Thursday, September 22, 2011

Buy High, Sell Low

ENEE, the Empresa Nacional de Energia Electrica, the state owned electric company of Honduras, knows how to drive a business into bankruptcy: buy electricity at horrendously high rates, and sell it for less to the consumers in Honduras.

Seriously, this is the ENEE business plan: to lose money.

Prices were set with the goal of subsidizing the cost of electricity for the poor, here defined by how much electricity they consume in a month.

Prices were reset higher in 2008 during the Zelaya administration, and at that time ENEE was authorized to charge an energy cost surcharge on top of the usage charges. The subsidy for the poor was expanded into higher usage tiers.

At this point, no one in Honduras is paying the actual cost of electricity, not businesses, not the wealthy, not the poor. Somehow what started out as subsidy for the poor got expanded to everyone. Is it any wonder ENEE runs at a loss?

Blackouts are once again common in Honduras, especially in the area around San Pedro Sula, in the western part of the country, in the central part around Yoro, and in Olancho. This is because domestic production of electricity is insufficient to meet demand, and the distribution system in the country is incapable of distributing the excess production in other parts of the country to the parts that lack electricity.

This was entirely expected and preventable.

The electricity shortage was the subject of a 2007 US Embassy study, as well as a 2010 World Bank one. Both predicted Honduras would need more power than is generated in the country by 2011, and accurately predicted how much more power was needed.

Many of the neighboring Central American countries produce excess electricity. ENEE cannot buy this excess production because the interconnects linking its distribution system to those of its neighbors are inadequate and outdated.

ENEE is under government orders not to buy any additional electricity produced by bunker oil or diesel generating plants.

Yet, earlier this year it placed a request for bids for 50 megawatts of so called "thermal" power. At the time it received bids costing $0.34/KWh to $0.54/KWh. Roberto Martinez Lozano, manager of ENEE, rejected all the offers then as being too expensive.

Now Martinez Lozano wants to buy electricity at $0.50/KWh, and wants to sign a contract at that rate for the next two years.

Who gains?

The Finnish firm Wartsila, which offered the electricity at $0.16/KWh, as long as the government of Honduras buys and transports the fuel. At current market prices that raises the cost to ENEE to around $0.48-50 KWh.

ENEE sells this electricity back to businesses and consumers for less than it pays for it.

According to the US Embassy, in 2007 ENEE paid about $0.14 KWh and sold electricity for an average of $0.08 KWh.

Nearly 25% of electricity is not paid for, compared with a Central American average of 15%. Only about 10% of that total is transmission line loss. The remainder is due to billing errors, illegal connections, and fraud.

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