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A plan to connect the power grids of six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama) is finally about to become reality. First proposed in 1987, the Sistema de Interconexión Eléctrica de los Países de América Central (SIEPAC) is scheduled to become fully operational in Spring 2011.

For Central America and its 7.9 million electricity consumers, the plan means a great improvement in transmission capacity and an important step toward regional power market integration.

The original impetus for the interconnection initiative came from a consensus among seven partners. The six state-owned Central American power companies and Spain's formerly state-owned electric utility company, Endesa, agreed that coordinating planning and centralizing management of the regional power system would be both practical and profitable. The result was the laying of SIEPAC, a 1,788 kilometer (1,100 mile), 230 kilovolt (kV) system of new transmission lines, which will allow 300 megawatts (MW)-expandable to 600 MW-of power exchanges between most countries in the region. Total cost: an estimated $494 million.

But SIEPAC only represents the first step. The broader goal is to harness the regional electricity market created by this major transmission project to increase energy efficiencies and reduce operating costs. That market, known as the Mercado Eléctrico Regional, or MER, is expected to be fully implemented later this year. MER would initially function as a seventh market alongside the six national markets. Its basic operating strategy is to engage in electricity trade through long-term contracts and spot transactions, allowing power producers and power traders to purchase and sell electricity while accessing the regional transmission system. Power companies could then install plants in any of the member countries and sell energy at a regional level, creating a market with its own rules and institutions independent of-and parallel to-national markets.

A fully functional MER would increase system reliability, reduce reserve capacity and lead to optimal use of the renewable sources that currently constitute 61 percent of the electricity generated for the region's transmission networks. Moreover, according to the Consejo de Electrificación para América Central, operating costs could be reduced by 4 percent, with the potential 23 percent drop in average generation costs likely to transfer to customers. Interconnections with Mexico (already operational) and Colombia (expected to be operational by 2014) would further increase the benefits of a MER.
Would a Regional Market Work?

Both the size of the market and the availability of resources suggest that MER could be a successful integration experience. Although the individual electricity markets are not large, together the six countries have an installed generation capacity of more than 10,000 MW and annual energy generation of nearly 40,000 gigawatt hours (GWh). Regional electricity demand, on the other hand, has also seen sustained growth-posting an average annual increase of approximately 4 percent over the last decade.

On the resource front, Central America has a large, untapped potential for renewable power generation. Most of it is hydroelectric power, which is estimated to have a potential of 25,000 MW, less than 20 percent of which has been installed. And looking ahead, renewables account for more than 50 percent of likely capacity additions in Costa Rica, Guatemala, Nicaragua, and Honduras.

Despite this potential, in recent years the region has seen a steady decline in the volume of electricity trade. At the end of 2009, less than 1 percent of disposable energy was traded among countries. The reasons: restricted transmission links and relatively minor gaps between the supply and demand of electricity in most countries. Here is where SIEPAC and MER would make the greatest difference.

Recent market performance also reflects low generation capacity in some of the national power systems. Because of market segmentation, producers have increasingly relied on thermoelectrical generation (power obtained mainly by burning fossil fuels) with its share growing from 30 percent in 1990 to 46 percent in 2008 at the expense of more efficient hydro generation. With a regional market, these short-term solutions to meeting the needs of national energy markets would optimally be replaced with a broader vision and long-term strategy.

But challenges remain for a regional power grid. Chief among them will be exploiting the full potential offered by the transmission line and the now-integrated market power demand. To attract more energy projects, the region must maintain its political commitment to the integration process and the institutions that oversee it. Most important, electrical regulatory and supervisory bodies must be strengthened, especially their technical and legal capacities, to guarantee the enforcement of market rules and fairness in market transactions.

Even with SIEPAC coming on line, larger questions remain regarding how to build and consolidate a successful regional power market. The region's development is intrinsically linked to a financially strong and technically reliable power system. For that to happen, Central Americans need to see the real benefits of a truly single integrated market-one that would take advantage of the possibilities offered by larger hydro generation projects to attain efficiency gains beyond modest improvements in system performance. Here, cross-border interests must prevail over national concerns when making regional market decisions.