Breaking new ground

Central America is a region composed of countries very unlike the Western nations that have deployed large volumes of renewable energy to date. Germany, Japan and other affluent, industrialized nations are typically associated with renewables, not developing nations in the Global South.

However, the nation with the highest portion of solar generation in its electricity mix last year was not Germany, or Japan, or even Italy. Instead, it was a nation of 8 million people with a per-capita gross domestic product of only US$5,000 per capita and serious social problems: Honduras.

And although Honduras is the first nation known to pv magazine staff to get more than 10% of its electricity on an annual basis from solar, it has not stopped installing renewable energy, and it is not alone. Nicaragua already has one of the highest penetrations of wind in its electricity mix of any nation on earth, and a wave of new renewable energy procurement is also happening in El Salvador and Panama.

The Energy Transition does not belong to the wealthy nations. Not anymore.

 

A test for renewable energy

Latin America can be seen as a laboratory for deployment of renewable energy, and this holds true for Central America. Unlike Europe where feed-in tariffs served as the dominant policy model for the largest wave of solar deployment, Central American nations are currently deploying many different means to procure wind and solar, and developers are trying new approaches that have not been used widely elsewhere.

This includes auctions, feed-in tariffs, sale of electricity on the spot market, and bilateral negotiation of contracts. Not all of these mechanisms are working without flaws, and some nations have utilized several different forms of procurement.

Not only does the analogy of the laboratory fit for policy approaches, but also for the issue of integration of renewable energy. As some Central American nations have achieved some of the highest penetrations of renewable energy deployed to date, there is the question of how this solar and wind is being integrated into national and regional grids, which are somewhat geographically isolated and in poor shape.

This could become even more of an issue as more renewable energy is added, for solar in particular, there is a lot of procurement going on this year and next year, which we will explore in the next section.

 

Auctions, the current trend

Auctions are one of the main mechanisms currently for adding solar energy worldwide and this is also the case in Central America. In specific auctions for renewables and in auctions open to different technologies long-term agreements have already been awarded for more than 300 megawatts (MW) of solar PV in the last years in Guatemala, El Salvador and Panama. Around a third of the capacity is already in operation.

And it looks like auctions will keep being a source of opportunities for solar in the region. This year a new electricity auction for several hundred megawatts open to different technologies is planned in Guatemala, where three solar parks totaling 85 MW awarded in auctions are already in operation.

The most recent auctions in the region in which solar projects have been awarded took place in El Salvador and Panama. In the latter nation, a milestone was achieved last December when a solar project from the company Enel Green Power was the first solar project be awarded a short-term electricity contract in an auction, to supply power from 2017 to 2020.

Panama has already contracted electricity from solar parks in a long-term supply auction. In fact, it is the only country in the region in which an auction only for solar projects has taken place. The auction took place in 2014 and five solar projects were awarded although only contracts for two of the projects were signed. The average price for the solar projects awarded was US$87.25 per megawatt hour.

The other country in which solar projects have been awarded recently is El Salvador. In a solar and wind auction last January four solar projects with 120 MW were awarded, at an average price of US$51.48 per megawatt-hour, the lowest price for solar in the region to date. In another auction in 2014 El Salvador awarded 94 MW of solar PV, and these projects are expected to come online this year.

 

The feed-in tariff experience

Most of the solar capacity online currently in Central America was not contracted through auctions but through a feed-in-tariff (FIT) program which Honduras launched in 2013. A cap of 300 MW for projects to receive a bonus of three U.S. cents per kilowatt-hour was established, and to obtain this higher tariff the projects had to be in operation before the first of August 2015.

However, all has not gone as planned. pv magazine has learned that there are problems with the payment of the bonus tariff.

But where payment has been problematic, like other FITs the program was extremely successful in terms of supporting the deployment of large amounts of solar rapidly. Honduras is currently the leader in solar capacity in Central America. 388 MW of solar PV were commissioned in 2015 and further 45 MW in 2016, so that the nation achieved a cumulated capacity of 433 MW of solar PV, according to the state utility ENEE.

