Costa Rica Leads Latin American Renewable Energy Revolution

Costa Rica has proved that power grids can be completely renewable. Now it must show they can be economically sustainable too…

Costa Rica’s electricity sector could be a metaphor for the wider situation facing the country. On one level it’s an incredible success as the world’s greenest power grid. But beneath the surface pressure for change is growing, with local companies chafing at an electricity bill that’s about a third higher than in neighbouring countries. Moreover, the increasingly long, polluted traffic jams, caused by a transport system 70% powered by fossil fuels, is undermining Costa Rica’s claims to be a world leader in environmental issues.

The organisation responsible for creating the world’s greenest electricity system is Grupo Ice, an autonomous state-owned company founded in 1949 to spread electricity throughout the country, with telecommunications added to its mandate in 1963. Nowadays ICE’s customers make up 80% of the power market, with 6 local utilities sharing the remainder. Its domination means that it will be the key driver if Costa Rica is to bring down the cost of its power supply.

Mega projects

The bedrock of ICE’s power generation is its hydroelectric power plants, which account for 78% of the country’s electricity. Hydro power is a great source of renewable energy but these mega projects don’t come cheap. For example, the 300-megawatt Reventazón dam inaugurated last year cost $1.4billion. Building a series of these capital-intensive projects has left ICE with a debt pile, whose repayment schedule adds to the overall electricity cost. The problem is exacerbated by the massive overheads that come with being a state-owned company with almost 20,000 employees, in a country where public workers have secured very generous payment and pensions.

Eduardo Kopper, the CEO of Sunshine Solar Energy, a distributed solar firm that operates in a market niche not covered by ICE, is adamant it must change. “Like most Costa Ricans I am very proud of ICE. It achieved some remarkable things for this country… but without doubt the world is changing… Ultimately ICE can’t keep charging Costa Rica 30% more for electricity than our neighbours in Central America pay.”

The person charged with transforming ICE is Irene Cañas, who was appointed by the new government earlier this year. Cañas is under no illusions about the need for change. ICE played a vital role in developing Costa Rica but now the country faces other challenges, and ICE has to adapt to deliver them.” One factor, says Cañas, is that national power demand, which had been projected to grow strongly, is stagnating. “Our population is not growing so quickly, which limits residential consumption increases. Meanwhile our industry has shifted from light manufacturing to services. Whereas 30 years ago we had lots of plants assembling manufactures we now have business process outsourcing centres, or very niche production in areas like medicine. As a result, operations just need electricity for lighting, air conditioning and computers, not the heavier machines that were more common before.”

Solar power

But slowing power demand is not ICE’s only problem. In the last seven years a new source of competition has emerged – distributed solar. Costa Rican law allows for 15% of electricity to be generated independently by residential or commercial consumers using solar panels. And in recent years a favourable shift in pricing has encouraged a solar boom, says Kopper. “We benefited from worldwide trends. European and Californian consumption targets encouraged growing Chinese panel production, which lowered panel costs and improved the economies of distributed solar in Costa Rica.”

One private sector user that has already switched to distributed solar is Lindora Corporate Centre, explains Fernando Carozo, a director at Garnier & Garnier, the country’s largest developer of office and business parks. “The economics depend on the type of business, energy use and roof space. However, we’ve saved about 30% on our energy bills since installing them in Lindora.”

That’s great for customers but it creates a real challenge for ICE because every building that installs its own solar panel reduces the group’s client base, raising the cost burden for those who remain. It also creates a headache for the Costa Rican government that doesn’t want to see one of its largest, and most successful, state companies run into financial difficulties. As a result, limits have been placed on the expansion of distributed solar energy, explains Alejandro Brenes, CEO of Enertiva, Central America’s largest solar energy firm.

"With ICE we don’t have a monopoly, we have a dictatorship…"

“With ICE we don’t have a monopoly, we have a dictatorship”, complains Brenes. “It has very close links with the energy ministry and regulator, which means the rules are made to suit it. There is a 15% limit on distributed energy, but they have made it more complicated by dividing the country into 200 sub-regions, none of which can have more than 15%. In industrial areas, there are sub-regions that have already reached the limit, while elsewhere there are remote areas where no solar panels are installed. It’s also a messy process to get the permits needed for distributed solar, which causes more delays.”

Cañas agrees that distributed energy is challenging ICE’s traditional business model, noting that it’s an issue across the world, not just in Costa Rica. Moreover, she accepts that “this trend is here to stay”. However, she disagrees that ICE gets an unfair advantage. Really the regulator needs to create new pricing mechanisms for these consumers that also produce their own electricity. When their solar panels aren’t generating any power, they rely on the grid for electricity so ultimately, they should pay towards the infrastructure that maintains the system.”

Transforming ICE

But ICE isn’t just being undercut by solar panels. Increasingly the local utilities, which have been investing in their own generation assets, are providing cheaper electricity to their customers. For example, JASEC, the electricity distribution company in Cartago, is about 10% to 15% cheaper than ICE, says Carozo. “The reason they are less expensive is they have lower overheads and run themselves more as business than a public body. About 20% of their power is self-generated, while the rest is bought from ICE. Their own production is a lot cheaper, hence their lower tariffs. Moreover, they have a project pipeline that will allow them to generate 80% of their own energy within five years. Given that the law prevents them from making profit it’s clear that costs will come down a lot over the next few years.”

The challenges facing ICE seem insurmountable but Cañas believes that some analysts have been too quick to write off the group.Lots of people see ICE as old-fashioned but actually we face this new era with many inbuilt advantages. The most important is that ICE’s two main businesses are electricity and telecommunications. Traditionally these areas have been kept separate but increasingly there are natural synergies between them. On the telecommunication side, with kölbi we have been laying fibre optic cable, improving internet speeds and processing vast amounts of data. Now these elements are becoming important in the power sector because of the emphasis on smart grids that need to process information in realtime and manage electricity supply and demand accordingly.”

Another ICE characteristic is its large scale. That’s seen by many as a disadvantage because of the overheads it brings but Cañas believes that size can be used to clean up the transport part of Costa Rica’s energy matrix.ICE has bought 100 electric vehicles that we will use as an example to the rest of society. More importantly we are developing the charging infrastructure so that a private consumer can buy an electric car, safe in the knowledge that it won’t run out of power. We are also working with the railway entity here in Costa Rica to develop an electric train.” ICE’s size can also be used to spread Costa Rican renewable energy expertise abroad, says Cañas.Decarbonising power supplies is now a global trend and we are world leaders in the area… there is demand for our renewable energy expertise across the region.”

Ultimately the different challenges that ICE faces are positive for Costa Rica’s power sector. Another country might be content to have the world’s greenest electricity grid but in Costa Rica competition from agile renewable companies and regional utilities is pushing ICE to innovate. The transformation will create myriad investment opportunities, from refinancing ICE’s debt to providing smart-grid technology. It’s a perfect fit for UK plc, which is strong in these areas, while contracts in Costa Rica could help British firms gain a foothold for work elsewhere in the region.