Report N . f70 1K) Honduras: Issues and Options in the Energy Sector Auigust 1987 *sS œ 9 .. ... ; . ............ i * ;f Itp -r T21 he jonIUNDP/WorId BankEnergy Sector Assessment Program, --s dorurn'ent his a ri--strncted di5trfb6tion Its contents may not be disclosed it i'66 . ;thirz,,~ i___* Ba2 -S . -- JOINT UNDP/WORLD BANK ENERGY SECTOR ASSESSMENT PROGRAM REPORTS ALREADY ISSUED Country Date Number Indonesia November 1981 3543-IND Mauritius December 1981 3510-MAS Kenya May 1982 3800-KE Sri Lanka May 1982 3792-CE Zimbabwe June 1982 3765-ZIM Haiti June 1982 3672-HA Papua New Guinea June 1982 3882-PNC Burundi June 1982 3778-BU Rwanda June 1982 3779-RW Malawi August 1982 3903-MAL Bangladesh October 1982 3873-BD Zambia January 1983 4110-ZA Turkey March 1983 3877-TU Bolivia April 1983 4213-BO Fiji June 1983 4462-FIJ Solomon Islands June 1983 4404-SOL Senegal July 1983 4182-SE Sudan July 1983 4511-SU Uganda July 1983 4453-UG Nigeria August 1983 4440-UNI Nepal August 1983 4474-NEP Gambia Novdember 1983 4743-GM Peru January 1984 4677-PE Costa Rica January 1984 4655-CR Lesotho January 1984 4676-LSO Seychelies January 1984 4693-SEY Morocco March 1984 4157-MOR Portugal April 1984 4824-PO Niger May 1984 4642-NIR Ethiopia July 1984 4741-ET Cape Verde August 1984 5073-CV Guinea Bissau August 1984 5083-GUB Botswana September 1984 4998-BT St. Vincent and the Grenadines September 1984 5103-STV St. Lucia September 1984 5111-SLU Paraguay October 1984 5145-PA Tanzania November 1984 4969-TA Yemen Arab Republic December 1984 4892-YAR Liberia December 1984 5279-LBR Islamic Republic of Mauritania April 1985 5224-MAU Jamaica April 1985 5466-JM Ivory Coast April 1985 5250-IVC Benin June 1985 5222-BEN Togo June 1985 5221-TO Vanuatu June 1985 5577-VA Tonga June 1985 5498-TON Western Samoa June 1985 5497-WSO Burma June 1985 5416-BA Thailand September 1985 5793-TH Sao Tome and Principe October 1985 5803-STP Ecuador December 1985 5865-EC Somalia December 1985 5796-SO Burkina January 1986 5730-BUR Zaire May 1986 5837-ZR Syria May 1986 5822-SYR Ghana November 1986 6234-GH Guinea November 1986 6137-GUI Madagascar January 1987 5700-MAG Mozambique January 1987 6128-MOZ CONFIDENTIAL Report No. 6476-HO HONDURAS ISSUES AND OPTIONS IN THE ENERGY SECTOR AUGUST 1987 This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for this work has been provided, in part by the UNDP country IPF Account, as well as by the Canadian International Development Agency (CIDA) and the Inter-American Development Bank (IDB), and the work has been carried out by the World Bank. This report has a restricted distribution. Its contents may not be disclosed without the authorization from the Government;, the UNDP or the World Bank. ABSTRACT Honduras' energy strategy f or the medium term should be oriented to purchase petroleum products at least cost, improve the control of the oil revenues from sales of petroleum products, support the integrated social forestry management projects, promote export sales of electricity, and improve the coordination of the energy sector. The basic objective of Honduras' strategy in petroleum should be to obtain petroleum supplies at least cost and to improve the collection of oil revenues from the sales of petroleum products. In 1985, the operation of the refinery was not economic, and oil revenues from sales of petroleum products actually deposited in the Central Bank were significantly less than what should have been deposited under present arrangements. Although the forestry sector may well become the backbone of the Honduran economy, it has not yet received the attention necessary to achieve its true potential. The Government of Honduras (GOH) needs to develop an integrated forestry program and consider the expansion of the ongoing social for&stry management projects which include timber harvesting and reforestation, resin and seed collection, charcoal production from forest thinnings, small power generation, and forestry protecsion. In view of El Caj6n's hydrogenerating plant excess capacity, international electricity sales may offer the only significant contribution in the short term to minimizing the National Electric Power Company (ENEE) financial problems. Although energy accounted for almost 501 of public investment expenditures in 1981-1985, the important role of energy in the national economy is not reflected in coordinated administrative actions. A public entity needs to assume full responsibility for coordinating energy sector policies as well as the actions carried out by different government agencies. ABBREVIATIONS B Billion = 109 bbl Barrel bd Barrel per day BTU British Thermal Unit ERR Economic rate of return gal Gallon GW Gigawatt ha Hectare IS Interconnected system kcal Kilocalorie kgoe Kilograms of oil equivalent kj Kilojoule km Kilometer ktoe Kilo tons of oil equivalent kV Kilovolt kW Kilowatt kWh Kilowatt hour L Lempiras LJG Liquefied Petroleum Gas m Cubic meter M Thousand MAI Mean annual increment MIS Management Information System Mm Million MT Metric ton MW Megawatt MWh Megawatt hour toe Tons of oil equivalent This report is based on the findings of an Energy Assessment Mission that visited Honduras in February 1986. The mission comprised Gabriel Sanchez-Sierra (Mission Leader), Ignacio Rodriguez (Energy Economist), and the following consultants: Robert Chronowski (Forestry and Fuelwood Specialist), John Shillingford (Petroleum Processing and Marketing Specialist), Alberto Brugman (Rural Energy Specialist), Fernando Lecaros (Electric Power Economist), Arnaldo Vieira de Carvalho (Energy Conservation Specialist), Gustavo Rodriguez (Institutional Specialist). Principal authors of the report are Gabriel Sanchez-Sierra and Ignacio Rodriguez. Secretarial assistance was provided by Mmes. Sylvie Hottelet and Tara Holtby-Allen. ACRONMS CAP Petroleum Administrative Commission COHDEFOR Honduran Forestry Development Corporation DGMH General Mines and Hydrocarbon Directorate EaEE National Electric Power Company FAO Food and Agriculture Organization of the United Nations COH Covernment of Honduras INCEHSA Comayagua Cement Plant OCP Petroleum Commercialisation Office SECPLAN Ministry of Planning, Coordination and Budgeting CUmAuir qmvuMu (190) Official exchange rate US$1 a 2 L"piras (which is equivalent to the shadow exchaSnge fte) I3UtC CoUvIUSoU FACUU 1 Ical 3 3 S19 B 1 toe a 10.2 x 106 kcalt 40.5 x 10 8ISU or 7.33 barrels of oil Coal 0.58 toe per metric ton -~~~~~ Density Calorific Value Product kg/bbl kcal/hg Crude Oil 140.69 10,000 LPC 85.37 1O5O0 Gasoline 116.84 10,350 Kerosene 128.45 10,300 Diesel Oil 139.89 10t000 Fuel Oil 148.16 9,600 Electricity - a/ Firewood 0.69 bl 3,00 Charcoal S-,OO0 Bagasse 1,50 a/ kcal/lkWh. b/ ton/X3. Source: SECPLA. TABLE OF CONTENTS Page EXECUTIVE SUl-ARY AND RECOMMENDATIONS ...... *'00.......... i I. ENERGY IN THE ECONOMY .................................... . 1 Country Background .. .. . . . .......... .................... .... I Economic Stain............................... 1 Energy Resources .............. a ...... ... ....... .... e * * . 1 Energy Balance, 1984t.................................... 2 Energy Demand Projections .................e.............. ..... 3 II. ENERGY DEMAND MANAGEMENT ........................... . 4 Energy Pricing ............................... 4 Petroleum Products. ...... .. ..... . .... . . ..... ...... . . . . ..... 5 Recommendations .........................................e...... 6 Electricity Tariffs.................................... 6 Recommendations ....................................... . 8 Energy Conservation and Substitution..................... 8 The Structare of Energy Demand .oo*................... 9 The Household Sector .................. ..... . ... ....... . 9 The Industrial Sector ....* . .. o . ..... ... .........o.. 10 The Transport Sector........ ......................... .. 11 Legal and Institutional Aspects........................ 12 Recommendations ................................................ 12 III. FORESTRY ..o ...................................... 14 3thervies ...... ^ 0 ~~~~~~~14 The Forestry Sector and the Economy ...................... 14 Potential Contribution to the Economy.................. 14 Forestry Resources and Utilization......................* 15 Supply and Demand Considerations .................*9000*0 15 Investment Priorities ................................. 16 Integrated Social Forestry Management Projects ......... 16 Institutional Issues..................................... 17 Recommendations .......................... ............ . 19 IV. PETROLEUM ............................. ... .. 20 GaeotoEylratie.......................................... 20 Current Exploration and0utook........................ 21 Organization of Petroleum Exploration.................. 22 Petroleum Product Supply and Demand...................... 22 Unaccounted for Oil Revenues........................... 25 Demand Forecast ....................................... . 25 Petroleum Product Supply Strategy...................... 27 Petroleum Port Facilities and Storage.................. 27 Transport Facilities i liet ie.............. ......s...... 27 Institutional Issues 28 Recommendations.. . . $ . . . ........ . . * . **g.e..... 28 V. ELECTRICITY ................ 29 Overview.... ..... ........ .......... e........ ............. 29 Basic Resources and Existing Facili'ti. 29 G e n e r a t i o n ~~~~~~~~~~29 Transmission and Distribution. e ......e...e.oecceec 29 Service Coverage.... 30 Electricity Growth and Demand Forecasts.................. 31 Expansion Plans. .....................c.. e 31 ENEE's Financial Prospects. e.e.c..... e.e.c..... cc...o. 33 Possible Solutions to ENEE's Financial Problems*e**,,,, 34 Rural. ...................Elcrfcton..... ..........*....e 35 Preliminary Evaluation of Rural Electrification Projects.o j.... ..e ... ccc....t s cc 35 Institutional I sus37 Recommendations... cc.. . e.g.. ............ XX......... 38 VI. OTHER ENERGY SOURCES ........... ..... ...... e 39 Small Hydro.......... .... ..... .. .. 39 Solar Energy ...................... . .. 40 Ziogas ~~~~~~~~~~~~~41 3agasse ~~~~~~~~~~~~42 Coffee Pulp and Skin 42 Wind Energy ......... c 42 Ethanol............ ... ............ ....................... 44 Lignite ~~~~~~~~~~~~44 Leothermal... ....................................... ..e 44 VII. ENERGY SECTOR COORDINATION.... 47 ..................... ................... ................ . 47 Institutional Framework. ........... ....... .se........e 47 Options to Improve Coordination........................e. 49 TABLES Table 1.1 Relative Importance of Petroleum Imports................ 2 Table 1.2 Summary Energy Balance - 1984.................o.... 2 Table 1.3 Demand Projections - 1995 .......3........ 3 Table 2.1 Comparision of Fuel Economic Costs in Honduras.......... 5 Table 2.2 Petroleum Product Retail Prices and Economic Costs ...... 6 Table 2.3 Electricity Tariff Structure - 1986..................... 7 Table 2.4 Vehicle Fleet in Honduras, 1984ccec.ccce.cce..cc..eo. 11 Table 3.1 Estimated Minimum Volume of Inventoried Forest Resources Available ..... ccccc..cc cg..c c........o 16 Table 3.2 COHDEFOR Sales and Operating Profits, 1979-1984......... 19 Table 4.1 Refinery Yield and Product Demand, 1985................. 24 Table 4.2 Petroleum Product Demand Forecast, 1990-1995............ 26 Table 5.1 Basic Characteristics of the Honduras Power System, 1985 ..... .......... .......... . ...... 30 Table 5.2 Power Demand Balances.... 00*.. ........................... 32 Table 5.3 Rural Village Electrification Projects with ERR Higher than 12X.................. . ........ ....... .... . 36 Table 6.1 Feasibility of Interconnection to the Main Grid......... 39 Table 6.2 Fuel Costs of Water Heating in Tegucigalpa.............. 40 Table 6.3 Summary of Solar Energy Cost for Water Heating.......... 40 Table 6.4 Solar Applications of Photoelectricity................ . 4i Table 6.5 Pumping Water Costs of Windmills in Honduras ............ 43 Table 6.6 Wind Electricity Costs in Honduras...................... 43 Table 6.7 Benefit/Cost Analysis for a 5,000 Short Ton of Sugarcane per day Honduran Sugarmill............ 45 Table 7.1 Participation of Institutions in Energy Subsectors...... 48 1. Honduras-Energy Balance: 1984............................ 51 2. Honduras-Projected Energy Balance: 1995................... 52 3. Electricity Long Run Marginal Cost Analysis................ 53 4. Taxaco Refinery Economics, 1985............................ 