Identifier
Created
Classification
Origin
07SANJOSE873
2007-05-09 22:16:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy San Jose
Cable title:  

PARADISE BY CANDLELIGHT: COSTA RICAN POWER FAILURE

Tags:  EINV ECON SENV ENRG CS 
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VZCZCXYZ0008
RR RUEHWEB

DE RUEHSJ #0873/01 1292216
ZNR UUUUU ZZH
R 092216Z MAY 07
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 7939
INFO RUEHMU/AMEMBASSY MANAGUA 4906
RUEHZP/AMEMBASSY PANAMA 3601
RUEHGT/AMEMBASSY GUATEMALA 3782
UNCLAS SAN JOSE 000873 

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON SENV ENRG CS
SUBJECT: PARADISE BY CANDLELIGHT: COSTA RICAN POWER FAILURE

REF: SAN JOSE 00653

UNCLAS SAN JOSE 000873

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON SENV ENRG CS
SUBJECT: PARADISE BY CANDLELIGHT: COSTA RICAN POWER FAILURE

REF: SAN JOSE 00653


1. (U) This is another installment in our ongoing series explaining
why Costa Rica is not quite paradise. These cables seek to paint a
realistic picture of the challenges faced by Costa Rica. Travel
brochures don't tell the entire story.


2. (U) SUMMARY. Costa Rica's electrical generation system collapsed
on April 19 as the country suffered its first nation-wide blackout
in six years. Parts of the nation were without power for the next
24-48 hours. Rolling blackouts (except on weekends and holidays)
began on April 26. The collapse resulted from the combination of a
severe dry season as well as the failure of the National Electrical
Institute (ICE),Costa Rica's state power and telecom monopoly, to
both adequately maintain its own equipment and to invest in
increased capacity. ICE initially stated that power shortages were
likely to continue unless the state regulator allowed a 23 percent
rate hike. Meanwhile, businesses in Costa Rica suffered. While
President Arias announced the end to rolling-blackouts on May 4,
experts from General Electric tell us there are no quick or easy
solutions to Costa Rica's long-term problem of a lack of spare
capacity. END SUMMARY.

It All Comes Crashing Down
--------------


3. (U) On Thursday April 19, Costa Rica's electrical power system
failed just after 8:00 PM local time, triggering a country-wide
blackout that lasted for one and a half hours. Parts of the country
were without power for the following 24-48 hours. According to ICE,
the state-owned power and telecom monopoly, the collapse was due to
the combination of a "rainy-season" with very little rain that has
left the country's hydroelectric resources at 25 percent of normal
capacity and the breakdown of three turbines and two major
transformers over the course of two weeks. This, coupled with an
ever-increasing demand led to a situation where demand outstripped
capacity, leading to a system-wide shutdown of the grid.

Can't Meet Current Demand
--------------


4. (U) Over the last five years, ICE has not adequately invested in
its electrical generation capacity, as projects in the works for
years continued to face delays. Environmental groups have derailed

or postponed plans for two major hydroelectric projects planned in
environmentally sensitive areas. Major thermal (fuel-burning)
projects have also faced delays. For the last fours years ICE has
planned on constructing a 120-megawatt plant in Garabito. According
to the original timeline, the plant should have already been in
operation. Construction has not yet begun due to contracting
disputes (not unusual in Costa Rica).


5. (U) Costa Rica has long prided itself as a "green" country that
makes extensive use of non-thermal sources of electrical power and
has a history of using renewable sources to provide the vast
majority of its power. While that is still true, over the last two
years there has been a dramatic increase in the use of thermal
generators as well as purchases of electricity from neighboring
countries. Previous to 2006, approximately 6 percent of the
electricity consumed in Costa Rica came from thermal generators. In
2006 this figure had risen to 20 percent as Costa Rica purchased
more of its power from suppliers in Panama.


6. (U) This shift toward the increasing use of thermally-generated
electricity came as the price of oil also rose, dramatically
increasing the cost to ICE of generating electricity from thermal
sources. It costs ICE an average $0.03 per kilowatt-hour to produce
electricity in hydroelectric plants, $0.14 from their thermal
plants, and between $0.08-0.13 per kilowatt-hour to import
thermal-generated electricity (not including transportation costs)
from neighboring countries. Due to its own power shortages, Panama
is no longer exporting electricity to Costa Rica.


