A correct energy strategy must be aimed at Nicaragua’s development

This electrical engineer shares his detailed knowledge of Nicaragua’s electricity system and its current energy model, with particular emphasis on the Ortega government’s lack of an energy strategy or a national development strategy.

Fernando Bárcenas

Acountry’s total energy demand includes the needs related to transport, light, making machines run, cooking, etc., and is supplied by a variety of sources. Almost 50% of Nicaragua’s energy still comes from firewood given that much of our population uses it to obtain energy for cooking, whereas firewood accounts for only 15% of the energy consumption on a world level because its caloric power is only a third that of propane gas and its efficiency five times inferior. When the rate is appropriate, the use of propane and electricity produces integral economic savings—i.e. one accounting for both factors—of 45% over the cost of firewood. Nicaragua has no strategy regarding this.

As for the other 50% of the country’s overall energy demand, electricity still only supplies 10% while petroleum derivatives, fundamentally gasoline and diesel, supply the remaining 40%, mainly for transport.

The stages of the world’s
technological evolution

Before analyzing the evolution of our country’s electricity industry and pointing out the decisions involving very important errors, let’s first go over some fundamental characteristics of energy development in the world context, starting with the stages of technological evolution.

The earliest energy source humanity used was biomass, the name for all organic material that can be transformed into energy. Humanity evolved as it became able to do more work with the same resources, to make labor more productive through ever more technologically efficient means to transform and use the different forms of energy. This process slowly translated into more knowledge and greater wellbeing. Humanity evolves as technology becomes more complex, not only to make better use of nature’s resources, but also to increase our control over the uncertainty inherent in the conditions of life and work. In other words, it evolves to the degree that we learn the laws of nature.

Technological evolution, which as at the core of civilization’s leaps forward, has been concentrated in three basic stages over the course of history. The first occurred when humanity started fashioning tools using rocks, bone, wood, fire and metals. That covered the Paleolithic then Neolithic periods and later the bronze, copper and iron ages. The second stage, which we’re still in, started in 1760 when humanity began using machines, making way for the industrial revolution. This stage incorporated electricity to facilitate the use of a variety of tools and utensils, including in domestic activities. The third stage began with automation, which is freeing human beings from mechanical work and from the external alienation involved in having to be a living piece of conveyor belt systems. This stage could ultimately liberate humanity from exhausting work and a new world order could allow us to dedicate ourselves to scientific discovery and the arts. That would be a fantastic leap for humanity. But so far we’re only seeing it as a utopian goal.

When the world runs out of oil…

Petroleum has been used as an energy source for 3,000 years before our era, a time when wind, water and animal traction were also being used. Until the mid-18th century, the transformation and consumption of energy remained virtually stable, but the industrial revolution produced an enormous surge of production and consumption.

The wellbeing associated with that huge increase in energy consumption also increased the world’s population, which grew from 1.65 billion in 1900 to 5.3 billion by 1990. But while the population multiplied 3.2 times in those 90 years, energy consumption increased five times more, from 0.89 to 13.5 terawatts. That vast leap in energy demand, facilitated by petroleum production, is estimated to have topped out in 2006.

The energy sources sustaining the current peak of world consumption are oil (35%), coal (26%) and natural gas (23%). Those included used most recently have been natural gas and uranium, the latter currently accounting for 13% through nuclear power. The other energies—hydroelectric, geo¬thermic, solar, biomass and wind—still contribute insignificant percentages. As we know that our three main energy sources are finite, humanity will very probably have to rationalize its energy consumption patterns, also considering the Earth’s homeostatic balance.

There are now some 7 billion people on this planet, which doesn’t have the capacity to sustain such a high energy consumption level without degrading. One current theory is that when the oil reserves are depleted, the population will have to adjust to levels that again make human life on the planet sustainable. According to that theory, by around 2030 to 2050 energy production will have dropped off as rapidly as it grew and humanity will have passed the crest of its energy production.

What an energy strategy needs… and needs to avoid

Economic development is inexorably linked to the productivity of the means of production and more efficient use of prime quality secondary energy sources such as electricity, which can be transformed almost integrally into labor. The design and implementation of any development policy for Nicaragua must include a coherent strategy for an optimum supply of electricity over the long haul that contributes efficiently to the country’s competitiveness. A plan to simply expand the electricity supply in the next 12 years isn’t a strategy. What we have today is barely an indicative plan.

