Chapter 9
The case of Uruguay
The institutions
Two large monopolistic state-owned utilities—UTE (National Administration of Power Plants and Electricity Transmission ) in the electricity sector and ANCAP (National Administration of Fuel, Alcohol and Portland Cement) in the oil sector—prevailed over the institutional structure of the Uruguayan energy sector for most of this century.
Both utilities were not only monopolistic producers but also regulated their respective subsectors. Private participation was restricted to distribution and commercialization of liquid derivatives and liquefied gas. The concession for provision of gas to Montevideo, the capital city, belongs to a company that was alternately privately and publicly owned and is now controlled by French capital (GASEBA). A binational (Argentina-Uruguay) hydroelectric project (Salto Grande) was built twenty years ago. This new power generator is managed by a Binational Technical Commission.
This institutional structure is, at present, undergoing deep changes.
Design and implementation of energy policy is the responsibility of the Ministry of Industry, Energy and Mining (MIEM), which operates through the National Energy Directorate. The National Load Dispatch, an agency under the National Energy Directorate, is in charge of the technical operation of the national power grid. The Planning and Budget Office, also at the ministerial level, supervises and plays a decisive role in investment, tariffs and indebtedness of public utilities.
The new Electricity Regulatory Framework Law allows private-sector involvement in power generation (and possibly also distribution). It has created a wholesale market that will be managed by the Wholesale Electricity Market Administration (in which both public and private operators will participate).
In the oil sector, ANCAP is forming associations with private companies. The expansion of Argentinean natural gas is bringing new actors to this institutional scheme: transnational consortiums—some in association with ANCAP—will exploit gas transportation and distribution throughout the country.
Uruguayan energy sources
Energy consumption in Uruguay has increased in the last 15 years. Oil derivatives are the main energy source, accounting for 57% of end-use consumption. Uruguay neither produces nor has reserves of fossil fuels that could be commercialized, so it is highly dependent on oil imports.
The main local energy resources, hydroelectricity and fuelwood (19% and 22% of end-use, respectively) have been intensively developed. The two big hydroelectric projects were built between 1974 and 1983, Palmar and Salto Grande (Binational Project). With these projects and the existing dams of Rincon del Bonete and Baygorria, the potential for large-scale hydroelectric generation is almost exhausted, though small hydropower projects could be developed in some places.
Following the oil crises of the 1970s, fuelwood consumption expanded from traditional residential use to industrial use, becoming one of the main industrial fuels. The process of substituting fuelwood for hydrocarbons in the industrial sector has now come to a halt.
The current strategy is to incorporate Argentinean natural gas into the Uruguayan energy matrix for power generation and residential consumption. The gas pipeline that connects the Argentinean province of Entre Rios with the Uruguayan city of Paysandu is already operating, and the construction of the Buenos Aires-Montevideo gas pipeline is on course.
The new regulatory frameworks
In the Uruguayan oil subsector, the monopoly of state-owned ANCAP that was established in 1931 is still in force. ANCAP has the legal monopoly for importation of liquid, semi-liquid and gaseous fuels as well as for crude oil refining.
Distribution and marketing of liquid derivatives are partially implemented by ANCAP, which sells to only a few large consumers. Most of this business is in the hands of private distributors, as is distribution of liquefied gas. For the time being, ANCAP regulates the distribution and commercialization of oil and gas without MIEM intervention through confidential agreements with private distributors. In view of market deregulation, which will probably be required by regional integration, the company is making strategic alliances to operate under competitive conditions.
The gas subsector was restricted to the operations of GASEBA, the company that distributes gas in Montevideo under a monopolistic concession. The expansion of the sector through inclusion of Argentinean natural gas has brought new actors and new regulations that are not yet enforced.
In the electric power subsector, a new Regulatory Framework Law was approved in 1997 but has not yet been implemented. The law establishes the separation of the regulatory and managerial functions of the state, leaving to UTE and the Salto Grande Commission a role that, formally, is not different from any other private company acting in the sector. The regulatory function now depends directly on the Executive Power. The operational coordination of power generation and transmission systems as well as the technical supervision of the high voltage grid will be the responsibility of the National Load Dispatch, which answers not to UTE but to ADME (Wholesale Electricity Market Administration).
