Energy options in central america: the need for policies

Li Susan Bogach

 

Overview

Energy is a prime constraint to development in Central America, but it is not the most important constraint. Economic recession, political strife, and war, or the threat of war, are more fundamental problems. However, energy accounts for a large share of national import bills and investment programs. Regional analysis of the problems and options for energy in Central America is limited by political fragmentation. To meet future challenges in the energy sector, a planned, coordinated approach is required to address the energy options available in the region.

Analysis

Energy Consumption Trends

Just as there are two different spheres of economic activity (modern industry and agriculture, and small traditional industries and subsistence farmers), there are modern and traditional fuels. There is a strong pattern of overlap between activity and fuel. Modern fuels tend to serve industries and large agriculture, whereas traditional fuels serve the subsistence economy. Development planners tend to consider these spheres as separate, and they ignore areas of overlap (for example, transportation and agriculture). A large share of non-commercial fuel is marketed in urban centres, whereas rural people are strongly affected by the availability and price of petroleum products, mainly because of their dependence on the transportation system.

Consumption of modern fuels varies widely and follows economic trends. Petroleum consumption has decreased dramatically because of falling production, large increases in the price of gasoline, curtailment of travel in countries with guerrilla warfare, and rationing in Nicaragua. The share of electricity as a modern fuel is increasing, but supply is limited in many countries and there is unsatisfied demand from potential customers who are waiting to be connected to the grid.

Among the traditional fuels, wood is, and will continue to be, the most important indigenous energy source. Traditional fuels are used for domestic cooking, in traditional industries, and in commercial enterprises. Agricultural residues supplement wood on a seasonal basis. Bagasse is used extensively in sugar processing. Although data are lacking for traditional fuels, it is known that the commercial trade in wood is large and occurs mainly in urban areas, charcoal consumption is minimal, industries are switching from modern fuels to wood when the price of wood is competitive, there have been sharp increases in the price of wood in recent years, and there is a trend to maximize the use of bagasse and wood in sugar processing and to minimize the use of diesel.

The rapid increase in modern energy requirements from 1970 to 1978 was caused by population growth, a healthy rate of economic expansion, and rapid urbanization. Forecasts of modern energy requirements were based on positive assumptions and overestimated demand in the early 1980s. Because there is no accurate information on present trends in the use of traditional energy, forecasts are difficult. However, there is a steady increase in the consumption of fuelwood because of rapid population growth and high costs of other forms of energy.

Because of the uncertain political and economic stability of the region, it is almost impossible to forecast economic development and related energy demand. However, it is expected that energy growth will be slow because of limited economic growth.

Supply and Resources

Petroleum and wood dominate energy supply. Oil is the most widely used form of modern energy, but its share is slipping as hydroelectric and geothermal power replaces petroleum in electricity generation. Exploration has been minimal because of the political situation and because the oil industry has limited geological interest in Central and South America.

Central American countries benefit from an annual agreement with Mexico and Venezuela that involves a low-interest line of credit equivalent to 20% of the purchase price of reconstituted crude. Interest on this line of credit is reduced further if the funds are used for development projects. However, the nature of the reconstituted crude oil that is supplied does not match customer demand. Each country has its own refinery, which is small, uneconomical, and running below capacity. Imports make up the shortfall in light oil products.

Hydroelectric power has always played an important role in Central America. Steep terrain and heavy rainfall mean that hydroelectric resources can supply the majority of the region's electricity until the year 2000. Geothermal resources are relatively unknown, but El Salvador has advanced the farthest in developing geothermal potential. Coal is not produced in Central America, and deposits are mainly low-quality subbituminous coal.

Wood production, conversion, and use are labour intensive and have low costs in foreign exchange. High oil prices have opened the door for new uses of wood fuels (firewood, charcoal, wood chips, pellets, and methanol). Wood consumption exceeds sustainable supply in the densely populated parts of Central America. Generally, the cutting of fuelwood contributes to the negative effects of deforestation only after the land has been cleared for other purposes (for example, agriculture).

Other indigenous resources contribute to the region's supply base. Bagasse supplies most of the heat, steam, and electricity required for sugar processing. There is no incentive for efficient use of bagasse because the fuel is free. If the excess power could be sold to utilities, sugar processors might use bagasse more efficiently. Little is known about the amount of solar energy used for product drying on a commercial or household scale, but subsistence farmers have always dried their crops in the sun. Solar heat will play a larger role in the future.

Animal power is of limited importance in Central America because the steep slopes must be cultivated by hand. Wind-driven water pumps are used in some parts of Central America. Biogas production from animal manure and agricultural wastes occurs on a small scale on dairy and swine farms, but the average family does not own enough animals to generate the necessary wastes. Alcohol production has been considered, but a distillery in Costa Rica closed because of a lack of raw material.

Energy Problems

A major issue is to reduce the foreign exchange costs of energy to enhance rather than constrain development. Some of the components of this problem include

· Strong and increasing dependence on imported petroleum,

· Fuelwood shortages or deficits,

· Inadequate institutional structures for energy management,

· Inefficiency of the energy infrastructure in the region,

· Increases in energy costs, Shortage of foreign exchange, and

· Economic and political uncertainty.

Energy Options

Energy strategies to meet the problems of the region include three important options:

· Promote exploration and development of indigenous resources.

· Encourage fuel conservation and substitution.

· Improve the energy infrastructure.

Existing Energy Policies

Many Central American countries have made progress in creating institutional structures to administer and manage their energy sectors. However, in most countries government decisions still reflect the preeminence of the national electricity companies.

Although little official policy exists, a review of government actions reflects policies to

· Develop hydroelectric and geothermal power to minimize the use of petroleum to generate electricity,

· Encourage petroleum exploration by making geological data available to companies and by changing petroleum legislation,

· Protect local refineries,

· Set petroleum prices at a level that covers costs,

· Shield the residential and transportation sectors from the full impact of increases in oil prices by using gasoline revenues to subsidize diesel, liquefied petroleum gas, and kerosene,

· Improve the energy database, and

· Ration (in Nicaragua) to restrain demand and the outflow of foreign exchange.

Central American countries must develop and adopt energy strategies. Direct government action is needed to create local initiatives.

Suggestions for Further Research

Increase knowledge on the current energy system and the energy resource base by conducting research on

· Economic overlaps and energy flows between the traditional and modern sectors,

· The extent of energy resources (including wood and biomass),

· The dynamics of the commercial market for fuelwood and charcoal,

· The supply and use of bagasse, and

· The consumption, cost (in time or money), and availability of all fuels used in households, commercial enterprises, and industry.

Use research and demonstrations to define technological options for

· The production of fuelwood from fast-growing trees in small woodlots, commercial plantations, and agroforestry projects,

· The development of efficient equipment to use and convert wood (both in homes and in industry) and to use bagasse and agricultural residues in agricultural processing, and

· The production of liquid fuel from biomass.

Research is also needed on the role that the government should play in the energy sector. Practical research should explore

· Objectives of energy policy,

· Integration of energy planning with planning in other sectors,

· Institutional structures needed to manage the energy sector,

· Ways that the rate of resource development can be increased (especially for petroleum),

· Options for energy substitution and conservation (especially in industry and transportation) and for increasing the use of hydroelectricity,

· Methods to optimize the production and use of fuelwood and charcoal,

· Energy prices needed to meet policy objectives, and

· Methods to assess the impact of decisions on different sectors, social groups, and regions.

Links must also be established between research and implementation. Results should be published rapidly and diffused widely. Regional research projects should be encouraged to use the skilled individuals that are currently available.