GEOTHERMAL ENERGY IN EL SALVADOR IN THE NEW ERA.
Translation from Spanish to English from the original text https://observatoriosdemercadoinmobiliario.blogspot.com/2019/06/geotermia-salvadorena-en-la-nueva-era.html
written by Luis E. Dominguez. Investment Manager. E-Mail: luisernestodominguez@gmail.com. Saturday, June 8, 2019.
It is important that the new government of Nayib Bukele sends a positive message regarding private participation in sectors such as Geothermal energy. The two previous governments of the FMLN political party caused harm by blocking new concessions through irresponsible and illegal actions by CEL (Executive Hydroelectric Commission. A Government owned company), along with the complicity of MARN (Ministry of Environment and Natural Resources) and SIGET (General Superintendence of Electricity and Telecommunications). They took away livelihoods and dreams from many families. That's why people like myself, who had never spoken about politics or been involved before, started investigating what was happening and actively participating in politics. We promoted the principles of not using the state for personal gain, promoting free competition, and reducing political clientelism and crony capitalism. We realized that what we needed to advocate for was not favors, privileges, or handouts from the state, but rather fair rules of the game for everyone. By studying the Supreme Court rulings on SIGET's (General Superintendency of Electricity and Telecommunications) authority to grant concessions, we learned a lot about the legal aspects of Geothermal energy. We have seen how the FMLN politcal party confused the population and used the argument that the subsurface rights belong to everyone to justify that only the government through CEL Group (Executive Hydroelectric Commission. A Government owned company) can participate in geothermal energy production, despite the laws allowing private participation.
As a partner and General Manager of a company that was a member and administrator of a Geothermal Energy Consortium in El Salvador, I was responsible for directing the Pre-Feasibility studies of a 5 MW Geothermal Project and seeking financing from banks, investors, international geothermal companies, investment funds, and external cooperation. The new Regulatory Law for the Granting of Concessions (LEY REGULADORA PARA EL OTORGAMIENTO DE CONCESIONES DE PROYECTOS DE GENERACION ELECTRICA ENPEQUEÑA ESCALA . August 2013) allowed us to move forward with the project after spending a year in a legal limbo following the Supreme Court ruling. In the end, we realized that neither SIGET (Electricity Superintendency) nor MARN (Minister of Environment) wanted to resolve their contradictions regarding the new law, I believe out of fear and complicity with the FMLN political party leadership, who ideologized the issue of Geothermal energy to support their case of removing the Italians (ENEL) from LaGeo (State Geotherrmal Company) and gaining control of the resource. The FMLN politcal party always dreamt of financing its national and regional political agenda in the style of Chavez (Venezuela President) and his 21st-century socialism. The political right group of El Salvador (congressman, business assocations, and opinion leaders) remained passive on the issue of geothermal energy, perhaps because they were still dealing with the aftermath of the CEL-ENEL legal case (where their members where involved in a constroversial legal case) and wanted to avoid stirring up more controversy after the government (leftist FMLN politcal party government) reached an agreement with ENEL (Italians) to prevent problems with potential affected parties. I had the opportunity to present the obstacles faced by geothermal projects to representatives of the German government through an invitation from SICA (Central American Integration System). Currently, there is financing available for geothermal drilling, supported by the German State Bank, which we could not take advantage of due to the political situation surrounding Geothermal energy that remained unchanged during the FMLN politcal party governments.
It is necessary to rewrite the energy policy formulated by Funes (ex President Funes) through the CNE (National Energy Council) and avoid the contradictions of this policy with government plans, such as those that occurred under the Sanchez Ceren administration (President Sanche Ceren 2014-2019), which aimed to "restore the strategic role to CEL and its subsidiaries" (CEL is the State Owned Energy Company). This marked the beginning of the madness of creating the "Grupo Cel" (A Vertically managed group of state companies that were horizontally managed in the past) an objective that alarmingly I saw mentioned as an advantage for investors in the securitization (investment memorandum) that was carried out to pay the Italians with pension funds (Pay ENEL to leave their stake in the National Geothermal Company).
