Central America consolidates the integration of the Regional Electricity Market

Central America consolidates the integration of the Regional Electricity Market

This month we celebrate 25 years of the signing of the Regional Electricity Market Framework Agreement between the six Central American countries. This Treaty establishes the development of the Regional Electricity Market (MER), and the construction of the infrastructure of the Electric Interconnection System of the Central American Countries (SIEPAC).

It has been 25 years since the start of the Central American electricity integration process, one of the largest regional energy infrastructure projects in Latin America, especially due to its geographic scope. The SIEPAC project was executed between 2010 and 2014, through the construction of a transmission network of 1,800 km, which interconnects all national networks.

The project allowed the transition from weak binational interconnections with limited transmission capacity to a robust regional system with new criteria for reliability and security, and an initial capacity of 300MW, which is still in the process of consolidation. In this way, SIEPAC contributed to regional integration and facilitated the exchange of electrical energy with an impact on reducing electricity costs and strengthening regional energy security.

At the same time, the institutional architecture that enables the MER to function was created: the Regional Electric Interconnection Commission (CRIE), which acts as a regulator; the Regional Operator Entity (EOR), which is the system and market operator; and the MER Board of Directors (CDMER), which is the body through which the countries supervise and lead the application of political guidelines.

At the Inter-American Development Bank, we will continue to accompany the countries of the region in their development and competitiveness agenda through energy integration with the strengthening and consolidation of SIEPAC. Our objective is to promote the complete energy integration of Latin America to strengthen the regional electricity market and support the competitiveness of the region.

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At the IDB, we celebrate the cooperation, mutual trust, and efforts made in the development and implementation of the successful Electric Interconnection System for Central America (SIEPAC) project. This project is aligned with the IDB Group’s Vision 2025, particularly in the areas of: regional integration, productivity, digitization, and climate action.

Advances in the SIEPAC

Since the signing of the framework treaty, the progress of the MER has been significant. There has been a continuous increase in electrical exchanges. Regional energy transactions went from 700 GWh in 2013 to 1,403 GWh in 2014 and 3,100 GWh in 2019. SIEPAC currently supplies 6% of the regional electricity demand. Studies of economic equilibrium in the market, carried out by CDMER and the IDB, show that the optimal economic exchange with the first circuit at full capacity could supply up to 10% of the demand in the region.

In May 2021, and according to CRIE data, approximately 57% of energy transactions in the MER were based on the contract market, while 43% on the spot market. More than 300 agents participate in this market, including generators, large consumers, distributors and marketers.

The private sector has played a relevant role in the evolution of the MER. The participation of private generators and intermediaries has prevailed in the largest energy exchanges. Of the 24 contracts in force as of May 2021, 88% were between private agents, usually from generator to marketer or distributor, and less frequently between marketers.

Although there was a reduction in trade during the pandemic due to the fall in economic activity, they have resumed growth. Until November 2021, 2,700 GWh have already been reached, and it is expected to return to pre-pandemic levels in 2022. On the other hand, it is highlighted that there is a strong institutional structure and a solid regulatory framework that supports the growth of this great integration project.

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Challenges in the consolidation of the Regional Electricity Market

However, the consolidation and strengthening of SIEPAC and the MER still faces several challenges. The current infrastructure must reach its maximum level of transmission capacity to optimize the benefits of interconnection, and continue to grow in terms of transactions, agents and diversification of sources.

The regional institutions, although stable and recognized, have yet to complete their consolidation process. Achieving improvements in its governance, promoting the establishment of financing mechanisms that guarantee its sustainability and promoting greater inter-institutional coordination, are some of the issues that must be addressed in the short and medium term, as the consolidation of the MER progresses.

Accelerated demand growth will mean that in the next 20 years it will be necessary to build large-scale generation projects that will require a robust regional transmission system and a deep and consolidated regional electricity market. It is estimated that the regional electricity demand will double in the next two decades. This challenge requires immediate actions to invest in electricity generation, transmission and distribution.

Integration and its impact on decarbonization

On the other hand, there is a growing need to move towards the decarbonization of the regional electricity matrix. The introduction of new energy sources, the diversification of the energy matrix through the adoption of renewable technologies, and the urgent need to maintain the region’s competitiveness require a new coordination drive such as the one that made the SIEPAC possible. Regional integration can be a catalyst for achieving economies of scale and facilitating energy security in a decarbonized matrix.

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SIEPAC’s current operation shows the immense technical, operational and managerial capacity of the actors involved. There are several critical elements to continue advancing in the region’s energy agenda, among which stand out

  1. Make the investments required for the strengthening and expansion of national and regional transmission that allows the maintenance of the regional transmission capacity of 300 MW, and its subsequent expansion;
  2. Promote regional electricity planning to take advantage of the benefits of regional energy integration and make the use of regional electricity infrastructure more efficient.
  3. Achieve the development, adaptation and harmonization of regulation to the requirements of a MER in permanent evolution,[1] Y
  4. Promote the development of instruments that favor the operational coordination of the MER with the markets with Mexico, Colombia and the rest of Latin America.

Together, the three pillars of the MER must be strengthened: infrastructure, institutions and the regulatory framework.

[1] Regulatory issues stand out for their relevance, with an emphasis on formalizing the harmonization of coordinated planning processes; and the regulatory elements on the mandatory execution of national reinforcement works for regional benefit, in addition to other relevant issues such as: the development of regional generation, the regulatory harmonization of national and regional markets, the definition of regional positions and strengthening the institutional framework of the market.

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