Power Blackouts Continue in Ecuador

C O N F I D E N T I A L QUITO 001057 SENSITIVE SIPDIS E.O. 12958: DECL: 2019/12/23 TAGS: EINV EPET ENRG ECON EC SUBJECT: Power Blackouts Continue in Ecuador REF: QUITO 1110; QUITO 1026; QUITO 938 CLASSIFIED BY: Heather M. Hodges, Ambassador, U.S. Department of State, EXEC; REASON: 1.4(D) -------------- Summary -------------- ¶1. (SBU) Having failed to end energy blackouts by Ecuadorian President Correa's arbitrary deadline of December 15, Minister of Electricity and Renewable Resources Esteban Albornoz resigned December 16 and was replaced by Miguel Calahorrano. In the face of continuing energy shortages, President Correa bowed to reality and admitted December 19 that electricity rationing could continue past mid-January. Calahorrano's first act as Minister was to negotiate an energy import deal with Colombia. The GoE acknowledges it has spent US$245 million since the blackouts began in November to address the energy crisis. Critics say the cost of acquiring emergency power has been much higher and that losses to the economy will be in the range of US$1 billion. The GoE has turned to U.S. suppliers for power generation equipment, purchasing seven GE turbines and renting five power barges from U.S. companies. Although Colombia's agreement to sell electricity to Ecuador may provide some relief from blackouts during the holidays, energy shortages are expected to continue at least until the end of January, and likely well into February. End Summary. -------------- Electricity Minister Takes the Fall -------------- ¶2. (SBU) Failing to eliminate energy shortages by an arbitrary December 15 deadline set by President Correa, Esteban Albornoz resigned as Minister of Electricity and Renewable Natural Resources on the evening of December 16 after only five months in office. President Correa had established the deadline in his December 5 radio/television address when he also assured residents in Guayaquil that energy cuts there would end on December 10, since that city had endured the longest blackout periods since the crisis began on November 5 (Ref A). Since then, President Correa repeatedly assured Ecuadorians that there would not be blackouts during the Christmas holiday. Although energy cuts in Guayaquil were suspended on December 10, they resumed a week later. In announcing his resignation, Albornoz warned that blackouts would continue country-wide through the end of the year. Political opposition members in the National Assembly have called for Albornoz to come before the body to answer questions regarding the lack of action by the Ministry and the administration to prevent the energy crisis. ¶3. (SBU) On December 17, Miguel Calahorrano was named to replace Albornoz. Calahorrano had been heading the country's Energy Crisis Committee, an ad-hoc body formed to oversee government efforts to deal with the crisis. During the country's last energy crisis twelve years ago, Calahorrano had been forced to resign his position as head of the state energy company Inecel. In his first act as Minister, Calahorrano traveled to Colombia to request increased sales of electricity. Calahorrano reported to local press on December 18 that he had succeeded in reaching an agreement with the energy authorities of Colombia for the supply of 1,000 megawatts per hour per day (MWh/day) starting December 21/22. ¶4. (SBU) During his Saturday, December 19 broadcast President Correa said the current energy crisis is one of the worst in the country's history and acknowledged that energy rationing would continue into the new year. Correa blamed his mistake of promising a December 15 end to power shortages on ex-Minister Albornoz' overly "optimistic" projections. He said he asked for Albornoz' resignation on December 16 when he learned the GoE was still incapable of ending the outages. Correa noted that Ecuador has found it difficult to improve the power situation over the last three years, since during this time the water level at the country's main hydroelectric dam, Paute, has steadily deteriorated while energy demand in the country has increased. He claimed that the measures the GoE has adopted in recent months have been effective, but the hydro power situation has worsened. Correa assured Ecuadorians that the GoE will not allow power shortages during holidays, but concluded that blackouts will continue through January 15 in the most optimistic scenario and possibly as late as February 12 in the worst case scenario. -------------- No Light at the End of the Tunnel, Yet -------------- ¶5. (SBU) When the crisis began, GoE officials acknowledged that the country had an energy shortfall of around 7,000 MWh/day. In an effort to manage the crisis, the government