Caribbean & Central America - June 2021

Two energy conferences in May gave Central American government officials a chance to discuss progress in the transition to more renewable energy use and its implications for poverty reduction.

The energy transition refers to the switch from fossil fuels such as coal, oil, and gas to renewables such as solar, wind, geothermal, and biomass. The transition is already underway but there is growing international pressure to speed things up in order to cut greenhouse gas emissions as part of global efforts to combat climate change. The coronavirus (Covid-19) pandemic has thrown many existing plans into disarray, but also provides opportunities to accelerate the transition following a massive drop in global oil demand in 2020.

On 12 May high-ranking government officials from the Central American Integration System (Sica) met for the first high-level dialogue and regional forum on renewable energy and energy efficiency (Sicreee). In a press release, Sica said participants emphasised the need for new energy systems to be resilient to the Central American climate s well as more financial innovation and coordination between public and private sectors to promote the transformation of the energy sector. The energy transition also needs to boost labour market participation of women and young people, said Sica, as well as bringing electricity to isolated areas that have never had a connection before.

Throughout the month of May thought leaders from across the Western Hemisphere met virtually at the XXX La Jolla Energy Conference, an annual event organised by the Institute of the Americas, a US-based NGO. On 21 May, Silvia Alvarado, president of the Guatemala based international consultancy firm Energy Intelligence Consulting, told attendees that Central America had made good progress towards cleaner energy use in the last 10 years. “Central America has been successful in incorporating renewables into the energy matrix of all countries. Costa Rica has been the leader; it has always had a strong commitment to the environment”, Alvarado said. “Steps behind, Panama and Guatemala have conducted electricity auctions in recent years. The region is in good shape. Prices are low and there is an abundance of electricity. A demand boost is needed”.

Salvador Handal, executive secretary of El Salvador’s national energy council (CNE), an autonomous state institution, also told attendees at the La Jolla Energy Conference that the country’s energy transition has accelerated, and it generated more than 90% of its energy needs from renewables between January and March 2021. By 2025 the country will use only natural gas and renewables, Handal said, adding that by 2050 it plans to be carbon neutral. Part of this plan involves a new regulatory framework which will update rules on battery storage and hydrogen power, according to Handal. Both El Salvador and Costa Rica are members of the Hydrogen Congress for Latin America and the Caribbean (H2LAC), a platform that works to promote green hydrogen in the region run by the German foreign cooperation and sustainable development agency (GIZ).

These events follow on from other initiatives which show serious interest in the energy transition in Central America. On 15 February Sica signed a Memorandum of Understanding with the International Energy Agency (IEA), a Paris-based autonomous intergovernmental organisation, which will see the two organisations work together “to expand their cooperation on energy data and statistics, energy efficiency, and climate resilience of power systems”.

Sica also worked with the United Nations (UN) Economic Commission for Latin America and the Caribbean (Eclac) on a report entitled ‘Sustainable Energy Strategy of the Sica nations 2030’, which was published in November 2020. As the report underlines, the countries of the region are net importers of hydrocarbons, with economies that depend on fossil fuels, which make them vulnerable to international oil price shocks which impact transport and other productive sectors and hit the whole population, particularly the poorest families. This makes reform imperative.

The report also emphasises the need for a demand boost, as mentioned by Alvarado of Energy Intelligence Consulting, for example through the electrification of transport networks. The report mentions passenger transport systems such as the metro in Panama’s capital, Panama City, and the electric trains in and around Costa Rica’s capital, San José, but underlines that the main challenge is to electrify goods transport, which is the largest energy consumer in the transport sector. The report’s authors recommend greater regional integration in order to develop an efficient regional transportation system. They also recognise the importance of developing battery storage capabilities in order to make better use of intermittent renewable energy sources such as wind and solar power.

At a country level, Costa Rica leads the Central American nations in terms of current energy system performance and readiness for the energy transition, ranking third out of all Latin American countries, according to the World Economic Forum Energy Transition Index 2020, published in May last year. In Central America it is followed by Panama, El Salvador, Guatemala, Honduras and Nicaragua in descending order. Attracting investment to finance energy transition projects, such as the introduction of electric buses, for example, is a huge barrier. Interestingly, research organisation BloombergNEF’s Climatescope Index 2020, which “evaluates the investment conditions for clean energy in emerging economies and evaluates their ability to attract capital for low-carbon energy sources while building a greener economy”, ranks Costa Rica bottom out of the Central American nations. Guatemala heads the ranking, followed by El Salvador, Panama, Honduras, Nicaragua. Despite its widely touted green credentials, Costa Rica’s energy market is “regulated and dominated by the vertically-integrated Instituto Costarricense de Electricidad (ICE), the country’s major generator and sole power purchaser”, according to Climatescope, reducing its attractiveness to investors.

As mentioned by Sicreee attendees, boosting investment in renewables will help to provide energy to isolated communities in Central America. This is in fact part of the UN Sustainable Development Goal (SDG) 7, under which signatories agreed to “ensure access to affordable, reliable, sustainable and modern energy” by 2030. Central American countries have been lagging behind their Latin American and Caribbean peers in this regard, with Guatemala, Honduras, and Nicaragua all flagged by the UN in a 2019 progress report as lagging furthest behind. Building small wind turbines or installing individual solar panels is much cheaper than running mains power cables to isolated areas, and could help reach full electrification in the region.

The energy transition has also received a boost from outside the region in the shape of US Vice President Kamala Harris, who launched a ‘Call to Action’ for businesses to support economic development in Central America on 27 May. One of the main areas of focus is climate adaptation and clean energy, which includes “commitments to support the region’s resilience to climate change through adaptation and mitigation efforts; support industries impacted by climate change; and transition to clean energy”. Among the 12 companies and organisations that initially signed up is Davivienda, a Colombian bank that has already part-financed the first wind farm in El Salvador, which will supply power to 80,000 homes. The stated aim of the ‘Call to Action’ is to address the root causes of migration from the region by promoting economic development but it appears that the energy transition will benefit as well, even if the initial announcements did not detail any commitments to clean energy investments.

• Benefits

Central America already has a small carbon footprint compared to other regions in the world, but the energy transition could bring major benefits in terms of energy access and efficiency. Regional and international cooperation will be important in order to scale projects for maximum impact, as well as attracting finance for projects that will likely cost too much for national budgets squeezed by the pandemic.

• New natural gas plant in Panama

On 1 June Panama’s President Laurentino Cortizo announced US$1bn investment in the construction of a new natural gas energy project, Generadora Gatún, to be located in Colón province, which will have an installed capacity of 670MW. The project will be constructed by Consorcio Group Energy Gas Panamá, which comprises US-based InterEnergy Group and AES Panamá, a local subsidiary of US energy company AES. InterEnergy Group will own a 51% stake; the Panamanian state 25%; and AES Corporation 24%. President Cortizo said the investment was in line with a newly unveiled plan for the comprehensive development of the electricity sector which seeks to make it more competitive in terms of price and quality and ability to generate cleaner energy.