Cleaning Up Their Act

A new day is dawning for renewable energy in Central America.

Cheap clean energy has been the holy grail for Central Americans, who pay high prices for electricity despite years of liberalization and significant efforts to develop renewable energy sources.

Central America has bountiful energy resources—including wind, biomass, solar, geothermal and hydrodynamic—and no shortage of projects. There are plans to widen grid connections with Mexico while building them with Colombia to the southeast, thus providing a large market and making future projects larger and more attractive to international players.

However, the sharp decline in electricity demand caused by the pandemic has delayed plans considered key to kick-starting recovery. “Within the developing world, our region has been the hardest hit by the pandemic,” Alicia Bárcena, the executive secretary of the United Nations Economic Commission for Latin America and the Caribbean (Eclac), said at a June conference. “It is time for an energy transition. The transition toward renewable energies is a powerful engine for growth, for combating poverty, creating jobs and contributing to climate action.”

The economic hit from Covid-19 varied by country, with declines in GDP—according to World Bank estimates—ranging from almost 18% in Panama, where an economy based on tourism and services was brought to halt, to 1.5% in Guatemala, where farm exports remained high.

This had a major impact on electricity. “As a result of the pandemic, electricity consumption fell by 3.5% from 2019, the largest fall ever in this millennium,” says Victor Hugo Ventura Ruiz, chief of the Energy and Natural Resources Unit at Eclac’s Mexico subregional headquarters. Electricity demand in El Salvador declined by 7.3%, in Panama 7.2%, Belize 3.6%, Costa Rica 2.7%, Honduras 2.3%, Nicaragua 1.9% and Guatemala 1.1%. As a result of these drops, projects will likely be delayed.

“All the projects that were in the building phase will be delayed, by a few months or at most a year,” Ventura says. “The development of renewables will restart when the economy and the demand for energy restart and when the regulators will authorize the new tenders. I expect this to happen from 2022.”

In April, Guatemala postponed a public tender for a 400-megawatt (MW) energy-supply expansion project that was expected to use at least 60% renewable energy. The reason was that the pandemic would have limited international participation, thereby reducing competition among participants.

Demand for hydropower in Central America fell in the mid-1980s, only to rebound a decade later when renewables came back in fashion. Nowadays, Central America relies on a very high level of renewable energy sources for power generation. The six nations composing the Central American Electrical Interconnection System (SIEPAC)—Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama—had 66% of their electricity generated using renewable sources in 2019.

The renewables percentage was even higher in 2020, says Ventura, due to the end of the drought of the previous two years and 2020’s fall in overall demand. The region plans to bring the share of renewables to above 70% by 2030. Hydro remains the main source of power, well above 40% of the total power generated.

Among the six SIEPAC nations, there are wide differences in adoption of renewable energy. Costa Rica is the poster child of this revolution, generating 99.7% of its electricity with renewables in 2020. Electricity in Nicaragua and Panama, for comparison, is roughly half renewables.

The region also offers a wide variety of business models when it comes to power generation: Costa Rica has a state-run model, while Guatemala, Honduras and Panama have private markets. El Salvador and Nicaragua have a mix of public and private firms.

“Central American countries have made significant progress in the development of renewable energies for electricity generation. However, imported fossil fuels are still an important part of the power mix in several countries and grid losses are high in a couple of them,” says Ana María Majano, an independent consultant on climate change and other sustainable development issues. Honduras has transmission losses above 30% while Nicaragua’s transmission losses are above 20%.

A common issue is that prices in the regulated market remain well above international averages. The rates vary dramatically year to year and often peak in Nicaragua, El Salvador and Panama due to their greater dependence on the global prices of fossil fuels and generation inefficiencies.

“Some of these countries are more vulnerable than others because their energy is more expensive, their plants are less efficient and they depend more on fossil fuels and on climate too,” says Ventura. “In 2018 and 2019 we had a drought that severely impacted hydro production. When all these factors are considered, the two more vulnerable countries are Nicaragua and Honduras. El Salvador is vulnerable too, but they are importing from Guatemala and there is the best interconnection between the two.”

Sometimes Central American countries have adopted new renewable technologies at an early stage, like Nicaragua did with wind and Honduras with solar. That means their wind farms and solar farms are working at higher costs.

Also, “the regulatory frameworks—domestic and regional—are not updated in line with the development of the technologies,” says Rigoberto Salazar Grande, Coordinator of the Variable Renewable Energies Integration Component for the Regional Electricity System at the German development agency Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ).

Instead of using more-up-to-date technologies, inefficient fossil fuel plants are kept alive and funded only to keep rolling reserves meant to supply energy in case of a fall in production of solar or wind energy. “These costs are translated in higher tariffs,” he adds.

High costs of electricity created social tension in several Central American countries despite the wide presence of public subsidies. In Guatemala, this is compounded by a lack of transparency in electricity bills that often include hidden costs, such as the local cost of public lighting, that can double a household’s monthly expenses.

Indigenous people’s protests in Costa Rica a few years ago led to the cancellation of what was meant to be Central America’s largest hydro plant, the 652 MW El Diquís project.

“The issue of ESG [environmental, social and governance concerns] is important not only for funding availability but also for the development of these projects,” says Leopoldo Olavarría, international partner with law firm Norton Rose Fulbright (NRF). Solar and wind distributed generation “have a bright future,” he says. “They require smaller funding and affect smaller surfaces with the possibility of being collocated in remote places.”

Geography sometimes creates huge problems in connecting to the grid from small and remote villages. One case, for example, is Guatemala’s Batzchocola, where a small hydro plant began operations in 2014 to provide for the local population but was not connected to the rest of the grid.

Connecting the regional market to the grids in North and South America remains key to providing larger projects that offer investment opportunities to foreign investors.

In addition to a Mexico-Guatemala grid, which is already working, the Regional Electricity Market Board of Central America (Consejo Director del Mercado Eléctrico Regional de América Central) plans to promote a $405 million connection of Mexico with the Siepac countries, most likely in 2022. At the same time, the Mexican states of Oaxaca and Chiapas look to build a gas pipeline between Mexico and the Central American countries.

On the border between Panama and Colombia, Interconexión Eléctrica Colombia-Panamá, a 50/50 joint venture between Colombia’s state-run Interconexión Eléctrica and its Panamanian counterpart Etesa, is mulling a 500 km (311 mile) connection that would include a 130 km marine stretch.

“The presence of the SIEPAC connection grid and the regional electrical market creates economies of scale and therefore more opportunities for larger investments. It will boost foreign investors’ interest,” says NRF’s Olavarría. “The political climate and the regulatory framework are what matter the most. These countries will make it, including Nicaragua—where recent facts are raising some question marks. Solar, wind and geothermal will keep rising in importance and the price of electricity should eventually fall.”

The export of the hottest form of renewable energy, known as “green hydrogen” (green H2), could represent the next big thing in Central American countries’ exports. Green H2—gas separated from water using electrolysis powered from renewable sources—is essentially emission free and is seen as a clean fuel for cars, trucks and ships, and for heating buildings.

“Of course, there is room—a lot of room—to generate green H2,” says GIZ’s Salazar. It will depend on the development of wind and solar farms devoted to the production of green H2 and supported by geothermal plants. “The production of green H2 in Central America should be designed for export to developed markets such as European countries, for example, while a market is developing in the region that makes local consumption feasible in the medium or long term.”