By the Blouin News Business staff

Argentina restores much-needed balance to energy mix

by in Americas.

Argentine President Mauricio Macri. Source: Pro Argentina/flickr

Argentine President Mauricio Macri. Source: Pro Argentina/flickr

Argentina’s new president Mauricio Macri is putting the country’s broken finances back together, and energy is a top priority. New wholesale electricity prices went into effect nationwide on Monday, to be reviewed again in six months. In announcing them on Friday, Energy Minister Juan Jose Aranguren noted that some consumers could see their electricity bills increase five-fold.  (The federal government only controls the retail electricity rates in the capital, Buenos Aires, and its suburbs, but they comprise the single largest population center in the country, accounting for about a third of Argentina’s 42 million people.)

However, these won’t be wallet-busting reforms. Under the new rates, a household in Buenos Aires that consumes 180kw per month would see its bill rise to 150 pesos (slightly under $11) from the earlier price of 25 pesos (which Aranguren pointed out was roughly the same as a cup of coffee). Such ridiculously cheap subsidized electricity was politically popular and good for firms’ operations, but the rates encouraged wasteful overconsumption.

Furthermore, the gaping budget deficit that Macri inherited from his predecessor Cristina Fernández de Kirchner was in large part due to massive long-running energy subsidies. The government has spent $51 billion on power subsidies since 2003; around $10 billion (just under 2% of GDP) was spent in 2015 alone. Aranguren said that a near total freeze on electricity tariffs in parts of the country for many years – amid double-digit inflation — had left the power grid “on the brink of collapse.” But now these sizable rate increases should help Macri’s administration in its goal of trimming $4 billion off of the subsidy tab this year.

While the new rates are an improvement, they should be upped further to balance out the real costs of generation and usage. Thus, they are probably the first of several tariff increases to come over the remainder of Macri’s term.

Meanwhile, last week Chile agreed to supply Argentina with more energy as of May. Chile will sell 5.5 million cubic meters of LNG per day to Argentina, accounting for over 20% of what the country currently consumes. Chile will also provide 200MW of electricity through an interconnection system located in the north of both countries. Lastly, Argentina and Chile also committed to expand investment in the Incremental Project of the Magallanes Area (in the far south) to produce more oil and natural gas.

Argentina’s own massive gas deposits (the second largest in the world after China) still need much more investment and time to bring to large-scale production. However, local production has been rising  — state-controlled firm energy YPF recorded a 14.2% gas production rise last year. This bodes well for the government’s finances because it means correspondingly fewer gas imports. Even better, the price of imported gas (mainly from Bolivia) has fallen significantly with some correlation to the global drop in oil prices. Thus while LNG imports rose in 2013 and 2014, last year they fell 29%, and together with the drop in oil and gas prices, Argentina’s 2015 imported gas tab was half of what it paid in 2014.

And with state-controlled prices for new domestic natural gas roughly 50% more than imported gas costs, and domestic oil production set at $67.50 for 2016 (more than double the prevailing global price), Argentina’s domestic production is sure to rise. All the more so now that financially-responsible, business-friendly Macri is in power.