Regional Power Sector Integration : Critical Success Factors in the Central American Electricity Market

Greater integration of electricity markets between neighboring countries is a strategic option for mutual strengthening of national systems through economies-of-scale in investments and enhanced energy security. There are different possible levels of integration: (i) the development of cross-border interconnections, (ii) long term purchase agreements for development power plants (like Itaipu between Paraguay and Brazil or Nam Theun 2 between Lao PDR and Thailand) or (iii) the creation of regional electricity markets or power pools. The first two are not real integration but interconnection because, although the infrastructures are physically linked, the planning and operation are not. Moreover the level of integration of regional electricity markets can be divided into two whether the dispatch is coordinated or centralized. The deeper the integration larger the benefits are, in fact the World Bank (2011) describes the difference between interconnection and integration and that between trading goods and having a common economic market. Obviously the process for integration requires a harmonization process and some level of decision-power cession from national governments. These are the biggest barriers and can only be overcome with large political will and support. Nevertheless, that it is very challenging to achieve because of sovereignty and security concerns. For that, although the benefits of the integration are commonly understood, few regions have been able to overcome all the difficulties and to create a regional electricity market. Central American countries are an interesting example because of the large number of countries involved (six), the political and technical initial differences (from vertically integrated public monopoly to fully unbundled competitive electricity markets) and the creation of independent supranational institutions with decision power over the regional market (regional regulator and operator). The development of the Central American regional electricity market (MER) is a process led by the Central American state-own utilities with the support of the Inter-American Development Bank (IADB) materialized through the SIEPAC project (System for the Electric Interconnection of the Central American countries). In this process they have sign an international treaty (Marco Treaty) to ensure the political support, one company for the design, construction and maintenance of the infrastructure (EPR), constructed a regional transmission line through a “regionally owned” special-purpose company, created two independent regional institutions for the operation (EOR) and the regulation (CRIE) of the MER, and approved and enforced a regional regulation to which national systems must harmonize. During the implementation process extra-regional private and public companies have also become shareholders of the EPR, Endesa from Spain, ISA from Colombia and CFE from Mexico. Moreover the project is growing to interconnect the region with Mexico (already implemented) and Colombia (under development). Central American countries have just started to achieve some of the benefits like the management of the energy crisis in Panama during 2013. Nevertheless it took 25 years from the initial studies in 1987 until the final enforcement of the regional regulation in 2013, what is representative of the difficulties of the regional integration process. The combination of challenges and successes make the SIEPAC project an attractive case for the understanding of the complexity of the regional cooperation processes in the power sector and for finding evidences that could be utilized for other regions. The objective of this paper is to identify the critical success factors that have made possible to achieve the political support from the different Central American government even all the challenges faced during the implementation process. The causal analysis of the implementation process complemented from literature review and interview survey with stakeholders identified five critical success factors: (i) the concept of gradualism, which allowed to overcome the difficulties arose because of different national contexts; (ii) the involvement of the state-owned companies at the center of decision-making, critical for obtaining the required political support and to maintain the commitment of the countries during a long process with changes in the national political contexts; (iii) the incorporation of extra-regional partners, reducing the political interferences to the regional institutions and bringing the project to the national development agendas; (iv) the managerial and economic independence of the regional institutions, essential for creating a regional vision that move the project from inter-governmental to supra-national status and (v) the continuous support from the Inter-American Development Bank who played an important role as honest broker and main supporter of the project