Energy democracy and public ownership

What can Britain learn from Latin America?
04 December 2018
Article

Uruguay and Costa Rica are world leaders in clean, public, democratically accountable energy. Their success owes much to state-owned companies with the power to drive systemic change.

hot springs of Volcan Rincon de la Vieja, Costa Rica
hot springs of Volcan Rincon de la Vieja, Costa Rica / Photo credit Lindsay Cameron via flickr (creative commons licence)

In the United Kingdom, ‘public ownership’ in the energy sector has become a major demand for the Labour Party. Its real meaning, however remains ambiguous. Neither the format nor scale of public ownership in the energy sector have been clearly outlined. Many issues remain unresolved. How will public ownership be designed at the local, regional and national level? What functions will be owned publicly, and what will be left in control of the private sector? These are deep, vital questions for the Labour Party to answer in order to deliver lasting change.

Latin America has a long history of public ownership – particularly in the energy sector – and has waged a struggle against privatisation and fossil fuels since the 1990s. In particular, two countries, Uruguay and Costa Rica, have gained international attention for their rapid shifts towards renewable energy, much to the credit of their state-run energy utilities. Stories from Latin America offer a fresh perspective on the role of the state in the energy transition: stories that could be invaluable in designing the next system in the United Kingdom.

This article begins with an outline of ongoing exchanges over energy democracy and public ownership, and the options for a progressive restructuring of the energy system. It then turns to the Latin American power sector and analyses some encouraging outcomes, particularly that of Costa Rica and Uruguay.

Finally, it reflects on the role of the state in national energy transitions in order to extract relevant lessons for the United Kingdom.

Current debates on energy democracy and public ownership

Citizens around the world are increasingly demanding a transition to renewable energy sources, while challenging the big corporate interests of the old regime under the banner of energy democracy. Public ownership has been a key galvanising strategy in achieving energy democracy. A freshly-published report maps 835 international examples of de-privatisation across sectors, illustrating how citizens and progressive governments are reclaiming public services worldwide.1

The British Labour Party explicitly stated in its 2017 manifesto that it will ‘bring key utilities back into public ownership to deliver lower prices, more accountability and a more sustainable economy’, including ‘the creation of publicly owned, locally accountable energy companies and co-operatives’. 2 Party leader Jeremy Corbyn has explained how the Labour Party’s renationalisation proposal would bring energy prices back down by dismantling the false market that allowed an oligopoly of private gas and electricity companies known as ‘The Big Six’ to make abusive profits. Corbyn, however, has repeatedly clarified that the strategy cannot be ‘a return to the 20th century model of nationalisation but a catapult into 21st century public ownership’, and that ‘the future is decentralised, flexible and diverse with new sources of energy large and small’.3

However, it remains unclear how the Labour Party’s small-scale local, municipal or regional companies could meet the required decarbonisation targets. As a recent report by Trade Unions for Energy Democracy (TUED) explains, the scope of climate change and the need for a massive and rapid response requires a substantial intervention with state-owned and state-managed programmes.4

Some analysts have rejected the emphasis on public ownership. Peng and Poudineh argue that ‘a purely state-based, centralised and hierarchical structure cannot adequately deal with fast-paced changes’ in the energy sector, and therefore ‘a more holistic integrated thinking that seeks to understand and align both horizontal relationships ... and vertical relationships among levels of coordination in the power sector’ is needed.5 At first glance this argument seems to undermine the role of the state, but its call for horizontal coordination actually reclaims the space of energy policy as an essential mission that cannot be left in the hands of private actors. These have much less reason to look beyond their own corporate doors. The analysis of Latin American experiences could contribute to the design of a ‘twenty-first century’ model of public ownership that integrates both horizontal and vertical planning for a new energy system.

Energy policies and public ownership in Latin America

The institutional contours of the electricity sector in Latin America have gone through a series of changes in recent decades. Almost every country in the region carried out market-oriented reforms in the 1990s, adopting variations of the neoliberal recipe by opening markets and promoting private investment. In recent years, the trend has reversed drastically. The changing profile, achievements and pitfalls of the Latin American energy sector offers opportunities for reflection on the United Kingdom’s pursuit of public ownership.

Chile pioneered market reforms in the region. The government launched a wave of privatisation in 1982 under General Augusto Pinochet’s brutal military dictatorship. Following the neoliberal dogma of the ‘Chicago Boys’, Chile became the first country in the region to deregulate its power sector. It was soon followed by many of its neighbours. Argentina was the most radical among them, privatising public services on a massive scale. The state regained partial control of the energy sector during the twelve-year (2003-2015) tenure of presidents Nestor Kirchner and Cristina Fernandez de Kirchner, but the process was subsequently reversed.

