Electricity sector in the Dominican Republic


Electricity sector in the Dominican Republic

"Source": Electricity Superintendence Statistics

Transmission

The transmission system, which is under the full responsibility of the state-owned company ETED (Electricity Transmission Company) Comisión Nacional de Energía 2005] , consists of 940 km of 138kV single-line circuit lines that radiate from Santo Domingo to the north, east, and west.

Distribution

In the Dominican Republic, there are three distribution companies. The government owns two of them, EdeNorte and EdeSur, through the CDEEE (50%) and the "Fondo Patrimonial de las Empresas" (FONPER). It also maintains a 50% ownership of the third one, EdeEste, (the additional 50% is owned by the Trust Company of the West (TCW)which is operated by AES Corporation, its original buyer. The three companies serve a similar share of the market. Comisión Nacional de Energía 2005]

Renewable energy resources

As it has been described, most electricity generation in the Dominican Republic comes from thermal sources. Only 14% of the installed capacity is hydroelectric, with this percentage falling to below 9% when all the thermal self-generation is accounted for. The exploitation of other renewable resources (i.e. solar, wind) is very limited. However, this situation is expected to change following the enactment of in May 2007 of the [http://www.hacienda.gov.do/legislacion/leyes_incentivos/Ley%2057-07%20sobre%20Energia%20Renovable.pdf Law of Incentives to Renewable Energy and Special Regimes] (Law No. 57-07). Among other incentives, this law establishes financing at favorable interest rates for 75% of the costof equipment for households that install renewable technologies for self-generation and for communities that develop small-scale projects (below 500 kW).

Hydroelectricity

As it has been mentioned, Egehid's expansion plan contemplates the addition of 762MW of hydroelectricity capacity in the period 2006-2012. According to CDEEE, the first of the new series of dams and hydropower plants - Pinalito - is a "model of environmental management", with only 12 families resettled and extensive reforestation. [http://www.cdeee.gov.do/index.php?option=com_docman&task=cat_view&gid=38&Itemid=58 CDEEE-"Imagen Energética No.7"] ]

Wind

A 2001 study estimated that the Dominican Republic had a wind generation potential of 68,300GWh per year, equivalent to more than six times more than current power production. Comisión Nacional de Energía 2004]

History of the electricity sector

The situation prior to the reforms

Prior to the 1990s reform, the Dominican power sector was in the hands of the state-owned, vertically-integrated "Corporación Dominicana de Electricidad" (CDE). The operation of the company was characterized by large energy losses, poor bill collection and deficient operation and maintenance. During the 1990s, the rapid growth in the power sector mirrored the high economic growth experienced by the country. Total electricity demand increased at an annual rate of 7.5% in the years 1992-2001, while annual GDP growth was 5.9%. Generation capacity was not enough to meet peak demand, which translated into continuous supply constrains and widespread blackouts lasting up to 20 hours. In the mid 1990s, in order to address generation capacity shortages, several Independent Power Producers (IPPs) where encouraged by the government to sign Power Purchase Agreements (PPAs) with the CDE. The result of these deals, often nontransparent and negotiated, was high electricity prices. World Bank 2007]

Sector reforms: 1997-2002

Sector unbundling and privatization

The government, aiming to solve the enduring problems of the lack of available installed capacity and constant blackouts, enacted the Public Sector Enterprises Reform Law, which provided the framework for the privatization and restructuring of the power sector. World Bank 2007] In 1998-1999, under the first government of Leonel Fernández, the sector was unbundled and the vertically state-owned monopoly, "Corporación Dominicana de Electricidad" (CDE), was broken into a number of generation companies. EGE (Empresa Generadora de Electricidad) Haina and EGE Itabo, which ran the thermal plants, were privatized, and three distribution companies - EdeNorte (Empresa Distribudora de Electricidad), EdeSur and EdeEste - were created and also privatized. World Bank 2006]

An attempt had been made in 1997 to improve the functioning of the sector by strengthening sector regulation with the appointment of a new regulator, which was part of the Ministry of Commerce and Industry and thus had only limited autonomy.

