumulated during years of economic bonanza. The point is that, after ten-figure payments in dollars, they are hardly willing to just sit back and wait for the profits to trickle in. In Peru, specifically, there are clear risks in the medium term. Who will be able to say no to a demand from the Asian power?
When Yangtze Power bought Luz del Sur, the Peruvian competition regulator, Indecopi, set as a condition that the distributor could not buy energy from generators linked to its economic group without a supervised bidding process. This is because its parent company, China Three Gorges, also owns the third-largest hydroelectric plant in the country (Chaglla) and other smaller ones. Indecopi will probably set a similar condition for the purchase of Enel. One detail: this prohibition applies only until 2030.
Gigantic investments
Until then, two things will happen: some supply agreements that Luz del Sur has with the generators to obtain the energy it distributes to the regulated market will expire and also the contracts of more than 1,500 free customers with different electricity suppliers. In Peru, free customers are companies with high consumption (mining companies, cement plants, factories, malls, etc.) that are not obliged to connect to the general grid. They can buy energy, if it suits them, directly from the generators.
In addition, as detailed in Semana Económica magazine, Three Gorges and Yangtze Power have a strong short-term plan to increase their generation capacity to triple their participation in this segment. It is expected that large competing players, such as Kallpa, will sell and leave the country. A reconfiguration of the sector is coming and the Chinese are well-positioned to take advantage of it. Do they have a monopolistic aspiration?
The great risk is that, as of 2030, Luz del Sur buys without filters from the Chinese hydroelectric companies and, thus, closes part of the regulated market to the other generators. If it decides to play against the wall with the new owner of Enel (whose parent company, in the end, is controlled by the same Government), the closure would be extreme. This would also give them a much stronger position to “steal” free customers. In the worst-case scenario, the sources of energy generation that are not in Chinese hands could disappear.
Electricity market players
To avoid these risks, which are serious, the electricity market is separated into those who produce energy, those who transport it and those who connect it to the user. The operation of Chinese companies, both in generation and distribution, is something that should not have been allowed from the beginning in Peru. Today, Indecopi has the power to block China Southern Power Grid from acquiring Enel and it should do so.
The reality is that centralized planning, with competition “in lies” and favored treatment of state-owned companies, is in the DNA of Chinese state-owned companies. While China does not operate a communist economic system in the academic sense of the term, at the end of the day, the parent companies and their subsidiaries are aligned — because they are the same — with the CCP’s strategy. Just as in past centuries, British and U.S. corporations exported capitalism to the world, it is to be expected that firms from the Asian power will also try to operate in Latin America with their own logic, standards and practices.
In the end, the great risk is to end up giving almost total control of the power switch to a global power, whose state-owned companies operate today as flagships of its economic model and geopolitical ambitions. What negotiating capacity will the institutions of Latin American countries have in such a scenario — which does not seem so far away, if we look at Peru as a paradigm for the region — to defend their national interests or to stand up to China?
*This text was originally published in Diálogo Político. Translated from Spanish by Micaela Machado Rodrigues