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Cablegate: Electricity Shortages Threaten Ecuador

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OO RUEHWEB

DE RUEHQT #2807/01 3192119
ZNR UUUUU ZZH
O 152119Z NOV 06
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5686
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6176
RUEHCV/AMEMBASSY CARACAS PRIORITY 2169
RUEHLP/AMEMBASSY LA PAZ NOV 0221
RUEHPE/AMEMBASSY LIMA PRIORITY 1161
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 1439
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 002807

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/EPSC FAITH CORNEILLE
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: ECON ENRG EINV EC
SUBJECT: ELECTRICITY SHORTAGES THREATEN ECUADOR

REF: A. Quito 1735
B. Quito 2218

1. (SBU) Summary: A potential electricity crisis in Ecuador looms
once again on the horizon. Growing demand coupled with lack of new
investment has resulted in an industry stretched thin. Low rainfall
near the main hydroelectric plant in Paute, located in the lowlands
of eastern Ecuador, has again caused an annual shortfall that must
be made up by thermal electricity generation and imports. Industry
experts believe Ecuador should be able to make up the difference
with various stopgap measures during this "dry season" for Paute.
However, given how tight supplies are, if any of these stopgap
measures falter Ecuador could face temporary electricity rationing
in the next 2-3 months, just as a change in government takes place.
This situation is likely to recur in forthcoming years until Ecuador
invests in its electrical sector. End Summary.

2. (U) For much of the year, 60-70 percent of Ecuador's electricity
is produced by hydroelectric plants (Paute accounts for 60 percent
of Ecuador's hydroelectric capacity) and 30-40 percent is produced
by thermal plants. However, from October through February or March
(the "dry season" east of the Andes), the area near Paute suffers
from low water levels and the majority of electricity must be
provided by thermal producers, although their installed capacity is
much lower than that of hydroelectrics. In November, 60 percent of
Ecuador's electricity is being generated by thermal plants, 25
percent by hydroelectric plants, and 15 percent is being imported
from Colombia.

An Annual Problem, But Worse this Year?
---------------------------------------

3. (SBU) Every year Ecuador faces the same shortage; thermal
producers must ramp up production and the country must also increase
imports. This year events conspired to create an even tighter
situation than usual. Water levels near Paute have been unusually
low and the plant has produced even less electricity than normal for
this time of year. Lack of advance planning meant that thermal
producers did not have enough fuel available in November to meet the
increased demand (Ecuador imports fuel for this purpose; imports for
December should be sufficient), and a terrorist attack on Colombian
operations limited Colombian imports for several days. In addition,
many thermal producers have not been performing sufficient
maintenance on their machinery due to cash flow difficulties
(chronic underpayment hampers the sector), and now that demand has
increased are unable to operate at full capacity due to broken
machines.

Short Term Remedies...
----------------------

4. (SBU) Head of Ecuador's electricity regulator Conelec, Alejandro
Ribadeneira, believes the country will be able to meet increased
demand in the short term with a number of measures. First, imports
of fuel for thermal producers have been increased for the coming
months. Second, several thermal plants that are operating under
capacity will recover 80-100 megawatts (mw) over the next few weeks
after the completion of maintenance on their systems, and an
additional 40 mw by the end of the year. (A caveat to this,
however, is that the thermal plants (other than U.S.-owned Machala
Power) are old and in poor mechanical condition. There will likely
be continued breakdowns.) Third, a number of barges with thermal
plants are scheduled to come on line by the end of November, adding
approximately 150 mw of electricity. Ribadeneira downplayed a
November 7 press release by Cenace (Ecuador's electricity
dispatcher) that only 15 days of electricity remained before
rationing would commence. He believes the announcement is a scare
tactic to try and increase awareness and encourage less consumption,
but that rationing will not become necessary.

5. (SBU) In contrast, technical director for Duke Energy and Cenace
board member Rafael Drouet believes it is quite likely blackouts
will occur if anything interferes with supplies for more than a day
or two, for example if Colombian imports are halted (Colombian
transmission lines feeding Ecuador have been blown up twice in the
last three months) or if there is a breakdown at an important
Ecuadorian generator. Should this happen, Cenace has an emergency
plan for rotating blackouts in different city sectors for a few
hours at a time, as was done in the early 1990s. However, this
would likely only last until Colombian imports were re-established
or increased.
6. (SBU) Drouet bemoaned the failure of rationing measures to deal
with the current electricity emergency. Weak attempts such as
requiring bars to close an hour early and prohibiting lit billboards
after midnight are not proving very effective. Stadiums are
supposed to be closed for night events to conserve electricity and
in some areas every other street light is supposed to be off.
Drouet claims these rules are being ignored, and blames Conelec's
lack of enforcement ability.

...But A Long Term Solution is More Difficult
---------------------------------------------

7. (SBU) In the long term however, the problem remains of how
Ecuador will meet growing demand. With an estimated growth in power
demand of 5.8 percent per year based on the last 5 years, experts
predict Ecuador would need approximately 125 mw of new power each
year to keep up. The structural problems of nonpayment to
distributors and generators have resulted in lack of investment in
the sector (ref A). The last major investment in Ecuador's
electricity sector to come on line was Machala Power in 2002
(subsidiary of U.S. firm Noble Energy). Machala's plant runs on
natural gas making it a very low cost producer in comparison with
most other aged thermal plants that run on subsidized diesel.
Willing to invest more in the sector, Machala had planned second and
third stages of investment that would provide close to 200
additional mw of electricity. However, the firm has filed for
international arbitration due to underpayment and has not continued
with its investment schedule. A recent electricity reform law was
to improve rules governing the electricity sector and increase
investment. Implementation of several key parts of the law have yet
to take place and new capital investment does not appear likely from
private sector sources (ref B).

8. (SBU) One new project, funded by the government, will come on
line next year. The San Francisco project is a hydroelectric plant,
drawing from an already-existing hydroelectric dam, which will
provide 100 mw of electricity in January 2007, and another 100 mw
upon completion of its second phase in July 2007. However, since it
is on the same side of the Andes as Paute, it will be subject to the
same seasonal lack of rainfall. Imports from Colombia are scheduled
to increase next year when a new 250 mw capacity interconnection is
completed. However, reliance on imported electricity may not be a
viable long term solution, given frequent lapses in electricity
supply due to terrorist attacks on Colombian lines and the high
price of Peruvian electricity. A proposal exists for a huge
hydroelectric plant on the west side of the Andes that would be
subject to different rainy seasons than Paute. Ecuador has approved
a law to set aside part of the income from the former Oxy fields to
invest in the hydroelectric sector but construction and
implementation of a new hydroelectric plant would be years away.

JEWELL

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