Electricity Law of 2001

A comprehensive regulatory framework was not enacted until July 2001, with the Electricity Law (Law 125-01)passed under the government of Hipólito Mejía. Under this law, the government's operational presence in the sector was to be through three entities:

* the formerly integrated utility CDE, which kept the contracts with the Independent Power Producers (IPPs);
* a transmission company, "Empresa de Transmisión Eléctrica Dominicana" (ETED); and
* a hydropower production company, "Empresa de Generación Hidroeléctrica Dominicana" (EGEHID).

A new holding company, "Corporación Dominicana de Empresas Eléctricas" (CDEE) was established to own ETED and EGEHID and to eventually substitute the CDE. Initially the government had intended to transfer its assets to manage the companies as an investment under a Trust Fund separate from the entities governing the sector, rather than using its ownership as a potential instrument for sector policy. However, this change was not implemented.

The 2001 Law and its supporting regulations from 2002 included the creation of an autonomous regulatory agency, the Electricity Superintendence (SIE). It also created the National Energy Commission (CNE) and a wholesale market under responsibility of a Coordinating Agency. World Bank 2007]

2000s developments

The crisis and renationalization of distribution companies

The reform resulted in new generation facilities, which were built and financed by the private sector, and investment in distribution by the privatized companies. Thanks to the new investments, between the end of 2000 and mid-2003, effective capacity experienced a 43% increase, with the distribution network also showing improvement. This led to temporary reduction in blackouts and distribution losses and increasing operating efficiency, the combination of which translated in improvements in the quality of service. Unserved energy decreased to 11% of the potential demand in 2002, down from 40% in 1991. In the same period, capacity deficits to meet unsuppressed demand were estimated to have fallen from 30% to 16%. However, rising oil prices, the introduction of generalized subsidies and political interference negatively affected the sector's financial health. In 2003, these unfavorable conditions and strong political pressure led the government to repurchase Union Fenosa's shares in the privatized distribution companies EdeNorte and EdeSur. These companies have experienced a deteriorating operating efficiency since their renationalization. World Bank 2006] , World Bank 2007]

The electricity sector has been in a sustained crisis since 2002, characterized by very high losses (both technical and commercial) and frequent blackouts of long duration. This situation has led to very high economic and social costs: high fiscal costs to the government; high production costs and uncertainty to industrial consumers as a result of service interruptions; high costs to industrial and residential consumers for public and private power generation, and increased social instability, including rising crime rates, caused by frequent blackouts and disruption in basic public services (e.g. hospitals, clinics and schools). In addition, domestic and international investment has been deterred, especially in sectors that depend on a reliable power supply for their activities, although many facilities (such as tourist resorts) have their own sources of power supply. World Bank 2006]

Blackout Reduction Program

The Blackout Reduction Program (PRA) was established by the government in 2001. Initially designed to last two years, it has been subsequently extended in the absence of an alternative way to deal with the issues it addresses. This program has the objective of targeting subsidies to the poor on a geographical basis and implementing rolling blackouts in a more organized fashion. The poorest neighborhoods in the cities were to have a provision of about 20 hours of electricity per day at a price highly subsidized by the government and the utility. The PRA was initially considered a success. However, the country's macroeconomic crisis, the perverse incentives built into the PRA, and the deficiently targeted subsidy scheme have jeopardized the medium-term sustainability of the program. The absence of demand management, the lack of metering systems, sustained losses, a culture of non-payment and the absence of incentives for the distribution companies to fix the technical problems make it urgent to design a new subsidy and rationing system that is part of a more comprehensive approach to solve the problems of the power sector.World Bank 2007]

Measures against fraud: modification of the Electricity Law

In 2002, the government created the National Program to Support the Eradication of Electricity Fraud (PAEF) (Decree No. 748-02), whose main objective is to support the distribution companies in their efforts to eliminate fraud. [ [http://www.procuraduria.gov.do/PGR.NET/Dependencias/PAEF/Documentos/memoria%20anual%20de%20las%20ejecuciones%20del%20PAEF.pdf PAEF report] ] However, results of the PAEF to date have been modest.World Bank 2007] The most serious step to combat fraud was taken in 2007 with the modification of the Electricity Law. Law 186-07, which modifies Law 125-01, criminalizes electricity fraud (e.g.illegal connections, non-payment, etc.), prescribing fines and/or jail sentences to those who breach its mandate.

