Venezuela has finally started to implement an electricity market liberalization and privatization process. Keen to encourage investment in the electricity sector, the government must boost investor confidence by clearing up some important issues.
Evolution of Venezuela’s installed generating capacity (GW)
Although Venezuela is richly endowed with a variety of energy resources, it has relied largely on hydropower for electricity generation. Hydropower generating capacity surged in 1980s, rising from 2.7 GW in 1980 to 10.5 GW in 1990 (see Figure 2).
Today, Venezuela has a total installed capacity of just over 20 GW, of which hydropower accounts for 12 GW. Much of this is accounted for by one massive plant: the 10 GW Guri facility situated on the Caroni river. The remaining thermal capacity is divided between gas-fired plant (32 per cent) and oil-fired plant (seven per cent).
The country has a fully integrated transmission and distribution system ranging in capacity from 240 kV to 765 kV. Venezuela’s grid is joined to that of Colombia through three lines, and two more lines are planned.
The Venezuelan electricity sector is a mixture of state-owned and private companies. There are five main vertically integrated state-owned utilities with generation, transmission and distribution assets, and several private distribution companies (see Table 1).
The interconnected system, SNI, covers the whole nation with the exception of small isolated communities and is owned and managed by the four largest generating companies: Edelca, Cadafe, Electricidad de Caracas (EdC) and Empresa de Energía de Venezuela (Enelven).
Until recently, Cadafe operated as a fully integrated generation, transmission and distribution company, supplying about 60 per cent of the total residential consumers in areas beyond major urban centres. In 1997, the company reorganized its business units into four large regional distribution subsidiaries: Eleoriente, Eleoccidente, Elecentro, and Cadela; one separate transmission company; and several hydropower and thermal generation subsidiaries. Privatization is expected for many of the generation units.
With a coverage of over 90 per cent, Venezuela has one of the highest electrification rates in Latin America. Per capita electricity consumption is roughly a third of the average for OECD countries, but is one of the highest in Latin America. This is partly due to the fact that consumers only pay a fraction of the actual cost of their electricity, which is heavily subsidized by the government. This has dire consequences on the financial accounts of the electricity companies, and has reduced incentives for end-use energy efficiency.
Electricity consumption, past and projected trends (%pa and TWh/a)
Peak demand reached 12 000 MW in 1998. Electricity consumption growth between 1980 and 1998 averaged 3.6 per cent per annum. Growth is expected to continue at an average annual rate of 3.3 per cent over the next ten years, according to official projections (see Figure 3).
In order to meet the expected increase in electricity demand, Venezuela plans to add 8 GW of hydropower facilities over the next 5-10 years. Many other projects involve the upgrading and expanding of existing facilities, and the conversion to gas-firing of oil-fired plants.
On the drawing board are also several projects for gas-fired CCGT autogeneration units linked to the development of the country’s natural gas resources and pipelines. However, the country’s large amount of excess capacity and current low electricity tariffs may delay their construction.
While the figures above call for significant investment in generation, the most pressing need is the reinforcement of the transmission system. Rapid demand growth and chronic under-investment in the grid has led to recurrent blackouts and brownouts.
In 1997, 32 major power failures occurred, one of which, in August, left 75 per cent of the country without electricity. In 1998, the number of power failures of more than 100 MW rose to 75, and preliminary figures for 1999 indicate that the problem has worsened. Imbalances between investments in generation and in transmission/distribution have also led to bottlenecks in power supply and a higher-than-necessary reserve capacity, attaining 40 per cent.
Power losses reached 25 per cent in 1998, one of the highest levels in Latin America and twice the industry norm. It has been estimated that some $200 million would be required in the short term to avoid power shortages.
Overall, investment requirements varying between $5-6 billion are estimated to be needed over the next five years to maintain the system and meet the growth in demand.
The new electricity law
After years of indecision and delays, Venezuela finally has a new comprehensive electricity law. The law was enacted under special powers granted by the Congress to President Hugo Chávez earlier in 1999 and approved by the cabinet in August 1999.
Formalising and further developing many features of a previous 1996 Presidential Decree, the new law establishes the following points:
• Private sector participation is allowed in all areas of the power industry: generation, transmission, distribution and supply, with the following exceptions:
(1) existing and future generation of hydroelectricity in the Caroni, Paragua and Caura river basins will remain under the control of the state, due to their ‘strategic importance’; (2) transmission of electricity will be permitted only under concession and will be dominated by a state company for the time being.
• Participation of domestic private investors will be encouraged by special measures.
• Existing electricity companies are required to unbundle their activities into separate legal and financial distribution, transmission and generation entities. No single company may undertake any two of the generation, transmission, distribution or grid operator activities. The unbundling is to be completed within the next three years.
• Open access to transmission and distribution networks will be granted to all generators, independent marketers and distributors, and to the large users (>5 MW). Competition in generation and supply will be promoted.
• Creation of a new company, the Centro Nacional de Gestión del Sistema Eléctrico (CNGSE), which will own, manage and operate the interconnected transmission system, replacing the existing system operator OPSIS. The CNGSE will manage and operate the wholesale power market.
• A new regulatory body, the Comisión de Energéa Eléctrica (CNEE), will be in charge of regulating the monopolistic activities and overseeing the functioning of the system. While nominally autonomous, the appointment and tenure of CNEE’s board members are mainly in the President’s hands.
