Electricity sector in Nicaragua

Installed capacity

Nicaragua is largely dependent on oil for electricity generation: 75% dependence compared to a 43% average for the Central American countries. In 2006, the country had 751.2 MW of nominal installed capacity, of which 74.5% was thermal, 14% hydroelectric and 11.5% geothermal. 70% of the total capacity was in private hands.

Gross electricity generation was 3,140 GWh, of which 69% came from traditional thermal sources, 10% from bagasse thermal plants, 10% from hydroelectricity, and 10% from geothermal sources. The remaining 1% corresponds to the electricity generated in the “isolated” systems. The detailed breakdown of generation among the different sources is as follows:

Source: INE Statistics

Although nominal installed capacity has increased by 113 MW since 2001, effective capacity has only increased by 53 MW, remaining as low as 589 MW in 2006. The large difference between nominal and effective capacity is due to the existence of old thermal plants that do not operate properly and that should be either refurbished or replaced.

Demand

In 2006, total electricity sold in Nicaragua increased 5.5%, up to 2,052 GWh, which corresponds to 366kWh annual per capita consumption. The consumption share for the different economic sectors was as follows:

Demand versus supply

Maximum demand has increased in Nicaragua at an annual rate of about 4% since 2001, which has led to a low reserve margin (6% in 2006). Furthermore, demand is expected to increase by 6% per year for the next 10 years, which increases the need for new generation capacity.

Access to electricity

In 2001, only 47% of the population in Nicaragua had access to electricity. The electrification programs developed by the former National Electricity Commission (CNE) with resources from the National Fund for the Development of the Electricity Industry (FODIEN), the Inter-American Development Bank, the World Bank and the Swiss Fund for Rural Electrification (FCOSER), have led to an increase in electricity access to 55% (68% according to the Census estimates, which also consider illegal connections)by 2006. However, this coverage is still among the lowest in the region and well below the 94.6 average for LAC Coverage in the rural areas is below 40%, while in urban areas it reaches 92%.

In 2004, the National Energy Commission (CNE) developed the National Plan for Rural Electrification (PLANER), which established goals and investment figures for the period 2004-2013. Its objective is to bring power to 90% of the country’s rural areas by the end of 2012. The Rural Electrification Policy was approved in September 2006 as the main guide for implementation of the PLANER.

Interruption frequency and duration

In 2003, the average number of interruptions per subscriber was 4 (weighted average for LAC in 2005 was 13), while duration of interruptions per subscriber was 25 hours (weighted average for LAC in 2005 was 14). However, the situation worsened during the energy crisis in 2006, when large sections of the country suffered continuous and lengthy blackouts (See Recent developments below).

Distribution losses

In 2006, distribution losses in Nicaragua were 28.8%, the highest in Central America together with Honduras, whose average was 16.2%. This is one of the most acute problems faced by the sector in Nicaragua, as it leads to very large economic losses. This problem is partially caused by the widespread existence of illegal connections, altered metering systems and low bill collection capacity in certain areas.

Policy and regulation

The regulatory entities for the electricity sector in Nicaragua are:

The National Dispatch Center (CNDC) is the operational body in charge of administering the Wholesale Electricity Market (MEN)and the National Interconnected System (SIN).

Generation

In 2006, there were 10 generation companies in the National Interconnected System, eight of which were in private hands. The number and type of plants operated by each company was as follows:

Source: CEPAL 2007

Transmission

In Nicaragua, 100% of the transmission is handled by ENATREL, which is also in charge of the system’s dispatch.

Distribution

In Nicaragua, the company Dissur-Disnorte, owned by the Spanish Unión Fenosa, controls 95% of the distribution. Other companies with minor contributions are Bluefields, Wiwilí and ATDER-BL.