The concepts behind an energy strategy must respond to various questions: How much primary energy is spent extracting a different, better quality form of energy? Is that primary energy imported or from an autochthonous source? What do we produce with the better quality energy and with what energy intensity? How much value do we add to the goods we produce with that energy? And how efficiently do we do it given that energy degrades into lower quality forms?

An energy strategy must reverse the inefficiencies in energy transformation and in the final use the country makes of that energy. It must defeat the interests that impede independent energy development, ending individual control over the electricity sector that obtains speculative benefits through bureaucratic privileges and places onerous burdens on the system, obstructing transparency. An authentic energy strategy must also be the central tool of a social policy at the service of the nation.

Unless the State’s political resources are under citizens’ control it’s impossible to open the way for a nationalist energy strategy with social content. Because abuse of power is about the search for any possible personal benefit, it would be naïve to think that a healthy electricity industry could be conceived as long as the State is in the hands of an absolutist and corrupt clique. Corruption has no strategy because it’s only out to leap at opportunities for pillage. Poised to grab arbitrary advantages, such a clique can’t draft a coherent energy sector plan; in fact it can’t even draft one for its own benefit. Because Nicaragua’s energy supply lacks a strategy, major errors are being committed that end up scuttling even the businesses entered into beyond the law.

Privatization of the electricity industry

Nicaragua has been without an economic development policy since the eighties, thus encouraging a culture of improvisation. Lacking an ideology and any social content that would give programmatic meaning to the required transformations, state policy has been reduced to the control of power for petty personal reasons.

As it had become not only a poor but also a scandalously indebted country during the eighties, Nicaragua was pressured by the International Monetary Fund’s structural adjustment program into privatizing the electricity industry in 1998. As a result, it was split into three segments: generation, transmission and distribution, with a state regulatory entity in charge of applying operational regulations with technical and commercial rules that, in theory, would guide private investors toward financial efficiency. At the same time, however, it eliminated the objective of social service in the electricity supply and with it the sector’s strategic goals.

In such a model, private profitability can easily degenerate into a game played with loaded dice, above all if there’s an extremely bureaucratic political power that sees itself as independent of society. Today, this deregulated model, which could have developed better methods to assess the technical and economic efficiency of each activity in the sector to at least promote competitiveness among market agents, has lost any possibility of coherence under the Ortega government. Instead of central planning by the State, which is typical in the integrated supply of this public service, we have a spurious and corrupt integration with the governing family moving into the different segments of the energy system as an investor. In so doing, it uses the state institutions responsible for energy policies and the sector’s regulation to serve its own economic interests.

Thanks to this government, this strategic sector is suffering profound distortions that result in cost overruns, bad technical quality and economic inefficiencies. Moreover, it won’t be possible to reverse all this even in the medium term. The speculative damage done to this strategic industry will structurally affect the national economy, weakening it vis-a-vis globalization. And because the decisions being taken with respect to energy always have long-term consequences, it will affect our society in a sustained way, making electricity more expensive with direct commercial contracts that sidestepped transparent public bidding processes with the endorsement of the Nicaraguan Energy Institute (INE), the State’s regulatory entity, and the Ministry of Energy and Mines (MEM). The world has become more conflictive, with the international market imposing the law of the jungle and the weakest and least competitive dying out or struggling for survival in the poverty traps.

We could have privatized
with a more strategic plan

Looking back, we could have argued that everything ruled by commercial logic is negative and that the electricity system should be integrally state-run. We could have opposed the privatization ordered by the IMF in the nineties, because the history of our energy system changed with that decision. Following it, the mistakes, the occasional bad faith, occasional useless bureaucracy and lack of vision have helped the electricity sector become a center of mafioso speculation.

It may seem possible to be radical and choose different alternatives in the abstract. But in reality we always have to operate based on the correlation of forces in play at the time. And in the nineties, when the IMF ordered the privatization of the electricity system, Nicaragua was so deeply indebted that it had no favorable force on its side. Our debt was ten times larger than our GDP and hence unpayable. It’s infantile to simply ignore such a disagreeable setting. At that time it simply wasn’t possible to reject the norms and oppose the privatization of the electricity system. In that adverse scenario the only thing we could have done—and should have done—was draw up the best strategy possible.

Even within commercial logic we could have drawn up a strategy that would favor the country, but the leaders of our political class don’t have a nationalist vision, so the electricity sector was deregulated improvisationally. Commercial logic does have some advantages, among them revealing the efficiency or inefficiency of generators and distributors so the value of efficiency, losses and waste can be quantified. Knowing this is very valuable because it allows the taking of corrective measures and decisions that reduce weaknesses and neutralize threats. When everything is in state hands, as happened in the eighties, nothing could be analyzed because absolutely nothing was known about what was being produced efficiently and what wasn’t, making it impossible to know anything about the cost of doing it one way versus doing it another.

