ESMAP Technical Paper 116/07 May2007 40243 Strengthening Energy Security in Uruguay Energy Sector Management Assistance Program Energy Sector Management Assistance Program (ESMAP) Purpose The Energy Sector Management Assistance Program (ESMAP) is a global technical assistance partnership administered by the World Bank and sponsored by bi-lateral official donors, since 1983. ESMAP's mission is to promote the role of energy in poverty reduction and economic growth in an environmentally responsible manner. Its work applies to low-income, emerging, and transition economies and contributes to the achievement of internationally agreed development goals. ESMAP interventions are knowledge products including free technical assistance, specific studies, advisory services, pilot projects, knowledge generation and dissemination, trainings, workshops and seminars, conferences and round-tables, and publications. ESMAP work is focused on four key thematic programs: energy security, renewable energy, energy-poverty and market efficiency and governance. Governance and Operations ESMAP is governed by a Consultative Group (the ESMAP CG) composed of representatives of the World Bank, other donors, and development experts from regions which benefit from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice-President, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Program's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank, and from the energy and development community at large, to conduct its activities. Funding ESMAP is a knowledge partnership supported by the World Bank and official donors from Belgium, Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom. ESMAP has also enjoyed the support of private donors as well as in-kind support from a number of partners in the energy and development community. FurtherInformation For further information on a copy of the ESMAP Annual Report or copies of project reports, please visit the ESMAP Website: www.esmap.org. ESMAP can also be reached by E-mail at esmap@worldbank.org or by mail at: ESMAP c/o Energy and Water Department The World Bank Group 1818 H Street, NW Washington, D.C. 20433, U.S.A. Tel.: 202.458.2321 Fax: 202.522.3018 ESMAP Technical Paper 116/07 Strengthening Energy Security in Uruguay Ishmael Edjekumhene, KITE Akosua B.K. Amaka-Otchere, KITE Harriette Amissah-Arthur, KITE Energy Sector Management Assistance Program (ESMAP) Copyright © 2007 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in India First printing May 2007 ESMAP Reports are published to communicate the results of ESMAP's work to the development community with the least possible delay. The typescript of the paper therefore has not been prepared in accordance with the procedures appropriate to formal documents. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The Boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP Manager at the address shown in the copyright notice above. ESMAP encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. (Papers in the ESMAP Technical Series are discussion documents, not final project reports. They are subject to the same copyright as other ESMAP publications.) Contents Acronyms and Abbreviations vii Acknowledgments ix Executive Summary 1 Introduction 1 Energy Sector Background 2 Issues and Options in the Energy Sector 5 Electricity and Natural Gas 7 Crude Oil and Oil Products 16 Energy Pricing 18 Energy Efficiency 21 Corporate Performance 23 Government Strategy and the Way Forward 23 References 29 iii STRENGTHENING ENERGY SECURITY IN URUGUAY Tables Table 1: Synthesis of Critical Aspects in the Energy Sector 5 Table 2: Electricity Imports 9 Table 3: Estimates of Thermal-generating Costs for 300 MW Units of Competing Fuels (US¢/kWh, 2005) 11 Table 4: Instruments for Fostering Renewable Energy Investment 14 Table 5: Typical Costs of Biofuels, 2002 18 Table 6: Compared Prices of Oil Products (US$/lt) as of May 2005 21 Table 7: Comparison of Fuel Costs for Final Users 22 Figures Figure 1: Final Energy Consumption, by Source of Energy 3 Figure 2: Energy Demand by Energy Source and by Sector, 2005 4 Figure 3: Electricity Production, by Source 8 Figure 4: Evolution of Fuel Prices (2000-June 2006) 10 Figure 5: Relationship between Production and Demand of Oil Products 17 Figure 6: Electricity Prices, 1995-2005 18 Figure 7: Evolution of the Domestic Consumption of Oil Products (Thousands of m3) 19 Figure 8: Relationship between Tax-free Domestic Fuel Prices and Import Parity Prices, in Percentage 20 Figure 9: Energy Use and GDP in some Latin American Countries 21 iv Units of Measure bbl Barrels Ktoe Kiloton Per Oil Equivalent kWh Kilo Watt (s) Per Hour kW Kilo Watt (s) MMBTU Million British Thermal Units m/s Miles Per Second MW Mega Watt (s) MWh Mega Watt (s) Per Hour lt Liter toe Ton Per Oil Equivalent v Acronyms and Abbreviations ADME Administración del Mercado Eléctrico (Electricity Market Administration) ANCAP Administración Nacional de Combustibles, Alcohol y Portland CCGT Combined Cycle Gas Turbine CIER Comisión de Integración Eléctrica Regional CNG Compressed Natural Gas CO2 Carbon dioxide DINAMA National Environmental Agency DNETN Dirección Nacional de Energía y Tecnología Nuclear (Director, National Directorate of Energy and Nuclear Technology) ESMAP Energy Sector Management Assistance Program EU European Union GoU Government of Uruguay IGCC Integrated Gasification Combined Cycle LNG Liquefied Natural Gas MIEM Ministry of Industry, Energy and Mining OPP Budget and Planning Office RB Republica Bolivariana de Venezuela RE Renewable Energy REs Renewable Energies RPS Renewable Portfolio Standard S&L Standard and Labeling SOEs State-Owned Enterprises vii STRENGTHENING ENERGY SECURITY IN URUGUAY T&D Transmission and Distribution TUs Trade Unions UNIT Technical Norms Institute URSEA Unidad Reguladora de Servicios de Agua y Energía (Regulatory Entity for Energy and Water Services) UTE Administración Nacional de Usinas y Trasmisiones Eléctricas (National Administration for Electric Transmission) VAT Value Added Tax viii Acknowledgments This Technical Paper consists of the Executive Summary of a full report prepared as part of the joint World Bank and Energy Sector Management Assistance Program (ESMAP) in support to the Government of Uruguay (GoU) for the preparation of an energy strategy. Mr. Manual Dussan, Mr. Jorge Chamot and Mr. Pedro Touzett (individual consultants) contributed with a report on "Energy Strategy ­ Support on Specific Energy Issues." Mr. Héctor Pistonesi and Mr. César Chávez (Fundación Bariloche) facilitated the consultative workshop which took place in May 2006 with key public stakeholders in the energy sector. The Uruguay team which prepared the "Guidelines for an Energy Strategy" section of this Executive Summary included Mr. Jorge Lepra (Minister of Industry, Energy and Mining), Mr. Martín Ponce de León (Vice Minister of Industry, Energy and Mining), Mr. Gerardo Triunfo, Dirección Nacional de Energía y Tecnología Nuclear (Director, National Directorate of Energy and Nuclear Technology) ­ DNETN, Mr. Pablo Mosto (DNETN) and Ms. Carmen Villasante (DNETN). The World Bank team included Mr. Philippe Durand (Task Manager), Mr. Carlos Vélez, Mr. Fernando Lecaros and Ms. Lucia Spinelli. Ms. Marjorie K. Araya and Ms. Ananda Swaroop from ESMAP coordinated the publication and dissemination process. ix Executive Summary Introduction The need for an energy strategy. The Uruguayan energy sector is at the crossroads. As in the case of many other countries, high oil prices in the international market are taking their toll on an economy which imports all of its oil and oil products. Uruguay has also depended, to a large extent, on import of electricity from Argentina to complement its supplies. Trade in electricity and natural gas collapsed during the economic recession of 2001-02 and Argentina's crisis in the same period, which, together with the rise of oil prices, have brought to the fore questions of energy security (that is, ensuring sufficient, reliable and cost-effective supply of national energy demand) and the cost/risk trade-offs involved in depending on foreign suppliers. The Uruguayan government has rightly perceived this to be a fundamental economic issue and sought to put together a strategy for addressing it. Objectives and scope of the study. The study was conceived as support to the GoU for addressing strategic issues in the energy sector. The process through which the strategy was developed consisted of three phases. In the first phase, issues and options in the energy sector were examined with support from specialized consultants,1 who had an overall look at energy sector issues and options. At GoU's request, the consultants examined more specifically the following themes: comparative analysis of energy strategies and power sector reform in relevant countries, review of prospects for local hydrocarbon production, analysis of options to promote Renewable Energy (RE) sources and review of power generation alternatives including the ones based on imported coal or Liquefied Natural Gas (LNG). A second phase of the study took place through a seminar in which options to address issues in the energy sector were shared and consulted with key public stakeholders in the energy sector, including the two government-owned companies Administración Nacional de Usinas y Transmisiones Eléctricas (National Administration for Electric 1Manuel Dussan, Jorge Chamot and Pedro Touzett. 