Electricity Projects & Regulation in Honduras 2017 – Latin Lawyer, by Karla Aguilar


October 13th, 2017

This year, Karla Aguilar, BLP Partner and expert in Energy & Infrastructure matters, authored Latin Lawyer’s Reference Guide on Electricity Projects & Regulation of Honduras 2017. This is the second year in a row that Karla contributes to this section, last year’s Reference Guide can be read here.

The full guide states:

1. What are the principal power sources in your jurisdiction?

These are:

  • thermal (bunker, coal, and diesel);
  • solar photovoltaic;
  • wind;
  • hydroelectric;
  • biomass;
  • biogas; and
  • geothermal.

2. What are the current trends affecting the energy mix in your jurisdiction?

Given that in the past 10 years Honduras has changed its policies of installed capacity to generate energy, changing from an original structure of the energy matrix of 70 percent thermal v 30 percent renewable, to the current structure of installed capacity 40 percent thermal v 60 percent renewable. In 2016, the energy production was of approximately 2,000MW. Current trends in the market are affected by the actual installed capacity, which is:

  • 800MW thermal:
  • 20MW state-owned; and
  • 780MW privately owned
  • 1200MW renewable:
  • 480MW state-owned; and
  • 720MW and privately owned.

During 2014 and 2015 what was developed most was solar energy. During 2016, the tendency has been for industrial and commercial companies to focus on investing in small solar energy parks for self-consumption. Furthermore, currently, significative hydroelectric energy projects have been the biggest investments.

3. What are the current forecasts for electricity demand in your jurisdiction?

The demand for energy will rise; however, the market will be in the transmission and distribution of energy, not production or generation per se. This pursuant to the fact that we have a high installed capacity and a poor transmission and distribution system that causes losses in the system.

4. Is there an open electricity market in your jurisdiction? Are any activities in the electricity market reserved for the government only? Are private entities allowed to build and operate power plants and transmission and distribution lines?

Yes, Honduras is a new and open market. On June 2015 Honduras entered into a new energy market plan, making it an open market with great possibilities.

Under recent legislation, all aspects of the market have been opened to the possibility of private parties. Said legislation is still being implemented within the market.

Yes, as stated before, under recent legislation it is possible; however, the process of doing so is still being decided upon and placed into action.

5. What is the role and function of the regulator? Would you describe the regulator as being independent?

In Honduras, the role of regulator is taken by the Electric Energy Regulation Commission (CREE) made up of three directors, elected by a nominating board for a period of seven years. Its functions are to:

  • oversee the application and compliance of all regulations regarding energy;
  • define fees and charges for transmission, distribution, and unit cost for electric energy;
  • issue the necessary regulations to aid the better application of the law;
  • approve requests from the subscribers to qualify as large consumers of electricity;
  • issue operation licenses to the transmission and distribution of electric energy;
  • keep a public record of the companies in the electric sector in Honduras; and
  • develop a national and international basis for the purchase of energy or other things.

All of the above is taken from Decree No. 404-2013.

6. Is there an open market for off-takers in your jurisdiction or are there restrictions on the sale of electricity?

To begin with, Honduras is subscribed to the Regional Electric Market. The only authorized agent to part take in international sales is the National Electric Energy Company (ENEE), therefore local private companies can part take in various activities in the electricity sector with the proviso that to sell on the international market permits must be obtained from the regulator.

7. If the sale of power is to a public utility as offtaker, are such entity’s payment obligations backed-up or guaranteed by the government? 

For energy purchase contracts previous to new legislation, in the event that the sale is to the national public utility, ENEE, payments are guaranteed by the government through the figure of a support agreement, which is approved by Congress and published in the Official Gazette as law.

With the current legislation, rather than the state being obliged to provide support agreements, ENEE is allowed to negotiate alternate financial guarantees for its obligations.

8. Does the market have an independent system operator? If so, what are the ISO’s tasks and duties?

Under recent regulation, the Honduran National Congress passed the General Law of the Electricity Industry under Decree 404-2013, an independent system operator is designated to be in charge of the operation of the National Electric System. The ISO is yet to be appointed, and its role is currently fulfilled by ENEE. The ISO may be a public, private or mixed entity, as long as it is non-profit and fulfills its tasks in an independent and transparent manner in the dispatch of generating units to meet the total demand at minimum cost.

9. How are electricity rates set and what cost components affect such rates?

The CREE sets all rates through a specific regulation. Among the components for setting said rates are costs incurred in power generation, transmission costs, system operating costs, all of which are to be calculated every three years, and distribution costs that will be calculated every five years. The CREE may contract consultants to conduct studies with independent criteria to adjust the rates.