The law also creates a Wholesale Electricity Market and a Wholesale Electricity Market Administration (ADME), and enables competition between generators who supply this wholesale market, thus giving way to private-sector involvement in power generation. Transmission and distribution are kept as monopolies, but UTE is entitled to grant service-area concessions to private agents. Free access to the transmission grid is also established.
The energy policy
Energy sources
With the completion of two large hydroelectric projects, Salto Grande and Palmar, now in operation, the Uruguayan hydropower potential is practically exhausted. To meet an ever-increasing demand, the government strategy focuses on two fronts:
* Addition of Argentinean natural gas to national supply, in an attempt to lower energy prices. Efforts are specially focused on avoiding energy input costs to interfere with the competitiveness of Uruguayan products in the Mercosur. Pipeline natural gas will fuel (new or reconverted) thermal power plants and supply industrial and residential consumption.
* Modification of rules governing international energy trade, first in the electricity sub-sector and later in the oil and gas subsectors, to facilitate access to cheaper imported energy sources. The new regulatory framework for the power sector—quite similar to that of Argentina—was justified by the need to facilitate access to the Argentinean power system. Grid interconnection with Brazil is also underway.
Enterprise and market restructuring
Privatization initiatives in Uruguay suffered a setback in 1992 when a trade-union initiated plebiscite revoked by a 72% majority a Law of Public Enterprises that would have permitted the sale of public enterprises to private investors. The plebiscite showed the overwhelming opposition to privatization of public companies. It places restrictions on any future proposal for privatizing the assets of UTE (electricity) and ANCAP (oil).
Facilitation of private-sector participation in the energy sector is now being attempted through the introduction of new regulatory frameworks and by taking advantage of legal loopholes. Private-sector participation will be accomplished through public work concessions for essentially monopolistic projects such as the Buenos Aires-Montevideo gas pipeline; through participation in competitive activities such as power generation; or through associations with public companies for new projects.
Meanwhile, UTE and ANCAP retain an important role. No attempt has been made, however, to improve the management of these companies.
The possibility has been opened for competition in power generation and there are plans—not yet implemented—to deregulate the fuel market. Meanwhile, the government seeks to regain control of its regulatory function from the jurisdiction of public utilities, and in a broader sense, of its authority over the definition of large public works and the entrepreneurial structure of the sector.
Financing of investments, prices and tariffs
The state-owned enterprises of the Uruguayan energy sector operate as large tax collectors of indirect taxes, a fact which has led to high fuel and power prices and tariffs. UTE and ANCAP provide revenues to the state budget and, in general, finance their own investments. Due to this fiscal burden, fuels in Uruguay are among the most expensive in Mercosur.
In the electricity sector, differential tariffs imply cross-subsidies. Tariffs for big power consumers are lowest—ranking as the lowest in the region. Low to medium residential consumers and commercial consumers with relatively low consumption levels have medium tariffs compared with the region's average, while residential and commercial consumers with relatively high consumption levels pay the highest tariffs. The least privileged consumers in poor neighborhoods are subsidized.
In the new context of competition and greater influence of private agents, it is reasonable to assume that electric power utilities will not be interested in investing in poor areas with a high level of default and theft, or in rural electrification programs, given the low profitability of those projects. The modality of growing competition between different energy sources (eg, gas and electricity for heating and cooking) could have negative impacts on redistribution, since enterprises may devote most efforts to areas of highest profitability (which coincide with the highest-income segments) at the expense of other areas.
Energy efficiency
Government discourse on the new energy orientation focuses on the significance of increasing energy consumption as a development indicator. Increase in energy demand is considered a positive sign. In their public declarations, authorities do not show concern for the efficient use of energy or for the improvement of energy-intensity indicators. There are no incentives or programs for improving energy efficiency. This is partly due to inadequate resource allocation. It is certainly due to lack of environmental awareness and understanding, on the part of the enterprises, that saving energy can reduce costs.
Environmental and social impacts
In the oil sector, the main environmental impacts are caused by:
* The location of Uruguay's only refining plant in a residential area of Montevideo, on Montevideo Bay, although environmental considerations have only recently been included in design and operational standards for equipment. Oil refining is largely responsible for contamination of the bay, for gaseous emissions and the risk of accidents in the urban area;
* The risks of oil and derivatives spillage in maritime transportation, evidenced by the accident of the oil tanker Santa Maria in February 1997;
* The illegal washing of tanks by oil tankers in the Rio de la Plata (River Plate) as well as in the area of the oil buoy of Jose Ignacio in the Atlantic Ocean;
* Oil refining, with estimated annual emissions of 230,000 tons of CO2 and 490 tons of NOx.