1 STRENGTHENING ENERGY SECURITY IN URUGUAY Transmission) (UTE) and Administración Nacional de Combustibles, Alcohol y Portland (ANCAP), the energy sector regulator Unidad Reguladora de Servicios de Agua y Energía (Regulatory Entity for Energy and Water Services) (URSEA) and the power market administrator Administración del Mercado Eléctrico (Electricity Market Administration) (ADME); Fundación Bariloche, a well-known Argentinean think tank, acted as seminar facilitator.2 In the final phase, the government team alone put together an energy strategy based upon the information gained from the preceding phases and its own analysis and considerations, through final consultations with the same key public stakeholders. Report organization. The results of the study are presented in this Executive Summary which includes: (a) a general review of energy resources in Uruguay together with basic data on consumption, the sector's institutional set-up and the main actors; (b) background, issues and options for electricity and natural gas; (c) supply and demand issues and options for oil and oil products; (d) pricing and energy efficiency issues; and (e) a summary and discussion of the government's energy strategy. Energy Sector Background Uruguay does not possess great energy resources. Local energy is limited to hydropower and biomass and other RE; however, the former has been practically developed in its entirety and the latter entails relatively high costs. Therefore, the country is dependent on imports for a large part of its supply of modern primary energy. The issue is whether to depend on trade for supplies of secondary energy, for example, should electricity be produced in Uruguay with an imported resource such as coal or natural gas, or should it be imported from a neighboring country. Despite the dearth in natural energy resources, there may be possibilities for increasing supply. In the case of hydroelectricity, the potential is well known,3 but the same may not be true for the oil sector. Although the country has always depended on imports to feed its refinery, it possesses sedimentary basins where oil exploration could yield positive results. Exploration has not taken place because the primary indications have not been optimistic; however, as in many other countries, high oil prices and modern drilling technology have become an incentive to search for oil deposits in areas which had been neglected until now. 2Héctor Pistonesi and César Chávez. 3Including medium-sized projects on the Río Negro (80-160 Mega Watt (s) (MW) Isla Gonzalez project, 70 MW Villa Darwin project) or binational projects with Argentina (Salto Grande expansion) and Brazil (Paso Centurion and Talavera projects), as well as a total of 200 MW of smaller projects in Uruguay. However, all these projects have high generation costs (above US$90/Mega Watt (s) hour [MWh]). 2 EXECUTIVE SUMMARY Uruguay has a relatively modest demand for energy. Energy demand in Uruguay is relatively low on a per capita basis compared to other Latin American countries. While Argentina and Chile consume about 1,000 and 1,200 Ton Per Oil Equivalent (toe) per habitant per year respectively, Uruguay consumption is only about 600 toe per capita per y e a r . This is in contrast to its per capita income, which is among the highest in the region. The discrepancy between these two factors may be explained because of a lack of energy-intensive industries in Uruguay, as well as relatively high energy prices compared to the region. Figure 1 shows the evolution of final energy consumption. One can observe the growing participation of electricity, the predominant role of petroleum products, the limited contribution of natural gas and the still important role of biomass energy. Figure 1: Final Energy Consumption, by Source of Energy 2500 447.5 552.2 556.7 2000 1500 ktoe 1,392 1440.2 1,236 1000 500 478.5 416.6 442.3 0 [VI] 1996 2000 2005 Biomass & Wood Natural Gas Mineral Coal Oil Products Electricity Source: DNETN. Oil products constitute the major element of energy demand. Oil products account for 51 percent of the total energy demand, followed by electricity (24 percent), biomass (19 percent) and natural gas (3.5 percent). Within demand subsectors, transport accounts for over 32 percent of the total consumption, followed by the residential subsector (29 percent), industry (21 percent) and the commercial subsector (9 percent) as shown in Figure 2. The relatively low participation of industry confirms the low energy consumption pointed out above. 3 STRENGTHENING ENERGY SECURITY IN URUGUAY Figure 2: Energy Demand by Energy Source and by Sector, 2005 9% 6% 6% 24% 29% 21% 3% 32% 9% 19% 32% 10% Electricity Natural Gas Biomass Residential Commercial Transport Gasoline Gas Oil Fuel Oil Industry Agriculture Others Source: DNETN. The energy sector exhibits a predominant public sector presence. The Ministry of Industry, Energy and Mining (MIEM), through its DNETN, is the principal government authority in the sector. Other agents and authorities include: · ANCAP imports, stores and refines all crude oil and oil products and sells in bulk to distribution companies. The company has a refinery with a 50,000 Barrels (bbl)/day capacity and it also has a downstream presence through its participation in companies which distribute natural gas, propane and liquid fuels, as well as through its presence in the transport of natural gas; · UTE concentrates its activities on generation, transport and distribution of electricity, including imports and participation in the Salto Grande binational project. Although UTE has no legal monopoly, it has a de facto monopoly on power sector activities; · URSEA, an agency within the executive branch, regulates operations in electricity, natural gas, oil products, water and sanitation. Besides, URSEA advises the executive on concessions and market rules, and has functions of consumer protection; and · ADME is nominally the power system's dispatcher and clearing house; however, UTE continues to operate the market and to dispatch the production facilities. Despite the above, there is a significant private sector presence in the oil subsector. Private sector companies are present in the distribution of natural gas (Petrobras); there is also private sector participation in natural gas transport, for example, in the Gas del Sur pipeline (British Gas group, Pan American Energy, Wintershall), in association with ANCAP. In addition, several private companies participate in the distribution of liquid fuels ­ Esso, Texaco and Petrobras operate 60 percent of the country's gas stations. 4 EXECUTIVE SUMMARY Issues and Options in the Energy Sector Several issues in the energy sector put at risk the security of supply and the efficiency in energy demand and supply. These issues include mainly: the vulnerability of electricity supply to external factors; the unconsolidated regulatory and institutional framework in the electricity sector; the obstacles to the development of the electricity and gas regional markets; the low penetration of natural gas in the energy matrix; the lack of transparency in electricity prices; the limited incentives for development of Renewable Energies (REs); the dieselization of the automotive stock; the high fuel prices compared to regional prices; and the prospects for further improving governance and management of State monopolies in the energy sector. The causes and consequences of these sector issues are summarized in Table 1 and are analyzed in greater detail in the rest of this section, which also identifies policy options to address sector issues. Table 1: Synthesis of Critical Aspects in the Energy Sector Critical Aspect Causes Consequences Vulnerability of · Dependence on hydro · Compromises certainty electricity supply to generation without seasonal of electricity and gas uncontrollable factors water storage domestic supply · Lack of firm contracts for · Lack of trust in the purchase of electricity and gas regional market and from Argentina due to energy higher supply costs crisis in that country · Costly emergency/ · Lack of diversification of back-up solutions energy sources · Risk of energy rationing with social, economic and political impacts Unconsolidated · Assumptions for the power · Weakening of new regulatory and market model not fulfilled institutions for power institutional framework (demise of regional markets) market regulation and of the electric sector · Argentina's economic crisis in administration 2002 and energy difficulties · Lack of incentives for since 2004 development of Power wholesale · Economic crisis in Uruguay independent or market model · Undefined market cogeneration projects established by law is development strategy · Obstacles to Uruguay's not applied · Doubts on convenience insertion in regional of model energy markets 5 STRENGTHENING ENERGY SECURITY IN URUGUAY Critical Aspect Causes Consequences Necessary transition to · DNETN's lack of operative · Private investors avoid the new electricity tariff capacity assuming risks and prefer scheme ·Good public perception of direct electricity sales to UTE's performance and good UTE guaranteed by quality of electricity service the State ·Lack of incentives for UTE to improve its efficiency · Higher costs of energy supply in the medium- and long-terms Obstacles to the · Energy difficulties in Argentina · Higher costs of energy development of · Lack of trust in regional supply electricity and gas market as firm back-up to · No advantage taken of regional markets meet demand of electricity benefits of natural gas as and gas a clean fuel vs. fuel oil Low penetration of · Limitations of power and gas oil natural gas in the interconnection with Brazil energy matrix ·Low electric tariffs in the industrial sector Lack of transparency in · No application of distribution · High final prices and/or electricity prices and transmission calculated doubts in this respect prices (VAT and VADE) · Cost-plus system for tariff-setting upon UTE's proposal Limited incentives for · Costs of these alternative · Greater vulnerability to development of sources volatility of hydrology and renewable energies · Limited potential in Uruguay prices of imported fuels Dieselization of · Distorted fuel tax structure · Higher cost of imported automotive stock resulting in lower retail crude (light crude prices for diesel than for to maximize gasoline diesel production) · GoU strategy of support to · Excess production of hauling and industrial sectors relatively low value gasoline in refinery (due to surpluses of gasoline production at regional level) · Increased environmental pollution High fuel prices · Fiscal objectives · Discourages efficient compared to regional · Possible efficiency gains in the substitution of fuels prices fuel chain 6 EXECUTIVE SUMMARY Critical Aspect Causes Consequences Prospects for further ·Incomplete separation of · Consumers pay higher improving governance policy, regulation and prices than they should and management of operational functions in · UTE at a disadvantage State monopolies in the sector to compete in regional the energy sector · State monopolies (de facto or power market de jure) with insufficient transparency and incentives to increase efficiency · Good public perception of UTE and ANCAP's performance and service quality Electricity and Natural Gas The power system exhibits characteristics and issues of hydro-based generation. In quantitative terms, maximum demand to the order of 1,500 MW is met with a generation system of around 2,200 MW capacity. The apparently wide reserve margin conceals the vulnerability to hydrology ­ as 70 percent of installed capacity is hydro ­ with important fluctuations in hydropower generation; in dry years (1999 and 2004, for instance) it was necessary to import up to 30 percent of the demand. In 2004 and 2005, the system depended on purchases in Argentina's and Brazil's market, with some degree of uncertainty and impacts in terms of system vulnerability. For these reasons, a secure, sufficient and reliable power supply has become a priority objective of energy policy. For a full decade no power capacity was added to the power system. Until the incorporation of the 100 MW Punta del Tigre diesel power plant in August 2005, UTE added its last power station to the system in 1995 (last unit of the Salto Grande binational project) following the installation of La Tablada gas turbine in 1991. The absence of commissioning of new production facilities during this extended period was the product of a conscious, strategic decision to take advantage of market developments in Argentina and in the region, which would allow imports to supply shortfalls which might occur in Uruguay, while exporting hydropower surplus production to Argentina and Brazil during wet years (Figure 3). 7 STRENGTHENING ENERGY SECURITY IN URUGUAY Figure 3: Electricity Production, by Source 140% 120% 100% 80% requerida 60% neta 40% 20% generaclón %0% 1995 1996 1997 1999 2004 -20% 2000 2001 2003 /95/04 1998 2002 -40% gen hid térmica importación exportación autogen gen hid (%genhid/95-/04) Source: DNETN. Dependence on imports from Argentina started facing difficulties in 2004. Before 2004, UTE was able to supply its demand growth through a combination of contracts and purchases on the Argentinean spot market. As a result of the Argentine energy difficulties, UTE's contracts with Argentina for firm supply of 365 Mega Watt (s) (MW) were reduced to 150 MW and are not expected to be extended beyond 2007. Notwithstanding this forced reduction in supply contracts from Argentina over the low hydrology period of 2004-06, UTE was able to maintain energy imports through a noticeable increase of imports from Brazil (Table 2) and purchase of energy from the Argentine spot market. It should be noted that the average price of imported energy has been lower than US$26.5/ Mega Watt (s) Per Hour (MWh) in recent years, which reflects attractive prices in the spot market and a rather favorable price of the energy purchasing contract with the Güemes plant in Argentina (of less than US$25/MWh). This means that during the years 2004 and 2005, Uruguay obtained some back-up energy from the regional market at prices far below the costs of thermal generation in Uruguay, having benefited from low prices in the Argentine spot market and from hydraulic surpluses in the Brazilian system. 8 EXECUTIVE SUMMARY Table 2: Electricity Imports Year Argentina Brazil Total Average Price Average MW US$/MWh 1999 81 0 81 2000 152 0 152 2001 13 1 14 2002 64 0 64 2003 50 0 50 12.2 2004 221 47 268 22.0 2005 95 86 181 26.2 Source: DNETN. Power sector reform of 1997; the standard reform model was put in place. In 1997, the national electricity law was updated following the principles of the so-called "standard model," which contemplated the separation of regulatory/governance functions from corporate functions, and put in place the regulatory agency URSEA and a market administrator ADME. The reform contemplated the remuneration of generators in order of merit, the creation of a wholesale market with regulated prices in those activities where competition was not possible (Transmission and Distribution [T&D]). The reform has not been effectively implemented. After passing the modifications to the electricity law, secondary legislation was not forthcoming and the system continued to operate without any significant change. The new model was regulated in 2002 and it was expected that new operators would enter into a competitive market. The market did not develop as planned and demand actually decreased due to the economic crisis in the region. For instance, natural gas provision, which could have supplied new power generating units, did not materialize and, to this day, the existing gas pipelines between Argentina and Uruguay are underutilized. Although URSEA and ADME were established, to this day, they cannot fulfill most of the functions established in their mandate, especially in the case of ADME (power system dispatch and market administration). Policy options to ensure energy security include back-up thermal generation in Uruguay, the strengthening of the regional electricity market, the expansion of interconnection capacity 9 STRENGTHENING ENERGY SECURITY IN URUGUAY with Brazil, the development of renewable sources, the development of an efficient market of electric energy and the strengthening of the electric institutional and regulatory framework. A detailed evaluation of power capacity expansion alternatives should be conducted to assess their respective economic and environmental merits over the long term, based on different fuel price assumptions and with a probabilistic evaluation of supply risks entailed in each alternative. The type of fuel is the determining factor regarding new thermal generation. For example, the use of mineral coal for electric generation can reduce uncertainty of supply and the vulnerability to the volatility of prices, because the international market for this resource is large and diverse, with multiple suppliers and ample reserves (Figure 4). Figure 4: Evolution of Fuel Prices (2000-June 2006) 14 12 US LNG Import Cost 10 8 WTI Crude "Henry Hub" Gas 6 US$/MMBTU Resid Fuel Oil 4 Colombian Coal 2 Gulf 0 1 2 3 4 5 6 7 Year Source: WB, LCR Energy Strategy Study, January 2007. Prospects for the use of mineral coal for electric generation. "Clean coal" technologies have been developed, which improve the environmental performance of coal and allow for compliance with internationally accepted environmental norms. There is ample supply for Uruguay of high quality bituminous coal (sulfur content less than 1 percent) from South Africa, Australia and Colombia. The average generation cost of a 300 MW basic unit, without including investments at port, would fluctuate between US$40 and 50/MWh, with a monthly consumption of 60,000 tons of coal, delivered at prices between US$1.8-2.7/MMBTU equivalent. As there are no ports in Uruguay to harbor bulk ships of appropriate size, it is necessary to make a detailed study of the plant site, to determine 10 EXECUTIVE SUMMARY additional costs of investments in port facilities, transport and handling of the coal and equipment to mitigate the environmental impact. Table 3 shows the compared costs of thermal generation in a recent study. The relative advantage of conventional coal shown in this Table is partly offset by the additional costs incurred in port facilities. Nevertheless, coal-based generation would seem to remain a viable alternative for an energy-poor country like Uruguay. Table 3: Estimates of Thermal-generating Costs for 300 MW Units of Competing Fuels (US¢/kWh, 2005) Technology Capacity Cost Fixed O&M Var. O&M Fuel Cost Total Cost3 Residual Oil-Steam 1.27 0.35 0.30 5.32 7.24 CCGT1-Gas 0.95 0.10 0.40 4.12 5.57 Coal (Sub. Crit. Steam) 1.76 0.38 0.36 1.97 4.47 Coal IGCC2 2.49 0.90 0.21 1.79 5.39 1Combined Cycle Gas Turbine. 2Integrated Gasification Combined Cycle. 