The road to a sustainable energy future in Central America.

• Author: Majano, Ana Maria

When the first Climatescope report was published by the Multilateral Investment Fund (MIF) of the Inter-American Development Bank and Bloomberg New Energy Finance in 2012, it may have been surprising to many people that a Central American country ranked second among Latin American States in the index evaluating the investment climate for clean energy, yielding only to Brazil. Perhaps even more unexpected was the fact that it was Nicaragua, a country that only a decade before had the highest percentage of fossil fuel-based electricity generation in the region (almost 80 per cent). Also among the top 10 ranking countries were Panama (3rd), Costa Rica (8th) and Guatemala (9th).

These results reflect a very interesting development which has taken place in the region in the past decade: a deliberate reversal of the trend characterized by an ever-growing share of fossil fuels in the power generation mix. Meeting energy demands with fossil fuels became an increasingly heavy burden for the national and household economies of countries completely dependent on oil imports, especially when prices peaked in 2007-2008.

During the 1990s, after a decade of political turmoil and civil wars, Central American countries opened their energy sector to private participation in different degrees and modalities: from competitive wholesale markets in El Salvador, Guatemala, Nicaragua and Panama, to single-buyer systems in Costa Rica and Honduras. The motivations for this move were a combination of the need for new investments to satisfy growing energy demand, and the influence of international financial institutions adherent to the principles of the Washington Consensus.

The combination of cheap oil prices, regulatory frameworks encouraging short-term gain, absence of long-term policies, and risk-management considerations on the part of private investors, resulted in an increased use of petroleum derivatives for electricity production in all countries except Costa Rica, which maintained a strong focus on the development of renewable resources. For the region as a whole, participation of renewable sources in electricity generation decreased from 91 per cent in 1990 to less than 60 per cent in 2005. That year, petroleum-based power generation was the highest in Nicaragua (77 per cent) and Honduras (70 per cent). This situation backfired when international oil prices began to rise.

Faced with the impact of increasing oil prices in a heavily oil-dependent energy sector, Governments scrambled to respond with a number of disparate measures, not all of them sustainable--such as increased subsidies for energy consumption. However, partly due to regional collaboration efforts and aid from international organizations, by the mid-2000s, all countries had issued policy statements recognizing the need to increase the use of renewable energy...