Leadership and Democracy LabWestern Social Science

Guatemala and Renewable Energy Investments

Analysts: Haliz Doskee, Don Houston, Sydney Reis

Team Leader: Haliz Doskee

27/02/2017

Overview

Like many Central American countries, Guatemala has the potential to meet 100% of its energy needs through renewable energy resources. There are several key green energy technologies that are integral to Guatemala’s future as a green energy consumer and cite for future short term and long term investments; solar, hydroelectric, wind, and geothermal. Each of the four energy technologies have the potential to provide significant opportunities for SMEs, MNCs, TNCs, and local populations. Guatemala currently holds the largest Solar PV Plant operation in Central America. Current Green Technology projections in Guatemala are rumored to spearhead developments in water filtration systems (Basin Management), hydroelectric grids, and solar technology. The Advanced Power Integrated Stations "GPTech APIS" is projected to continue to increase from 2016 to 2070. But, as we will see, both the technologies and opportunities can only be realised through Green Tech Transfers.

Current Dependency

Over the last several decades Guatemala has become highly dependent upon hydrocarbons such as petrol and its derivate. However, local authorities have implemented significant measures to change the country’s energy matrix, promoting other sources of energy production. Future outlooks suggest that this shift will include both clean and renewable energy. However, the country’s high dependence on hydrocarbons still holds the country back from developing clean renewable energy. Despite the high dependency on hydrocarbons economic growth has had a positive impact in Guatemala’s need for energy; mining demand has quadrupled since the mid 1980s. Several events have happened during this time, such as the electricity rationing during 1991, which led the government to sign contracts with private suppliers to meet the country’s power requirements. In 1992, the government signed a contract with Enron (USA) to build a 110MW plant in Puerto Quetzal (Pacific, 180km from Guatemala City). Guatemala enjoys high returns from Carbon tax trading. For the last several years Guatemala has been looking to reduce its dependency on non-renewable resources. The top domestic priority is to address growing residential energy demands. Such demands are leading Guatemala to become highly dependent upon firewood. Guatemala is projected to generate 60% its domestic electricity from renewable energy sources by 2027.

Solar Energy

For a country such as Guatemala, where over 30% of the population lives off the grid, the need for portable, reliable, and safe energy alternatives has never been greater. Harnessing solar energy is reliable, predictable, and cost efficient, making it the most predictable and efficient renewable energy source available for Guatemalans and future investors looking to invest in the country. Major solar energy projects undertaken by the country could set the industry standard for decades to come. However, this can only be realised if the country takes progressive steps away from non-renewable energy sources.

Current conventional power systems in Guatemala threaten agriculture, land usage, and incur heavy maintenance costs. Traditional solar systems are expensive, insufficient, and ineffective for meeting the needs people in Guatemala’s most rural area. Advances in solar technology have made it possible for portable panels to be freely installed in rural and isolated communities that operate outside of major power grids. Solar power can be harnessed and generate clean, sustainable, and coast-effective energy alternatives to biofuel. With the onset of portable solar panels the future of harnessing and consuming energy is looking ever more promising. Solar panels are lightweight, portable, and cost efficient; pose little to no risk to businesses, populations or the government; can be installed where need; and require very little maintenance. This makes solar energy one of the most promising renewable energy endeavours in the country.

By incentivising homeowners and small businesses to make the switch to solar generated energy, such individuals could see an estimated distributive deployment of energy at a rate of 20 MW per year between 2019 and 2022. As solar energy is harnessed throughout the day it means that both businesses and homeowners can reduce the amount of hydropower reliance during peak evening usage of energy.