58 5. Central Government Revenues from Crude Oil and Petroleum Product Operations, 1985 ............................ 60 6. Preliminary Pipeline Economics............................. 62 7. Proposed ENEE Distributior Project......................... 64 8. ENEE's Financial Analysis.................... .......... .... 69 9. Rural Electrification: Results of the 62 Projects Evaluated and Methotology.... .............................. 72 10. Organization of the Energy Sector in Honduras ........, 78 NAPS IBRD No. 19771 - Honduras IBRD No. 19772 - Land Use IBRD No. 19774 - Main Sedimentary Basins IBRD No. 20342 - Interconnected Power System and Preliminary Identification of Rural Electrification Projects EXECUTIVE SBUMARY AND RECOMMEMDATIONS 1. The two critical areas of the Honduran energy sector which require the most improvement and support are petroleum product orocurement and social forestry projects. The current petroleum product supply arrangement is inadequate and should be oriented to purchase products at l.east-cost. rhe GOH also should accelerate the integrated social forestry projects which optimize the utilization of the abundant forest resources and raise substantially the standard of living of the country's large rural population. 2. Honduras' major indigenous energy resources are its forests and hydropotwer potential. Forest lands cover over 60% of the total land surface; hardwood resources, which ;rovide the bulk of fuelwood used, are estimated to be almost 95 million m . The hydropower potential is estimated to be 2,800 MS' to 6,000 MW, with a current surplus capacity resulting from the El Caj6n project (300 MW). Petroleum resources in commercial quantities have not. been identified yet, although a potential does exist. 3. In 1984, Honduras consumed about 2 million toe of energy. Per capita energy consumption was relatively low at 450 kgoe, compared with an average for Latin America of 1,000 kgoe. Woodfuels met 62% of total final demand, petroleum products 28%, bagasse 6%, and electricity 4%. 4. The country is heavily indebted, mainly as a result of the large investment made in the power subsector over the last decade. The National Electric Power Company's (ENEE) capital and interest payments for 1986 make up almost 40% of the country's external public debt service. Petroleum imports also weigh heavily on the balance of payments, accounting for 15% of total imports and the equivalent of 18% of total exports in 1985. The recent sharp decline in international oil prices is expected to reduce the Honduran oil bill by US$40 million in 1986, or by roughly 3% of totol imports in 1985. In 1985, debt service and oil imports accounted jointly for 41% of total ex?orts. Major Issues 5. Honduras' energy strategy should focus on: (i) optimizing the contribution of forest resources to the economy; (ii) purchasing petroleum products at the least-cost supply option; (iii) optimizing the use of electricity available from the El Caj6n hydro project; and (iv) improving the overall coordination of the energy sector. - ii - Forest Resources 6. The major issues identified in the forestry subsector are: (a) the need to identify the optimum contribution the forests can provide to the Honduran economy; and (b) the restructuring of the Honduran Forestry Development Corporation (COHDEFOR). 7. Contribution to the Economy. Even though there is not currently a generalized deforestation problem, nor a national fuelwood shortage, the forestry sector requires more attention at the national level to take into account its potential contribution to the economy. The forestry sector may well become the backbone of the Honduran economy because of its abundant forest resources. Encouraging accelerated ebconomic growth and the creation of employment are the overriding macroeconomic policy issues in Honduras; well-managed forestry resources can increase the country's foreign exchange earnings and provide a much larger number of jobs in the forest areas, while substantially raising the income of the poorest population segment. While 30% of Honduras' total population lives in forest areas, only 2X of that population is employed in forestry activities. 8. To increase the contribution of the forest resources to the economy, an integrated forestry investment program is needed, including timber production, forest protection, and social forestry. The key investment priority is to expand the ongoing integrated social forestry management projects which aim to increase employment in the forest industry and income generation. These projects include work on forestry protection, resin and seed collection, timber harvesting and reforestation, charcoal production from forest thinnings, and small power generation (paras. 3.4-3.7 and 3.12-3.15). 9. Institutional Restructuring. Any investment in the forestry sector needs to be developed in conjunction with the redirection of COHDEFOR. 1/ Although there is not a generalized problem of deforestation, COHDEFOR should take a more active role in forest management to assure that localized problems do not sxpand. Its participation in the marketing of forest products has diluted its focus on resource side management. Since the international price of sawn wood increased by about 40% in 1978-1984 in real terms, the decline in Honduras' production and export (33% in 1980-1984) of this product has to be attributed to domestic factors. The performance of COUDEFOR has deteriorated steadily, resulting in lower profits and rising 1/ In January 1987, COUDEFOR initiated its restructuring with steps oriented to the privatization of marketing activities and greater support to energy activities. - iii - administrative costs. A more private-oriented approach to the marketing of forest products should be pursued to utilize more efficiently the sawmill capacity available ane to minimize the politicization of the decision-making process. At the same time, COHDEFOR should pay greater attention to the energy aspect of forestry. Although COHDEFOR has qualified staff who deal directly with the issues of firewood and charcoal supply, pricing, and long term availability, the coordination of their activities should be strengthened and supported by policy guidence (paras. 3.16-3.20). Petroleum 10. The major issues identified in the petroleum subsector are: (a) the uneconomic operation of the refinery; and (b) the accounting system in the Petroleum Administrative Commission (CAP) which does not provide a clear account of government revenues. 11. Uneconomic Operation of the Refinery. The operation of the refinery in 1985 cost Honduras some US$7 million more than the alternative of importing products. Built in 1968 for hydroskimming, the 14,000 bd refinery is operating at half its capacity and has been kept running only by a special agreement with the Government which allows the refinery operator, Texaco, a 20% return on capital utilized in the refinery operation. To minimize petroleum product costs, the GOH should purchase petroleum products on a competitive basis. As a potential bidder, Texaco would have the option of any other bidder to supply products from the refinery or import products. Thus, the decision to operate the refinery would be an economic decision determined by its owner (paras. 4.19-4.23 and 4.29). 2/ 12. Petroleum Accounting System. CAP's accounting system makes a complete and clear account of government revenues from petroleum sales obscure and difficult. In 1985, the revenue actually deposited in the Central Bank from petroleum products refined in Honduras was signifi- cantly less than what should have been deposited under the present arrangements administered by CAP. There was a gap of more than US$15 million between estimates and data obtained from the Central Bank. Central Bank receipts for petroleum products refined in Honduras in 1985 amount to US$5.5 million which implies an ex-refinery purchase price of US$45/bbl, rather than the estimated ex-refinery price at US$35/bbl. CAP's accounting system is not transparent, since available data did not make clear the actual ex-refinery purchase price. If the average purchase price in 1985 was actually US$45/bbl, instead of the estimated 2/ As of February 1987, major steps have been taken by the Government of Honduras in purchasing petroleum products directly. - iv - US$35/bbl, then the operation of the refinery was even more uneconomic than reflected in the above paragraph. A Management Information System (MIS) for petroleum supply should be established which would include the design of an accounting system and serve to strengthen the Government's capabilities to supervise and monitor the operations of the oil industry (paras. 4.24-4.25 and 4.35-4.36). Electric Power 13. The major issues id.ntified in the electric power subsector are: (a) the need to improve the financial situation of ENEE by promoting both international and domestic sales and improving the collection of public sector bills; and (b) the need to define a distribution and rural electrification strategy within the country's economic constraints. 14. Solutions to ENEE's Financial Difficulties. While tariff levels are well above the long run marginal cost of electricity supply, ENEE faces revenue and cash flow problems stemming from the low volume of sales relative to available energy. In the short term, international sales may offer the only significant contribution to minimizing ENEE's financial problems in view of El Caj6n's excess generating capacity. If international sales reached 400 to 500 GWh per year, the net annual increase in income would be about US$8 million equivalent, which would cover debt service and contribute to investment after 1987 (ENEE would still run a deficit in 1987). An evaluation of the feasibility of sales to Central American markets should be done, based on a review of the electrical interconnection study carried out by ECLA, as well as an assessment of prospects of payments for services rendered. 15. With respect to public sector electricity bills, accounts receivable are mounting at a rate of US$5 million per year, totalling US$13 million in January 1986. The COH should no longer condone non- payment of electricity bills by government agencies. In addition, ENEE should reach an agreement with the Government which will allow it to promptly collect the account receivables on public sector electricity bills on an agreed schedule. ENEE also should take a more responsible approach to its debt service obligations (paras. 5.14-5.23). 16. Distribution and Rural Electrification Strategy. Honduras will have excess capacity into the early 1990s as a result of the recent commissioning of the El Caj6n hydropower project. The emphasis now is on distribution plans which are, however, jeopardized by ENEE's financial constraints. ENEE's proposed distribution project shows that it should be economically attractive, having a rate of return of about 25%. A two- year delay of the project would result in only a minor improvement in ENEE's cash flow in the near future, and at best would release US$3.9 million in 1987, which would reduce the cash flow deficit by 13% in that year. v - 17. Twenty-four rural electrification projects were identified with an estimastd ERR higher than 12%. Overall service coverage is 32% and, while the urban coverage is in the 80%-90% range, rural coverage reaches only 11% or less. A feasibility study is needed to define specific priorities in rural electrification within the country's and ENEE's economic constraitlts (paras. 5.13 and 5.24-5.27). Other Enerly Sources 18. Small hydro, solar water heating, and bagasse are particularly interestiig alto-rnatives to conventional energy use in Honduras. Other alternative energy sources such as geothermal and ethanol productior. are not econouicallv attractive in the near future (paras. 6.1-6.19). Energy Sector Coorlinatior 19. There is no leading organization responsible for the overall formulation of energy policy in Honduras. This issue is critical to the effective coordination of fuLure energy sector activities and should be addressed immediately. The five government agencies active in the energy sector are: (a) the Min.stry of Planning, Coordination and Budgeting (SECPLAN), which although invo&ved in gathering and processing energy sector data and coordinating activities, has an ill-defined role in the sector and is oriented to macroeconomic planning; (b) the General Directorate of Mines and H'drocarbon (DGMH) of the Ministry of Natural Resources, responsible for oil expl.oratian; (c) CAP, responsible for the commercialization of petroleum proaucts and supervision of the refinery and privata distributors; (d) COHDVErOR, wich total control over lumber exports and processing of fine -esins besides the functions of forest management and protection; and (e) ENEE, as a planning office as well as a generation, transmission, and distribution company. 