Excluding the impacts of the hydroelectric plants built long ago and despite the efforts made by UTE to reduce its environmental impacts, many local problems persist in the power sector. These include emissions of burning gases in the thermal plants Batlle—also located in downtown Montevideo on the bay—and La Tablada on the city's northwest side.
There are plans to convert these plants to natural gas in a near future (they now burn fuel oil and gas oil). Substitution of gas will mean a reduction in gaseous and particulate emissions per kilowatt generated. Overall emissions will probably grow, however, since it is expected that both plants (especially La Tablada), which operate only occasionally now, will soon operate with greater continuity.
Public controversy surrounded the construction of the thermal power plan La Tablada only 150 meters from a housing complex. This plant, installed in 1991, has been challenged by local neighbors and business-people, environmental NGOs, the Uruguayan University and the College of Architects. Their arguments for moving the facility still stand.
The impact of high voltage power lines in urban and suburban areas has also to be taken into account.
In the gas sector, the most important current impacts relate to the existence of a GASEBA plant in downtown Montevideo with the subsequent risk of accidents. Some minor explosions have occurred in the last two years, and the trade union has repeatedly denounced the risks to which they and the plant's neighbors are exposed.
If natural gas from Argentina effectively enters the country, this risk could disappear when installations and tanks are properly dismantled. But the entry of natural gas is not free of environmental problems.
First, there is the problem of leakage. Natural gas, composed essentially of methane, has associated leakage problems worldwide, either in transportation or storage. This implies risks of accident and also greenhouse gas emissions with subsequent impact on global warming.
Secondly, in the case of Montevideo, natural gas supply is linked to the construction of an underground reservoir in the basin of Santa Lucia river. This river provides clean water to Montevideo and is in the major horticultural production area of the country. The technical feasibility of this reservoir has not yet been studied, and parliament is already considering a law to authorize its construction.
Thirdly, an expected three million cubic meters/day of natural gas will enter the country and only a small proportion of it will replace other fuels. Hence CO2 and NO2 as well as CH4 emissions will increase significantly.
Other environmental impacts stem from the use of energy. Oil is the main source of primary energy in Uruguay—around 60% of the total—and all of it is imported. More than half of this oil is consumed for transport—50% by cars. A further 50% increase in fuel consumption is expected in the sector by the year 2005 (Tabacco, B. et alia, Estimación del consumo en el sector transporte, Montevideo,1996).
Since Uruguay has no legislation requiring the use of unleaded gasoline or gasoline without catalyzers, air pollution is significant, at least in Montevideo. The sector also has important external impacts on health. It is estimated that hospital costs due to car accidents are US$300 million annually, including material and intangible losses (Barrios, G. et alli, Trauma en Uruguay 95, Montevideo, 1996).
The transport sector is responsible for the highest level of gas emissions in the country, with an annual estimate at 1.8 million tons of CO2, 127,000 tons of CO and 23,000 tons of NOx. Serious water contamination is caused by pouring around 20 million liters/year waste lubricating oil into the sewage. An estimated increase of 1.5 in the number of vehicles during the next five years will further affect these figures.
There are no provisions in the emerging regulatory reform process for improving energy supply to the poorest social sectors. Since the emphasis of public utilities is on profit maximization, it is unlikely that they will budget for supply to non-profitable clients. Efforts will be to improve tariff collection in poor urban areas where people have tapped illegally into the grid. For this purpose, UTE has already implemented metering control.
Improvement potential: efficiency and non-conventional energy sources
Non-conventional renewable sources
The current role of "alternative" energies in the national energy balance is, with the exception of fuelwood, almost nil. Research into alternative energy sources has had no significant financing, and there are no activities for promoting the use of "alternative" energies. While existing studies show an interesting alternative power potential, there is no strong evidence that it can be exploited profitably under current market conditions.
Non-conventional energy sources should not be considered in isolation but analyzed within an interconnected system that includes solar, wind, biomass and hydro energy. Since it is unlikely that the absence of sun, wind, wood, and rain would occur all at the same time, one or more of these sources will always be contributing energy. Hence the profitability of the total, integrated system should be assessed. No country can afford to ignore environmental variables, in particular, climate change.
