In the late eighties most of Central American countries made minor investments in the energy sector, suffered several damaging power shortages and experienced fairly high power prices due to the elevated cost of oil and coal. This is the beginning of the story of the Central American Electrical Interconnection System (SIEPAC): an ambitious program set out by Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama to develop their power infrastructure and create an energy-integrated market that could be more efficient and attractive for new investments, improving the region’s overall competitively within Latin-American.
Part of this project involved the interconnection of existing national infrastructure and the construction of new regional power lines, including the future possibility to interconnect the whole region with Colombia and Mexico. It cost US$494 million, and was mainly financed by the Inter-American Development Bank (IDB) – US$ 253M; Central American Bank for Economic Integration (CBEI); Latin American Development Bank (CAF); National Foreign Trade Bank (Bancomex); the regional governments (shareholders in the operational company -EPR-) and smaller investors.
The project also included the creation of the Regional Electrical Market (MER): the main intention was to integrate the region’s national markets into a so-called “supermarket”, implementing common rules and authorities for regional electrical transactions. The project began to operate partially in 2006 and was finally completed in October 2014.
The project was intended to increase and reinforce the stability of the electrical power system, optimizing the use of natural resources (for renewable technologies), developing regional power plants (that could benefit from economy of scale) and lowering electricity prices for users. Today, a few years after MER began to operate, several flaws have emerged that have to be addressed in order to achieve its potential.
Firstly, MER is not functioning as it was envisioned and the region’s energy sector development strategy is not clearly coordinated. Each state, with no coordination among them, has decided to expand its own electric power system, and use nationally generated energy to supply its demand, without taking into consideration the benefits that MER and an integrated energy market could represent in terms of resource allocation optimization. Correspondingly, the region’s installed power plant capacity is growing at a faster pace than the region’s demand for power, leading to an energy overcapacity in the region. Panama for example, from 2017 to 2018, increased its installed capacity by 21.3% and doubled it since 2011, but its power demand grew just 29.4% in the past eight years and less than 0.5% from 2017-2018. Guatemala’s installed capacity increased more than 18% from 2016-2018 and around 85% since 2011, but its demand grew only an average of 3% in that time.
The region’s power capacity is growing faster than its demand (even if some technologies cannot always operate at full capacity) and its growth keeps increasing as governments continue to offer public contracts with incentives to build new power plants. A situation that could, on the brighter side, push inefficient technology to exit the market, leaving only clean and more efficient technologies, but that could also lead to stressing assets and accelerating some of these plants’ slumps towards structural unviability and into non-performing assets for banks. MER was conceived in a high energy price scenario and in the midst of pressure to invest in new renewable technologies, but with national power oversupply, the downward trend in oil prices, and the lack of understanding between governments, MER is becoming a less attractive asset to governments in the region.
Secondly, SIEPAC is also facing operational and institutional difficulties. For instance, one of SIEPAC’s purposes was to be attractive for investment with clear and uniform regulations related to the auction of transmission rights, with fixed prices for the use of power transmission lines in a determined period of time. Yet MER’s authorities are constantly changing the applicable operational regulations and auctioning transmission rights that do not last longer than a year (in the energy sector a short term usually means 5 years) and sometime none at all as a consequence of technical overstress. This leads to a lack of operational stability and legal certainty, making it impossible for private companies to bid for long-term interregional power supply contracts, and offering no incentives to invest in regional power plants. A situation that turned MER – far from being an integrated market that optimizes the use of resources and investment for the region – into a financial market for price speculation.
Finally, there is also a lack of understanding among national and regional authorities. For example, since 2017 the transmission line that connects Guatemala to El Salvador has been disconnected on several occasions because of the lack of agreement between Guatemalan and MER authorities over the safety limits of power imports from Mexico to Guatemala. Each authority claims to have done operational tests that determine the correct amount of MW that Guatemala can inject into its system without affecting MER’s operational system, yet for over two years they have not reached an agreement on it. Therefore, every time that Guatemala imports above the limit that MER authorities consider correct, Guatemala is disconnected from MER, interrupting the agreed transactions between private generators in Guatemala and users in Salvador, causing economic losses and diminishing the users’ trust in the market.
A way forward
Despite the aforementioned shortcomings, the project still has an untapped potential for the future growth of the region.
Firstly, reinforcing the transmission system and assuring longer terms of transmission rights could give the most efficient energy generators the security: i) to make long-term investments, ii) to bid for longer-term contracts with users from other countries, iii) to provide lower prices to users, iv) to expand the use of cleaner and more efficient technologies, and v) to optimize the use of resources in the region.
Secondly, governments need to overcome their political issues, starting to share strategic planning, improving operational coordination and assuring legal certainty for investors.
Last, SIEPAC should concretize the interconnection with Mexico, a fairly new liberalized energy market, that could lead to diverse economic opportunities for generators and its surplus installed capacity, without mentioning the operational redundancy that this would give to the entire region in the case of power shortages. The construction of the second phase of the project would be an opportunity to exploit SIEPAC’s full potential, as already envisioned by the IDB, the main investor in the project.
In the meantime, MER authorities are already conducting a feasibility study for the second circuit of SIEPAC’s transmission line, identifying the infrastructure needed to enhance the region’s exchange capacity and the program to execute associated construction projects.
 Inter-American Development Bank report “Integraciòn Elèctrica Centroamericana.Génesis, Beneficios y Prospectiva del Proyecto SIEPAC” copyright 2017.
 ENEL from Italy trought Endesa Internacional (ENDESA); Interconexión Eléctrica, S.A. (ISA) from Colombia, and the Federal Electrical Commission (CFE) from México.
 From 2013 to 2016 increased in additional 4,199MW (almost the triple of Guatemala, biggest country in the Region, national demand).
 Panama’s National Energy Secretariat report “Resumen de información de energia electrica 1970-2018”