Honduras Energy Situation

Energy situation especially in rural areas

2.1.1 Energy demand and supply in the household sector The total primary energy offer in Honduras is around 3,020 kTEP or 35,110 GWh. The main source of primary energy is petroleum with 50% share followed by firewood (34 %), hydropower (6 %) and other biomass (6.5 %). The residential share of energy consumption is around 42% of which 87% are provided by fuel wood. Gross electricity generation of the national grid (Sistema Interconectado Nacional –SIN) is currently around 5,959 GWh, with the share of 63.3 % petrol power plants, 34.7 % hydro power, 1.7 % Biomass (bagasse) and 0.3 % imports. The net electricity offer is around 4,430 GWh including imports and exports. Consequently, 25.2% of the gross electricity production is lost. The losses are the highest in Central America after Nicaragua and for 60% classified as non-technical. Following a recent study on the financial crisis of the state owned electricity company ENEE; the non technical losses are caused 40 % by fraud, 30 % by illegal connections in marginalised settlements and 30 % by errors in the billing. While the illegal connection make up for 77% of the non technical losses caused by the residential sector (in total 39%), the fraud and billing errors occur especially in the commercial and industrial sector (50 % of the non technical losses). The installed effective capacity increased from 565 MW in 1994 to 1158 MW in 2006 (with a nominal capacity of 1547 MW) while the peak demand increased from 453 MW to 1088 MW in the same period. As the demand is rapidly increasing a deficit for the period 2007-2010 of 170-380 MW is expected, which has to be covered by imports and emergency diesel power plants. 2.1.2 Rural electricity supply Honduras has one of the lowest rural electrification rates in Latin America after Nicaragua. About 55 percent of the rural population still lacks access to electricity. In absolute terms, it is estimated that more than 400,000 households or more than 2,2 Million people in rural areas remain unserved. The national electricity system is concentrated on the western part of Honduras while the sparsely populated eastern part remains mainly beyond economic line-extension distances. (see figures below). The population density in Honduras is about 58 inhabitants per square kilometre. While in the western departments the density reaches proportions of 137 Inhabitants per km2 (Francisco Morazán) and 306 Inhabitants per km2 (Cortés) in the eastern part it declines to 17.5 (Olancho) and 4 (Gracias a Dios - Mosquitia) . In Rural areas population is highly dispersed and access is often difficult (for example, there is only river access to most of the Mosquitia Region). These two characteristics prevent provision of electric services by the conventional grid, and call for site-specific off-grid solutions like the diesel plants, solar or hydropower. Off-grid electrification in Honduras today consists mainly of installing diesel minigrids, operated by independent companies to serve some larger villages on the bay islands (Roatán Electric Company” RECO, “Utila Power Company” UPCO, “Bonaca Electric Company” BELCO) and in Puerto Lempira in the department Gracias a Dios (INELEM and ELESA). In a few cases hydroelectric and solar home systems have been implemented.

Institutional set up and actors in the energy sector

Honduras' power sector started a deep restructuring in 1994, when it was decided to unbundle the generation, transmission and distribution divisions of the state-owned Empresa Nacional de Energia Electrica (ENEE). However, only the generation was opened for private producers while ENEE buys all electricity via long term power purchase contracts and manages the national transmission system (SIN) and the distribution. Since 2000 ENEE faces a deep financial crisis and since 2005 the discussion on finally unbundling ENEE has intensified.
2.2.1 Public institutions
Energy policy in Honduras remains highly disorganised with many different institutions involved without a clear separation of responsibilities and tasks. The main conflict lies in the fact that the Ministry for Natural Resources and Environment (Secretaría de Recursos Naturales y Ambiente - SERNA) through its subsection Dirección General de Energía (DGE) has the formal responsibility while the national electricity utility Empresa Nacional de Energía Electrica (ENEE) whose director takes up even the rank as minister of the government is de facto more powerful and keeps the control of all the activities connected to the SIN.
Even the Fondo Social de Desarrollo Eléctrico (FOSODE) which has been founded in 1994 with the aim to increase the electrification rate is managed by the Oficina de Electrificación Social (OES) as a subsection of the ENEE. Consequently all grid connected activities are implemented by the ENEE while SERNA in cooperation with some international donors implements off grid projects based on solar and hydroenergy. At the same time even the ministries of health and education and the Consejo Hondureño de Ciencia y Tecnología – COHCIT (with the rank of a ministry as well) have implemented some off grid renewable energy projects in Honduras parallel and without coordination.
Also, during the restructuring in 1994 based on the Ley Marco del Sub Sector Eléctrico, Decreto Legislativo No. 158-94 the Comisión Nacional de Energia was founded, which was supposed to regulate the Energy market. But currently this institution seems to have no power and importance at all.
Honduras has participated in the HIPC initiative and developed a Poverty Reduction Strategy. During this process, sector tables for the coordination of national policy with international donors and the participation of the civil society have been set up. The former ‘subsector table’ for energy has been validated by the new government as an own ‘sector table’, but is currently not working.
2.2.2 Electricity generation, transmission and distribution
Power Generation: ENEE owns 4 thermal power plants with a total capacity of 124 MW. Additionally, 7 hydropower plants with a total capacity of 464 MW are owned an operated by ENEE. The private power producers operate a total capacity of 957 MW (10 thermal power plants with 860 MW, 8 private hydropower plants with 37,5 MW and 8 biomass cogeneration plants with 59,8 MW). The Hydropower, solar and biomass operators are organised in the Asociación Hondureña de pequeños productores de energía renovable – AHPPER. (recently renamed in APER)
Transmission: ENEE is operating the national grid (SIN).
Distribution: Monopoly by ENEE with the exception of some isolated grids on the bay islands (Roatán Electric Company” RECO, “Utila Power Company” UPCO, “Bonaca Electric Company” BELCO) and in Puerto Lempira, department Gracias a Díos (INELEM and ELESA).
Costs of electricity: Electricity is currently sold at an average price of 105 US$/MWh or 10,5 cents per KWh. The generation costs are calculated to be 135 US $/MWh or 13,5 cent per KWh. Consequently, electricity generation is highly subsidized by the government. Detailed information on different tariff and subsidy levels are given in the table below.