The conclusions of feasibility studies on alternative energies presented below were developed mainly by the School of Engineering of the University of Uruguay strictly on technical and economic grounds, taking into account current market conditions and government policies. Environmental, social or foreign-dependency aspects were not considered. Exogenous environmental factors were not included since there are no national antecedents on the issue. The results are relative given the limitations imposed by this partial approach and should not be used to dismiss non-conventional energy sources as unviable.
* Wind energy
Studies carried out by the School of Engineering (University of Uruguay) for UTE show that:
* For low daily consumption, wind generation is not economically feasible anywhere;
* For systems larger than 20 kW, wind generation alone is not feasible, but the diesel-wind alternative appears workable compared with connecting to the 15kV network if the line length exceeds 15km and the average wind speed is not below 5.6 m/s, which would limit its application to a few cases.
The studies revealed that there are some potentially interesting sites for wind generation, mainly in the south of the country between Colonia and Punta del Este. But resource variability is a major hindrance for developing wind power. Nevertheless, results are encouraging, since:
a) In the historical series analyzed, no long periods without wind were detected;
b) Using high-performance generators in each area, wind equipment could generate over 50% of installed power capacity for at least 3,000 hours a year;
c) The latest studies performed by the School of Engineering with state-of-the-art equipment show that wind generation costs can compete with thermal power generation.
* Small-scale hydraulic exploitation
Another joint study of the School of Engineering and UTE determined which points of the national territory are suitable for small-scale hydroelectric exploitation.
Since most of the costs originate from civil works, installation of micro-turbines should be linked with other projects that make use of the dams to obtain an acceptable level of profitability. Thus, small-scale hydroelectric generation becomes feasible if implemented within an overall economic development scheme in which the dam is also used for other purposes: irrigation, drinking water supply, flooding control, etc.
The study shows that dams should be located near the national power grid. Only in the most favorable spots will micro-hydro facilities compete with conventional sources.
* Solar energy
Uruguay receives a mean radiation intensity of 400 cal/cm2/day with great annual fluctuation. Hence electricity production per square meter of panel is nearly 200 kWh/year, with a power capacity of around 150 watts per "useful" square meter of panel.
Medium or large-scale solar application is not economically feasible since, for a photovoltaic system to be competitive, power unit cost would have to be significantly reduced. This would be possible if equipment becomes less costly or if there is a significant increase in the conversion yield of solar panels.
Photovoltaic systems are suitable only for residential lighting, radio and television and communication in rural areas. For higher consumption uses, the degree of competitiveness is rapidly lost.
* Biomass, other than fuelwood
Sugar cane, rice and sunflower husks are the main agricultural wastes used for energy purposes.
Studies performed in the rice-growing area of eastern Uruguay reveal an availability of 60,000 tons of rice husk for an arable area of 96,800 ha in this region. Study results yielded an average rate of 1.2 tons of rice husk per MWh of electricity/steam co-generation in a thermal power plant. This implies an energy potential of 50,000 MWh for the eastern rice basin region, which would meet the harvest needs of the region and generate a 15% surplus.
Taking into account that rice-husk energy generation technology requires the use of steam cycles with special boilers, investment costs will be high—even though rice husks have no opportunity cost. Nevertheless, a plant of this kind will soon be built through an agreement between the major rice mills of the eastern region and the US agency TDA.
* Fuelwood
Following the oil crisis in the 1970s, Uruguay started a program to use fuelwood as an energy source for industry. In the 1980s, the number of enterprises that used fuelwood for production increased tenfold, and fuelwood consumption accounted for a third of energy end-use in the sector by 1994, even surpassing oil and electricity. For residential consumption, fuelwood accounts for almost half of energy end-use.
Without reducing the standing forested volume, ie, on a seasonal production basis, the existing Uruguayan forests and tree plantations could yield a total primary energy output per year of around two MOET (two million oil equivalent tons), which is of the order of the total end-use energy consumption of the country. Forest biomass is therefore a very important resource from a quantitative point of view, and, in the long term, it constitutes a significant energy reserve for a country that is relatively poor in primary energy sources.
The potential for renewable energy sources has not been adequately researched, although its potential for development is of considerable interest. Given Uruguay's increasing dependency on foreign energy resources, and the environmental impacts—at local and global levels—of their production and use, it can be concluded that these alternative sources should receive greater consideration and promotion.