3Assuming the following prices for primary energy: crude oil US$30/bbl; coal US$32/ton; natural gas US$3.9/MMBTU. Source: Technical and economic assessment: off-grid, mini-grid and grid electrification technologies. Summary Report, World Bank, November 2005. Importing LNG is an expensive option. LNG imports have been adopted as an option in other countries, notably Chile within the Southern Cone. However, this does not seem to be a practical or economically viable solution, because the size of the Uruguayan market will not warrant the level of investment for it to become a realistic alternative. LNG prices are associated with the "Henry Hub" price of gas in the United States, which is expected to be around US$7 to US$8/MMBTU; in addition to the base price, a transport premium of US$1-2/MMBTU would yield delivered prices on the order of US$8-10/MMBTU, hence, variable production costs of around US$55-70/MWh which would hardly be competitive with other options. Importing more natural gas is a realistic possibility in the medium term. The gas pipelines are in place and have spare capacity. However, the dependence on Argentinean contracts which broke down during the economic crisis requires that any alternative of this type be considered within a regional perspective. The large regional reserves are in Bolivia, which has a small domestic market and must, therefore, turn to exports to profit from its resource. The first steps have been taken in a recent agreement between Argentina and 11 STRENGTHENING ENERGY SECURITY IN URUGUAY Bolivia, for a minimum offtake of 27Mm3/day, during 20 years, at the initial price of US$5/MMBTU. Natural gas generation would appear to be the energy alternative with the lowest overall cost; the reactivation of Argentine production, together with production increases in Brazil, would point toward this option as the most convenient one to foster in the short- and medium-term. Electricity production using imported natural gas in the range of US$4-6/MMBTU would yield total costs on the order of US$45-55/MWh. Another promising possibility is to import electricity. The energy difficulties in Argentina had a negative impact in Uruguay, leading to a crisis of confidence in the regional energy market as a reliable source of steady supply to meet the domestic demand. Yet, the strengthening of the regional electricity market and the expansion of the interconnection with Brazil are fundamental options for the supply of the Uruguayan market, given its geographic location. Uruguay recognizes the importance and the benefits of occasional exchanges of electricity to optimize the operation of the Uruguayan electrical system and provide assistance in case of low hydrology and emergency situations. The factors associated with the economic crisis and energy difficulties in Argentina, as mentioned above, should not discourage the efforts to achieve a regional electricity market: the experience in the development of the domestic electricity market in the European Union (EU) illustrates the process. Although slow in the region so far, it should begin to consolidate through the adoption of basic principles like reciprocity, nondiscrimination, the opening of the market to large consumers, a transparent balance market, open access to transmission networks and independence of the system operator. Interconnecting with Brazil could be particularly attractive. The expansion of the interconnection capacity with Brazil may be carried out either along the Coast or from Salto Grande. This expansion would contribute to diversifying the supply sources and could be done in order to take advantage of the installation of large thermal (coal) plants in the South of Brazil (Candiota). Imports will take place when marginal costs in Brazil are lower than marginal costs in Uruguay, that is, to substitute expensive or inefficient generation in diesel or fuel oil-based plants,4 with cheaper hydropower or thermal energy from Brazil. Even if the electricity trade with Brazil could initially be developed independently from the regional market, it would obviously integrate into it in the medium term. Renewables could play a role in future energy supply, in particular wind power. REs ­ wind or biomass, in particular ­ are an option which could contribute to reduce dependence on imported energy in Uruguay. To cover their additional costs, the development of energies could be promoted through incentives for project developers, which would be 4For instance, in the La Tablada power plant (US$230/MWh), Battle power plant (US$105/MWh) or the new Punta del Tigre diesel power plant (US$135/MWh), at current fuel prices. 12 EXECUTIVE SUMMARY justified on the grounds of associated environmental benefits which would accrue to Uruguayans. International experience offers a wide range of possibilities to promote these projects (essentially though fiscal incentives and/or tariff or capital subsidies), which may be competitive with natural gas combined cycle or coal power plants. In Uruguay, the wind resource has favorable characteristics, but its cost ­ estimated at US$45-50/MWh for large projects (50-100 MW), assuming average wind speed of 10 Miles Per Second (m/s) and a capacity factor of 40 percent ­ is still uncertain, highly site-dependent and calls for more precise project assessments. Consequently, the estimated wind potential of 600 MW cannot yet be taken as a feasible value, from an economic standpoint. It is, however, advisable to continue developing small projects on the order of 10-30 MW to acquire experience with this resource which has seen an extraordinary growth in other countries. Biomass is another renewable option. Biomass offers attractive renewable sources such as rice husk, whose volume could generate up to 20 MW at competitive prices; firewood has already been used as a substitute for fuel oil in the 80s and cellulose projects expect to generate up to 65 MW for sales to the network. Although biomass-based power generation is unlikely to become a core component of electricity supply, it does have a significant role within the spectrum of energy supply alternatives. Instruments to foster RE investment. Two main types of (mutually exclusive) instruments are used worldwide to provide incentives for investment in large RE projects: (i) price-defined targets (generally known as feed-in laws5) where the price is determined and the market sets the amount of generation; these are used mostly in Europe (Austria, France, Denmark, Germany and Spain); and (ii) quantity-defined targets (including the Renewable Portfolio Standard [RPS] and tendering systems6) where the amount of generation is determined and the market sets the price ­ these are used in the United States and in Europe (Italy, Sweden, the Netherlands and the United Kingdom). In 2001, direct support for renewable electricity supply in Europe was ranging between US¢2(v2)-7 per Kilowatt-hour (s) (kWh).7 Financial incentives, such as tax breaks, accelerated depreciation, upfront investment subsidies and so on, are also often used in addition to these above instruments, which are compared in Table 4. 5Under feed-in laws, the government mandates a price at which utilities must take power from eligible renewable generators under long-term contracts (15-20 years) and pass the resulting costs to their consumers. There are three methods of setting price: (i) Estimated long-term cost of project including reasonable return on investment; (ii) Wholesale avoided cost of power; and (iii) Percent of retail electricity price. There is generally no cap on the amount of capacity receiving the subsidy. 6Under an RPS system, electricity suppliers are required to obtain a certain amount of their electricity (specified in terms of either Kilo Watt (s) Per Hour kWh or Kilo Watt (s) kW) from RE sources. Least-cost acquisition to meet required targets is typically left to market mechanisms, with utilities either producing their own power, procuring it directly or by engaging in purchase of "Green Certificates" representing qualifying Renewable Energy (RE) power produced by another supplier. Such a certificate approach can facilitate cost-effective transactions across utilities or regions with differing abilities and RE resource. Under tendering schemes, the regulator or government calls for competitive bids from private developers to build capacity up to a predefined level, normally stated in terms of installed capacity. Developers providing the least-cost bid or bids receive funds to make up the difference between their bid cost and the market price of electricity. 7Average weighed subsidy between all renewable sources (wind, photovoltaic (PV), biomass and hydro). 13 STRENGTHENING ENERGY SECURITY IN URUGUAY and for than simple complex complex feed-in, design, design Simplicity Most to administer, enforce, contract More to administer, complex generators More than simpler SPR risk reduce ecirp if APP price for risk of reduce provide feed-in) estorvnI hti Certainty Can investor w guarantee dna Lack certainty difficult investors/PPA can risk Can certainty well designed (more than players players least-cost established established Local Industry Development Excellent Favor technologies and industry Favor least-cost technologies and industry and and funding to planning Market Sustainability Technically economically sustainable Technically economically sustainable Tied resource planning process; sustainable if supported, stable Investment 2006. Energy Resource Diversity Excellent Favor least-cost technologies Favor least-cost technologies August ­ is price cost Renewable tariff wisely dna reducing at Proceedings at and competitive the Cost/Price Reduction Cost-efficient if periodically and adjusted SPR tendering best cost with bidding Good reducing Forum, Fostering of Policy for time RE of targets only Energy amounts short meet in enforced, quantity process Quantity ER Development Large RE If can realistic Related to established by Renewable Instruments 4: ESMAP Feed-in Laws SPR enderingT Table Source: 14 EXECUTIVE SUMMARY The government has taken action to promote RE development. In March 2006, the executive power issued a decree to foster private generation through wind, biomass and small hydropower plants. A target of 60 MW (20 MW for each of the three RE sources) was established for the first bidding which was conducted by UTE in August 2006. Although bids received for wind and biomass projects were all higher than US$70/MWh, this can be attributed to the small size of the proposed projects and the uncertainty of contractual arrangements. A strategic line emerges for the power sector from the above considerations. There are evidently many options to consider and a full-blown power expansion plan lies outside the context and resources of this study. However, some strategic elements emerge (with the caveat that they still require greater quantification), such as: · A balanced strategy which ensures that energy security is likely to consist of a combination of