Honduras: Power Sector Issues and Options Issues Sector Power Honduras: Formal Report 333/10 Honduras: Power Sector Issues and Options May 2010 Formal Report 333/10 Report Formal Energy Sector Management Assistance Program 5176-COVR.pdf ii 5/19/10 1:11 PM Green Initiative Environmental Benefi ts Statement The Energy Sector Management Assistance Program, together with the World Bank, is committed to preserving endangered forests and natural resources. To this end, this publication has been printed on chlorine-free, recycled paper with 30 percent postconsumer fi ber in accordance with recom- mended standards for paper usage set by the Green Press Initiative, a nonprofi t program supporting publishers in using fi ber that is not sourced from endangered forests. For more information, visit www.greenpressinitiative.org. 5176-COVR.pdf i 5/19/10 1:11 PM Formal Report 333/10 Honduras: Power Sector Issues and Options Energy Sector Management Assistance Program 5176-FM.pdf i 5/19/10 1:12 PM Copyright © 2010 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, NW Washington, DC 20433, USA All rights reserved Produced in the United States First printing May 2010 ESMAP Reports are published to communicate the results of ESMAP’s work to the development community with the least possible delay. Some sources cited in this paper may be informal documents that are not readily available. The fi ndings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank or its affi liated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The Boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP Manager at the address shown in the copyright notice above. ESMAP encourages dissemina- tion of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. 5176-FM.pdf ii 5/19/10 1:12 PM Contents Acknowledgments ix Currency Equivalents xi List of Acronyms xiii Executive Summary xv Part A—The Electricity Sector Diagnostic 1 1. Financial Situation of ENEE 3 Income Statement 3 ENEE’s Cash-fl ow Performance 6 Financial Indicators 7 2. Fiscal Impact 9 Electricity Subsidies and Financial Losses 9 Equity Contributions and Net Transfers to ENEE 9 Tax Exemptions 10 3. Reliability of Power Supply 11 Retrospective 11 Generation Expansion 17 4. Institutional Arrangements and the Regional Power Market 25 Introduction 25 The Sector Reform of 1994 25 5. Pricing Policies 33 Electricity Price Setting 33 Need to Update Tariffs 33 Comparison with Economic Costs 34 Comparison with Central America’s Tariffs 34 Subsidies 34 Normalizing ENEE’s Tariffs 37 6. Access to Electricity 41 Introduction 41 The Institutional Framework 42 Existing Social Electrifi cation Policies and Regulations 42 Current Coverage of Electricity Service 43 Level of Investment and Sources of Funding 44 Electrifi cation Challenges 44 iii 5176-FM.pdf iii 5/25/10 10:33 AM HONDURAS: POWER SECTOR ISSUES AND OPTIONS PART B—POLICY OPTIONS TO MEET SECTOR CHALLENGES 47 7. Improving Sector Effi ciency 49 Good Corporate Governance and Management of ENEE 49 Developing a Competitive Wholesale Power Market 53 Improving the Institutional Arrangements 56 8. Ensuring Financial Sustainability 59 Cost of Energy Purchases 59 ENEE’s Investment Program 60 Financial Projections 62 9. Improving Electricity Coverage 67 Assessment of Electrifi cation Policies 67 Identifying Investment Needs 68 Analysis of Tariffs and Subsidies—Recommendations for a Sustainable Scheme 70 10. Diversifying Energy Sources 75 Development of Large- and Medium-sized Capital-intensive Projects 76 Development of Small Renewable Energy Projects 80 Expanding Energy Trade with the Regional Market 81 Energy Effi ciency 82 Annex 1: ENEE’s Financial Situation—Detailed Analysis 85 Drop in Hydroelectric Generation 85 Average Price of Energy Purchases 86 The Surge of Thermal Generation Using Diesel Oil 87 Investment 91 Balance Sheet 91 Annex 2: Government Transfers to ENEE 99 Annex 3: Reliability of Power Supply 101 Present Generation Capacity and Supply and Demand Balance 101 Distribution Improvements: The Seven Cities Project and Other Measures 101 Generation Expansion—Assumptions and Details 107 Generation Candidates 108 Annex 4: Historical Background 115 ENEE’s Creation and Golden Years—Crisis and the Electricity Law 115 The Legal Framework 116 National and Regional Power Markets 118 Annex 5: Pricing Policies 125 Honduras’s Electricity Pricing System 125 Annex 6: Electricity Coverage Index by Department, 2006 