 

The spot market and bilateral contracts

Most of the around 600 MW of solar parks currently installed in the region were contracted then either through the Honduran FIT program or through auctions. However, there are also projects under other business models.

While Chile was the first Latin American country to host solar parks that sell the electricity generated in the spot market, Panama also hosts merchant projects, including the 10 MW project Divisa Solar which was completed last year by England’s Solarcentury and Ecosolar. Solarcentury stated that this project will sell 100% of its output in the spot market.

In the middle of last year Panama reached a capacity of 77 MW of solar parks, according to the latest available data by the regulator ASEP. In addition to this, ASEP has provided final licenses for several hundreds megawatts of solar projects.

Another mechanism for contracting solar in the region is bilateral contracts, including a 10 MW project which is being built by Grupo Ortiz in El Salvador, and is expected to go online this year. Law firm BLP has stated that it has assisted El Salvador’s Grupo Borja in a 15-year power purchase agreement with the utility AES El Salvador for the supply from this project, and according to a statement by BLP, this is “the first contract privately executed in this country that involves this type of power source without resorting to a public bidding process.”

Another project that has a bilateral contract with a utility is the 101 MW Providencia solar park, which is also located in El Salvador. A portion of this project will deliver electricity through a contract obtained in an auction but another portion will be delivered within the framework of a bilateral agreement with a utility.

 

Distributed generation also flourishes

Not only are solar parks blossoming in Central America, but all of the nations in this region have active distributed solar markets. However, the form of regulation differs in each, with some implementing net metering regulations, some relying on self-consumption programs, and others lacking a specific framework.

Guatemala and Panama both established net metering regulations in 2008, and each has deployed around 7 MW as of the most recent available data from last year. After setting up a pilot regulation a few years back, Costa Rica has also moved to full net metering program last April.

And while the nation with the most installed distributed solar is El Salvador, it does not yet have a net metering program and official data on the volume installations is incomplete. El Salvador awarded 11 MW in an auction for distributed projects in 2014, and most or all of these have been completed, there is also a program with a quota of 1 MW of residential solar.

In Honduras and Nicaragua there also has been growth in the segment of solar distributed generation in the last years. Honduras hosts the largest solar roof-top installation, a 3 MW solar self consumption project built by local company Smartsolar.

 

Support of development agencies and multilateral banks

Besides the Honduran FIT program -which can be considered direct support- there has been only indirect support for solar in the region, like the removal of import taxes for solar products or the introduction of tax incentives for solar projects in some countries.

More crucial for the growth of utility-scale solar in the region has been strong financial support for many solar projects from multilateral banks and programs of development agencies. The German Development Agency (GIZ) has advised governments and provided support for the deployment of renewable energy through a specific program for Central America, and the U.S. Agency for International Development (USAID) has provided various forms of support.

The French Development Agency (AFD) has supported one of the largest projects in the region with financing, the 101 MW Providencia solar project in El Salvador. And even Spain is supporting a 1.4 MW solar project in a university in Honduras.

As for the multilateral banks, the Inter-American Development Bank (IADB) and the World Bank’s International Finance Corporation (IFC) have provided finance for most of the utility-scale solar projects built in the region.

 

Wind, solar and petroluem

The amount of solar that will be awarded over the next few years in Central America is massive. A calculation of projects in an advanced state of development by pv magazine staff suggests that 200-300 MW of solar could come online this year alone, which matches solar electric production estimates by Ente Operador Regional, which operates the regional grid.

This new PV projects will add to already high levels of solar in Honduras, where EENE estimates that solar met 10.2% of demand over the full year 2016. But Honduras is not the only nation with a high level of variable renewable energy, as Nicaragua has been getting 20-21% of its electricity from wind since 2014, placing it roughly tied with Spain as the fourth-highest portion of wind for any nation on earth.

To understand why these nations are aggressively adding renewable energy, it is important to look at the larger power system. Central America has a tiny domestic coal mining industry, no pipelines to bring in gas from outside the region and no nuclear power plants. As such, there have traditionally been two main available sources of generation: hydroelectric dams and plants that burn imported liquid petroleum products.

