Unplugged

Despite promises and some progress, the creation of a Central American electric grid and market has been slowed by the inertia often associated with large-scale projects and the difficulty of reconciling the primacy of domestic markets with grander notions of regionalism.

Jeremy M. Martin

he integration of Central America’s fragmented electricity mar- ket has always seemed a no-brainer—at least to outsiders. A seamless grid for delivery of electricity would not only make regional power generation projects affordable, but would also reduce costs to consumers and governments alike, as well as strengthen energy security at the national level. The foundations for a robust regional electricity market were, in fact, T laid by a regional treaty in 1996, establishing the Sistema de Interconex- ión Eléctrica de los Países de América Central (Central American Electrical Interconnection System—siepac), which aimed to knit together the elec- trical grids from all six countries. But the original target completion date of 2008 was not met. Although several key pieces of the regional market are under development, the plan has fallen victim to regulatory bottlenecks and the shifting politi- cal priorities of individual governments. The unfortunate result: Central America’s electricity markets remain mostly within national boundaries. ESTEBAN FELIX/AP

AMERICASQUARTERLY.ORG SUMMER 2013 Americas Quarterly 103 Central America Unplugged JEREMY M. MARTIN

idb review of the siepac investment indicates that a “high level of integration” of the energy market will, in fact, more than pay for itself over time, delivering the benefits of region-wide cooperation and long-term planning to the region’s future electric generation capacity and market op- erations. Just as significantly, re- gional power integration is likely to help reverse Cen- tral America’s dependence on oil imports, which av- eraged $10 billion per year over the past three years Power play: (from left) Presidents Martín Torrijos of , Antonio Saca of El and surpassed $13 billion Salvador, José Manuel Zelaya of , and Vicente Fox of at the inau- in 2011. As the 2011 spike un- guration of a new electrical supply power plant in Panama on July 11, 2006. derscores, the dependency has also exposed the region to price fluctuations. Cen- The central obstacle to moving from blueprint to real- tral America’s fossil fuel imports include sizable consump- ity is the lack of political will at the highest levels to ad- tion by the region’s transport sector, but they also make dress the complex challenges required to complete the up a significant share of electricity generation, particu- regulatory interfaces among the six countries’ systems. larly diesel and bunker fuel. And that, in turn, requires each of the governments to Since 1990, Central America’s electric generation mix think beyond the short-term costs of such a project and has gone from one-third thermal-based to almost half contemplate the long-term regional benefits. today. The growth in thermal generation has arguably That won’t be easy. Bridging the diverse markets will come at the expense of hydropower, a renewable re- require more than just presidential attention. One of the source and one generally abundant in Central America. fundamental challenges is setting up a regional market A more seamless regional market will provide incen- and regulatory system in which political intervention tives for medium and large-scale generation projects and assists rather than impedes integration. Moreover, the investment that could displace many of the diesel fuel- framework must foster constructive political participa- based power plants belching smoke and carbon diox- tion to facilitate and demonstrate long-term benefits for ide across the region today. An integrated market could the region’s electric system and, in turn, its consumers. also open a previously nonexistent avenue for access to Despite such formidable obstacles, there’s reason to be natural gas supplies and gas-fired generation. The natu- optimistic. The grid’s anticipated impact on energy costs— ral gas boom in the United States and the possibility of and its potential to reduce electricity-sector investment liquefied natural gas (lng) exports to its free trade part- requirements by already-taxed treasuries across the re- ners in Central America may create further incentives gion—has made the project hard to dismiss. The Inter- for regional integration and provide a powerful boost American Development Bank (idb), a long-time proponent to the construction of regional-scale electric generation and financier of Central American electricity integration projects—in this case natural gas-fired power plants. Re- efforts, estimates a 10 percent to 15 percent reduction in gional authorities are optimistic about the potential for average incremental electric generation costs through natural gas imports to reduce the region’s reliance on oil.

the siepac project. But perhaps most importantly, an Discussions of possible lng import projects in the re- HERRERA/AP TITO

