Nicaragua Energy Situation

Situation analysis and framework conditions

Energy situation especially in rural areas

Energy demand and supply in the household sector

The total primary energy offer in Nicaragua is around 3,000 kTEP or 35,000 GWh. The main source of primary energy is firewood with 57% share followed by petroleum (34 %), geothermal (2%), hydropower (1 %) and other biomass (2 %). The total energy consumption is around 2,500 kTEP (29,000 GWh) which is about 80% of the total primary energy offer. The residential share of energy consumption is around 60% of which 94.4% are provided by fuel wood. Gross electricity gene¬ration of the SIN is currently around 3,100 GWh, with the share of 77 % petrol power plants, 11.6 % hydro power, 10.6 % geother¬mal power plants and 0.8 % diesel oil genera¬tors. The net electricity offer is around 2,900 GWh including imports and exports. 30% of the electricity is lost during transmission and distribution. The losses are the highest in Central America and for two-thirds classified as non-technical. The load factor of the installed generation capacity is 65.5 percent, which is similar to the load factors of neighbouring countries. The effective installed capacity has been fallen from 658 MW in December 2002 to 565 MW in December 2006 while the peak demand increased from 422 MW to 500 MW in the same period. This results in a decline of the reserve capacity from 36 % in 2002 to 11 % in 2006, causing frequent current outages in 2005 and 2006. With the arrival of diesel generators and new contracts for daily petrol supply of 10.000 Barrels from Venezuela in February 2007 the situation has improved significantly.

Rural electricity supply

Nicaragua has one of the lowest rural electrification rates in Latin America. About 89 percent of the rural population still lacks access to electricity. In absolute terms, it is estimated that a total of about 400,000 households in both urban and rural areas remain unserved, of which about 160,000 live in off-grid areas being beyond economic line-extension distances. The national electricity subdivided in two concession areas covers only the western part of the country. More than half of the country remains outside of these concession areas (see figure below). Source: CNE - PLANER More than half of the country on the Caribbean and Atlantic coasts remains out of the concession area, including half of the Rio San Juan Region, the Region Autonoma Atlantico Sur (RAAS), the Region Autonoma Atlantico Norte (RAAN) and two thirds of the Jinotega region, Matagalpa, Boaco, Chontales and Rio San Juan. The area not covered by the SIN is called the “Open Area.” This area remains open to be divided into smaller concession areas on a case-by-case basis. The Open Area is characterized by very low population density—only 6 inhabitants per square kilometre. There are 15,584 households in an area of 124, 433 square kilometres, while density in the two concession areas reaches approximately 80 inhabitants per square kilometre. Population is highly dispersed and access is often difficult (for example, there is only river access for most of the Atlantic 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, or if hydro resources allow, a micro, mini or small hydropower plant. Off-grid electrification in Nicaragua today consists mainly of installing diesel minigrids, operated by ENEL to serve some larger villages in remote rural areas, often at heavy financial losses which need to be financed by the Government of Nicaragua on a continuous basis. In a few cases hydroelectric and solar home systems have been implemented.

Institutional set up and actors in the energy sector

Nicaragua's power sector underwent a deep restructuring during the late 1990s, when the generation, transmission and distribution divisions of the state-owned Empresa Nicaraguense de Electricidad (ENEL) were unbundled, and the privatization of the generation and distribution activities allowed. A wholesale market was created, which allowed electricity trading through long term contracts between generating companies and utilities or large users (more than 2 MW of installed capacity). A spot market also exists. Four generation companies (GEMOSA, GEOSA, HIDROGESA, and GECSA) a transmission company ENTRESA and two distribution companies (DISNORTE and DISSUR) were created. Two generation companies were sold and are now privately operated; the transmission is expected to remain public and the two utilities were sold to the Spanish company Unión Fenosa in September 2000, with a concession that covers the Western, Central and Northern zones of the country. The eastern part of the country along the Atlantic Coast remains in the responsibility of ENEL which manages some mini-grids at the Atlantic coastline.

Public institutions

The “Ministerio de Energia y Minas (MEM)” was recently created as result of the transformation of the Comisión Nacional De Energía (CNE) into a ministry. MEM is in charge of formulating, coordinating, and setting overall objectives, policies, strategies, and general directives for the entire energy sector. It is also in charge of undertaking strategic indicative planning for the energy sector aimed at achieving development goals and optimising the use of national energy resources. MEM reviews energy demand and supply balances, pricing policies, energy conservation programs, service coverage, and investment and financing strategies. It undertakes studies, issues criteria for investment projects, promotes private sector participation, and proposes concessions for use of natural resources by the private sector to the National Assembly. The mandate of MEM includes also the development of rural electrification initiatives in coordination with multilateral and bilateral agencies and the promotion of national and foreign investment. INE (Instituto Nicaragüense de Energía) is the national regulatory authority for the power and hydrocarbon sub sectors, responsible for applying energy policies adopted by Comisión Nacional de Energía (CNE). In the power sector INE approves tariffs, adopts technical norms, and undertakes planning functions. The mission to issue concessions and licenses to operators has currently been transferred to the MEM. As many concessions have been pending since more as a year due to slow processing by INE an increased speed can be expected in the near future. As remaining state owned electricity company,ENEL manages some 30 diesel powered mini-grid in the non concession areas which are heavily subsidised to meet national electricity prices. The Ministerio para el Fomento, la Industria y el Comercio (MIFIC) is in charge of granting concessions for the use of water in hydroelectricity projects. The Ministerio del Ambiente y Recursos Naturales (MARENA) develops policies and defines norms for the ambient sector. Based on environmental impact studies, MARENA gives permits for all activities regulated by the environmental law (Ley del Medio Ambiente).

