Drivers of Scale Economies

Drivers of scale economies refer to efficiencies wrought by volume (i.e. provide large quantities at low cost). Those drivers were intrinsically integrated with the ICE’s reasoning when making choices about energy options, since earlier stages. Based on a calculus approach and aided by benefits of scale economies from electricity production dams, the ICE developed characteristics of a natural monopoly. From this perspective, dams provided large quantities of electricity, at a reasonably cheap prices, compared with many other forms of energy.

The characteristics of dams matched very well with the social orientation of electricity pricing and grid development that predominated during the 1950s until the 1980s. Their relevance continued in the following decades, not only for grid development but to sustain economic growth and further expand electricity sales. The government’s goals and the actions taken by the ICE, during the 1990s, confirm this.

133 For example, in the year 2000, after finishing one of the largest dams of the decade (i.e. the Angostura HP, 180 MW), the ICE revived efforts to develop the next largest dam known as

“The Great Boruca” (i.e. 1500 MW). Planning officials, at the ICE, during this period stated that according to their plans, the Boruca HP would follow, foreseen to be in operations in 2010.¹¹³ According to Sacchi (2002) and Carls & Haffar (2010), at that time, project managers presented the Boruca HP as a key project for the country’s growing electricity demand and to supply energy to neighboring countries.

There were contradictory statements in this regard. The authors found out that, in other statements, the ICE’s officials affirmed that the dam production would be used only towards satisfying the national electricity demand. However, the Boruca dam would significantly increase the national energy generation capacity by nearly 50% (Sacchi, 2002; Carls & Haffar, 2010), the surplus could be sold in the Central American region. Similar inconsistencies were detected during interviews with the Energy Planning Sector, in 2013, concerning the Diquís HP (i.e. 650 MW).

Nevertheless, when the government ratified the Central American Electric Market, in 1998 (i.e.

Law 7848), the dams’ advantages became apparent. Firstly, hydroelectricity is a clean energy source; secondly, the benefits of scale economies, from hydroelectric dams, increase the country’s competitiveness in the region. As indicated by the policy think tank “Programa Estado de la Nación”:

“(Tariffs) differences are explained by issues such as Costa Rica’s lower tariffs because its electricity generation mostly comes from renewable sources, mainly hydroelectricity, different to other countries that use (fossil-fueled) thermal energy…” (PEN, 2008, p.

54).

According to the market protocol, among electricity players in the country, only the ICE is allowed to participate in the regional electric market. In the case of private investments, their incorporation as electricity producers began after liberalization reforms, in the 1990s, but still limited to the domestic market. The continued opening of the sector promoted by the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) increases their interest in the national and regional market.

On the other side of the coin of hydroelectric projects was the use of solar energy at smaller and micro-scales within the Rural Electrification Program.¹¹⁴ According to project documents,

113 “La Angostura prende máquinas” La Nacion, 21.07.2000.

114 RORs, geothermal stations and wind projects are in the middle with small and medium size installations.

134 feasibility studies of the Program considered two possible technologies for electrification in rural areas: SHS and micro hydroelectric stations (GEF, 2005). The choice of using decentralized renewable energy systems (i.e. SHS or micro-hydro) versus centralized (i.e.

central plant delivering electricity through the grid) had cost-benefit logics (e.g. additional cost per kW). This was confirmed in interviews stating that “The cost of the grid expansion in areas with difficult geographical conditions or disperse settlements was higher than the energy provision with solar home systems” (Interview 1Q, 2013).

In the documents, it was also found that within the projects’ portfolio, comparing micro hydroelectricity stations and solar energy installations, the latter were more costly (MINAE, 2005; UNDP-GEF, 2011). Moreover, the REP aimed at incorporating micro hydroelectric stations, hence including “the expertise of private developers and other rural distributors”

(MINAE, 2005, p. 96-99). However, preliminary feasibility studies, in selected areas, showed that hydropower potential was lower than expected (UNDP-GEF, 2011).

Therefore, in spite of the higher cost of the SHS, the state company chose this technology with the implications it has for the overall program. As pointed out in project documents: “if the proportion of hydroelectric projects is significantly lower, the implications, in terms of costs and quality of the services provided to the consumers, have to be re-evaluated in the program”

(MINAE, 2005, p. 100). In addition, given the poverty reduction objectives, the SHS were provided to the beneficiaries, at subsidized rates, increasing the cost to project investors.