2.2.3 Non governmental service providers for rural areas in the field of energy
Projects implementing NGOs:
Energy is only a side topic for most Honduran NGOs and also the umbrella organisation of development organisations, the Federación de Organisaciones Privadas de Desarollo – FOPRIDEH with currently 73 members, is not focussing on the field of rural energy supply.
There are two Honduran NGOs, AHDESA and PROLEÑA which have experiences in the field of the introduction of improved stoves. They are both partners of the EnDEv-HO Project and therefore later described (see chapter 3.1). The project involved several NGOs in the dissemination of stoves and SHS of which the most important is Hermandad de Honduras which is introduced in chapter 3.3.
In the field of rural electrification almost no information exists about Honduran NGOs that implement own projects. This reflects the strong monopoly of ENEE, which still is regarded by the majority of the Hondurans as responsible for rural electrification.
However, some very small scale activities have been carried out by the Fundación Hondureña de Investigación Agrícola (FHIA) in the field of micro hydropower. As FHIA is also a partner of EnDev Ho it will be described in chapter 3.2.
Commercial service provider:
In the field of photovoltaic systems about 8 providers work in Honduras of which Solaris, Soluz, CADELGA and Soluciones Energeticas are the most important. The Solar companies in general have difficulties to develop markets in rural areas. The different subsidy schemes of international donors make the commercial distribution even more difficult.
Especially Soluz accumulates interesting activities in the field of cash and credit sale as well as in offering fee for service options. About 6000 SHS have been sold to rural customers. The credit offer requires a 50% down payment and 3 to 6 monthly rates with an interest rate of 3 % per month.
The fee for service approach with 1500 SHS had to be terminated after the end of World Bank credit support, as the service fees have not been sufficient to cover the primary investment costs of the systems. SOLUZ has calculated that a monthly fee of 18 $ would be required while the customer has to pay the battery by himself.
There are just a few producers of agriculture machines that produce hydropower turbines and the technical level is very low as well. Customers are mostly owners of coffee fincas. Therefore FHIA started to produce hydropower turbines itself.

