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Spotlight on Honduras: In the middle of energy reforms [free access]

December 10, 2018

Honduras, with a gross domestic product (GDP) per capita of USD2,480 in 2017, is the second poorest country in Central America and the third poorest in Latin America, ahead of only Haiti and Nicaragua. Despite its economic situation, Honduras has enough natural resources to achieve energy self-sufficiency. The potential of its hydroelectric resources is estimated at 5,000 MW, while solar energy also has significant potential due to the country’s geographic location.


Given the renewable potential, the country is looking to promote renewable energy generation to achieve energy self-sufficiency, reduce the cost of power and improve the electrification rate. Honduras set a goal to generate 60 per cent of its electricity through renewables by 2022 and increase this further to 80 per cent by 2034. The recent initiatives undertaken by the government to attract private investment for clean energy projects resulted in the country surpassing its 2022 renewable energy targets in 2017, with 5,435 GWh of renewable energy generation.


While the power generation segment has witnessed private participation through the development of renewable energy projects, power transmission and distribution (T&D) remains in the hands of the debt-ridden state-owned vertically integrated utility Empresa Nacional de Energía Eléctrica (ENEE), which has been struggling with a financial deficit for several years. This is largely attributable to the high costs of thermal generation, which have to be absorbed by ENEE without the possibility of passing the charges on to the final consumer’s bill, a decision seen as a political move. In addition, its organisational structure is obsolete and urgently needs a change to allow a more flexible administration, better oriented to technical activities.


Considering this, in 2014 the government announced the Electricity Industry Law, a legislation aimed at further liberalising the country’s energy sector. As per the law, ENEE will be split into three separate entities—one each for electricity generation, transmission and operation of the national grid, and distribution. The unbundling of ENEE was to be completed by July 1, 2015. However, more than three years after that deadline, this is still under process. As per the latest information available, the staff of ENEE will be divided among the three new firms so that they can begin work under the new organisations from January 1, 2019 onwards.


Past reform measures

The country’s power generation capacity has historically been dependent on thermo-based and hydro-energy based projects. This makes the generation capacity of the country vulnerable to international oil prices and natural disasters. In the early 1990s, the electricity sector in Honduras experienced a severe financial crisis when electricity tariffs were not adjusted to cover the debt service of the El Cajón hydroelectric project commissioned in the mid-1980s, and ENEE’s performance was poor (electricity losses of about 28 per cent, overstaffing and poor maintenance of thermal plants). The financial crisis led to the energy crisis of 1993, when a severe drought coincided with a lack of generation reserve capacity. There was an urgent need to mobilise private financing to expand generation capacity and to improve ENEE’s performance.


To resolve the energy crisis, the government adopted the Electricity Act, Decree No. 158-94, the regulations of which were adopted three years later. The new Electricity Law included establishing a competitive power market (vertical unbundling, freedom of entry to all sector activities, open access to transmission and distribution networks, and freedom of choice for large users); separation of the roles of policymaking, regulation and provision of electricity services; application of cost-recovery tariffs and targeted subsidies; and private provision of electricity services.


This provided a boost to private investment in power generation. About 98 per cent of the operational fossil fuel plants were commissioned after this reform, and were privately owned. The major developments in the renewable energy segment also came from private players. As of 2017, about 79 per cent of the generation capacity of 2,571 MW was in the hands of the private sector with ENEE controlling the remaining capacity.


However, the new model failed to provide the required push in other sectors, mainly due to the monopoly of ENEE over power T&D, lack of political and technical support to conduct energy planning and policymaking, and rising oil prices, which were not being passed on to retail consumers. This resulted in rising energy losses, declining financial strength of ENEE and underinvestment in the electricity sector.


New law

ENEE is also currently the de facto T&D system operator. Its weak financials have been a key cause for the power sector’s poor performance as it impacts the quality of service and ability to make investments to improve the current state of affairs. ENEE has been facing high levels of debt. As of April 2018, the company had a public debt of HNL42,027 million, 476 per cent higher than the HNL8,836 million in 2010. This is the result of hiring internal and external debt for the execution of works and making payments to suppliers, mainly to private generators. Further, the non-payment of electricity charges by local and national authorities reduces its ability to pay off debts.


