URUGUAY'S POTENTIAL AS A RENEWABLE ENERGY LEADER IN THE

UNCLAS MONTEVIDEO 000401

DEPT FOR WHA/EPSC FCORNIELLE and FCOLON
DOE FOR LEINSTEIN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENGY EAGR UY
SUBJECT: URUGUAY'S POTENTIAL AS A RENEWABLE ENERGY LEADER IN THE
HEMISPHERE


1. (U) This telegram is sensitive but unclassified, and not for
Internet distribution.

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Summary
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2. (U) Uruguay has the potential to become an alternative
energy-based economy if it continues its current effort and improves
the policy environment and needed infrastructure. In its quest for
energy security, the GOU is pursuing a three-pronged strategy that
parallels current U.S. energy policy: breaking Uruguay's dependence
on oil; producing more energy at home; and promoting energy
efficiency. Several projects -- both private and public sector
driven -- in the areas of biofuels, bio-mass and wind generation are
bringing the country closer to being able to capitalize on its
potential. By the end of 2009, Uruguay will generate six percent of
its electrical power from non-traditional renewable energy (e.g.
biomass and wind). Embassy Montevideo is actively pursuing a series
of biofuels and alternative energy-related initiatives with the GOU.
End Summary.

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Uruguay: Energy Overview
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3. (U) From 2003 to 2005, the need for Uruguay to expand its
national energy portfolio was brought into sharp focus by the
country's worst-ever energy crisis. Rising demand forced Uruguay to
supplement its normal electricity supply with greater purchases from
its neighbors Argentina and Brazil. Under normal conditions, 70 per
cent of the country's annual electrical energy requirement of 2500
megawatts (MW) is generated by large scale domestic hydroelectric
power plants, with the remaining 30 per cent being met mainly by oil
imports (together with a small amount of gas and imported
electricity). As recent droughts have demonstrated, however, this
optimum 70 to 30 ratio changes dramatically in times of low
rainfall. Uruguay's lack of domestic oil leaves it completely
dependent on imported oil supplies and vulnerable to price increases
(the country's petroleum imports exceeded USD 1 billion in 2007 and
almost doubled in 2008). Consequently, a driving force behind the
diversification of Uruguay's energy sector is a desire for energy
security and independence.


4. (U) The GOU is convinced that renewable energy could play a
central role in solving Uruguay's energy concerns. Upon assuming
office in 2005, President Tabare Vazquez announced that his
government would aim to generate 500 megawatts, or 20 per cent of
the country's electricity, from alternative sources by 2015. In
support of this target, the GOU launched a sustainable energy policy
designed to support the growth of the renewable energy sector.
Under this program, the government offered to grant tax exemptions
and financial benefits of 10 to 20 years to private investors who
produce renewable energy. In 2007, the state utility company UTE
issued tenders for 60 MW worth of wind, biomass, and small-scale
hydroelectric power plants projects (originally intended to include
20 MW from each source). So far, however, only 36 megawatts have
been awarded to bidders, none of which have been for hydroelectric
power. UTE officials told emboffs that economic conditions have not
favored small-scale hydroelectric projects and they expect to award
more wind and biomass contracts instead.


5. (U) A central part of the GOU's efforts to increase the presence
of renewable energy in the overall energy matrix is the use of
biofuels in the transport sector. Of Uruguay's 2007 total energy
demand, transportation accounted for 33 percent. Diesel
consumption for vehicles in 2008 was about 880 million liters, while
gasoline was 380 million liters. The GOU aims to partially replace
petroleum in cars and public transport with biofuels over the next
five years.

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Hydroelectric Power
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6. (U) Uruguay has four hydroelectric plants in operation; three on
the Rio Negro and one, the Salto Grand Dam, that is shared with
Argentina on the Rio Uruguay. The stations on the Rio Negro date
from World War II and are in need of upgrades. Additionally, UTE
has plans for a new 80 MW plant near Montevideo, with equipment and
engineering support coming from Finland.


7. (U) Most of Uruguay's rivers are already dammed and land costs in
suitable areas are prohibitively high. Sources at the Ministry of
Energy speculate, however, that a number of local rice producing
companies are already ideally situated, but are not yet aware that
installing hydroelectric power could be a viable option.