104 Americas Quarterly SUMMER 2013 AMERICASQUARTERLY.ORG JEREMY M. MARTIN Central America Unplugged

gion are already under way. Reliable power supplies from allow a small amount of private power generation, though natural gas would help reduce emissions from the current the power market remains state-dominated and the na- diesel load and, in turn, permit the inclusion of more local, tional power company—Instituto Costarricense de Electri- though typically intermittent, renewable energy power cidad (Costa Rican Electricity Institute—ice)—functions generation and a more diversified power generation mix. as a monopoly, retaining its vertically integrated structure and acting as a single buyer. The small percentage of pri- Business and Politics vate power produced in is facilitated through entral America is divided into six national an independent power producer project scheme and by electricity markets, each with different law is capped at 15 percent of generation. levels of economic development, infra- The variations in implementation of reforms, as well structure and preferences. Across the six as the evolution of respective electric markets, have nations (for a variety of reasons, is complicated integration. The different degrees of com- Ctypically omitted from these discussions), petition within electricity markets across the region re- the electricity sectors vary greatly—from main a hurdle to the successful operation of a regional fully competitive wholesale generation markets, such market. There’s a perception, for example, within the as in , to monopolistic, vertically integrated countries that have opened their domestic markets to utilities that act as single buyers for—and single sell- competition and private participation that they would ers to—their nation’s power demand, as in Costa Rica. be at a disadvantage in the regional market. The differences derive from each country’s specific po- This issue is compounded by what some consider a litical context. lack of reciprocity between countries. In other words, During the 1990s, countries in Central America im- there is little confidence that opening your electricity plemented a series of electric-sector reforms that were market to a neighbor will earn similar access for your aimed at reducing the role of the state in the sector. own power generators. Striking the appropriate balance Certain market segments were opened to competition between regional regulatory and domestic interfaces and to increasing private participation and investment. with the regional market is paramount for reducing The reforms had important but different outcomes these concerns and tensions. across the region. Guatemala, , Panama, and Ni- The treaty creating siepac, however, established one im- caragua moved away from a so-called vertically integrated portant principle. Under the treaty, all six nations agreed structure by “unbundling,” or separating, electricity gener- to establish a seventh regional electricity market, the Mer- ation from transmission cado Eléctrico Regional and distribution, which (Regional Electric Mar- largely opened the three ket—mer), which would power market segments permit exchanges of elec- to competition and pri- THE DIFFERENT tric power across the ex- vate investment. isting six markets, using In Honduras, legis- DEGREES OF the siepac and enhanced lation aimed at unbun- national transmission dling some segments competition within infrastructure, such as made little progress. As electricity markets transmission lines and a result, the state-owned substations. power system today con- across the region The treaty and two tinues to function as a de subsequent protocols facto single buyer of elec- remain a hurdle to ratified by all six na- tricity and is responsi- tions provided the legal ble for meeting national the operation foundation and specif- power demand. OF A REGIONAL ics for the institutional Costa Rica made mod- and physical infrastruc- erate changes to its na- MARKET. ture under which inte- tional electric policy to gration has taken place.

AMERICASQUARTERLY.ORG SUMMER 2013 Americas Quarterly 105 For many, it also marked GIVEN THE vary greatly by country a new era of political and and have huge fiscal im- economic collaboration HISTORY OF THE pacts for the individual on the isthmus. The countries, but often pro- treaty also created the region, thinking vide little relief for their institutional, legal and about energy in citizens’ pocketbooks. technical mechanisms Simply put, domestic pol- to facilitate regional in- terms of “who wins” itics and markets trump tegration according to the considerations of the three guiding principles: and “who loses” broader regional mar- gradualness, reciprocity undermines Central ketplace. and competition. Economic growth The final market rules AMERICAN and concurrent energy and regulations for mer demands have in many went into effect on June STABILITY. ways tightened supply- 1, 2013. Meanwhile, mer demand balances across has also begun realizing the isthmus and thus fur- regional electricity ex- ther limited the capacity changes—essentially, spot market transactions. Other and political desire to exchange electricity. Worse, it has advances have included ramping up supporting institu- reinforced in some minds the need for limits on cross- tions in accordance with the project’s mandate, particu- border power exchanges. larly the two regional regulatory bodies: the Comisión Complicating the increased domestic demand driven Regional de Interconexión Eléctrica (Regional Electric In- by booming economies have been the extreme weather terconnection Commission—crie) and the Ente Opera- patterns that have hit the region’s large hydropower out- dor Regional (Regional Operating Agency—eor). put. Moreover, limited regional transmission rights do crie, set up with offices in Guatemala City, serves as not provide the level of certainty for long-term contracts regulator for the new regional wholesale market, and and regional supply arrangements that are essential to its board comprises one representative from each coun- establishing a robust regional power market. try. The eor acts as the operator and administrator of Indeed, not the least of the challenges derived from regional power transactions and its board includes two domestic politics and concerns about energy security is members from each country. the necessity for each country to determine and achieve Despite the fact that the project has gone well beyond the appropriate mix of competition and regulation in its original 2008 target completion date, the transmis- its national electricity market. sion infrastructure is now virtually complete. A few ki- Energy will also weigh heavily on foreign policy con- lometers in Costa Rica are left to be constructed. Central siderations in each capital. Policymakers fear being seen American officials are optimistic that these final seg- as surrendering their political sovereignty over such a ments will be completed before the end of 2013. strategic resource as power. It has not been uncommon in domestic political debates about developing power The Triumph of Domestic Concerns plants and domestic electric supply contracts to oppose nergy security can be defined in many fully linking them to the regional market. A recent pub- ways. The most relevant definition per- lic auction to supply 350 megawatts of electricity in El taining to Central America relates to the Salvador explicitly stipulated that only 70 megawatts idea of “defense of the domestic economy.” could be supplied by imports—that is, power from re- This concept implies subordinating gional projects located outside the country. Eother policy goals to a more aggressive pur- Focusing on short-term interests instead of long-term suit of domestic supplies, price controls benefits is not unique to the region. But given the com- and trade restrictions. Not dissimilar from many devel- plicated modern history of the region, thinking about oping economies, price controls and subsidies are a ma- energy in terms of “who wins” and “who loses” only un-

