While many have heard of the Central American Electrical Interconnection System, SIEPAC, few are aware that electricity integration in Central America is now a reality. SIEPAC is already operating commercially and has helped to provide electricity to countries’ national grids when they were experiencing shortages. An important milestone was achieved on June 1 of this year, when the regulatory framework of the Central American Regional Electricity Market (MER) entered into effect, providing the impetus for regional exchanges ofelectricity and stimulating private investment in the sector.

Thanks to SIEPAC, Panama was able to recover from an energy crisis that had arisen in May as a result of a prolonged drought that reduced the levels of reservoirs at hydroelectric dams, reducing generating capacity. Panama was able to import electricity generated elsewhere in Central America, transmitted across the SIEPAC network from El Salvador, Honduras and Nicaragua. The amount of electricity imported was equivalent to the average monthly consumption of 100,000 families, demonstrating the importance and reliability of a network that encompasses 1,800 km and has an installed capacity of 300 megawatts (MV).

The activation of SIEPAC and MER and the consolidation of this one-of-a-kind transmission network and integration plan comes as a result of much hard work by countries in the region, with support from the IDB. The 25th anniversary of its initial conception provides an opportunity to recognize that the region can now count on robust electricity infrastructure extending from Guatemala to Panama, complemented by a connection to Mexico, and to Colombia in the future. This regional scope underlies the ability to plan for and operate the integration of national electricity markets in a centralized and coordinated manner through the MER, as though it were a seventh market alongside the individual countries.

The high cost of electricity remains an important issue. Estimates place the wholesale price in Central America at around $150 per megawatt-hour compared to $50 for other, comparable systems—making it three times as expensive. With SIEPAC fully operational, a significant reduction in that cost is anticipated for both households and business users, along with increased security and greater reliability.

These advances will occur on various fronts. SIEPAC and MER will enable the development of larger and more efficient regional generation projects, while also facilitating the preparation of a larger number of renewable energy projects, traditional and non-traditional, thus contributing to a diversification of the regional energy matrix. The system also will allow countries to reduce their need to maintain reserve capacity, leading to additional savings.

Forecasts indicate that Central America should double its installed electricity generation capacity over the next 15 years to cover growing demand, which is driven by rising economic growth and increasing urbanization. SIEPAC’s entry into effect comes at a time when high energy costs, the need for secure supply and decreased use of oil and gas for electricity generation are all at the fore.

SIEPAC’s support for greater integration also coincides with the region’s transition toward a more efficient electricity system, including generation powered by natural gas. The SIEPAC network will allow for the construction of combined-cycle gas generation plants, catalyzing the use of natural gas, providing for efficiency gains and reducing emissions from fossil fuels that are higher in contaminants. It is estimated that one half of the new installed generating capacity will use gas as its primary source, subject to stable trends in its price.

The IDB has provided consistent support for these developments over many years, with $253.5 million in financing, accounting for more than half of the total $494 million cost for the regional electricity infrastructure. The Bank has also contributed $25 million in technical assistance to create the regional market and its institutions and has brought parties together to engage in political and technical dialogue to generate the commitments and agreements needed to achieve the progress to this point.

Clearly, challenges and tasks remain. To fully realize their potential, SIEPAC and MER still need to account for the dynamics and the heterogeneity of the electricity sectors of the various countries of Central America. Nonetheless, this is an historic moment for investment, principally for the private sector in energy projects that are regional in scope and that feature the use of renewables and natural gas as cleaner sources—adding up to tangible benefits for households and business throughout the region.

This article was originally publish, here.