Policy framework

2.3.1 Poverty reduction strategy
Honduras is one of five lowest income countries in Latin America. Its per capita income in 2004 was estimated at $1,030, slightly above that of Guyana, Bolivia and Nicaragua, though more than twice that of Haiti. The population of about seven million grows at 2.5 percent per year. Poverty is widespread, particularly in rural areas where four out of ten people live in extreme poverty. Neither set of estimates shows any significant improvement over the past several years. In 2001, Honduras worked out a poverty reduction strategy which has become the guideline for the national development strategy. Although Honduras made some progress in reducing poverty, four of the Millennium Development Goals (MDGs) targets are not currently on track to be met by 2015 according to an evaluation of the World Bank .
The Honduran government considers the improvement of the infrastructure especially that of energy services, a key factor for economic growth and for the alleviation of poverty in rural areas. In November 2007 the Government of Honduras obtained a new IADB $27 million credit to promote rural businesses. The program will be implemented by the Ministry of Agriculture’s National Office for Sustainable Rural Development (DINADERS) in the departments Olancho, El Paraiso, Colon and Gracias a Dios. It could offer opportunities for cooperation in the area energy for productive use.
2.3.2 Energy policy
For the electric sector, all policy is based on the Electricity Law of 1994 , which defines roles and responsibilities of the institutions described in chapter 2.1.
On 31.5.2007 the national congress passed the new law on renewable energy which will replace the law from 1998 . The law promotes the use of renewable energies for the electricity generation by custom tax exoneration. The valued added tax (12%) is not part of the exoneration. In addition the law foresees income tax exoneration for the power producer. Additionally ENEE is obliged to buy power generated from renewable energy plants at an increased tariff. As the last point does not address off grid power plants the incentives favour the larger grid connected power plants. Thus the new law has only minor impact on small renewable energy projects.
SERNA approved in 2005 a sustainable energy action plan which is currently updated for the period up to 2025 (Plan de Acción para la Implementación de una Política Energética Nacional Sostenible). The plan covers the whole range of renewable energy, energy efficiency and rural electrification and defines several milestones including the goal to reduce the national fuel wood consumption by 10 % and to disseminate 40.000 improved stoves by the year 2010. However, SERNA does not implement any off-grid projects. Its mandate is to define the general energy policy of the government and the dissemination of improved stoves is spearheaded by the two NGOs PROLEÑA y AHDESA (see chapter 3.1).
As described above the policy regarding rural electrification is mainly developed and executed by ENEE via the OES-FOSODE. FOSODE was able to raise significant funds of international donors in the last decade, resulting in an annual budget of around $10 million per year.
Programa Nacional de Electrificación Social Período 1995 – 2003
Origen de los Fondos No. Proyectos Financiamiento (M US$) Período
ENEE (ENEE) 123 2.93 1995 – 2001
FOSODE (GoH) 103 3.63 1995 – 2003
Asignaciones (GoH) 88 1.56 2001 – 2003
ER-580/91(BCIE) 182 18.88 1995 – 2003
Decreto 88 (GoH) 22 0.76 2001 – 2003
ES-N97 (Noruega) 89 2.71 1997 – 1998
ES-N98 (Noruega-BCIE) 185 7.82 1998 – 2003
Japón 1+2 (Japón) 371 4.00 1999 – 2003
ENEE-FCN (FCN – GoH) 76 2.70 2000 - 2003
Corea (Corea) 177 9.50 2004 – 2005
ES-N98-Amp 2 (BCIE) 105 10.11 2004 – 2005
Japón 3 (Japón) 101 5.88 2004 – 2005
NDF (Finlandia) 200 10.10 2004 – 2006
Total Ejecutado 1822 80.58
Fuente: OES/FOSODE

Proyectos en Ejecución y por Ejecutar
Origen de los Fondos No. Proyectos Financiamiento (M US$) Período
ES-RP-2002 (BCIE) 413 12.72 2005 – 2007
PIR/BM N/D N/D 2005 – 2008
Electrificación Social (BID) 75 2.0 2005 – 2008
Total Ejecutado 488 14,72
Fuente: OES/FOSODE

In this way, ENEE could increase the electrification rate from 43% in 1994 to 69% in 2006. In 2002, ENEE with support of CIDA has developed a ‘Plan Nacional de Electrificación Social’ (PLANES) which aims to increase the coverage of the national grid to rural areas and peri-urban marginalised settlements. The scope of PLANES, which covered initially only the timeframe up to 2012, has been increased by the government to an electrification rate of 80% in 2015.
Currently, the activities are mainly concentrated on grid extension, as in the PLANES only the option of about 25 diesel powered minigrids has been included. However, there are doubts that this approach is economically feasible.
The average costs for grid connection of rural households quickly increases if the remoter villages are targeted. Consequently, during the last grid extension projects of ENEE the costs exceeded US$ 700 per household. Other studies claim costs in excess of US$ 1000 including required investments in transmission grids of ENEE. To reach the goal of an electrification rate of 80% by 2015, average annual investments of US$ 40 million from 2005 to 2015 have been estimated instead of the US$ 10 million p.a. FOSODE has mobilised until 2008. Additionally, the current subsidies on electricity increase with every new connection, which adds on the costs of grid extension. Therefore, the World Bank is currently pushing to make FOSODE an independent institution promoting rural electrification and to focus more on off grid options using renewable energy.
In the field of off grid hydropower some experiences have been gained during the EU financed GAUREE project but though the project is conducted by ENEE the developed capacities have not been incorporated into FOSODE and are under risk of dispersion when GAUREE II is finished by the end of 2008.
However, hydropower is not considered as the most economic option to provide households with electricity. The World Bank analysed the cost and advantages of different options for rural electrification as shown in the table below, with the following conclusions:
1.Grid extension is not always the most cost efficient option.
2.Hydropower is expensive and should only be implemented if local hydro potentials have been confirmed and feasibility studies can confirm hydropower to be the least cost option for the local communities.
3.SHS are comparatively cheap but energy service is limited and business and service systems are critical and often have high transaction costs.
The World Bank concludes that the least cost solution to reach the goal of the Honduras Government of 400,000 new connections by 2015 would be the dissemination of SHS. With 50% of 20Wp SHS for US$ 400 each and 50% of 50 Wp SHS for US$ 600 each, the total cost of the disseminated systems would be of US$ 200 millions and would require an annual budget of approx. US$ 22 millions per year.
As a first step, the OES-FOSODE in cooperation with the FIS (Fondo de Inversion Social) prepares a World Bank/GEF funded solar programme to disseminate 3000 Solar Home Systems in 8 pilot areas (see chapter 3.3.2).

