While Colombia and Mexico experienced increases derived from global warming, Peru and Chile are committed to adjustment programs. On the other hand, Argentina struggles to maintain public spending in the face of an economy in crisis.
Latin America is experiencing a current scenario marked by dilemmas related to the use of energy. The coming to power of progressive governments in the region has fueled the debate on the use of renewable energies, to the detriment of traditional ones. Although countries such as Chile and Colombia have focused their efforts on the production of green hydrogen and other alternative energy sources, the truth is that electricity rates are still far from reaching stable and accessible prices for everyone. The rise in inflation, raw material prices and even eventual natural disasters alter the cost of an essential public service for Latin American families. We cannot forget the fact that there are countries that traditionally rely on subsidies to a greater or lesser extent.
SMART MEASUREMENT AND NATURAL DISASTERS
Peru has experienced a downward trend in electricity rate prices during 2023. In the first days of August, the Supervisory Body for Investment in Energy and Mining (Osinergmin), the Andean country's regulatory body, declared that in the course of During the year, rates had been reduced by 12%. Only in August these decreased by 5%. These are surprising figures if we take into account that in May 2022, electricity rates in Peru were among the second highest in the region, after those of Colombia. Even in the final semester of last year, a total increase of 9.1% was recorded. While for March 2023, Osinergmin registered a 4.7% decrease in electricity rates related to the consumption of 150 kW.h (Kilowatt hour) of a residential customer, compared to 2022. Now Peruvian users paid an approximate monthly of S/. 106.62 (US$28).
On the other hand, the new downward trend, derived from macroeconomic factors such as the variation in copper and aluminum prices, has led Osinergmin to launch a strategy to offer even more economical rates. The program, designed in June of this year, consists of a smart metering pilot plan for 100,000 users that would save between 5% and 19% on their electricity bills. To achieve this objective, the regulator will establish, starting next September 1, differentiated electricity prices through three time blocks: base (11 pm to 8 am), medium (8 am to 6 pm) and peak (6 pm to 11 p.m).
During the process, smart meters will record the home's electricity consumption levels depending on the time of day. In this way, if electrical services are used during the base and mid-hour blocks, monthly rates could be reduced by up to 19%. On the other hand, if electricity is used during peak hours, rates could increase by 8%. “If, for example, I have a hot water heater that consumes 1,500 watts, I am not going to turn it on during rush hour, but rather outside of these hours where it is cheaper,” declared Miguel Révolo, Tariff Regulation Manager at Osinergmin, for TVPerú, a television channel. of the Peruvian State.
The swings in inflation and mineral prices are not the only triggers for the rise in electricity rates in Latin America. For example, in Colombia, this trend has been influenced by natural disasters such as the El Niño phenomenon. A report from the National Administrative Department of Statistics (DANE) indicates that the unit costs of electricity rates in Colombia are calculated according to the costs of generation (35%), transmission (5%), distribution (38%) and marketing (13% ). Over the past two years, rates have been steadily rising.
For example, in April 2022, the price of energy negotiated in contracts for the regulated market (small businesses and homes) was an average of 275.04 pesos/kWh (US$ 0.065), according to figures from XM, market administrator of Wholesale Energy of Colombia. A year later, in April 2023, the average payable was 284.56 pesos/kWh (US$ 0.069). In this way, a growth of 3.46% was recorded. While in the same period, rates in the unregulated market (industry and commerce) grew by 8.13%. By June of this year, the then Minister of Mines and Energy, Irene Vélez, recognized the influence of climate change on this trend.
“With the El Niño phenomenon, summer increases and water becomes scarce in hydroelectric plants, which generates stress that leads us to consume more electricity from thermoelectric plants; and when these plants, which are the support of the system, increase their participation in the electricity market then it effectively impacts the configuration of the price,” declared Vélez during the visit of Gustavo Petro's government to Germany with a view to managing the production agreement and commercialization of green hydrogen.
It should be noted that during the first half of May 2023, a severe drought occurred that led the average energy price on the stock market to reach daily values of around 837 pesos/kWh (US$ 0.202). Although at the end of May, the price decreased until reaching values close to 364 pesos/kWh (US$ 0.088). However, residential rates have maintained the trend of cost instability in the following months.
STABILIZATION PROGRAMS
Historically, Chile has only subsidized electricity rates in targeted sectors. In 2020, an ECLAC analysis highlighted that the Chilean State provided subsidies to people in urban and rural sectors with few resources if there was an increase of more than 5% in their electricity rates within six months. This is a temporary benefit that is granted only once, a detail that contrasts with the state support present in neighboring Argentina or Mexico.
However, this tendency to dispense with social programs does not translate into the absence of state intervention. Already in November 2019, the government of Sebastián Piñera introduced the PEC1, a stabilization mechanism aimed at avoiding an increase in electricity rates. Since then, prices remained stable until July 2022, when the rise in inflation and the dollar motivated the creation of a new statute: the Customer Protection Mechanism (CPM).
