Honduras: Energy Opportunities Are Vast, But Risks Remain

Honduras: Energy Opportunities Are Vast, But Risks Remain

Honduras: Energy Opportunities Are Vast, But Risks Remain

Honduras is in the middle of an energy reform. It passed the Electric Law in 2014, which aims to attract private investment, improve efficiency, and ensure transparency. The reform was also prompted due to large non-technical losses and the high level of debt of the state-owned company Empresa Nacional de Energia Eléctrica (ENEE)

The law also decentralized the electric system. Before the electric law, ENEE controlled transmission, distribution, and most of the generation. In fact, at the beginning of 1990s ENEE owned 98% of all generation in the country.

 

Renewable Energy Framework

Although Honduras is still transitioning from the old scheme and crafting a stronger legal framework, the 2014 Electric Law has already created instruments to bolster investor confidence in the country. The Law establishes that all new capacity will be contracted through Power Purchase Agreements (PPAs) allocated via auctions. These will be regulated by the Energy Regulatory Commission (CREE by its acronym, in Spanish) that serves as grid operator as well. In addition, it encouraged the creation of the Public Private partnership Empresa Energía Honduras (EEH), which operates the national distribution grid since 2016.

The creation of independent agencies such as the CREE, the establishment of auctions as a contracting mechanism, and the outsourcing for distribution operation through EEH build trust and confidence across international private investors.

It is important to note that before the current regulation, generation was partly liberated by 1994 when the Electricity Subsector Framework Law of 1994 was enacted. It allowed the development of privately-owned power plants. 98% of the current fossil fuels plants were commissioned after this reform, all of them privately-owned.

By 2006, private power plants accounted for 62% of the total capacity (959 MW) of which 861 MW were fossil fueled generators. Through the years private participation increased ever more, but this time including more renewable energy capacity. As of August 2018, private participation accounted for 81% of the total installed capacity (2,121 MW) of which 946 MW were fossil fueled generators and 1176 MW renewable energy sources.

Since the passing of the 2014 Law, Honduras has mainly focused on fossil fuels. So far, the CREE has launched two auctions both designed to contract power from oil, diesel, natural gas, and coal. The first one, CREE granted 452 MW of the 820 MW auctioned and the second one is underway.

 

Renewable Energy Auctions

Although the first auction had significant delays and some capacity was not granted, it’s expected that the second auction could allocate 420 MW since both CREE increased the maximum kWh price and investors have better knowledge about the actual costs and conditions.

Even though Honduras has only auctioned fossil fuel power, it also represents a good opportunity for renewable energy investors. Several renewable energy projects have been developed in the last decade, particularly solar projects.

Honduras went from having no solar energy in 2013, to 450 MW of generation by the end of 2017, accounting for 10% of the electricity in the country. Wind, geothermal, and biomass also entered the Honduras energy matrix during the last decade and have experienced significant growth.

We expect Honduras to achieve its national clean energy goals, and fossil fuels will likely serve as baseload capacity. Developers may find the investment opportunities related to renewable energy robust because of the increased transparency and the opportunity to sign PPAs for 10, 15 and 20 years. However, we expect projects to experience delays driven by labor and skills shortages and security issues. Please contact Latam Energy Advisors to learn more about renewable energy opportunities in Central America.