Comprehensive Plan for the Electricity Sector

In 2006, by request of President Leonel Fernández, the CDEEE, the CNE and the SIE designed a Comprehensive Plan for the Electricity Sector for the period 2006-2012. This Plan aims at achieving self-sustainability of the Electricity Sector in the Dominican Republic. The main objectives of the plan are: achieve financial sustainability of the sector, reduce electricity prices for final consumers and promote an efficient use of energy. For the medium term, it recommends the renegotiation of contracts with generators, the construction of coal plants, the development of transmission plans, the addition of new hydroelectric capacity, the promotion of renewable energy sources, a review of cross-subsidies and the strengthening of the Electricity Superintendence (SIE).CNE, CDEEE, SIE 2006]

Tariffs and subsidies

Tariffs

Electricity tariffs in the Dominican Republic are among the highest in the Latin American and Caribbean region. This is due to several factors: reliance on imported oil, weak institutional environment, difficulties to pursue large non-payers, high prices originally negotiated in power purchase agreements with the generators, high commercial risks faced by generators such as non-payment or delayed payment by the distribution companies and/or the government, low cash recovery index (CRI), and high operating costs in the distribution companies. World Bank 2006]

The country's policy of cross-subsidizing residential tariffs by disproportionate increases in commercial and industrial tariffs translates into higher rates for industrial and commercial consumers compared to residential consumers. World Bank 2006] In 2007, the average residential tariff was US$0.160 per kWh (LAC weighted average was US$0.115 in 2005), while the average industrial tariff was 0.230 (LAC weighted average was US$0.107 per kWh in 2005) [http://realserver.worldbank.org/wbimm/lacelectricity/home.htm Benchmarking data of the electricity distribution sector in Latin America and Caribbean Region 1995-2005] ] and the average commercial tariff was as high as US$0.290 per kWh. [World Bank]

Subsidies

Electricity subsidies are estimated to exceed US$ 1 billion in 2008, corresponding to a stunning 3% of GDP. [ The Economist: "Two Cheers for Fernández", May 10th 2008, p. 48 ] The need for subsidies has increased due to higher oil prices while electricity tariffs have been kept constant. Subsidies are channeled through two major mechanisms: The Blackout Reduction Program and the Tariff Stabilization Fund.

The Blackout Reduction Program (PRA) is targeted to poor areas. Due to low collections rates, these consumers have been receiving virtually free electricity since the program's inception.

Residential consumers outside the PRA areas and thus likely not to be among the poorest, are charged below-cost electricity prices for consumption below 700 kWh/month, a very high threshold by international standards. About 80% of residential users outside the PRA areas fall into this category. This subsidy is drawn from the Tariff Stabilization Fund (FET), which was designed to reduce the impact of high oil prices. The financial burden in this case is transferred to the distribution companies, which have found themselves unable to cover their costs in a scenario of rising oil prices, low efficiency and a limited customer base that could be charged to finance the cross-subsidy. This situation has forced the government to provide much higher than expected subsidies to the sector, which in turn translates into reduced ability to finance investments in other key sectors such as health and education. The government has started to reduce cross-subsidies gradually, with the final objective of limiting them to households with monthly consumption below 200 kWh, which is closer to thresholds for subsidized residential electricity encountered in other countries.World Bank 2006]

Investment and financing

The power sector attracted an important amount of foreign direct investment (FDI) following the privatization of the main generation facilities and the distribution companies in 1999 and the subsequent expansion in generation capacity. In the period 1996-2000, the sector accounted for over 28% of FDI, reaching 37% in 2001. World Bank 2006]

Generation

As previously described, the precarious situation of the electricity sector in the Dominican Republic is not caused primarily by limited generation capacity. Although a reduction of losses may provide a more economic way of resolving the crisis, there are plans for significant new investments in new generation capacity, especially in hydropower.

