VENEZUELAN ELECTRICITY SECTOR IN CRISIS AFTER

UNCLAS SECTION 01 OF 02 CARACAS 001228 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MMALLOY COMMERCE FOR 4431/MAC/WH/MCAMERON E.O. 12958: N/A TAGS: ECON EINV ETRD EIND PGOV VE SUBJECT: VENEZUELAN ELECTRICITY SECTOR IN CRISIS AFTER NATIONALIZATION REF: A. 2007 CARACAS 59 ¶B. CARACAS 598 ¶C. CARACAS 1200 ¶D. CARACAS 1209 CARACAS 00001228 001.2 OF 002 ¶1. (SBU) SUMMARY: A power blackout that affected half of the country on September 1 illustrates the fragility of Venezuela's electrical power sector. The consequences of the government's failure to invest in the sector are now clear from insufficient generation to dilapidated distributions infrastructure and poorly handled finances. General Electric (GE) Venezuela executives report the power generation system is stretched to the breaking point and they expect large-scale blackouts to become more common in 2009. The BRV's focus on centralizing authority in the industry by creating a "National Electric Corporation" has stalled new generation projects for the last two years. END SUMMARY. -------------- --- NEW INDUSTRY STRUCTURE FOLLOWING NATIONALIZATION -------------- --- ¶2. (SBU) In January of 2007 Chavez announced his plans to nationalize, among other sectors, the electrical power industry (ref A). The government bought out all but one of the U.S. corporations in the sector, which included AES, Global and CMS Energy. The publicly traded U.S. company Public Service Enterprise Group (PSEG) still maintains a small, low profile presence in Venezuela. A Venezuelan GE executive told Econoffs on August 13 that the privately owned companies in the sector were happy to be nationalized as it had been impossible to invest in their Venezuelan operations due to the low, BRV regulated electricity prices. ¶3. (SBU) GE's Regional Manager for Latin American Sales stated there has been no new power generation projects in two years as the BRV has had its hands full trying to set up the National Electric Corporation (Corpoelec) designed to centralize all authority under the supervision of the Petroleum and Energy Ministry. The BRV no longer allows the BRV-owned Electrical Administration and Development Corporation (Cadafe) to negotiate new projects due to Cadafe's past ineffectiveness and current near paralysis due to serious union troubles. Corpoelec is now responsible for every aspect of the industry. A PDVSA-led team within Corpoelec has taken the lead on coordinating national power generation, distribution and transmission. (NOTE: Corpoelec is consistent with BRV plans to centralize authority in all "strategic" industries as evidenced by its plans for National Construction and National Cement Companies. See refs C and ¶D. END NOTE.) -------------- THE NUMBERS TELL THE TALE -------------- ¶4. (SBU) Power consumption in Venezuela has grown by an average of about nine percent per annum since 2004 according to statistics from the BRV's Office of Interconnected Operations (OPSIS). The supply has not expanded with demand. According to Corpoelec President Hipolito Izquierdo, in 2008, 74 percent of Venezuela's electricity is still from hydropower, particularly the Guri dam located in the southeast of the country far removed from the major population and industrial centers. Thermal power generation has actually dropped one percent from 2007 to 26 percent in ¶2008. The state of the Cadafe-run Planta Centro, the largest thermal power generation plant in Latin America with 2,000 megawatts (MW) of installed capacity, is illustrative. During the last weeks of July, all of Planta Centro's five generation units were out of operation and only one has since been repaired. Our sources indicate that the units simply are beyond refurbishment and should all be replaced. ¶5. (SBU) Power sector analysts agree that new thermal power generation capacity growth should average 1,000 MW each year in order to meet demand requirements. During the past five years it has grown at an average of 250 MW each year. The president of a local electrical supply company told Econoffs on July 28 that the expansion projects are almost all still in the procurement state and are proceeding very slowly. The BRV's most recent answer to the thermal generation deficit has been to install a series of 15 MW generation units, contracted through the Cuban government, across the country. CARACAS 00001228 002.2 OF 002 -------------- THE RESULTS -------------- ¶6. (SBU) GE told Econoffs that there were over 100 large scale blackouts in 2007 and 2008 will close with more, as demonstrated by the country-wide outages on April 29 and September 1 (ref B). Izquierdo has admitted to the press that there have been "important power failures." In Bolivar state, home to Guri, one of the largest hydroelectric plants in the world, Cadafe registered over 200 outages in August, some lasting for three days, while parts of Falcon state have been without power for six days. Chavez' home state of Barinas rations power four days a week. Some claim the BRV uses the power crises in many states to hurt opposition governors. Press reports indicate the BRV diverted power generating plants destined for opposition controlled Margarita to Nicaragua. ¶7. (SBU) Izquierdo told the press that Caracas alone consumes 500 MW more than it generates, although BRV-owned power company Electricity of Caracas indicated the number is now 1000 MW as an additional plant has gone out of service, making Caracas highly dependent on power transmission from remote states. He added the BRV hasn't built new power generation capacity in years and has instead focused on refurbishing small plants throughout the country. Izquierdo has a budget of USD 1.5 billion to added 1,200 MW to the national electricity system over the next three years. In the meantime, PDVSA is transferring some of its generators to Caracas to relieve pressure on the system in the short term. The BRV has also contracted with Cuba to provide expensive and inefficient low megawatt thermal generation stations as a stop-gap measure. -------------- OIL SECTOR -------------- ¶8. (SBU) Due to electricity supply issues in the past, most of Venezuela's oil sector facilities self-generate power but use BRV generated power as a back-up. This will become an issue in upcoming years as GE executives told Econoffs that refinery generators, most of which are GE brand, average 15 to 20 years in age and will need to be replaced soon. GE estimates replacing outdated generators will take about four years. In the meantime, the oil sector may come to increasingly rely on the already strained BRV power supply. Although outdated GE power generation machinery would normally represent an opportunity for GE to sell new generators, the BRV has given preference to GE's European competitors. -------------- COMMENT -------------- ¶9. (SBU) The increase in power demand has created additional pressure on overburdened generation and transmission systems. Without immediate construction of new generation capacity at a regional level, demand on the transmission system from Guri cannot be sustained. Our GE interlocutors noted that the BRV suffers from a serious lack of planning and poor execution. This has been compounded by the fact that most qualified staff left or were fired following the nationalization of the industry. GE executives added that the power generation sector is almost entirely dependent on BRV subsidies for continued operations, as the BRV has set electricity prices so low that in effect, power companies only get paid for half of what they produce. The GE executives noted that the BRV, which has not increased electricity prices since 2004 in spite of high inflation, has no intention of raising prices in an election year to make the sector less dependent on BRV hand-outs. DUDDY