•Although the CNEE will establish the principles, methodologies and models that will rule price formation in the wholesale electricity market and transmission, the government, through the MME, will ultimately retain the right to fix the retail tariffs that distribution companies will apply to their regulated customers.
The law also provides for the promotion of extension of services to isolated and depressed areas and alternative energy sources.
According to the new law, the government has the responsibility for planning of the power sector activities. The MME, with the support of the CNEE and the CNGSE, will formulate the National Electricity Service Plan. This plan, indicative in nature, will include: the sector policies, a forecast of future power demand, the estimate new generation capacity requirements, the portfolio of investment projects, the transmission expansion requirements, guidelines to foster end-use energy efficiency and the expansion to off-grid areas using renewable sources.
The Fondo de Inversiones de Venezuela (FIV), a government agency responsible for privatizing state assets, will remain in charge of the electricity privatization process, according to timetables established by the Privatization Law.
Drafting the regulations and performing other tasks required in setting up both CNEE and CNGSE will take some time. During the interim, the Ministry of Energy and Mines, with the support of Fundelec will fill the place of CNEE, and the existing system operator OPSIS will perform operation and control of generation and transmission activities.
With the enactment of its new electricity law, Venezuela joins the ranks of the growing group of Latin America countries that have engaged in what is one of the world’s more drastic liberalization and privatization processes ever. Following the pioneering experiences of Chile in the early 1980s, and later of the UK, several countries of the region have undergone a series of far-reaching institutional, organizational and regulatory reforms of their electricity markets to make them more competitive and more attractive to private sector participation.
The main issue confronting the sector, other than the drafting of the by-laws and the establishment of the regulatory and power market institutions, is the clarification over the nature and pace of the privatization process. While the Law sets a clear role for the participation of the private sector there is not agreement within the government yet on the procedures and/or criteria to be followed in the privatization of existing assets.
The government, through the FIV, got a head start when it completed privatization of the Empresa Eléctrica de Nueva Esparta (Seneca), serving Margarita Island, in late 1998. Further targets for early privatization are the companies: Sistema El?ctrico de los Estados Monagas y Delta Amacuro (Semda), Energéa Eléctrica de Venezuela (Enelven), Energéa de la Costa Oriental del Lago (Enelco), and Energéa Eléctrica de Barquisimeto (Enelbar). The government’s intention is to sell between 60-70 per cent of the equity of each company depending on demand from investors. Eventually, some of the generation and distribution companies split from the former Cadafe, as well as the new national transmission company, are targets for future privatization.
The sale of the four companies was initially scheduled to go ahead in 1999 and early 2000, but privatization schedules are once again in doubt due to differences of opinion within the government. While the FIV’s intention had been to push for a prompt sale of the companies, the MME’s strategy is to refloat several of the troubled state-owned power companies prior to privatization, with funds coming from the FIV, the treasury and domestic investors. Furthermore, the government is mulling over whether to separate the generation, distribution and marketing activities of the utilities before moving ahead with the privatizations.
A group of 14 investors, who pre-qualified last year, are said to have maintained their interest, though they have expressed concern over the effects of the new constitution. Investors’ confidence was certainly not improved by the MME’s attempt, late last year, to renegotiate the terms of the only privatization contract awarded so far, over alleged irregularities.
Venezuela has the lowest electricity rates in the region. A recent IEA study (1999) pointed out that household tariffs, which have been heavily subsidized for social policy reasons, average only 16 per cent of full costs, while industry pays a little under half of full supply costs. A rate-setting formula, introduced in 1989 as part of an IMF loan agreement, has not been fully applied. Further increases in nominal tariffs have failed to keep pace with inflation.
The costs of underpricing electricity are high. The IEA estimates that the annual economic-efficiency loss to Venezuela is over 200 billion bolivares or $350 million. In practice, this is reflected in chronic under-investment by the industry, in deteriorating reliability of supply and in power shortages.
Artificially low prices have also contributed to encourage uneconomically and unsustainable high levels of electricity use.
The new Electricity Law allows for cross-subsidies to very low-income residential consumers or specific sectors, as well as other transfers. Nevertheless, the reform of the pricing system with substantial tariff increases remains critical to the overall success of the electricity sector restructuring and privatization process.
Only a tariff structure that reflects production costs as well as opportunity costs in international markets, will ensure adequate financial returns which are needed to attract domestic and foreign private investors alike. It remains to be seen whether the government will have the political will and strength to impose unpalatable tariffs rises to its electorate.
The new constitution – approved in December 1999 – accentuates the dominance of the state in the economy, raising serious concerns as to the privatization plans of the government and its commitment to safeguarding private sector investments.
The government also needs to clarify the measures aimed at fostering the participation of indigenous engineering, goods and services, and capitals in power sector activities announced in Article 10 of the Electricity Law. Ending this uncertainty will clarify the environment for foreign investors.
The devastating floods of December are likely to delay the elections for president, national assembly and state governors, initially scheduled for March 2000. A vote is unlikely before May and may have to be postponed until after mid-year. Political uncertainty has been a key factor in deterring corporate investment and this uncertainty may last for another six months, further delaying privatization programmes.