It is necessary to consider the complementarity of the various sources and their integrated applications, rather than their individual potential, and associate them—as in the case of hydro power and rice husks—to other productive needs.
It should also be considered that the expected increase in both rice and wood production will result in an increase of by-products which could be used as energy sources.
Energy efficiency
In general, there have been no incentives or programs for the improvement of energy efficiency in the country, due in part to lack of resources, but certainly also to lack of political will.
In the industrial sector, there were only two programs in the 1980s, the GRID program (for the rational use of energy in industry) and a later program of energy audits in some representative enterprises. No public or private programs have been undertaken in the residential and tertiary sectors. The only actions undertaken in the power sector which to some extent are linked to energy efficiency are time-of-day tariffs and a metering control program aimed at avoiding energy theft in the poor sectors. There are no special funds for encouraging energy audits or for financing investments in energy rationalization to save for collective benefit.
Since little has been done to use energy efficiently, it is reasonable to think that the country's potential for energy saving and rational use is high. Hence there is great potential for profitable activities that have not been undertaken because they have not been promoted.
The energy sector and the Multilateral Development Banks
The only loan since 1992 for which data are available is the "Power Transmission and Distribution Project" (UY-PA-8177) approved in 1995 for US$125 million. UTE is contributing US$103 million for this project.
The most important objective of this project, for which $164.5 million is being invested, is renewal and expansion of transmission and distribution lines and sub-stations, including improving the national grid system for an interconnection with Brazil. Other less important objectives (US$2.5 million) have to do with technical assistance for the reduction of non-technical losses and demand-side management, and with staff training in the new structure of the sector and for strengthening UTE's environmental unit. This loan reflects two Bank policies: regional integration, and generation and transmission efficiency. In comparison, the contribution to demand-side efficiency and environment preservation is almost negligible.
Two previous loans were "Power Sector Rehabilitation" (2622-UR), signed in 1991 to rehabilitate part of hydro plant Gabriel Terra (130 MW), and the "Power Modernization Project" (3221-UR), which enabled the construction of the gas oil-burning thermal power plant La Tablada (230 MW). The latter required a total of US$242.8 million of which the Bank furnished US$65.5 million. This project seems to be in open contradiction with the new guidelines of the Bank. The new thermal power plant La Tablada burns an oil derivative and produces air and sound pollution in an urban area. For economic reasons, this power station has hardly operated since 1994 and has been widely challenged by several sectors of the population.
Historically, the IDB has played a small role in the sector. The only two projects for which some information is available are "Programa de Transmisión y Distribución Eléctrica" (Electric Power Transmission and Distribution Program) (903/OC-UR), approved in 1995 for US$54 million (plus a local share of US$35 million) and the "Reforma del Sector Energético" (Energy Sector Reform) (ATN/MT 5276-UR) approved in 1996 for US$630,000 with a local share of US$310,000.
The main objectives of the first project are to create the conditions for an interconnection of the Uruguayan and Brazilian systems and to improve the distribution networks in several cities in the country's interior. The project aims at regional integration and supply-side efficiency goals.
The second project, funded with a grant provided by the Multilateral Investment Fund (branch of the IDB) is to study a proposal for oil and natural gas deregulation and for a draft law on hydrocarbons. The main goal of this program is to create favorable conditions for private investment in the sector.
There is also a loan to the agriculture sector with a large component for rural electrification: "Programa de Infraestructuras para Empresas Lecheras" (Infrastructure Program for Dairy Enterprises) (914/OC-UR). This project, approved in 1996 for US$40 million plus local support of US$18.9 million, has two main objectives: to improve electrification for about 1,200 dairy farmers and the road infrastructure for transport of dairy products.
In general, MDB policy in Uruguay has placed greater emphasis on expanding generation and transmission capacity than on promoting consumption efficiency and energy saving. This has remained unchanged, although greater emphasis on energy efficiency and saving would—in the long run—reduce the need for these generating facilities.
MDB goals for Uruguay are similar to those articulated for other countries in the region: to increase electricity supply, and efficiency in power generation and energy end-use; to reduce the burden of the power sector on public finance; and to identify and adopt alternative options to mitigate negative environmental impacts of electricity supply and end-use. The main guidelines are: transparent regulation, importation of services, commercialization and corporatization of public utilities, encouragement for private investment; and subjection of loans to government commitments.
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