Diego Barril
Economista País Argentina y Uruguay, CAF -banco de desarrollo de América Latina-
This blog post was written by Diego Barril and Walter Cont.
Energy policy takes center stage in discussions about future prospects of countries beyond this conjuncture. The security of primary sources, the reliability of supply, the efficient management of energy resources, the expansion of access, the affordability of service and environmental sustainability—with increasing pressure—are part of the agenda of governments of the region.
One of the instruments to meet—at least partially—these goals is the possibility of integrating with other countries to exchange electricity, given the balances between production, sources, and capacities. This requires physical interconnections between systems of the countries involved and a transnational regulatory framework. The specialized literature agrees that integration between countries helps mitigate risks associated with the randomness of renewable energy sources, such as hydro, wind or solar (induced by different climatic conditions), thus improving the reliability of national systems. It also helps meet demand peaks, which are usually not synchronized, with a broader energy base coming from the interconnected system.
Third, a large market gives room for planning and implementing large-scale investments (which would not be economically profitable locally), thus reducing the cost of energy. Additionally, regional-scale projects based on renewable sources facilitate a planned energy transition, on a regional scale, which favors environmental sustainability (environmental protection and the fight against climate change). The key lies in the predictability of energy in the expanded market (the required volumes will be available, at market price, whenever required).
During the last 30 years, the most notable integration initiatives in South and Central America arose through bilateral (South America) or regional (Central America) interconnections. This is a remarkable difference in the different initiatives, which is largely explained by a bias—sometimes not clearly justified—in energy security (understood as the non-vulnerability of a country’s economy to external energy shocks).
The farthest-reaching integration process in Latin America connects six Central American nations (Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama), and seeks to optimize energy reserves and leverage hydrological diversity. In mid-2013, the Regional Electricity Market Regulation (MER) came into force, and in 2014 the last phase of the Electrical Interconnection System for Central America (SIEPAC) was completed. The MER operates with its own rules, in parallel with the six national systems, where vertically integrated monopolies (Costa Rica and Honduras) coexist with limited-income private generation, and market systems (El Salvador, Guatemala, Panama and Nicaragua). In this context, countries have adopted harmonization measures between their national and supranational regulations.
To date, this have yielded benefits in several areas, e.g. cost savings, lower price randomness, cushioning the impacts of climate phenomena and increased investments (see details at the end of the note). However, although the MER regulation gives priority of supply to formal contracts, national regulations have prioritized situations of national shortages leaving little room for long-term transactions, while the system has systematically operated below capacity in several sections.
In the Andean region, over the past 15 years, electricity transactions have been guided by a principle of self-sufficiency prioritization and short-term exchanges of surpluses. Although in 2017 a proposal was made to replace the current mechanisms with a Short-Term Andean Regional Energy Market, leaving the consideration of a single market for the future, this regulation failed to advance beyond the development phase of operational, commercial and regional coordination regulations. This update would take shape within the framework of a broader agenda in that region, which includes the SINEA (Andean Electrical Interconnection System) initiative to connect the electricity markets of the Andean Community and Chile, but always with a less-than-urgent priority compared to domestic capacity to meet secure supply nationally.
Lastly, in the rest of South America, interconnection experiences (excluding bi-national dams) have been bilateral in nature and involved private operators, covered by regional frameworks such as Mercosur (Argentina-Brazil) or bilateral agreements (Argentina-Chile). However, several of the experiences at the end of the last century were exposed to conflicts during the first decade of the twenty-first century, due to combinations of factors that set the technological, institutional, resource and market conditions under which the assets involved would operate. Only in 2018, contacts were resumed between representatives of the electricity sector from Argentina, Brazil, Chile and Uruguay to conduct a study of electricity interconnections in the Southern Cone (SIESUR initiative).
Energy integration experiences in Latin America have been mixed, especially in depth (or steps) of integration, participants and the rules under which physical and economic transactions are carried out. However, there are common factors such as countries’ preferences to prioritize energy security and the lack of dispute resolution mechanisms that allow investments under conditions of legal certainty. The SINEA and SIESUR initiatives should learn from these lessons and evaluate possible ways to implement a sustainable energy integration strategy in the region, putting in place instances of bilateral exchanges and subsequent unification. In Central America, the experience is more ambitious, and aimed to improve the path of integration towards a single market (similar to the European experience). To this end, they should continue to strengthen the current market, particularly the technical and regulatory areas.
This note was based on the research conducted by the authors in Chapter 5 of the Economy and Development Report (2021), “Pathways to Integration: Trade Facilitation, Infrastructure and Global Value Chains,” which can be accessed