In the case of thermal energy, its rates are pre-established, but will vary in accordance with the international price of fuel and international market.

10. What approvals are required to build and operate a power project? Are these easy to obtain? Please describe the salient features of the relevant licence conditions and the grounds for revocation. What levels of fines can be imposed for failure to comply?

Major required permits are:

  • Operating agreement: must be filed with the CREE.
  • Environmental license issued by SERNA.
  • Water contract: projects from water resources require a water contract, in accordance with the provisions of the General Water Law Decree No. 181-2009, purposing the principles and regulations in the proper management of water resources for the protection, conservation, recovery, and utilization of water resources, currently granted by SERNA.
  • Power purchase agreement, when the sale comes from a public/private, national/international bid.
  • Building permits: building permits will be requested according to the provisions of the Municipalities Act of the place the project is being built.

11. Is the government or the ISO conducting public auctions to award long-term power purchase agreements to public and private offtakers? Are the auctions open to any source of power, or are they focused on specific sources and technologies?

New regulation has been approved, where all power purchases must be done through public auctions. Specifics of the process or how it will be handled are still being discussed and implemented; however, logic dictates they will be for a specific source and technology, and their duration will be tied to the country’s energy demand at the time of the public auction.

12. What percentage of the country’s power output comes from renewable power sources and does your jurisdiction have any specific targets or milestones for renewable energy projects?

To date, 60 percent of the energy produced in Honduras is from renewable power sources. According to the 20/20 Plan, the National Plan approved in 2010, the participation of renewable power sources should be up to 80 percent of the country’s production by 2038, this is to prevent climate risk and aid in emissions reduction.

13. Is there a different regulatory regime for renewable energy projects? Are there any government programmes that foster the development of these projects?

Yes, renewable energy in Honduras falls under a special regime found in the Law for the Promotion of Electric Power Generation with Renewable Resources, approved under Decree 70-2007 on 2 October 2007 whose main objective is to promote public or private power generation projects through renewable resources found in Honduras, giving a series of legal benefits such as:

  • facilitating investment and the development of renewable energy resources;
  • introduce reforms in the process of granting permits to speed up studies and construction of new power generation from renewable resources;
  • the creation of new sources of direct employment in the rural sector during construction of projects;
  • improvement of the quality of life of the inhabitants in rural areas; and
  • finding new alternatives to traditional energy sources.

14. Are there any tax incentives for power projects and, in particular, for renewable power projects?

Yes, the regime gives the following benefits:

  • exemption from payment of sales taxes involved with the equipment used during development, installation, and construction of the power plant;
  • exemption from payment of all taxes, fees for importing foreign equipment in Honduras; and
  • exemption from income tax during the first 10 years of operation of any plant that does not generate more than 50MW of renewable resources.

15. Are there any investment vehicles or structures that permit the maximisation of investment in a power company, such as tax equity, master limited partnerships, real estate investment trusts (REITs) or yield cos?

Said vehicles are not a used form here in Honduras, given that current legislation allows for special incentives, tax exemptions and other benefits that allow for the maximisation of the investment.

16. Are there any governmental subsidies, benefits (other than tax-related) or incentives for investment in power projects and, in particular, renewable power projects?

There are a few, such as:

  • benefits of a special regime of temporary import authorization;
  • exemption from payment of income tax and legal deductions related to payment of service or professional fees by foreign individuals or legal entities.

17. Are there any capital controls or other regulations in your jurisdiction that prevent investors from repatriating investments in a power project?

No, investors are free to repatriate their investments and earnings as they see fit.

18. Is there a market for emission reduction certificates or clean energy certificates in your jurisdiction?

Yes, however, this is dependent on the international market, following international tendencies. Specifically, this has come to be applied to renewable power sources.

19. Which renewable power sources have been most successful in your jurisdiction and what is the medium to long-term outlook for them?

Out of all the existing ones, the most successful renewable source is hydroelectric. This is mainly due to the fact that it is the renewable source used by the government for state power plants. Hydroelectric would be followed by solar, which has been increasing in recent years.

Hydroelectric will probably continue to be successful in the future; in particular because of the approved plants the government is planning to build. If all approved and planned government hydroelectric plants are built, we would be looking at over 750MW of installed capacity in hydro resources alone. However, it is important to note the tendency of commercial and industrial companies to invest in private solar energy parks for self-consumption, which will bring a rise in solar energy.

20. Are there any non-regulatory factors that affect the development and financing of power projects in your jurisdiction, such as social, environmental, political or security concerns or rights of third parties?