7. (U) In the first three months of 2007, ICE has already exhausted
86 percent of the USD 66.3 million budgeted to run the country's
diesel-fired electrical generators for the entire year. After the
power outage of April 19, ICE requested the state Regulatory
Authority for Public Services (ARESEP) to approve a 23 percent
increase in electrical tariffs to pay for the purchase of
thermal-generated power. ARESEP denied the request, stating that
ICE must explain how the electrical system was allowed to fall into
disrepair in the first place. In response, ICE began implementing
rolling blackouts on April 26.

Can't Meet Future Demand, Either
--------------


8. (U) While Costa Rica has not adequately invested in new
electrical generation projects and is currently unable to purchase
power from Panama, electrical demand has continued to grow at an
average rate of 6 percent a year. Over the last year, Costa Rica's
economy grew by 7.9 percent. Manufacturing and Foreign Direct
Investment (largely in the form of construction in costal areas)
served in large part to fuel this growth, increasing their rate of
real growth by 12.5 percent and 14.8 percent respectively in 2006.
The rapid increase of manufacturing and construction has placed new
demands on Costa Rica's stagnant electrical power generation system,
leading to a situation in which ICE will need to invest USD 7
billion (USD 500 million annually over the next 14 years) to
effectively double power capacity by 2021 and meet projected demand.
Before the crisis, ICE had no finalized projects to increase
electrical generation capacity during the next two years.

The Cost of the Energy Crisis
--------------


9. (U) News reports have already put the economic impact of the
current energy crisis at anywhere from USD 20-100 million. The U.S.
multi-national paper company, Kimberly-Clark, reported that the
power outages from April 19-20 cost the company USD 174,652. Intel
lost a reported 150,000 microchips that were on its production floor
when the power failed. News accounts have been rife with stories of
private businesses closing their doors during the rolling blackouts
and losing clients and production capacity.

What Comes Next?
--------------


10. (SBU) To cut through the maze of speculation and conflicting
blame, Embassy officials met with four experts from General Electric
on May 2. While lauding Costa Rica's efforts to use renewable
sources for the majority of its power production (80 percent),the
experts stated that Costa Rica's current crisis is due to a failure
to maintain any reserve thermal capacity that could be brought fully
online when circumstances warrant. Now, Costa Rica is faced with a
situation where they need to make critical decisions in a short
period of time to prevent recurring power crises in the coming
years. The GE team said their company had seen this crisis coming
for years, but their approaches to the GOCR (the latest in December
2006) had been ignored or rebuffed.


11. (SBU) Even if ICE were to purchase new thermal turbines
immediately, it would normally take 24-36 months to receive and
install them, leading to another 2-3 years of annual energy
shortages at the end of the dry season. GE said that there are
several alternatives to meet Costa Rica's immediate energy needs in
the next 1-2 years, while the longer-term capacity is being
delivered and installed. GE originally intended to offer Costa Rica
the option of delivering truck-borne turbines in the next 60-90 days
to meet the country's short-term energy needs but was rebuffed.
Instead, on May 4 President Arias announced that the rains had
sufficiently filled the reservoirs and a new hydroelectric turbine
was brought online ahead of schedule. As a result, according to
Arias, there is no need to continue the rolling blackouts.


12. (SBU) The GE experts said that for any short-term solution to
succeed, Costa Rica also needs to simultaneously purchase additional
thermal generators. The experts informed the Embassy that due to
increasing worldwide demand for power generation equipment, Costa
Rica has a very short window of opportunity to place orders for
equipment that could be delivered and installed in time to prevent
outages next year. The largest impediment to this solution,
according to the industry experts, would be the failure of ICE and
Costa Rican government to move rapidly in making and implementing
decisions.
COMMENT
--------------


12. (U) Costa Rica's energy crisis has not come as a great surprise.
Experts and press have repeatedly warned over the last two years
that ICE needed to adequately invest in new capacity to avoid the
current situation. Unfortunately, this was not done. The lack of
real development of the sector, coupled with the general slow-moving
decision-making process in Costa Rica does not bode well for Costa
Rica's future energy security. While the beginning of the rainy
season may have filled the reservoirs and brought a temporary end to
the current rolling blackouts, only difficult and
uncharacteristically quick action by the GOCR and ICE over the next
few weeks, which now seems highly unlikely. Originally, the Arias
administration drafted an emergency decree to give ICE and the GOCR
more flexibility to quickly make timely and necessary decisions.
However, the emergency decree was never signed, and there is no
indication that Costa Rica is currently pursing long-term solutions
that could forestall what will probably be even worse energy crises
during the next few years.
LANGDALE