Latin America Initiative Foreign Policy at BROOKINGS CHANGING ENERGY DYNAMICS IN THE WESTERN HEMISPHERE: Impacts on Central America and the Caribbean HAROLD TRINKUNAS POLICY BRIEF, APRIL 2014 entral America and the Caribbean are poten- through the regional mechanism known as Petro- tially great beneficiaries of the energy revo- caribe. Although Central America and the Carib- lution in the Americas and rapid progress in bean face quite different problems on the energy Cenergy technology. Renewable sources such front, in both cases geography, market fragmenta- as solar, wind, and geothermal are becoming com- tion and politics compound the cost problem in en- petitive, particularly in areas remote from existing ergy production and delivery. The two regions have electric grids. Vast quantities of inexpensive natural historically bridged the gap between low income gas are also coming onto the market from sources and high energy costs with subsidized access to oil easily accessible to the region, including Colombia, from regional producers. Subsidized oil was first Trinidad and Tobago, and in the near future, Mex- provided by Mexico and Venezuela through the ico and the United States. These alternatives offer Acuerdo de San José beginning in 1980, and more a greener alternative to thermal power generation recently by Venezuela alone through Petrocaribe from oil-fired plants. Central America also bene- beginning in 2001.4 Acuerdo de San José ceased fits from the Sistema de Interconexión Eléctrica de operations in 2005, and Petrocaribe is increasingly los Países de América Central (SIEPAC), a regional in trouble due to declining production in Venezue- energy grid that enables the trading of electricity la, exacerbated by its economic woes and the high- across the six states in the region and allows new er priority it assigns to oil deliveries to China and energy sources to be shared.1 In addition, the Ca- Cuba.5 Continued Central American and Carib- ribbean states have explored the use of geothermal bean dependence on Petrocaribe is not beneficial energy and of undersea pipelines to use Trinidad in the long run. It creates disincentives for the and Tobago’s natural gas export capacity.2 adoption of new technologies and investment in new sources of energy, and makes Central Amer- Nevertheless, Central America and the Caribbean ican and Caribbean states politically dependent on have the highest electricity costs within the West- Venezuela for their energy security, and therefore ern Hemisphere, along with the highest dependency vulnerable to political pressure. on oil as an energy source. These are also the re- gions with the lowest average GDP per capita in the The power asymmetry between the oil exporting Americas. Yet, with the exception of Trinidad and and consuming countries is particularly acute in Tobago, a major natural gas producer, the region is this region, and it is compounded by the financial a net energy importer.3 incentives provided by Petrocaribe. Subsidized financing has led to rising levels of debt owed to Many countries in the region depend on subsidized Venezuela by the 18 member states. Petrocaribe financing from Venezuela to pay for oil products allows members states to finance 40 percent to 60 percent of their imports from Venezuela over 25 in the form of refined products. Some analyses years at interest rates between 1 percent to 2 percent of future oil prices suggest prices closer to $85- whenever the world price of oil exceeds $50/barrel. $90 per barrel. The volumes of oil flowing out With the exception of a brief window in 2009, oil of Canadian and U.S. shale oil fields are already has been above the price point since May 2005.6 As driving the export of refined products from a result, in some countries cumulative oil import Gulf refineries and creating pressure to lift the debt as a percent of GDP is as high as 50 percent,7 restrictions on crude oil exports. In the long and PDVSA estimates that one third of the Carib- run, Mexico’s energy reforms may result in bean’s foreign debt will be owed to Venezuela by the availability of additional crude and refined 2015.8 Petrocaribe is also not in Venezuela’s long- petroleum products in the Caribbean basin. term interests, since it reduces its oil revenues at a However, in even the best case, paying the full time when it is facing its own economic crisis.9 In market price of oil without subsidized financ- fact, Venezuela has already altered the terms of the ing will entail a very significant rise in present subsidies for its exports to Petrocaribe. Venezuela costs in Central America and the Caribbean. proposed doubling the interest rate to between 2 and 4 percent for newer members Guatemala and 2. Alternatives to Petrocaribe: It may be tech- Honduras, as well as financing a smaller propor- nically feasible to set up new regional supply tion of the oil it sells to Petrocaribe.10 Citing these arrangement to cushion price shocks experi- changes in financial terms, Guatemala withdrew enced by Central American states. This would from the pact in November 2013. Other