Brazil, Latin America’s largest country, followed an alternate path that largely rejected privatisation, until recently. In the mid-1990s, the government began to implement a near carbon copy of Margaret Thatcher’s electricity privatisation and liberalisation programme. However, the Workers’ Party, led by Lula da Silva, halted the deep privatisation after ascending to national office in 2003. Currently, the Brazilian power sector is a mixed public-private system, in which state-con- trolled companies own and manage the majority of electricity generation and transmission, and the private sector predominantly controls distribution. After the 2016 impeachment of Lula’s heir, Dilma Rousseff, the new government has aggressively tried to privatise the state-controlled power utility Eletrobras. The plan, however, has hit a series of roadblocks – first from Congress and then from the Supreme Court. As the country emerges from the October 2018 election, widely considered to be the most controversial and polarised in decades, the future of the Brazilian power sector looks bleak, as president-elect Jair Bolsonaro has announced an extensive programme of privatisation. In Mexico, meanwhile, president-elect Andres Manuel Lopez Obrador has explicitly declared that he will reverse the tides of energy sector privatisation and liberalisation initiated in 2014, which opened the country’s oil and electricity markets to private companies.

The recovery of public ownership through renationalisation in the power sector has been met with mixed results in recent years. In Venezuela, the political project of the ‘Bolivarian Revolution’ instituted by President Chávez included multiple nationalisations, from steel companies to telecoms, and from water and power utilities to bottle-making factories. In the country’s energy sector, years of mismanagement and corruption have led to an almost permanent electricity crisis, with constant blackouts and severe rationing.

In Bolivia, the process began in 2006 – when the Movement For Socialism (MAS), led by Evo Morales, took power. The new government brought back into public ownership oil and gas fields, pipelines and refineries, water and power utilities, telecoms and mining. The renationalisation of the power sector started in 2010 and included the creation of a new public enterprise: the National Electricity Company (ENDE). The coverage and quality of these services have improved since nationalisation, but progressive researchers and critical social activists argue that there have been no significant changes in the system beyond the modification of the ownership structure; that ‘the greatest limitation was not having reversed the capitalist mercantile logic of profitability imposed as key managerial principle’; and that ‘therefore, the nationalisation of electricity has not meant a real alternative to the commodification of this public service’.6

Despite the brutal neoliberal offensive of the 1990s, several countries’ power sectors are currently structured around vertically integrated and state-owned national companies as well as regional and municipal power, and these stand out as positive examples of the efficiency and capability of publicly owned power provision. The following sections go more deeply into a couple of these examples: specifically, the successful cases of public ownership in Costa Rica and Uruguay.

sustainable agro-business, Uruguay
sustainable agro-business, Uruguay / Photo credit Jimmy Baikovicius via Flickr (creative commons licence)

Costa Rica’s exemplary power sector

Costa Rica is an outstanding example of efficient and egalitarian service delivery rooted in public ownership. It has extensive electricity services – as well as water, health and education services – and they achieve remarkable scores on indicators for equity, quality, affordability, public ethos and environmental sustainability. Since its foundation in 1949, the Costa Rican Electricity Institute (ICE), a state-owned company active in the fields of energy and telecommunications, has evolved as one of the pillar institutions of a Latin American welfare state that ranks today among the world’s most advanced in terms of social development.

For almost seven decades, ICE has proved that it possesses high levels of technical, financial and managerial capability, and these have enabled it to develop one of the world’s most sustainable, efficient and equitable electricity systems. Since its creation, the public utility has expanded access to electricity services from 14 per cent in 1949 to more than 99 per cent today.7 Along with its fellow public power providers, ICE has also greatly contributed to Costa Rica’s current position as one of the world’s most advanced countries in the transition to renewable energy.

In 2017, hydropower, geothermal, wind, solar and biomass energy sources constituted 99.7 per cent of the national electricity mix, with fossil-fuel power representing a meagre 0.3 per cent.8 The vast majority of that energy was generated by state- and socially-owned power producers. ICE produced 66 per cent, and sub-national public utilities and rural energy cooperatives together generated another 7 percent.9 The rest of the energy has been provided through Power Purchase Agreements (PPAs) between the state and private, independent power producers.

