Central America and the Caribbean are the two regions in America with the highest level of participation of fossil fuels in their energy consumption. The share of oil products in the total consumption of these regions is 50 and 70 percent respectively. This high participation of petroleum derivatives brings with it a series of associated problems such as vulnerability to the volatility fuel prices and, in times of high oil prices, a significant macroeconomic impact on the trade balance and the level of inflation. In addition, increased fuel consumption has associated environmental side effects such as higher greenhouse gas emissions.
Fortunately, in Central America and the Caribbean other options are being presented to diversify energy consumption. One such option is the consumption of natural gas. On September 9, 2015, a contract was awarded to AES for the construction of a natural gas gasification plant in Panama with a capacity of 170 million cubic meters. In October 2015, the assignment of a natural gas supply contract to a 355 MW electricity generation plant in El Salvador was announced. Likewise, in November 2015, a 20-year natural gas supply contract was announced for a 120 MW power generation facility in Jamaica. In addition, in September 2015 a 10-year contract for 305 MW of energy generation was awarded in Panama.
Little by little, the introduction of natural gas in Central America and the Caribbean is becoming a reality. This scenario seemed distant three years ago before studies carried out by the IDB showed the technical, economic and commercial convenience of introducing natural gas in these two regions. These studies showed that the energy price differential between oil and gas made gas-based electricity generation profitable and, as a consequence, provided the economic conditions to build infrastructure that would allow the importation of gas.
With the introduction of natural gas in Central America and the Caribbean, the possibility of diversifying the energy consumption of the region to include other cleaner fuels with lower greenhouse gas emissions and to provide a real option to have other alternatives based on fuels other than petroleum products became a reality.
Although current projects to introduce natural gas in Central America and the Caribbean are linked to electricity generation, which has acted as an anchor for the demand that gives it economic viability, some of the immediate effects associated with the presence of gas in the energy market include the expansion of its use in other sectors like the industrial and residential sectors. Eventually this will happen once the current projects associated with the electricity sector are developed, but governments need to work on the preparation of the regulatory and institutional framework that allows for the appropriate operation of the nascent market and provides appropriate incentives so that the private sector can participate dynamically and effectively in this development.
Energy authorities should be ready to provide appropriate incentives to the different stakeholders in this sector while promoting healthy development with competitive practices in the allocation of distribution contracts and in the implementation and definition of tariff structures that apply to end users. That is, they must create the instruments and mechanisms of participation that promote competition and allow end users to be offered the lowest possible cost on the gas supplied. A lower cost is possible only if it has proper regulation that promotes the efficient operation of the sector and eliminates the monopoly rents that can be generated in a market with this structure.
The good news is that the market is nascent, and the potential for its development is enormous. To illustrate the potential for the natural gas market in Central America and Latin America, the current consumption to generate electricity based on natural gas in Latin America is 82 billion cubic meters. By 2025, Latin American will consume about 2,500 TWh of electricity, of which more than 1,000 would be generated by natural gas plants. If the incremental demand for electricity in the region were met by generation based on natural gas, it would be more than 250 billion cubic meters, which is more than three times the current use of gas for generation.