Cheap Energy.

Belgian company opens Peru's first coal utility plant.

SOUTH AMERICA'S LONGEST PIER thrusts three-quarters of a mile into the chilly Pacific Ocean. Perched atop it, two huge cranes wait to unload tons of Indonesian coal from cargo ships. The coal will move on a covered conveyor belt to the thermal generating plant nearby.

"No one ever contemplated using coal to produce electricity in Peru," says Klaus Huys, general manager of Enersur, which operates the towering Ilo 2 thermal plant. "Yet, around half of all the world's energy comes from coal. It's cheap, and it's in plentiful supply."

Enersur is a wholly owned subsidiary of Belgian company Tractebel, the world's third-largest independent power producer and part of the larger French power conglomerate Suez Lyonnaise des Eaux. "Producing power from coal in Peru-basically a hydro country--means taking a risk, but Tractebel has assumed that," says Huys.

Peru produces coal, but the coal is heavy with sulfur, which is costly to remove. For now, coal is imported from Indonesia, but Colombia and Venezuela are seen as potential future suppliers.

Before the plant opened, many of Ilo's 100,000 inhabitants were leery of promises that the coal-fired generator would not pollute. For decades, they had suffered the noxious emissions from a Southern Peru Copper Corp. smelter. Even with Ilo 2 located on an uninhabited coastal desert 15 miles south of town, local residents were hard to convince. But Enersur prevailed.

Huys managed to persuade townspeople, business leaders and non-governmental organizations that Enersur's coal production would meet strict international standards and that the plant's technology would prevent pollution. Ilos mayor, Ernesto Herrera Becerra, has no regrets about putting his political weight behind the plant. "After several decades of conflict and trauma with the mining industry over pollution," he says, "we have found that this company is a good neighbor. It convinced us that there would be no environmental damage."

Tractebel's US$230 million investment in Ilo 2 reflects the multinational nature of the venture. The complex was built under a turnkey contract with Japan's Hitachi. Krupp, a Germany company, supplied much of the machinery--including the cranes, a conveyor belt system and the mills to grind lump coal to powder. Hitachi kicked in the turbine and turbo-generating equipment, and Japan's Taisei Offshore built the pier.

Enersur has a 20-year contract to supply energy to copper producer Southern Peru; transmission lines run from the thermal plant to the nearby copper mines of Cuajone and Toquepala. Excess power will be sold.

Snag in the line. Until recently, a natural-gas pipeline was widely viewed as the solution to southern Peru's energy woes. Construction of a spur pipeline would have brought natural gas from the southeastern jungle deposits of Camisea. But negotiations foundered between Camisea's potential developers, Shell and Mobil, and the Peruvian government. The U.--Dutch--U.S. consortium pulled out of its projected $3 billion-plus hydrocarbon-development project in July 1998.

Even before the consortium withdrew, Southern Peru Copper, producer of almost two-thirds of Peru's copper, was not convinced that gas could be piped from the jungle as quickly as projected. As a result, the company struck a $40 million deal under which Tractebel supplies as much power as needed to southern Peru's large lb smelter and refinery.

The challenge for future developers of Camisea may be whether they can compete with power generated from Indonesian coal by a Belgian company using Japanese and German technology.

When Enersur signed its contract with Hitachi in April 1997, senior Tractebel officials assured Peruvians that the facility would convert to natural gas when and if it became available--as long as the price remained competitive.

"It is a very important initiative that these private investors have made," says Gaston Miranda, Peru's vice minister for energy. "They will be able to compete and sell energy anywhere in Peru."