Integrated state monopoly (1979-1992)

Until the early 1990s, the electricity sector in Nicaragua was characterized by the presence of the State, through the Nicaraguan Energy Institute (INE), in all its activities. Created in 1979, INE had Ministry status and was a vertically integrated state monopoly responsible for planning, regulation, policy making, development and operation of the country’s energy resources. During that decade, the sector faced serious financial and operational problems as a result of the currency devaluation, war, a trade embargo imposed by the United States and the lack of resources for investment in operation and maintenance of the electricity system.

Sector reforms (1992-2002)

At the beginning of the 1990s, the government of President Violeta Chamorro started the reform of the electricity sector aiming to ensure efficient demand coverage, to promote economic efficiency and to attract resources for infrastructure expansion. In 1992, INE was allowed, by law, to negotiate contracts and concessions with private investors. The Nicaraguan Electricity Company (ENEL) was created in 1994 as the state company in charge of electricity generation, transmission, distribution, commercialization and coordination of the operations previously assigned to INE. INE kept its planning, policy making, regulatory, and taxation functions.

The reform process was consolidated in 1998 with Law 272 (Electricity Industry Law - LIE) and Law 271 (INE Reform Law). The reform of the INE led to the creation of the National Energy Commission (CNE), which assumed the policy making and planning responsibilities. Law 272 established the basic principles for the operation of a competitive wholesale market with the participation of private companies. Electricity generation, transmission and distribution were unbundled and companies were prohibited to have interests in more than one of the three activities. ENEL was restructured in four generation companies (Hidrogesa, GEOSA, GECSA and GEMOSA); two distribution companies (DISNORTE and DISSUR), both acquired by Unión Fenosa and then merged into a single company; and one transmission company (ENTRESA, now ENATREL).

The privatization process that started in 2000 with a public offering of the four generation companies was complicated due both to legal problems and to lack of interest by investors. As a result, ENEL maintained a more relevant role than initially expected. Hidrogesa remained in public hands as the only player in hydroelectric generation while its profits serve to finance the losses of GECSA, which owns the thermal plants that did not attract private interest, and the rural electrification plans in isolated areas.

The reforms of the 1990s did not achieve their objectives. It had been expected that privatization would bring investment in new generation, but very little capacity was added in the years that followed the reform. Moreover, the generation capacity added in the last decade has been mainly dependent on liquid fuels, making the country more vulnerable to rising oil prices. In addition, as mentioned, distribution losses have remained at very high levels (28%). The reform also aimed at implementing gradual changes in electricity tariffs that would reflect costs, which proved to be politically unfeasible.

Oil price increase, financial stress and blackouts (2002-2006)

When oil prices increased from 2002 onwards, the regulator failed to approve electricity tariff increases, because they were expected to have been very unpopular. The financial burden of the higher generation costs was thus passed on to the privatized distribution company, which has, partly as a result, been suffering severe losses.

In 2006, the electricity sector in Nicaragua suffered a serious crisis, with 4- to 12-hour blackouts that affected virtually the whole country. The distribution company owned by Unión Fenosa, was blamed and the concession was temporarily cancelled by the government, which called for arbitration. This led Union Fenosa to call its MIGA (Multilateral Investment Guarantee Agency) guarantee. The crisis was further aggravated by the inability of INE and CNE to cooperate in a constructive manner. The emergency situation improved in 2007 due to the installation of 60MW of diesel generation capacity financed by Venezuela.

Creation of the Ministry of Energy (2007)

In January 2007, shortly after President Daniel Ortega took office, a new law created the Ministry of Energy and Mines (MEM), which replaced the CNE. The new Ministry inherited CNE’s responsibilities together with some additional competencies from the INE. Also, in August 2007, an agreement was reached between Unión Fenosa and Nicaragua’s new government. The government committed to pass a law to combat fraud, which will help reduce distribution losses and Unión Fenosa will develop an investment plan for the period up to 2012.

