McGill School of Environment - Regulation Reform in the Electricity Industry






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Final Report

Argentina's main purpose in reforming its electricity sector was to achieve efficient pricing production levels in the short term and an investment level sufficient to meet demand in the longer term. That required a major restructuring of the sector that started in 1989 with a revamping of the legal framework followed by the implementation of the Energy Act in 1992. The main goals of the restructuring were to Protect users' adequately; encourage market competition; regulate towards a fair and reasonable rates for transmission and distribution; foster efficient use of energy; and encourage private investment (Pistonesi, 2000). These goals are thus encompassed to achieve better sector performance by rendering society sufficient energy to supply the increase of the demand by taking into account the industries maintenance and expansion costs. The goal to foster efficient use of energy is stated in the Energy act (law 24065) and is supposedly maintained by the Executive Orders and Decrees (or ENRE). However, little information or investment has been provided, let alone economic incentive, towards initiatives or programs for energy efficiency since the electrical sector restructuring.

Demand and Pricing of Electricity in Argentina's Restructured Energy Market

With a population growth rate of approximately 1.5 % per year, Argentina's 2001 demographics entail that out of the 37 million people in the country, 95 % of people now have access to electricity. Geographically, 70 % have access in rural areas and 98 % have access in urban areas (Bouille etc., 2002). The rate of increase in electricity production within the country has dramatically been influence by the restructuring of the electricity sector of the economy to meet the growing demand of the population. This rate of electricity production had achieved new heights in 1999 where electricity generation in the country totaled 77 million kWh of which 60% came from conventional thermal sources (mostly natural gas), 31 % came from hydro and 9 % came from nuclear power (Lynch, 2002).

In relation to the increase in production came an increase in consumption per capita. Restructuring of the sector made electricity more readily available for the population especially in the rural and urban areas where consumption patterns grew due to a more efficient transmission and distribution rebuilding and structuring (Enerdata, 1998). Residential and service sectors of the economy increased in total consumption from 1993 to 1998 from 24.7 TWh in 1993, to that of 31.6 TWh in 1996 and 35.9 TWh in 1998 due to new residential sectors receiving an increased share of the power production (see figure 1) (Enerdata, 1998). The demand forecasts carried out by the Energy Secretary suggest an increase in the demand for electricity of between 3.5 and5.6% per year between now and 2010. Production in 2010 will be mainly thermal (via natural gas) (44%), and for hydroelectricity (47%), with the remainder being accounted for by nuclear (Enerdata, 1998). In order to answer this increase in demand, the capacity will need to be increased by finishing power plants under construction (Pichi PicunLeufu with 260 MW in 2000, Atucha IIwith 745 MW in 2006) as well as by the arrival of new producers and the construction of new plants (5 combined cycle plants of 845 800 850 780 and 720MW expected between 1999 and 2000). The investment to be made between now and 2002 is estimated at 1.5 billion US$. This increase in the demand of energy has yet to be matched by any energy efficiency initiatives implored by investors, especially for the residential consumer. Investments made in the generation of newer electrical plants seems to be the solution in Argentina to meet this increasing demand and consumption.
Figure 1. Consumption increase post-restructuring (Pistonesi, 2000)

Prior to economic restructuring, equity aspects dominated the pricing structure of the companies. This implies that prior to restructuring tariffs increased in blocks according to the amount of consumption, thus making both industrial and residential consumers paying a relatively higher amount. Argentina's main purpose in reforming its electricity sector was to achieve efficient pricing production levels in the short term and an investment level sufficient to meet demand in the longer term. Prices post restructuring of the electrical sector are charged by the privatized generation companies through the creation of the new spot market. This spot market, being the core of the reform in the generation chain, matches supply and demand with an hourly price and allows distribution and large users to buy from any provider. In this spot market the generator company receives a uniform tariff at the point of price delivery based on the economic costs of the system and are fixed in concession contracts, thus implying regulatory intervention in terms of pricing when the electricity enters the wholesale market . Prices are therefore based on a tariff and concession system, whereby the electrical companies on the generating, distributing and transmitting end are subject to this spot market tariff framework regulated by the administrations or organizations who alter the prices of energy and capacity accordingly . Furthermore, the tariff framework adopted by distributors is based on prices determined by the cost of energy transported, connection charge and the cost of transport capacity. The concessionaire then gets a stable tariff reflecting the expected average prices at the connection nodes. In terms of transmission to the consumer, the price to users must be identified with the cost of electricity from the spot market, however large users must go directly to the wholesale market and must include the cost of transport. Tariffs for both transmission and distribution are based on economic costs with a price cap formula and a system of sanctions applied to protect users against declining quality of service.

