MDB & Energy Project: Country Studies: Uruguay Summary

Uruguay Report

Summary

TABLE OF CONTENTS

Energy situation in Uruguay.
Renewable sources and energy efficiency potential.
Bank loans.
Expected results of MDB policies in the Uruguayan energy sector: Conclusions.

Energy situation in Uruguay

Uruguay is a relatively small country, with an area of 177,000 km2 and 3 million inhabitants. Half of its population lives in the capital, Montevideo, and another 35% is distributed over several cities. With this level of urban concentration and as one of the countries having the highest development indices in Latin America, it is not surprising that Uruguay has achieved electrification for almost all the population: 96%.

This service has been and is currently provided by two government-owned corporations UTE (for transmission, distribution and part of generation) and the Mixed Technical Commission of the Salto Grande bi-national dam (generation). Overall installed capacity is 1,500 MW of hydroelectric power and 540 MW of steam-generated power (gas oil and fuel oil). With a 5% annual growth in the demand for electricity, it is estimated that by the year 2000 the system’s possibilities will have topped out and that it will be necessary to increase installed capacity. The country foresees installation of one or two (imported) natural gas plants that would add some 350 MW to the network.

Unlike in other countries, these corporations’ financial situation is very good, and they even transfer part of their income to the country’s general treasury. Perhaps because of this, the privatization process so common in the region and the world met with a major setback in Uruguay in 1992 when a plebiscite derogated, by a broad margin, a law establishing the legal basis to transfer government corporations to private hands. This result has been interpreted by most political sectors as a decision by the majority of the country’s citizens to keep these companies in state hands.

Nevertheless, electrical power represents barely 18% of final national energy consumption, while derivatives of petroleum, a totally imported fuel, account for 60% of the energy consumed in the country. This energy sector is in the hands of another government-owned corporation, ANCAP, which is also financially healthy. Meanwhile, piped gas, which has a low share in overall consumption, is marketed by GASEBA, a private French company that distributes liquid petroleum gas, with the hopes that in the coming years the plans to bring in natural gas from Argentina will become a reality.

Wood warrants special mention in Uruguay, given that it accounts for 23% of total energy consumption. It is the largest source of energy for the industrial sector (33%) and represents almost half of all energy consumed in homes (46%). This wood does not come from natural forests (which cover barely 3% of the national territory where grasslands constitute the main ecosystem), but instead from plantations especially geared to these purposes. This situation originated with the oil crises of the 1970s and although wood use is falling, it continues to be high at industrial level.

With annual energy consumption slightly higher than 2,000 ktep., the share of the different sectors in final consumption is distributed as follows: 30% residential, 32% transportation, 24% industry, 8% agriculture and fishing, and 6% service sector.

Renewable sources and energy efficiency potential

On the horizon of Uruguayan energy policy there are no signs of development of programs or directives tipping the national energy balance toward greater use of renewable sources and an overall decrease in energy consumption. On the contrary, the idea that increased energy consumption induces development and that the most important energy source to adopt in the future should be natural gas prevails.

Despite maintaining a high external dependence in terms of primary energy sources -and especially a non-renewable resource like petroleum- no programs have been established for development of other renewable local sources or for energy savings and efficiency. Wind and water energy potential is not at all negligible: 45 and 207 MW respectively, for which there are no plans for exploitation. Biomass, in an essentially agricultural and livestock-raising country, shows ample possibilities for development. For example, a 7 MW private generating plant using rice husk will be built next year for self-supply by the rice sector, and other alternatives should similarly not be overlooked, such as sugar cane bagasse, sunflower husk, or biodigestion.

Wood particularly, as indicated above, represents the largest energy source for the industrial sector and almost half of residential use, and could be further developed. To have an idea of this fuel’s potential, suffice it to say, by way of example, that the current forest plantations could provide, while maintaining the same standing volume, the total energy consumed in the country, i.e., approximately 2,000 ktep. per year.

Solar energy has only been taken into account for providing power to schools and police stations in rural areas outside the network and other photovoltaic and thermal applications have been discarded, despite the fact that the country’s average level of insolation would permit them.

Moreover, no programs have been developed to improve the country’s energy efficiency, beyond the recent concern regarding "losses" (illegal connections and technical losses) in the electrical sector. In the industrial sector there have been a few isolated actions, while in the residential and services sectors there have been no systematic public or private programs for rational use of energy (for example: equipment efficiency, thermal insulation of buildings, rationalization of transportation, etc.). Taking into account the paltry efforts on this score, it is reasonable to think that the potential for savings and rational use in the country is high, and that there even is a set of cost-saving actions that are not taken by private citizens due to the nonexistence of an appropriate promotion program.

Bank loans.

World Bank

The only loan from 1992 to date on which information is available is the Power Transmission and Distribution Project (UY-PA-8177) approved in 1995 for 125 million dollars, with an additional contribution by UTE of 103 million dollars. The most important objectives are the upgrading of transmission and distribution lines and enhancement of interconnection with Brazil.

The last two loans preceding this one (which do not appear in the Bank’s public information center) are the one for Power Sector Rehabilitation (2622-UR) signed in 1991 for rehabilitating part of the Gabriel Terra dam (130 MW) and the Power Modernization Project (3221-UR) which made possible the construction of the La Tablada gas oil operated power plant (230 MW), which was broadly questioned because of the air and sound pollution it causes, in addition to its oil consumption.