To help ENEE improve its performance and thus the performance of the electricity sector, the Honduran Congress passed the Electricity Industry Law in 2014 to unbundle ENEE into three different entities so as to improve the functioning of all three segments of the electricity sector. The companies will work under the umbrella of a holding company. As a result, the status of ENEE will change from a state-owned company to a corporation, though this does not necessarily mean privatisation of the company.


The holding company plans to invest USD459.10 million in power generation and transmission during the period 2019-21. Of this, USD237 million will be directed towards improving and expanding its power transmission division, including the construction of new power substations in Tocoa, Arenal, Yoro, Palmerola, Lean and San Francisco de La Paz, and the expansion and upgrade of existing power substations.


The law will also end the single-buyer model and let the newly unbundled publically owned generation company compete against private generators for thermal and wind projects in an open market. This will allow large energy consumers to buy electricity directly from the generators. This will help reduce the electricity cost on the country and provide attractive investment opportunities for power generators, especially in the field of renewables.  The generators will have to pay a fee for using ENEE's installed network to sell directly to large consumers.


Further, in 2015, Comisión Reguladora de Energía (CREE) was established as the energy sector regulator. In August 2017, a presidential decree was passed to establish Secretaría de Estado en el Despacho de Energía (SEN), attached to the Ministry of Economy, to develop energy sector policies and strategy. Prior to this, the Ministry of Natural Resources, Environment and Mines (MiAmbiente) was performing this role.


Table 1: Snapshot of Honduras’s power sector







Installed capacity (MW)
















































–ENEE owned






–Privately owned






Generation (GWh)












–Private developers






Number of consumers






Electricity losses (%)






Source: ENEE; CEPAL; Global Transmission Research


Upcoming investment opportunties

As per the data of the International Renewable Energy Agency (IRENA), USD3,200 million is likely to be invested to develop approximately 815 MW of renewable energy projects in the country during the period 2019–22. To support this upcoming capacity, ENEE plans to add 190 km of transmission line network and 255 MVA of transformer capacity during the period 2018–20.  Some of the upcoming projects are the Lean–La Cumbre line, the Lean substation, the Amarateca–Limones–Juticalpa line, the Telica–San Francisco De La Paz line, the Ocotillo substation and the Tocoa substation.


To support these developments, ENEE is seeking multilateral funding. In September 2018, the Inter American Development Bank (IaDB) approved a USD150 million loan to improve the service quality of Honduras’s National Transmission System (NTS). The loan will help strengthen the NTS by financing ENEE’s priority projects. The loan will also boost ENEE’s interconnectivity with the regional electricity market (MER) to promote the use of the electricity system of the Sistema de Interconexion Electrica de los Paises America Central (SIEPAC) or the Central American regional power grid; improve ENEE’s financial sustainability and institutional capability; improve transmission quality by raising service reliability; and increase transmission to the NTS of energy generated from renewable sources. The programme is in line with the Honduras Country Strategy for the period 2015–18, which is aimed at improving service quality and efficiency, as well as diversifying the generation matrix and enhancing users’ access to the energy system.


In addition, construction of a second circuit of the SIEPAC is under consideration. In September 2018, Empresa Propietaria de la Red SA (EPR) sought financing from the IaDB for the same. The 300 MW second circuit is estimated to involve an investment of USD370 million, of which EPR is seeking USD225 million as a loan from IaDB. The proposal for the same was recently submitted to the bank.



The energy reforms instituted in Honduras are providing significant opportunities in the renewable energy segment. The unbundling of ENEE will further boost investment in the T&D segment by improving the structural, functional and financial parameters of the company. A limited and aging T&D network as well as the low electrification rate offers vast investment opportunities in the country’s power network. Further, the intermittent nature of renewable energy generation requires modernisation of the grid. ENEE needs a comprehensive plan alongside immediate actions to restore its financial position including revision of electricity tariffs and faster reduction in non-technical electricity losses, to meet the growing requirements of the T&D network. Further, the country should consider attracting private investment in the T&D segments to help establish a strong and advanced power supply network.



Figure 1: Trend in ENEE’s investment in transmission network (HNL million)


Source: ENEE


Figure 2: Expected growth in maximum demand of electricity (MW)


Source: ECLAC (or CEPAL in Spanish); Plan Estratégico del Grupo ENEE, 2016–2020