Hydroelectric Energy

Hydropower is the cheapest form of renewable energy available for a developing country such as Guatemala. Once initial investments are complete, such as the dam building process, the flowing water itself is a free resource. According to Central American Data, “Of the fourteen hydroelectric projects on hold, according to the Association of Renewable Energy Generators (Ager), six were suspended for having been declared unconstitutional, two are in the "dialogue process", one is waiting for a ruling from the Constitutional Court and another " ... five will not be developed because of the conflict." Indeed, resistance from local populations is a prominent occurrence in the face of hydroelectric development, and with understandable reason. Notably, two people died as a result of violence that broke out in a dispute over Guatemala’s Pojom hydro project in 2014. Plans for the Pojom hydro project were rejected by half of the 39,000 residents living in the development zone. A reality that was allegedly ignored by Guatemala’s Ministry of Energy and Mining. In March of 2014, the streets of Guatemala City saw 20,000 protesters. Opponents of hydroelectric projects argued that expansion interfered with indigenous rights to land, and privatization of energy resources increased the cost of power, particularly in the rural parts of the country.

Due to the unpopularity of hydroelectric construction, there is potential for hydroelectric investment in Guatemala to come to a five year stand-still. In june of 2016, congressmen presented a legal bill to the Guatemalan legislature that proposes a 5 year suspension on hydroelectric licenses. It is believed that a new national policy for the issuance of hydroelectric licenses should be negotiated. This would allow input from the local population, with the intention of mitigating the currently prominent social resistance.

Risk however, can only be mitigated internally. In the case of the Pojom hydro project, protesters expressed that in an act of exploitations, developers manipulated and bribed local residents into giving up their land for dam development. Because the construction of dams is relatively invasive, traditional risk mitigation measures of providing aid to local populations might not prove to be beneficial. Land use concerns from local populations is an issue that should be remedied internally by the Guatemalan government, due to the extensive understanding of local histories and politics.

Geothermal

The birth of geothermal energy can be traced back to 1972, when Guatemala’s National Institution of Electricity requested the assistance of a Japanese International development agency, the Organization for Overseas Technology Cooperation Agency. Guatemalan geothermal capacity resides primarily in the Pacaya Volcano. The Guatemalan government hopes that geothermal energy will meet 60% percent of the nation’s energy demand by 2022. In order to facilitate this the government is offering tax breaks for construction of geothermal plants. Guatemala currently has two geothermal plants, one in Zunil and another in Amatitlan. Both plants were developed by an Israel-based company, Ormat technologies. A third plant is currently being considered in Guatemala City by US Geothermal. The biggest issue for potential geothermal investors is the high resource risk during the early stages of the developmental process. The real or perceived uncertainty of geothermal energy during the early stages of field development makes it very difficult to obtain the required risk capital. The risk can potentially be mitigated by splitting costs with the government and the public sector. Mobilizing public funds is an issue for investors throughout all renewable energy initiatives in Guatemala. Villagers are very skeptical about investing in energy resources due to bad experiences in the past where they would give money and see no results. Building a trusting relationship with villagers is key for any investor, specifically by developing direct communication with villagers showing them the benefits they will receive.  It is estimated that only 4.92% of the geothermal potential is being utilized in Guatemala proving a large opportunity for potential investors.

Although recently honed on a global scale for its green capacity, geothermal energy is by no means novel. In some countries, geothermal use for cooking and cleaning can be traced back thousands of years. According to the Geothermal Resources Council, Geothermal energy is “heat (thermal) derived from the earth (geo). Rock and fluid beneath the earth’s crust contain thermal energy that can be used to generate electricity or regulate building temperature. It is found on both a shallow and deep level, and the temperature of the rock and fluid determines how it can be utilized. Geothermal water that is above 160 degrees Celsius can be used to provide green energy. To tap into geothermal energy, wells (sometimes more than a mile long) are drilled into underground reserves of hot water. The extracted hot steam and water is then used to power turbines connected to generators.