The private generation companies raise capital in the market. For example, in April 2007 EGE Haina raised US$ 175m in capital through 10-year bonds that were more than 10 times oversubscribed. [ [http://www.dominicantoday.com/dr/economy/2007/4/23/23618/Dominican-power-company-EGE-Haina-issues-US175-M-in-bonds Dominican today] ]

As for hydropower, Egehid's has identified in its 2006-2012 expansion plan new projects for an estimated value of US$1,442 million Egehid Expansion Plan 2006-2012 (power point presentation)] ] . The construction of first three dams (Pinalito, Palomino and Las Placetas) and associated hydropower plants will be partially financed through tied export financing from the Brazilian Development Bank BNDES approved in November 2006. The loans for the Palomino and Las Placetas projects total US$ 152.5 million, while the total costs of the facilities is estimated at US$ 512.5 million. A loan for the Pinalito project had already been approved earlier. Additional financing is provided by commercial Banks such as ABN and BNP Paribas. [ [http://goliath.ecnext.com/coms2/gi_0199-6473938/US-81-3-million-loan.html#abstract Goliath Business Knowledge] and [http://www.bndes.gov.br/english/news/not044_06.asp BNDES] ]

Transmission

There are bottlenecks in the transmission system that need to be addressed. The owner of the system, the CDE, lacks financial resources to improve the grid and the existing legislation has not allowed other mechanisms to mobilize private sector resources for transmission. World Bank 2007]

The Electricity Transmission Company (ETED) has produced an expansion plan for the transmission network to be executed in the period 2006-2012. [http://www.cdeee.gov.do/index.php?option=com_docman&task=cat_view&gid=38&Itemid=58 CDEEE-"Imagen Energética No.7"] ] Financing of US$284 million has been secured for the 2006-2008 period, with an additional US$80.75 million in process. Furthermore, US$222.5 million will be needed to finance the projects contemplated in the expansion plan for the period 2008-2012. [ [http://www.cdeee.gov.do/index.php?option=com_docman&task=cat_view&Itemid=&gid=26&orderby=dmdate_published&ascdesc=DESC ETED Expansion Plan 2006-2012] ]

Rural electrification

The Dominican Government claims to have plans to invest, through the Rural and Suburban Electrification Unit (UERS), about RD$1,500 million (US$50 million)in large number of scattered projects. [http://www.cdeee.gov.do/index.php?option=com_docman&task=cat_view&gid=38&Itemid=58 CDEEE-"Imagen Energética No.7"] ]

Summary of private participation in the electricity sector

In 1998-1999, the Public Sector Enterprises Reform Law provided the framework for the privatization and restructuring of the power sector, previously controlled by the vertically state-owned monopoly, Corporación Dominicana de Electricidad (CDE). A comprehensive regulatory framework was enacted in 2001, which determinated the government's operational presence in the sector through three entities: CDE(generation), EGEHID (hydroelectric generation), and ETED (transmission). As for distribution, two of the three existing companies, EdeNorte and EdeSur, are owned by the government, who also holds 50% ownership of the third one, EdeEste.

Electricity and the environment

Responsibility for the environment

The "Secretaría de Estado de Medio Ambiente y Recursos Naturales" is the institution in charge of the conservation, protection and regulation of the sustainable use of the natural resources and the environment in the Dominican Republic.

Greenhouse gas emissions

[http://www.olade.org OLADE] (Latin American Energy Organization) estimated that CO2 emissions from electricity production in 2003 were 7.63 million tons of CO2, which corresponds to 46% of total emissions from the energy sector [ [http://www.olade.org/informe.html OLADE] ] . This high contribution to emissions from electricity production in comparison with other countries in the region is due to the high share of thermal generation.

