IMF informe sector electrico RD

1. THE ELECTRICITY SECTOR
IN THE
DOMINICAN REPUBLIC
Washington DC,
C
June 21st, 2010
1

2. Current Situation
 The electricity sector in the DR has shown little structural
improvements, if any, in the last 12 months despite the
efforts of the current administration
administration.
 Clearly, the drivers for the historical “vicious cycle” remain
unchanged.
unchanged
 Although the underlying causes for the “vicious cycle” are
well known we have the perception that we continue
known,
shooting in the wrong direction. Myths continue to fog the
right path.
 After describing briefly these negative drivers our intention is
to share with you our view on how to transform them, and
c ea e o ce aga
create once again a “virtuous cycle” for the sector.
uous cyc e o e sec o
2

3. Virtuous Cycle (1999-2001)
Causes Effects
 Privatization process in
p  Significant direct
g
1999. investment in generation,
distribution, and
 Regulatory framework transmission.
 Electricity Law  Specially over 1,500MW of
 Specialized Regulatory new efficient generation
Bodies (OC, SIE, CNE) capacity.
 Long-term contracts  Additionally diversification
of the energy supply
gy pp y
 Market oriented political matrix (fuel & tech).
message  LNG, Coal, CC GT
3

4. New Investments
Technology Fuel MW Player
CCGT & LNG Terminal Natural gas 300 AES
OC GT (DPP) Natural gas 236 AES
Steam Turbine Coal (Conversion) 235 El Paso, AES
Diesel E i
Di l Engine HFO 150 Basic Energy, CDC
B i E
Steam Turbine Coal 45 Basic Energy, CDC
Steam Turbine HFO (Repowering) 200 Basic Energy, CDC
CCGT LFO 300 CDC, Cogentrix
Diesel HFO 100 Caterpillar, Local Group
Diesel HFO 60 Local Goup
Total 1,626
Current peak demand ~1,800MW
4

5. Energy Matrix
100%
FuelsOil
Fuel
80%
40% 43% 39%
47%
Carbón
Coal
62% 64%
72%
60%
14% Gas Natural
Natural Gas
24% 17% 7%
40%
3% 3%
10% Bagazo de
Bagasse
60%
21% Caña
C ñ
20%
37% 10%
33% 35%
28% Geonergía
Geothermal
15% 16%
0%
Hidroenergía
Pue Rico
minicana
uatemala
Hydro
Panamá
caragua
onduras
Salvador
epública
erto
Dom
P
Ho
Nic
S
Gu
Re
5

6. Vicious Cycle (2002-Today)
Causes Effects
 No tariff adjustments. Non-  Significant service interruption
technical tariff.
t h i l t iff affecting population and country
ff ti l ti d t
 Non-focalized subsidies growth.
 Geographical subsidies (PRA)  Exit of private sector from the
 All users above 150kWh/mo DisCos and GenCos.
 U i
Untimely payments to Di C
l DisCos  Stop of new investments in
before their re-nationalization. efficient generation within the
 Renegotiation of LT contracts. SENI.
 Change of Political message
g g  Withdrawal of existing generation
 State intervention and State utility capacity from the SENI.
mindset
 Inefficient investment in self-
 Constant threat to renegotiate
contracts generation by small users.
 Generation used as escape goat  Massive injection of state funds to
 Lack of consistent LT plan and cover part of the “hole”.
investments to reduce energy  Stalemate in government efforts to
losses reduce fraud and energy losses.
 Financing the “hole” with the  Higher financing costs f th
Hi h fi i t for the
generators country and all the players.
6

7. No Tariff Adjustments
END USER TARIFF
35
30
25
20
cUS$/KWh
15
10
Indexed User Tariff Frozen User Tariff
5
0
Feb
Feb
Feb
Feb
Jun
Nov
Dec
Jun
Nov
Dec
Jun
Nov
Dec
Aug
Sep
Aug
Sep
Aug
Sep
Jul
Jul
Jul
Oct
Oct
Oct
Apr
Apr
Apr
Apr
May
May
May
May
Mar
Mar
Mar
Mar
Jan
Jan
Jan
Jan
2007 2008 2009 2010
 The tariff is not used to curve consumption, give a price
s g a , a d e ec a e e de c es
signal, and reflect market tendencies.
 Tariff is managed politically
7

8. DR Tariff is NOT the highest in the world nor
the Region
END USER TARIFF, US$/KWh
45
40
35
30
$/KWh
25
cUS$
20
15
10
5
-
Virgin…
Dominica
Belice
Barbados
Rep. Dom.
St.Maarten
Antigua
Aruba
Jamaica
Cayman
St. Lucia
Bermuda
ST.Vincent
Nevis
Montserrat
Trinidad
Curacao
 Indexed tariff is still competitive when compared to the rest
of the region
region.
Source: Caribbean Electric Utility Service Corporation (CARILEC), 2009
8

9. Madrid Contract Prices & Market Spot Price
25.0
20.0
15.0
USCtvs
10.0
5.0
0.0
Madrid Average Spot Average
 Madrid energy prices are in line with the current system
generation mix.
 Renegotiation of contracts already occurred once in 2001
2001,
however, structural situation remained unchanged.
 Energy prices were reduced (up to 40% in some cases).
9