In practicality, this tariff based system does not function in total accordance with the tariff principles outlined above. For example, EDENOR being the major electrical distributor to the residential consumer is dealt with by CAMMESSA (an organization dedicated to protecting electrical consumers), other companies are supervised by other administrations that control energy prices. EDENOR, being responsible for the Greater Buenos Aires (GBA) area of Argentina converted to a tariff system that decreases with the amount of electricity sold. Figure A1 shows the tariff structure, post-restructuring, applied by Edenor and arranged by CAMMESSA that starts at a level of 18US cents/kwh and decreases to 5 US cents/kwh for larger customers only within the Greater Buenos Aires region. This means that a low-end consumer at 30/kwh in the GBA is paying 17 cents per kwh whereas a high end residential consumer at 200 kwh pays less than 10 cents per kwh. This implies that higher end consumers are favored in the GBA and are therefore favored by CAMMESSA in that they pay less per kwh. In this region, the more you consume the less you pay per kwh.

Figure 2. Pricing in Argentina (Pistonesi, 2000)

Figure 3 shows the prices prior to and after the restructuring of the electrical sector of the economy for the residential consumer of GBA.

Figure 3. Electricity Prices for Argentina (Pistonesi, 2000)

Prior to restructuring, the electricity prices fluctuated in a oscillatory fashion and are thus classified as economically unstable. Although, (not taking into consideration the fault in the spot market in 1993) prices have remained relatively stable with little oscillatory effect. In this sense, restructuring of this sector of the economy seems to have led to reliable prices in the GBA region. However, in addition to the tariff, residential customers in the City of Buenos Aires (Capital Federal) have to pay a further 28% of the tariff in form of municipal taxes. For customers in the region of Greater Buenos Aires or other rural places the taxes even rise to 44%, due to special funds for improving the electricity sector infrastructure. For an average tariff of US$82 per MWh in 1999, residential consumers in the city of Buenos Aires paid another US$29 per MWh, and in Greater Buenos Aires US$44 per MWh.

Energy Efficiency

However successful social programs have been in relieving problems of inequity, environmental programs continue to be pushed to the wayside. Environmental benefits have received hardly any attention from policymakers, public interest groups, or Argentine consumers and several analysts have expressed doubts as to whether electricity distributors actively promote end-use efficiency within integrated resource planning at all . Since the institution of reforms, major environmental issues have emerged. The tariff structure and unbundling of incentives have had negative impacts on demand-side management at the demise of end-use efficiency. The development of significant national renewable energy resources has been stagnated and meeting voluntary commitments to reduce greenhouse emissions has been a challenge.

The last major push at the federal level for environmental benefits was the institution of a National Office for the Rational Use of Energy (URE). Unfortunately, despite URE’s apparent mandate, higher levels of the executive branch did not follow through with the provision of necessary instruments or adequate resources. This limited URE to realistically pursue any major goals regarding energy efficiency. Thus in practice, government efforts to promote energy efficiency and sustainability were limited to activities supported by donor, multilateral, and bilateral assistance programs. These programs and improvements were channeled through the URE and focused on specific actions such as the diagnosis of energy-efficiency potentials, energy labeling, municipal street lighting and driver education projects. Out of these governmentally driven donor programs, energy labeling has been one of the most successful in terms of sustainability with the least infringement on competition. This was achieved by improving users’ information by means of adequate labeling of electrical appliances, thus allowing for customers to freely express their preferences (Instituto de Economia Energetica, 1999). In the late 1990s, the Argentine government began to issue new legislation mandating energy-efficiency requirements for a variety of electrical products. “Resolution 319/99,” issued in May 1999 by Argentina’s Secretariat of Industry, Commerce and Mining, required that household appliances, including refrigerators and freezers, clothes washers and dryers, dishwashers, electric water heaters, lighting, and air-conditioners be labeled for energy efficiency. The resolution took effect May 2000 (CLASP, 2002).

Although Argentina consumes significantly more energy than many other South American countries, energy consumption per dollar of GDP (energy intensity) in Argentina is relatively low. These gains only reflect efficiencies in the industrial sector and could be greatly augmented with more focus on the end-use of the residential sector. Because the residential sector accounts for 31 percent of the total electricity use in Argentina, the Pew Institute for Climate Change began conducting studies to model potential effects of end-user technology. 75 percent of the sector’s power consumption is composed of lighting, refrigerator-freezers, and other appliances.. Pew estimated a 16 percent reduction in residential sector demand could be obtained through labeling, improving lighting systems, and behavioral changes incited by tariffs and regulations.

Argentina’s government is attempting to reduce in both size and influence it’s economic sectors to promote competition in the market place. This, in combination with successive macro-economic adjustment policies will work to undermine the capacity and authority of the public state. A further decentralized government in Argentina means fewer resources, less personnel, lower salaries, and weaker technical capacity that will mostly likely skew public interests and strengthen private ones. This can be seen as an insult to environmental progress in Argentina, as many programs will be lost with the deteriorating infrastructure. As per capita energy consumption and electric power rise in tandem with income and incentives to save deteriorate with lack of adequate demand-side management; even market solutions like the implementation of cleaner technology will not be substantial enough to result in energy savings.


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