Our low energy consumption
contributes hugely to our high prices

Energy consumption is very unequally distributed in the world. While the United States consumes 12 barrels of oil equivalent (BOE) per capita, the other developed countries consume between 5 and 7, and the rest of the world only 0.44, which is 22 times less than per-capita consumption in the US. Nicaragua’s consumption is the second lowest in Latin America, after Haiti.

Our country’s low per-capita energy demand influences its high rates. The electricity industry, like any other, has fixed costs, in this case fundamentally in the Value Added Distribution (VAD). In our system that fixed value is US$54 per megawatt (MW) hour. This includes the New Replacement Value, which is the annual cost of replacing assets in grids, transformers and meters as well as operation and maintenance; and commercialization and administrative costs.

If the energy demand is relatively low, as in our case, the proportion of these fixed costs in each MW hour is high. In fact, the VAD accounts for 34% of the electricity rate in Nicaragua and this percentage as an expression of fixed costs rises as energy prices drop for the generators, e.g. through the fall in the price of oil. The small size of our electricity market is thus a decisive factor in making our rates the highest in the Central American region.

But what does expansion of the electricity market depend on? Economic development. Our stagnation is reflected in the fact that the country’s per-capita gross domestic product (GDP) is also lower than any other Latin American country save Haiti.

Another significant element is the energy intensity, which is the amount of energy required to produce US$1,000 of GDP. With the region’s highest electricity rate, Nicaragua needs twice the Latin American average and four times what the European countries require.

How to pay for rural electrification

One more aspect that explains our country’s high electricity rates is the expansion of electrification. The country has moved from 59% electrification to over 85%. But the electrification of more of the country hasn’t meant more income for the distributor; it has rather produced an increase in the commercial losses. The distribution company, previously administered by Unión Fenosa and now by Gas Natural, had at one point succeeded in lowering commercial losses by up to 19%. Today they are back up to 26-28% because of the electrification of rural zones, where the density of the charge per kilometer of line is extremely low and measurement, reading, billing and collecting is not profitable activity.

To palliate that, rather than the government contributing a social subsidy corresponding to the project of taking electrification into the countryside, it is now being analyzed whether to transfer that cost to the overall rate. This means that the other clients will cover the increase of the purchasing cost over the average sales price so the distribution company doesn’t lose anything. By so doing, greater electrification would by definition ultimately raise the rate. Rural electrification should be done anticipating a social rate of possibly up to 100%, through which the State would help subsidize energy to the poorest sectors. Today the social rate in Nicaragua is 15%, the lowest anywhere in Latin America.

Oil-driven generators
are sometimes cheaper…

At key moments, using oil could be a good strategy for producing electricity. Working out whether it is or not involves analyzing a combination of three factors. The first is the trend of international oil prices. For over a century the price of oil was kept very low, under $8 a barrel. That meant that renewable energies weren’t profitable because obtaining one MW with a thermic generator—which operates with oil derivatives—requires an investment of around US$1 million (currently just under US$800,000) while the investment in a hydroelectric plant required for the same MW is US$4 million. It’s clearly more favorable to recover the investment with thermic rather than hydroelectric production when the price of oil is low. Some renewable energies began to be profitable after the 1973 crisis, when the price of oil reached US$20 a barrel and stayed there until 2000, and above all with the 2008 crisis, after a barrel of oil had shot up to US$140 in just eight years.

In the Somocistaperiod Nicaragua’s electricity system was vertically integrated, with ENALUF, the state company, covering all the functions: administrator; system operator; energy producer, transmitter and distributor; sector regulator and energy policy designer. Under that model, banks loaned the State money to execute energy development projects. In 1965, the 60-MW Centroamérica hydroelectric plant in Jinotega went on line and the 50-MW Santa Bárbara hydroelectric plant in Matagalpa (now called the Carlos Fonseca Plant) began operations in 1971. Two dams were built on the Tuma River, one upriver in Asturias and one further downriver in Apanás to harness water for those two plants. Between them their two reservoirs store millions of cubic meters of water. La Virgen dam was built for the Carlos Fonseca plant, which also uses the water whirled by the Centroamérica plant. The 45-MW Managua Plant # 3, which functioned with bunker, was constructed in 1971, followed by the 100-MW Nicaragua Plant, which also uses bunker, in 1976. Between 1974 and 1978, 28 wells were drilled in the Momotombo geothermic field, permitting the operation of a 70-MW plant. As we can see, it was a balanced plan, with 176 MW in renewable plants and 145 MW in thermic plants, at times when oil cost less than US$8 a barrel.