Electricity companies

Power Generation: the state owned company GECSA manages the two thermal power plants ‘Managua’ (45MW) and ‘Las Brisas’ (65MW). The private company Coastal Power run the two thermal power stations, ‘Nicaragua’ and ‘Chinandega’, with a combined installed capacity of 114 MW. The third producer, HIDROGESA, owns the two hydro power plants ‘Centroamérica’ (50MW) and ‘Santa Bárbara’ (50MW) and GEMOSA owns the geothermal power plant ‘Momotombo’ (70MW). The North American ORMAT Technologies Inc. holds a 15 year leasing contract for GEMOSA. There exist other four small producers of which one is a cogeneration platform ISA (12MW) while the others run diesel generators: CENSA AMFELS (30MW), Tipitapa Coastal (50MW) and Corinto Enroc (70MW). Transmission: The transmission company Empresa Nacional de Transmisión Eléctrica S.A. (ENTRESA) remains a government-owned company and is responsible for the management of the transmission lines and the international electricity exchange, which is managed by the CNDC (Centro Nacional de Despacho de Carga), an independent entity within the national integrated power system, responsible for the dispatching functions. Distribution: Unión Fenosa isaSpanish owned utility which got the concession for the national grid covering the Western, Central, and Northern zones of the country. In the concession areas, Unión Fenosa holds a monopoly on distribution and retail supply except for final consumers with a power demand higher than 2 MW, who can contract directly with generators if so they wish. Unión Fenosa was unable to reduce the system losses. As INE refuses to approve tariff increases covering all system losses Unión Fenosa Nicaragua is currently not profitable. The power tariff is a mixture of the “mercado de contratos”: the long-term power purchase agreements and the “mercado spot.” The average price from the two yields the price of the “Mercado Mayorista” which Unión Fenosa is allowed to pass on to final consumers through its tariffs.

Non governmental service providers for rural areas in the field of energy

Projects implementing NGOs: Nicaragua has a well developed NGO sector with several organisations working in the field of energy. The most important are:

• APRODELBO Asociación de Pro-Desarrollo del Servicio Eléctrico Bocay (APRODELBO) operates a hydropower plant of 230 kW and the mini grid in the department Jinotega.
• ATDER-BL La Asociación de Trabajadores de Desarrollo Rural - Benjamín Linder, ATDER-BL, has carried out several energy projects in several communities in the centre and north of Nicaragua. ATDER-BL's energy activities are mainly focused on hydropower and include: feasibility studies, research, construction of equipment, administration and training of local groups in the operation of the constructed infrastructure.
• ASOFENIX utilizes photovoltaic pump systems in water projects. They are also promoting Solar Home Systems of 25W which cost 350US$ or 13 US$/month in rural areas. In addition, Asofenix is interested in two hydropower projects.
• ASOLPIC La Asociación Electronic Light-La Pita Central (ASOLPIC) is operating a micro hydro power plant of 30 kW in La Pita El Carmen and the mini grid.
• PROLEÑA Asociación para el Fomento Dendroenergético de Nicaragua (PROLEÑA) is promoting on one hand the use of improved cook stoves and on the other hand is developing three projects to generate electricity with biomass (shells of peanuts, rice husks and timber waste).
• FUNPROTECTA Fundación Nicaragüense para la Promoción de Tecnologías Alternativas (FUNPROTECA), are carrying out rural electrification projects including SHS and improved cook stoves in the pacific region.
• TERRASOL is promoting SHS in rural areas. They are also provide training in administration and management.
• BUN-CA (Biomass User Network – Central America) is a regional network with several energy related activities.
• FENERCA is providing business development services for small renewable energy companies. The organization also provided loans to start-ups financed by E+Co.
• Fundación Solar, is active in all renewable energy areas. Activities comprise studies, advisory services, promotion of renewable energy technologies.

