Commentary
Recently, Ecuador has faced a severe energy crisis, with power outages lasting up to
10 hours daily, affecting millions of citizens. The main causes are a prolonged drought and a highly centralized electricity sector.
The
drought, which has been the worst in six decades, has reduced water levels at hydroelectric dams to historic lows, affecting plants that generate more than 70 percent of the country’s electricity. Most of these hydroelectric plants are operated by Ecuador’s state-owned utility company, CELEC, concentrating energy provision in the hands of the government.
You may wonder why Ecuador is so dependent on hydro for energy. The truth? Efforts to diversify the
energy mix have stalled because of strong resistance to alternatives, a growing
diesel shortage, and missed opportunities to use
gas. This puts Ecuador in a risky spot, with its energy supply tied entirely to rainfall. Ecuador’s one-dimensional approach to energy is only becoming costlier as droughts grow more intense.
The electricity market is traditionally divided into four segments: generation (the production of electricity, such as at hydroelectric plants), transmission (transporting electricity over long distances at high voltages), distribution (delivering electricity to consumers at lower voltages), and retail sales (providing and selling electricity to customers). In Ecuador, these areas are mostly state-controlled.
The Cato Institute’s Gabriela Calderón de Burgos recently published an
insightful piece on the history of Ecuador’s electricity sector. She highlights how it once operated more efficiently under a decentralized model. However, after World War II, the government began to nationalize and centralize the sector, leading to increased state control over electricity generation and distribution by the 1980s.
As de Burgos
writes in another piece, although private entities are permitted to invest in generating their own electricity from various sources, electricity rates remain highly politicized. Heavy state control of pricing has disincentivized private investment, all while the citizens continue to pay the price.
The Ecuadorian Business Committee
estimates that businesses are losing approximately $12 million for every hour without electricity. However, those are only the visible costs. The invisible losses—those that affect productivity and future opportunities—are likely far greater and impossible to measure.
Ecuador’s energy crisis illustrates a broader economic principle: the risks of centralized, state-controlled systems. When vital sectors such as electricity are monopolized by the state, they become rigid and less responsive to external shocks, such as natural disasters. Centralization stifles competition and innovation, restricting the ability to adapt and respond quickly to crises. (More on the inefficiency of central planning can be found in Tibor Machan’s
article from our archive.)
In public debates, some Ecuadorian citizens have romanticized the Socialist Correísmo era (2007 to 2017), arguing that power outages were rare during that administration (more accurately, a dictatorship) and attributing the current crisis to “neoliberalism,” a term broadly used by people who oppose free markets and limited government. However, the reality is that a fully centralized system lacks the flexibility needed to tackle an energy crisis of this magnitude. And although many governments have come and gone since Correísmo, the current model is partly a legacy of that socialized view of electricity.
My colleague Sergio Martínez recently
highlighted on our Spanish social media platforms how countries such as Mexico, Cuba, and Venezuela have all suffered devastating blackouts due to government control of the electricity sector. In these nations, a lack of competition and incentives has led to inefficiencies, higher costs, and an inability to meet rising demands.
By opening the energy market, Ecuador could improve its resilience against future crises, encourage innovation, and ultimately ensure a more reliable electricity supply for its citizens. A more diversified energy market could attract private actors who compete not only on price, but also, more importantly, on reliability. This would ensure a better service for consumers and better responses to crises like this one.
It’s time for Ecuador to power up innovation and competition rather than being left in the dark.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