It should also be clear in the energy policy that CEL (The State Energy Company) is just another participant in the market. The management of ETESAL (The State Company in charge of electricity transmission infraestructure) should be taken away from CEL (the National Energy producer can block competitors from connecting to the energy distribution network) to prevent conflicts of interest and to avoid the temptation of blocking projects from competitors or political enemies of the government. This is a concern for any bank or private investor who is not a sympathizer, member, or financier of the parties that have been in government. I mention this based on how things have historically been, and we hope it will change with the Bukele government. Members of Congress must modify the laws and remove CEL's (The State Energy Company) ability to arbitrarily interpret its Law of Creation (and apply arbitrary eminent domain powers to wipe out competitors). CEL should not succumb to the temptation of using the Expropriation Law from the 1950s to create a state monopoly, as the former president of CEL attempted to do. This is necessary to provide legal certainty for private investments in the geothermal sector.
To attract private investment in geothermal energy, members of Congress must provide an authentic interpretation of Article 18 of the Regulatory Law for the Granting of Concessions for Small-Scale Electricity Generation Projects (LEY REGULADORA PARA EL OTORGAMIENTO DE CONCESIONES DE PROYECTOS DE GENERACION ELECTRICA ENPEQUEÑA ESCALA). It should be made clear that the Ministry of Environment (MARN) can be allowed to approve "GENERAL" Environmental Impact Studies (EIA) to process concessions in the Legislative Assembly. If possible, it should be clarified that the approval does not entitle the developer to request the environmental permit but only to use the approval of the General EIA to process the concession. In this way, the spirit of the Environmental Law is not violated, and it helps avoid claims from other sectors. This will resolve a problem that dates back to 2004 when the SIGET (Superintendency of Electricity) regulations allowed this procedure (General EIA instead of Specific EIA to have the right to ask for the concession), which was later ratified by lawmakers from all parties and became something permitted by the new Concession Law issued by the Legislative Assembly (In August 2013) after SIGET was stripped of the power to grant concessions, which was then given to the Assembly (Congress). Despite the new law, MARN (Ministry of Environment) and SIGET (Superintendency of Electricity) continued to pass the buck between them (one throwed the responsibility to the other) and in this way helped to starve projects to death, like the one in which I invested.
We had to endure the madness of the FMLN political party in the past 10 years, with its consequences directly affecting us. It hurts to know that the political opposition did nothing regarding the abuses of the president of CEL (The National State Owned Energy Company). He even said on television that "CEL has the power to declare important sectors such as Geothermal Energy as being of public utility," a completely irresponsible statement that created an atmosphere of insecurity for private investments in the sector. According to the law, private investors have the right to participate in the sector. What investor or bank would invest their money in a sector where the government acts based on ideology, disregards the laws, and is willing to do anything to prevent competition?
Part of the success that President Bukele's government can achieve in the energy sector lies in making decisions based on technical considerations rather than ideology, regarding the participation of the government, national and foreign private entities in geothermal energy, whichever benefits the country the most in the short and long term. This requires reviewing possible business models and engaging in a public-private dialogue, not situations where the government announces what it is going to do and invites private entities just to listen (one way conversations). Dialogue is dialogue, and it should be a bilateral process, not unilateral.
Below is an analysis I conducted in late 2014 on the government's contradictions in the geothermal energy sector, citing the World Bank's opinions.
CONTRADICTIONS BETWEEN THE FIVE-YEAR PLAN AND THE ENERGY POLICY: A WEAK FOUNDATION FOR PROMOTING RENEWABLE ENERGIES THROUGH THE NATIONAL CLIMATE CHANGE PLAN
By Luis Ernesto Dominguez Magaña. 2014.
