Argentine Summer Electricity Shortages: GoA Rolls Out

UNCLAS BUENOS AIRES 000019 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: AR ECON ENRG SUBJECT: Argentine Summer Electricity Shortages: GoA Rolls Out Modest Conservation Program Ref: (A) 2007 Buenos Aires 1892 (B) 2007 Buenos Aires 1819 (C) 2007 Buenos Aires 1726 (D) 2007 Buenos Aires 1456 (E) 2007 Buenos Aires 1415 This cable contains sensitive information - not for internet distribution. -------------- Summary -------------- ¶1. (SBU) The Greater Buenos Aires metropolitan area has begun to experience electricity cuts as overloaded distribution systems fail in the face of hot summer weather and high air conditioning loads on the electricity distribution grid. Resulting neighborhood protests have received wide media coverage. Summer electricity shortages have been widely predicted due to GoA- controlled electricity prices held at levels that have deterred new private investment in electricity generation and distribution infrastructure, including by U.S. energy major AES which has substantial assets here. The GoA has rolled out a modest energy conservation scheme that includes daylight savings time changes, rationalizing energy usage in public buildings and subsidies to encourage consumer use of energy efficient bulbs. Local analysts agree that the GoA program will fall far short of its goal of saving up to 1,000 MW/day, but they call it a welcome GoA acknowledgement that steps must be taken to shore up an inadequate and deteriorating national electricity infrastructure. Public anger at recent energy disruptions may grow as summer dog days set in. But, despite growing criticism of the GoA's short-sighted approach to energy planning, the Kirchner administration appears positioned to weather this crisis: the still-booming economy trumps all, and energy shortages are not expected to constrain industrial production during the slack January/February summer vacation season. End Summary -------------- -------------- Predicted Shortfalls: Insufficient Infrastructure Investment -------------- -------------- ¶2. (SBU) With the advent of hot summer weather and high air conditioning loads on the electricity system, the greater Buenos Aires metropolitan area has begun to experience electricity and water cuts as overloaded distribution systems fail. With many government officials, including the President, on vacation in the post new year period, political news is slack and television and print media have devoted considerable coverage to popular protests against electricity cuts in the streets of Buenos Aires neighborhoods. These electricity shortages have been widely predicted by energy analysts who emphasize that GoA-controlled electricity prices are being held at levels that deter new investment by private sector electricity generation and distribution companies. -------------- U.S. Company Perspective: AES in Argentina -------------- 3.(SBU) U.S. energy major AES operates 6 hydro and gas-fired power plants in Argentina (12% of national installed capacity) and also owns two electricity distribution companies in the province of Buenos Aires which provide energy to more than 450,000 customers. In a January 3 meeting with Ambassador, AES explained that, as a direct consequence of GoA price controls, its Argentine generation activities earn only $30 per megawatt hour (MwH),while generators in Brazil average $80 per MwH and those in Chile average $100 MwH. AES complains that these low rates paid to generators by GoA-controlled electricity wholesale distributor CAMMESA cover only variable costs and provide no/no incentive to invest in new capacity. Further, CAMMESA remains 6-9 months in arrears on its payments to generators. (The last payment received covered March 2007.) AES also noted that Argentine residential electricity end-users pay roughly one third of rates consumers pay in Brazil and Chile. Wholesale users, AES said, pay roughly half the electricity rates their competitors in Brazil and Chile do. Resulting insufficient cash flows, AES added, has prevented their distribution companies from investment sufficient to maintain network quality. ¶4. (SBU) AES noted that, while the July/August 2007 winter energy shortages (Ref E) were attributed to generation problems (low water levels at hydro plants and insufficient domestic natural gas supplies to meet demand),the current crisis is largely due to inadequate electricity distribution capacity to meet vastly expanded demand. Low government-mandated consumer electricity rates and a consumption-led economic boom have dramatically increased the number of air conditioners and white goods (refrigerators, etc.) drawing power from the grid. -------------- Modest GoA Conservation Initiative -------------- ¶5. (SBU) Last July 16, Planning Minister De Vido said in a radio interview that he would not "insult the intelligence" of sophisticated and socially responsible Argentine consumers by asking them to conserve. But on December 21, in anticipation of pressure on the electricity grid (and as outlined by De Vido in a July 26 meeting with Ambassador - Ref D),the GoA finally rolled out an energy conservation scheme. The modest plan includes pushing the national clock ahead one hour for the three month January - March period, modifying hours of civil servant workdays, rationalizing energy usage in public buildings and offering subsidy credits to consumers to incent use of energy efficient bulbs. The stated goal is to save up to 1,000 MW/day. Local analysts agree that GoA measures will fall far short of this energy saving goal. They, nonetheless, applaud this initiative and call it a welcome GoA acknowledgement that steps must be taken to shore up an inadequate and deteriorating national electricity infrastructure. -------------- Comment -------------- ¶6. (SBU) After months of public denials by senior GoA officials, including by Planning Minister De Vido ("there is no crisis"), and efforts to lay the blame on energy sector under-investment by profit-hungry private companies, the GoA has announced modest conservation measures. Notably absent, however, has been any significant move to limit consumption by adjusting domestic electricity tariffs that remain far below market rates in neighboring Chile and Brazil. To be fair, the GoA did allow nominal increases in industrial electricity rates charged by distributors over the past two years, including by U.S. electricity distributor AES. But "comprehensive reviews" for gas and electricity tariffs promised by the Planning Ministry Energy Secretariat to electricity distribution companies have been repeatedly deferred. ¶7. Public anger at recent energy disruptions may grow if high temperatures continue, and this could exact a political cost. But the Cristina Kirchner administration clearly believes that cheap energy that helps expand consumer purchasing power remains its best strategy. Despite growing criticism of the GoA's short-sighted approach to energy planning, the Kirchner administration appears positioned to weather this latest chapter of the national energy crisis relatively unscathed: the still- booming economy trumps all, and energy shortages are not expected to constrain industrial production during the slack January/February summer vacation season. WAYNE