CDM projects in electricity

Currently (December 2007), there is just one registered CDM project in the electricity sector in the Dominican Republic, the [http://cdm.unfccc.int/Projects/DB/AENOR1153378528.03/view El Guanillo wind farm] , with estimated emission reductions of 123,916 tCO2e per year. [http://cdm.unfccc.int/Projects/projsearch.html UNFCCC] ]

External assistance

World Bank

The World Bank is currently financing a [http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK=228424&Projectid=P082715 Power Sector Technical Assistance Project] . The US$10 million project will receive US$7.3 million funding from the Bank in the period 2004-2009. This project aims to: (i) strengthen the Government's regulatory and consumer protection performance, (ii) improve policy formulation and implementation, (iii) design the transmission grid and the wholesale power market, (iv) increase the quantity and quality of electricity for the poor, and (v) protect the environment.

The World Bank is also financing the [http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK=228424&Projectid=P082712 Second Generation Power Sector Reforms] of the Dominican Republic Power Sector Program through US$150 million of financing in the period 2005-2008. The power sector program, which consists of two policy-based loans and an investment loan for transmission and service expansion, seeks to support the Government's strategy for the recovery of the power sector, and in particular to: improve the quality of service, especially by reducing the widespread blackouts of recent years; establish conditions that would permit the financial sustainability of all efficiently-operated companies in the sector; and, increase the percentage of the population with access to electricity.

Inter-American Development Bank

The Inter-American Development Bank (IDB) supported the electricity sector reforms of the late 1990s, the creation of a National Energy Council and demand-side management to reduce electricity consumption through various technical assistance projects approved between 1996 and 2001. The IDB's private-sector arm also provided loans to the private electricity distribution companies Ede Sur and Ede Norte in 1999. [ [http://www.iadb.org/countries/home.cfm?id_country=DR&Language=English IDB DR - search for projects in the category energy] ]

See also

* Economy of the Dominican Republic
* Water supply and sanitation in the Dominican Republic
* History of the Dominican Republic
* Government of the Dominican Republic

Sources

* Comisión Nacional de Energía, 2004. "Plan Energético Nacional 2004-2015"
* Comisión Nacional de Energía, 2005. "Plan Indicativo de Generación del Sector Eléctrico Dominicano (PIG) 2006-2018"
* CNE, CDEEE, SIE 2006. "Plan Integral del Sector Eléctrico de República Dominicana 2006-2012"
* Olade, 2006. Energy Statistics Report 2005.
* World Bank, 2006. "Dominican Republic: Country Economic Memorandum. The Foundations of Growth and Competitiveness"
* World Bank, 2007. [http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2007/05/23/000090341_20070523152800/Rendered/PDF/397410Electricity0gap01PUBLIC1.pdf "Closing the Electricity Supply-Demand Gap. Case Study: The Dominican Republic"] .

Notes

External links

* [http://www.cne.gov.do/Pages.asp?cid=31&sid= "Comisión Nacional de la Electricidad (CNE)"] (National Electricity Commission)
* [http://www.cdeee.gov.do/index.php "Corporación Dominicana de Empresas Eléctricas Estatales" (CDEEE)]
* [http://www.medioambiente.gov.do/cms/ "Secretaría de Estado de Medio Ambiente y Recursos Naturales"] (Ministry of the Environment and Natural Resources)
* [http://www.sie.gov.do/ "Superintendencia de Electricidad"] (Electricity Superintendence)
* [http://www.hidroelectrica.gov.do/ EGEHID] (Hydroelectricity Generation Company)
* [http://www.edenorte.com.do/estafetas.html EdeNorte] (Distribution Company of the North)
* [http://www.edesur.com.do/ EdeSur] (Distribution Company of the South)
* [http://www.edeeste.com.do/nuestra_identidad.htm EdEste] (Distribution Company of the East)
* [http://www.iadb.org/projects/index.cfm?language=English Inter-American Development Bank projects in the Dominican Republic]
* [http://web.worldbank.org/external/projects/main?pagePK=217672&piPK=95916&theSitePK=40941&menuPK=223661&category=regcountries&regioncode=7&countrycode=DO World Bank’s projects in the Dominican Republic]


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