back-up production in Uruguay and market strengthening both in electricity and natural gas; · Back-up production in Uruguay could consist of either gas turbines (open- or combined-cycle according to expected plant factor) or ­ if a base load plant is required ­ a coal-based power station; further feasibility analyses are required to make a final choice; · Whatever the back-up production option in Uruguay, benefiting from trade of electricity becomes an essential strategic element; this requires seeking greater integration within Southern Cone markets as well as investments in interconnection facilities; · An interconnection with Brazil would diversify sources of supply and would be consistent with trading benefits; quantifying the economics of this option is a priority within the overall strategy; and · Supporting RE through incentive mechanisms is a sensible course of action which would help to gain greater familiarity with the resources and would provide diversification of supply. An integral strategy requires an institutional strengthening component. The strengthening of the institutional and regulatory context is seen as an essential element in the long term, to ensure consistency in policy formulation, in regulation and in the management of energy corporations such as UTE and ANCAP. The separation of functions and the establishment of a more competitive market would facilitate the insertion of the Uruguayan power sector into the regional electricity market and would promote private participation in future generation projects. This requires strengthening and consolidating government and regulation entities (DNETN, URSEA, ADME). 15 STRENGTHENING ENERGY SECURITY IN URUGUAY A gradual approach to power sector reform implementation appears to be a sensible option. This study proposes a gradual implementation of the power market, starting from a very simple model in the short term, in which UTE operates as a main buyer of energy and system operator, continuing with an orderly transition, to reach a medium term with ADME as system operator, together with a domestic spot and contract market, with a strengthened UTE which would compete in the regional market. Crude Oil and Oil Products Strategic questions associated with crude oil and refined products are less complex than those associated with electricity. ANCAP imports crude oil through international public tenders, paid at market prices, to feed its refinery. It also imports oil products, mainly gas oil and fuel oil. The sector has an increasingly prominent position, especially due to its participation in total country imports, which has grown along with the increase in international prices. From 14 percent of total imports in 2002, the oil participation went to 21 percent in 2005, hence the need to optimize the few controllable variables in the process of imports, production and wholesale distribution by ANCAP. Despite the absence of oil production, it is worthwhile promoting exploration activities. The country has five sedimentary basins, both onshore and on the continental shelf. The latter are those which have generated greater expectations and, under existing commercial conditions, private sector interest is likely to develop. Updating the available information through seismic studies is a requisite for exploring these possibilities. The existing legal framework is flexible enough to accommodate investors once the updated information can be submitted to them regarding the best areas. The oil refinery's feedstock should be optimized and the refinery should be able to process heavy crude. Adapting the refinery to the processing of heavy crude oil from Venezuela would diversify the sources of energy and reduce costs. Throughout the world, the demand for light crude has increased owing to the growing demand of gasoline; as a result, the price of heavy crude has dropped in relative terms and it could be processed in Uruguay, thus reducing the cost of feedstock imports. Additionally, the refinery has increased its gas oil production due to the dieselization of the automotive fleet; as a consequence, there is currently an imbalance between the supply of refined products and demand (Figure 5), which forces the exportation of gasoline surpluses of lower value in the market. However, a detailed assessment of the proposed upgrading and expansion of the refinery should be conducted, based on an evaluation of the domestic market and of the foreign market to dispose off surplus products from this project. 16 EXECUTIVE SUMMARY Figure 5: Relationship between Production and Demand of Oil Products 1000 900 800 700 3 m 600 of 500 400 Thousand 300 200 100 0 Gasoline Diesel LPG Fuel Oil Production 2000 Production 2004 Demand 2000 Demand 2004 Source: DNETN. Biofuels should also be promoted. In the case of Uruguay, biofuels are an interesting option to reduce dependence on imported energy and diversify the sources of supply. In 2002, Law 17.567 declared the local production of biofuels of national interest and empowered the Executive Power to grant significant fiscal benefits to biofuels ­ though the law has yet to be regulated, including the quantification of fiscal benefits. Additional subsidies (justified on the grounds of environmental externalities of fossil fuels) will probably be needed, especially in the case of biodiesel which would require an oil price of around US$80-90/bbl to be financially viable, while ethanol production would be viable at oil prices around US$60/bbl. Table 5 shows typical costs of biofuels for different countries and feedstock. A detailed economic assessment of benefits and impacts for the concerned sectors (energy, agriculture and environment) should be conducted in Uruguay to allow further policy decisions on the promotion of biofuels. 17 STRENGTHENING ENERGY SECURITY IN URUGUAY Table 5: Typical Costs of Biofuels, 2002 Fuels Raw Material Place US$/Liter Biodiesel Oleaginous United States 0.50 Oleaginous European Union 0.62 Ethanol Sugarcane Brazil 0.19 Wheat United States 0.23 Corn European Union 0.45 Sugar Beetroot European Union 0.51 Source: AEA Technology 2003/ESMAP Report 2005. Note: In December 2006, the retail prices of premium gasoline and diesel in Uruguay were US$1.26 and US$0.9 per Liter (lt), respectively. Energy Pricing Pricing is an integral element of the energy strategy. The controllable prices of some products are an integral element of any energy strategy, since they influence the level of demand and substitutions among sources of energy. In the case of electricity, the 1997 Law establishes that the rates should reflect economic costs under efficient conditions. The economic recession and its effects on the exchange rate led to a significant reduction in the price of electricity, rated in US$, which has only recently recovered its prerecession value (Figure 6). Figure 6: Electricity Prices, 1995-2005 150 30 135 120 24 105 90 18 75 60 12 45 $/US$ US$/MWh 30 6 15 0 0 Mar-95 Sep-95 Mar-96 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Residential 200 kWh Industrial 100 kW Industrial 350 kW-large Total average price on sales Exchange rate US$ Source: DNETN. 18 EXECUTIVE SUMMARY Electricity prices have recovered, but there are distortions among categories. Different calculations indicate that the methodology used to calculate reference costs undervalues supply costs at the generation level, and overvalues them at the T&D levels. This reflects in a greater measure on large consumer tariffs which are being adjusted at a higher rate than low voltage ones. In any case, an efficiency-oriented strategy requires that tariffs be adjusted to economic levels and be regulated by URSEA. This is one of the first and most important questions to address in implementing the reform. Low diesel pricing has led to a distorted consumption pattern. In the case of oil products, an important consideration arises regarding the so-called dieselization of the automotive fleet; its consumption has grown as a consequence of a favorable tax structure as compared to gasoline. As shown in Figure 7, diesel consumption has grown by around 80 percent between 1990 and 2005, whereas gasoline consumption is at the same level for the same period. As pointed out before, this increases the cost structure of crude and leads to exportation of gasoline at depressed prices. It is clear that this policy needs to be reviewed, to reduce such distortions. Figure 7: Evolution of the Domestic Consumption of Oil Products (Thousands of m3) 1000 900 800 700 3 m 600 of 500 400 Thousands 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Gasoline Diesel Fuel Oil LPG Source: DNETN. 19 STRENGTHENING ENERGY SECURITY IN URUGUAY Prices for oil products in Uruguay are the highest in the region. Additional analysis is required to be able to achieve prices for oil products ­ set by government ­ which are economically justified. The tax burden and its differential application to substitute products (gasoline and diesel), and the cost of distribution, could be too high. In any case, it is a cause of concern that the prices of by-products, though fluctuating around the importation parity prices, as shown in Figure 8, are the highest in the region (Table 6), and it would be advisable to revise the procedures for price-setting with the aim of achieving greater transparency and achieving efficiency gains in the fuel chain (imports, refining, wholesale and distribution). Such a review of the petroleum downstream sector would also evaluate the economics of the refinery and compare its viability over the longer run ­ with and without the proposed upgrading ­ to the products' importation option. Figure 8: Relationship between Tax-free Domestic Fuel Prices and Import Parity Prices, in Percentage 110 105 100 95 90 85 80 75 Jan/05 Mar/05 Jun/05 Aug/05 Jan/06 Mar/06 Jun/06 Aug/06 Gasoline Diesel Fuel Oil 3% LPG Source: URSEA. 