Large-scale geothermal construction began in Guatemala in the 1970s. Geothermal development was jointly funded by the Instituto Nacional de Electrificacin (INDE), the Inter-American Development Bank (IADB), Organization of Petroleum Export Countries (OPEC), and the Japan International Cooperation Agency (JICA), among a number of other international actors. Among the possible locations for geothermal development, the Zunil and Amatitlan areas received the greatest priority. According to the International Geothermal Development Council’s report entitled Geothermal Guatemala, “geothermal resources in Guatemala are estimated to 800 to 4,00 megawatts capacity, most likely about 1,000 megawatts.” To compare, Guatemala currently utilizes 1,700 megawatts of electrical generation. Therefore, geothermal energy has the potential to contribute substantially to energy production in Guatemala.

The international Geothermal Development commission identifies “the high up front investment required to find and confirm the existence of commercial-size geothermal resources, and the time required to amortize such investments” as the greatest impediment to geothermal investment in Guatemala. Furthermore, return on investment is largely dependent on the ability to sign long-term resource use agreements as well as a stable energy market.

The El Ceibillo geothermal project is a 24,710-acre development 12 kilometers southwest of Guatemala City. Concession was granted to U.S Geothermal Inc in April of 2010, and in 2015, the Guatemalan government approved a development schedule that included exploratory drilling. Exploratory drilling by U.S Geothermal Inc. resulted in the discovery of a 200-degree Celsius reservoir. Additional drilling is now underway, with the expectation that the plant will produce around 25 Megawatts of output. U.S Geothermal Inc. is optimistic in the plant's ability to obtain power purchase agreements with the Guatemalan government. However, if not developed properly, geothermal energy sites can be dangerous for the local populations they surround. Considering the remote locations of many geothermal generators, indigenous populations are at greatest risk for malpractice. A 1991 blast left 21 dead and another 30 people missing in western Guatemala.

In order to encourage private participation in geothermal energy development, Guatemala has worked to decrease the initial upfront investment required. In the case of the Zunil-I project, concession arrangements were made after the construction phase was initiated. Therefore, development costs and subsequent risks associated with low returns on high investment were reduced significantly. The Guatemalan government benefited from development loans from bilateral assistance programs and international development banks, primarily from the IADB.

In 2012-2013, power demand in Guatemala was about 8,821.58GWh. This was up by 230 GWh from the previous year, on account of steady economic development. To meet increasing demands, the Guatemalan government has allocated US$6,799 for renewable development, which includes plans to develop 30 hydropower plants and one biomass plant powered by sugar production. The British Embassy in Guatemala has also identified hydro as the most competitive market in terms of renewable sources. There is also strong interest by the government in wind projects.

Wind Energy            

Wind energy is not nearly as attractive of an investment in Guatemala as other forms of renewable energy are such as solar and geothermal energy. There are only a few areas in Guatemala where wind development would be worthwhile. The greatest potential being concentrated in the southern mountain peaks. There is only one wind turbine in Central American and it is located in Guatemala. It is located in the San Antonio region and was developed by Vestas, the world’s largest turbine manufacturer.  Investors looking into developing wind energy in Guatemala will have a similar issue to geothermal investors when dealing with villagers. Building a trusting relationship with villagers is key to investing in Guatemalan renewable energy. The biggest issue wind investors will face though is the lack of resource potential. Very few areas have the necessary wind power and speed to justify investment.

Investment Opportunities

When considering new green tech energy investment, companies should be aware, first and foremost, of the turbulent past between Guatemala’s local population and construction for energy development. Projects are often met with skepticism by local populations, and at times, violent opposition. This reaction may happen despite potential benefits for communities. The Guatemalan government has attempted to remedy this skepticism by passing legislation mandating a fixed rate of 4% net profits to local communities. Companies can also foster acceptance through aid programs, in the development of schools, medical clinics, and economic development projects.

Furthermore, as identified by Guatemala's current energy minister, Juan Pablo Ligorria at the Council of the Americas’ Energy Action Group, (2015) one major impediment for new green tech development involves institutional aspects including standardizing regulations, as well as learning how to deal with long-term contracts and how to transition rights that impact energy investments in the country.” Corporations interested in investment should be aware that this risk does exist, but it is also an identified priority for Guatemala.