The NATIONAL -CLIMATE CHANGE- PLAN, in its component 6 (Renewable Energy Promotion Program, Efficiency, and Energy Security), mentions that the country's competitiveness, based on the efficient use of natural resources and the utilization of clean technologies, requires a strong boost from the components of the NATIONAL ENERGY POLICY (PEN) related to the PROMOTION OF RENEWABLE ENERGIES.
There is a LACK OF CLARITY in the ENERGY POLICY 2010-2024 presented by the previous government (President Funes in 2014) (there was still no update from the government of Sanchez Ceren in 2019 ) and an apparent CONTRADICTION between the ENERGY POLICY 2010-2024 and the FIVE-YEAR PLAN 2014-2019 of President Professor Sanchez Ceren, which creates WEAK FOUNDATIONS for the implementation of the proposed actions in component 6 of the National -Climate Change- Plan (Promote renewable energy):
a) The ENERGY POLICY 2010-2024 states that it is necessary to RESTORE THE STRATEGIC ROLE OF CEL AND ITS SUBSIDIARIES (Cel is the State Owned Energy Company) for the sustainable energy development of the country and in line with the strategic objectives of the State, so that CEL AND ITS SUBSIDIARIES MAINTAIN GREATER COORDINATION WITH THE EXECUTIVE. It also states that the strategic role of CEL and its subsidiary companies should be strengthened, particularly in research, study, PROJECT EXECUTION, and OPERATION OF ELECTRIC POWER GENERATORS USING RENEWABLE SOURCES. Additionally, the Energy Policy 2010-2024 mentions that support for the installation of SMALL RENEWABLE ENERGY GENERATION PROJECTS should be enhanced in an EXTENSIVE manner involving different territorial actors. (Source: National Energy Policy of El Salvador 2010-2024, National Energy Council CNE, 4. Strategic Lines of the Energy Policy, 4.2. Strengthening the Institutional Framework of the Energy Sector and User Protection, Strengthening CEL and its Subsidiary Companies.)
b) According to the Five-Year Development Plan 2014-2019 of the Government of President Professor Sánchez Cerén and the objectives of a -good life-, which included boosting the national economy to GENERATE OPPORTUNITIES FOR BUSINESSES, there was a line of action that involved PROMOTING AND ATTRACTING NATIONAL AND FOREIGN INVESTMENTS, and within this line of action, strengthening the institutional and legal framework of INCENTIVES to attract and increase foreign and domestic investment. (Source: Five-Year Development Plan 2014-2019, "Productive, Educated, and Safe El Salvador," Technical Secretariat and Planning (STPP), Government of El Salvador, January 2015, Chapter V - Objectives of a Good Life: framework of the five-year programming, Objectives, strategies, guidelines, and goals for the 2014-2019 quinquennium, Objective 1 - Boost the national economy to generate opportunities and prosperity for families, businesses, and the country, Lines of action, E.1.7 Promotion and attraction of national and foreign investments, L.1.7.3 Strengthen the institutional and legal framework of incentives to attract and increase foreign and domestic investment.) Additionally, according to the Five-Year Development Plan 2014-2019 of the Government of President Professor Sánchez Cerén, PRIVATE INVESTMENT WILL BE PROMOTED AND DEVELOPED through guidelines such as increasing levels of national and foreign private investment in strategic productive sectors such as ENERGY, and implementing and fostering the realization of projects under the public-private partnership modality that contribute to economic growth and social well-being of the population. Vice President Oscar Ortiz (and then Sigifredo Reyes) will be responsible for much of this (through PROESA the national promoter of foreign direct investment), as the promotion and attraction of private investment require strengthening and consolidating the Agency for Promotion of Exports and Investments of El Salvador (PROESA) as a promoter of new investments and facilitator of the creation of public-private partnerships. (See: Five-Year Development Plan 2014-2019, "Productive, Educated, and Safe El Salvador," Technical Secretariat and Planning (STPP), Government of El Salvador, January 2015, Chapter VII - Guidelines for fiscal policy, investment, and resource mobilization, E. Guidelines for the promotion and attraction of private investment.)