Yes, Honduran law requires that all companies that are to build a power plant, must engage in social work in favor of the community living in the planned construction area. This can include paving roads, aiding in the repair of local school infrastructure, building community centers, etc, all proportional to the investment of the power plant. In the past, projects have had to deal with issues of social unrest from communities that are against the construction of a power plant, which is a risk any possible investor must take into account, as well as the importance of working hand in hand with various communities to prevent these issues.

As for indigenous rights, projects may not be built on indigenous land, as they are considered cultural heritage. Investors, through independent studies, must obtain a certification stating that the lands are not of archaeological or indigenous importance prior to beginning construction. The exception would be getting the approval from the indigenous communities to be affected.

21. Are subsurface rights separate from land rights? If so, what factors must a project take into consideration in determining whether an owner of subsurface rights could create issues for a project?

No, landowners are also subsurface owners.

22. How are wheeling tariffs set and are there any differences based on the power source and technology used? Is there a postage-stamp wheeling tariff in your jurisdiction?

Not applicable – in the process of being regulated.

23. Are there any open access rules for transmission? If so, how is access determined? Are there private transmission lines to which open-access rules don’t apply?

All government-owned transmission lines are open access, as long as you secure the corresponding permits. There may also be private transmission lines or public lines that are privately owned. In the latter case transmission companies cannot be linked to undertakings engaged in generation, distribution, and marketing of electricity, providing non-discriminatory treatment to all other users of the transmission network, while the installation operations of the transmission network are under the supervision and control of the system operator.

24. Are cross-border power exchanges regulated?

Purchase of capacity and energy from distributors to generators are assigned through international competitive bidding and the awarding of those contracts are not made for a period shorter than 10 years.

The bases of the bidding processes are imposed by CREE, the process itself is also under the supervision of CREE, and will be held independently for each type of generators of renewable energy sources to ensure adequate transparency and competition.

25. Are merchant power projects financeable in your jurisdiction?

I think this is very much a decision for the financing entities. Currently, the financing of projects is done through project finance models, given that up to now a pre-established power purchase contract is used for all projects, and this is taken into consideration. Now that there will be a change in the market and there will be no power purchase contracts, perhaps there will be a better opportunity for merchant power projects.

26. What are the biggest obstacles in obtaining debt financing for renewable power projects?

Unfortunately, one of the biggest risks in Honduras is the country itself and the security it provides, or not, to the investors who come to the country. Changes are being made in laws and policies in order to make the country safer for investors, but we still have work to do in that aspect.

There has been a growth in social unrest and disapproval of energy projects. This has led to various projects being put on hold and others have begun having social issues with surrounding communities. This creates risk and loss for the investors and has become a major obstacle recently.

27. What are currently the most significant obstacles to the growth of the electricity market in your jurisdiction?

Definitely social issues – unrest. As stated before, recent events have come to greatly increase disapproval of energy projects, which in turn has made investors and financers rethink investing in the region, thus suspending financing and investing. Infrastructure for transmission and distribution is a major obstacle. Not only does it cause losses to the projects by not being able to distribute all the generated energy, but it is currently also preventing new projects from being able to connect to the grid, generating losses both for investors and the country.

28. What are the biggest growth areas in the electricity market in your jurisdiction?

Honduras is reaching its limit for generation/transmission and distribution ratio. Honduras has a great amount of generation, but is not able to adequately distribute this amount of generated energy. This means the growth area will be in transmission and distribution.

29. Please describe any recent trends observed in your jurisdiction affecting the structuring of investments and financings in power projects.

As stated before, social unrest has really been a trigger in a tendency to slow down investment, or heavily conditioning financing of projects to complying with various social conditions.

30. Are debt offerings on the capital markets becoming a more common tool in your jurisdiction to refinance construction financing?

No, Honduras’ most used structure are trust funds.

31. Are power purchase agreements in your jurisdiction denominated in local currency or US dollars?

They are denominated in US currency in order to ensure investments in case of Honduran currency fluctuation. Payments, however, may be made in Honduran currency, at the exchange rate of the day of the invoice.

32. Are there regulatory limitations on foreign investment in, or control of, electric generation, transmission or distribution assets?

No, especially not now that we are converting to an open market.

33. How active in your jurisdiction is the M&A market for power assets?

Not applicable.

34. What are the most common dispute resolution mechanisms under local law-governed power purchase agreements in your jurisdiction?

The most common is arbitration, and given the response time and effectiveness, parties are more inclined to arbitration rather than national courts. Arbitration may be local or international when parties are private entities; however, whenever a government entity is involved, in accordance with local law, the Honduran Chamber of Commerce Arbitration Centre must hold the arbitration process.

To read the original article visit: Latin Lawyer