Argentina: Changes to energy policy unlikely despite crisis

Argentina is not expected to change its energy policies under a new Kirchner administration, sources said. As reported, the sovereign has been hit by the one-two punch of a lack of investment and governmental interference in the sector, coupled with abnormal weather patterns. The crisis has forced Argentina to cut 1200MW per day to industry from 4PM to 10PM in order to keep residential electric customers relatively unaffected by the crisis. 45% of gas demand cannot be satisfied during peak days, according to Ecolatina the consulting company founded by presidential candidate Roberto Lavagna.
If no immediate action is taken, Argentina could lose 15% of GDP growth by 2015, said Ruben Lo Vuolo, board member of Banco de la Ciudad and potential minister of the economy for presidential candidate Lilita Carrio. The crisis will cost the sovereign some USD 4bn this year in subsidies while the private sector is expected to lose USD 1.5bn, according to private studies and sources close to the government.

The energy crisis has its roots in the financial crisis of 2002. After freezing tariffs, the government never revealed the timeline for future hikes, constraining investment. Since then, the economy has grown at an average annual rate of 8%, but electricity tariffs for residential consumers have remained unchanged, remaining among the lowest in the world.

Although the government has tried to control consumption by penalizing excessive usage, the policy has failed. According to figures published in the 17 July Official Government Bulletin, residential clients of the three biggest power distributors in the city and province of Buenos Aires consumed 21% more energy compared to 2005. A CFO from the energy sector said the Kirchner administration never intended to restrict residential consumption as Buenos Aires urban areas account for half the votes required to win October’s presidential elections.

The government has been forced to supplement its local resources with costly imports. In addition to Bolivian natural gas, the government has already paid USD 703m in previous months for Brazilian electricity. While the sovereign must pay USD 54.5 per MW from Brazilian suppliers, local producers sell at USD 25 on the country’s regulated spot market. The country also pays USD 5 per 1M BTU to Bolivia while local producers are paid only USD 2. The final residential consumer only pays USD 0.30 after subsidies.

The agricultural sector, the powerhouse driving economic growth, has also been affected. Profertil, the main producer of urea, reportedly said that although it can currently satisfy demand for nitrogen-based fertilizers, it will not be able to satisfy future demand due to gas shortages.

Financial Times