Investing in thermic generators was shown to be an error after 2000. Nonetheless, Nicaragua still introduced private generators that use bunker in that period, between 1998 and 2003. The 74-MW Corinto Plant was installed with a 20-MW barge as a power back-up for a 50-MW power purchase agreement. CENSA (63.9 MW) and Tipitapa Power (52.2 MW) were also installed. A few years earlier the State had installed Units 4 and 5 of the Managua Plant, each with a capacity of 6.25 MW. As all these private investments in thermic generators coincided with the abrupt increase in oil prices, the decision to introduce them triggered a rate hike.

It should be mentioned that the rise or fall of oil prices has to do with crises in the producing countries, not necessarily with the production itself. Oil production doesn’t increase fast enough in reaction to rising prices, so low prices are unexpected. For example, the current price drop is temporary because it’s based on a conflict of interests among the world’s major producers. In the United States they’re selling below traditional production costs using the hydraulic technique of fracking. Saudi Arabia has responded by lowering prices to bankrupt those companies and thus maintain its market quota, eliminating the US competitors. It costs US$50-60 to produce a barrel with the fracking technique and when the international price falls below that US companies involved have to start closing. In this period of falling prices 34 such companies in the United States have already shut down. If Saudi Arabia succeeds in bankrupting that competition, the price of oil will go back up.

…some perform better……

The second factor in considering whether to select thermic plants is their performance: how many kilowatts they produce per gallon of fuel. The Corinto Plant yields 17.6 KW per gallon, which is the highest in our generator park and it set the bar. No other generator installed after that one was allowed a lower output, as it’s a decisive element in determining the cost variable of the plant’s energy production. Nonetheless, at the beginning of the Ortega government in 2007, another enormous error was made by installing the 62-MW Hugo Chávez plant, which uses diesel, 24% more costly than bunker. It has demonstrated a yield of only 14.1 KW per gallon. Then between 2010 and 2013 nine batteries of generators made up of 92 units of 2.51 MW each were installed. Known as the “Che Guevara” generators, they provide another 231.32 MW at an average output of 16.4 KW per gallon. In short, the most recent plants installed to cover the energy demand are economically the least efficient.

These generators belong to ALBA de Nicaragua S.A., (Albanisa), the private joint venture company with Venezuela created to manage the investment funds generated by its oil supply to Nicaragua. They were added to the system without public bidding and their introduction corresponded neither to the established conditions nor to transparent competition. Another serious problem is that they’re connected in the premises of the distribution substations, where the transmission changes the voltage from high to medium tension, so they are connected to the same distribution bar. This means that any fluctuation affects the quality of the energy sent by the substation to nearby industries. Nowhere in the world under any concept is a generator allowed to be connected in a distribution substation that injects energy into the transmission grid. It should be injected with its own substation, which should have its own security parameters.

…and sometimes their
design best fits the system

The third factor to be considered in choosing thermic plants is whether their design characteristics meet the system’s minimum performance characteristics established in the Operation Norms. Technically speaking, they need to be able to contribute auxiliary services with an inertia constant that provides dynamic stability to the system when contingencies occur.

But none of the 231 MW of the Che Guevara units meets those technical criteria. This produces another excess cost, as auxiliary services have to be purchased from other generators, altering their optimum economic dispatch by obliging them to dispatch to less efficient generators so they can contribute the inertia constant the system requires.

The electricity crisis of 2006

In January 2007, when the FSLN returned to government, it created the Ministry of Energy and Mines. The Nicaraguan Electricity Company (ENEL), the state company created in 1994 to take charge of electricity generation, transmission, distribution, commercialization and other operations of plants still in state hands, was placed under MEM’s supervision. At the same time it promised to establish a mechanism to ensure the automatic adjustment of electricity rates in line with the market costs of purchasing energy.

It was the right thing to do, the normal thing, and was even established in the regulations, because before then INE officials had believed there would be no consequences of failing to pass through the changes in generating costs, for example due to the rising cost of oil. The consequence of accumulating them was that the distributors lost income, so stopped paying the generators, which in turn stopped maintaining the plants (Hidrogesa, Geosa and Gecsa) and paying the oil suppliers, and they soon turned off the faucet. No new generating company wanted to invest in Nicaragua. The banks viewed financing generation projects in our country as a foolish risk.