In part, these difficulties explain the slow progress in the distribution of these systems to the remaining population without electricity. By the year 2002, 1000 solar energy systems were installed in rural communities (MINAE, 2005). According to the ICE’s data, 1325 solar systems were installed in 2006 and by the year 2010 the number of systems reached 1650 (UNDP-GEF, 2011; Interview 1Q, 2010). By the year 2011, the number of households without electricity remained at 13.533 (i.e. 1.1% of total households) (INEC, 2011).

With the Net Metering Pilot Project or distributed electricity generation (DEG), one of the purposes is to promote renewable energy sources at small scales. In a next step, the project seeks to incorporate other state companies and rural electricity providers. However, these companies have been reticent to get involved in DEG.

In interviews to managers at Coopeguanacaste, a rural electricity cooperative that operates in Guanacaste province, argued that existent infrastructure is mainly distribution grid supplied by hydroelectric plants. Therefore, their primary concerns in taking further steps in DEG projects are mainly due potential adverse effects on their core business: energy distribution.

135 Furthermore, since 2010 they are opposed to bill proposals in the legislative that come up to changes in supply electricity to the segments of ‘great consumers’ (FINE, 2010).

Conversely, the first solar energy park is still small (i.e. Miravalles Solar Park, 1MW). The park was not designed to compete or complement other electricity plants, neither in terms of size nor in production. Technicians and operators reaffirmed the following, when assessing the solar parks against geothermal stations of similar size:

“Comparing geothermal energy and solar energy productivity per hectare, solar energy generation capacity is far behind, for example in 30 hectares, the solar energy installation produces 1MW, while one geothermal station in the same area produces 10 MW” (Interview 3J; Interview 2D, 2013).

Nevertheless, state and private investors have expectations to continue developing solar energy installations at larger scales in the future. The benefits of the pilot solar parks in terms of electricity production, low maintenance cost, and avoided carbon emissions, are remarked by project developers (Interview 3J; Interview 5H, 2013). For instance, technicians affirmed that in spite of the relative lower production (e.g. kW per ha.) “the net energy generation of the plant surpassed expectations in terms of kWh during most part of the year” (Interview 5H, 2013).

Even though, the issues of scale and other “gray areas” of the solar technology still need to be clarified. As stated in interviews with project developers and academia, one problem to resolve in the future development of the solar technology is that basic research is conducted at smaller scales, though profits are produced at larger scales (Interview 2H; Interview 2C, 2013). Besides, there are some ambiguities in terms of socio-environmental impacts of the technology (Interview 3L; Interview 1A; Interview 1P, 2013).

Based on this evidence it seems to be clear that in the case of large dams, drivers of scale economies are an incentive for the ICE to expand further these projects. In this way, the ICE could fulfill not only national but also a regional demand with massive quantities of electricity at low cost. This is different in the case of private investors because although RORs can also reach larger scales, the possibilities to profit from scale economies were limited by Law.

Moreover, private producers compete in the national small market (when a bid is open), but they are not allowed to participate in the Central American Electric Market that is exclusive for the ICE. This restriction of the regional market is expected to change in the near future, and both, the ICE and private investors are foreseeing competition in the regional market (Interview 1G, 2013).

136 Even so, the anticipation of the country’s regional competitive advantage, based on “clean”

hydroelectric sources, might not be applicable in the near future. As pointed out by experts during the interviews conducted, other countries in the region have accelerated developments, not only in hydroelectric projects, but mainly in wind and solar energy installations (e.g. in Nicaragua and Honduras) (Interview 2P, 2013). In the case of solar energy, other efficiency logics different from scales economies motivated initial energy decisions in the selection of the technology to achieve electrification, at minimum cost and in isolated areas. Those motivations can be linked to economies of scope (i.e. efficiencies wrought by variety, not volume).¹¹⁵ Nevertheless, over time, scale economies also became relevant in the proliferation of solar technology on a global level.¹¹⁶

The lack of commitment to net metering or distributed electricity generation (DEG) is a central limitation to further advances in the use of the technology. From the statements above, a possible explanation for this might be that DEG is a limitation to the core business of electricity distributors that takes advantage of scale economies from the existent distribution infrastructure.

The fact that there is much controversy, on sizeable consumers, stresses the relevance of larger scales: the profitable segments are those who consume large amounts of cheap electricity. This also points out to other elements of inertia, created by actors, such as vested interests, fixed assets and sunk costs (further expounded in the next chapter).