Four state-owned entities – one national (ICE); one regional, an ICE subsidiary active in the metropolitan region of San José (CNFL); and two municipal companies (ESPH and JASEC) – as well as four cooperatives (COOPEGUANACASTE, COOPELESCA, COOPESANTOS and COOPEALFARO), operate all of the country’s distribution and commercial needs, with no participation whatsoever by profit-driven private companies. In the words of ICE’s Chief Engineer: The Costa Rican population became used to good quality electricity, and therefore people are much more demanding, because our services are perceived as a fundamental right to which every person should have access, regardless of the location, social position or economic capacity of users.10

Previous researchers have argued that ICE’s ‘ability and willingness to plan in the long term and pursue renewable sources of energy is a product of its relationship with Costa Rican society’. And they have noted that ‘ICE’s embeddedness among civil society organisations, labour unions, intellectuals, and mass public opinion has allowed it to acknowledge society’s interest in a clean, sustainable, and domestic supply of electricity’; and that ‘ICE’s technical expertise, its public nature, and its financial independence provide the autonomy and internal coherence’ required to pursue a far-sighted vision.11

In spite of its proven success as a highly efficient public enterprise, a series of neoliberal governments from the 1980s to the present day have promoted reforms to ICE’s publicly-based and solidarity model, which has been so integral to shaping the power sector’s evolution. ICE is also operating within an increasingly liberalised market and has been subject to internal corporatisation, through a process that has changed the institutional and managerial frameworks of the company.

Costa Rica’s achievement, however, remains significant. Over the past seven decades, the evolution of electricity services in Costa Rica has to a large extent developed in opposition to private business interests. Labour’s current emphasis on public ownership as a key factor for restructuring the power sector in Britain has similar motives to those of the ICE, which was created ‘to oppose big business and drive private capital out of the electricity industry’.12

Uruguay’s energy revolution

In the last decade, Uruguay has accomplished an authentic energy revolution. Today, fossil fuels contribute a marginal proportion of its electricity mix; and the country also enjoys a near-universal level of access. 99.7 per cent of Uruguay’s population of 3.4 million have full access to electricity services, and the national power utility is setting up distributed generation alternatives to meet the needs of the remaining 0.3 per cent of the population that cannot be connected to the grid.13

In July 2014, El País, Spain’s largest newspaper, published an article entitled ‘Uruguay’s renewable energy revolution’. As the article reported, the country ‘had no oil or natural gas resources’ and until recently its ‘high energy prices were dragging down productivity’. However, the country now used renewable sources ‘like no other place in the world’; it had become ‘a major example of how to make a dramatic shift towards renewables in a very short amount of time’.14 As British newspaper The Guardian put it, ‘in less than 10 years the country has slashed its carbon footprint and lowered electricity costs, without government subsidies’.15

As of March 2018, wind has become the major energy source in the country. According to official data, during that month wind power amounted to 41.2 per cent of total electricity on the national grid, while hydroelectric plants contributed 38.9; biomass 9 per cent; thermal 7.6 per cent; and solar photovoltaic 4.6 per cent.16 These figures show the very rapid and massive development of wind energy in the country – something almost unprecedented worldwide.

The energy transition began with a policy covenant backed by all political parties represented in Parliament, which proposed the development and co-ordination of different forms of ownership, management and financing for renewable energy projects. In March 2005, for the first time in the history of the country, a left coalition – the Frente Amplio (Broad Front) – assumed national office. In 2008, the government outlined the foundations of its energy policy, and in February 2010 the parliament enacted the Política Energética 2005-2030 (National Energy Policy 2005- 2030) strategic plan, voted for by legislators of all parties. The agreement established concrete goals, mechanisms and institutional guidelines.

The National Administration of Power Plants and Electrical Transmissions (UTE), a vertically integrated power company fully owned by the Uruguayan state, has been the key player in the transition. More than a century after its founding, UTE remains a highly efficient company, in both the quality and reliability of its services and in its economic stability. In fact, it is one of the main sources of financing – at zero cost – for the Uruguayan state. International credit agencies have awarded UTE the category AAA (investment grade, the highest), noting that ‘historically, the company has maintained an adequate level of indebtedness’, which guarantees ‘easy access to the banking and financial market’.17

UTE has been a hegemonic actor in the electricity sector, owning approximately half of all generation assets in Uruguay and managing them directly. It is also the owner and sole operator of the transmission and distribution network, though it is obliged to provide open access to third parties in exchange for a transmission toll. Likewise, UTE is the only buyer in the national electricity market. The wholesale energy market is a vestige of the sector’s liberalisation in 1997 – a decade before the accession of the left to national government – and is made up of independent power producers. The 2005-2030 energy strategy required UTE to enter into public-private partnerships (PPPs), particularly Power Purchase Agreements (PPAs) with twenty- year contracts.