Regional integration, the SIEPAC project

In 1995, after almost a decade of preliminary studies, the Central American governments, the government of Spain and the Inter-American Development Bank agreed to the execution of the SIEPAC project. This project aims at the electric integration of the region. Feasibility studies showed that the creation of a regional transmission system would be very positive for the region and lead to a reduction in electricity costs and to improvements in the continuity and reliability of supply. In 1996, the six countries (Panama, Honduras, Guatemala, Costa Rica, Nicaragua and El Salvador) signed the Framework Treaty for the Electricity Market in Central America.

The design of the Regional Electricity Market (MER) was done in 1997 and approved in 2000. MER is an additional market superimposed on the existing six national markets, with a regional regulation, in which the agents authorized by the Regional Operational Body (EOR) carry out international electricity transactions in the region. As for the infrastructure, EPR (Empresa Propietaria de la Red S.A.) is in charge of the design, engineering, and construction of about 1,800 km of 230kV transmission lines. The project is expected to be operational by the end of 2011.

(For a map of the regional transmission line, see SIEPAC)

Tariffs

Electricity tariffs in Nicaragua had increased only slightly between 1998 and 2005 (in fact, industrial tariffs decrease in that period). However, in 2006 electricity tariffs experienced a high increase relative to 2005: 12% for residential, 26% for commercial and 23% for industrial tariffs. Average tariffs for each of the sectors were:

These tariffs are not low; they are in fact among the highest in the Central American region. Residential prices are close to the regional average while industrial prices are the highest in the region.

Subsidies

Currently, there are cross-subsidies in the tariff structure. Medium voltage consumers pay higher tariffs that serve to subsidize lower tariffs for low voltage consumers. Users that consume less than 150 kWh per month receive transfers from the rest of the consumers. The lowest-consumption users (0-50kWh/month) benefit from reductions between 45% and 63% in their average tariff. Consumers above the 50kWh limit also benefit from the subsidy scheme to a smaller extent.

Generation

In 2007, new “emergency” generation (60MW) has been financed by the Venezuelan government. On the other hand, the new hydroelectric projects will receive both public and private financing, while the ongoing Amayo wind development and the new San Jacinto Tizate geothermal plant are privately funded.

Transmission

Entresa has elaborated a Plan for transmission infrastructure expansion for the period 2007-2016. However, financing has not been ensured for all the projects yet.

Distribution

In August 2007, Unión Fenosa committed to elaborate an investment plan for the period up to 2012.

Rural electrification

Financing sources for rural electrification are limited. The National Fund for the Development of the Electricity Industry (FODIEN) receives its resources from the concessions and licenses granted by the Nicaraguan Energy Institute (INE). However, funds have been insufficient. The World Bank (through the PERZA project) and the Swiss government (through FCOSER) have also contributed funds and assistance to advance the objectives of rural electrification in the country.

Summary of private participation in the electricity sector

Electricity generation, transmission and distribution, previously in the hands of state-owned ENEL, were unbundled in 1998. Today, there are 10 generation companies in the National Interconnected system, 8 of which are in private hands. 100% of the hydroelectric capacity is in the hands of the public company Hidrogesa. As for transmission, it is handled solely by state-owned ENATREL, while distribution is 95% controlled by Spanish Unión Fenosa.

Responsibility for the environment

The Ministry of Environment and Natural Resources (MARENA) is the institution in charge of the conservation, protection and sustainable use of the natural resources and the environment.

The National Climate Change Commission was created in 1999.

Greenhouse gas emissions

OLADE (Latin American Energy Association) estimated that CO₂ emissions from electricity production in 2003 were 1.52 million tons of CO₂, which corresponds to 39% of total emissions from the energy sector. This high contribution to emissions from electricity production in comparison with other countries in the region is due to the high share of thermal generation.

CDM projects in electricity

Currently (November 2007), there are only two registered CDM projects in the electricity sector in Nicaragua, with overall estimated emission reductions of 336,723 tCO₂e per year. One of them is the San Jacinto Tizate geothermal project and the other one is the Monte Rosa Bagasse Cogeneration Project