The fall in the global oil price in recent months has had a dramatic impact on energy pricing. Whilst the near term cost benefits are being felt globally by consumers, energy efficiency from both a demand and supply side is of pivotal importance in ensuring long term energy security and access, and also in mitigating climate change. The need to address energy efficiency is highlighted by the fact that approximately 34 million people in Latin America and the Caribbean (LAC) still lack access to electricity. In order to meet rapidly growing electricity demand, LAC will need to double its installed power capacity by 2030. According to a recent Inter American Development Bank (IDB) report, the region had a population of 590 million, with an electrification rate of 88% – overall, Central America has the highest number of countries at or below this rate, with a combined 8 million people in Honduras, Nicaragua, Guatemala, El Salvador, and Panama lacking access to electricity.
The importance of becoming self sufficient is exacerbated by the level of energy imports that currently support the (albeit inadequate) energy supply in Central America. This burden on national budgets due to expensive fuel imports will continue, causing a vicious cycle in further restricting public funding available to invest in modernising and expanding outdated grid infrastructure. According to the Climatescope 2014 report, Nicaragua has the second lowest percentage of the population in LAC with access to grid generated power at 76%, followed by Guatemala at 82%. Until this much-needed infrastructure upgrade is effectively implemented, the region remains constrained in its ability to effectively optimise and benefit from its diverse mix of renewable power generation with biomass, geothermal, wind and hydro resources.
So, how influential are fossil fuels as a component of energy consumption?
World Bank statistics show that the percentage of net energy imports in Central America has been increasing with the exception of Guatemala, which has fluctuated over the period due to a higher concentration of locally produced hydroelectricity and biomass energy within the country’s overall energy mix. This sector has been stimulated by tax incentives for renewable energy including exemptions on imported equipment and machinery during the construction phase, as well as a 10 year tax exemption on profits. Guatemala also aims to establish an additional 1,770 MW of new electricity generation from renewable energy sources between 2014-2028. Arguably, the failure of Honduras’ publicly owned Empresa Nacional de Energia Electrica (‘ENEE’) has resulted in a higher reliance on imported electricity in an attempt to meet ever increasing demand. The influence of Nicaragua being positioned to access lower petroleum prices via the Bolivarian Alliance for the Peoples of Our America (‘ALBA’) block also explains the elevated level of fuel imports, primarily coming from Venezuela.
Figure 1: Net energy imports (% of energy use) source: World Bank database
A higher reliance on energy imports equates to a higher risk to energy security due to price fluctuations of underlying commodities as well as currency movements, and results in public funds being diverted from other areas. Furthermore, given the high incidence of poverty in Central America, the capacity of these groups to withstand higher prices (where there is energy access) is limited.
An additional consideration is the pressure volatile energy prices place on already negative balance of trade accounts in the region. Data has been difficult to obtain for Honduras and El Salvador, and so trends for Nicaragua and Guatemala have been detailed below in Figure 2. Interestingly, in the case of Guatemala, there is a fairly strong negative correlation coefficient of -0.6 from 1994 to 2011 between net energy imports as a percentage of energy use and petroleum net imports as a percentage of the country’s trade deficit (for Nicaragua the same correlation coefficient is a mild positive 0.4). This suggests as fossil fuels as a percentage of energy use decreases, the trade deficit in Guatemala increases – partially linked to a lower level of exports on a relative basis, which could suggest lower levels of production or lower value of exports. A similar coefficient of -0.7 for Guatemala is found between increased petroleum prices and fossil fuels as a percentage of energy consumption, which indicates a lower level of consumption of petroleum and related products as petroleum prices increase between 1998 and 2011 (data source: World Bank statistics).
Figure 2: Petroleum net imports as a percentage of aggregate trade deficits (sources: Banguat, Banco Central de Nicaragua)
And so – where to from here?
Policy driven initiatives including auctions and feed in tariffs have increased clean energy capacity in the region. In 2013, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama attracted a total of USD673m for new projects. Relative to the region’s installed capacity if 12.5GW, this represents a significant sum. Individual country policy initiatives are supported at a regional level via the regional power market (Mercado Electrico Regional – MER) which allows clean energy in one country to benefit another.
Meeting current energy demands is already challenging in the region, although against the backdrop of growing demand, ageing infrastructure and volatile petroleum pricing, the ability to address these through investment into renewable energy is of crucial importance. Given already stretched national budgets, this responsibility falls outside of public funding and effective policy initiatives are essential in ensuring the required infrastructure is established to underpin energy security. Assuming these initiatives gain traction and incentivise developers to establish this infrastructure, renewable energy has significant potential to enhance access to energy, improve economic production and reduce the reliance of the region on imported fossil fuel sources.