When the ENERGY POLICY 2010-2024 stated that it was necessary to restore the STRATEGIC ROLE of CEL and its subsidiaries in the sustainable energy development of the country and in achieving the strategic objectives of the State, on the one hand, it did NOT MENTION NOR EXPLAIN THE ROLE OF PRIVATE PARTICIPATION, and on the other hand, when the ENERGY POLICY added that CEL and its subsidiaries should MAINTAIN GREATER COORDINATION WITH THE EXECUTIVE, they gave a COMPETITIVE ADVANTAGE to CEL and its subsidiaries over any private entity wishing to enter the renewable energy market where CEL or its subsidiaries had or seeked to have participation, which also openned the doors to a STATE MONOPOLY. While it was true that some privatizations did not bring the expected benefits to the country in terms of technology transfer and efficiency, and instead, the profits of privatized entities were accounted for in the GDP of other countries, depriving the state of the revenues it used to have, it is necessary to STUDY WITHOUT IDEOLOGIES THE ROLE IN THE MARKET OF PARTICIPANTS SUCH AS CEL AND ITS SUBSIDIARIES, ALBAPETROLEOS (A joint venture between local governments and the Venezuela Oil Company), AND THE PRIVATE SECTOR, and what was best for the renewable sector and the country. When the ENERGY POLICY 2010-2024 stated that the STRATEGIC ROLE OF CEL AND ITS SUBSIDIARIES SHOULD BE STRENGTHENED WITH REGARD TO THE EXECUTION OF PROJECTS AND OPERATION OF ELECTRIC POWER GENERATORS USING RENEWABLE SOURCES, it did not specify whether by saying "strategic role of CEL and its subsidiary companies" it meant a "PREPONDERANT" ROLE??, or if they intended for CEL and its subsidiaries to have a HEGEMONIC AND MONOPOLISTIC ROLE?? in the renewable energy market. The aforementioned situations and their LACK OF CLARITY were a DISINCENTIVE FOR ANY PRIVATE INVESTOR IN RENEWABLE ENERGY. Who would want to compete with a government that is the same one granting permits? On the other hand, THE ROLE OF ALBA PETROLEOS AND ITS SUBSIDIARIES OR RELATED COMPANIES was NOT CLEAR, which were clearly private companies that HAD INFLUENCE IN THE GOVERNMENT, which was a COMPETITIVE ADVANTAGE that no private entity had, and it DISCOURAGED COMPETITION AND INVESTMENT by potential private competitors. Which government official would refuse to help Alba Petróleos? Which official would help a private company that wants to compete with Alba Petróleos or with CEL and its subsidiaries? THERE ARE NO CLEAR RULES, POLICIES, OR GOVERNMENT PRONOUNCEMENTS REGARDING THE ROLE OF THE GOVERNMENT, CEL AND ITS SUBSIDIARIES, ALBA PETROLEOS, AND THE PRIVATE SECTOR, regarding which market niches each one should or can occupy, according to the government's guidelines and support and what is best for the country. Any high-ranking official, even a Minister, would be afraid to support private initiatives that compete against Alba Petróleos or CEL and its subsidiaries out of fear of falling out of favor with the party or with the economic or political interests behind these companies and the officials who managed them. Let's not forget that it is the government's policies that INTERNATIONAL COOPERATION AND DEVELOPMENT BANKS must support and respect, and with this lack of clarity, they cannot support private projects. What cooperating entity would want to support private ventures that competed against Alba Petróleos or Cel and its subsidiaries if they risked falling out of favor with the government or the FMLN pollitical party or with government officials representing these interests? On the other hand, when the energy policy 2010-2024 mentioned that support will be strengthened for the installation of SMALL RENEWABLE ENERGY GENERATION PROJECTS in an EXTENSIVE manner involving different territorial actors, it is mentioned that support will be provided extensively to small projects, but it is not clarified whether this means supporting small projects that are exclusively owned by CEL and/or its subsidiaries, or if they will be projects in which CEL and its subsidiaries must have participation with private entities and/or local governments. All of this generated confusion, insecurity, and increased