has been repairing thermoelectric plants, purchasing and renting new generating capacity, purchasing energy from Peru and Colombia as available, and implementing energy savings programs. Purchases from Peru of around 1,600 MWh/day and reintroduction to the grid of around 2,500 MWh/day from power barge Victoria II (Intervisa) and 900 MWh/day from Power Barge II have helped to narrow but not close the gap. Until the recent agreement with new Electricity Minister Calahorrano, Colombia has only been able to offer electricity to Ecuador on an intermittent basis since the crisis began (Ref B). ¶6. (SBU) In order to increase generating capacity the GoE has turned to U.S. suppliers, purchasing seven TM2500 turbines from General Electric (21 MW each) and renting five power barges from APR Energy and Energy International. The GE turbines and APR barges are together estimated to provide a total 388 MW of additional generating capacity. However, this new supply of energy will be slow to come on-line. Only one 40 MW APR barge is likely to start generating power before Christmas. Four of the GE generators are now in-country, but only one has been unloaded and installation begun; GoE officials say it will be on-line by December 24, but the company in charge of installation has told Embassy officials that it is unlikely to be generating power before the end of December. The GoE plans to close the energy gap with installation of the other six GE generators and the four additional power barges, all of which it expects to have operating by the end of January. -------------- What's the Cost and Who's to Blame? -------------- ¶7. (SBU) Critics have already started to decry the cost of the energy crisis for the country. On December 16, Coordinating Minister for Production Nathalie Cely told reporters that the government had invested US$245 million in November and December to deal with the energy crisis: US$176.2 million for the purchase of turbines, transformers and installation; US$25.9 million for the purchase of electricity from Peru ($0.35/kWh) and Colombia ($0.25/kWh); US$7 million for the purchase of a replacement turbine for an existing plant; and US$36 million for maintenance of thermoelectric plants. These calculations do not include the cost of imported diesel for operating the turbines, which reportedly totals another US$43 million. Nor do they appear to include the cost of renting the five new power barges or the cost of government programs to provide energy savings bulbs to citizens and replace old, energy-inefficient refrigerators. (Venezuela has apparently agreed to donate Ecuador five million energy saving light bulbs.) ¶8. (C) The Chamber of Industries in Guayaquil, the country's production and commercial center, claims the energy crisis has caused losses of approximately US$1 billion for the country. Although the full cost of the crisis will not be known for a while, Technical Secretary at the Coordinating Ministry for Production Mauricio Pena told Econoffs on December 17 that the Ministry had committed to conduct a comprehensive study of the costs associated with the energy crisis, once it had passed. ¶9. (C) Luis Castelo Leon, advisor to outgoing Minister Albornoz, told Emboffs December 16 that there were three simultaneous events that together caused the energy crisis: 1) the worst drought in 40 years, which crippled the electric system's mainstay 1070 MW Paute hydroelectric plant (which normally provides 30-35% of the country's power); 2) Colombia's decision to suspend/limit electricity sales, which had accounted for as much as 12-20% of Ecuador's energy consumption; and, 3) failures at the country's second most important hydroelectric plant, the 213 MW San Francisco plant. (Note, Brazilian company Odebrecht was expelled from the country in September 2008 over conflicts with the GoE regarding construction flaws that have prevented the plant from operating properly since its inauguration in May 2007.) ¶10. (C) Looking back further, Castelo said a low level of investment over the past decade coupled with a 6% annual growth in energy demand had left Ecuador's electricity sector in a vulnerable state. Castelo explained that Ecuador's current energy law, dating from 1996, was designed to induce private investment in the sector and explicitly prohibits direct public investment in electricity generation, except when using funds generated by state-owned electricity generating companies. The state's role was to identify projects, produce studies, and solicit private investment. However, substantial private investment did not materialize, in part he acknowledged, due to GoE payment problems. Only in July 2008, through Mandate 15, did the executive regain the