20. Responsibility for energy policy decision making and coordination of activities in the energy sector should be consolidated within one entity. The entity should 'e asstgned sufficient resources to provide technical and economic analysis to make policy recommendations to the appropriate decision-making authority. The entity should also be responsible for coordinating and monitoring the executing agencies to assure that sectoral policy decisions are carried out effectively. Because of the relatively small size and limited complexity of the energy sector in Honduras, the c-eation of ne,4 institutions to coordinate the sector is not warranted. In general, creation of additional bureaucracy, under whatever authority, should be minimized. Institutional options for coordination in the sector should be evaluated in light of the recent reforms embodied in the recenc Public Administration Law and the Law creating SECPLAN, which took effect January 1, 1987. SECPLAN assumes the responsibilities of the former National Planning Council as well as certain responsibilities formerly assigned to other Ministries. SECPLAN has temporarily assumed the responsibility for the coordination of the energy sector (paras. 7.1-7.9). - vi - 21. In order to implement effectively the actions recommend with respect to the various subsectors, the issues have to be addressed in a coordinated fashion with a comprehensive sector approach in the macro- economic context. Lack of such coordination will not permit a consistent policy framework conducive to efficient resource utilization. Investment Priorities and Technical Assistance Needs Investment Priorities 22. The only short-term investment priority in the energy sector in Honduras is to expand the electrical power distribution system. With a total cost of US$38 million for a corresponding project, the overall service coverage would be raised from 322 to 35Z over five years, providing service to 47,000 new users (para. 5.13). 23. The expansion of integrated social forestry management projects should be a short- to medium-term investment priority. This requires completion of the prefeasibility study which will prioritize the 100 identified communities. UNDP funds for the prefeasibility study are available (paras. 3.12-3.15). 24. With respect to interfuel substitution projects, the recent declines in international oil prices have negatively affected the coal and ethanol projects. The break-even prices are well above the current economic cost of the petroleum products concerned, thus not justifying any interfuel substitution for the short term. The break-even price for converting the Comayagua cement plant (INCEhSA) from fuel oil to use imported coal is at US$16/bbl of fuel oil, assuming a Comayagua c.".f. coal price of US$60/MT (para. 2.27). With respect to the ethanol project, the break-even price for substitution is at US$1.37/gal of gasoline (para. 6.15). Technical Assistance Needs 25. The following technical assistance studies are considered to be the most urgent, listed in order of priority: (a) Establishment of a petroleum supply management information system, emphasizing least-cost petroleum supply options and petroleum product accounting (paras. 4.27 and 4.33-4.34). (b) Development of a forestry sector plan, including timber, energy, and forest protection, with an analysis of the redirection and restructuring of COHDEFOR (paras. 3.11 and 3.16-3.20). (c) Prefeasibility study on integrated social forestry management projects (paras. 3.12-3.15). - vii - (4) Operation analysis of the Honduran power grid (para. 5.22). (e) Detailed analysis of supply, transport, and demand of fuelwood in twelve urban areas (para 2.21). (f) Feasibility study on rural electrification (paras. 5.25-5.27). (g) Energy efficiency in the coffee industries (paras. 6.10-6.12). (h) Strengthening of DCMH in preparation for fuiture negotiations of exploration contracts (paras. 4.11-4.13). I. *NERGY IN THE ECONOMY Country Background 1.1 Honduras has a land area of 112,000 km2 and is divided into four geographical regions (IBRD Map No. 19771): (a) the northwestern valley and Caribbean coastal plains; (b) the northeastern Caribbean coastal plains; (c) the central and western region; and (d) the southern Pacific coastal plains. The northwestern valley and Caribbean coastal plains contain 30% of the population, the best agricultural soils, and the main banana plantations. The northeastern Caribbean coastal plains have low population density and poor soil which is used mostly for extensive cattle raising. The central and western region has almost 40% of the population and contains mountainous terrain used mainly for timber, cattle, and coffee. This region also houses the capital of Honduras, Tegucigalpa. The southern Pacific coastal plains have a long dry season and limited water resources. The country's 1985 population of about 4.3 million (64% rural) is growing rapidly, at 3.4% per annum, straining available resources. Forest lands cover over 60% of the total land surface of Honduras. More than 80% of these forest lands are suited for forestry purposes while only 8% is suited for intensive agriculture. Economic Situation 1.2 The per capita GDP of Honduras was about US$730 in 1985--one of the lowest in Latin America. Over the 1970s, real growth in per capita GDP totalled only liZ--about 1% per annum--which was about one quarter the average for Latin America. During 1980-1983, the economy stagnated as exports and private investment lost momentum; real GDP per capita declined by about 9% during the period, and recovered slightly in 1984. The Honduran economy is based on agriculture, which contributed 27% to GDP in 1984. 1.3 Honduras is heavily indebted in the energy sector. The invest- ment of the almost completed El Caj6n hydropower project (US$650 million) represents 45% of the total national investment for the period 1980-1984. The ENEE external debt service payments for 1986 are about 39% of the estimated total external public debt service for that year. In addition, in 1985, petroleum imports accounted for 151 of total imports, and they were equivalent to 18% of total exports and 5% of GDP (Table 1.1). Table 1.1: EULATIVE lORANCE OF PETROLEUM IPORTS 1977 1901 1985 As a percentage of total lmports It 14 15 As a percentage of total exports 12 17 18 As parcontage of GOP 4 6 5 Source: World Bank, "Honduras Current Economic Morandum," April 17, 1967 Energy Resources 1.4 The forests and hydropower are Honduras' major indigenous energy resources. The forests provide almost 68X of the national energy demand, with about 5 million hectares (ha) of active forests covering 601 of the total land surface (IBRD Map 1o. 19772). Hydropower is an abundant energy resource, with a potential estimated from 2,800 NW to nearly 6,000 MW and an annual production potential of about 16,000 GWh (present annual needs are about 1,500 GUh), sufficient to meet the country's electric power requirements for the foreseeable future. Petroleum exploration promotion efforts are under way. Energy Balance. 1984 1.5 Fuelwood is the main source of energy in Honduras. In 1984, domestic production of primary energy amounted to almost 1.4 million toe, of which 861 was fuelwood, 8X bagasse, and some 61 hydropower. The country imported almost 0.5 million toe of crude oil and over 0.2 million toe of petroleum products. A small quantity of surplus fuel oil was exported. Of the total final energy demand, biomass met around 671, while petroleum products met 291, and electricity 41. Table 1.2 summarizes the 1984 energy balance presented in Anne" 1. Table 1.2: SUMMARY ENERWY BALANM - 1904 (thousnd toe) Petroleum Biomass Produwct Electricity Total Demand 1,316 601 92 2,009 Domestic Supply 1,316 - 92 1,408 Imports - 632 -- 632 Exports (31) 8 (31) Source: SECPLAN and World Bank estimates. - 3 - Energy Demand Projections 1.6 Energy demand projections were based on two GDP growth rates: 3% p.a. between 1986-1995 in the low growth case, and 5.2% p.a. between 1990-1995 in the high growth case. 1/ A correlation between GNP growth and petroleum product consumpticn by product was estimated for the 1975- 1985 period to determine future demand growth rates, while taking into account any known discontinuity such as the virtual elimination of heavy fuel use in electricity production. Since no substantial structural changes are expected during this period, it has been assumed that the distribution of energy demand between sectors would remain similar to that in 1984, and that sufficient supply of primary energy (biomass and hydropower) would be available to meet projected demand. Table 1.3 summarizes the results of the projected energy balance for 1995, presented in Annex 2. Chapters IV and V discuss in greater detail the demand for petroleum products and electricity. Table 1.3: DEMAND PROJECTIONS-1995 (thousand toe) Biomass Petroleum Electricity Total Base Case a/ Demand 1,489 718 164 2,371 Domestic Supply 1,489 --- 164 1,653 Imports --- 718 --- 718 High Case b/ Demand ,1750 780 181 2,711 Domestic Supply 1750 -- 181 1,931 Imports --- 780 --- 780 a/ 3% GDP Growth between 1986-1995 b/ 3% GOP Growth between 1986-1990 and 5.2% between 1990-1995. Source: World Bank estimates. 1.7 In both scenarios, Honduras would be able to meet its 1995 electric power demand with existing indigenous hydropower and, in addition, eliminate the need to rely on domestic thermal plants with all petroleum products imported (para. 4.26). Biomass will still be the most important source of energy in 1995 and it is estimated that, on the whole, the country will be able to meet the demand for biomass. 1/ Projections from World Bank "Honduras: Current Economic Memorandum," April 17, 1987. -4- II*. ENERCY DEMAND MANAGEHENT Energy Pricing 2.1 In Honduras, the prices of commercial fuels are well above their opportunity costs, defined here as the c.i.f price for petroleum products in Puerto Cortes and the Long run marginal cost for elec- tricity. The energy pricing policy in the past decade has been to maintain energy prices above cheir opportunity costs. With the recent drastic fall in world oil prices, the differential between domestic and international petroleum product prices has widened, providing additional fiscal revenues. 2.2 In general, energy pricing policy in Honduras is providing the correct signals to the consumers, and it also takes into consideration the need for general government revenues from petroleum products, and the financial viability of the sector enterprises. The GOH could nevertheless consider the different trade-offs involved in applying the additional oil revenue benefits to the fiscal budget, to private consumers, or to stimulate industrial and economic growth. 2.3 On the fiscal side, maintaining petroleum product retail prices at their present level is crucial to the economy because they are a main source of government revenues. However, these resources would have to be allocated in an efficient manner with proper control of oil revenues (para. 4.25). At the same time, maintaining current price levels, the GOH will continue to encourage conservation efforts on the assumption that energy prices will increase in the future. Furthermore, there is a political argument for maintaining product prices since, if prices are lowered now and international prices rise in the medium term, it will be more difficult to restore domestic prices to the former levels. In theory, a reduction in retail petroleum product prices could result in stimulating growth in the economy and particularly in industry. However, because of the small size of the industrial sector, there is little scope for increasing economic activity significantly only by lowering domestic energy prices. On balance, therefore, petroleum product prices should be maintained at their present level. 2.4 With respect to electrical power, a decrease in residential tariffs would not be followed by a corresponding increase in demand and, therefore, would only further exacerbate the financial situation of the ENEE. Nevertheless, in the case of the relatively few lar 1 consumers, a lower marginal tariff should be investigated to promote sales and generate beneficial economic effects. 