THE DOMINICAN GOVERNMENT'S ANSWER TO THE

UNCLAS SANTO DOMINGO 001025 SIPDIS SIPDIS DEPT FOR WHA/CAR, WHA/EPSC, EB/ESC/IEC/EPC, EB/IFD/OIA E.O. 12958: N/A TAGS: ECON ENRG PGOV PREL EINV DR SUBJECT: THE DOMINICAN GOVERNMENT'S ANSWER TO THE ELECTRICITY CRISIS - MORE ELECTRICITY! REF: 06 SANTO DOMINGO 3733 ¶1. (SBU) Summary. According to press reports and industry contacts, construction on a 660MW (megawatt) coal-fueled electricity generating plant is finally scheduled to begin in May 2007, two years after Chinese firm Sichuan Machinery signed the contract to build it. Sichuan Machinery will build, own, and operate the plant in Pepillo Salcedo (Manzanillo),a small Dominican town on the north coast bordering Haiti. Although most investors would shy away from the Dominican electricity sector, the government sweetened the deal for the Chinese by offering land, coal, and letters of credit. It may sound promising, but it will not solve the three main factors of the electricity crisis: corruption, theft and poor service by the government distributors. End Summary. -------------- -------------- PPAs, the Madrid Accord, and Renegotiation efforts -------------- -------------- ¶2. (U) Currently, the electricity sector in the Dominican Republic has the ability to provide about 3500MW. Current peak demand, however, is about 1900MW. The Sichuan coal plant and the planned 600MW coal plant in Azua are products of the government's attempt to better the electricity situation. The coal plants, according to the government, would provide an extra 1200MW to the system, which would create an oversupply of electricity and, the government reasons, drive generation prices down by 2010. The plan will work only if the government can renegotiate its contracts under the Madrid Accord (Accord). The Accord extended the power purchasing agreements (PPAs),signed under the capitalization program (1998-2000) between the private electricity-generation companies and the government, to 2016. ¶3. (U) When the PPAs were rolled up under the Madrid Accord, the generation companies agreed to charge 5.1 cents (US) per kilowatt hour (kw/h) to the distribution companies; (however, the accord allows the price to fluctuate depending on the price of oil, which was about USD 21 per barrel at the time of signing the Accord). According to industry experts, up to 70 percent of the electricity cost that the private generation companies charge to the distribution sector is indexed to the price of fuel. Fifty-seven percent of electricity generated in the Dominican Republic uses either diesel or bunker fuel, whose prices have risen threefold since the agreement was signed. Therefore, the price that generation companies are now charging the distributors has risen over the years to an average price of 11 cents (US) per kw/h. Due to this price increase, the government decided to supply the coal to the Chinese plant in order to lock in the 5.4 cents (US) per kw/h. The government claims that its involvement will ensure lower prices for the distributors, which should equate to lower prices for the end-user. ¶4. (U) Current consumer electricity prices in the Dominican Republic range between 22 to 25 cents (US) per kw/h. According to industry experts, the private generation companies charge the distribution companies about 10-12 cents (US) per kw/h, the transmission company charges about 2 cents (US) per kw/h, and the distribution companies charge about 9-11 cents (US) per kw/h, of which a portion is used to offset a hefty government subsidy in the electricity sector. ¶5. (SBU) Since 2005, the government has been trying to renegotiate the Madrid Accord, but has yet to produce significant results due to the government's willingness to waive the stick without offering any carrots. The goal of the renegotiation effort is to reduce the 12-year timeline of the contracts in order to free up the electricity-purchasing market by 2009, which coincides with when the new coal plants would come on line. Owners of the coal plants know that a coal-fired electricity generation plant can produce electricity at a cheaper cost than those plants that use diesel or bunker fuel. If the Madrid Accord is curtailed in 2009, the market will favor the coal plants over diesel or bunker fueled plants. -------------- The Coal Plants -------------- ¶6. (U) Sichuan Machinery is not new to the electricity industry, but is new to the Caribbean region. The 660MW coal plant will consist of two units. The first unit should be completed in 2 years and the second in 33 months. The plant will provide electricity to the Cibao region, particularly Santiago, the second largest city in the Dominican Republic. It will provide electricity to the state-owned distribution company (EdeNorte). The expected cost of generating the electricity will be 5.4 cents (US) per kw/h. This is a 50 percent reduction in the current price of electricity to the distributors, which stands at about 11 cents (US) per kw/h. The reduction is not a surprise considering that the government is supplying the coal. ¶7. (SBU) Two private electricity-plant general managers told econoff that they would be very happy to have the same terms as these two coal plants received from the government: free land, free fuel, and letters of credit. They also mentioned that if any new U.S. player comes into the market, they could demand the same terms that these coal plants received under the National Treatment clause of the CAFTA-DR regional free trade agreement. ¶8. (SBU) The Azua coal plant is still in a state of flux. Emirates Power signed a contract with the government holding company of state-owned electric companies (CDEEE) to develop a 600MW coal fired electricity generation plant. However, financing issues are holding up the project. Industry sources say that Emirates Power is looking to sell its contract to Seaboard Corporation and the sugar-producer Vicini family. In private conversation, Vicini's Communications Vice President added that Seaboard is taking the lead on the coal-plant contract and confirmed Embassy's opinion that Seaboard is waiting for the outcome of the government-led renegotiation efforts to finalize their decision. If Seaboard acquires the contract, the Vicini Group will become a minority share holder; the Vicini Group solely owns MetalDom, a 50MW electricity-generation plant that uses bunker fuel, but sells on the spot market. -------------- Concerns -------------- ¶9. (SBU) Although greater supply should bring down the price of electricity, the overarching issues to the electricity problem will still not be resolved. As previously reported in reftel, the real causes of the electricity crisis are theft, corruption, and poor distribution service. Until the government forces its own institutions, big business, and the population at large to pay their electricity bill, new coal plants and a minimally reduced electricity bill will not solve the problem. ¶10. (SBU) The government's involvement in the coal business is yet another area where existing government corruption may exert its influence. The government is also taking on the burdens of finding and allocating government resources to purchase coal on the international market and of becoming a dependable coal supplier for the Sichuan coal plant. This suggests that the government will have to create more jobs to handle the business of purchasing and distributing coal. According to coal experts, a 500 megawatt coal plant produces 3.5 billion kilowatt-hours per year, enough to power a city of about 140,000 people. It burns 1,430,000 tons of coal/yr, uses 2.2 billion gallons of water/yr and 146,000 tons of limestone/yr. For the Sichuan coal plant, the government will be contracting ships to carry roughly 30,000 tons of coal weekly from Colombia to Manzanillo. This is just another headache that the government thinks is a remedy to solve the electricity crisis. ¶11. (U) This report and extensive other material can be consulted on our SIPRNET site, http://www.state.sgov.gov/p/wha/santodomingo/ HERTELL