jor part of the Central American energy narrative. They dermines the broader goals of Central American stability.

106 Americas Quarterly SUMMER 2013 AMERICASQUARTERLY.ORG JEREMY M. MARTIN Central America Unplugged

Getting Plugged In try discriminate against its neighbors in energy terms. ne might imagine a long list of rec- Guided by this premise, two specific recommenda- ommendations for advancing Central tions may help: America’s electric sector and the goal of Promote an understanding across each of the six na- regional electric integration. But many 1 tions at both the political and general public level of of the issues boil down to one broad the long-term benefits of regional cooperation—princi- Oimperative: deepening regional cooper- pally more secure, reliable and cost-effective access to ation and understanding. The continu- electric supply—while recognizing that balancing these ing inability of Central American countries to recognize goals with the short-term costs will differ for each nation. their interdependence is a pressing regional problem. Foster a regional mindset that emphasizes the idea Tackling this requires nothing less than what could 2 that regulatory harmonization does not mean ho- best be described as a consciousness-raising effort. That mogenization—i.e., it is possible to create regional ben- will involve skillful diplomacy at home, which, in turn, efits while accepting some differences in how the six means persuading a skeptical public that sharing power nations serve their individual needs. is in its long-term interest. Individual decisionmakers But there is one more critical confidence-building step. need to be persuaded as well. A public education cam- Independent regulatory institutions, including those paign demonstrating the benefits of a regional elec- that reflect national and regional values, are necessary tricity market would address the large knowledge gap for the success of a regional market. siepac responds to between policy experts and policymakers. some of the challenges posed by the region’s regulatory Practitioners within the ministries of energy and and political differences, but without a concerted effort national and regional regulatory bodies across Central across the isthmus to form fully functioning and inde- America are very knowledgeable and very honest about pendent institutions, the “high level of integration” en- the lack of harmony caused by policies in their own visioned by the idb will remain just wishful thinking. nations. But harmonization will remain unachievable while citizens continue to demand benefits only in the Jeremy M. Martin is director of the Energy short term, and more so if they insist that their own coun- Program at the Institute of the Americas.

JUST THE FACTS

IEPAC is a roughly future second circuit. Of Proprietaria de la Red the participation of each 1,800-kilometer the approximately 1,800- (EPR), the company rep country’s electric company Selectric transmis- kilometer length of the with owning, operating in charge of transmission. sion line project project, the countries of and constructing the These companies are: that will run from Panama Central America will have project. INDE in Guatemala, CEL to Guatemala and connect the following segments: A consortium of private and ETESAL in El Salvador, the electric systems of all Guatemala: 282 km; El Sal- and public companies ENEE in Honduras, ENATREL the countries of Central vador: 287 km; Honduras: from Central America, in , ICE and CNFL America. The project con- 270 km; Nicaragua: 309 Mexico, Colombia, and in Costa Rica, and ETESA in sists of 15 substations and km; Costa Rica: 489 km; Spain, EPR was established Panama. The consortium 230KV high-tension trans- and Panama: 151 km. in 1998 in accordance with also has three extra- mission lines that allow for Since 1998, the a 1996 regional treaty, regional shareholders— capacity of 300MW in both project’s transmission and since 2002 has been Comisión Federal de directions at the outset, infrastructure headquartered in San Jose, Electricidad (CFE) from but will also include tower implementation has Costa Rica. Mexico, Endesa from Spain infrastructure to enable a been led by the Empresa The company relies on and ISA from Colombia.

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