The expansion of wind power, alongside the requirement to buy from independent power producers, has radically modified the ownership structure of UTE’s generation section, which until recently was entirely public, as the state owned the hydroelectric plants and other sources of electricity. By 2016, 65 per cent of installed capacity in the wind sector was already in private hands. UTE controlled the remaining 35 per cent of installed wind capacity, but this was mainly through indirect investment structures: public limited companies, trusts and operating leases. Only 7 per cent of the wind farms were built and managed directly by the state-owned utility through traditional forms of public investment.18

Trade union activists, academic researchers, environmental activists and the press have criticised the profitability that the state assures to private investors. The twenty-year PPA contracts UTE signs with suppliers obliges it to pay even for the wind energy it does not need, if the windmills can run.

According to official data published in its annual audited balance sheets, UTE’s net income was US$1,919 million over the past five years.19 In 2017, it had a net income of US$492.1 million – an increase from the year before – in spite of the many limitations set upon its public investments. The company could have invested more of its own (public) resources in the development of wind farms and other forms of non-conventional renewable generation, but the Ministry of Finance did not allow it to do so. Since the beginning of the third left government in 2015, the ministry has prioritised the profitability of state companies. It is focused on reducing the fiscal deficit to 2.5 per cent or less in 2019, and the revenues generated by UTE are frequently drawn on to balance the public budget and reduce the fiscal deficit.

UTE’s sound financial indicators and positive credit rating could have allowed it to obtain sufficient external financing to fund wind power as a fully state-owned and managed programme. If the Ministry of Finance had allowed UTE to invest directly in wind generation instead of relying on independent power producers, it could have made significant savings. There would have been greater public debt in the short term, but UTE will lose money over the longer term in having to purchase energy from private suppliers.

The trade unions have criticised the expansion of private players in the renewable energy sector, pointing out that it constitutes a new and covert form of privatisation. They have identified a number of factors that contribute substantially to private investors’ ability to take home all-too-high profits: UTE’s commitment to buy all the wind power generated even when it is not needed; the long, twenty-year agreement periods of the PPAs; and the fixed energy price. As a Uruguayan economist has explained, the state has relinquished the most profitable portion of the energy market – the wind sector – to private capital:

The least profitable component, the burning of fossil fuels that might be necessary to guarantee constant supply, was left in the hands of UTE. But there are no risks involved for the private investors, since our public power company guarantees them long-term profits. All the risks are shifted to the public sector. In other words, UTE raises the ravens that will tear out her eyes.20

The workers’ movement in Uruguay is demanding the full renationalisation of electricity generation. This demand is not wholly unrealistic in a country that has successfully resisted and reversed other waves of privatisation in previous decades. In 1992, when the neoliberal government of the time tried to carry out a bulk sell-off of public assets, the enabling legislation was massively rejected by the citizenry in a referendum. Following this, in 2004, a coalition of diverse social movements won the support of 65 per cent of the electorate in a plebiscite for a constitutional reform that would ensure public ownership and management of water resources in perpetuity – thereby impeding any future privatisation attempts.

Learning from Latin America

The most important and obvious lesson emerging from any analysis of Latin American experiences is that there are alternatives to the current state of affairs. Costa Rica and Uruguay demonstrate that it is certainly possible to build a national and publicly-owned power system that provides high-quality, clean and affordable energy services to everyone, as Labour proposes to do in Britain. The rapid and massive development of wind power in Uruguay would have been impossible without a powerful national and state-owned utility. These experiences also show that privatisation can be stopped and eventually reversed, and that state-owned enterprises (or a combination of national, municipal and socially-owned companies, as in Costa Rica) can enable a radical energy transition to renewables sources, acting in the public interest.

The experiences of Costa Rica and Uruguay also show the importance of an integrated power system in which the state, and in particular national public enterprise, plays a hegemonic role. The response to the long years of privatisation, deregulation and oligopoly within the electricity sector must not be to adopt a balkanised system based on small (local, municipal or regional) power utilities. Diverse forms of ownership can coexist and work together, but public enterprises such as ICE or UTE are needed at national level to act as the articulator and catalyser for the whole system. Furthermore, though public and social ownership can assume diverse shapes and be harmonised, it is not feasible to let some companies hold on to the most profitable parts of the energy market while publicly-owned providers serve the costliest areas. ICE and UTE also illustrate the need for strong public utilities that can ensure equitable access to electricity for remote and low-income users through- out the country. The lesson for the United Kingdom is that full decentralisation is not always the best option: both these positive examples show that a large overarching national public entity is key to providing large-scale planning and integration of energy services.