20 EXECUTIVE SUMMARY Table 6: Compared Prices of Oil Products (US$/lt) as of May 2005 Product Uruguay Argentina (*) Brazil Chile Paraguay Regular Gasoline 1.10 0.58 0.96 0.54 Premium Gasoline 1.17 0.64 0.92 0.98 0.71 Diesel Fuel 0.74 0.49 0.67 0.69 0.62 *February 2005. Energy Efficiency Energy efficiency is becoming an increasingly important factor as a strategic element. Although Uruguay has a relatively low energy intensity (Figure 9), there is an important potential for savings in the industrial, commercial, residential and governmental sectors. In the industry sector, it is estimated that 5 percent of the total electric consumption, which, together with an important cogeneration potential, is equivalent to 21 percent of the total industrial electric consumption. In the other sectors, the improvements in efficiency are related mainly to changes in lighting equipment; for example, in the government subsector, there is still a high proportion of inefficient lighting equipment (70 percent mercury lamps, 10 percent incandescent). Figure 9: Energy Use and GDP in some Latin American Countries 2,000 500,000 400,000 cápita 1,500 per- 300,000 US$ 1,000 200,000 Million equivalent oil of 500 100,000 Kg - Argentina Brazil Colombia Costa Rica Ecuador Uruguay Venezuela, GDP RB Energy Use Source: World Bank Indicators, 2003. 21 STRENGTHENING ENERGY SECURITY IN URUGUAY GoU is promoting energy efficiency measures. A World Bank-financed energy efficiency project is currently in place, with the participation of DNETN, UTE, ANCAP, URSEA, the Budget and Planning Office (OPP), the technical norms institute (UNIT) and the national environmental agency (DINAMA). The project seeks to: (a) review norms and regulations to promote efficiency measures; (b) establish an equipment Standard and Labeling (S&L) program; (c) disseminate energy efficiency information through courses and campaigns; (d) establish an energy efficiency fund to finance improvements, particularly in the industrial subsector; and (e) promote energy efficiency companies to put in place the measures identified in the project. UTE, in particular, is expected to offer demand management services. The energy efficiency project, besides promoting energy savings, will help to postpone important investments in electricity generation facilities, reduce oil and natural gas imports and limit the carbon dioxide (CO2) emissions associated with thermal generation. It is expected that during its six years of implementation, the project will produce total savings of 57 Kiloton Per Oil Equivalent (Ktoe), including 7 Ktoe in fuel savings, 6 Ktoe due to cogeneration projects and 44 Ktoe due to more efficient electricity use. From an energy efficiency perspective, natural gas has a great potential. The region has abundant reserves of natural gas, which could be distributed to Uruguay at very competitive prices once the regional scenario is stabilized. Natural gas could replace fuel oil in the industrial sector and electricity in the residential and commercial sectors. Table 7 illustrates the differences in costs of final energy (under thermal equivalent basis). Table 7: Comparison of Fuel Costs for Final Users Fuel Residential US$/MBTU Industrial US$/MBTU Natural Gas 20.9 6.6 LPG 25.3 Electricity (a) 42.9 24.6 (b) 18.9 Firewood 4.8 2.4 Kerosene 25.4 Gas Oil 25.8 25.8 Fuel Oil (Heating) 13.2 Heavy Fuel Oil 10.8 Notes: Market prices for the second semester of 2005, including taxes. Exchange rate: 23.5 UR$/US$. (a) Residential Consumption: 400kWh/month. Industrial Consumption: 300 kW and 50 MWh/month. (b) Industrial Consumption: 350 kW and 100 MWh/month. 22 EXECUTIVE SUMMARY Corporate Performance Despite the lack of competition, UTE has performed reasonably well in its role of providing electricity as a public service, but there is room for improvement. UTE's performance indices are reasonably good, and surveys of consumer satisfaction place it among the top performers in the Latin American region.8 However, its operation in the area of collections leave much to be desired, with significant delays on the part of municipalities, as well as its commercial operation, with the level of losses for 2006 estimated at 18 percent. There is, therefore, a lot of ground for improvement in reducing commercial losses. Something similar occurs in ANCAP, where there is a seemingly high number of employees in relation to the level and amount of activity. The lack of a clear demarcation of normative, regulatory and operational tasks goes against ANCAP's efficiency, although the company has demonstrated its expertise as evidenced by its corporate incursions in the Argentinean market for oil products. In this context, it is possible to implement measures to improve corporate governance in the State-Owned Enterprises (SOEs), UTE and ANCAP. Such measures would aim at providing incentives for greater efficiency and transparency within the SOEs and could include: (i) subjecting the SOEs to private law by transforming them into limited liability companies (Sociedades Anónimas); (ii) establishing a performance contract between the government and the SOEs, with a time frame to meet efficiency targets, linked to actual tariff and price adjustments; (iii) further strengthening the SOEs' reporting to the public and information on their performance and policies; (iv) taking further steps to instill a commercial culture in the SOEs, for example, by appointing independent directors from successful businesses; (v) requiring the SOEs to borrow from private lenders without the benefit of a government guarantee, to bring to bear the benefits of scrutiny by lenders and credit rating agencies; (vi) listing a minority of the SOEs' shares, to create market information on commercial performance, allow equity-linked compensation and create monitoring by other shareholders; (vii) eliminating any role of the SOEs in the policy and regulatory functions; and (viii) separating responsibility within government for policy and ownership of the SOEs. Government Strategy and the Way Forward Between May and August 2006, the GoU and key public stakeholders worked together toward the definition of guidelines for an energy sector strategy, taking into account the inputs from the pervious phases of the ESMAP-financed work. As a result, on August 18, 8According to surveys conducted by CIER (Comisión de Integración Eléctrica Regional) in Latin American power utilities. 23 STRENGTHENING ENERGY SECURITY IN URUGUAY 2006, the MIEM published a document ­ "Guidelines for an Energy Strategy" ­ which is presented below. The key objectives visualized by the government for the energy sector are to: (i) ensure cost-effective supply of domestic demand, with adequate service quality and under the orientation of the State, by maximizing the use of local, regional and RE resources, so as to contribute to Uruguay's sustainable growth and environment; (ii) promote energy efficiency at supply and demand levels and pursue energy supply diversification and the promotion of clean energy; and (iii) allow sector development and expansion with public and private participation, through the adaptation and development of the legal and regulatory frameworks for the energy sector. The government guidelines include the following lines of action: Creation of a robust system of electricity supply at the lowest possible cost · Establish local back-up of power capacity using diverse technologies and energy sources; · Seek new ways of international trade and intensify actions for an interconnection with Brazil; · Formulate, with the intervention of competent entities and the coordination of the MIEM, a reference plan for generation expansion; and · Establish transmission tolls which are required for contracts between authorized market agents. Improve ways of access and supply of fossil energy resources to reduce the impact of imported fuels on the national economy · Foster prospecting of hydrocarbons within Uruguay (for example, studies and exploration on the continental shelf); · Analyze local potential reservoirs of natural gas; · Expand the options for crude processing in the refinery; · Maintain a database on analysis of new energy sources: oil shale, coal, and so on; · Establish specific lines of work on the consumer matrix of oil refined products (for example, to correct the imbalance between consumption of gas oil and gasoline); and · Analyze the possibility of incorporating more significant amounts of coal to the country's energy mix. 24 EXECUTIVE SUMMARY Definition on the participation of natural gas in the energy matrix · Negotiate and put in application the existing gas contract with Argentina for power generation, with the possibility of alternative uses; · Have an active role in possible multilateral gas pipelines; · Evaluate other options for energy supply such as Compressed Natural Gas (CNG) and LNG; and · Study gas pipeline expansion within Uruguay. Advance significantly the incorporation of renewables (particularly biofuels, wind power and biomass-based power generation) · Generate specific funds to support the implementation of development policies; · Systematize and complete an evaluation of the potential of each resource; · Create a national database and documentation within the DNETN; · Develop pilot projects for less well-known sources of energy; · Formulate specific regulatory norms to promote new and renewable sources in the energy system; · Promote the articulation of productive chains for REs; · Promote the use of local technological capacity and labor; and · Consolidate government inter-institutional groups and their exchanges with the private and academic sector. Consolidation of the energy efficiency policy · Boost actions in the electric sector which form part of the ongoing energy efficiency project. Expand actions of this project to the hydrocarbons sector; · Propose and support programs of efficient use of energy in sectors like transport, housing, and so on, as well as a plan to reduce losses in distribution systems; and · Elaborate a law of energy efficiency as a general framework for long-term actions. Adaptation of regulatory frameworks · Prepare the regulatory framework for the gas sector; · Establish regulation of service and product quality for hydrocarbons and biofuels; and · Adapt the regulatory framework of the electricity sector by consolidating the roles of URSEA and ADME, developing capacity and efficiency in the public company and setting up the mechanisms for private participation in generation, with emphasis on distributed, renewable and back-up generation. 