VZCZCXRO4991
RR RUEHAST RUEHDH RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHSL RUEHTM
RUEHTRO
DE RUEHSJ #0615/01 2041903
ZNR UUUUU ZZH
R 231903Z JUL 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 1054
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHMCSUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 SAN JOSE 000615 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/CEN, WHA/EPSC:AWONG AND FCORNEILLE, EEB/ESC/IEC/EPC, 
EEB/IFD/ODF, OES/PCI AND OES/ENV 
TREASURY FOR DVKOCH AND SSENICH 
 
E.O. 12958: N/A 
TAGS: ENRG ECON ETRD EIND SENV EFIN SENV EFIN EINV PREL
PGOV, CS 
SUBJECT: COSTA RICA'S ELECTRICAL INFRASTRUCTURE - OPPORTUNITIES AND 
CHALLENGES 
 
REF: 2007 SAN JOSE 000873 
 
¶1. (U) SUMMARY: U.S. investors identify physical infrastructure 
challenges as the key hurdle for Costa Rica's development and 
modernization, according to the Costa Rican-U.S. Chamber of 
Commerce.  Costa Rica provides a sometimes reliable electric power 
supply to over 97 percent of the country. Its mountainous terrain 
and abundant rainfall have made it nearly self-sufficient in 
electricity generation. Despite this efficient record, Costa Rica 
must expand and invest in its electrical infrastructure to keep pace 
with ever-increasing demand, mitigate environmental impact, avoid 
blackouts (most illustrative during the 2007 dry season), seek 
solutions to manage higher costs, and refurbish dated machinery and 
equipment.  END SUMMARY. 
 
---------------------------------------- 
ELECTRICAL POWER GENERATION BY THE STATE 
---------------------------------------- 
 
¶2. (U) The state-owned monopoly, the Costa Rican Institute of 
Electricity (ICE), provides 97 percent of the country's electricity. 
ICE has fulfilled domestic power needs since 1949. The total 
installed electrical capacity (public and private) in Costa Rica as 
of 2008 was 2,378 megawatts (MW), with a maximum demand of 1,525 MW, 
and a seasonal surplus availability (2007) between 60 and 562 MW 
depending on the day and supply.  During the rainy season, ICE 
exports electrical power to Nicaragua, Honduras, El Salvador, 
Guatemala, and Panama.  However, during the dry season, ICE often 
needs to import electricity from those same countries, mostly from 
Panama.  Overall, electricity imports and exports are marginal 
compared to overall usage, with no set contracts, and only utilized 
on an as-needed basis.  ICE's subsidiary, Compania Nacional de 
Fuerza y Luz, S.A. (CNFL), handles distribution for ICE, as well as 
five independent cooperatives. 
 
¶3. (U) In 2008, the leading sources of energy generation were broken 
down as follows: 
 
-- 78 percent generated by 29 public and 23 private (small) 
hydroelectric power plants (emitting no greenhouse gases); 
 
-- 12 percent generated by 4 geothermal power plants in one 159 MW 
field in Bagaces, Guanacaste; and 
 
-- 2 percent generated by 5 wind farms in Arenal and Miravalles (2 
public and 3 private). 
 
Thus renewable, clean energy contributed 92 percent of energy 
generation.  Fossil fuel sources contributed the remaining 8 percent 
of electricity generated in 2008.  Total national production was 
9,416 GW/h and total national consumption was 9,320 GW/h, yielding a 
deficit of 96 GW/h which was imported. 
------------- 
DEMAND RISING 
------------- 
 
¶4. (U) ICE estimates that electricity demand will rise by 5.7 
percent annually through 2020 (and up to 10 percent in tourism boom 
towns, assuming that visitor flows edge back up when the financial 
crisis eases).  Ministry of Environment, Energy, and 
Telecommunications (MINAET) representatives confirm that ICE will 
need USD 7 billion over the next 14 years to keep generation, 
production, and distribution in line with the growing demand.  ICE's 
expansion director and engineer Javier Orozco Canossa told us that 
current capacity can handle the two daily electrical usage peaks 
during the hours of 1000-1230 and 1700-2000.  However, ICE struggles 
to cover seasonal deficits each dry season, especially every April, 
the last month of the dry season.  From February to May, 
hydroelectric capacity drops from near 80 percent to 63 percent on 
average, requiring additional fossil fuels to compensate the 
difference. 
 
