Caribbean & Central America - March 2020

A massive blackout last year brought regional electricity supply to the fore at a pivotal time for the sector.

Periodic power cuts are a fact of life in many parts of the world. However, a range of factors combine in Central America to make the region particularly vulnerable to widespread outages. This was illustrated perfectly on 20 September 2019, when an electrical fault in Honduras plunged the entire country into darkness and also affected Nicaragua, El Salvador, and Guatemala. Experts blamed the catastrophic failure on the weakness of national and regional electricity distribution systems and pointed out the urgent need for hundreds of millions of US dollars in investment to improve them. 

Regional system in dire need of investment

In addition to the obvious question of where that kind of money would come from, energy distribution in Central America is complicated by the 1996 Central American electricity market framework treaty. This deal integrated distribution systems in Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama using a 1,800km power line that runs from Guatemala to Panama. Known as the Central American electrical interconnection system (Siepac), it cost US$500m to build and came online in 2014.

However, transmission systems in the region aren’t strong enough to deal with a fault in the line, which as a result cause overloads and collapse, according to René González Castellón, executive director of the Siepac regional operating agency (EOR). This can be explained as a kind of domino effect in which a fault knocks out one part of the line, flooding other areas with huge amounts of energy that the systems cannot handle all at once.

Faults which lead to regional power outages are rare, averaging one or two per year, but they can be incredibly damaging. For example, a blackout that started with a fault in Panama left almost the whole of Central America without electricity for a few hours in July 2017, and another in January 2019 affected the whole of Panama as well as parts of Nicaragua, Costa Rica, and Guatemala.

These power cuts are devastating for key infrastructure such as the Panama City Metro, which had to suspend services and evacuate passengers in 2017, as well as the Panama Canal and Tocumen International Airport, which had to use generators to maintain service. Outages also affect hospitals and cause economic losses as every electrical system without a backup generator goes down.

Institutional problems abound

While there is a consensus that Central America needs to invest heavily in electricity distribution infrastructure, the situation is complicated. Since the 1970s the region has been gradually interconnecting electricity distribution systems, a process that was accelerated in the 1980s due to damaging power shortages and high electricity production prices due to the cost of oil and coal. This inspired the creation of Siepac, which aimed to improve power infrastructure and make buying and selling electricity easier while reducing generating costs. The idea was to make Central America more efficient and competitive, according to the Italian institute for international political studies (ISPI) think-tank but the system leaves countries at risk of blackouts if faults occur elsewhere in the network.

As things stand, the EOR is responsible for planning the regional transmission network, directing and coordinating technical operations at the regional electricity system (SER) and the commercial management of the regional electricity market (MER). The latter is designed to join national markets together, bound by common rules and authorities, and the agreement allows the six member states to buy and sell energy from each other. González says the system has brought US$500m in benefits in the last four years alone, but others say the MER isn’t working as planned.

Regional coordination is lacking, and member states are pursuing independent strategies, according to María Andrea Higueros Trujillo, a Latin American energy market consultant at ISPI. This means they have been boosting national generating capacity and disregarding the MER, which has led to installed capacity outgrowing demand for electricity. In Guatemala, for example, installed capacity has grown around 85% since 2011, but demand has only increased around 3% per year in that time. González denies that the region has too much capacity, pointing out that not all of it is available all the time. He uses the example of hydroelectric dams, which aren’t always able to produce electricity, and wind farms, which do not always provide power when it is most needed.

Analysts call for serious reforms

González says that the integrated system needs investment, particularly in transmission systems, and a January 2020 EOR study came up with a figure of US$208m. On top of that each country needs to invest in its own national system, which will require even more money. The EOR chief is understandably optimistic about the future of the integrated system, but Higueros is less enthusiastic. She points out that the MER was conceived when energy prices were high, but now things are different. There is now an oversupply of electricity, oil prices have been falling, and the EOR hasn’t proved that it can get regional governments to coordinate. It has also been criticised for changing regulations and prices, damaging confidence in the market and disincentivising a regional approach among national governments. 

Guatemala provides a good example of what is going wrong. The country imports electricity from Mexico, but authorities haven’t been able to agree on a safe limit that won’t cause problems for the regional system. Whenever Guatemala imports more electricity than the MER believes is safe, it disconnects the country from the rest of the network. This in turn affects Guatemalan electricity sales to El Salvador, cutting clients off and denting confidence in the MER. Following a legal dispute, the Central American court of justice (CCJ) ruled that MER authorities should stop disconnecting Guatemala from the system, but Guatemalan companies complain that they are still being prevented from exporting electricity to the rest of the region.

