Central America can decarbonize power sector without added costs: IRENA

Nations in Central America can increase energy production and maintain affordability without sacrificing the goal of reaching net-zero carbon by 2050, according to a new report by the International Renewable Energy Agency (IRENA).

The countries can do this with a push to make their power sector nearly 100% green—and for the same cost that would likely to incur with a more traditional mix of fossil fuels and renewables, IRENA said in "The Renewable Energy Roadmap for Central America," published in March.

The seven nations in Central America—Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama—produce less than 150 million metric tons (mt) of GHGs annually, only 0.3% of global GHG emissions. But the amount has approximately doubled since 2020, due largely to transportation use.

Source: IRENA

GHG emissions could continue to increase over the next three decades, as the countries are expected to double their GDP by 2050 and to increase in population from 48 million people to 65 million. IRENA's modeling found that a business-as-usual scenario would result in emissions reaching about 110 million mt by 2050, compared to 55 million mt in 2020.

Instead, a commitment to deeper decarbonization and electrification would reduce annual emissions to 30 million mt, IRENA said. To change the emissions trajectory, it recommends more renewable generation, electrification of transportation, investment in green hydrogen for heavy-duty trucks, and energy efficiency measures.

Moreover, this can be done at no additional cost beyond what the countries are expected to do in order to meet rising energy demand, IRENA said.

Analyzing the seven countries' current energy use and policies, as well as the emissions programs stated in their nationally determined contributions to reach Paris climate goals, IRENA found that that they are facing investment costs of $1.95 trillion by 2050. IRENA dubbed that the "planned energy scenario," or PES, and compared it to a "decarbonizing energy scenario," or DES, that it says would cost slightly less, at $1.93 trillion.

The renewables-heavy DES would reduce fossil fuel use in the power sector by 90% compared to forecasts, and by 65% in end-use sectors such as transportation and manufacturing. Mass electrification of the transportation sector alone would reduce CO2 emissions by about 70% from forecasts, or 43 million mt.

Tripling renewable installations annually

To pursue the DES, Central American nations would triple their annual renewable power installations from under 500 MW per year currently to about 1,400 MW annually. This would require annual spending of $3.5 billion, or 1.6% of the region's GDP in 2018, IRENA said.

IRENA did not discuss where money would come from, except to note it would be a combination of government and private funding, both from Latin American nations and through foreign direct investment. However, a report by the UN Economic Commission of Latin America and the Caribbean (ECLAC) last year found that foreign direct investment in Latin America fell to $105 billion in 2020, due to COVID-19, with fossil fuels investments falling by nearly 48%.

ECLAC recommended "a big push for sustainability" in new investments, specifically identifying the "transition to renewable energy, electricmobility in cities … [and] the bioeconomy" among sectors that should receive priority attention.

At COP26 in November, wealthy nations raised their commitment to supporting the global energy transition with $100 billion per year of funding, some of which could find its way to Central America as well.

Already, the seven nations studied by IRENA are well on their way to become economies driven by clean energy, with renewables contributing 70% of the region's power generation in 2018, led by Costa Rica at 99%. IRENA's scenario envisions the region's mix rising to 97% renewables regionwide by 2050, but also extending electric power deeply into transport for electric vehicles and indirectly through green hydrogen for trucks.

Electricity in 2018 was 13% of the region's energy consumption, but it would surge to 49% in 2050. Traditional biomass, which is one-third of current energy use and correlates to high emissions and health problems, would be nearly eliminated at 6% of energy consumption.

Improving power grid interconnections across borders will be critical to the transition as well, IRENA said.

Central America shares an electrical interconnection system known as SIEPAC, a single transmission line through six of the countries with a capacity of 300 MW. IRENA recommends upgrading this to 2,000 MW, extending the line to connect with new renewables projects, and ending various restrictions on how the line can be used.

Source: IRENA

"In addition, joint co-ordination in regional energy planning for the medium and long terms, including in end-use sectors and the selection of projects, will be required to develop the [grid] system in the most cost-efficient and secure way, which is not possible if each national system is separately planned," it said.

Renewables to the forefront

More inroads across Central America, as well as Latin America and the Caribbean, can be expected, as IRENA is working with countries on a series of programs to propel renewables to the forefront of the energy sector.

IRENA reported that the weighted-average levelized cost of electricity (LCOE) has been plummeting in the region, as it has around the world. For large hydropower plants in Central America and the Caribbean LCOE reached around $0.10/kWh in by 2020, onshore wind was at $0.059/kWh, and solar PV was $0.078/kWh—each down by more than 35% in a decade.

IRENA signed a memorandum of understanding with the Latin American Energy Organization in January to establish a general framework of collaboration to stimulate low-carbon investments in the region. This builds on the Renewable Energy for Latin America and the Caribbean Initiative, signed in 2020 by Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Haiti, Honduras, Paraguay, and Peru. In that agreement, the 10 countries set a goal of 70% renewables in power generation by 2030.

Under the new framework, the countries are encouraged to leverage their investments in COVID-19 economic recovery to create more than 3 million clean-energy jobs, said IRENA Director General Francesco La Camera in a press statement.

The downside to not making these types of commitments is illustrated in a new report by Institute of the Americas about the experience of Mexico's state power authority, CFE.

Since 2014, CFE has been legally obligated to sign long-term contracts for renewable generation, as part of an effort to lower Mexico's GHG emissions and diversify its energy mix. CFE has resisted the mandate, arguing that it's more costly than using existing power plants fired by coal, diesel, and natural gas.

Analyzing the results of Mexico's renewable power auctions and the costs of purchased fossil fuels for traditional thermal power plants, the researchers found that renewables are cheaper.

"The clean energy contracted by CFE through the first three long-term auctions represent substantial savings compared with the carriable generation costs require to bring thermal plants online, regardless of the fuel to operate them," the researchers concluded.

Even within fossil fuel use, they found huge variations, as running gas-fired turbines for peak power demands one-third to one-tenth the cost of using diesel units for the same purpose. The institute recommends investing in efficient gas-fired turbines as well as renewables.

"Imposing the use of fuel oil instead of natural gas or imported coal in dual fuel power plants, as has been done in the last couple of years, cause important economic losses as well as significant damage to human health and the environment," they said.

Posted 17 March 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.