A conflict between Honduras and renewable energy companies could end badly

Five foreign companies that have invested in renewable energy in Honduras have submitted at least five notices of intent to submit their cases to international arbitration alleging discriminatory treatment, including failure to pay bills for months and explicit threats of expropriation.

The public notices open a period of consultation with the Government of Honduras, which could be the last opportunity to build agreements and avoid very costly litigation for the Central American country.

Read also: Check out our coverage on Honduras

Bloomberg Línea found from sources linked to the national electricity sector that the amount in dispute under possible arbitration would be more than US$300 million, a value similar to the total investment announced to strengthen the transmission network throughout the country during the decade 2022-2031.

In late October, Energy Secretary and interim general manager of the National Electric Energy Company (Enee), Erick Tejada, told local media that he had received a notification of intent to arbitrate under the Free Trade Agreement between the United States, Central America and Dominican Republic (DR-CAFTA).

Then, the official indicated that they were two energy generating companies and that this situation was due to the renegotiation of energy contracts that the Government made within the scope of a refoundation project, whose main objective is to rescue and strengthen public institutions, mainly the state electricity company.

ACTIONS TO RESCUE THE ELECTRICITY SECTOR

At the beginning of her term, President Xiomara Castro said that the Enee was a “fiscal hole of insurmountable dimensions in the short term” and that it went beyond energy. “It is a social and economic problem,” for which she announced a series of measures to face it.

When the new government management began, on January 27, 2022, Enee’s non-technical losses, referring to non-payment of users, were 38% of the generation, that is, the second highest number in Latin America, behind only the Haiti, according to the Latin American Energy Organization (Olade).

However, for specialists, the policies implemented in the first nine months of the Government did not advance in solving the problems of the state-owned company, nor of the electricity sector in general.

Economic and political analyst Roberto Lagos recalled that when, in his inaugural speech, Castro spoke of debt restructuring instead of “refinancing,” as the Secretary of Economic Development (SDE), Pedro Barquero, later clarified, Honduras’ country risk increased considerably.

Then, through the Special Law to guarantee the electricity service as a public good of national security and human right of an economic and social nature (Decree 46-2022), approved last May, “the issue of fair value is mentioned, but when you start to review what it consists of, you can’t find any technical document that guides or explains what this fair value mechanism consists of”, said Lagos.

In his opinion, with the lack of technical capacity of the authorities responsible for the Honduran energy sector, “a process begins, a more ideological narrative, but without the technical foundations.”

THE RENEGOTIATION OF CONTRACTS

The Law that declares energy as a public good also authorized the renegotiation of contracts and prices at which the State, through Enee, purchases the supply of energy and energy by thermal plants, especially in terms of fixed charges that include operation, maintenance and reasonable profit, and variable charges consisting of fuel, operation and maintenance.

“If renegotiation is not possible, it is authorized to propose the termination of the contractual relationship and the acquisition by the State, before the fair price”, states the Law.

In early October, the Government of the Republic signed an agreement to renegotiate at least 16 contracts with 14 electricity generating companies in Honduras, which is 55% of what was proposed in contracts that state authorities consider higher prices.

For Lagos, the Government “has been selective with the companies with which it has negotiated and has not internalized the risks that an arbitration process can have for the international market and for attracting investments not only in the energy sector, but also in other sectors. So the point is, the plan is being tackled, but it’s not being done right. The problem of energy losses had to be addressed first,” he said.

THE LACK OF TARGETING OF THE ELECTRICITY SUBSIDY

The Government also announced “free energy” for 1.3 million people with consumption of less than 150 kilowatts (kW), as an action against poverty that covers 74% of homes, according to the National Statistics Institute (INE).

“In our country, given the budgetary and fiscal limitations we have, which we came from a pandemic and from a precarious situation in which the previous management left us, a subsidy process is carried out tion, which should not have been carried out. way, but it should have been done in a more focused way,” Lagos said.

According to the expert, the Government should have first identified the 400,000 poorest households in the country, “and offered these people subsidies because this would affect the stability of public finances and then tried to see how the new identified households were incorporated”. However, many of the people who are benefiting are not necessarily in the lowest income quintiles.

RENEWABLE ENERGY IN HONDURAS

Honduras, the country with the third lowest Gross Domestic Product (GDP) per capita in Latin America according to the World Bank, has been a model of renewable energy development in recent years.

As of 2014, the generation matrix was transformed and the country sought to have an energy matrix in which renewable sources predominated; hydraulic, wind, solar, geothermal and biomass. The National Plan established that by 2022, 60% of national demand would be supplied with renewable sources.

With information from Bloomberg Línea