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Giving Andorra power to develop
Energy sector's progress boosts economic evolution

One of Andorra's greatest challenges in diversifying its economy is encouraging new industry, an aim reflected in its energy policy. As part of a long list of incentives, it has sought to diversify its energy sources to provide low-cost, reliable energy.

At the heart of the effort has been Forces Electriques d'Andorra (FEDA), the country's state owned energy company. "In the last three years rates have been cut by about 12 percent and are now among the lowest in Europe," Ramon Cereza, General Manager of FEDA, boasted.

In 1995 FEDA introduced a new rate structure, which for the first time made a distinction between industrial and domestic consumption. "Before everyone paid the same - ski stations, households, store owners - now there are different rates for each group," Cereza explained. Domestic rates were already competitive so cuts have focused primarily on the commercial and industrial sectors.

Strong economic growth has lead to a marked increase in the country's energy consumption. Between 1981 to 1998, energy consumption more than doubled, from roughly 40,000 tons of gasoline and gas-oil to almost 100,000, according to the Ministry of Economy. In the same period, electric power usage rose from 150,000 to 400,000 megawatt hours (MWh).

Managing the increase has challenged FEDA. As the country's only producer and importer of electricity it is responsible for planning and executing the energy infrastructure improvements necessary to meet the swelling consumption. This is no easy task since Andorra has only one hydroelectric power plant - at Salt d'Escaldes. The plant, fed by water collected from the Engolasters Lake, produces roughly 100 MWh a year, insufficient to cover the Principality's electricity requirements. In the last few years, FEDA estimates local production has covered from 25 percent to 30 percent of demand. The difference has been made up with imports from Spain and France.

"The government's goal is to increase internal production by innovative means," said Minister of Economy and FEDA President Enric Casadevall. He explained that recent government studies have shown that Andorra could increase its energy production by 12 percent using wind energy. That prompted the government to evaluate a project to construct twenty wind towers in the mountains Pics de Maia.

Dependence on outside sources led FEDA to sign an agreement in 1988 with Electricite de France (EDF) and Red Electrica de Espana (RDE) to insure electricity supply within a stable rate-making system in the medium term. The deal, in effect for nine years, provided much-needed investment on both sides of the border to adapt the distribution grid to keep up with future growth in demand.

"Although we are looking for new sources [of energy], Andorra will continue to rely on electricity grids connecting Andorra with France and Spain," Ramon Cereza general manager of FEDA said. "That is why we need a guaranteed [electricity] supply not only for commerce but also to accommodate millions of tourists that visit our country every year. The best guarantee we can have is to be connected to the French and Spanish grids."

Imports were formerly split almost equally between France and Spain, but with the agreement up for renewal and Spain's recent liberalization of its electricity market, the balance has tipped in favor of Spanish imports. "The opening of the Spanish market has had a very positive effect for us. Prices are more economical and more in keeping with market trends," Cereza said. Roughly 70 percent of Andorra's electricity imports now come from Spain's Endesa with the remaining 30 percent bought from EDF.

FEDA recently set forward a new and ambitious 20-year investment plan. The plan is aimed at strengthening the network, constructing a booster transformer at the Pas de la Casa and renewal of the Adrall high-voltage line to double its capacity.

A focal point of the program is the improvement of the quality of FEDA's service. In 1998, outages were 42 minutes compared with 10 hours when the company began a little over a decade ago. "In the last 10 years we have invested over 10 billion pesetas ($66.6 million) and we hope to boost that investment by about 1 billion per year," Cereza said. "In a country like the United States this may seem ridiculous, but in the context of Andorra it isn't. It is about 20 percent of the companies' earnings, which last year were about 6 billion pesetas. For us it is a very important investment that we want to continue and hope will bear fruit."

FEDA has also pledged to replace overhead with underground lines. Currently, 62 percent of the network is already underground, compared to 23 percent in France and 20 percent in Spain. Cereza says this has been a focus for FEDA since maintaining the picturesque beauty of Andorra's natural landscape is vital to tourism. "It is important for us to consider the visual impact of electricity lines."

Energizing economic development
Energy sector activity dates back to the beginning of the century when local companies took limited advantage of the countries' resources. In 1929 Andorra's General Council authorized Forces Andorranes Societat Anonima (FASA) -a private company financed by French and Spanish interests- a concession to exploit the country's hydroelectric potential. In exchange for a commitment to build up Andorra's road networks into Spain and France, FASA was given the right to export any additional energy capacity beyond Andorra's domestic consumption, then estimated at a mere 10 percent of overall production.

"FASA was very important to the social and economic development of our country, which until then existed under medieval structures, isolated from its neighbors and with a population whose livelihood was based on agriculture," Cereza said. "It was the stepping stone to what Andorra is today, its economic motor, its revolution. Communication spurred the birth of Andorra's banks and later its commerce and tourism."

As Cereza explained, what in principle was an agreement for a private company to produce energy and make a business from its export became an integral force powering Andorra's development. He stressed, however, that it was a concession conceived only for exports, not the provision of public service needs like domestic infrastructure. "That is why FEDA took over FASA 11 years ago, picking up where the company left off."

Consolidating efforts
As consolidation sweeps through Europe's energy sector, FEDA's role is also slated to expand. Small local companies that had been operating alongside FEDA in distribution are planned to merge into its folds in order to create a single energy company. "FEDA has always had a monopoly in production and import but not in distribution," Cereza explained. He says the new distribution network will enable FEDA, which now has 50 percent of the network, to expand its coverage to 95 percent. In terms of consumption, FEDA will gain 21 percent of the market.

The merger of Nord Andorra and Mutua Electrica de Sant Julia de Loria with FEDA will help the government respond to calls to offer equal service within the whole territory. "There are small companies that have a historical concession for distribution but do not generate enough resources to keep up to date with new technologies," Minister Casadevall explained. He said this has often resulted in a difference in the quality of service between FEDA and the small companies. "We needed to merge in order to make service equal for everyone."

Only two companies have chosen to remain outside the merger, representing about nine percent of the country's electricity consumption.

"Consolidation is good for the company," FEDA's General Manager said. "Not only will it increase its market share but in Andorra, given our dimension, it is a necessity if we want to be competitive and exploit our resources in the most efficient and economic manner. We must come together and unify our efforts - even if it seems current trends are the opposite in Europe and in the United States."

The move will also benefit politicians. According to Casadevall if the company is competitive - FEDA is already a profitable state-owned company - the state can justify keeping it. This, he says, will provide a secure income for a state that does not levy direct taxes. The state will maintain a majority share - 84 percent - in the new company, however, it has already indicated it intends to sell its share in a public offering.

"First we have to make the company competitive, later comes the political decision whether to privatize or turn to the market," Casadevall said. "Just because we are a small country does not mean we don't have to offer the best quality service."

Table of Contents

(1) A young country with an ancient history

(2) Finding Andorra's place in the world

(3) Andorran-US Relations: common hopes, common ties

(4) Andorra At A Glance

(5) Useful Contacts

(6) A pillar of prosperity and security

(7) Shaping a fiscal paradise to fit the times

(8) Voices of Andorra's Future

(9) The pleasure of shopping

(10) Giving Andorra power to develop

(11) Speeding towards the future

(12) A country of contrasts