--------- 
BLACKOUTS 
--------- 
 
¶5. (U) In April 2007 (reftel), Costa Rica experienced rolling 
blackouts nationwide when ICE's capacity dropped 25 percent due to a 
particularly intense dry season, lack of infrastructure maintenance, 
and lack of emergency planning.  The sequence of equipment failures 
started on April 3 when the 3 year-old Moin thermal turbine plant, 
which normally generates 40 MW, stopped due to a design flaw.  The 
next day, the 34-year old 17 MW San Antonio de Belen thermal turbine 
 
SAN JOSE 00000615  002 OF 004 
 
 
plant stopped due to a transformer problem.  On April 16, a 16-year 
old 36 MW turbine, also in Moin, halted.  Two days later, the 
33-year old thermal plant in Barranca stopped functioning.  On April 
19, a transformer at the Arenal substation exploded, losing 157 MW, 
and causing a national blackout lasting nine hours. 
 
¶6. (U) Two of the three turbines and the Belen transformer were 
repaired within a week.  The Moin turbine and the Arenal substation 
transformer issue took about a month to restore. Subsequent to the 
national blackout, the country experienced rolling blackouts for the 
next several weeks. 
 
¶7. (U) Due to domestic demand, neighboring Panama stopped selling 
surplus electricity to Costa Rica prior to the April 2007 blackouts. 
 ICE's production technician Alejandro Zuniga Luna stated that the 
April 2007 blackouts marked an "extraordinary event, and that it was 
not representative of the normal stability or efficiency of ICE." 
 
---------------------------- 
CHALLENGES OTHER THAN DEMAND 
---------------------------- 
 
¶8. (U) Rainfall pattern shifts due to climate change pose a 
significant challenge to Costa Rica's hydro-electrical production. 
When the water level in Lake Arenal falls (the nation's largest 
reservoir), there is not enough to maintain adequate power 
production.  When the water level rises, the extra "potential" 
cannot be harnessed.   For example, in January 2008, Arenal's dam 
was so full that 26,900 cubic meters of water had to be released. 
This amount of water could have generated 53 million kilowatt hours 
and provided electricity to 250,000 families (or one quarter of 
Costa Rica's households) for a month.  ICE's technicians state that 
larger reservoirs and additional hydroelectric plants are needed to 
adapt to the changing climatic conditions and still keep pace with 
rising demand.  If global climate changes greatly decrease 
hydroelectric power in the future, Costa Rica will need to seek 
alternative options or use additional fossil fuel energy to close 
the gap in demand. 
 
----------------- 
CONTINGENCY PLANS 
----------------- 
 
¶9. (SBU) Elbert Duran, ICE's public relations representative and 
spokesman, stated that ICE has established a variety of contingency 
plans to avoid future blackouts.  These include renting two 
privately-owned, oil-fueled thermal plants; renting portable 
oil-fueled thermal plants to relocate as conditions merit; 
considering concessions for a biomass plant; and increasing 
concessions for Build-Operate-Transfer (BOT) plants that ICE will 
acquire after buying 20 years of electricity.  ICE intends to expand 
their plan to draw off a variety of resources in order to avoid the 
"embarrassment" of future blackouts.  In addition, ICE has 
encouraged public rationing and created a more aggressive public 
energy saving campaign, something that MINAET representatives stated 
was "unheard of" just a few short years ago. 
 
-------------------------------- 
LACK OF INVESTMENT IN THE FUTURE 
-------------------------------- 
 
¶10. (SBU) ICE blames economic constraints on investments, delays or 
blockage of issuing government authorizations, high oil prices, 
restrictive environmental and regulatory laws (such as the possible 
passage of the Water Resources Act), and environmental opposition 
groups for much of the shortfall in strategic projects.  Rodolfo 
Gonzalez, General Manager of Costa Rica's Public Services Regulatory 
Authority (ARESEP), the GOCR's rate establishing agency, says that 
ICE has not kept pace with its own Electricity Generation Expansion 
Plan (PGE) for 2004-2020.  ARESEP tends to set electric rates on a 
cost plus model, plus an additional amount for future investments. 
ICE claims that ARESEP's model underpays "real expenses," leaving a 
shortfall of funds to invest in infrastructure.  According to MINAET 
representatives, the conflict was resolved in 2007 with the 
intervention of the IMF, which "re-categorized" new power plants as 
investments, rather than expenses, and brokered a deal between the 
Treasury Department, ARESEP, and ICE as to what constitutes expenses 
associated with energy production. 
 
¶11. (SBU) According to ICE, a much-needed positive change came from 
the Arias Administration to help them invest in the future. An 
October 19, 2006 presidential decree ("Fortalecimiento del ICE y sus 
Empresas" No.33401) allows the state-owned institution and its 
 
SAN JOSE 00000615  003 OF 004 
 
 
subsidiaries to assume debt and invest funds in infrastructure, 
without asking permission from the National Council for Internal and 
External Financing (CONAFIN), a part of the Finance Ministry.  The 
decree allows ICE to open credit lines, create environmental 
guarantees, refinance assets, restructure risks and costs, and 
assume up to USD 435 million in debt between 2006 and 2010. 
Furthermore, the decree allows ICE new liberties in administrating 
its human resources, creating positions, increasing salaries, 
apparently in an attempt to retain knowledgeable officials under 
CAFTA-DR.  ICE representatives stated that they had asked for this 
type of flexibility for years, and President Oscar Arias "finally 
had the guts" to do it. 
 