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Biomass
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8. The burning and/or gasification of renewable biomass is presently
the largest non-traditional (i.e. not including hydroelectric power)
renewable source of electricity in Uruguay. As such, energy
produced from biomass largely accounts for the GOU claim that
Uruguay has the highest proportion (6 percent) of electricity from
non-traditional renewable sources in the western hemisphere. At
present, although many companies use biomass to produce heat energy
for their own operations, all biomass-produced electricity moving to
Uruguay's grid comes from one source: Finnish company Botnia's huge
paper mill located in the west of the country on the border with
Argentina. The plant produces electricity from vapor produced by
the burning of 'black liquor,' surplus residue from the production
of pulp. The plant produces 120MW annually; half is used to sustain
its own operation, with the other half sent to the grid and sold to
UTE.


9. (U) The production of energy from biomass is set to grow. U.S.
forestry company Weyerhaeuser, which already uses biomass (waste
from its forest product operations) to fulfill its heat and steam
requirements, is finalizing construction on a 10MW turbine
electricity plant and has recently signed a contract with UTE to
provide 4 MW of electricity to the national grid. ALUR, a
subsidiary of the state oil company ANCAP, is constructing a biomass
generation facility to power its sugarcane refinery and bioethanol
plant. The plant will burn sugarcane bagasse, rice husks and sweet
sorghum residuals. ALUR has also signed a contract to sell surplus
MW to UTE. Additionally, at least three other local forestry
(Bioner and Fenirol) and rice producers (Galofer) have concrete
plans to produce electricity for UTE. Between them they could
generate up 28 MW for the national grid.

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Biofuels: Ethanol and Biodiesel
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10. (U) Uruguay produces, or has plans to produce, both ethanol
(generally produced from sugars and starches in plants),and
biodiesel (generally produced from oily biomass such as seed and
animal fats) and has made an important regulatory commitment to
mandate the use of biofuels in the country. In November 2007, the
GOU passed a law regulating their production, commercialization, and
utilization. As a result, Uruguay has a legislatively mandated
target of a) a five percent ethanol/gasoline blend by 2015 and b) a
two percent biodiesel/ diesel blend by 2010 rising to five percent
by 2015.


11. (U) Ethanol: The state-owned petroleum company ANCAP already
produces some 1.5 million liters of industrial-use ethanol per year
through its alcohol subsidiary ALUR, and is currently installing
equipment to produce ethanol for use in vehicles. In 2006 ALUR took
over the Bella Union Sugar Company's sugar plantations and refinery
and now aims to add value to its operations by producing bioethanol
and generating electricity with biomass. Using molasses as a
feedstock, ALUR expects to meet and even surpass the five percent
blending target by 2010. Final production is well underway on the
site's alcohol distillery, and production is set to begin by the end
of 2009.


12. (U) In addition to soy, sunflower and other oily grains,
biofuels proponents in Uruguay consider sweet sorghum an excellent
feedstock. Sweet sorghum contains an exceptionally high amount of
sugar, and yields approximately the same amount of ethanol per
bushel as corn, but is not vulnerable to the charge of displacing
food supplies. The plant seems to fare particularly well in
Uruguay, and ANCAP, Weyerhaeuser and a French company AKOU are all
independently engaged in testing with a view to developing sweet
sorghum pilot projects. Uruguay's National Agricultural Research
Institute (INIA in Spanish) has conducted its own studies and
continues to work with researchers and ANCAP to study the prospects
for sweet sorghum as a fuel crop. ANCAP and INIA have been engaged
with researchers at Texas A&M, a leader in sweet sorghum, since
visiting the University in 2007 on an Embassy-sponsored program.
AKOU's endeavors with sweet sorghum seem particularly advanced.
While production has not yet begun, the company has plans to expand
its 550 hectare plantation to 8- 10,000 hectares over the next few
years. The company has secured permission to construct an ethanol
plant and, if production is successful, hopes to develop an export
market.


13. (U) In addition to the apparent potential offered by sweet
sorghum, Uruguay is well-positioned to pursue the longer term trend
towards cellulosic ethanol. This process utilizes the structural

material that comprises much of the mass of plants and has the
advantage of being supported by a relative abundance of source
material when compared with sources such as corn, sugar cane or
sorghum. Of particular interest in Uruguay are the possibilities
offered by the processing of wood chips and thinnings, sawdust and
other such residuals from its rapidly growing forestry industry.
Although cellulosic ethanol is generally more complicated (and
therefore costly) to produce, it nevertheless seems to be edging
ever closer to being viable. Both ANCAP and Weyerhaeuser have
indicated their interest in exploring cellulosic technologies in
Uruguay.