Inter-American Development Bank (IDB)

This Bank’s participation has historically been very slight in this sector. The only two projects on which information is available are the Electrical Power Transmission and Distribution Program (903/OC-UR) approved in 1995 for an amount of 54 million dollars (plus a local contribution of 35 million dollars) and the Energy Sector Reform (ATN/MT 5276-UR) approved in 1996 for 630,000 dollars and having a local contribution of 310,000 dollars.

The most important objectives of the first project are to create conditions for interconnecting the Uruguayan system with the Brazilian system and to improve the distribution networks in various cities in the interior of the country. The second loan, coming from MIF (Multilateral Development Fund, which is part of the IDB), is for studying a proposal for deregulation of the fuel and natural gas sector and a draft law on hydrocarbons.

We should add to this list a loan for the agricultural sector but having a large rural electrification component: Infrastructure Program for Dairy Enterprises (914/OC-UR). This project was approved in 1996 for 40 million dollars plus a local contribution of 18.9 million dollars and has two major objectives: to improve electrification for some 1,200 dairy producers and the highway system for transporting production. It is particularly important given the fact that the water table in the dairy region, to which this project is geared, has been contaminated by use of chemical fertilizers and concentration of the sector’s animal waste. During the 1980s biodigestors began being installed in the zone, but the effort was abandoned without any follow-up being undertaken. This technological alternative would have cut down on water pollution and would have provided part of the energy necessary on the farms. If the intention to incorporate renewable energy and to take care of the environment had prevailed, the electrification solutions, in this specific case, could have been different.

Expected results of MDB policies in the Uruguayan energy sector: Conclusions.

As can be seen from this description, the loans granted by banks over the past five years have primarily been geared to improving transmission systems and regional interconnection. Apart from the extent to which they are in line with the policies and commitments of the multilateral development banks themselves, their orientations will have a profound influence on the country’s energy future, as analyzed below.

Private participation

Private sector participation should be analyzed within the framework of a peculiar national situation, in which the consensus of public opinion is in favor of the State’s business activities and against their privatization. As we have seen, the government-owned corporations on the whole and those in the energy sector in particular maintain rate levels such that they do not require any contribution of funds from the Central Government, and instead are fund-generators for the latter. If the World Bank and the IDB seek, through private investment, to decrease the government’s liabilities, in Uruguay this measure could have a reverse effect, taking resources away from the government, if no type of compensatory measure is put in place.

Business orientation and company organization

The incentive for government corporations to maximize profits will hinder their allocating part of their budget to supply customers who are not profitable, such as those in marginal neighborhoods or rural dwellings. An inspection plan is currently underway to eliminate theft in more than 100 poor neighborhoods whose only possibility of accessing this source of energy is through illegal connections. On the other hand, heavy competition among companies offering energy substitutes (e.g. piped gas and electricity, for heating and cooking uses) will have negative redistributive effects, since the companies are going to devote their greatest efforts to areas promising higher profitability (which coincide with richer sectors), to the detriment of the remaining areas. It would be necessary in Uruguay, if business criteria are strengthened in the management of government corporations, to establish explicit central government subsidies for unprofitable social or environmental programs.

Renewable sources of energy

The current incidence of "alternative" sources of energy on the national energy balance sheet, leaving aside wood, is practically nil, although some of them have shown interesting potentials from a sustainable development perspective. Yet they have been discarded based on strictly economicist cost/benefit assessments. If environmental costs are included and other non-monetizable but positive aspects for the country and the region are evaluated as a whole, the existing renewable energy potential could be developed to supplement, even if not to replace, conventional sources. This problem will worsen with the sector’s regulatory reform since, because these sources are not generally economically competitive in the wholesale generation market, they will be completely left aside.

Energy efficiency

Despite the fact that in Uruguay the potential for improving energy efficiency and savings is significant, bank policy in Uruguay has generally placed more emphasis on financing the expansion of generating capacity and networks, than on promotion of more efficient consumption and energy saving. Considering the new regulatory framework’s provisions in terms of private sector participation and the commercial orientation of government corporations, it is probable that, if there is no type of regulation encouraging such policies, that the opposite will be the case, and that free competition in the market will encourage the irrational and inefficient use of energy in final consumption.

4.5. Integration with regional market

Integration with regional energy markets seeks, through increased competition, to obtain greater overall efficiency. Nevertheless, integration under a business logic does not necessarily imply that more satisfactory overall efficiency will be achieved. The interplay of contrary interests can lead to situations of suboptimization, where investor interest in steam power plants is in opposition to entry of cheaper energy that could affect their profit margins, as has happened in some cases in the region.

Regulatory framework and transparency

The interference of the different governments in Uruguayan state-owned corporations has been high. The political system itself recognizes that they have served as a basis for political patronage and that rates have varied based on the needs of the various administrations. Thus, more transparent regulation, as proposed by the Bank, with separation of regulatory and administrative functions and decentralized systems could be good measures for a sector still within the framework of government company ownership. By way of example, a regulatory agency independent from the government energy companies could be established, with participation of the Executive, the productive sector and consumers.

Commitment of countries

Taking into account the foregoing comments made as to the effects of the Bank’s policies on the Uruguayan energy sector, it does not seem appropriate for the World Bank and IDB to condition loans to all countries on development of the same battery of policies. The measures and goals analyzed above may be highly useful and productive for some countries, but not in their entirety in the Uruguayan case. The Bank should analyze the country’s conditions, particularly the situation of the government corporations and the energy sector specifically, and consider the most appropriate policies for achieving the goals proposed and the commitments assumed internationally. Conditioning loans on the proposed policies, as has been seen throughout this document, may be contrary to the goals set by the Bank itself.