Nadar Farah Senior, Vice President
International Operations, KEMA Consulting

Six Central American nations have embarked on a project to interconnect their electricity systems. The $320 million project will help to improve reliability and efficiency in the region’s power markets.

Six Central American countries have embarked on a $320 million plan to build an 1830 km power transmission line that will allow them to share generation capacity and create a regional electricity market. By interconnecting their existing electric networks and jointly operating some transmission components, the countries expect to reduce costs while also reducing outages caused by local generation disruptions. Ultimately, the Central American nations hope to link the interconnection line with grids in North and South America.

Figure 1. The transmission line will interconnect six Central American states
Click here to enlarge image

“This project is a direct consequence of globalization, liberalization and open markets,” said Renato Cespedes of KEMA Consulting. The Fairfax, VA-based arm is developing the regulatory and operational rules for the new market with Interconexión Eléctrica–ISA of Colombia, with the exception of the regulation applicable to the transmission grid and operation criteria. Cespedes added, “Energy supply reliability is the key concept here. These countries want to improve the efficiency of their power supply and create mechanisms for a reliable, interconnected operation.”

Known as SIEPAC (Sistema de Interconexión Eléctrica de Países de América Central), the project involves Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama. Although construction of such a lengthy power line presents certain technical difficulties, the primary challenges involve the structuring and operation of the regional market. Fortunately, similar projects already completed in Europe and the US can offer some guidance to SIEPAC participants.

Figure 2. New lines will help solve some of the challenges faced by Central America’s power systems
Click here to enlarge image

“The challenge in a project of this type is to develop a regional market that will benefit all of the countries without interfering with operation of their national markets,” said Cespedes.

Building the line

The SIEPAC countries currently derive much of their electricity from fossil fuels and each nation has harnessed some hydroelectric power. As a business, the electric industry in Central America faces two problems. The first is scale. The countries are rather small so that operating costs are disproportionately high, making it very difficult for them to aggressively build infrastructure and expand capacity. As a result, reliability is often spotty in localized areas.

The other problem is inconsistent generating capacities among the countries. The best example of this is Costa Rica, which has developed a more significant hydroelectric capability than the others. In wet years, it is looking to sell excess electricity to neighbours, but when the rivers run dry, Costa Rica needs to purchase power. Regardless of the weather, one country is typically trying to buy or sell electricity to or from another.

To ensure that sufficient power is available during dry years or when local disturbances cause outages, several of the SIEPAC nations have been forced to build extra generating capacity to fill in the gaps. These reserve units are typically small but very expensive.

Weak interconnectivity, averaging about 50 MW, has already been established between specific countries, but this capacity is insufficient to meet demands or to build a truly regional market. The planned line, which will be constructed above ground, will have a capacity of 230 kV and have at least one connection point in each country.

Once the new transmission line is completed in 2007, these nations will be able to buy and sell significant amounts of power from each other. Countries plan to share operation of the reserve generators and make that additional output available on the line.

“Capacity and reliability will increase, and operating costs will decrease,” said Cespedes. “The SIEPAC countries will be able to invest in their infrastructure and perhaps extend service to areas currently without electricity.”

After the line is built running the entire length of Central America from north to south, a connection could be made with Mexico and Colombia, integrating the SIEPAC network into the enormous North and South American power markets. Such an interconnection could enhance economic relations between the continents, according to some SIEPAC members.

Developing a regional market

In the six SIEPAC nations, there is a wide range of market-types, from a vertically integrated monopoly with regulated prices in Costa Rica to full retail competition with bid-based prices in El Salvador. This combination of vastly different market structures may sound like a recipe for chronic disagreement, however, representatives from the SIEPAC nations have already met and signed a framework treaty that spells out the basic operating principles of the regional market. Of the total $320 million project, SIEPAC set aside $3.5 million to develop and implement specific regulatory and operating rules to govern the market and develop the operation and market organizations.

“This new market requires new and sound regulations, and strong regional governing and operating entities,” said Cespedes. “Our job is to study the technical and commercial market aspects, develop detailed rules of operation, and assist with establishing the regional regulatory and operating entities.”

The framework treaty calls for establishing a bid-based market. At each node, or connection point between the line and a nation’s network, bids and offers will be made regarding the price a given market agent within a country is willing to pay to buy power or accept to produce power at that node. Each nation will have a market operator who works within the national market to determine if and where excess capacity is available for sale or how much power must be purchased from the regional market to fill needs.

In addition to the bid market, SIEPAC has agreed to set up a contracts market by which individual market agents within countries can create long-term production and delivery deals with each other. In this case, the new power lines would merely act as the conduit through which the contracted power would be transmitted.

Tariffs will be levied on each transaction to offset the cost of building and operating the interconnection line. This fee structure is now being determined.

SIEPAC members have decided that two organizations will oversee operations of the new line and market. A regional market operator will manage the daily activities. Based on bids submitted by various participants, the operator will determine which generators should operate and then will perform the very important function of handling billings and payment.

The regulatory entity oversees the market to ensure that each SIEPAC member is being treated fairly. The regulator also acts as a mediator of disputes between market agents or countries. A major part of KEMA Consulting’s task is to draft rules governing resolution of the conflicts that may arise.

Both the Board of Commissioners of the regulatory agency and the Board of Directors of the operating agency will have equal representation from each nation. On a rotating basis, presidents will be selected to serve their respective organizations.

The procedure for electing or assigning presidency has yet to be determined.

“Communication between the national market operators and the regional market operators is critical to the success of the project,” said Doug Bowman, KEMA Consulting’s manager of performance assessment and strategy services. “We are in the process of developing reliable telecommunications links among all of the participating organizations to ensure that bids and offers are received immediately. A computerized database will also be designed to support this activity.”

Another component of the consulting contract now underway is the adoption of technical standards for each nation’s operating capabilities. The idea is to bring every country’s generation and transmission infrastructure into alignment so that technical problems in one country will not impact operations in another.

“We have learned from our involvement developing new regional markets elsewhere in the world that no country’s reliability can be diminished as a result of the interconnection,” said Bowman. “Getting all of these countries upgraded to equal technical standards is not going to be easy because investing in new infrastructure is expensive.”

Project underway

KEMA Consulting will complete the drafting of the operational, regulatory and technical rules by the middle of 2003. These rules will be revisited in 2004 to determine if they are satisfying the SIEPAC members.

The line owner the Empresa Proprietaria de la Red presently prepares designs and specifications to bid the construction in three parts of about equal length. The construction phase is scheduled to start in 2004. Funding for the SIEPAC project is coming partly from the participating nations in addition to a $240 million loan from the Inter-American Development Bank which includes a $70 million loan from the Spanish government. An additional

$40 million loan is being negotiated with the European Investment Bank with the guarantee of Endesa of Spain.

“The primary challenge in this project is to set up a structure that will assure participants that they will see benefits from the regional market,” said Bowman. “As long as individual countries are benefiting and their operating costs are decreasing, SIEPAC will be a success.”