14. (U) Biodiesel: Until last year, Uruguay had a modest but
thriving biodiesel sector concentrated at the level of local farmers
and small private operators who produced biodiesel as a by-product
of animal feed production. The biodiesel was then used to run local
farm machinery and, in one case, a local bus company. A recent rise
in the price of the two main feedstocks (animal tallow and soybean),
however, has meant that placing the by-products directly on the
market offered greater economic gain than converting them into fuel.
Consequently, the majority of these plants have presently ceased
biofuel production.


15. (SBU) ANCAP is ramping up the largest biodiesel project in
Uruguay, working with the edible vegetable oil producer COUSA.
COUSA operates the country's largest pressing plant and edible oil
refinery on the outskirts of Montevideo. Cousa and ANCAP are
finalizing the details to have Cousa source raw material and expand
pressing operations to provide grain oil that ANCAP will use to meet
upcoming mandatory blending requirements for bio-diesel. ANCAP will
install two biodiesel refineries at the location of its central
refinery in Montevideo. These plants will enable ANCAP to produce
around 4-5 million liters by the end of 2009. Although ANCAP is
unlikely to meet the mandated 2 percent blend by the end of the
year, production is expected to step up to around 16-17 million
liters in 2010, enabling it to comply with the GOU target.
According to Cousa, the project's ideal feedstock is around 75
percent sunflower seed to 25 percent soy, which would be purchased
on the open market. ANCAP is working with local cooperatives to
provide both technical support and guarantees that they will
purchase the crops at market prices.

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Wind Power
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16. (U) The potential to harness wind energy in Uruguay is
significant. The National Directorate of Energy is currently
creating a wind-map of the country to identify the most advantageous
sites. Currently, there are two functioning projects: a private
wind farm in Rocha (owned by Argentine investors) and the UTE-owned
"Sierra de los Caracoles" wind farm in Maldonado. Both operations
generate approximately 10 MW per year. While economic constraints
mean that the Rocha farm is unlikely to expand in the near future,
UTE hopes to be generating 300MW of wind-power by 2015 (ten percent
of Uruguay's annual requirements).


17. (SBU) The response to UTE's call for wind power tenders has been
enthusiastic and ongoing (UTE and the Ministry of Energy are
currently interviewing interested parties, including U.S. firms),
but UTE has not yet contracted additional projects. A key
consideration for potential investors will be to obtain an "iron
clad" purchase contract from UTE, which has a monopoly on the
purchase of energy as well as the right to set conditions, price and
location. One additional, primarily technical challenge arises from
the fact that Uruguay's electricity grid is designed to be fed only
from a few central sources. Consequently, potential investors have
to design and budget for the necessary bridging technology.


18. (U) The GOU's 2005 plan also included incentives for buildings
and homes to use mini-wind parks to create self-sustained energy.
Another initiative is mini-turbines used in family homes. Although
these remain long-term aims, Ramon Mendez, the National Director of
Energy, has stated that grid energy consumption could be reduced by
almost 30 percent through this method. Additionally, the
mini-turbines could potentially feed the grid and the owners could
receive a discount in their energy bills.

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Solar Power
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19. (U) The use of solar power is only at an incipient stage in
Uruguay. Uruguay's largest single installation is 150 m2 and the
country currently has only 1.000 m2 of solar panels or less than 0.3
m2 of coverage per thousand inhabitants. This compares to Brazil
with 17 m2 of solar paneling per thousand inhabitants, Germany with

104m2 and Israel with 770 m2. Uruguay's existing solar power
technology is primarily thermal (i.e., based on solar collecting
devices that generate energy directly heating water, as opposed to
the costlier photovoltaic technology, which uses sunlight to produce
electricity). For the last two decades, most solar power has been
employed by a limited cadre of small business and homeowners using
thermal solar devices to meet their water heating needs.


20. (U) The potential for solar power in Uruguay is encouraging.
Uruguay receives an average of 1700 kw/m2 of sunlight a year, which
puts it on par with Mediterranean countries and makes solar energy a
viable option. There may also soon be legislative support for solar
power: the Senate recently passed a 'Promotion of Solar Technology'
law that would require every newly constructed health center, hotel
and sports club with more than 20 percent of their energy
expenditure devoted to heating water to install solar collectors.
Additionally, many state institutions are working together to
support solar initiatives. "Mesa Solar" (Solar Table) is a group of
engineering, architecture, local government and business
institutions who communicate on topics connected to thermal solar
energy. Also, the public university teaches a module on solar
energy as part of its "Technology and Renewable Energy" and
Architecture courses.


