Grupo La Colina

VENEZUELA: THE ELECTRICITY CRISIS

Summary

Venezuela’s electricity sector, already suffering from years of underdevelopment and overuse, has been impaired by a drought that has seriously impacted the country’s hydroelectric power generation. The crisis has dire implications for the country’s economic situation, and the government does not appear to have a comprehensive plan to address the challenge.

Analysis

Venezuela is mired in an electricity crisis of skyrocketing demand and declining production capacity. The cause is a combination of factors that have conspired to bring the country to the brink of darkness. There has been no lack of creative ideas to stem demand and raise production, but true solutions to the crisis seem far off (or at least out of the hands of the government), raising serious questions about how Venezuelan President Hugo Chavez’s government will handle the situation.

This is not the first time Venezuela has faced electricity shortages. In fact, the electricity system has been deteriorating for more than a decade. Things came to a head in 2008 and 2009 with several major electricity failures — including unplanned blackouts lasting several hours, and rolling blackouts that have lasted as long as 17 hours in some parts of the country.

Problems with Supply and Demand

Part of Venezuela’s problem lies in a deteriorating production capacity. The drought conditions caused by theEl Nino weather pattern have contributed to the problem. With about 73 percent of Venezuelan electricity coming from the Guri Dam, the reduction of water levels to historic lows as a result of the drought has caused the dam to shut down some of its operations, and has caused a great deal of concern. Government officials have stated that unless drought conditions improve, the dam could reach critically low levels in January, and be forced to make significant cuts in electricity production.

Colombia’s decision to cut natural gas exports to Venezuela from 7 million cubic meters per day to 2.3 million cubic meters per day has further exacerbated Venezuela’s woes. The decision was prompted by Colombia’s own drought-related concerns, but certainly carries political implications at a time when relations between the two countries are at a serious low point. This reduction has forced some natural gas-powered electrical plants to run at reduced capacity, shift to using diesel fuel, or shut down completely.

Problems also exist on the demand side of the equation. Due to price subsidies and outright theft, Venezuela claims some of the highest per capita usage of electricity in all of Latin America — and usage continues to increase. National demand has skyrocketed, reaching record highs in 2009 of around 17 gigawatts, a 25 percent increase from five years earlier.

The rapid increase in demand has been coupled with — and in part driven by — a pervasive lack of maintenance and investment in infrastructure, has placed Venezuela’s aging and increasingly inefficient electric grid under considerable stress. With little funding for maintenance and upgrades, Venezuela’s electricity system is particularly vulnerable to inefficient transmission — where electricity simply gets lost — and electricity theft. Many users do not pay for the service at all, opting instead to tap electricity lines with improvised wiring systems. This practice is made easier by the fact that electricity producers do not have the resources to police the lines. For those who do pay for electricity, low fixed prices incentivize high usage levels.

A 1999 report by Venezuelan electrical industry experts anticipated these problems to an extent, and recommended adding an additional 1,000 megawatts per year to the electricity system. Some of this was achieved through the acquisition of 300 Cuban-manufactured electrical generation units. However, the cost of purchasing and operating the single-megawatt units was almost four times as expensive per kilowatt-hour as operating a major electrical plant. Even so, the government has only managed to achieve about 10 percent of the recommended additions, which leaves a very narrow margin between production and consumption. STRATFOR sources estimate that consumption is just 18 percent below production on a per capita basis, leaving a minimal ability to handle spikes in usage or dips in production. Reports estimate that nearly 9,000 megawatts would have to be added to the system to achieve the 1991 reliability levels.

Government Responses

The most forceful government response thus far has been to address the demand side of the problem with water and electricity rationing measures, which were announced in December 2009. The measures required 20 percent cuts from certain consumers, such as malls and casinos, and stated that consumers that failed to comply with the cuts would face fines or electricity shutoffs. The government has attempted to mitigate personal consumption levels by distributing energy-efficient light bulbs and prohibiting the importation of electrical devices. It has even considered changing the country’s time zone to gain additional workday hours — a measure that would reverse the country’s 2007 decision to align itself with the -4:30 GMT time zone.

Power cuts have led to dramatic production complications in the country’s industrial sector. The metals industry has been particularly impacted, with Venezuelan aluminum producers Venalum and Alcasa cutting production by as much as 40 percent. Venezuelan steel maker Sidor has also shut down some of its operations. Government officials have openly speculated about the possibility of shutting down both industries entirely to save on electricity, something that could have grave consequences for the country’s overall growth prospects. Despite these measures to force cuts in electricity usage, achieving a significant system-wide reduction will prove to be extremely difficult, as electricity providers lack the ability to enforce usage cuts or even payments on a wide variety of other consumers.

There is not much hope on the supply side, either. Though the government has promised to increase electricity production, it has failed to meet previously stated goals due to a lack of resources and organization. In 2008, for instance, the government set a goal of raising national generating capacity by 1,000 megawatts. However, only 700 megawatts of capacity was installed, over half of which was subsequently deemed unavailable due to maintenance issues and poor construction.

The government has gone so far as to promise to build a canal from the Amazon River to the Guri Reservoir. Even if the project were feasible — which it is not since the Amazon rain forest and Venezuela’s own mountains are in the way — it would take years to complete. By that point, the effects of this year’s El Nino would be long passed.

In the meantime, Caracas appears to be counting on an end to the drought as a solution to the crisis, but this is clearly only the most immediate cause. Systematic underinvestment in the energy sector, coupled with poor maintenance and high usage rates have pushed Venezuela’s electricity grid to the point of breaking.

Political Consequences?

An improvement in the weather, a change in the time zone, electricity quotas and thousands of energy efficient light bulbs may effectively stabilize the situation in the medium term. However, the long-term prospects of the sector’s survival are dim without a massive influx of rejuvenating capital. But Venezuela has enough money woes even in light of high oil prices, and a steady source of reliably managed cash may not be available.

With no comprehensive solution in sight, energy scarcity may be something Venezuela will have to get used to. A political response opposing the government is possible, butthe opposition remains disunited and hamstrung so its ability to use the electricity crisis as a platform to challenge Chavez is likely limited. In the long term, however, the electricity situation will contribute to the decline in the Venezuelan economy that started in 2009 and shows no signs of slowing. As the economy declines, so does the Chavez government’s ability to meet its populist spending promises, which is a very serious long term threat to the regime.