Correa takes first steps to make good on his promise to eliminate government subsidies for LP gas and gasoline

President Rafael Correa announced Saturday that the government will end subsidies for LP gas by 2016, when new hydro electric projects go online. He said that consumers will be encouraged to replace gas hot water heaters, stoves, clothes dryers and other gas appliances with electric models.

“This will save the country hundreds of millions of dollars and reduce pollution at the same time,” Correa said in his weekly television broadcast. During the 2012 presidential campaign, Correa said he hoped to end all fuel subsidies by the end of his second term in office in 2017. “We will be like the rest of the world with energy costs being determined by the market,” he said.

He also said that plans are also being developed to eliminate the subsidy for gasoline with details to be announced soon. According to Correa, the LP gas and gasoline subsidies cost the government $3.8 billion annually, with $700 million of that covering LP gas. “We can build 1,000 new schools with that money and have more left over to invest in other public services.”

With the current gas subsidy, the government says, consumers pay only about 8% of the international market rate. The subsidized cost for a 15-kilogram domestic gas tank refill is $1.60, not counting delivery charges. The same refill costs $24.25 in the U.S., $25.87 in Colombia and $19.68 in Peru. The huge price differential has led to a thriving gas black market across Ecuador’s borders with Colombia and Peru, which has sometime disrupted supplies at home.

Correa has long maintained that the subsidy benefited much of the population that doesn’t need it. “Why should the government pay for people in Quito and Cuenca to heat their swimming pools?” he asked.

Correa said that eight new and expanded hydro electric plants will provide more than enough electricty for the country’s needs, and still leave a surplus to be sold to Colombia and Peru. Among the plants under construction are Coca-Codo Sinclair in Napo, Toachi-Pilatón in Santo Domingo, and Delsintanisagua in Morona Santiago. Two Paute generation plants east of Cuenca, which currently supply almost half of the country’s electricity, are being being expanded.

The government is already in talks with domestic makers of gas burning appliances about switching production to electric models. Appliance factories, including Indurama in Cuenca, say they will phase out gas models as the date for the elimination of the gas subsidy approaches.

The government says that consumers will pay the market rate for electriciy but that the government will cover the first 60 kilowatts of household usage per month. A typical three bedroom, two bath home in Ecuador currently uses about 250 kilowatts a month, according to the census office.

Correa said that there will be no prohibition on those who want to continue using gas. “This will be their choice. They will just be paying the same prices that people in the rest of the world pay,” he said.

The government has been in contact with the National Federation of LPG Distributors, the trade association of gas distributors. A spokesman for the association says that the elimination of the subsidy will mean at least 50% fewer jobs. The government says it will work with distributors to find new employment for those affected.

Talks are underway at several government agencies regarding the elimination of subsidies for gasoline, which currently costs 30% to 40% of the international market rate. The government said that some subsidy will continue for private vehicles based on a quota system, but this would be a temporary arrangement. Gasoline subsidies for public transportation vehicles would continue.

Photo caption: Correa addressing a crowd during his Saturday television broadcast.