Caribbean & Central America - October 2022

President Xiomara Castro’s leftist Partido Libertad y Refundación (Libre) government plans to dedicate a huge share of public spending to the energy sector under its proposed 2023 budget, as authorities prioritise getting a handle on the parlous state of the country’s state-owned electricity company Empresa Nacional de Energía Eléctrica (ENEE).

The government owned and operated power company will be designated L58.7bn (US$2.4bn), three times more than the combined funds destined for the ministries of security and defence, underlining how fundamental energy is to Castro’s strategic plan for the country. The budget was approved by the government on 13 September, but it still needs to be ratified by congress.

As things stand ENEE has accumulated huge debts, and its losses are impacting public finances. Castro highlighted the crisis in the company soon after coming to power in January, while in March Energy Minister Erick Tejada told the media that losses of US$1bn are forecast for this year. Fraud and non-technical failures are responsible for the majority of losses, meaning ENEE is one of the least efficient energy providers in Latin America. A government press release dated 8 February 2022 highlights that the company has debts of over L75bn. According to the latest US State Department investment climate statement on Honduras, published in July 2022, ENEE loses more than US$30m every month and its debts are equal to more than 10% of the country’s GDP. To blame are mismanagement, corruption, and exorbitant prices paid to private electricity generators.

In May, the national congress approved a law that designates access to electricity a “public good of national security and a human right,” empowering the Honduran state to take action in the energy sector. The law aims to reduce electricity costs by renegotiating contracts with private generators, and it raises the possibility of terminating the contracts if an agreement cannot be made.

It also calls for the disbanding of the regulating body Comisión Reguladora de Energía Eléctrica (CREE), which will be replaced by a national control centre. Hailing the decision on her Twitter account, Castro wrote: “ENEE is now in public hands for the benefit of the people, they corrupted and indebted it. We will rescue it!”

The CREE released a statement in support of the reform, in which it called for more transparency in the energy sector and the strengthening of the ENEE.

While some sectors such as the national public university Universidad Nacional Autónoma de Honduras (UNAH) came out in favour of the law, others expressed alarm. In an article published 10 May Jesús Humberto Medina Alva, managing partner at local law firm Central Law, told Santiago-based online business news service BNamericas that while energy prices were indeed high, the law was a “setback” for the sector. “When those prices were agreed upon, there was an emergency situation and the generators agreed to quite high prices, they definitely need to be reviewed, but to go from that to a possible termination of the contractual relationship if the generators don't agree with the government … we're already entering into the issue of nationalisation or expropriation,” said Medina, who believes that government control of the grid coordinator Operador del Sistema (ODS), a private company, would be “serious”.

Also in May, US law firm Clifford Chance issued an advisory note warning that the law “does not provide any variables to calculate the compensation in the case of nationalisation of the assets,” and the fact that it “contemplates that the compensation will be paid with government bonds raises potential concerns”. The law could “potentially jeopardise the investments made by domestic and foreign companies in the renewable energy sector,” added the note, which reminded investors that bilateral investment treaties and free trade agreements typically protect against nationalisation. 

According to the US State Department investment climate statement: “The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.”

The law also “damaged perceptions of commercial rule of law in Honduras, increasing state control of the sector and leaving many investors wondering which other sectors will be subjected to government coercion and threats,” according to the statement.

US ambassador to Honduras Laura Dogu sparked a minor spat in criticising the new energy law on 3 May, raising concerns about negative effects on foreign investment and the independence of the energy regulator. In response Honduras’ foreign minister, Enrique Reina, called her comments “misguided,” adding that pronouncements on Honduras’ domestic affairs “do not contribute to good relations with the US”.

Perhaps to ease tensions, US Under Secretary for Economic Growth, Energy, and the Environment Jose Fernandez said on 4 May that Washington was ready to “work closely” with Honduras on necessary reforms. “Taking time to sort out this complicated sector will pay huge economic dividends in the near term,” said Fernandez. 

ODS issued a statement which said that the law addresses issues of national interest such as rescuing ENEE. “However work must also be done to rescue the national electricity sector as a transversal pillar of the economy and this is achieved by promoting investment in generation, transmission and distribution, the legal certainty of which the operation of the system and the administration of the market carried out objectively and transparently is a fundamental part,” it said.

Since the law was passed, the ENEE has signed pre-contract agreements for 12 updated contracts with eight private electricity generators, of a total 28 contracts that are to be renegotiated, as outlined by an article published 26 August by national daily El Heraldo.

Miguel Aguilar, president of the ENEE workers’ union, welcomed significant resources for the energy sector promised in the 2023 budget and called for the money to be invested in electricity systems and better working conditions. Funding improvements to the electricity system is a real challenge for the Castro administration, given that international donors have previously seen millions of dollars in funding lost to corruption. However on 26 September the Central American development bank (BCIE) approved US$450m in loans destined to reduce losses at ENEE and subsidise energy prices.

Tejada has spoken of preliminary discussions with countries such as Japan, Germany, and the US over further financial aid for the energy sector but nothing concrete has emerged as yet. Tejada has also said that the government is working on a new regulatory framework “that provides clear rules, promotes transparency in the relationship with the government and local communities, and that the relationship is beneficial for both parts without any asymmetries, as happened in the past”. He also plans to support the development of biomass and wind projects, while ending hydropower mega-projects that cause social conflicts.

Sorting out structural problems in the energy sector will take years, and the Castro government will be wary of moving too far, too fast so as not to spook international investors and affect the business climate. This could be possible if private energy companies recognise that deep and lasting reforms are also in their interest and contracts can be renegotiated successfully without any expropriations. The early signs are encouraging in this regard, but there remains a lot of work to be done.