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Central American University - UCA  
  Number 287 | Junio 2005
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Nicaragua

The Energy Crisis Explained

In a talk to envío, economist Adolfo Acevedo explained the reasons behind Nicaragua’s current energy crisis.

Adolfo Acevedo

According to data of the United Nations’ Economic Commission on Latin America (ECLA), updated in 2003, 72% of Nicaragua’s electrical energy capacity depends on imported petroleum. The figures for El Salvador and Honduras are 48% and 55%, respectively, while Costa Rica has managed to lower its oil dependency to 21%. Our considerable dependency is largely the result of policy options adopted in the nineties. During that period, the World Bank and the Inter-American Development Bank (IDB) stopped financing public investment in energy infrastructure, having been the big backers of such investments in previous decades. In addition to suspending such spending, they established a “framework policy” in which investment in this field would depend entirely on attracting foreign investors, particularly by privatizing existing state infrastructure and companies and granting new concessions.

Nicaragua and Costa Rica:
Moving in opposite directions

While this was happening in Nicaragua, particularly in the second half of the nineties, during the administration of Arnoldo Alemán, Costa Rica was considerably expanding its hydroelectric generating capacity, with support from the Prototype Carbon Fund, among others. It was thus able to reduce its dependence on hydrocarbons to practically zero and start selling cheap electricity to both its own population and the interconnected Central American electricity grid. Nicaragua took the path recommended by the multilateral financing institutions, basing its energy strategy entirely on granting concessions to private corporations such as AMFELS, COASTAL and ENRON to install diesel combustion-based thermal power plants. At the time, it was rumored that generous bribes were being paid to ensure the granting of these concessions. It also appears that there were “private incentives” to go forward with the privatization of the state distribution company and generating plants at any cost. The initial investments in the generation segments were attracted with relative ease, due to the highly favorable conditions offered to reduce market risks. These investments concentrated almost 90% of electricity generation into a handful of economic groups.

A private affair with private benefits

When they started operating in 2000, the private thermal power plants represented 50% of Nicaragua’s total electricity generating capacity, thus increasing the country’s dependence on hydrocarbon importations to an extreme. These investments also created important excess generating capacity and a large “reserve ratio.” By 2003, the generating capacity had risen to 686 megawatts, 155% of the maximum observed peak demand of 442 megawatts.

Despite this notable reserve ratio, over half of Nicaragua’s population still lacks access to electricity, particularly in rural zones. According to ECLA figures, the “electrification rate,” which measures the population’s access to electricity, is only 48% in Nicaragua, compared to 97% in Costa Rica, 87% in Guatemala, 80% in El Salvador and 63% in Honduras. It is worthy of note that Guatemala had the same electrification rate as Nicaragua in 1996. In 2002, 2.8 million Nicaraguans, or 457,000 households, were “pending electrification,” as the experts like to put it. According to the World Bank, Nicaragua’s per capita electricity consumption is much lower than other countries with similar poverty levels. Obviously, when access to electricity depends on strict private profit considerations, there is no “incentive” to supply it to the most isolated geographic regions or the poorest segments of the population. As a result of the policy of private sector concessions for the installation of new thermal power plants, 67% of the country’s total generating capacity is currently in private hands: GEOSA and GEMOSA—which were granted as concessions—and the Amsfeld, Coastal and Enron diesel plants. The remaining 33%—HIDROGESA and GECSA—is still in public hands.

With respect to distribution, the privatization processes left the entire capacity in the hands of the Spanish transnational corporation, Unión Fenosa, which runs a virtual private monopoly and applies a very high markup on distribution costs compared to generating costs. This exaggerated distribution markup on energy costs were established in “transition contracts,” which expired at the end of 2004. These contracts were exclusively designed to make the distribution companies attractive to foreign investors, as the IMF and World Bank now recognize in a document marking Nicaragua’s reaching of the completion point of the Highly Indebted Poor Countries (HIPC) initiative. Both institutions acknowledge that these markups were established with the express aim of ensuring extraordinary benefits for the purchasing companies, seemingly with no consideration whatsoever for the impact this would have on the Nicaraguan population, 78% of which struggles to survive on under two dollars a day.

Unión Fenosa: Markups and unfair charges

The World Bank figures show that electricity distribution adds 61% to the generating costs, so that if the latter is 100, Unión Fenosa’s distribution markup increases the consumer price to 161. This figure is fundamental to explaining Nicaragua’s high energy prices. To this is added an extra 9% that the company attributes to “distribution losses,” essentially due to illegal direct splicing into street electricity wires, bypassing the meter, if the residence or tiny business even has one. So overall, Unión Fenosa effectively adds 70% to the generating costs.