2.5 A preliminary comparison of the opportunity cost of fuels in Honduras was made for the household, industrial, and transport sectors. In the household sector, the analysis indicates that fuelwood is the most economic source of energy, as a result of the overall wood surplus in the country. With respect to the industrial sector, fuelwood is also the most economic source of energy, followed by fuel oil, kerosene, diesel, and electricity. Nevertheless, special attention should be given to the areas of wood deficit and regions experiencing deforestation trends (para. 3.10). In the transport sector, diesel oil is the most economic fuel, followed by gasoline. Table 2.1 comparei7 the opportunity cost of fuel in Honduras for the three sectors. Table 2.1: COMPARISON OF FUEL ECONOMIC COSTS IN HONDURAS (May 1986) Efficiency Relationship to Opportunity correction Cost of cheapest fuel cost factor useful energy in the sector (USS/toe) (%) (US$/toe) Household Sector Fuelwood a! 2 10 20 1.00 LPG 109 25 436 21.80 Kerosene 177 25 708 35.40 Electricity 1,512 40 3,780 189,00 Industrial Sector Electricity 1,046 80 1,308 261.60 Diesel Oil 160 50 320 64.00 Kerosene 177 50 234 46.80 Fuel Oil 88 50 176 35.20 Fuelwood a/ 2 40 5 1.00 Transport Sector Gasoline 186 20 930 1,45 Diesel Oil 160 25 640 1.00 a/ Based on COHDEFOR's protection and management costs of the forest. So¶rce: ENEE, CAP, and World Bank estimates. Petroleum Products 2.6 All retail prices of petroleum products in Honduras are, and have been in the past few years, well above their opportunity costs (para. 2.1). In 1985, the weighted average retail price was over 170% of the opportunity cost. The Government maintained most retail prices in 1986. Due to the steep decline in international prices by May 1986, the weighted average retail price represented 245% of international petroleum prices. 2/ Table 2.2 shows the retail prices of petrole'am products in Honduras and their opportunity costs. 2/ In March 1986, only the retail prices of fuel oil and kerosene were lowered. - 6 - 2.7 The price structure in Honduras is oriented to provide govern- ment revenues while aiming to favor low-income groups. However, the price structure needs to be carefully examined, particularly because of the large price differential between gasoline and diesel. The Government maintains a relatively low price of diesel because: (a) diesel is a fuel heavily used in the public transport and truck fleet, and the government is concerned about the effects of price increases on the final price of food or other basic commodities; and (b) to promote mechanization of agriculture. An upward revision in the price of diesel may be indicated on econcmic grounds, taking into consideration the higher investment cost of diesel transport, road maintenance costs, fuel efficiency in the Honduran transport system, and possible illegal use of kerosene, if the price differential between diesel oil and kerosene becomes marked. Table 2.2: PETROLEUM PRODUWCT RETAIL PRICES AND ECONOMIC COSTS (May 1986) Retail Prices as % of Share of 1984 Retail Opportunity Economic Fuel Demand Prices Cost Cost (%) (S/Gal) (S/Gal) (%) Premium Gasoline 7.3 2.08 0.54 385 Regular Gasoline 9.2 1.96 0.51 384 Diesel 37.9 1.21 0.53 228 Jet Fuel 1.3 1.44 0.56 257 Kerosene 8.7 1.08 0.56 193 Fuel Oil 34,5 0,66 0.32 206 LPG 1.1 1.36 0.36 378 Weighted Average 100.0 1.14 0.46 245 Source: SECPLAN and World Bank estimates. Recommendations 2.8 The existing retail price levels should be sustained. In addi- tion, the GOH should closely monitor government revenues corresponding to petroleum retail sales and examine the price structure, particuilarly between gasoline and diesel. Electricity Tariffs 2.9 In 1979-1980, ENEE commissioned a study with the French firm SOFRELEC to determine the cost of service using a marginal cost approach. Although a substantial part of the analysis is still valid today, the recommendations were never implemented. 2.10 Marginal costs were estimated based on SOFRELEC data and with an analysis of the current supply and demand balance. The result is a marginal cost for 1986-1990 of around US3-40/kWh. This very low value is - 7 - due to an extremely low marginal generation cost (USO.60/kWh, US$15/kw) caused by excess supply that could persist into the early 1990s. For long term projects (i.e., electrification programs), an average value of US5.50/kWh was used in order to reflect probable long-run conditions when the marginal cost will be determined by the fuel oil price. Present tariffs, in the range of US9-13¢tkWh (valued at the official exchange rate) far exceed these estimated levels. Annex 3 shows the marginal cost analysis. 2.11 Tariffs in the Interconnected System are divided into five classes: (a) two at low voltage level, structured by blocks and with only energy charges, and (b) three for large customers, at high voltage levels, also structured by blocks, and with energy and demand charges. Residential and commercial clients who have a monthly consumption of less than 20 kWh benefit from a lower rate than those in the 21-100 kWh range, and another block is established for consumers who use more than 100 kWh a month. Industry has the most sophisticated rate structure which includes differentiation according to the voltage and demand for the fixed charge of the supply, and another charge for energy consumption. Table 2.3 shows the present tariff structure. Table 2.3: ELECTRICITY TARIFF STRUCTURE-1986 Block Tariff Other Charges (kWh/Month) (US$/month) Tariff A: Residential O - 20 USSl.76/month 0.25 20-100 US11.5t/kWh 0.25 > 100 US8.5f/kWh 0.25 Tariff B: General Low Voltage O - 20 US$3.25/month 0.25 - 0.50 a/ 20-100 US14f/kWh 0.25 - 0.50 100-5000 US12¢/kWh 0.25 - 0.50 > 5000 US8f/kWh 0.25 - 0.50 Block KW Basic Charge Energy (USIfkWh) Tariff C, D and E: Large Customers C >250 USS8.7A(W-Month 5.8 (Minimum charge US$2,170/month) 0 >2500 US$8.7AfW-Month 5.34 (Minimum charge US$21,688/month) E >2500 US$9.35A(W-Month 6.00 (Minimum charge US$23,366/month) a/ USS0.25 (I phase); US$0.50 (3 phase). Source: ENEE. -8- 2.12 To lighten ENEE's financial difficulties, a general tariff increase, sufficient to eliminate ENEE's projected short-term deficit, may not be feasible, since commercial users already find electricity a relatively expensive source of energy, and raising them would only create a greater distortion in relative prices of alternative sources of energy. Revenues could not be increased through a general tariff reduction aimed at stimulating sales, since price elasticity is significantly less than one. 2.13 However, it may be possible to encourage the few large customers who currently use their own thermal generators, but are connected to the system, to substitute electricity for diesel consumption. This may be done by either increasing diesel prices (para. 2.7) or by lowering electric tariffs for individual users. A reduced tariff for a limited time period could promote sales and have beneficial overall economic effects. Such a contract could specify a low marginal tariff over a certain base amount of contracted load and time of day; incentives could also be provided by double metering in order to reflect full/slack hour costs. To accomplish this, ENEE would have to acquire the institutional flexibility to negotiate with individual users and to accommodate special consumption conditions that are not considered in the tariff schedules. Recommendations 2.14 General tariff levels should, at least, be maintained in order not to worsen ENEE's financial problems. Some tariff reductions in the industrial sector, during 1987-1990, for energy delivered above a certain "base" consumption might encourage industrial consumption and result in increased revenues for ENEE. ENEE requires institutional flexibility to negotiate with individual users and to accommodate special consumption conditions that are not reflected in the tariff schedules. Energy Conservation and Substitution 2.15 There is some room for improving the efficiency of energy use in Honduras; efforts to this end initially should focus on petroleum conservation since: (a) all petroleum is imported, draining 17% of foreign exchange earnings (1984); (b) there is excess hydropower capacity as a result of the completion of El Caj6n; and (c) there is no fuelwood shortage. -9- The Structure of Energy Demand 2.16 In 1984, Honduras consumed 1.87 million toe of energy. Per capita energy consumption was relatively low at 450 kgoe, compared with a world average of 1,500 kgoe and an average for Latin America of 1,000 kgoe. Woodfuels met 62% of total demand, petroleum products 28%, bagasse 6%, and electricity 4%. 2.17 Commercial energy consumption amounted to 603,000 toe in 1984, represented by: diesel 44%, gasoline 17%, fuel oil 14%, other petroleum fuels 12%, and electricity 13%. The transport sector is the most important consumer of commercial energy (41%), followed by industry (37%), and households (10%). 2.18 Non-commercial energy consumption in Honduras totaled 1,271,000 toe in 1984, of which 92% was woodfuels and 8% bagasse. Charcoal represents less than 1% of the woodfuels consumed in the country. Bagasse is used as a boiler fuel at the sugar mills, representing 24% of the energy consumed in the industrial sector. The Household Sector 2.19 The household sector consumes almost 60% of all the energy used in Honduras, and its share remained roughly constant over the period 1980-1984. Fuelwood is the most important source of energy for this sector, supplying 95% of the total in 1984, followed by petroleum 3%, and electricity 2%. 2.20 In the period 1970-1979, the consumption of kerosenet LPG, and electricity in the household sector increased an average of 9% per year, while this sector's total energy '4nsumption increased by only 2% per year. However, growth in total petroleum consumption fell off after the 1980 increase in petroleum fuel prices. 2.21 Since Honduras is not facing fuelwood shortages on a national scale, energy conservation in the household sector is not a major issue. However, localized wood shortages do exist (para. 3.10), and the possibilities for energy savings and interfuel substitution in the critical areas should be investigated. About 6,000 Lorena stoves 3/ are reported to be installed and operating successfully. SECPLAN is carrying out a preliminary analysis for supply, transport, and demand in 12 urban areas, and also investigating the use of forest residues for making charcoal. 3/ Wood stove originally designed in Guatemala. - 10 - The Industrial Sector 2.22 The industrial sector is a relatively small component of the country's economy, accounting for about 14X of the 1984 CDP. About one- half of this contribution was provided by the food subsector, 13% by petroleum and chemical products, 10% by woodworking, and 8% by textile industries. 2.23 In 1984, the industrial sector was the second largest consumer of energy in Honduras (23X), after the household sector. The industrial sector was also the second largest consumer of commercial energy (311), after the transport sector, and the largest consumer of electricity (411). The total supply of energy to this sector was provided in equal proportions (about 24X each) by diesel, fuelwood, and sugarcane bagasse, followed by fuel oil (17%) and electricity (8%). 2.24 Possibilities for Energy Conservation. Visits to selected plants in the cement, sugar, textiles, food, and chemical products industries identified a number of possibilities for energy conservation, even with modest investments such as improving thermal insulation and general housekeeping procedures. Audits carried out by the Central American Institute of Research and Industrial Technology in selected industries (responsible for about 20Z of fuel oil consumption) have indicated that about 13% of the present energy used by these plants could be saved. 2.25 Some plants have implemented energy conservation and interfuel substitution measures, but at a slow pace. The sugar mills in Honduras require fuel oil only as a back-up fuel to cope with the variations in sugarcane supply, and therefore of bagasse, and equipment failure. Fuel oil consumption in the sugar industry has been reduced from 0.62 gal/short ton of cane in 1981-1982, to 0.26 gal/short ton of cane in 1984-1985. However, in the sugar industry as in other industries in Honduras, further savings can be achieved by improving the efficiency of industrial process steam generation. 