25 STRENGTHENING ENERGY SECURITY IN URUGUAY Increase access of population sectors below the poverty line to the various uses of energy · Establish a basic energy basket (financed by a specific fund) in coordination with the rest of the social policies; · Promote and inform about safety and efficient use; and · Facilitate energy access through the tariff policy. Articulation and coordination among actors and energy institutions responding to a global vision and supporting the formulation of policies and plans · Strengthen human and material resources/capacity in the MIEM/DNETN; · Systematize coordination among the actors and institutions of the sector, both national and international; · Adopt decisions which consistently attend to the short-, medium- and long-term issues; and · Take action toward developing a national energy plan. In the above guidelines, the government successfully put together most of the results of the study. The guidelines are based on sound development objectives for the sector and, overall, they contain adequate actions to reach these objectives. The workshops and internal consultations with public stakeholders allowed to tailor the strategy to the sector's political economy and government priorities. The guidelines should be developed into a full-blown energy strategy, with detailed actions and specific targets to be reached within a given time frame. Ultimately, the strategy would result in the establishment of a national energy policy, through a broad-based consultative process with all sector stakeholders, including the private sector, legislative branch, trade unions (TUs), academic, consumers, civil society and others. The consensus-building process, which led to the definition of the above guidelines, also resulted in a lack of specificity with respect to important issues in the sector. Such aspects include, for instance: i) the incentives and measures to improve corporate governance and increase efficiency of UTE and ANCAP; ii) the steps and sequence to achieve the insertion of Uruguay in the electricity and gas regional markets, and to develop a local power market, once the situation in Argentina is stabilized and Bolivia's gas exports materialize; iii) the detailed pricing policy for the power sector, which should aim to reflect efficiency costs, so as to achieve the objective of energy supply at the lowest possible cost and generate benefits for consumers and the economy; iv) the design and financing options for targeted subsidies, and the addressing of the tax distortions in the price of fuels; v) the consolidation of the 26 EXECUTIVE SUMMARY natural gas market in the medium term in substitution to electricity, fuel oil and diesel; vi) the specific incentives for the development of renewable and clean energy; vii) the consolidation and development of the sector regulatory framework, in parallel with the development of the power and gas markets and the further improvement of service quality; viii) the economic analysis of the upgrade and expansion of the oil refinery, comparing it against the option of importing refined products; and ix) the comparison of alternatives for power expansion through imported fuels ­ coal, natural gas and LNG ­ in economic, social and environmental terms. It is expected that these aspects and others would be addressed by the GoU in the preparation of a detailed strategy ­ leading toward the ultimate definition of a State policy for the energy sector. 27 References Arizu,B., Gencer, D., Maurer, L. Centralized purchasing arrangements: International practices and lessons learned on variations to the single buyer model. The World Bank, Energy and Mining Sector Board Discussion Papers. Paper No. 16, March 2006. Borgio, H and Rodríguez, A, UTE y las energías renovables, paper, June 2004. Carpio and León, Programa Esco's ­ International Workshop on Energy Efficiency, August 2003. Chamot, J., Touzett, P. and Dussan, M. (coordinator) República Oriental del Uruguay ­ Estrategia de Energía ­ Apoyo puntual en temas energéticos, May 2006. CIER, ESMAP, The World Bank, Department of Energy, Interconexiones Regionales de Mercados Eléctricos en Sudamérica. Propuesta para facilitar el incremento de los intercambios energéticos en la región. December 2000. CLASP, Proposed Uruguay Labeling Program, 2003. Department of Energy, USA, International Energy Outlook 2005, July 2005. ESMAP, Potential for biofuels for transport in developing countries, ESMAP Report, October 2005. DNETN, MIEM "Diagnóstico y perspectivas para el sector energético," 2005. 29 STRENGTHENING ENERGY SECURITY IN URUGUAY ESMAP, Regional Electricity Markets Interconnections - Phase I. Identification of Issues for the Development of Regional Power Markets in South America. December 2001. European Commission, 4th benchmarking report on the implementation of the gas and electricity internal markets, 2005. European Parliament and Council, Directive 2005/89/EC of the concerning measures to safeguard security of electricity supply and infrastructure investment, January 2006. Fundacion Bariloche ­ Informe Final del Taller de Formulación de políticas, May 2006. IEA, Coal Information, Statistics 2005. Lindlein, P., Mostert, W, Financing Instruments for Renewable Energy, April 2005. Irwin, T., Yamamoto, Ch, Some options for Improving the Governance of State Owned Electricity Utilities., The Energy and Mining Sector Board, The World Bank Group February 2004. OLADE/CEPAL/GTZ, Energía y Desarrollo Sustentable en América Latina y el Caribe: Guía para la Formulación de Políticas Energéticas, Serie Cuadernos de CEPAL, Santiago de Chile 2003. Takahashi, M. Technologies for reducing emissions in coal-fired plants, Energy Issues, WB, August 1997. UDELAR/IMFIA, Estudio para la instalación de microturbinas en zonas alejadas de la red eléctrica nacional, 1993. The World Bank, Clean coal technologies for developing countries, Technical Paper 286, July 1995. The World Bank, Energy Unit, Technical and economic assessment: Off grid, mini-grid and grid electrification technologies, November 2005. World Coal Institute, The coal resource, 2005. 30 List of Technical Reports Region/Country Activity/Report Title Date Number SUB-SAHARAN AFRICA (AFR) Africa Power Trade in Nile Basin Initiative Phase II (CD Only): 04/05 067/05 Part I: Minutes of the High-level Power Experts Meeting; and Part II: Minutes of the First Meeting of the Nile Basin Ministers Responsible for Electricity Introducing Low-cost Methods in Electricity Distribution Networks 10/06 104/06 Cameroon Decentralized Rural Electrification Project in Cameroon 01/05 087/05 Chad Revenue Management Seminar. Oslo, June 25-26, 2003. (CD Only) 06/05 075/05 Côte d'Ivoire Workshop on Rural Energy and Sustainable Development, 04/05 068/05 January 30-31, 2002. (Atelier sur l'Energie en régions rurales et le Développement durable 30-31, janvier 2002) Ethiopia Phase-Out of Leaded Gasoline in Oil Importing Countries of 12/03 038/03 Sub-Saharan Africa: The Case of Ethiopia - Action Plan Sub-Saharan Petroleum Products Transportation Corridor: 03/03 033/03 Analysis and Case Studies Phase-Out of Leaded Gasoline in Sub-Saharan Africa 04/02 028/02 Energy and Poverty: How can Modern Energy Services Contribute to Poverty Reduction 03/03 032/03 East Africa Sub-Regional Conference on the Phase-out Leaded Gasoline in 11/03 044/03 East Africa. June 5-7, 2002 Ghana Poverty and Social Impact Analysis of Electricity Tariffs 12/05 088/05 Women Enterprise Study: Developing a Model for Mainstreaming 03/06 096/06 Gender into Modern Energy Service Delivery Sector Reform and the Poor: Energy Use and Supply in Ghana 03/06 097/06 Kenya Field Performance Evaluation of Amorphous Silicon (a-Si) Photovoltaic Systems in Kenya: Methods and Measurement in Support of a Sustainable Commercial Solar Energy Industry 08/00 005/00 The Kenya Portable Battery Pack Experience: Test Marketing an Alternative for Low-Income Rural Household Electrification 12/01 05/01 Malawi Rural Energy and Institutional Development 04/05 069/05 Mali Phase-Out of Leaded Gasoline in Oil Importing Countries of 12/03 041/03 Sub-Saharan Africa: The Case of Mali - Action Plan (Elimination progressive de l'essence au plomb dans les pays importateurs de pétrole en Afrique subsaharienne Le cas du Mali -- Mali Plan d'action) Mauritania Phase-Out of Leaded Gasoline in Oil Importing Countries of 12/03 040/03 Sub-Saharan Africa: The Case of Mauritania - Action Plan (Elimination progressive de l'essence au plomb dans les pays importateurs de pétrole en Afrique subsaharienne Le cas de la Mauritanie ­ Plan d'action.) 