In 2003, the generating cost was US$58.90 per kilowatt-hour, with the distribution markup adding a further $32.60 per megawatt-hour, in addition to $10.80 to cover distribution losses. According to ECLA, distribution losses in Nicaragua have continued to rise even more rapidly following the privatization of distribution, from 28% in 1997 to almost 33% in 2003. The figures for Costa Rica, El Salvador and Honduras are 7%, 13% and 17%, respectively. This is alarming, considering that the promise to reduce distribution losses was one of the justifications for privatization in the first place. According to ECLA, reducing losses to 11% would allow a significant reduction in prices.

As the Nicaraguan Consumers’ Defense Network charges, Unión Fenosa also tacks various other unfair charges onto its rates, such as marketing, street lighting, a guarantee deposit, payment default charges, non-registered energy, meter rental, etc. As a result, a high percentage of poor families’ income goes to pay their electricity bill. This in turn pressures them to make illegal connections to maintain access to this vital service, which of course increases distribution losses.

In addition, the electricity generating cost prior to distribution is surely also inflated by the high markups and monopoly privileges that Bolaños negotiated with the economic groups that control generation during the Alemán administration, when he was Vice President and also headed the state-run electricity company ENEL. The “contracts” containing these privileges have remained secret ever since.

All of these factors make Nicaragua’s electricity costs the highest in Central America. In 2003, they reached $123 per megawatt-hour, while they were $117 in El Salvador, $113 in Guatemala, $90 in Honduras and $69 in Costa Rica. The highest prices in the region are found in the three countries that privatized their distribution services, with Nicaragua obviously in the lead. Of the $123 charged for each megawatt-hour in Nicaragua, 54.5% corresponds to generating costs, 3.6% to transmission costs, 32.6% to distribution markups, 9% to distribution loss and 0.5% to other factors.

It is interesting to note that profit margins in gasoline distribution in Nicaragua are also the highest in Central America. In 2003, the respective per-gallon markups in Nicaragua for super and regular were $0.61 and $0.59, compared to $0.21 and $0.25 in Guatemala, $0.45 and $0.38 in El Salvador and $0.42 and $0.40 in Costa Rica.

Saved from further costs and damage

The IMF and World Bank pressured for years for privatization of the state-run generating companies HIDROGESA and GECSA. These lending institutions now recognize that not doing so—due to social opposition to the arbitrary conditions they established—has saved Nicaragua from important costs and further economic and social damage, including losses the population would have suffered from the creation of an additional electricity generation monopoly. It also saved the country from great financial costs. To ensure high profit margins to Unión Fenosa, the transition contracts established stable electricity prices from the generator plants, possible mainly because of HIDROGESA’s low operating costs and the state’s price regulation policy, which kept HIDROGESA’s rates to Unión Fenosa below market prices, thus subsidizing the distribution company’s profits.

Privatizing HIDROGESA in 2003 would have established a powerful private monopoly in control of the country’s entire generating grid, as the companies competing to acquire it were the very ones that already owned the diesel-run plants. The creation of such a monopoly would have implied a large increase in generation charges, and with electricity rates already set below market costs, the government would have had to grant an even more generous financial subsidy to Unión Fenosa to keep to the distribution prices established in the contracts.

Rising international oil prices
and their effects in Nicaragua

In this context, what impact have the rising international petroleum prices had? They have obviously pushed up the electricity generating costs in the thermal power plants, which use petroleum-derived fuel, causing these private plants to raise the price at which they sell to Unión Fenosa, to protect their profit margins. Meanwhile, HIDROGESA, which generates water-powered electricity, continues subsidizing Unión Fenosa by selling at below-market prices, but the resulting decapitalization leaves HIDROGESA unable to replace equipment or make investments, which would be its only way to mitigate the pressure on its prices.

Unión Fenosa, in turn, is pressuring to increase its own prices in response to the increased cost passed on from the thermal generating companies. Passing on increased costs to users to maintain its own distribution profit margins and cover its enormous electricity distribution losses is perfect capitalist logic. Thus Nicaraguans are learning that the argument used by the government and the international lending institutions to encourage public support for the privatization of the electricity utilities was only partially right: privately held companies are not necessarily more efficient than publicly held ones in generating services, but they are definitely more efficient in generating profits, because that, after all, is their business.

Many unanswered questions

This whole story raises many questions. Some concern the whole market structure, with its considerable levels of monopolistic concentration and a regulating body—ENEL, which will now become the “Superintendence of Energy” as part of the new Superintendence of Public Services—effectively “kidnapped” by powerful private interests that do not protect the “public interest.”

Other questions concern the results of the privatization policy, and the interests that have been and continue to be favored by public policies. Doesn’t the fact that private foreign monopolies are involved in generating and distributing electricity, acting with local partners, ensure that public policies will be biased towards their powerful interests?

And above all, many serious questions are related to economic policies: who’s footing the bill and who’s profiting and who pays the debt when mistakes are made, such as focusing on petroleum-powered electricity generation to the exclusion of water-powered generation in a country such as this one? But up to now, little importance has been attached to the fate of the many Nicaraguans who so desperately need electricity.

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