2.26 Small industries are using diesel instead of the lower cost fuel oil for their boilers. This can be explained by the relatively small amount of energy consumed in these industries. The GOH should nevertheless examine the possibility of converting to fuel oil boilers in the larger industries, where the use of diesel boilers may well turn out to be uneconomic. 2.27 One energy conservation option being discussed in Honduras is to replace fuel oil with coal in the INCEHSA. However, this option is uneconomic at the moment. The break-even price for the conversion to imported coal is at about US$16/bbl of fuel oil. 4/ 4/ At a c.i.f. coal price Comayagua of US$60/MT. - 11 - 2.28 The utilization of surplus hydroelectricity for process heat generation, or other alternative energy uses in the industrial sector, is constrained by the small size of the Hondaran industrial sector. However, there are some cases in which ENEE could promote electricity use by industry through tariff incentives. If properly planned, tiis could provide additional revenue to ENEE while at the same time displacing imported petroleum fuels (para. 2.13). The Transport Sector 2.29 Structure of the Sector. The transport sector contributed about 8% of GDP in 1984, with road transport providing 80% of that share. In 1984, the country highway network reached 16,350 km, of which 13X were paved roads. Forty percent of all roads are passable only in the summer. The railway network is about 1,000 km and limited to the northern coast. 2.30 Essentially, all road freight and passenger transport is in private sector hands. The vehicle fleet in 1984, as shown in Table 2.4, reached 94,000 units, increasing at 7.4% per year since 1975. 2.31 The fuel efficiency of the fleet is bound to decline in the medium-term, if the fleet continues to age rapidly as the result of import restrictions. Almost one-third of the fleet is over 10 years old and more than 80% is over 4 years old. Table 2.4: VEHICLE FLEET IN HONDURAS, 1984 Number of Units Light Passenger Vehicles 66,554 Trucks 12,357 Busses 4,579 Motorcycles 7,624 Others 3,000 TOTAL 94,114 Source: Central Bank. 2.32 Energy Consumption. The transport sector is the third largest energy consumer in Honduras, using 13X of the energy available. However, it is the largest user of petroleum (47X) and commercial energy (41%). The consumption of petroleum fuels by the transport sector increased at 4.7% per year in the period 1975-1984, reaching 257 ktoe in 1984 (561 diesel, 35X gasoline, and 92 kerosene). Over that same period, diesel consumption increased by 6.5% p.a., and kerosene/jet fuel 8% p.a., while gasoline consumption declined as diesel-fuelled vehicles penetrated the market due to substantially lower diesel fuel prices (paras. 2.3-2.4) and - 12 - better fuel efficiency. 5/ The high increase of kerosene/jet fuel consumption can be explained by the introduction of jet airplanes during the period. 2.33 Possibilities for Energy Conservation. While the relatively high prices of transport fuels have encouraged more efficient fuel use, there is still room for further energy savings. Improvements in urban transportation in the two largest cities (Tegucigalpa and San Pedro Sula) should receive high priority. Parking restrictions on main roads during peak hours and traffic light sequencing have been proposed but not implemented. Terminals for loading and unloading urban buses could also be built with minimum investment and the complete bus systems rationalized in the two largest cities. Intercity passenger terminals could also be built. 2.34 Freight terminals could be built, as well as back-haul information centers (by telephone). The planned terminal near San Pedro Sula should be encouraged. Products coming from Puerto Cortes would be shipped by rail to the terminal and transferred to large trucks to proceed to Tegucigalpa, alleviating traffic on the Puerto Cortes/San Pedro Sula highway. Legal and Institutional Aspects 2.35 No legislation, regulations or standards have been identified that pertain to energy efficiency or interfuel substitution. Restrictions on more energy efficient imported equipment and high interest rates on private loans have restricted energy savings possibilities in Honduras. 2.36 The lack of technical capabilities in Honduras was overcome by relying on technicians from other countries in the region, e.g., Costa Rica. Several Honduran engineers from different industries have already received training in energy conservation techniques under the Proyecto de Eficiencia Energetica en la Industria Regional Program. Recommendations 2.37 The GOH should take the following actions in order of priority to optimize energy use in Honduras: (a) review the restrictions on the importation of equipment affording greater energy efficiency, such as boilers and motor vehicles; (b) build terminals for freight and passengers, both urban and intercity, and particularly in Tegucigalpa and San Pedro Sula; 5/ Separate data for kerosene and Jet fuel are not available. - 13 - (c) examine the feasibility of converting boilers from diesel to fuel oil in the larger industries; and (d) investigate the potential for energy savings and interfuel substitution where local shortages of fuelwood exist. - 14 - III. FORESTRY Overview 3.1 The country is experiencing no overall fuelwood shortages at present, nor is there any prospect of natural shortages for the foresee- able future. Forestry problems, therefore, are not directly related to energy considerations, but rather to the need to identify the optimum contribution the forests can provide to the Honduran economy, the need to develop an integrated forestry investment program, and the need to redirect and restructure the COHDEFOR. 3.2 The forestry sector has been totally controlled by COHDEFOR since 1974. COHDEFOR is an autonomous institution with control of all marketing activities in the sector. Besides the functions of forest management and protection, COHDEFOR exercises total control over lumber exports and the processing of pine resins. 3.3 COHDEPOR plays a dual role. On the one hand, it must render services of a strictly public nature as the entity in charge of protecting, controlling, and regulating the forest resource. On the other hand, it must also carry out the production and sales functions that require a high degree of flexibility and managerial capability. The Forestry Sector and the Economy 3.4 Although the forestry sector may well become the backbone of the Honduran economy, it has not yet received the attention required to achieve its true potential. The forests of Honduras are the country's major indigenous energy resource, providing over 60% of the energy consumed nationally, and the third largest generator of foreign exchange through timber sales (5Z of total export earnings). Potential Contribution to the Economy 3.5 If managed properly, Honduras' forestry resource can continue to play a major role in the energy sector, provide a much larger number of jobs, help to raise substantially the income of the poore-st people, and increase the country's foreign exchange earnings. Honduras has enough forest capacity to produce all of the wood required both for th*e timber industry to operate at a much higher mill capacity than at - 15 - present 6/ and to supply present and prospective energy demands. However, maintaining this capacity over the longer run will call for serious efforts of forest protection, management, regeneration, and limited reforestation. 3.6 As the majority of Honduras' population live in forested or agricultural areas, the social aspects of any forestry activity are critically important. However, while 30% of Honduras' population lives in forested areas, only 2% of that population is employed in forest- related activities. As both the tree resource and population resource are available for beneficial exploitation, social forestry initiatives become the obvious path to pursue. 3.7 The forest dwellers are the poorest population segment in Honduras. Family incomes typically can be as low as US$200 per year in the rural areas, where slash-and-burn subsistence agriculture is the only way of life. This problem is magnified by the fact that most of the forest soils are not suitable for agriculture. Forestry Resources and Utilization Supply and Demand Considerations 3.8 The National Forest Inventory Project of COHDEFOR has estimated a forest resource of roughly 3.5 million ha including pine forest, hard- wood forest, mixed forest, and mangroves, as shown in Table 3.1. The pine resource il estimated at 73.2 million m of commercial quality and 26.1 million mi of non-commescial quality. The hardwood resource is estimated to be 94.9 million m 3.9 Hardwoods are preferred for firewood and therefore are more heavily exploited for this purpose than are the pines. The firewood estimated by FAO/COHDEFOR comes from four identifiable sources: 67% from non-commercial hardwood species; 19% from pines; 9Z from forest waste; and 5% from sawmill waste. 3.10 The preliminary estimate of the mean annual increment (MAI) of Honduras' forests indicates that it is actually higher than the corresionding fuelwood and timber demand. An MAI of roughly 13 mil- lion m compares to a fuelwood and timber demand of about 8 million m3 per year. However, the expansion of the agricultural frontier assisted by excessive fuelwood demand in some regions has brought about cases of localized deforest,.ion. Deforestation has already been observed in three watersheds: the Chamelecon, the Ulua and the Choluteca and around the larger cities of Comayagua, Tegucigalpa, and San Pedro Sula. 6/ Operating at 58% (640,000 m3) of total installed capacity for sawmilling. - 16 - Table 3.1: ESTIMATED MINIMUM VOLUME OF INVENTORIED FOREST RESOURCES AVAILABLE Type of Resource ------- Amount------------- Volume Area MAI (ha) ('000 m3) (m3/ha) (W) (W) (million m3 Pine 1,460,753 99,261.3 67.95 45.16 42.23 7.3 Broadleaf a/ 1,432,074 94,873.7 64.60 43.16 41.40 4.3 - Detailed Inv. 840,874 94,873.7 64.60 24.71 24.31 - Surveys 591,200 38,191.5 64.60 17.37 17.09 -- - Broadleaf In Pine Forests 873,073 2,363.0 2.71 1.08 -- -- Mixed Forests 268,715 17,356.4 64.59 7.90 7.77 0.8 Subtotal a/ 3,161,542 213,854.4 67.64 97.29 91.39 12.4 Mangroves 297,800 5,956.0 20.00 2.71 8.61 0.8 Total a/ 3,459,342 219,810.4 63.54 100.00 100.00 13.2 a/ Excluding broadleaf areas in pine forests. Source: UNOP/FAO, 1985. Investment Priorities 3.11 Honduras has no integrated forestry investment program. A long-term integrated master plan for the forestry sector needs to be developed in conjunction with the redirection and restructuring of COHDEFOR (paras. 3.16-3.20). The preparation of a forestry sector master plan would encompass energy forestry, timber forest production, and forestry protection. Integrated Social Forestry Management Projects 3.12 The key investment priority in the forestry sector (from the energy efficiency/conservation perspective) in Honduras is to expand the ongoing social forestry projects which use an integrated management approacn. 7/ Several of the existing small investments in the forestry sector are good examples of the successful types of investment that can integrate the forestry sector in the Honduran economy by including social forestry components. These existing investments can be considered pilot projects which may facilitate preparation of larger investments. The return on investment for these projects has been estimated by FAO between 19-28X. (Economic analysis of the Chaguite Grande project). 3.13 One example of these successful small investments is the work taking place in the village of Chaguite Grande as part of the FAO/COHDEFOR social forestry program. These activities have generated 7/ Forest protection, resin and seed collection, forest thinning, small scale sawmilling, firewood and charcoal production, commercial timber harvesting, and reforestation. - 17 - employment and raised family incomes by a factor of three, and there is excellent potential for further increases as additional integrated activities are planned. Activities already implemented include forestry protection, resin and seed collection, firewood production, timber harvesting, and reforestation. The activities to be implemented include: a small sawmill to process only non-marketable size loge- charcoal production from forest thinning operations, and a steam powe, plant using residues as fuel. 8/ Preliminary indications are that there is adequate domestic demand for the main project's product, i.e., timber logs, resin, and products from the small sawmill such as lobster traps, broomsticks, etc. 3.14 The integrated social forestry management projects represent what should be done in future forestry initiatives, matching market demands with products obtained from a well-managed resource. The objective now is to identify, replicate, and coordinate social forestry projects on a larger scale. FAO/COHDEFOR identified 100 projects requiring an investment of US$250,000 each. These projects now need to be prioritized. 