Summary: Argentina’s energy crisis may take longer to resolve than initially thought. The government has begun a campaign to reduce demand in what is perhaps the single most important culprit of the country’s energy crisis: runaway residential demand. They may have to soften the messaging to be successful.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He co-founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and publishes the Latin American Energy Review in his free time.
He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit held at the Ritz Carlton in Miami, Florida this October 3-5, and will also be speaking at the Argentina International Clean Energy Congress in September.
Argentina’s energy crisis might take longer to resolve than initially thought. The government’s recent energy re-pricing schemes have come under fire, culminating in a court decision to halt utility bill price increases until further review. This could put a wrench in the administration’s goals to attract new energy investors.
But while the press focuses on the aggressive price hikes to gasoline and natural gas, it fails to see the true problem: runaway residential electricity consumption, far beyond what other countries have experienced — regardless of economic growth or social equity issues.
No one disputes anymore that Argentines enjoyed very cheap and heavily subsidized energy during the last populist government. I wrote about it in detail in my 2011 book, Estado de la industria argentina de energias renovables, a few years after founding the Argentine Renewable Energies Chamber (and which includes 75 maps, graphs and charts — download free of charge here), making the case that those very subsidies kept investors away from the GENREN tenders at that time. The country’s electricity costs have been among the lowest in the region; two examples from independent sources:
- In 2010 the Corporacion Andina de Fomento (CAF) completed a study of residential electricity costs in the region’s 24 largest cities, finding that the average utility bill was $29/month. Among the highest were Montevideo at $58/month and Rio de Janeiro at $46. Buenos Aires had the second lowest in the region at $15/month, beaten out only by La Paz, at $14.50.
- The Organizacion Latinoamericana de Energia (OLADE) completed an analysis of electricity rates by country in 2009 and the results were even more revealing. Argentina’s residential rates of three cents a kilowatt-hour (kwh) were lower than any of its neighbors and less then one-fifth the regional average cost of $0.16/kwh. See graph below (click on images for greater clarity).
Prolonged levels of subsidization create an environment where there is no incentive for consumers to save energy or be energy efficient. It is also a disincentive to invest in long term generation assets. It leads to increased electricity consumption – and not of the productive kind.
Proof of Argentina’s out-of-the-ordinary growth in electricity consumption can be seen in a World Bank study collecting data on kwh per capita consumption over time (see next graph). Here you are looking at energy consumption, regardless of its relative or absolute cost.
Looking at the last ten years (2004-13 – latest available figures), a different picture emerges showing that Argentina’s overall electricity consumption grew by 36% during that period, among the fastest in the region and certainly higher that the regional average of 26% — or even the world average of 21% over that same period (green bars).
But even this still masks the problem, because rapid energy consumption in and of itself doesn’t give you the complete picture: it could be coming from greater industrial or commercial usage – a sign of strong economic expansion. Not only that, some of the more mature economies (see the US and the European Union in the graph) have seen consumption contraction over this period while still maintaining economic growth, as these economies have elected to focus on energy efficiency (lowering the demand side) rather that expanding capacity. But during the same time period, China’s per capita electricity demand grew by an astonishing 137%; it didn’t even fit on my chart.
Unfortunately Argentina’s demand growth was not borne of greater industrial or commercial activity.
The final graph borrows newer data from CAMMESA, Argentina’s wholesale power market administrator. It shows a breakdown of electricity demand between residential, commercial and industrial categories over the 2006-2015 period. Industrial demand has remained essentially flat, growing only 8.5% during this ten year period, while residential demand increased an amazing 66% (see red line).
Thus, the vast majority of demand growth in Argentina over the last decade has been from non-productive residential consumption. What has actually taken place is a major shift in the demand matrix away from industrial consumption towards residential: from productive demand (such as factories or commerce) to pure residential consumption.
Whereas in 2006 the Argentine electricity demand pie was fairly evenly split between the three sources (residential 34%; commercial 29%; industrial 37%), by 2015 industrial demand had been hollowed out by the significant growth of residential demand (residential is now 42% of total demand; commercial unchanged at 29%; and industrial demand represents only 29% of total demand).
(As a point of comparison, in the USA the split is 37% residential; 35% commercial; 27% industrial. In the EU-27 countries it is 29% residential; 27% commercial; 44% industrial.)
All this is not made any easier by the fact that President Macri and team have something of a tin ear. Their messaging is off balance and reveals that they are largely businessmen more than polished politicians. Energy minister Aranguren has justified fuel increases with a callous shrug (“…if fuel prices are too high consumers will simply elect to not consume…”) and admitted only after significant public outrage that a 400% month-over-month increase in gas bills might have been a bit much. For this delicate matter to succeed they will need to get better at communication and educating the public.
But we now see why they are beginning to hammer away at residential electricity consumption and plead for moderation: it has gotten out of hand. By getting this item in line over time, it will free up electricity generation to be used for more productive concerns. What remains unknown is if Argentina’s citizens will take to austerity quietly while investors begin to invest long term in new capacity.
© Latin American Energy Review 2016
About the Author: Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, a financial advisory firm focused on renewables in emerging markets. Carlos co-founded the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first President until 2011; is a board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); is the founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.