That chain of consequences resulting from INE never assuming the real cost of energy brought about massive electricity rationing in 2006. After daily power outages of between 3 and 12 hours that whole year, the electricity industry law was modified to temporarily permit generating contracts without bidding to get us out of that emergency stage. It was also proposed to hire an 80-MW barge to be installed in Port Corinto within two months. But that coincided with the departure of President Bolaños and the arrival of Ortega, and the barge never came. What we got instead were those inefficient Albanisa generators whose power is purchased at considerable cost.

More energy consumption
vs. more efficient energy use

Where does Nicaragua get its primary energy? How do we produce it and how do we distribute it? Up to now, over 50% of the primary energy used to produce electricity in Nicaragua comes from abroad. We’ve basically been consumers of petroleum-based energy and our own valuable energy resources—volcanoes, water and wind—have barely been tapped. Nicaragua has an abundance of geothermic, hydroelectric, wind and biomass resources. These have the potential for at least 4,000 MW, which we could be tapping into to produce electricity. But we’re only using 8% of our autochthonous energy resources.

A country such as ours, which doesn’t make use of its own resources and instead spends 62% of its export income to pay for imported primary energy—oil and its derivatives—doesn’t have a development policy. It’s a dependent county, tied hands and feet to exogenous factors. To be clear, the problem isn’t so much that we import oil as that we don’t use the energy it generates to produce and export products with enough value added to keep the oil bill from subtracting such a high percentage from our export income.

It’s calculated that by 2035 the world will need double the amount of energy it consumed in 2000. But a significant phenomenon is occurring. In the OECD countries, the most developed ones, energy consumption will increase very little because they’re achieving great efficiency. Half of the increase in their demand will be covered by greater efficacy in the final use of the energy. In contrast, the non-OECD countries, the less developed or developing ones, will increase their consumption over those years. In fact, it is calculated that over 90% of the world’s increase in energy consumption will be produced in the less developed countries.

Let’s look at an example of cost reduction via efficiency in our own reality. If we were to have to increase our generation by 45 MW we would need to invest US$150 million if we were to choose a geothermic plant—which generates energy based on volcanoes. But we could avoid the need for those additional 45 MW altogether by investing US$40 million (26% of the cost of that new plant) in efficient technology programs and more efficient lamps and motors.

A country with an oil bill that consumes 62% of its export income, largely due to the reduced productivity of our production, is unviable. The current government’s decision to invest in low-efficiency thermal generators means that the part of the oil bill associated with electricity production eats up 16% of the country’s exports. The remaining 46% goes for the fuel used in operating the country’s vehicle park. When saying that the decisions a country makes regarding its energy system are strategic, I’m referring to decisions that cause this kind of dependency.

We’ll probably see more outages

More than 30% of the generators currently installed in the country are unable to resist a contingency in the system, which is technically very serious. To Albanisa’s 232 MW this government added another 200 MW of wind generating plants, which do not deliver a constant output. Each wind turbine has 2.1 MW of power and delivers energy when the wind velocity is within a range between 3-5 meters and 19-21 meters per second. The energy generated fluctuates throughout the day and by season. Wind generators are functional when the energy system is robust and can resist a maximum of 7–10% of that energy to avoid exceeding the rotating reserve capacity of the other installed generators. Rotating reserve refers to the reserve of plants that “rotate” 5% of their power without producing energy, but can use it to immediately supply any fluctuation between supply and demand.

The combined 430 MW of the Che Guevara units and wind generators have no inertia constant. This means they can’t maintain the system’s frequency for the fraction of time needed to reestablish the balance among high-velocity generator interrupters in response to a contingency triggered by an imbalance between supply and demand. Instead, they aggravate the imbalance when their over-sensitive protection systems go into operation, either due to high or low frequency.

The disequilibrium between demand and generation causes a chain failure of the generators and that provokes a power outage in the entire country. That sudden interruption of energy, however brief it may be, causes the most sensitive industries to lose what they’re doing at that moment, and is very damaging to their equipment, and of course to household appliances.

In 2014 we had a series of sudden blackouts that we hadn’t experienced for some time, and they weren’t due to programmed rationing. We’ll probably see more because the system is working without security or reliability conditions or dynamic stability. To help out those generators, GEOSA, the plant Somoza installed in 1976, which couldn’t generate enough even then and now has an efficiency of 12–13 KW hours per gallon, had to come onto the system as of 2010, with a permanent cost overrun that had to be added to the sale price of its energy. Due to the characteristic of its generators, such overruns obviously contribute to raising the electricity rate in Nicaragua.