3.15 In the small villages which lack hydroelectric resources and where interconnection to the power grid is too expensive, small electric plants or direct drive engines may be economically attractive if there are sufficient wood resources, particularly in the form of lumber residues. When dealing with wood residues, steam is the most competitive alternative at US8.5¢/kWh, and with internal combustion systems run on gasification, generation cost is estimated at US13¢/kWh (if the cost of firewood--US$7.5/ton--is included) which would decrease to US9.5C/kWh if no cost is assigned to the fuel. This compares to diesel generation costs estimated at US14-19¢/kWh (based on a price of US$22-24/bbl for diesel delivered at the plant). Institutional Issues 3.16 COHDEFOR's responsibilities comprise the management and regulation of the forest, as well as the marketing and commercialization of forest products. Although there is not a generalized problem of deforestation, the expansion of agriculture is creating some local deforestation problems. COHDEFOR should take a more active role in forest management to ensure that localized problems do not expand. Its participation in the marketing of forest products has diluted its focus on resource management. COHDEFOR has also underestimated the role of wood for energy. 8/ Estimated cost at US8.5e/kWh, in comparison with US14¢/kWh, based on a price of US$22/bbl for diesel delivered at the plant. - 18 - 3.17 COHDEFOR's management of the marketing of forest products has become inefficient and constrained by problems since it entered directly into sawmilling and timber marketing. Its performance has deteriorated steadily, resulting in lower profits, rising administrative costs (by a factor of eight between 1974 and 1984), and loss of timber market shares. Table 3.2 shows the evolution of COHDEFOR's sales and operating profits. 3.18 As the international price of sawn wood increased by about 40% in real terms between 1978 and 1984, the decline in Honduras' production and exports (33% between 1980 and 1984) has to be attributed to domestic factors. These factors include: negative sawn wood production incentives since the sawmills are obliged to sell 70% of their production to COHDEFOR, COHDEFOR's export trade monopoly with a very significant export tax imposed on the sawmills, shortage of working capital, and the increase in production of final wood products. 3.19 A redirection of COHDEFOR is needed alon, with the forestry sector as a whole. With the goals identified in the proposed forestry sector master plan, COHDEFOR can be analyzed for remodeling of both its structure and role in the sector. The agency should shift its efforts from timber production, by encouraging privatization of marketing, to focus on integrated activities necessary to protect and renew the forest resource, to regulate and manage the exploitation of the forests to meet both timber and energy demands at a rate consistent with sound environmental and ecological practices, and to coordinate and implement social forestry programs that would bring employment and financial benefits to a large percentage of the population in the forest areas. 9/ 3.20 A more private-oriented approach to the marketing of forest products should be pursued to utilize, more efficiently, the sawmill capacity available and to minimize the current politicization of the decision making process. At the same time, COHDEFOR should pay greater attention to the energy aspect of forestry. Although COHDEFOR has qualified staff who deal directly with the issues of firewood and charcoal supply, pricing, and long term availability, the coordination of their activities should be strengthened and supported by policy guidance (paras. 7.7-7.9). 9/ COHDEFOR initiated its restructuring in January 1987 to focus on the protection of forestry resources, leaving the commercialization of forest products to the private sector. - 19 - Table 3.2: COHDEFOR SALES AND OPERATING PROFITS, 1979-1984 (USS'OOO) 1979 1980 1981 1982 1983 1984 Total Sales 44,878.05 39,198.95 47,929.05 51,308.40 45,811.15 37,983.55 Export Sales 41,801.55 36,362.80 43,152.40 45,824.65 40,389.25 32,897.40 Cost of Sales 25,669.50 23,672.55 31,478.45 34,368.55 31,016.65 24,428.75 Gross Profit from Sales 19,208.55 15,526.40 16,450.60 16,939.85 14,794.50 13,554.80 Operating Costs 11,912.20 12,978.70 14,455.55 17,006.00 15,600.25 14,494.70 Net Profit from Sales 7,296.35 2,547.70 1,995.05 (66.15) (805.75) (939.90) Other Income 2,033.95 2,002.20 1,953.45 2,531.00 2,399.95 2,785.35 Net Total Profit 9,330.30 4,549.90 3,948.50 2,492.40 a/ 1,594.20 1,686.55 b/ Net Total Profit as % of Total Sales 20.79 11,61 8.24 4.86 3.48 4.44 a/ Includes $27,600 from adjustment to previous result. b/ Includes $158,900 from adjustment to previous result. Source: COHOEFOR. Recommendations 3.21 To optimize the use of forest resources in Honduras, the GOH should consider the following actions, in order of priority: (a) redirect COHDEFOR, shifting its focus from timber production and marketing activities to the protection and control of the forest, while encouraging privatization of the production and marketing side; I (b) continue the successful ongoing social forestry projects and identify, prepare, and coordinate similar efforts on a larger scale; and (c) develop a forestry sector master plan, encompassing both energy and commercial timber considerations. - 20 - IV. PETROLEUM Overview 4.1 Honduras' energy strategy in the petroleum subsector should focus on purchasing petroleum products at least cost. The key issues are: (a) the uneconomic operation of the refinery; and (b) the inadequate accournting system found in the CAP which prevented the govern- ment from being able to account for all oil revenues. 4.2 Although the Hydrocarbon Law of 1985 assigns various functions to the DGMH, such as oil exploration, regulation and commercialization, in practice, exploration is DGMH's main concern. The responsibility for petroleum supply rests with the CAP, which consists of representatives of the Ministry of Economy, the Ministry of Finance, and the President of the Central Bank. The CAP is assisted by the Petroleum Commercialization Office (OCP) located within the Ministry of Economy. The main responsi- bilities of the CAP include: purchasing of crude oil and reselling it to the Texaco refinery; and the setting of all product prices at each point in the supply chain, i.e., ex-refinery, delivered to point of sale, ex- distributor, and final retail price. Petroleum Exploration Geology 4.3 Five main basinal areas 10/ have been identified in Honduras: Mosquitia, Tela, Ulua-Olancho, Amatique, and Agua Fria (IBRD Map No. 19774). The first three basins are of greater interest. 4.4 The Mosquitia Basin, which encompasses an offshore area of some 50,000 km2 to the northeast of Honduras, with an onshore extension of 15,000 k2m, contains favorable facies for both hydrocarbon generation and reservoir development. The main Basin is located on a portion of the regional Caribbean high known as the Nicaragua Rise. The Nicaragua Rise extends northeast from the shoreline of Honduras and Nicaragua to the island of Jamaica. 4.5 The offshore Mosquitia Basin is under-explored with a well density not exceeding one well per 5,000 km . The large number of sizeable structural closures deserve further attention, along with the 10/ Based upon their respective structural style, the age of their development, and the postulated thickness of the sedimentary fill in each main depocenter. - 21 - significant potential for stratigraphic and combination traps identified by earlier seismic interpretations. 4.6 The Tela Basin is an offshore east-west trending elongated depression in northern Honduras, covering a surface area of some 20,000 km between the shoreline and the shelf edge. This area is relatively under-explored, with only four wells. Indications of favorable gas-prone hydrocarbon sources have been inferred from well data restricted to structural highs. This Basin is made up of tertiary extensional tectonics. 4.7 2The onshore Ulua-Olancho Basin covers an area of approximately 35,000 km and consists of a broad mesozoic depocenter later affected by cenozoic grabens. The area has not been tested seriously by drilling, as many of the wells do not exceed 300 m. Careful examination of high sensitivity aeromagnetic data will be required for exploration because of the irregular occurrence of intrusive and extrusive igneous rocks in the sedimentary basins. Past Exploration 4.8 Although Honduras' oil exploration activities in the past have not been successful, the country remains under-explored with potential for discoveries of oil in commercial quantities. The first exploratory wells in Honduras were drilled in 1920 by the Honduras Petroleum Company. These wells were located onshore in the Amatique Basin near the Guatemalan border (IBRD Map No. 19774) and turned out to be dry. In 1960, three shallow wells were drilled in the Ulua-Olancho Basin, where reports of numerous oil seeps in limestone crops have been verified. 4.9 Offshore, the exploration activity began in the Mosquitia Basin in 1970 and continued until 1975. During this period nine wells were drilled by various operators, including Shell, Mobil, Union Oil Co., and Aminoil. A deep well (3,500 m) drilled by Union Oil Co. (Main Cape 1) recorded hydrocarbon shows in an Eocene section around a depth of 2,750 m. 4.10 Seven shallow wells reportedly were drilled on an anticlinal structure in the onshore portion of the Tela Basin where gas and oil sands have been reported. In the offshore section, four wells (2,500 m- 3,700 m), drilled by Texaco and Esso between 1978 and 1980, had negative results. Current Exploration and Outlook 4.11 In collaboration with the World Bank, the GOH initiated a petroleum exploration promotion project tc encourage foreign oil - 22 - companies to explore the most promising areas. 11/ As a part of this effort, Honduras recently introduced a new and attractive Hydrocarbon Law which was written with OLADE's support. The participation of private oil companies in the DGMH-hosted seminars, which were held in Houston, Tokyo, and London in October 1985, demonstrated an interest on their part in the Honduran promotional package. These seminars set out to provide information in preparation for a round of competitive bidding for leasing of offshore and onshore blocks. The Government should continue the bidding process because of the interest generated by the promotion seminar and in order to demonstrate the Government's interest in attracting international oil companies to explore for oil in Honduras. Organization of Petroleum Exploration 4.12 Under the recent Hydrocarbon Law, the responsibility for overall petroleum exploration activities within the Government has been given to the Ministry of Natural Resources, and within this to the DGMH. Under the scope of the petroleum exploration promotion project (Loan 1861-HO), some DGMH staff were trained in geophysics, petrology, and geochemistry. However, these people have recently left the entity. 4.13 DGMH should be strenghtened in view of possible future negotiations of exploration contracts with oil companies and the inadequate level of supervision of existing contracts. Through technical assistance, training should continue to be provided. An independent experienced contract negotiation consultant, as well as an experienced petroleum exploration specialist, would be useful to assist DGMH in monitoring current exploration agreements, as well as in the organization of its petroleum affairs. DGMH should also be given a budget adequate to retain and attract technical staff and meet minimum operational expenditures. Petroleum Product Supply and Demand 4.14 With the exception of crude oil purchases, which are bought directly by the GOH and resold to the Texaco refinery, all petroleum supply functions are handled by private companies (Texaco, Esso, Shell, Tropigas, and small Honduran distributors). These companies operate within the limitations of a cost and pricing structure set by the Government. 