ability to invest directly in generation, transmission, and distribution of electricity. A pending draft energy law is expected to centralize all generation, transmission, and distribution activities within one state-owned entity. ¶11. (C) Even with the restrictions of the current energy law, Castelo faulted previous administrations for not having the political will to find ways of increasing and safeguarding generation capacity. Castelo noted that plans to build the 160 MW Mazar hydroelectric plant had been developed in 1998, but that construction did not begin until 2005; the plant is expected to come on-line by August of next year. More important than its generating capacity, the Mazar plant lies on the same river as and above the Paute hydroelectric plant, with a reservoir four-times the size of Paute's. Once the reservoirs for both Mazar and Paute are full, they will enable both plants to operate for a full month without any additional water flow, providing critical flexibility for weathering drought conditions. -------------- Looking To a Brighter Future -------------- ¶12. (SBU) Under Ecuador's normal energy matrix, the country would rely on hydroelectric power at about $0.04/kWh to cover base needs. During periods of increased demand, the system would draw additional energy from more expensive thermoelectric plants ($0.12-$0.14/kWh) and imports from Colombia (app. $0.25/kWh). At peak demand, Ecuador would rely on hydroelectric power to supply 35-40% of the energy required, thermoelectric generation for 45-50%, and purchases from Colombia for 10-20%. The Correa administration's goal is to change the energy matrix by 2020 so that during peak demand hydroelectric power will supply 70-80% of the country's energy, thermoelectric plants will supply 10-20%; and renewable energy sources will supply 10%, thus eliminating the need to purchase power from neighboring countries. ¶13. (SBU) Most of Ecuador's hydroelectric plants are in the Oriente, east of the mountainous Sierra region, which is relatively less populated and has substantial water flows. Recognizing the vulnerability of hydroelectric plants to climactic conditions, the GoE is studying hydro projects to the west of the Sierra, whose rainy season is during the opposite time of year from that of the Oriente. However, these projects pose unique challenges, principally because they are in highly populated areas. As part of its long-term strategy, the administration also intends to increase substantially the use of alternative energies, principally wind, solar and geothermal. However, funding constraints will likely limit the extent to which the government will be able to pursue its ambitious energy programs. Case in point is the recent difficulties the GoE has had in reaching agreement with the Chinese Exim bank on terms for financing 85% of the $2 billion Coca Coda Sinclair hydroelectric plant construction (Ref C and septels). -------------- Conclusion and Comment -------------- ¶14. (C) Even with the 388 MW additional power generating capacity the GoE hopes to have on-line by the end of January, Ecuador's electricity sector will likely remain fragile well into the future. The water level in Paute's reservoir is critically low, hovering around 1,971-1,975 meters above sea level. The rainy season to the east of the Sierra, where Paute is located, is not expected to commence in earnest until April and it will take months to fill the reservoirs. Should the water level in Paute's reservoir drop to 1,965 meters, the plant would have to be shut down entirely, potentially causing a collapse of the country's electric system since Paute not only feeds into the power grid but also helps regulate it. In the medium-term, funding constraints will likely limit the government's ability to increase power generation capacity in line with growing energy demand. ¶15. (C) While a lack of foresight by past administrations may underlie the country's current energy problems, the present administration is under fire for the continuing crisis. Correa has touted the high level of investment his administration has made in the electricity sector when compared with previous governments, but these investments have been largely focused on long-term projects. Critics contend the government is at fault for not properly assessing the risk of relying so heavily on Colombia as a source of energy and of a potential drought brought on by El Nino, and blame it for not taking prudent steps to maintain and increase the country's thermoelectric generating capabilities. With blackouts to continue well into 2010, despite earlier government assurances that they would not, the President's approval ratings will also likely continue to suffer. HODGES