Albanisa is the big beneficiary

The MEM’s indicative expansion plan includes the coming on line this year of 140 MW of medium-speed motors in the form of four 35-MW thermal plants that run on fuel oil. The generation by these plants meets the requirement determined by the National Electricity Transmission Company (ENATREL) and the National Load Dispatch Center (CNDC) to guarantee the system’s quality, security and reliability and assure the regulation level required for the National Interconnected System to operate given the incorporation of renewable source projects (the current wind generators and the future Tumarín hydroelectric project). ENATREL and the CNDC considered that bringing these medium-speed motors into the system will make it viable to phase out GEOSA. In other words, bringing these motors on line is supposedly about relief for the obligated generation, even if they can’t produce enough. Mixing generators using renewable sources that don’t meet the technical requirements to permit their connection to the system with thermic generators that can’t dispatch enough energy isn’t the best decision for the country’s energy independence, much less for reducing generating costs.

You might wonder who’s behind these four generators, which have already arrived at the port of Corinto. The answer, of course, is Albanisa. Because the transitory law allowing contracts without bidding, passed to resolve the outages of 2006, has continued to be used right up to today, there hasn’t been a single tender for energy-generating contracts during the eight years of the current government. This has lent itself to all kinds of deals and has prevented the technically and commercially best generators being chosen. It’s yet another anomaly we’re now paying for and will continue paying for over 15 to 20 more years.

Moreover, the government of Taiwan donated Nicaragua 27 MW in thermic plants in 2007, but they disappeared as state plants to later reappear as Albanisa plants. A contract should have been made with the distributors for zero added power value because they were a donation to the Nicaraguan people. Doing so would have helped reduce the electricity rate, but their generating capacity is now part of the private assets of Albanisa, which charges for that power, thus affecting the electricity rate.

How will the rate savings due to
the low oil prices be distributed?

Between 1990, when economic activity was reinitiated in Nicaragua after the war of the eighties, and 2003, the generator park doubled, with 80% of the electricity supply depending on the thermic plants listed above while the use of geothermal and hydraulic energy fell. Today, with the policy to change the energy grid, the electricity obtained from oil has dropped to 49%, but the electricity rate hasn’t dropped one iota, even with the fall in oil prices we’ve been seeing since July 2014.

Not unreasonably, the population is demanding a rate reduction at least commensurate with the savings on the oil bill. Technically, what’s behind the current discussion about the percentage the rate should be reduced by is the variation of the average price in medium-voltage bars.

The government’s decision not to meet until April to decide how much it will lower the rate isn’t because it doesn’t know the new price. The CNDC reports the value of the average purchase price of each generator’s output every day based on its variable cost to cover the hourly demand of the system’s load curve. It provides this transactions document to INE so that regulatory body knows precisely how much savings are being produced, including with the fall in oil prices. Nor is it any problem to project ahead the average purchase price using statistical software fed by variables that don’t have an elastic correlation. INE does it all the time to define the average sale price expressed in the rate sheet. What’s not known is how they are going to justify the arbitrary distribution of that savings, because surely the oil prices are going to go back up.

What’s in the future?

The Energy Ministry’s expansion plan has projections all the way to 2027. By that year, the change in the energy grid will supposedly mean that only 7% of our energy will be produced with oil and its derivatives, but it needs to be kept in mind that this is only an indicative plan. At the end of the day, the only part of the government’s project proposal portfolio that will be executed is the part that attracts the commercial interest of investors, and then only in a highly concessionary setting.

Beyond this temporary price drop, we can observe in MEM’s indicative plan for expanding the system how we’re going to generate electricity at least as far as 2019. The 14-MW Larreynaga hydroelectric plant was planned to go on line in 2014, but it still hasn’t. For this year the plan announced the 140-MW thermic generators with medium-speed motors I already mentioned. After that the geothermic energy generated at the Casita volcano will come on. That plant, which plans to provide the system with 35 MW in 2016, will continuously contribute that power and energy at a lower price than the wind generators, whose demand must be covered by the rotating reserve of other generators or by a less efficient one if they stop operating because the wind doesn’t blow within their working range. Geothermic energy is very favorable, but it’s unlikely that Casita will actually start operating in 2016.

The expansion plan also includes 24 MW of biomass generation for 2015 and 32 MW more for 2016. That energy very probably will enter into the system because it’s in the interest of the sugar refineries to obtain that considerable income from cane bagasse, the discarded leafage whose volume is otherwise hard for them to deal with. The refineries have realized that selling electrical energy using the bagasse as primary energy is more profitable than selling the processed sugar itself.