11/ Under the project, the acquisition and interpretation of 37,000 line-km aeromagnetic data was also carried out, along with the interpretation of over 30,000 line-km of existing offshore seismic data, of which 900 line-km were reprocessed. - 23 - 4.15 Prior to 1968, only petroleum products were imported, mostly originating from El Salvador. Small receiving terminals at ?uerto Cortes, Tela and La Ceiba were used to receive and store products, with inland shipping by road tanker or by rail car. 4.16 In 1968, Texaco built and started up a small (14,000 bd) petroleum refinery at Puerto Cortes to refine Texaco's own crude oil imported from Trinidad or elsewhere in the Caribbean. Since this refinery was capable of producing almost all the fuel products required in Honduras, the other marketing companies then purchased most of their requirements from the refinery. 4.17 In the late 1970s, the unprecedented rise in petroleum prices severely strained all petroleum importers and small countries such as Honduras found it hard to maintain supplies. In 1980, under the San Jose Agreement, Venezuela and Mexico agreed to supply crude oil to Honduras, under favorable terms, to promote economic cooperation. Approximately 12,000 bd of crude oil was to be supplied at official prices to the GOH, with Venezuela and Mexico each offering up to 6,000 bd. 4.18 Originally, under the San Jose Agreement, Mexico and Venezuela offered credits equal to 30% of the crude oil billings, over a five-year term at 4% p.a. However, if these credits were used to invest in projects urgently required for economic development, and within these for energy, then the credit would extend for a term of 20 years at 2%. Recently, as petroleum prices have fallen and both Mexico and Venezuela have faced debt repayment problems, the credit has been reduced to 20% of crude oil billings at interest rates of 6-8%, making it less attractive than before. Refinery 4.19 Operation. The refinery is of the hydroskimming type with a capacity of 14,000 bd, designed to process a light crude oil. Due to the limited fuel oil domestic and export market, the refinery's surplus of fuel oil has constrained the operation of the refinery (para. 4.21). In 1981, the refinery was shut down when Texaco found it more economic to import products directly from Trinidad. 4.20 Under a new Government, further discussions with Texaco and crude oil suppliers led to restarting the refinery in September 1982. Since then, the refinery has operated under the CAP. The refinery has been kept running by the payment of what in effect is a subsidy to the refinery, through the Government control of the price structure. The Government purchases crude oil and sells it to the refinery, allowing it a guaranteed rate of return of 20% on capital utilized in the refinery operation. 4.21 Since the export of fuel oil is very disadvantageous, the refinery has been run at a level just sufficient to produce the amount of heavy fuel oil needed to meet local demand. In 1985, the refinery was - 24 - operating at roughly 50% of its capacity. In view of the difficulties experienced with Mexican Maya crude as a result of the high fuel oil yield, the refinery has been buying its full share (6,000 bd) of Venezuelan reconstituted crude oil. 12/ Any additional requirements for crude oil are filled by Mexican crude. In spite of these practices, middle distillate yields from the refinery are too low to match the demane for these products, as shown in Table 4.1. Table 4.1: REFINERY YIEL.D AND PRODUCT DEMAND, 1985 Refinery Production Demand (%) (%) Gasolines 16 19 Middle Distillates 47 63 Fuel Oil 34 18 4.22 The required product imports (39% of total consumption in 1985) are supplied by an affiliate of Texaco, and are imported directly into refinery product storage (paras. 4.29-4.32). Currently, about 70% of these imports are middle distillates. 4.23 Economics. In 1985, the operation of the refinery was not economic. 13/ The operation of the refinery cost Honduras some US$7 million more than the alternative of importing products that year. This result was derived by comparing the cost of the refinery's products (i.e., the estimated ex-refinery price averaging US$35/bbl in 1985 and defined as the import cost of crude, plus refinery operating cost, plus 20% guaranteed rate of return on investment to refinery owner) with the cost of importing directly the same volume of each product. Since total cost of imported crude in 1985 was almost identical to the cost of importing the same volume of products that could be obtained from the crude, the loss to the Government was therefore equal to the entire refinery operating cost, adjusted to take account of those costs that 12/ A blend of Ceuta crude oil to which is added kerosene and diesel oil in proportions appropriate to the Honduran market, to reduce the refinery's fuel oil yield. 13/ Based on actual operating data and product costs provided by Texaco and CAP. - 25 - would be incurred even if products were imported, 14/ plus the refinery's guaranteed return on investment. Annex 4 presents an economic analysis of the refinery with average world oil prices of 1985. Unaccounted for Oil Revenues 4.24 The GOH fixes the retail prices of refined petroleum products at a level which allows: (a) a guaranteed 20% return on capital utilized in the refinery operation; (b) a margin for distribution and transport- ation; (c) a margin for government revenues; and (d) coverage of all operating costs, including the cost of crude oil. 4.25 In 1985, the revenue actually deposited in the Central Bank from petroleum products refined in Honduras was significantly less than should have been deposited under the present arrangements administered by CAP (para. 4.36). Government revenues from the marketing of crude and petroleum products originate from two sources: (a) indirect taxes; and (b) additional revenue from petroleum products refined in Honduras. With respect to indirect taxes, independent calculations yield the same figure as shown by the Central Bank records (about US$38 million). However, with respect to rexenues from products refined in Honduras, there was a gap of more than US$15 million between the estimates based on retail price and sales volume data and the estimated ex-refinery price (para. 4.23), compared with Central Bank accounts of May 1986. Central Bank receipts for 1985, amounting to US$5.5 million, imply an ex-refinery purchase price for petroleum products of US$45/bbl, rather than the estimated ex-refinery price at US$35/bbl (para. 4.23 and Annexes 4-5). CAP's accounting system is thus not transparent, since available data did not make clear the actual refinery purchase price. If the average purchase price in 1985 was actually US$45/bbl instead of the estimated US$35/bbl, then the operation of the refinery was even more uneconomic than reflected in the above analysis (para. 4.23). Specific details on Central Government revenues from crude oil and petroleum product operations are shown in Annex 5. Demand Forecast 4.26 The demand forecast for petroleum products assumes that the domestic refinery will not Ie operational in 1995, and that all petroleum 14/ The analysis considered that, even if the refinery were shut down, there would be ongoing costs (US$2 million) to maintain the oil jetty, pipelines, tanks, laboratory, product loading racks, and maintenance facilities. - 26 - products will be imported. 15/ Total product demand is expected to climb to 14,000-16,000 bd from the current 12,000 bd. Results show a continued high rate of growth in diesel consumption, with gasoline fatling to about 17% of total product demand in 1995, and middle distillates climbing to about 68%. Table 4.2 shows actual petroleum consumption in 1985, and the forecast for 1995. 4.27 The growth rate of gasoline consumption is mostly restrained by the domestic pricing policy, which favors diesel. This policy needs to be analyzed in detail (para. 2.6). Diesel is used in most sectors of the economy and is the major transport fuel, so growth in its consumption should be tied quite closely to general economic growth. 4.28 Fuel oil demand has fluctuated in the past due to its predominant use in three industries: electricity, cement, and sugar. With the completion of the El Caj6n hydropower project, fuel oil required for electricity is expected to be negligible, at least for the next five years. This will further aggravate the situation for the refinery by restricting the domestic demand for fuel oil (para. 4.21). LPG growth has kept in step with GNP growth over the last ten years, due to the convenience and acceptability of this fuel for domestic purposes. Meanwhile, domestic use of kerosene has been falling as households have switched to electricity or LPG. Table 4.2: PETROLEUM PRODUCT DEMAND FORECAST, 1990-1995 1985 1990 1995 Actual Demand ---Growth-- ---Demand-- ---Growth-- ---Demand-- _Mbi I%p_ Mb)( pa. (Mbi I 1i I 11 I 11 I 11 Gasoline 827 0.75 1.00 858 869 0.75 1.0 891 927 Kerosene a/ 619 1.50 2.00 667 683 1.50 2.6 718 777 Diesel 2,014 3.00 4.00 2,366 2,483 3.00 5.2 2,743 3,199 Fuel Oil 550 0.75 1.00 571 578 0.75 1.3 592 617 LPG 141 3.00 4.00 163 172 3.00 5.2 289 222 Total 4,151 4,625 4,85 5,133 5,792 a/ Includes Jet fuel. Scenario I : 3.0% GNP growth, 1986-1995 Scenario II: 3.0% GNP growth, 1986-1990 5.2% GNP growth, 1990-1995 Source: World Bank estimates. 15/ By 1995, the existing refinery becomes less relevant to the needs of the country. The refinery could only be utilized to produce 4,000- 5,000 bd, as limited by the fuel oil demand (para. 4.21). In addition, the refinery would be almost 30 years old. - 27 - Petroleum Product Supply Strateg 4.29 The basic objective of Honduras' strategy should be to ensure that it obtains its petroleum supplies at least cost. As indicated earlier, this is not the case at present. In principle, least cost supply could be ensured by permitting open bidding by all international suppliers of petroleum products. However, the degree of competition that would result from such a strategy is open to question since potential suppliers would have to make substantial investments in storage and distribution facilities in order to gain effective access to the market. Therefore, it would appear that the GOH would be better advised, for the immediate future at least, to retain its procurement role but to adopt a policy of purchasing products on a competitive basis through periodic tenders. As a potential bidder, Texaco would have the option of any other bidder to supply products from the refinery or import products. Thus, the decision to operate the refinery would be an economic decision determined by its owner. Petroleum Port Facili-ties and Storage 4.30 Facilities have been installed to import petroleum at Puerto Cortesp Tela, La Ceiba, Puerto Castilla and San Lorenzo. However, only the Texaco terminal at Puerto Cortes is now being used, since it is the only adequate port facility. The other facilities are small and uneconomic for the volumes required. 4.31 In the case of LPG, which is presently being imported through Puerto Cortes, Tropigas maintains a floating LPG storage vessel with a 25,OOO gallon capacity. A permanent LPG import terminal at Puerto Cortes is planned by Hidrogas, S.A., at an investment c(ist reported to be US$3 million. 4.32 Investment to increase the oil storage capacity in Honduras is not justified at the moment, particularly if the refinery is to be shut down. The 46 days of crude oil storage is adequate, along with the 23-26 days of clean product storage. However, assuming a higher growth rate of diesel consumption (para. 4.26), the storage capacity for diesel would be reduced to 19 days by 1990 and 15 days by 1995. An expansion of product storage capacity would therefore be analyzed jointly with a predetermined refinery strategy. In case the refinery is to be shut down, the 246,000 bbl crude tank could be converted to diesel service, and the 92,000 bbl crude tank to gasoline. These are minor cost items involving tank cleaning and piping revision. The product pipeline proposal (para. 4.33-4.34) would also provide an additional seven days of storage. Transport Facilities 4.33 Crude and petroleum products are transported almost entirely by tank truck. A product pipeline from Puerto Cortes to San Pedro Sula is a - 28 - promising alternative to road transport. Almost all the products consumed in the country now must travel this route by road. Under the pipeline option, a new terminal would be located in San Pedro Sula with a more modern truck loading facility than exists at the refinery. Onward distribution to the rest of the country would be by truck as at present. 