VZCZCXYZ0008
RR RUEHWEB

DE RUEHSJ #0873/01 1292216
ZNR UUUUU ZZH
R 092216Z MAY 07
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 7939
INFO RUEHMU/AMEMBASSY MANAGUA 4906
RUEHZP/AMEMBASSY PANAMA 3601
RUEHGT/AMEMBASSY GUATEMALA 3782

UNCLAS SAN JOSE 000873 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ECON SENV ENRG CS
SUBJECT: PARADISE BY CANDLELIGHT: COSTA RICAN POWER FAILURE 
 
REF: SAN JOSE 00653 
 
¶1. (U) This is another installment in our ongoing series explaining 
why Costa Rica is not quite paradise.  These cables seek to paint a 
realistic picture of the challenges faced by Costa Rica.  Travel 
brochures don't tell the entire story. 
 
¶2. (U) SUMMARY. Costa Rica's electrical generation system collapsed 
on April 19 as the country suffered its first nation-wide blackout 
in six years.  Parts of the nation were without power for the next 
24-48 hours.  Rolling blackouts (except on weekends and holidays) 
began on April 26.  The collapse resulted from the combination of a 
severe dry season as well as the failure of the National Electrical 
Institute (ICE), Costa Rica's state power and telecom monopoly, to 
both adequately maintain its own equipment and to invest in 
increased capacity.  ICE initially stated that power shortages were 
likely to continue unless the state regulator allowed a 23 percent 
rate hike.  Meanwhile, businesses in Costa Rica suffered.  While 
President Arias announced the end to rolling-blackouts on May 4, 
experts from General Electric tell us there are no quick or easy 
solutions to Costa Rica's long-term problem of a lack of spare 
capacity.  END SUMMARY. 
 
It All Comes Crashing Down 
-------------------------- 
 
¶3. (U) On Thursday April 19, Costa Rica's electrical power system 
failed just after 8:00 PM local time, triggering a country-wide 
blackout that lasted for one and a half hours.  Parts of the country 
were without power for the following 24-48 hours.  According to ICE, 
the state-owned power and telecom monopoly, the collapse was due to 
the combination of a "rainy-season" with very little rain that has 
left the country's hydroelectric resources at 25 percent of normal 
capacity and the breakdown of three turbines and two major 
transformers over the course of two weeks.  This, coupled with an 
ever-increasing demand led to a situation where demand outstripped 
capacity, leading to a system-wide shutdown of the grid. 
 
Can't Meet Current Demand 
------------------------- 
 
¶4. (U) Over the last five years, ICE has not adequately invested in 
its electrical generation capacity, as projects in the works for 
years continued to face delays.  Environmental groups have derailed 
or postponed plans for two major hydroelectric projects planned in 
environmentally sensitive areas.  Major thermal (fuel-burning) 
projects have also faced delays.  For the last fours years ICE has 
planned on constructing a 120-megawatt plant in Garabito.  According 
to the original timeline, the plant should have already been in 
operation.  Construction has not yet begun due to contracting 
disputes (not unusual in Costa Rica). 
 
¶5. (U) Costa Rica has long prided itself as a "green" country that 
makes extensive use of non-thermal sources of electrical power and 
has a history of using renewable sources to provide the vast 
majority of its power.  While that is still true, over the last two 
years there has been a dramatic increase in the use of thermal 
generators as well as purchases of electricity from neighboring 
countries.  Previous to 2006, approximately 6 percent of the 
electricity consumed in Costa Rica came from thermal generators.  In 
2006 this figure had risen to 20 percent as Costa Rica purchased 
more of its power from suppliers in Panama. 
 
¶6. (U) This shift toward the increasing use of thermally-generated 
electricity came as the price of oil also rose, dramatically 
increasing the cost to ICE of generating electricity from thermal 
sources.  It costs ICE an average $0.03 per kilowatt-hour to produce 
electricity in hydroelectric plants, $0.14 from their thermal 
plants, and between $0.08-0.13 per kilowatt-hour to import 
thermal-generated electricity (not including transportation costs) 
from neighboring countries.  Due to its own power shortages, Panama 
is no longer exporting electricity to Costa Rica. 
 
¶7. (U) In the first three months of 2007, ICE has already exhausted 
86 percent of the USD 66.3 million budgeted to run the country's 
diesel-fired electrical generators for the entire year.  After the 
power outage of April 19, ICE requested the state Regulatory 
Authority for Public Services (ARESEP) to approve a 23 percent 
increase in electrical tariffs to pay for the purchase of 
thermal-generated power.  ARESEP denied the request, stating that 
ICE must explain how the electrical system was allowed to fall into 
disrepair in the first place.  In response, ICE began implementing 
rolling blackouts on April 26. 
 