Tumarín is rife with negatives

The other big project in the expansion plan, which deserves a lengthy description, is the Tumarín hydroelectric plant, which will supposedly supply 253 MW in 2018, although in all likelihood it won’t go on line before 2020. Its story is particularly important because it will supply 33% of the power demanded and 23% of the electricity Nicaragua consumes.

So many eggs in one basket: Given our reality, there are serious consequences when a single point of supply, a single generator, with a gigantic hydroelectric plant supplies such a high percentage of the country’s demand. Any contingency that affects that plant or its interconnection would make the system’s overall supply reliability unmanageable.

Lording it over geothermic sources: Another negative aspect of Tumarín has to do with Nicaragua’s high geothermic potential. An important exploitation of volcanic energy is through “must run” plants, which contribute base energy to the system and are in constant operation 24 hours a day. They could clash with what Tumarín generates in some pre-dawn hours, when demand in the country is low. That is why the two Brazilian companies that will build Tumarín, the state-run Electrobras and private QueirozGalvao, are requiring that the contract make clear that the energy generated by Tumarínbe dispatched before any other. It this happens, no bank will want to finance a geothermic project with an expressly limited “must run” energy criterion. It’s worth considering that our Pacific volcano chain has a geothermic potential of 1,500 MW and that the heat 10,000 meters beneath the surface of the planet has 50,000 times more energy than all the oil and natural gas existing on Earth.

Consumers will pay for its idleness: Tumarín’s builders are also requiring that the contract establish that the 1,108 gigawatt (GW) hours per year of energy they project that Tumarín will generate must be paid for, even if some kind of crisis impedes the generation, for example if there isn’t enough water during a drought due to climate change. This will naturally have a major impact on the electricity rate because another generator will have to generate and be paid for that electricity as well. Given this possibility, they’ve also introduced into the Tumarín law that another rate loan be made so the energy doesn’t go up, again indebting the consumers, who have no reason to assume the generator’s operative risks.

They’ll also pay for its crutch during the dry months. In addition to all this, Tumarín’s generating plant depends on the hydrological cycle. It will surely generate energy at full capacity for six to eight months, but its generation capacity will drop by 90% during the dry months. That means that another reserve generator will be needed during the dry season but will be turned off for a good part of the year. In other words that reserve generator will charge for its power only to generate some three months a year to complement Tumarín, implying a contract with another seasonal generator for when Tumarín isn’t generating.

Its energy can’t be stored: Tumarín can’t generate all year long, optimizing its output, as Hidrogesa’s Carlos Fonseca and Centroamérica hydroelectric plants do, because it has a structural inconvenience. It’s a run-of-the-river plant that generates by using the available water flow, as do very small hydroelectric plants that can’t justify constructing a dam and reservoir. That’s fine as long as the water is running, but reservoirs allow the energy potential to be stored as dammed water as if it were a battery. That allows an annual regulation of the power produced, with the CNDC using that stored energy to plan its optimum dispatch from thermic generators based on the price of oil and from hydrothermal ones based on the availability of stored water. It can’t do that with either geothermic steam, which must be used continually, or with a run-of-the-river plant like Tumarín. It’s inconceivable that the government could have authorized such a gigantic plant that takes advantage of our most abundant river basin in a way that doesn’t allow the CNDC to regulate that energy to the country’s convenience. It should never have been allowed for that incredibly rich basin to be used in that way.

It wastes water: Being a run-of-the river plant, it receives more water than it can make use of, so water will be wasted when it is generating because it will pour out unharnessed. The engineering work to construct a reservoir to regulate the water is costly and the Brazilian companies are taking advantage of a natural phenomenon to avoid costs: they will only build a small dam across a narrow throat of the Río Grande de Matagalpa flanked by rocky cliffs at the site of the engine house.

The savings of the economy of scale isn’t being passed on to consumers. The original power of its generators was increased from 180 MW to 253 MW, reducing the already small original reservoir and worsening the plant factor, but it will now generate 200 additional GW hours with a relatively small partial investment by increasing only the power of the generators. Thus, with an economy of scale, they considerably reduced the costs of the energy generated, but without passing those savings on to the contractual sales price. Did they do that through negligence? Hardly. It was done because nobody in Nicaragua is safeguarding the country’s interest.

