Chapter 2. Presenting Case: Ecuador’s Coca-Codo-Sinclair
The LRSE also introduced marginal pricing theory to Ecuador. Under this scheme, CENACE, as the independent system operator, must identify available electricity supply from all generators connected to the national and prioritize the dispatch of energy from the source with the lowest marginal cost at any given moment. CONELEC would establish referential prices from which to estimate the cost of supply, and calculate additional charges before setting end-user tariffs. Electricity markets would putatively provide economic incentives for investors to develop new generation capacity and sell power to distribution companies and large consumers (who are free to negotiate direct, long-term contracts with suppliers). The ambiguity around institutional ownership, combined with the actual performance of electricity markets, created a vicious circle. One of the main reasons the state kept its stake in former INELEC assets was lack of efficiency and transparency in electricity transactions. Distribution companies in Ecuador were notorious for the inability to collect tariffs, as result of mismanagement, corruption, and theft; some of these companies have historically perceived losses representing close to 25% of collected income. (CONELEC, 2008) Unpaid suppliers would then refuse to settle their bills with Ecuador’s national oil company, Petroecuador, for the supply of fossil fuels for thermal generation. To this day, the Ecuadorian government often has to absorb unpaid balances between distribution companies, CENACE, and electricity suppliers. With respect to generation, the risk associated with free market transactions provided little incentive for private investment, especially for projects like large hydropower, which entail high upfront capital expenditures and take an average of five years to build. In practice, the incentive was to reap the benefits from thermal plants that, given fossil fuel price volatility, would spike up the marginal prices in the market. Thus, far from boosting private participation in hydroelectric capacity and upgrades to existing projects, the wave of reforms steadily increased the country’s reliance on thermal generation. As Villalba Andrade has shown (2011), hydropower’s share in total electricity production (measured in GW hours) decreased from close to 70% in 1996 to approximately 40% in 2006, a decade after the passing of the LSRE. Energy production from thermal plants— mostly diesel-fired generation—grew from 32% to 47% in the same period. Curiously, a !
60