Venezuela has been suffering prolonged power cuts and electricity shortages since late 2009. This is partly due to unusually low water levels at the Gurí hydroelectric dam, but also to long-term underinvestment in energy infrastructure. The government will seek to improve the situation ahead of legislative elections in September 2010, while the resulting disruption will have negative results for business profits and consumers.

  • From late 2009 Venezuela has suffered power cuts of up to six hours at a time across the country, sparking public protests and disrupting economic and business activity;
  • The government claimed that the shortages were the result of unusually low rain and a related fall in electricity from the Gurí hydroelectric dam, which provides approximately 60% of Venezuela’s electricity output. In 2009, 74.0% of Venezuela’s electricity was produced by hydroelectric generation;
  • However, the shortages also reflect long-term underinvestment in energy infrastructure. The departure of many private companies from the energy sector has left the government solely responsible for infrastructure projects. Ongoing shortages will harm the business environment and reduce the potential for business profits and consumer wage growth.
Venezuela’s electricity production by type: 2004-2009
% of total electricity production

Source: Euromonitor International from OECD.

Implications

  • Electricity shortages and black-outs will create immediate disruption to business operations, including the lucrative oil sector. Disruption to the oil industry will have serious consequences for economic growth. In 2009 oil exports comprised 97.6% of total exports. Venezuela’s economy contracted by 3.3% annually in 2009 as the world economy declined;
  • Disrupting economic activity will also weigh on consumer spending potential, particularly if lower production results in shortages of goods. In 2009, private final consumption expenditure totalled 60.4% of GDP;
  • Consumer purchasing power is also being eroded by high inflation (27.0% in 2009). However, energy shortages are unlikely to lead to rising electricity prices given the government’s unwillingness to increase prices ahead of elections;
  • Sustained electricity shortages will increase popular unrest, with protests having taken place across the country. The most violent protests took place in Caracas in February 2010 after an attempt to introduce electricity rationing. The government was subsequently forced to abandon the rationing initiative in Caracas only, worsening national shortages;
  • The prospect of ongoing shortages may discourage foreign companies from setting up business in Venezuela. The country’s business environment is already one of the worst in the world, with the World Bank’s Ease of Doing Business 2010 report ranking Venezuela 177th out of 183 countries;
  • The government has had little financial ability to embark on major infrastructure projects. In January 2010 the government devalued the currency to increase the domestic funds available for spending. The 2010 budget allocated 46% of this spending to social programmes, in an effort to maintain the government’s popularity ahead of the September 2010 elections.
Venezuelan government expenditure by type: 2009
% of total expenditure

Source: Euromonitor International/International Monetary Fund (IMF), Government Finance Statistics/national statistics.

Prospects

The electricity shortages should ease slightly in the rainy season (June to October) but this will only mask the underlying infrastructural problems:

  • Greater water available at the Gurí dam will help to improve production of hydroelectric electricity. The government is likely to maintain electricity rationing across the country (except Caracas) until at least the onset of the rainy season;
  • The government did create an extra 563 megawatts of electricity by April 2010 by opening new units and replacing others, although this is not quite estimated to meet demand;
  • The government in February 2010 created a US$1 billion fund for electricity improvements, but the construction of new generating plants is likely to take at least a year, preventing short-term improvement in electricity supply. However, such investment will secure better electricity supply in the medium-term.

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