The companies get nine more years to charge commercial rates. Last but not least, another benefit was added to the Tumarín law in the latest negotiations, with the justification of finally being able to wave the starting flag for work that was supposed to have started seven years ago but has yet to begin. The original contract was for 26 years of commercial operation by its builders, after which it would belong to Nicaragua, which would then mean zero commercial costs for that energy in our electricity rates save for maintenance and operation. But the Tumarín companies got the contract extended for nine more years in exchange for building a 52-kilometer highway between San Pedro del Norte and Tumarín. In other words, thanks to this govern¬ment’s arbitrary discretionality we have given the companies over US$380 million in costs and plant maintenance for those additional years in exchange for a highway that will cost them US$21.7 million to build, and with a considerable rise in the cost of the KW hour, which is obviously a major distortion of the electricity system’s function.

And what about the canal?

Finally, some are asking if there’s enough energy in Nicaragua to supply the demand associated with the construction and subsequent operation of an interoceanic canal. What we should really be asking about is the energy required for Wang Jing’s speculative sub-projects, because none of the actions so far suggests they’re really working on an engineering project of the scope of a canal. There are no signs of any financing for it, and without financing there’s no project. To guarantee financing investors need to see very professional technical feasibility studies, and only based on those and on detailed estimates of the construction costs, with detailed designs based on multidisciplinary engineering studies, could the financial profitability be estimated based on valid scenarios of commercial competitiveness. And so far we have heard absolutely nothing about all that.

All we get are speeches about the canal as a justification for grabbing up all the lands in Nicaragua that have tourist and environmental value and for taking over the water resources without any definition or limits to the area of the concession. Wang Jing’s project in Ometepe talks about making volcano hiking paths yet they’re going to appropriate all the lands leading up to the Maderas and Concepción volcanoes. In San Miguelito, which has very valuable wetlands, Wang Jing has announced plans to build a golf course for international tournaments. In the Punta GordaReserve his project is jungle walks or adventure tourism. In the nearly 400-square-kilometer artificial lake called Lake Atlanta they’re planning to build, he’s talking about a project to farm fish to sell in China. In Rivas he’s thinking of building casinos, four hotels and a 140,000-unit residential center. There will also be an airport to connect Europe and South America passing through Nicaragua. There will be commercial storage warehouses and fuel storage tanks near Brito, also in Rivas, and one or two deep-water ports. He’s thinking of doing all this, but he won’t do the actual canal.

For all these canal sub-projects, Wang Jing says he’ll install cement and metallurgy factories. And to supply the energy in this country under his control, an enclave segregated from Nicaragua, he’s announced he’ll build a 200-MW generating plant.

One thing is high electricity rates;
another is why they aren’t dropping

Throughout this presentation I’ve described a very inefficient system. Nobody really benefits from inefficiency. In other words, no one seeks it as an objective. It’s the result of a corrupt system. Those who skew the electricity industry, increase the price of energy for their own benefit, elude the competition of public tenders and collude with the authorities to invest the least possible for the maximum gain generate cost overruns and inefficiencies. Establishing market rules to their own measure without the proper regulation and control provokes corruption. When we have a regulating body that doesn’t fulfill its function and policies centralized in a few hands, as we now have, it makes way not only for corruption and inefficiency, but also for policies that are taking us to the brink of disaster.

The day the country recovers its judicial order, we’ll be able to climb out of the mess this clique has distorted for its own purposes and all that will return to state hands. But it won’t be possible to reverse all the damage. For a time there will be an inertial influence in other contracts and it will be necessary to consider corrective measures, the renegotiation of agreements, so Nicaragua won’t irresponsibly close itself off to international financing.

I hope I’ve made it comprehensible why Nicaragua has the most expensive electricity rates in Central America. But if someone still asks me why the rate isn’t dropping even though the oil price has, I must confess that although I don’t understand it I can explain it with a simple analogy, since explaining how things happen doesn’t imply being able to sort out why they happen that particular way. My analogy is this: before the coming vacations begin, the transit police has sent 400 officers out to issue 30 fines each per day. That means an illegitimate monthly take of 109 million córdobas (over US$4 million). The officers doing the fining also order the drivers to take the fined vehicle to the vehicular deposit of the Managua mayor’s office, which then charge them for having had their vehicles towed… Okay, analogously speaking, Caruna, the lending institution of the family in power, is taking our savings in energy costs as payment for similarly virtual service and for the same reason—it just wants the money. What that indicates is that we need to drive very cautiously and efficiently in Nicaragua’s electricity market until today’s reality is transformed.

Fernando Barcenás was president of the wholesale electricity market’s Operations Council in 2002-2003.

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