Caribbean & Central America - December 2025

On 10 November the European Investment Bank (EIB), the long-term lending institution of the European Union (EU), said it would provide €1bn (US$1.16bn) in financing to strengthen power grid integration and clean energy across Central America.

The funds will be used for transmission and distribution projects, as well as renewable energy initiatives, said the EIB in a statement. “The operation aims to help the region advance its energy transition and decarbonisation goals, while improving access to reliable and affordable electricity,” it said. There are expected to be five or six sub-operations worth €150m-€350m each, which “will be implemented through framework loans and investment loans with national utilities and regional institutions,” added the EIB.

The aim is to bolster the development of the Central American regional electricity market (MER), which facilitates electricity trade and integration between Panama, Costa Rica, Nicaragua, Honduras, El Salvador, and Guatemala, as well as improving the reliability and interconnection of regional power grids, cutting energy losses, and opening business opportunities for European firms to invest in the region.

The region has had an interconnected electricity grid since 2014, which allowed for the creation of the MER, the aim of which was to lower electricity prices and increase energy security by allowing member states to sell surplus electricity to the grid to make up for shortfalls elsewhere.

However, while generating capacity has increased, investment in transmission and distribution capacity has lagged, leading to regular blackouts that have caused significant economic losses. There has also been wrangling around the rules governing energy sales, and growing tensions as prolonged periods of drought have led to energy shortages in a region that is heavily reliant on hydroelectric power plants. As a result, in 2021 Guatemala announced that it would leave the MER, with the decision coming into effect in 2031 according to the rules of the treaty.

Resolving these issues will require a massive amount of investment and a level of political coordination that has not so far been evident, with work still to be done on harmonising different national regulations. Nonetheless, there is significant support from the EU and other multilateral organisations determined to optimise the MER, including the Inter-American Development Bank (IDB), which was the primary source of financing for the 1,800km transmission line that connects the regional electricity grid. The IDB reiterated its commitment to the project in a statement published in November 2024, which set out a Vision 2050 plan envisaging a massive rollout of solar and wind generation plants. It also estimated that around US$20bn in new investments would be necessary to guarantee operational stability in the coming decades. 

As a result, while the EU announcement is encouraging, far more money will be needed to achieve the stated aims of the architects of the MER, who also plan on building out new connections between Guatemala and Mexico; Guatemala and Belize; and Panama and Colombia. It is possible that more funding will be forthcoming from the EU under its Global Gateway Investment Agenda (GGIA), which aims to drive investment in green and digital opportunities in Latin America, but that will likely depend on the successful execution of this first round of projects.

Even if transmission and distribution projects improve stability in the rest of Central America, Nicaragua would remain an issue. The country will not benefit from EU financing as it has become an international pariah in recent years amid deepening political repression, but restricted access to funding would likely leave the country as a significant weak point in the regional electricity network, increasing the risk of continued blackouts. As a result, there are significant political challenges to improving regional electricity integration, in addition to technical and financial ones, at a time when electricity demand is forecast to increase as the energy transition progresses, and there is more demand for cooling technology such as air conditioning as climate change intensifies.