With a vision of the future focused on its commitment to sustainability, the Central American electricity sector seeks integration whilst promoting private initiatives that favour efficiency. Here are the challenges and opportunities of this industry.

The Central American electricity market is full of opportunities, arising from the economic and populational growth of its countries, electrical interconnection and even the challenges that the region faces in adapting to global changes.

In Central America, as in other parts of the world, both governments and private initiatives are involved in the generation, transmission and distribution of electricity. Most countries have already liberalised their markets, or at least part of them, allowing the participation of private players and promoting competition to improve efficiency and supply - with public companies in charge of hydroelectric and thermal plants, as well as main transmission lines and substations.

Additionally, private, national and international businesses play a crucial role in the development of traditional and renewable energy projects, such as solar, wind, geothermal and biomass.  The vast majority of developments begin with a power purchase agreement or an energy purchase agreement granted by the government, energy distributors and, in fewer cases, final consumers. There are some projects that are launched opportunistically into the market, seeking to take advantage of situations in energy demand and its prices.

Sustainable and interconnected electricity

Although each country has its own regulations, there are integration efforts in different countries coordinated through the Central American Integration System (SICA), aiming to have a shared power grid between the countries. SICA’s integration achievements, particularly in the field of electrical energy, include the Regional Electricity Market (MER) and the Electrical Interconnection System of the Countries of Central America (SIEPAC) that have allowed six out of seven countries in the region (Belize is not currently connected but there are discussions of joining) to have an interconnected power grid through an electrical transmission line roughly 1,790 kilometres long that is operated by a Regional Operating Entity (EOR).

All countries in the region have confirmed their commitments to sustainability, reducing their carbon footprint and evolving towards an energy matrix with greater participation of non-traditional renewables. This was established with the approval of the Statute of the International Renewable Energy Agency (IRENA) – an agency established to promote increased and widespread adoption of sustainable development through renewable energy.

Another interesting element is that the region is attractive for investments from multilateral entities, development entities and economic groups that could offer interest rates that make projects viable and reduce the risks for investors. Of course, this is accessible for those who operate with world-class standards and have strong commitments to the Natural and Social Environment and good Governance.

Opportunities in disguise

One of the main challenges facing SICA’s integration efforts is the diversity of interests and levels of development among member countries. This diversity can hinder the coordination of common policies and generate economic and social imbalances within the region. However, it also represents an opportunity to strengthen regional cooperation and promote equitable and sustainable development that benefits all countries and communities.

Furthermore, the Central American region has experienced internal conflicts and governance problems, which have undermined regional stability and made the effective implementation of integration measures difficult. Yet, continued integration efforts can contribute to building peace and reconciliation in the region, addressing the root causes of internal conflicts and promoting a culture of peace and dialogue.

The dependence and influence of external powers also represent a relevant challenge for the integration of SICA, limiting the autonomy and self-management capacity of the countries. Although, regional integration can strengthen autonomy and allow countries to reduce their external dependence, promoting their own sustainable development agenda.

Likewise, the lack of adequate infrastructure and the region's vulnerability to natural disasters and climate change complications are significant hurdles. But, with investment in resilient and sustainable infrastructure, the countries can improve regional connectivity, boosting trade and investment, and strengthening the region's adaptive capacity.

From our perspective and experience at RSM, we think it is critical that companies interested in participating in this integration challenge recognise as an imperative the need to adopt sustainable and ethical business practices. Improving Environmental, Social and Governance (ESG) performance is key to contributing significantly to the regional integration process. That is, strengthening regional cooperation, as well as promoting peace and reconciliation. Working towards autonomy, sustainability, and building a more prosperous and peaceful future for all the inhabitants of Central America is crucial to the region’s growth. Taking advantage of these opportunities will require continued commitment from SICA member countries, as well as collaboration with international organisations and other regional actors.

If you wish to dive deeper into these opportunities, you can contact Luis Arturo Orellana or Paola Piña directly.