One proposed solution is to change the agreement to allow MER to regulate the Guatemala-Mexico connection, as well as the Panama-Colombia connection in the south. However, in early January Guatemalan electricity companies protested as they want to retain control themselves.

Back to the drawing board

To achieve the original aims of the MER project, deeper integration is needed. BNamericas, a regional business intelligence platform, argues that Central American nations know they are too small to realise economies of scale, and in many of them public funds are limited so public works on the electricity system tend to focus on maintenance and small projects.

Another problem is the lack of an overarching regulatory framework, with different electricity market structures in use. While El Salvador, Guatemala, Nicaragua, and Panama liberalised their markets and opened generation, transmission, and distribution to private companies, in Honduras and Costa Rica state-owned utilities are still vertically integrated and act as a single buyer.

Ramón Fiestas, Latin America director at the Global Wind Energy Council (GWEC), has told BNamericas that a true single market needs to be formed instead of six member nations functioning individually. Both Fiestas and ISPI analyst Higueros would like to see better integration between Siepac and Mexico in the north, and Colombia in the south, but Fiestas does not envisage Colombia investing in such a project in the near term.

Higueros recommends assuring longer terms of transmission rights to encourage long-term investments, and also points out that political wrangling between regional governments is also hurting progress. Fiestas agrees on this point, using problems caused by ongoing social unrest in Nicaragua as an example of how national politics can have a negative impact on regional integration. 

Flashpoint in Guatemala

This was recently illustrated in Guatemala, where the September 2019 decision by former President Jimmy Morales (2016-2020) to fire the directors of the national electricity commission (CNEE) caused uncertainty in the sector.

Following a legal battle, Guatemala’s constitutional court ruled that the trio should be reinstated in their posts, but the damage was done.

Another factor is the inauguration of President Alejandro Giammattei, who came to power on 14 January. In the run up to a 10 January meeting of the regional electricity market directors council (CDMER), which was set to discuss the aforementioned reforms to the MER, Giammattei’s designated energy & mines minister, Alberto Pimentel, implored his outgoing counterpart, Luis Chang, not to agree to any changes. Chang did not sign off on any reforms, and Pimentel will get to have his say on the matter. Pimentel revealed that he plans to give utility companies a chance to communicate their opinion on the changes, and he has said that the CDMER decision making processes should be changed. 

The intervention will push back any reforms, and illustrates the difficulties facing the MER. On the one hand, Central American nations have committed to implementing a regional electricity market, but the current situation is unsustainable. A standardised regulatory framework needs to be introduced, and better regional coordination needs to be developed if the MER is to work as planned. Only once these political aspects are ironed out can Central America really start to deal with the serious infrastructure shortfall that causes outages such as the one in September 2019 in a coordinated way.

Diversifying the energy matrix

In the meantime, individual nations are pressing ahead with a number of projects. One example is a liquid natural gas (LNG)-to-power project in the Salvadorean port of Acajutla, for which Salvadorean company Energía del Pacífico (EDP) secured US$1bn in foreign direct investment (FDI) in early January. The 378MW power plant will connect to the Siepac system and is scheduled to come onstream in 2021, bringing environmental benefits by cutting the amount of diesel and heavy fuel oil El Salvador uses to generate electricity. The country will follow in the footsteps of Panama, which brought its first LNG-to-power plant online in September 2018 in order to diversify away from its heavy reliance on hydroelectric dams, which have been suffering poor generating performance due to a lack of rain. Panama has also seen an increase in the amount of geothermal energy generated, which increased 3% in January-November 2019 compared to the same period in 2018.
Giammattei and Pimentel have also released a 2020-2034 power generation and transport extension plan, which aims to diversify Guatemala’s energy matrix and cut greenhouse gas emissions. The plan also earmarks US$275m for investment in transmission capacity, which will focus on reinforcing the Petén region in the short term.

• Guatemala infrastructure projects

Other planned infrastructure projects for 2025-2029 include strengthening the 230kV grid and Guatemala’s interconnection with Mexico, and the plan categorises liquified natural gas (LNG) as an “interesting option for the country”. While new generating capacity may be necessary to ensure energy supplies, a bigger regional power plant would be more efficient than a number of smaller projects. However, planning and financing such a project may be beyond the current capacity of regional authorities unless structural organisational issues can be resolved