Challenges and opportunities of liquefied gas for power generation in the Central American region

By: María Alejandra Tulipano and Gustavo Vega

Regional energy strategies and sustainable development objectives in the countries of the Central American region have as a priority the diversification of their energy matrices. In this context, the alternatives for diversification include the participation of renewable energies, such as solar, wind and geothermal; as well as the integration of generation plants based on traditional hydrocarbon-based energies, including high efficiency technologies such as gas turbines. Because of its efficiency, supply reliability and price, natural gas is a very effective option for diversifying the region’s energy matrix.

There are several reasons to consider the introduction of gas as an alternative for electricity generation in Central America:

  1. The abundance of reserves distributed in different countries of the world;
  2. The successful international experience in including gas as an energy option for applications in the residential, commercial, industrial, transportation and generation sectors;
  3. Rapid integration into the energy matrix of countries at competitive prices.

Alternatives for introducing natural gas in Central America

Several studies and development strategies, including some of the IDB proposals, analyze the convenience of introducing natural gas in Central America. The strategies evaluated have a demand concentration approach to market development in Central America, such as, but not limited to:

  1. Stand-alone projects: Consists of the development of the gas market independently in each of the countries of the region.
  2. Regional integration: It contemplates the regional coordination for the commercialization of electricity or gas among the countries.
  3. Integration with Mexico: Similar to the previous alternative, it is based on regional integration for the purchase and distribution of gas or electricity between countries.

In order to achieve the integration of the Central American liquefied gas market, it is necessary to standardize national regulatory frameworks and develop a common framework for the entire region. Although countries such as Honduras and Guatemala have basic regulations, it is necessary to standardize the regulatory framework in all countries and define the entities that will exercise the functions of market regulation and oversight. According to IDB studies, the regional framework can be made up of at least four elements:

  1. An overriding standard: Participating countries can agree to develop a common standard that considers the formation of vertically integrated value chains at the regional level. On the other hand, the implementation of partial limitations can be established in varying degrees of separation for each component of the value chain.
  1. A regulation of regasification terminals and pipeline supply: Regulations for the operation of regasification terminals and gas pipelines can be composed of rules for the transportation and distribution of gas in all its forms, and the conditions for third-party access. It is advisable to allow third party access to increase competition in the market. Access to new market participants can be regulated or freely negotiated, and the most common access mechanisms are: first-come, first-served, bilateral negotiations and by proportion of available capacity.
  2. Price and rate of return regulation: Regulated markets are the most effective mechanism for setting prices for imported pipeline gas. However, the development of the value chain will depend on the security and predictability of the market. In the first years, it may be convenient for the entities that own the projects to set the price of gas as a tool to initiate the market, although there should be a maximum limit linked to its setting. In general terms, it is recommended that tariff regulations be delayed.

The development of the market requires a maturation period to stabilize demand and provide capacity for third-party access. To this end, it is recommended that countries grant a certain degree of freedom in setting tariffs.

  1. International guarantees: Countries should reach political agreements to guarantee the use of the maximum capacity of cross-border projects and the fulfillment of electricity or gas sales contracts between countries. Currently, national laws prevent the granting of guarantees of any nature outside their territory. These restrictions may affect the development of the value chain by relying on the implementation of agreements that are facing delays and the need to enter into new agreements between the countries that will share the gas pipeline networks.

The introduction of gas is an energy alternative of high economic benefit for Central America. This benefit can benefit public services or government budgets and boost low-cost access to energy in diverse areas.

In the analysis of the benefits of the studies conducted by the IDB on the subject, it indicates that the substitution of electricity generation based on liquid fuels for gas would be economically justified for all the countries in the region. These are some of the points:

  1. Demand instability. The greater the uncertainty about demand, the greater the interest in making the conditions of supply contracts more flexible.
  2. Seasonality of demand. Floating terminals can cover the demand for a marked period of the year when there are reductions in electricity generation capacity.
  3. Significantly lower investments are required compared to onshore terminals for similar volumes.
  4. Location versatility. FSRU terminals can be installed in the vicinity of generation plants and/or in areas that do not require dredging of port access to allow landing of LNG

One possibility for securing electricity transmission could be the development of a long-term transmission financial rights framework. For joint gas purchase agreements, countries would have to create an association of gas buyers in order to enhance their bargaining power with suppliers and negotiate better purchase conditions.

The regulatory framework for the new gas market in the region can include a national and regional approach. National regulations need to define, among others, the functions of the regulatory agencies and establish the technical standards and legal provisions of the value chain. The regional approach to this framework would have to ensure the enforcement of energy sales contracts between countries. Finally, it is important that the regulatory framework for gas can be independent of regulations for other fuels. This will avoid confusion in the interpretation of the rules applicable to the sector in the areas of production, import, storage and regasification, transportation, transit and export, distribution to customers, vehicles, and residential use.

The analysis and recommendations of multilateral entities have expressed the convenience that the specific rules of the sector should be part of a primary gas law, which is autonomous and independent from oil regulations.

Our Energy practice area is at the disposal of the different actors of the Central American electricity sector to promote policies, make projects viable and generate added value in advisory services in these topics and others of interest. Do not miss our next publications and particularly the edition on the viability of energy storage in Central America and its investment bet.