Rationing and Protests Provide Backdrop to Electricity Reforms in Venezuela

Council of Ministers Approves Electricity Decrees; Further Reform Planned

The Council of Ministers on 22 May approved two new electricity decrees: one authorising the merger of state-owned CADAFE with its affiliates. CADELA, ELECENTRO, ELEORIENTE, ELEOCCIDENTE and the Electric System of Monagas and Delta Amacuro (SEMDA); and the other suspending the privatisation of SEMDA.

The reunification of CADAFE effectively confirms a policy that has been in place for a number of years. Publicly owned and private utilities currently co-exist in the Venezuelan electricity sector. However, with the exception of Seneca on Margarita Island, there have been no new electricity privatisations since President Hugo Chávez came to power. Rafael Ramírez, the president of Venezuelan state oil company PDVSA and minister of energy and petroleum, announced the decrees, saying that they would banish 'the ghost of privatisation' definitively and remove an obstacle to new investments. He also stated that the government, through CADAFE, planned to invest US$120 million in distribution and transmission in the states of Monagas and Delta Amacuro over the next 18 months.

Meanwhile, the president of the Energy and Mines Commission in the National Assembly, Angel Rodríguez, announced on Friday (26 May) plans to submit an electricity reform bill for debate on the floor of the house before 15 June, El Universal reported. One of the aims of the new legislation will be to establish guidelines for hydroelectricity and the use of nuclear power. Venezuela's president has repeatedly spoken about the country's 'right' to nuclear energy for peaceful purposes. Although this might have exacerbated Venezuela's already fraught relations with the United States, the expansion of domestic gas supplies and thermal power generation - rather than the introduction of a new fuel to the country's energy matrix - would be the best way to reduce the risk of power shortages during periods of drought (see Venezuela: 11 October 2005: Venezuela-Argentina Nuclear Talks Spark Controversy).

Blackouts and Protests Provide Backdrop to Reforms

The announcements coincided with reports in the local press of rationing and blackouts in different parts of the country. Among the worst affected was the state of Anzoátegui, which is frequently hit by blackouts and will not see the supply shortages resolved until 2007. There were also reports of protests in the state of Falcón over power failures, an extension of power rationing in the state of Monagas and power problems in other areas, including Nueva Esparta.

Venezuela saw a 61.5% increase in the number of power failures last year, compared to 2004, with grid operator OPSIS recording 84 power interruptions in 2005, compared to 52 in 2004. The new reports of power shortages confirm that the system remains under strain.

New Plants Start Operations

Although the power failures are a reminder that years of underinvestment in the sector have put the electricity system under increased strain, there are some signs that the situation might be improving. A number of new plants have started operations in the past few months, and further investments are planned in expanding electricity generation and transmission.

The 12th unit at state-owned Electrificación de Caroní (Edelca)'s Caruachi hydroelectric project started operations at end-March, signalling the completion of a project that began in 1998. The unit brought the plant's total capacity up to 2,196MW. Earlier that month, President Chávez inaugurated three new thermal power plants: CADAFE's 300-MW Pedro Camejo plant in the state of Carobobo; the Argimiro Gabaldón plant; and the initial phase of the Termobarrancas plant. Termobarrancas is an integrated gas and power project being developed by Spanish-Argentine energy group Repsol-YPF. Initial production of 80MW is expected to be increased to 450MW by 2007. A further plant - the Palavecinos plant - is expected to start operations in 2006. Others are also under development: the 514-MW La Vueltosa hydroelectric plant; the 450-MW Josefa Camejo plant on the Paraguaná Peninsula; the 150-MW Ezequiel Zamora plant being developed by Enelbar in Lara state; the 300-MW Alberto Lovera plant in Puerto La Cruz; and the 200-MW La Raisa plant being built by U.S.-based AES Corp.'s Venezuelan subsidiary EDC.

Outlook and Implications

Venezuela needs to expand its generating capacity and increase investments in transmission and distribution in order to meet growing national demand and reduce its dependence on hydroelectric power. The construction of new power plants as well as investments aimed at increasing domestic gas production should help to ease Venezuela's power supply problems over the coming years. Regional development banks such as the Inter-American Development Bank (IDB) have provided some financial support to new projects such as the 2,160-MW Tocoma dam being built by state-owned utility Edelca. However, the expansion of the electricity sector is mainly being driven by the country's state-owned utilities, with financing provided by funds created using oil export revenues, Fonden and Fondespa. The use of oil revenues rather than cash flow from operations to finance new investments raises doubts about the sustainability of investments in the sector in the event of lower international oil prices or increased pressure on state oil company PDVSA's revenues from other areas of government spending. The government's reluctance to increase tariffs has meant that utilities have not been able to finance new investments themselves, while the tariff freeze since 2003 and a lack of clarity in the regulatory environment for the energy sector have also acted as a disincentive to greater investment by the private sector.

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