Before its big build-out of wind over the last decade, Nicaragua was the nation with the highest portion of fossil fuel generation in the region, which represented 70% of its annual power as recently as 2009. As is the case in many island nations, heavy dependence upon imported fuel meant not only high and unpredictable power prices but also problems with supply and blackouts.

After Nicaragua reached a higher portion of renewables through the deployment of biomass, geothermal and wind, the nation with the next-highest portion of fossil fuel generation was Honduras, with thermal power representing nearly 60% of generation in 2013 and 2014. It was during this time that the nation rolled out its aggressive FIT and the 388 MW of solar PV deployed in 2015 was equal to 17% of the nation’s entire electricity capacity.

In 2016 EENE estimated that the nation got 52% of its power from renewable energy including hydroelectric dams, thus mitigating imports of petroleum products.

 

Integration

However, despite this massive build-out in these two nations and similar progress in Costa Rica, which is nearly 100% powered by renewable energy, the numbers for non-hydro renewables are much more modest for the region as a whole. In 2015, Central America only got 5.9% of its power from wind and 1.2% from solar PV, which are similar levels to the United States.

However, with the current boom in procurement the operator of the regional grid is forecasting that solar penetration in the region will reach 3.9% in 2017 and 5.0% in 2018.

In theory this should not be much of a problem. In 2014 the International Energy Agency published a report which estimates that most nations can integrate up to 45% wind and solar without significant overall additional costs as long as system-wide changes are planned carefully.

However, this is theory and every grid has unique challenges. As an isthmus with impenetrable jungles at its narrow Southern end, Central America is largely geographically isolated, and national grids show high levels of losses.

 

SIEPAC

As a project to both improve the reliability of electricity supply to consumers and integrate more electricity from renewables, over the last decade Central America built a regional high-voltage interconnection, the Electrical Interconnection System of Central American Nations (SIEPAC).

In 2014 the final stretch of transmission lines in the SIEPAC grid were installed in Costa Rica, finalizing the physical interconnection between six of the seven nations in Central America.

And while electricity trading between the nations has increased over the last few years and hit a new quarterly record of 500 gigawatt-hours in the third quarter of 2016, there is more to a grid than power lines. In the Western United States, for example, integration of higher levels of wind and solar have necessitated changes to operational practices including more frequent trading of electricity, improved forecasting and other measures.

Honduras appears to have carefully planned for the integration of the solar which it contracted under its FIT. Developers built these solar projects close to main transmission lines, and the nation was advised in 2015 on integration of renewable energy by the German Development Agency (GIZ). It is important to note that this advise comes from a nation with experience integrating high levels of renewable energy.

SEIPAC operator Ente Operador noted in a January report that there is still work to do in the regional electricity market (MER). “As we have observed the energy transactions between the nations in MER have a relevant potential in the order of 4,000 gigawatt-hours annually,” declared the report. “However it must be taken into account that in reality these transactions have not been used optimally, which may be related to the application of conservative operational policies or even by particular strategic behaviors by the agents participating in MER.”

 

Forecasts, goals and ambition

While the smaller volume of renewable energy markets in Central America have flown under the radar of some of the industry, due to rapid deployment, innovation in procurement and integration of record high levels of wind and solar Central America is already a leader in the global Energy Transition.

This is only the beginning. Through a massive build-out of solar, wind and hydro, Honduras’ EENE estimates that the nation will reach 95% renewable energy in 2027 which is on a similar scale to world renewable energy leader Denmark’s plans to reach 100% renewable heat and electricity by 2035, and ahead of even the most ambitious renewable energy mandates in U.S. states.

And while missing its goal of 94% renewable energy by 2017, Nicaragua has readjusted its plans and now is attempting to reach 90% renewable energy in 2020. This is mostly due to a massive expansion of hydro, but including plans for 74 MW of solar PV which will meet around 6% of national demand.

Whether or not these lofty goals are met, Central America has already broken new ground, and this region can serve as an example for nations around the world. Falling prices for solar PV ensure that solar will play a central role in Central America’s transition to renewable energy, a transition which is already proving that small developing nations can be world leaders.

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