Can't Meet Future Demand, Either 
-------------------------------- 
 
¶8. (U) While Costa Rica has not adequately invested in new 
electrical generation projects and is currently unable to purchase 
power from Panama, electrical demand has continued to grow at an 
average rate of 6 percent a year.  Over the last year, Costa Rica's 
economy grew by 7.9 percent.  Manufacturing and Foreign Direct 
Investment (largely in the form of construction in costal areas) 
served in large part to fuel this growth, increasing their rate of 
real growth by 12.5 percent and 14.8 percent respectively in 2006. 
The rapid increase of manufacturing and construction has placed new 
demands on Costa Rica's stagnant electrical power generation system, 
leading to a situation in which ICE will need to invest USD 7 
billion (USD 500 million annually over the next 14 years) to 
effectively double power capacity by 2021 and meet projected demand. 
 Before the crisis, ICE had no finalized projects to increase 
electrical generation capacity during the next two years. 
 
The Cost of the Energy Crisis 
----------------------------- 
 
¶9. (U) News reports have already put the economic impact of the 
current energy crisis at anywhere from USD 20-100 million.  The U.S. 
multi-national paper company, Kimberly-Clark, reported that the 
power outages from April 19-20 cost the company USD 174,652.  Intel 
lost a reported 150,000 microchips that were on its production floor 
when the power failed.  News accounts have been rife with stories of 
private businesses closing their doors during the rolling blackouts 
and losing clients and production capacity. 
 
What Comes Next? 
---------------- 
 
¶10. (SBU) To cut through the maze of speculation and conflicting 
blame, Embassy officials met with four experts from General Electric 
on May 2.  While lauding Costa Rica's efforts to use renewable 
sources for the majority of its power production (80 percent), the 
experts stated that Costa Rica's current crisis is due to a failure 
to maintain any reserve thermal capacity that could be brought fully 
online when circumstances warrant.  Now, Costa Rica is faced with a 
situation where they need to make critical decisions in a short 
period of time to prevent recurring power crises in the coming 
years.  The GE team said their company had seen this crisis coming 
for years, but their approaches to the GOCR (the latest in December 
2006) had been ignored or rebuffed. 
 
¶11. (SBU) Even if ICE were to purchase new thermal turbines 
immediately, it would normally take 24-36 months to receive and 
install them, leading to another 2-3 years of annual energy 
shortages at the end of the dry season.  GE said that there are 
several alternatives to meet Costa Rica's immediate energy needs in 
the next 1-2 years, while the longer-term capacity is being 
delivered and installed.  GE originally intended to offer Costa Rica 
the option of delivering truck-borne turbines in the next 60-90 days 
to meet the country's short-term energy needs but was rebuffed. 
Instead, on May 4 President Arias announced that the rains had 
sufficiently filled the reservoirs and a new hydroelectric turbine 
was brought online ahead of schedule.  As a result, according to 
Arias, there is no need to continue the rolling blackouts. 
 
¶12. (SBU) The GE experts said that for any short-term solution to 
succeed, Costa Rica also needs to simultaneously purchase additional 
thermal generators.  The experts informed the Embassy that due to 
increasing worldwide demand for power generation equipment, Costa 
Rica has a very short window of opportunity to place orders for 
equipment that could be delivered and installed in time to prevent 
outages next year.  The largest impediment to this solution, 
according to the industry experts, would be the failure of ICE and 
Costa Rican government to move rapidly in making and implementing 
decisions. 
COMMENT 
------- 
 
¶12. (U) Costa Rica's energy crisis has not come as a great surprise. 
 Experts and press have repeatedly warned over the last two years 
that ICE needed to adequately invest in new capacity to avoid the 
current situation. Unfortunately, this was not done.  The lack of 
real development of the sector, coupled with the general slow-moving 
decision-making process in Costa Rica does not bode well for Costa 
Rica's future energy security.  While the beginning of the rainy 
season may have filled the reservoirs and brought a temporary end to 
the current rolling blackouts, only difficult and 
uncharacteristically quick action by the GOCR and ICE over the next 
few weeks, which now seems highly unlikely.   Originally, the Arias 
administration drafted an emergency decree to give ICE and the GOCR 
more flexibility to quickly make timely and necessary decisions. 
However, the emergency decree was never signed, and there is no 
indication that Costa Rica is currently pursing long-term solutions 
that could forestall what will probably be even worse energy crises 
during the next few years. 
LANGDALE