After this account of the most positive lessons, it should be noted that not every Latin American transition has been successful. Nationalisation sounds like an inherently progressive and hopeful trend, but the mixed outcomes of the de-privatisation of the power sector in Venezuela and Bolivia suggest the need for caution. The shift to public ownership should be both accountable and irreversible.

Moreover, a closer analysis of the energy transition in Costa Rica and Uruguay (in particular the shift to wind power in the latter) demonstrates that attention must be paid to the ‘stealth privatisation’ that can be brought about through the proliferation of private, independent power producers and other profit-driven schemes. In the long run, opening the door to independent power producers may turn out to be the wrong financial decision. The experience of UTE in Uruguay shows that countries such as the United Kingdom should not introduce artificial debt caps that may prevent the public sector from investing in the transition to clean energy.

Latin America is a showcase for remarkable energy transitions. Costa Rica and Uruguay have defied the conventional wisdom that says public ownership damages the economy and hinders social development, or that the state is an inherently bad provider of energy services. In their successes – and limitations – the public energy systems of Latin America provide important political lessons, for Britain and the rest of the world.

Notes

1. S. Kishimoto and O. Petitjean (eds.), Reclaiming Public Services: How cities and Citizens are Turning Back privatisation, Transnational Institute, Amsterdam 2017.
2. Labour Party, For the Many Not the Few, 2017: https://labour.org.uk/wp-content/ uploads/2017/10/labour-manifesto-2017.pdf.
3. Labour Party, ‘Jeremy Corbyn speech to Alternative Models of Ownership Conference’, 2018: https://labour.org.uk/press/jeremy-corbyn-speech-alternative- models-ownership-conference.
4. S. Sweeney and J. Treat, ‘Preparing a Public Pathway: Confronting the Investment Crisis in Renewable Energy’, TUED Working Papers 10, Trade Unions for Energy Democracy, Amsterdam 2017: www.rosalux-nyc.org/wp-content/files_mf/ tuedworkingpaper10.pdf.
5. D. Peng and R. Poudineh, ‘Electricity Market Design for a Decarbonised Future: An Integrated Approach’, Oxford Institute for Energy Studies, Oxford 2017.
6. C.A. Vargas and J.C. Guzmán, Políticas en cortocircuito. Nacionalización de la electricidad en Bolivia, CEDLA, La Paz 2014.
7. D. Chavez, ‘An Exceptional Electricity Company in an Atypical Social Democracy: Costa Rica’s ICE’, in D.A. McDonald (ed.) Rethinking Corporatization and Public Services in the Global South, Zed Books, London 2014.
8. Instituto Costarricense de Electricidad (ICE), Generación y Demanda. Informe Annual 2017, ICE, San José 2018.
9. Ibid.
10. Interviewed by the author.
11. J. Wilde-Ramsing and B. Potter, ‘Blazing the Green Path: Renewable Energy and State-society Relations in Costa Rica’, The Journal of Energy and Development, 33/1, 2006.
12. Ibid.
13. Administración Nacional de Usinas y Trasmisiones Eléctricas (UTE), ‘Electrificación Rural’, UTE 2018: https://portal.ute.com.uy/institucional/ electrificaci%C3%B3n-rural.
14. M. Martínez, ‘La Revolución Renovable Uruguaya’, El País, 7.10.14: https://elpais. com/internacional/2014/07/10/actualidad/1405027005_646202.html.
15. J. Watts, ‘Uruguay Makes Dramatic Shift to Nearly 95% Electricity from Clean Energy’, Guardian, 3.12.15: www.theguardian.com/environment/2015/dec/03/ uruguay-makes-dramatic-shift-to-nearly-95-clean-energy.
16. UTE, ‘Composición energética de Uruguay por fuente’, UTE, 2018: http://www.ute. com.uy/SgePublico/ConsComposicionEnergeticaXFuente.asp.
17. Fitch Ratings, ‘Administración Nacional de Usinas y Trasmisiones Eléctricas (UTE).43 RENEWAL Vol 26 No. 4 Informe de Actualización’, FixXCR, 30.11.17: www.fixscr.com/ uploads/15256963785af0477a31645.pdf.
18. F. Esponda et al, ‘La Dimensión Contable de la Revolución Eólica Uruguaya’, paper submitted to the 6th Latin American Energy Economics Meeting ‘New Energy Landscape: Impacts for Latin America’, Rio de Janeiro, 2-5 April 2017.
19. UTE, Estados Financieros Consolidados y Separados Correspondientes a los Ejercicios Finalizados el 31 de Diciembre de 2017, UTE, Montevideo 2018.
20. P. Messina, ‘UTE Ante el Discreto Encanto de la Burguesía’, Valor: Separata Económica de El Popular, 356, 2016.