10. Myth of Excessive Generation Profit
Corporate Sovereign (EBITDA/Sal
Company Country
Rating Rating es)
AES Panama Panamá BBB- BBB- 66%
Termocandelaria Colombia BB- BB+ 64%
Enel Fortuna Panamá BBB- BBB- 61%
Empresa Nacional de Electricidad
E N i l d El t i id d Chile
Chil BBB A 46%
AES Andres Dom Rep B- B 31%
Itabo Dom Rep B- B 29%
AES Gener Chile BBB- A 23%
Haina
H i Dom R
D Rep B-
B B 16%
Electroandina Chile BB A 5%
 The profits of the Dominican GenCos listed are amongst the lowest
lowest.
 This situation is worsened when returns are risk-adjusted.
Source: Fitch Ratings
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11. Why the Withdrawals from the SENI?
Power Plant Technology Fuel MW
Sultana del Este Diesel Engine HFO 50
Monte Rio Diesel Engine HFO 100
Seaboard Diesel Engine HFO 97
Total 247
 Is the business that good?
 Several international strategic players have exited the sector
at a significant discount to initial investment.
 Union Fenosa and AES as distributors.
 El Paso, CDC Globeleq, Cogentrix, Caterpillar.
11

12. Actual Capacity With & Without Investments
3,500
3,000
2,500
MW
2,000
1,500
1 500
1,000
500
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Capacidad instalada
Installed Capacity Demanda Maxima
Max. Demand Capacidad disponible
Available Capacity
12

13. Marginal Costs With & Without Investments
SPOT MARGINAL COST, cUS$/KWh
45
40 No new
35 Investments
30
cUS$/kWh
25
Additional 150 MW
20 of Coal per Year
15 (US$300mln/yr)
$
10
5
0
2010
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2011
13

14. Are AR an attractive financial business?
1,000
800
S$ mln
600
400
400
US
AR
200 Sales
‐
Sep‐07
Sep‐08
Sep‐09
Jul‐07
Jul‐08
Jul‐09
Mar‐07
Mar‐08
Mar‐09
Mar‐10
Jan‐07
Nov‐07
Jan‐08
Nov‐08
Jan‐09
Nov‐09
Jan‐10
May‐07
May‐08
May‐09
 Distribution companies’ late payments force generators to finance the deficit of the
Electrical Sector with a negative carrying.
 Generators pay 9 5% to 12% on their indebtedness (144A/Reg S Notes)
9.5% Notes).
 Generators charge 7% to 9.5% to the DisCos (Historical USD Local Active Interest Rate
under PPAs).
 Additionally, merchant generators (mostly the DR Govt. throught CDEEE &
EGEHID) charge 11%-18% interest rate in DOP plus an 18% penalty, which
combined with exchange rate stability makes a 25%-35% USD effective interest
rate on energy purchases of Contracted Generators.
 Conclusion, except for merchant generators financing the DisCos is a very bad
business.
business
 If the GenCos would monetize the AR, USD 400mln could be used to fuel a new
wave of investments at higher rates of return.
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15. ¿Where is the hole?
US$MM
Potential Gross Sales
Potential Gross Sales 2 473 1
2,473.1
31%
Tariff Deficit (404.7)
Commercial Losses ** (889.4) 69%
Real Gross Sales (A)
Real Gross Sales (A) 1 179 0
1,179.0
Real System Costs
Generation *
G ti * 1 593 8
1,593.8 Tariff Deficit Commercial Losses **
Fixed Costs (D&T) 288.0
CAPEX (D&T) 96.0
Sector Debt Interests 32.0 * This includes ~150mln annual
profit of the GenCos
Total System Costs (B) 2,009.8
** Losses from Theft and lack of
Annual Deficit (A‐B) (830.7) collections
15

16. What Reducing the Contract Prices Means
 Private GenCos combined Net Income was US$154mln in 2009.
Annual Deficit
900
800
154
700
600
US$ mln
500
400 831
300
676
200
100
‐
Current GenCos Conceed Net Income
 If GenCos were to reduce their prices in 0.02 US$/kWh their profit
would disappear and still the hole would be unmanageable. Noted
that without appropriate returns there are no investments.
 Th problem i not i th G C
The bl is t in the GenCos, it i i energy th ft non-focalized
is in theft, f li d
subsidies and tariffs.
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17. Conclusions
 We are at a critical point for decision making.
 With the wrong incentives we will continue with the “vicious cycle” and
run out of generating capacity in 3 years.
u o ge e at g capac ty yea s
 The electricity sector deficit representing ~1.8% of the GDP is
unsustainable.
 Implementing market oriented measures are the way to go:
 A t h i l t iff which will provide th right price signal
technical tariff, hi h ill id the i ht i i l
 Focalized subsidies, below 150kWh/mo
 Fully transfer the DisCos to private ownership
 Eliminate arrears with generators
g
 Political will to enforce the law against electricity theft
 Moreover, key elements for positive change are present:
 Willingness of existing players to invest in new efficient capacity.
 The country remains attractive for the investment community (telecom
community. (telecom,
tourism, recent placement of sovereign bond, etc.)
 The right incentives and fulfillment of contractual obligations,
are the only way to reduce long-term energy marginal costs.
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