21. (U) The GOU is also interested in exploring photovoltaic power,
and by 2015 aims to have established two pilot photovoltaic farms at
a rural location isolated from the main grid. UTE has already
installed a few photovoltaic panels since 1992. In 2004, they
embarked on a plan to install 1000 50 watts/peak (wp) systems.
Roughly 600 of these have been successfully installed in rural
schools, police stations and ranches with the rest slated for
installation by the end of 2009. The vast majority of those already
installed are operating well. The public university currently
teaches a module on Photovoltaic energy as part of its "Technology
and Renewable Energy Course."

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U.S.-Uruguay Energy Partnerships
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22. (U) In September 2008 Uruguay signed an Alternative Energy and
Energy Efficiency MOU with the U.S. In the months leading up to the
signing and since, Embassy Montevideo has pursued a series of
biofuels and alternative energy-related initiatives with the GOU.

-- October 2007 - the U.S. Department of Energy supported a visit by
GOU officials and experts at ANCAP, Uruguay's state-owned petroleum
company, to visit and establish connections with North Carolina
State University (NCSU) on biofuels. Following the visit, Uruguayan
students have studied and done research at NCSU and the Embassy
brought a renowned NSCU biofuels expert to visit Uruguay. The
Embassy continues to facilitate interaction between NCSU and ANCAP.

-- September 2008 - Embassy Montevideo supported a seminar that
brought a U.S. expert in next-generation cellulosic biofuels to
Uruguay. He met with Minister of Industry and Energy Daniel
Martinez, ANCAP and Ministry of Energy engineers, as well as private
companies involved in biofuels and academic researchers.

-- October 2008 - Embassy Montevideo arranged for the University of
Georgia, with the assistance of Weyerhaeuser, to develop academic
exchanges and research opportunities with the University of
Montevideo in areas such as forestry and biofuels, among others.

-- May 2009 - Embassy Montevideo organized a round table discussion
with Ms. Carey Bylin, Natural Gas STAR Program, Oil & Gas, EPA, and
local government and private institutions. The meeting focused on
methane emissions from oil and gas, landfills, coal mining and
agricultural waste. In follow up to the meeting, the Embassy and
Ms. Bylin discussed with the Director of Energy the possibility of
Uruguay joining the EPA's Methane to Markets initiative.

-- June 2009 - ANCAP formally thanked the Embassy for assistance
provided within the MOU by the Commercial Section to identify
equipment suppliers as well as information on standards for ethanol
in support of the company's program to meet mandatory ethanol
blending requirements of 2% by end of 2009 and 5% by 2014.

-- July 2009 - Embassy Montevideo will bring a U.S. expert in land
management and use of carbon credits to fund biofuels projects to
Uruguay for a two-day visit. The Stanford University professor will
meet with Ministry of Energy officials, ANCAP representatives, NGOs
and private companies involved in biofuels, and academic
researchers.

-- In February, emboffs and officials from the Uruguayan National
Directorate of Energy and Nuclear Technology (DNENT) met to discuss

the current state of Uruguay's energy sector and potential next
steps within the framework of the MOU. DNENT agreed to develop a
draft plan of action to implement the MOU's provisions to (1)
promote exchanges, research and development and (2) establish a
bi-national working group on renewable energy and energy efficiency.
DNENT stressed GOU support of public-private cooperation and
investment in the development of the biomass sector. An
OPIC-partnered project on biofuels may be a possibility. Another
area identified for future collaboration is technical assistance and
policy development on integration of privately generated power into
the national power grid.

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Comment
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23. (SBU) The GOU's commitment to renewable energy is strong, but
limited by its overall technical capacity. Uruguay offers a great
deal of potential in the field and the GOU appears prepared to
support long-term targets in order to realize some of this
potential. Steps thus far have been relatively small but steady.
As energy security continues as an important issue and Uruguay's
electricity needs grow by 50-60 MW a year, those steps will need to
increase in size to keep pace with demand. On biofuels in
particular, Uruguay has the potential to produce much more than the
five per cent of total motor vehicle fuels required by law. With
forward-leaning public policy it could adapt into a biofuels-based
economy based on today's technology and likely advances in the
future. Potential export markets look tougher, as it will be
difficult to compete with much larger Argentine operations. Private
investment will prove essential in these endeavors, and the GOU will
need to consider carefully the roles of its state-owned monopolies,
UTE and ANCAP. Whereas the private production of electricity is
economically viable, its purchase and distribution is controlled by
the state-owned monopoly UTE, which can set its own price.
Meanwhile, only ANCAP can import, refine and blend petroleum
products, making it the 800 pound gorilla on decisions related to
biofuels in Uruguay. END COMMENT.