Micro-Finance Institutions: The Nicaraguan micro-finance sector has a well-developed set of institutions, including non-governmental organizations (ACODEP, Fama, Finca Nicaragua, and Fondo de Desarrollo Local-FDL), two large credit Unión movements (La Caruna and La Financiera, supported by the World Council of Credit Unións), and two finance companies (ConfUa, FIDESA). There are also smaller regional micro-finance/business development institutions, such as Pana Pana, serving less developed parts of the Atlantic coast. In overall terms, the sector is characterized by a high outreach (over 150,000 clients, large in comparison to micro finance coverage in other Central American countries), however, only an estimated 19,000 of the more than 150,000 clients (13%) live in rural areas.

Policy framework

Poverty reduction strategy

Nicaragua is the second poorest country in the Latin America and Caribbean (LAC) region after Haiti with an estimated per capita GDP of US$817 in 2004. In 2001 Nicaragua worked out a poverty reduction strategy which has become the guideline for the national development strategy. Although Nicaragua made some progress in reducing poverty nearly half of all Nicaragua’s Poverty Reduction Strategy Paper (PRSP) and Millennium Development Goals (MDGs) targets are not currently on track to be met by 2015 according to an evaluation of the World Bank. The Nicaraguan government considers the improvement of the infrastructure especially of energy service a key factor for economic growth and for the alleviation of poverty in rural areas. Within the frame of the implementation of the PRSP the government committed itself to provide 15 Mio US $ from the national budget for a special rural electrification programme for the period 2005 – 2009. The objective is to connect 14,235 households (approx. 80.000 persons) in 483 villages to the grid. The programme is part of the national plan for rural electrification.

Energy policy

Based on the National Development Plan (PND) CNE worked out a national programme for rural electrification (PLANER). The aim of the programme is to achieve a national electrification rate of 70% by 2013. In absolute figures it means to provide 1,585,909 people with access to electricity. The programme costs are calculated to be 344 million US $ or 189 US $ per person. The Government's sees the expansion of electricity services in the rural areas as part of its strategy to improve the competitiveness of the country through the strengthening of rural economic activities, and as a tool to improve the living standards of the rural population. The Government however, is also aware, that the electricity sector would be able to contribute to the achievement of this ambitious goal only if electrification is combined with the promotion of economic activities in rural areas. Therefore, the Government's strategy aims at strengthening rural businesses by upgrading agricultural technology, promoting integrated clusters and networks for the dairy and coffee sector, and by training trainers to deliver business development services to rural areas. In October 2000 the Nicaraguan government created the public fund “Fondo para el Desarrollo de la Industria Eléctrica” (FODIEN) to finance rural electrification projects. The fund is managed by MEM. FODIEN is designed to finance feasibility and pre-feasibility studies, project design, execution of projects, and education and communication campaigns in the field of rural electrification. FODIEN resources come from multilateral agencies, bilateral donors, and from the states via the general budget of the republic. In addition, the fund will be filled up through concession and licence fees and fines. FODIEN can finance projects through grants, soft loans, loans without interest, and commercial loans. FODIEN has only recently become operational and so that first electrification projects in rural areas receive financial contributions through that mechanism. The Government of Nicaragua has decided to encourage specially the development of the renewable energy resources in the country as an essential element in the growth of the national energy system. Consequently, in 2005 the Nicaraguan parliament passed a law for the promotion of power generation with renewable energy sources. In this law the use of renewable energies is declared of national interest. The law establish the following incentives for all equipment and materials necessary to establish power generation with renewable energies:

• exoneration of import taxes,
• exoneration of value added tax,
• exoneration of income tax for seven years for the operation of renewable energy power plants
• exoneration of all local taxes as well as other taxes and
• the obligation of utilities to buy power generated from renewable energy plants.

Key problems hampering access to modern energy services in rural areas

Obstacles for grid based rural electrification

Several factors handicap rural electrification in Nicaragua:

1. 1. insufficient financial resources for investments in grid extension and installation of minigrids. Unión Fenosa is not interested in grid extension into rural areas, as the profitability of the investment is considered low. The same refers for establishing mini grids in rural areas. Private companies generally don’t invest in this sector as cost of providing access are high due to remoteness of the sites, dispersed nature of the populations and difficulty of the terrain. Local communities don’t dispose of sufficient proper financial resources to make infrastructure investments in their community. Consequently, only the central government and NGOs are left for this kind of investment. NGOs are specialized on small systems whereas the MEM is involved in middle size systems. However, both depend to large degree from international donations to be able to carry out mayor investment in rural electrification. In the case of MEM less than 30% of the calculated costs of the national rural electrification plan are currently covered by international grants and loans.
   2. Lack of skills in operating small power generating plants and mini grids. Although there are several examples where micro and mini hydropower plants are managed successfully in rural areas in Nicaragua, 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.
   3. Difficulty to operate mini-grid profitability due to the low purchasing power and the low energy demand of rural clients.

Obstacles for off grid energy technologies and services

1. Insufficient financial resources to carry out dissemination programs for off-grid technologies due to reasons described under 1.4.1
2. 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, limited experience in rural markets and a lack of access to best practice information and technical tools.
3. 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.