Key problems hampering access to modern energy services in rural areas

2.4.1 Obstacles for grid based rural electrification
Several factors handicap rural electrification in Honduras:
a)Insufficient financial resources for investments in grid extension and installation of mini¬grids: ENEE as host of the OES-FOSODE promotes rural electrif¬i¬ca¬tion mainly by grid extension, but the considerable funds made available by international donors are still not sufficient to reach the targeted increase from 69% in 2006 to 80% by 2015.
b)Low tariffs and financial problems of ENEE: (a) cross subsidies to help the poorest cus¬to¬¬mers were badly targeted and unsustainable causing a constant income loss for ENEE. Currently the average subsidy for small residential consumers is about US$ 1.90 per month which ENEE becomes compensated by the state. (b) Parti¬cu¬larly commercial, industrial and public customers often don’t pay their bills due to fraud or billing problems (60% of the non technical losses). (c) As 63% of the electricity generation is based on pe¬trol, costs increase with the international petrol price. At the same time ENEE has to fulfil expensive power purchase agreements concluded during former energy crisis. ENEE is unable to compensate increased costs with the current tariffs. As a consequence, invest¬ments in the generation, transmission and distribution of infrastructure are low.
c)Beside the still existing distribution monopoly of ENEE, private companies invest only in exceptional cases in minigrids, as in the case of the bay islands where considerable resources and economic interest exist due to the strong tourism infrastructure. Normally, costs of providing access are too high due to remoteness of the sites, dispersed populations and difficulty of the terrain. Local communities don’t dispose of sufficient proper financial resources to make infrastructure investments in their community.
d)The subsidised tariffs promote an excessive use of electricity in house¬holds. With a¬bout 200 kWh/month, the consumption is almost twice as high as in El Salvador or Gua¬te¬¬¬ma¬la. The low price makes cooking and water heating with electricity cheaper as with LPG.
2.4.2 Obstacles for off grid energy technologies and services
a)There is strong political motivation to improve access to electricity of rural populations, particularly those remote from the grid. However, the cost of doing so has become increasingly high and there has been little effort to adopt new technologies and approaches. Grid extension is virtually the only approach by ENEE / OES-FOSODE to rural electrification and little attention has been paid to decentralized options.
b)Other actors like SERNA or NGOs act uncoordinated from OES-FOSODE and lack sufficient financial resources to carry out dissemination programs for off-grid technologies.
c)Lack of skills in operating small power generating plants and mini grids. There are few examples where micro and mini hydropower plants are managed successfully in rural areas in Honduras and the number of sufficiently qualified persons is low. This refers to technical skills necessary to maintain and repair the system as well as to management skills regarding appropriate tariff-setting and operation of the plant.
d)Insufficient availability of micro-finance schemes for energy technologies in rural areas. Large parts of the country have almost no access to institutional micro-finance services and must rely largely on moneylenders, suppliers, family and friends for short term seasonal loans. There are no secure liquid savings options available to these households, which would enable them to build assets over time. Existing micro-finance institutions often have a narrow credit product line (e.g. Soluz offers credit sales but only with an down payment off 50% and a payback time up to 6 month), limited experience in rural markets and a lack of access to best practice information and technical tools.
e)Lack of a marketing and maintenance structure for energy technology devices in rural areas. Almost all retailers are established in cities with no outlets in rural communities. Thus, clients have to travel to cities to purchase energy devices and for repair orders, which is difficult for most rural families. Establish rural outlets are considered not to be profitable due to the high costs for transportation and mobilization, the dispersed nature of the populations and the low income and low demand of the local population.

EnDev-Honduras