This is an initiative by Gabriel Boric's administration focused on stabilizing rates, although accompanied by adjustments by consumption segment, which would be reflected in a price increase on each monthly bill. Already in April 2023, the Chilean Ministry of Energy made the measure official with a decree that unfrozen increases in electricity rates and defined three consumption brackets: low (up to 350 kWh per month), intermediate (between 350 and 500 kWh per month) and high. (greater than 500 kWh). At that time, the Association of Electrical Companies of Chile estimated that around 90% of Chilean residential customers would experience variations of close to 2.5% in their rates, since they belonged to the low consumption segment.
Although logically, the exact amounts would vary depending on each city and commune: thus, according to Enel, in Santiago, a 300 kWh consumer went from paying 40,740 pesos per month (US$ 47.7) in March 2023 to 41,751 pesos (US $48.9) in April, representing an increase of 2%. While in Concepción, the second most populated city in Chile, CGE projected a greater increase. There, a 300 kWh consumer who paid 47,548 pesos per month (US$55.6) in March would now acquire the service for 48,769 pesos (US$57.1). The increase in rates would be accentuated during May and June with the entry into force of the winter quota.
On the other hand, among the Pacific Alliance countries, Mexico saw a sustained decline in electricity rates regulated by the Federal Electricity Commission (CFE) in recent years. As an example, the basic consumption per month, as of May 1, 2023, was established at 0.969 pesos per 75 kWh (US$ 0.056). In comparison, by 2022 this item was worth 0.902 pesos (US$ 0.052). Thus, the rate increased 0.067 pesos (US$ 0.004), which represented the first increase in the cost of electricity since 2017.
More recently, for this month of August, a 7.1% increase in total rates is expected. This is a direct consequence of the intensive use of electronic devices to combat the heat of the Mexican summer such as fans and air conditioning systems. The CFE estimates that these effects will be noticeable in 13 states that include Mexico City, the State of Mexico, Puebla, Jalisco, Hidalgo, among others. Thus comes the end of the subsidy that the CFE traditionally grants to the states most affected by the high summer temperatures. It should be noted that the CFE maintains eight different rates (01, 1A, 1B, 1C, 1D, 1E, 1F and DAC), whose prices vary depending on the service and electricity consumption of each user. For example, the basic rate is 0.987 pesos for 75 kWh (US$ 0.057); a figure that increased to 7.63 pesos (US$ 0.447), compared to 2022.
ARGENTINA: THE END OF ELECTRICITY SUBSIDIES?
On another note, Argentina represents a separate case in terms of public services. Well, the country has a long tradition of state protectionism and electricity is no exception to the rule. However, currently, the subsidies granted by the State are due to more practical than ideological issues. Every six months, the Ministry of Energy calculates and sanctions a seasonal price for energy at the wholesale level throughout the national territory, which is dispatched by CAMMESA (Argentine Chamber of the Wholesale Electrical Market SA). While electricity distributors pay a fixed rate for their services, known as the Seasonal Price of Electric Energy (PEST), with which generators and transporters are paid. According to Oscar Medina, energy specialist and professor at the Faculty of Engineering of the Austral University, since 2003 “the PEST sanctioned by the Ministry of Energy is not enough to cover the costs of the electrical system. Therefore, the difference is covered by the National State through subsidies,” he told AméricaEconomía.
According to Medina, the activation of the Néstor Kirchner gas pipeline would not lower the electricity rates paid by end users. However, it would reduce the amounts of subsidies provided by the Argentine State in the electricity system. Thus, if in 2023, subsidies to the electrical system are projected at US$5.7 billion, by 2024, these would decrease by US$1.2 billion. This reduction in public spending returns to the trend originally followed by the government of Mauricio Macri (2015-2019). During this period, the State reduced subsidies, paying up to 75% of the real cost of the electrical service.
Later, during the administration of Alberto Fernández, statism was returned with a freeze on rates and an increase in subsidies during the first three years. Only in 2023, with the increase in inflation and external debt, did the government undertake a partial withdrawal of subsidies: currently 33% of residential users pay their rates without subsidies, while the remaining 67% remain under state support. For July 2023, it is estimated that the average energy cost in the Wholesale Electricity Market (MEM) is US$ 86/MWh.
On the other hand, distributors pay an average price (PEST) of US$ 40/MWh, that is, 46.5% of the real cost of electrical energy in the MEM. The remaining 43.5% is paid by the Argentine State through subsidies. With the possible arrival of Javier Milei to power and his promises of a radical reduction in public spending, is the end of the protectionist model in Argentina looming? So far, everything remains in the realm of speculation, while Argentines still pay for one of the cheapest electricity services in the region.