31 STRENGTHENING ENERGY SECURITY IN URUGUAY Region/Country Activity/Report Title Date Number Nigeria Phase-Out of Leaded Gasoline in Nigeria 11/02 029/02 Nigerian LP Gas Sector Improvement Study 03/04 056/04 Taxation and State Participation in Nigeria's Oil and Gas Sector 08/04 057/04 Regional Second Steering Committee: The Road Ahead. Clean Air Initiative In Sub-Saharan African Cities. Paris, March 13-14, 2003 12/03 045/03 Lead Elimination from Gasoline in Sub-Saharan Africa. Sub-regional Conference of the West-Africa group. Dakar, Senegal March 26-27, 2002 (Deuxième comité directeur : La route à suivre - L'initiative sur l'assainissement de l'air. Paris, le 13-14 mars 2003) 12/03 046/03 1998-2002 Progress Report. The World Bank Clean Air Initiative 02/02 048/04 in Sub-Saharan African Cities. Working Paper #10 (Clean Air Initiative/ESMAP) Landfill Gas Capture Opportunity in Sub Saharan Africa 06/05 074/05 The Evolution of Enterprise Reform in Africa: From 11/05 084/05 State-owned Enterprises to Private Participation in Infrastructure-and Back? Senegal Regional Conference on the Phase-Out of Leaded Gasoline in 03/02 022/02 Sub-Saharan Africa (Elimination du plomb dans I'essence en Afrique subsaharienne Conference sous regionales du Groupe Afrique de I'Ouest Dakar, Sénégal. March 26-27, 2002.) 12/03 046/03 Alleviating Fuel Adulteration Practices in the Downstream Oil Sector in Senegal 09/05 079/05 Maximisation des Retombées de l'Electricité en Zones Rurales, 03/07 Application au Cas du Sénégal South Africa South Africa Workshop: People's Power Workshop. 12/04 064/04 Swaziland Solar Electrification Program 2001 2010: Phase 1: 2001 2002 (Solar Energy in the Pilot Area) 12/01 019/01 Tanzania Mini Hydropower Development Case Studies on the Malagarasi, Muhuwesi, and Kikuletwa Rivers Volumes I, II, and III 04/02 024/02 Phase-Out of Leaded Gasoline in Oil Importing Countries of 12/03 039/03 Sub-Saharan Africa: The Case of Tanzania - Action Plan Uganda Report on the Uganda Power Sector Reform and Regulation Strategy Workshop 08/00 004/00 WEST AFRICA (AFR) Regional Market Development 12/01 017/01 EAST ASIA AND PACIFIC (EAP) Cambodia Efficiency Improvement for Commercialization of the Power Sector 10/02 031/02 TA For Capacity Building of the Electricity Authority 09/05 076/05 China Assessing Markets for Renewable Energy in Rural Areas of Northwestern China 08/00 003/00 Technology Assessment of Clean Coal Technologies for China Volume I-Electric Power Production 05/01 011/01 Technology Assessment of Clean Coal Technologies for China Volume II-Environmental and Energy Efficiency Improvements for Non-power Uses of Coal 05/01 011/01 Technology Assessment of Clean Coal Technologies for China Volume III-Environmental Compliance in the Energy Sector: Methodological Approach and Least-Cost Strategies 12/01 011/01 Policy Advice on Implementation of Clean Coal Technology 09/06 104/06 Scoping Study for Voluntary Green Electricity Schemes in Beijing and Shanghai 09/06 105/06 Papua New Guinea Energy Sector and Rural Electrification Background Note 03/06 102/06 Philippines Rural Electrification Regulation Framework. (CD Only) 10/05 080/05 Thailand DSM in Thailand: A Case Study 10/00 008/00 Development of a Regional Power Market in the Greater Mekong Sub-Region (GMS) 12/01 015/01 32 LIST OF TECHNICAL REPORTS Region/Country Activity/Report Title Date Number Vietnam Options for Renewable Energy in Vietnam 07/00 001/00 Renewable Energy Action Plan 03/02 021/02 Vietnam's Petroleum Sector: Technical Assistance for the Revision 03/04 053/04 of the Existing Legal and Regulatory Framework Vietnam Policy Dialogue Seminar and New Mining Code 03/06 098/06 SOUTH ASIA (SAS) Bangladesh Workshop on Bangladesh Power Sector Reform 12/01 018/01 Integrating Gender in Energy Provision: The Case of Bangladesh 04/04 054/04 Opportunities for Women in Renewable Energy Technology Use 04/04 055/04 In Bangladesh, Phase I EUROPE AND CENTRAL ASIA (ECA) Azerbaijan Natural Gas Sector Re-structuring and Regulatory Reform 03/06 099/06 Macedonia Elements of Energy and Environment Strategy in Macedonia 03/06 100/06 Poland Poland (URE): Assistance for the Implementation of the New Tariff Regulatory System: Volume I, Economic Report, Volume II, Legal Report 03/06 101/06 Russia Russia Pipeline Oil Spill Study 03/03 034/03 Uzbekistan Energy Efficiency in Urban Water Utilities in Central Asia 10/05 082/05 MIDDLE EASTERN AND NORTH AFRICA REGION (MENA) Turkey Gas Sector Strategy 05/07 114/07 Regional Roundtable on Opportunities and Challenges in the Water, Sanitation 02/04 049/04 And Power Sectors in the Middle East and North Africa Region. Summary Proceedings, May 26-28, 2003. Beit Mary, Lebanon. (CD) Morocco Amélioration de d´Efficacité Energie: Environnement de la Zone Industrielle de Sidi Bernoussi, Casablanca 12/05 085/05 LATIN AMERICA AND THE CARIBBEAN REGION (LCR) Brazil Background Study for a National Rural Electrification Strategy: 03/05 066/05 Aiming for Universal Access How do Peri-Urban Poor Meet their Energy Needs: A Case Study of Caju Shantytown, Rio de Janeiro 02/06 094/06 Integration Strategy for the Southern Cone Gas Networks 05/07 113/07 Bolivia Country Program Phase II: Rural Energy and Energy Efficiency 05/05 072/05 Report on Operational Activities Bolivia: National Biomass Program. Report on Operational Activities 05/07 115/07 Chile Desafíos de la Electrificación Rural 10/05 082/05 Colombia Desarrollo Económico Reciente en Infraestructura: Balanceando las necesidades sociales y productivas de la infraestructura 03/07 325/05 Ecuador Programa de Entrenamiento a Representantes de Nacionalidades Amazónicas en Temas Hidrocarburíferos 08/02 025/02 Stimulating the Picohydropower Market for Low-Income Households in Ecuador 12/05 090/05 Guatemala Evaluation of Improved Stove Programs: Final Report of Project 12/04 060/04 Case Studies Haiti Strategy to Alleviate the Pressure of Fuel Demand on National Woodfuel Resources (English) 04/07 112/07 (Stratégie pour l'allègement de la Pression sur les Ressources Ligneuses Nationales par la Demande en Combustibles) 33 STRENGTHENING ENERGY SECURITY IN URUGUAY Region/Country Activity/Report Title Date Number Honduras Remote Energy Systems and Rural Connectivity: Technical Assistance to the Aldeas Solares Program of Honduras 12/05 092/05 Mexico Energy Policies and the Mexican Economy 01/04 047/04 Technical Assistance for Long-Term Program for Renewable Energy Development 02/06 093/06 Nicaragua Aid-Memoir from the Rural Electrification Workshop (Spanish only) 03/03 030/04 Sustainable Charcoal Production in the Chinandega Region 04/05 071/05 Perú Extending the Use of Natural Gas to Inland Perú (Spanish/English) 04/06 103/06 Solar-diesel Hybrid Options for the Peruvian Amazon Lessons Learned from Padre Cocha 04/07 111/07 Regional Regional Electricity Markets Interconnections - Phase I Identification of Issues for the Development of Regional Power Markets in South America 12/01 016/01 Regional Electricity Markets Interconnections - Phase II Proposals to Facilitate Increased Energy Exchanges in South America 04/02 016/01 Population, Energy and Environment Program (PEA) Comparative Analysis on the Distribution of Oil Rents (English and Spanish) 02/02 020/02 Estudio Comparativo sobre la Distribución de la Renta Petrolera Estudio de Casos: Bolivia, Colombia, Ecuador y Perú 03/02 023/02 Latin American and Caribbean Refinery Sector Development Report - Volumes I and II 08/02 026/02 The Population, Energy and Environmental Program (EAP) (English and Spanish) 08/02 027/02 Bank Experience in Non-energy Projects with Rural Electrification 02/04 052/04 Components: A Review of Integration Issues in LCR Supporting Gender and Sustainable Energy Initiatives in 12/04 061/04 Central America Energy from Landfill Gas for the LCR Region: Best Practice and 01/05 065/05 Social Issues (CD Only) Study on Investment and Private Sector Participation in Power 12/05 089/05 Distribution in Latin America and the Caribbean Region Strengthening Energy Security in Uruguay 05/07 116/07 GLOBAL Impact of Power Sector Reform on the Poor: A Review of Issues and the Literature 07/00 002/00 Best Practices for Sustainable Development of Micro Hydro Power in Developing Countries 08/00 006/00 Mini-Grid Design Manual 09/00 007/00 Photovoltaic Applications in Rural Areas of the Developing World 11/00 009/00 Subsidies and Sustainable Rural Energy Services: Can we Create Incentives Without Distorting Markets? 12/00 010/00 Sustainable Woodfuel Supplies from the Dry Tropical Woodlands 06/01 013/01 Key Factors for Private Sector Investment in Power Distribution 08/01 014/01 Cross-Border Oil and Gas Pipelines: Problems and Prospects 06/03 035/03 Monitoring and Evaluation in Rural Electrification Projects: 07/03 037/03 A Demand-Oriented Approach Household Energy Use in Developing Countries: A Multicountry 10/03 042/03 Study Knowledge Exchange: Online Consultation and Project Profile 12/03 043/03 from South Asia Practitioners Workshop. Colombo, Sri Lanka, 34 LIST OF TECHNICAL REPORTS Region/Country Activity/Report Title Date Number June 2-4, 2003 Energy & Environmental Health: A Literature Review and 03/04 050/04 Recommendations Petroleum Revenue Management Workshop 03/04 051/04 Operating Utility DSM Programs in a Restructuring Electricity Sector 12/05 058/04 Evaluation of ESMAP Regional Power Trade Portfolio 12/04 059/04 (TAG Report) Gender in Sustainable Energy Regional Workshop Series: 12/04 062/04 Mesoamerican Network on Gender in Sustainable Energy (GENES) Winrock and ESMAP Women in Mining Voices for a Change Conference (CD Only) 12/04 063/04 Renewable Energy Potential in Selected Countries: Volume I: 04/05 070/05 North Africa, Central Europe, and the Former Soviet Union, Volume II: Latin America Renewable Energy Toolkit Needs Assessment 08/05 077/05 Portable Solar Photovoltaic Lanterns: Performance and 08/05 078/05 Certification Specification and Type Approval Crude Oil Prices Differentials and Differences in Oil Qualities: A Statistical Analysis 10/05 081/05 Operating Utility DSM Programs in a Restructuring Electricity Sector 12/05 086/05 Sector Reform and the Poor: Energy Use and Supply in Four Countries: 03/06 095/06 Botswana, Ghana, Honduras and Senegal 35 Energy Sector Management Assistance Program (ESMAP) 1818 H Street, NW Washington, DC 20433 USA Tel: 1.202.458.2321 Fax: 1.202.522.3018 Internet: www.esmap.org E-mail: esmap@worldbank.org