133 Annex 7: Financial Projections—Assumptions and Detailed Results 137 Cost of Energy Purchases 137 Financial Projections 139 iv 5176-FM.pdf iv 5/25/10 10:33 AM Contents Annex 8: Increasing Access to Electricity 149 Estimates of Investment Needs for Three Off-grid Scenarios 149 Policy Options with Tariff and Subsidies 157 Annex 9: Development of Renewable Energy and Energy Effi ciency 165 Renewable Energy 165 Institutional and Financial Challenges of Renewable Energy 170 Barriers to the Development of Small On-grid Renewables 173 Partnerships to Overcome Financing Constraints 173 Relevant International Experience in Renewable Energy 174 Potential for Energy Effi ciency Alternatives 179 Experiences with Energy Effi ciency Programs in Honduras 183 Assessment of the Honduran Experience 186 Boxes Box 5.1 Electricity Tariff Principles and Tariff Setting under the Electricity Law 33 Box 7.1 The Corporate Governance of State-owned Enterprises 49 Box A9.1 El CATEX Case Study: Process Transformation in the Textile Industry to Leverage Co-generation Potential 184 Box A9.2 Sale of Compact Fluorescent Lamps Case Study: Joint Project by UREE and the Dutch Agency for Cooperation, 2000 to 2003 185 Figures Figure 1 Supply/Demand Balance 2007–2010 xvii Figure 2 Financial Projection 2007–2010, Business as Usual Scenario xviii Figure 3 Electricity: Percent Distributional Losses xx Figure 1.1 ENEE’s Income Statement 3 Figure 1.2 Honduras Energy Balance and Losses 2001–2006 4 Figure 1.3 Energy Purchase Price vs. Fuel Price; Amount of Energy Purchases, by Fuel 5 Figure 1.4 Energy Supply Costs and Prices 5 Figure 1.5 Sources and Application (in million Lps) 6 Figure 3.1 Generation Capacity (MW) in December 2006 11 Figure 3.2 Electricity: Average Duration and Frequency of Interruptions per Connection 16 Figure 3.3 Peak Demand 20 Figure 3.4 Fuel Prices, 2007–2020 21 Figure 4.1 Electricity: Residential Connection and Energy Sold per Employee 27 Figure 4.2 Percent Interconnection Capacity, 2005–2007 30 Figure 5.1 Historical Trend of Average Tariff in Nominal and Real Terms (Lps/kWh) 34 Figure 5.2 Electricity: Average Residential and Industrial Tariff (per GWh, in dollars) 36 Figure 5.3 Electricity: Energy Sold per Connection (GWh/yr) 37 Figure 6.1 Electricity: Coverage 41 Figure 8.1 Monthly Energy Balance, 2007–2015, Base Case 60 Figure 8.2 Fuel Costs and Fixed Costs, Thermal Contracts, Base Case, 2007–2014 60 Figure 8.3 Average Energy Purchase Cost 61 Figure 10.1 International Fuel Prices 77 Figure A1.1 El Cajón Reservoir Level 86 Figure A3.1 Energy Loss in Percent, Twelve-month Average 107 Figure A5.1 Relationship between Sale Price and Cost per kWh 127 Figure A9.1a Demand Curve in Tegucigalpa and Comayaguela for a Typical Workday 182 Figure A9.1b Demand Curve in La Ceiba for a Typical Workday 182 v 5176-FM.pdf v 5/19/10 1:12 PM HONDURAS: POWER SECTOR ISSUES AND OPTIONS Figure A9.2 Average Residential Consumption in Various Central American Countries, kWh/month 186 Figure A9.3 Average Electricity Consumption and Price (US$/kWh) in Central America 187 Tables Table 1 ENEE’s Financial Projections (2007–2010) xix Table 2 Breakdown of Commercial Losses, in Percent xx Table 3 Summary Results Tariff Adjustment Options xxi Table 4 Honduras Power Market Development xxiv Table 5 Summary Matrix of Objectives and Short- and Medium-term Options xxviii Table 6 Summary Results Scenarios xxxi Table 1.1 ENEE Accounts Receivables 7 Table 1.2 Percentage of Amount Billed in February 2006 Collected up to 12 Months after Billing 7 Table 1.3 Key Financial Indicators that Summarize ENEE’s Financial Performance 7 Table 2.1 Annual Electricity Subsidies (in million Lps) 9 Table 2.2 Equity Contributions and Transfers to ENEE (in million Lps) 10 Table 2.3 Tax Exemptions (in million Lps) 10 Table 3.1 Power Generation and Peak Demand (in MW) 12 Table 3.2 Energy Generation, Sales, and Losses (GWh) 13 Table 3.3 Equivalent Outage Duration in Hours 15 Table 3.4 Peak Shaving in MW in 2003 16 Table 3.5 Breakdown of Commercial Losses, in Percent 17 Table 3.6 Peak Demand Projections: Three Scenarios 19 Table 3.7 Peak Demand Balance 2007–2010 (in April of EachYear) 20 Table 3.8 Generation Expansion Plans, 2007–2015: Capacity Additions (MW) 22 Table 3.9 Generation Expansion Plans 24 Table 4.1 Large Consumers 29 Table 4.2 Electricity Traded in 2007 in Central America (GWh) 31 Table 5.1 Comparison of Unit Costs, Tariffs (with Cross