risks and capital costs for any private entity wishing to venture into large or small renewable energy projects. Regarding the FIVE-YEAR DEVELOPMENT PLAN 2014-2019 of the government of President Professor Sánchez Cerén and its line of action to promote, attract, and encourage national and foreign investments, and to PROMOTE AND DEVELOP PRIVATE INVESTMENT IN STRATEGIC SECTORS SUCH AS ENERGY, this was seemingly contradictory to the ENERGY POLICY 2010-2024 since the Energy Policy aimed to restore the STRATEGIC ROLE OF CEL AND ITS SUBSIDIARIES IN THE IMPLEMENTATION OF RENEWABLE ENERGY PROJECTS. It was necessary for the government and the National Energy Council to clarify the rules of the game between CEL and its subsidiaries, Alba Petróleos, and private entities wishing to invest in renewable energy projects, and for fair competition to exist among them. On the other hand, it was important to note that according to the FIVE-YEAR DEVELOPMENT PLAN 2014-2019, NATIONAL AND FOREIGN PRIVATE INVESTMENT IN ENERGY WILL BE PROMOTED AND DEVELOPED, as well as the implementation and acceleration of projects under the PUBLIC-PRIVATE PARTNERSHIP modality. This could become another obstacle for developers of small projects if this model is required by government policies since implementing Public-Private Partnerships in small projects could make them unviable due to the high costs and waiting times required for a central or local government to decide to invest under this modality using the new Public-Private Partnership law. Finally, it is worth mentioning that as early as 2012, after the government had launched its Energy Policy 2010-2024, the Energy Unit of the Latin America and Caribbean Region of the World Bank, through the Energy Sector Management Assistance Program (ESMAP) and the Geothermal Potential Assessment for Central America, concluded and recommended for El Salvador in their findings and recommendations (Drilling Down on Geothermal Potential: An Assessment for Central America, March 2012, Energy Unit of the Latin America and Caribbean Region of the World Bank, ESMAP, Chapter 5. Conclusions and Recommendations-El Salvador), they stated that El Salvador had a well-defined institutional structure that allowed for a solid prioritization for energy generation through its energy planning process. The assessment mentioned that energy sector planning was the responsibility of the National Energy Council (CNE), which was at that time in the process of contracting the development of the plan. The evaluation stated that whether the CNE was up to the task of developing a well-structured plan remained to be seen, and yet, outsourcing the planning process was a step forward to counteract the dominant presence of the Salvadoran Electricity Company (CEL), which developed hydropower resources, and the new agreement with the CNE provided a more equitable approach that favored other renewables, including geothermal energy (see: Drilling Down on Geothermal Potential: An Assessment for Central America, March 2012, Energy Unit of the Latin America and Caribbean Region of the World Bank, ESMAP, Chapter 5. Conclusions and Recommendations-El Salvador, Point 118). This indicated that the World Bank perceived CEL's dominant position in renewable energy planning as a problem. Furthermore, the World Bank's assessment stated that there was active private sector participation in energy generation, mainly for thermal generation, and in order to promote private sector involvement in geothermal generation, the role of the geothermal state company (La Geo) in developing geothermal prospects needed to be clarified. Specifically, whether it was financially viable for La Geo to continue acting as the sole developer or if the market should be opened to other participants. The assessment mentioned that La Geo was better positioned to lead a master plan due to its experience in conducting the required exploratory work (see: Drilling Down on Geothermal Potential: An Assessment for Central America, March 2012, Energy Unit of the Latin America and Caribbean Region of the World Bank, ESMAP, Chapter 5. Conclusions and Recommendations-El Salvador, Point 121).
