Financing Paraguay's Yguazu project23 May 2006
The Japan Bank for International Cooperation has signed an official development assistance loan agreement with the Republic of Paraguay for construction of its Yguazu hydro power plant
WHILE the peak demand in Paraguay is 1241MW (2004), the country’s own installed capacity is as low as 216MW. Paraguay thus has to purchase power from the Itaipu hydro power station (12,600MW), which the country developed jointly with Brazil, in order to meet over 80% of its power demand. Since power supply is contracted on a power output volume basis (kW) with the Itaipu hydro power station, it is economical if there is constant use to meet base demand, but could be relatively expensive when some power remains unused during off-peak time in covering peak demand. In addition, the buying cost is exposed to a high exchange risk, as the contract is denominated in US dollars, and is very likely to increase due to exchange rate fluctuations. Paraguay is restraining expenditure for buying power, and as a result there are blackouts because peak demand cannot always be covered. Thus, the power supply system seems unstable.
Since the country’s power demand is supposed to increase by 3.4% per year henceforth to reach 1800MW in 2015, Paraguay aims to stabilise the power supply under the governmental programme (2003-2008), and gives high priority to constructing its own domestic power station along with related equipment in the electric sector development plan (1998-2007).
To meet this demand, plans were put in place to utilise the existing Yguazu reservoir (total water volume: approximately 8.5Bm3; surface area: approximately 620km2), with the construction of a 200MW hydro power plant. The project – in the departments of Caaguazu and Alto Parana – also involves building a substation and distribution facilities to provide linkage between the power station and the power grid.
Since the project was attempted with the participation of private sector but suffered setbacks, the Republic of Paraguay requested an official development assistance (ODA) loan from the Japan Bank for International Cooperation (JBIC). In light of the fact that stabilising the power supply in Paraguay will enable power interchange with neighbouring countries, and contribute to a stable power supply system across the region in the future, the project is recognised in the context ‘Initiative for the Integration of Regional Infrastructure in South America (IIRSA)’. This initiative is attracting attention as it is seen to contribute to well-balanced growth throughout South America, as well as increasing business opportunities in the region. This is the first ODA loan commitment that JBIC has made for this initiative.
Furthermore, in JBIC’s Medium-Term Strategy for Overseas Economic Cooperation Operations (1 April 2005 – 31 March 2008), ‘A Foundation for Sustained Growth’ is considered a priority area. Consequently, there is a strong need and high relevance for the ODA loan assistance for this project.
The US$192M loan, which was signed in mid February 2006, will fund construction of the hydro power station, as well as laying of transmission lines, connection to a transformer substation and consulting services. Work started in March 2006 and is expected to be completed in February 2012.
The Environmental Impact Assessment (EIA) report for the scheme was approved by the Secretary of Environment of Paraguay in September 2005. As the project consists of construction of a hydro station utilising an existing reservoir, it is likely to have no particular negative impact. The project site is not located in or around any sensitive area such as a nature reserve designated by domestic law or international agreements, no rare species’ habitats have been found nearby.
The project requires land compensation of about 1.6km2 (necessary for right of way under the transmission lines), which will be implemented in accordance with the country’s domestic procedures. The project will not involve any land acquisition or involuntary resettlement. Environmental impact regarding such issues as air and water quality will be monitored by the executing agency.
Since there are blackouts in economically disadvantaged residential areas when power demand in Paraguay temporarily exceeds supply capacity, the project will contribute to raising the quality of life of the poor through stabilising the power supply. The executing agency also plans to plant a forest preserve – not covered under the ODA loan – to prevent soil erosion and so on around the Yguazu reservoir and plans to employ local residents for the planting, operation and maintenance of the forest preserve.
Because the project uses water, a clean energy source, and helps reduce greenhouse gas emissions, it is expected that a Clean Development Mechanism (CDM), one of the Kyoto mechanisms, will be applied to the project. JBIC signed a cooperation agreement with the Secretary of Environment (SEAM) of Paraguay, in order to promote the implementation of CDM projects in the country. Under this agreement, JBIC will conduct a study on possible applications of a CDM for this project as part of its effort to help acquire Certified Emission Reductions (CERs) through the provision of ODA loans.
ODA loans make development funds available to developing countries at low interest rates and with long repayment periods. These loans provide funds to develop and improve the economic and social infrastructure necessary to support self-help efforts and sustainable economic development for developing countries. For further information, visit www.jbic.go.jp/english.