The Energy Sector in Cuba:

Financial and Economic Considerations

Juan A. B. BeltDirector

Office of Infrastructure and EngineeringUSAID

Presented at the Annual Meetings of the Association for the Study of the Cuban Economy (ASCE), Miami, Florida

August 2008The opinions expressed in this presentation are those of the author and

do not represent the views of the US Government

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Disclaimer

• The opinions expressed in this presentation are those of the author & do not necessarily represent the views of the US Government

• All information comes from public sources available in the Internet

• Special thanks & appreciation to my friend & colleague Luis Velazquez for his crucial support in the preparation of this paper

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Outline

1. Methodology

2. Comparisons with selected countries in Latin America

3. Electricity trends in Cuba

4. Financial & economic aspects of the electricity sector

5. Sector reform during a transition

6. Conclusions

“Communism is Soviet power plus the electrification of the whole

country”

Cuba has continued to ignore financial

and economic aspects

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LNG Plants (Sherritt)

Thermal Plants

Diesel Plants

Gensets

Domestic production

PDVSA Imports 102.0

Refineries

35.0 CO

68.0 CO

51.1 RP

24.5 LNG

15.9 Diesel

53.4 FO

16.4 Diesel

Oil and Gas Flows 2007 ('000 bpd, MM cfd)

Power Generation

(17,621 GWh)

Transportation, Industrial,

Residential, and Other Fuels

33.2 RP

2,797 GWh

404 GWh

11,099 GWh

3,321 GWh

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Liquid Fuels: Supply & Uses 2007

Liquid Fuel Supply bbl/day % of TotalDomestic production 68,000 40%Imports 102,000 60%

Total supply 170,000 100%

Liquid Fuel UsesPower generation 85,700 50%Transport 84,300 50%

Total uses 170,000 100%

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Comparisons with Selected Countries

Cuba

Chile

Costa Rica

Dominican Republic

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GDP/Capita & Electricity 2007

• Chile & Costa Rica have increased GDP/capita much faster than Cuba in 1959-2007; social indicators are similar in the 3 countries (Carmelo Mesa-Lago book)

• DR has caught up and its GDP/capita is similar to Cuba’s

• All countries essentially have universal coverage• Electricity consumption/capita is similar in Cuba & DR

GDP/capita Electricity Country PPP

(US$) Nominal

(US$) Coverage

(%) Consumption (kWh/capita)

Chile 14,400 9,874 99 3,062 Costa Rica 13,500 5,525 99 1,730 Cuba 4,500 3,958 95 1,300 Dominican Rep 5,865 3,789 92 1,067

Source: CIA – The World Factbook – https://www.cia.gov/library/publications/the-world-factbook/

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Electricity Consumption(kWh/capita)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1970 1990 2007

Chile Costa Rica Cuba Dominican Rep

Since 1990 energy consumption in Cuba

stagnatedChile

Dominican Rep

Costa Rica

Chile, Costa Rica, and Cuba had similar

consumption in 1990

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Cuba: Trends & Present Financial Issues

*** ** **

**

*** * *

**

Pinar del Río

Cienfuegos

Santa Clara

Vicente

Camagüey

CTE 10 de Oct

Holguín

Cueto

CTE Felton

CTE Renté

Punta Gorda

Matanzas

CTE GuiterasCTE Habana

CTE Mariel

Habana

Cotorro

*

Bayamo*

*CTE CMC

Next Topics:

1. Electricity trends in Cuba

2. Financial & economic aspects of the electricity sector

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Unión Eléctrica – Nominal Installed Capacity (MW)

886

4,2754,078

4,287 4,411

3,960

3,965

3,764

5,176

5,389

397

2,731

0

1,000

2,000

3,000

4,000

5,000

6,000

1958 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007

Increase:

GENSETS 1,200 MW

GAS 400 MW

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Electricity Consumption 1958-2007 (GWh)

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

1958 1975 1985 1987 1989 1992 1995 1997 1999 2001 2003 2005 2007

Total Industry and Construction Residential Others Ag / Trans / Comm

“Período especial”

Industry & construction 28% lower in 2007 than

1990

Blackout period

Gensets & gas-fired plants

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Union Electrica: Economic Profit

Description Units Results

Crude Oil Price $/bbl 87 100 120 140

Fuel price (80% fuel oil, 20% diesel)

$/bbl 112 125 145 165

Economic Profit M $ (1,503) (1,867) (2,427) (2,987)

EBITDA M $ (709) (1,073)

(1,633)

(2,193)

EBITDA (fuel discount 40%)

M $ 547 329 (7) (343)

EBITDA (fuel discount 100%)

M $ 2,432 2,432 2,432 2,432

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Union Electrica: Labor Efficiency Comparisons

IndicatorCosta Rica

DR Cuba

Residential connections per employee

260 200 111

Electricity sold per employee (MWh/year)

2,837 881 409

Employees per '000 residential connections

3.8 5.0 9.0

Chile has only 0.7 employees per 1,000 connections

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Union Electrica: Total Unit Costs (G, T & D)

Crude Oil Price $/bbl 87 100 120 140

Fuel price (80% fuel oil, 20% diesel)

$/bbl 112 125 145 165

Cost per kWh sold $/kWh 0.310 0.336 0.376 0.417

Cost per kWh generated $/kWh 0.244 0.265 0.297 0.328

• Oil & diesel accounts for 70-80% of generation costs; Cuba 5th in the World in 2003 after Yemen, Iraq, Benin & Jamaica in use of liquid fuels for generation

• Labor efficiency very low

• Technical losses high (16%)

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Reform Takes Time & Requires Planning

Activity Description Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Transition begins                                        

Infrastructure Strategy & Legal Framework                                        

Draft strategy                                        

Develop consensus                                        

Draft laws (power, telecom & water)                                        

Enact laws                                        

Establish regulatory agency                                        

Power sector                                        

Emergency Rehabilitation Program                                        

Operation contracts                                        

Unbundle / corporatize                                        

Adjust rates                                        

Sell DISTCOS                                        

Sell GENCOS                                        

Could be reduced to 3

years

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Generation

• Cuba needs to diversify energy sources to reduce reliance on liquid fuels

• For new generation capacity Cuba should promote greater use of1. Gas (will depend on domestic availability)2. Coal (will require bulk import handling facilities)3. Biofuels including bagazze (would depend largely on

revitalization of sugar industry)4. Wind (becoming more competitive today)5. Mini-hydro (fairly limited)6. Solar (costs are still high)

• Tariff free imports of machinery & equipment for renewable generation & reasonable tax breaks could reduce over reliance on liquid fuels

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Conclusions

• Lack of reliable data makes analysis very difficult• Power sector suffered since the collapse of USSR

but now blackouts not as common as in 2004-06• UE rates do not cover economic costs• UE: expensive fuel, low labor productivity & high

losses• UEs economic loss almost $3 billion or around 6%

of GDP (oil price $140/bbl)• Reform to promote private participation would be

necessary during a transition• Well-designed system of incentives to decrease

reliance on liquid fuels should be implemented

Any questions?

Juan A. B. BeltDirector

Office of Infrastructure and Engineering (I&E)Bureau for Economic Growth, Agriculture, &

Trade (EGAT)US Agency for International Development

(USAID)E-mail: jubelt@usaid.gov