Petrocari- most likely need to involve regional multilater- be members such as Honduras and the Dominican al financial institutions and Mexico, Colombia Republic indicate that deliveries have become un- and the United States as the other major sup- reliable or fall below agreed to amounts.11 pliers of petroleum products in the Caribbe- an basin. This would hedge against relying on Under the present energy matrix, simply shifting a single source that may experience financial from subsidized rates directly to market prices for volatility and supply unreliability. It would also energy would make Central American and Carib- diminish the political vulnerability of partici- bean economies less competitive to trade pressure pating oil importing states by shifting from a from other regions. This issue will become even single source model to a multilateral model. more salient if the United States is successful in Such a model, however, would maintain the negotiating the Trans-Pacific Partnership and the disincentive to invest in new technologies and Trans-Atlantic Trade and Investment Partnership. to transition to a more efficient and green en- Decreased competitiveness for regional businesses ergy production matrix. It would also have to and enterprises will only contribute to the growing overcome toxic relations between the United attraction of illicit markets and trafficking opera- States and Venezuela. tions across the two regions, both of which are asso- 3. Liquefied and compressed natural gas (LNG ciated with high levels of violence and corruption. and CNG, respectively): Natural gas is relative- ly inexpensive and available for export from Given that existing regional solutions to high en- Peru and Trinidad and Tobago. In the not too ergy costs are under stress, what alternatives are distant future, it will become available in in- available to Central America and the Caribbean? creasing volumes from Colombia, Venezuela, and the United States. Recent studies by the 1. New sources of petroleum and petroleum prod- Inter-American Development Bank show that ucts: It is possible that the North American en- liquefied natural gas and compressed natural ergy renaissance will provide sufficient energy gas are feasible alternatives from a technical at reasonable prices to the region, particularly CHANGING ENERGY DYNAMICS IN THE WESTERN HEMISPHERE LATIN AMERICA INITIATIVE, FOREIGN POLICY AT BROOKINGS 2 and economic point of view for Central Amer- scale that is suited to distributed power genera- ica and the Caribbean, resulting in cost reduc- tion at consumer sites. Distributed small-scale tions to consumers of 15 percent to 20 percent. installations also offer the opportunity to de- velop microfinance alternatives for consumers. In Central America, this will require investing in new gas-fired electricity generation and ei- In the long run, it makes sense for Central Amer- ther interconnections to the gas pipelines of ican and the Caribbean states to transition to an Mexico or Colombia, or the development of energy infrastructure that combines improved ef- an LNG or CNG offloading facility at a region- ficiency, use of renewable energy sources, and nat- al port. Panama currently provides the lowest ural gas power generation to reduce demand for cost options for sea-borne LNG or CNG. In the oil. High Central American and Caribbean energy Caribbean, this will require additional invest- production costs have been a focus of internation- ment in pipelines or ports, power generation al attention for years, yet progress has been slow. infrastructure, and possibly vehicle retrofits to Since 2009, the Energy and Climate Partnership 12 use natural gas. of the Americas has been exploring connectivity 4. Further electric grid integration: Central Amer- among small island states in the Caribbean and ica already has an integrated grid through SIE- has worked to facilitate shifts to renewable sources 13 PAC, but for it to become a source of lower cost of energy. Connecting the Americas 2022 brings energy for this region, it needs to draw on Mex- together the OAS, Inter-American Development ico’s grid to the north or connect to Colombia’s Bank (IDB) and World Bank with a goal to facili- 14 to the south. Both interconnections would pro- tate public-private dialogue. Both the World Bank vide the region access to lower cost electricity. and IDB have focused considerable research effort Projects to accomplish this have been planned on this issue, releasing a series of technical rec- and partially financed, but are not yet a reality. ommendations in the past decade on how Central America can move towards a more cost effective 5. Improved energy efficiency: Both Central Amer- and sustainable energy matrix. Most recently, at the ica and the Caribbean have a considerable way 2014 North American Leaders Summit President to go in ensuring the integrity of their electri- Obama, President Peña Nieto and Prime Minister cal power grids and efficiency in power genera- Harper called for a meeting of their respective en- tion, transmission and use by consumers.