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### Viewing cable 07SANJOSE873, PARADISE BY CANDLELIGHT: COSTA RICAN POWER FAILURE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07SANJOSE873 | 2007-05-09 22:16 | 2011-03-21 16:30 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy San Jose

`

    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

`