VZCZCXYZ0007
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