----------------------- 
BUREAUCRATIC CHALLENGES 
----------------------- 
 
¶12. (U) ACOPE (Costa Rican Association of Private Energy Producers) 
predicts that there won't be many new private electrical generation 
projects until a law allowing more private participation in the 
market is passed.  Furthermore, ACOPE doesn't believe that the 
political climate is favorable for such a law.  Two laws currently 
on the books allow private participation in the electricity market. 
However, institutional intransigence has frozen Law 7200, designed 
to allow electric power generation not exceeding 20 MW by a single 
project owned by private companies or consortia.  Observers point to 
ICE's unwillingness to approve new contracts for purchasing 
electricity from private generators as the obstacle.  ICE is more 
willing to acquire electric power under Law 7508, which provides 
private electric power generators the opportunity to build 
individual renewable energy production projects not exceeding 50 MW 
each under the Build-Operate-Transfer (BOT) scheme.  The BOT scheme, 
however, is not attractive to private generators because they must 
transfer the project to ICE at the end of the contract term, 
typically a period of 15 to 20 years. 
 
---------------------- 
FUTURE EXPANSION PLANS 
---------------------- 
 
¶13. (SBU) According to the Electricity Generation Expansion Plan 
(PGE), Costa Rica will produce all its electricity from renewable 
sources by 2010.  ICE's Planning Director Gilberto de la Cruz told 
us, "By 2021, Costa Rica will obtain its energy needs by:  76 
percent hydroelectric, 10 percent geothermal, 5 percent wind and 
biomass, and 9 percent biofuels."  In other words, ICE plans to 
replace fossil fuels with biofuels, biomass, and increased wind 
generation.  ICE's flagship project is the USD 1.6 billion Diquis 
project which includes a hydroelectric plant, dam, and reservoir. 
ICE's Expansion Director and Engineer Orozco believes that the PGE 
is "overly optimistic" and that Costa Rica will continue to need 5 
to 9 percent fossil fuels to "smooth out the seasonal bumps" during 
the dry season, and "maybe more" depending on what happens with 
global climate changes.  However, ICE does continue to explore other 
alternatives such as biofuels (sugar cane, pineapple, African palms, 
rice peel, orange peels, banana peels, and wood), additional solar 
panels, garbage conversion to fuel (under development by the "Ad 
Astra Rocket" company), marine algae, and marine current power. 
 
¶14. In January 2009, the National Assembly approved a USD 500 
million Inter-American Development Bank (IDB) loan that will focus 
on five major areas:  (a) assist renewable energy research and 
modernize hydroelectric plants; (b) improve reservoir maintenance 
equipment; (c) meet quality, reliability, and continuity standards; 
(d) expand the rural electric grid; and (e) improve energy 
efficiency. 
 
------- 
COMMENT 
------- 
¶15.  Given Costa Rica's energy potential, the country should be able 
to satisfy its own electricity needs through prudent management of 
its resources and streamlining the numerous bureaucratic obstacles 
that prevent the country's energy generating capacity from growing. 
Electricity is just one of many aspects of Costa Rica's 
infrastructure which makes doing business challenging for U.S. 
companies operating here.  Roads, ports, airports, and 
telecommunications are also at the top of the list of infrastructure 
needs.  As a cogent overall summary of Costa Rica's infrastructure 
challenges, Fernando Quevedo, Country Representative for the IDB in 
Costa Rica, observed to Embassy officials, "Costa Rica has lacked 
investment in infrastructure over the last 15 to 20 years." 
 
 
SAN JOSE 00000615  004 OF 004 
 
 
¶16.  We believe that private sector investment initiatives could 
take firm root in Costa Rica; however, the GOCR needs to 
re-structure its government processes and address the general fear 
of private sector involvement in infrastructure investment in order 
to realize its true potential.  Such an endeavor requires the (often 
elusive) cooperation of various public entities, including ICE, 
ARESEP, MINAET, Ministry of Foreign Trade, Ministry of Public 
Transport, the Comptroller, and the National Assembly, to develop 
new mechanisms for infrastructure development.  And, the 
infrastructure players have to make tough choices, such as pushing 
ARESEP to recognize the real costs of providing electricity and 
allow ICE to pass these costs on to consumers.  Such difficult 
decisions cut against the Tico cultural preference to reach 
consensus without hard choices. 
 
BRENNAN