4.34 The preliminary findings indicate a rate of return of 31% on the pipeline. This includes a new modern loading terminal at San Pedro Sula with seven days of product storage. The pipeline would reduce diesel oil consumption resulting from the transportation of oil by truck and replace it with hydroelectricity. A prefeasibility study is recommended to further analyze the economics of the pipeline. Annex 6 shows the preliminary assumptions and findings. Institutional Issues 4.35 The CAP is grossly understaffed in view of its present structure and its many responsibilities. Just two persons in the OCP, within the CAP structure (para. 4.2), are responsible for formulating and coordinating the- hydrocarbon's purchase programs, and controlling, supervising, and negotiating with the refinery and other companies. They also execute all the activities related to financial transactions, dispatching, survey, data processing, and official publications. 4.36 The accounting system does not permit a clear and complete accounting of government revenues from petroleum sales. The assured 20% rate of return with the Texaco refinery (para. 4.20) is only a verbal agreement, and the financial transactions of Government revenues are not clear (para. 4.25). Recommendations 4.37 The following actions listed, in order of priority, are recommended to be taken by the GOH: (a) ensure least-cost supply of petroleum products and permit open bidding by all suppliers. This could be achieved by implementing a petroleum supply MIS oriented to purchase petroleum products at least-cost and to formalize and simplify the accounting procedures; (b) continue the petroleum exploration bidding process, strengthen DGMH's technical capabilities, and provide DGMH with an appropriate operating budget; and (c) inititate a prefeasibility study on a product pipeline from Puerto Cortes to San Pedro Sula. - 29 - V. ELECTRICITY Overview 5.1 The country's energy strategy in the power subsector should focus on optimizing the use of electricity available from the recently commissioned El Caj6n hydropower project. The principal issues confronting the electric power subsector in Honduras are: (a) the need to improve the financial situation of the ENEE; and (b) the need to define a distribution and rural electrification strategy within the country's economic constraints. 5.2 The electric power sector in Honduras is organized under ENEE, which operates as a planning office as well as a generation, trans- mission, and distribution company. ENEE covers the whole country with the exception of some isolated municipalities that perform distribution functions. Basic Resources and Existing Facilities Generation 5.3 The main economic source of primary energy for power purposes in Honduras is hydropower. The hydropower potential is estimated to be between 2,800 MW and nearly 6,000 MW. 16/ Besides hydro, there are some manifestations of geothermal energy sources in the country which have not yet been investigated thoroughly. 5.4 The country's generating capacity totals 566 MW with a potential average hydro production of 2,000 GWh/year. Its electricity demand has a peak value of 220 MW and a gross energy consumption of 1,230 GWh (1985). The striking imbalance between generating capacity and actual demand was brought about by the commissioning of the El Caj6n hydrogenerating plant (300 MW) in 1985. Until 1985, generation within Honduras was roughly 90% hydro and 101 thermal; generation over the next five years is expected to be practically 100% hydro, with thermal plants operating only in isolated areas not connected to the main grid. Transmission and Distribution 5.5 The Interconnected System (IS)--operated by ENEE--consists of the main transmission network that spans the country in a roughly north- south direction, from the Atlantic Coast to the border with Nicaragua. 16/ At an estimated cost of about US$2,000 per installed kW. - 30 - Regions to the West and East of this backbone are referred to as isolated, as they are not connected to the system. 5.6 The transmission grid consists of: (a) a 230 kV, 517 km network that transports El Caj6n energy to the main load centers of San Pedro Sula and Tegucigalpa; (b) 138 kV lines (900 km); and (c) 69 kV lines (180 km). Subtransmission and distribution are performed through 34.5 kV lines (1,595 km), 13.8 kV lines (319 km), and 4.16 kV lines (32 km). Table 5.1. presents the basic characteristics of the Honduran power system. IBRD Map No. 20342 shows the country's power system. Table 5.1: BASIC CHARACTERISTICS OF THE HONDURAN POWER SYSTEM 1985 Installed Capacity (MW) Hydro 423 Thermal 143 Total 566 a/ Peak Demand 220 Annual Gross Generation (GWh) 1985 1986 (est.) Hydro 1,312 1,480 Thermal 46 -- Subtotal 1,358 1,480 Imports 5.8 -- Exports 134 150 Gross Internal Consumption 1,230 1,330 Overall Service Coverage 32% (est.) a/ 552 MW interconnected; 14 MW isolated. Source: ENEE. Service Coverage 5.7 Service coverage, as well as per capita consumption, is very low by Latin American standards. Overall, 32% of the population receives service, and while about 80-90% of urban areas receive service, 15% or less of rural areas receive service. 17/ Per capita consumption in 1985 was approximately 280 kWh, which is very low compared with other Latin American countries where it is 500-900 kWh. 18/ 17/ 60X of total load and sales are accounted for in the two principal cities of Tegucigalpa (30%) and San Pedro Sula (30%). 18/ Mostly because of the low industrial base in Honduras. - 31 - Electricity Growth and Demand Forecasts 5.8 Overall electricity growth has been moderate in the 1980-1985 period (6.8% p.a.), although it varies substantially from sector to sector. Consumption in the residential sector has grown by 9% p.a., while consumption in the industrial sector has only grown at 3.4X p.a. The present consumption of electricity by sector is: industrial (42%), residential (31%), commercial (17%), and others (10%). 5.9 According to ENEE's projections, electricity demand is expected to grow at 7% p.a. in the 1986-1995 period. The methodology used by ENEE to determine this growth rate consists of an analysis by major consumer groups (industry, commerce, etc.). It is impLrtant to emphasize that the actual electricity growth rate for the 1986-1995 period could fall far short of ENEE's forecast (7% p.a.) if there is a shortage of funds to extend service coverage through distribution investments. Consequently, ENEE should review electricity demand projections yearly, taking into account the effect of the expansion of the distribution system. Expansion Plans 5.10 Generation. With the commissioning of El Caj6n (300 MW) in 1985, Honduras entered a period of excess capacity. Even with a 6.8% growth rate for power demand as projected by ENEE, this situation is expected to continue at least into the early 1990's. A generation plan was developed by Chas. T. Main in 1984 which is oriented mainly towards selecting hydro sites for future development. Before any decision is taken with respect to expanding the system or carrying, out feasibility studies for future generation projects, a careful revision of the generation plan should be carried out. First, there is considerable uncertainty in the demand growth projections; second, there are geologi- cal problems, 19/ and third, petroleum prices are relatively low. Table 5.2 presents the energy demand (GWh) and peak demand (MW) for the period 1986-1991. 5.11 The least-cost generation expansion plan should be reviewed periodically. An adequate information base and a catalog of prefeasibility studies should be prepared and associated risks weighed, prior to the definition of the expansion plan. Extensive soil analyses should be done well in advance of the final decision for a project to avoid costly overruns due to geologic uncertainty. A periodical update is needed on oil price developments, construction cost variations, and changes in deman1d growth to reduce some risks. The opinion of a group of 19/ Karstic limestone was found in El Cajon only after construction was under way, and in the Remolino site, which is one of the major projects included in the current least-cost generation expansion plan. - 32 - international consultants is needed to evaluate designs and discard uneconomic alternatives at an early stage to avoid waste of resources. Table 5.2: POWER DEMAND BALANCES (Energy Demand (GWh) and Peak Demand (MW)) Year 1986 1987 1988 1989 1990 1991 Energy Balance (GWh) Hydro Potential a/ 2,000 2,000 2,000 2,000 2,000 2,000 Energy Demand 1,280 1,350 1,440 1,530 1,640 1,750 GWh Surplus 720 650 560 470 360 250 Peak Demand Balance (MW) Hydro b/ 380 380 380 380 380 380 Thermal 115 115 115 87 87 87 Total Capacity 495 495 495 467 467 467 Peak Demand 240 250 270 280 300 320 Reserve Capacity 255 245 225 187 167 147 a/ Average year. b/ Corrected to 90% availability. Source: ENEE. 5.12 Transmission. Since implementation of the transmission system backbone has been completed, little transmission expansion is required until 1990, except for final investments in El Caj6n related lines and for the Remolino project, which would eventually require transmission extensions. 5.13 Distribution. Investments in distribution are a top priority given the low service coverage and availability of excess capacity. However, the feasibility of extending service within urban areas is being questioned due to ENEE's financial constraints (paras. 5.14-5.21), although the plans are economically justified. In particular, a distribution project was reviewed which would require US$38 million in long-term financing from international or bilateral institutions. The project is designed to incorporate new users to the system in urban areas and remodel distribution circuits. This distribution project has a high rate of return (25%) because of the excess power capacity available, providing low costs in the initial years of operation. Annex 7 presents the economic evaluation of the distribution expansion project and the expected impact on ENEE's finances. - 33 - ENEE's Financial Prospects 5.14 Even with its high tariff levels (para. 2.9), ENEE faces revenue and cash flow problems stemming from: (a) the low volume of sales relative to available capacity; and (b) public sector arrears on electricity bills. 5.15 As a consequence of the low sales volume, ENEE is not likely to be able to cover all of its debt service in the next two to three years. The Central Government has been forced to honor a significant part of ENEE's debt service obligations in 1986, and will probably be obliged to do so for the next couple of years. ENEE should accept responsibility for as much of its debt service as possible; preparation of a complete financial plan for the enterprise would help ENEE establish reasonable performance targets and permit the government to rationalize its budget with respect to ENEE's obligations. 5.16 At least until 1990, ENEE's investment would have to be financed through increased indebtness, i.e., multilateral development banks, suppliers or possibly commercial banks. 20/ The rate of return on assets will remain low as long as there is idle capacity in the system; higher rates could be produced only by accounting measures such as writing off idle thermal plants. 5.17 Public sector accounts receivable on electricity bills are mounting at a rate of US$5 million per year (about 5% of total revenue in 1985) totalling US$13 million in January 1986. Payment of this debt would undoubtedly improve ENEE's finances; however, such an event is unlikely to happen in the short term given that the Government has supported this practice. ENEE should reach an agreement with the Government which will allow ENEE to collect public sector electricity bills on an agreed schedule, while obliging ENEE to accept greater responsibility for payment of its debt service through strengthened financial management. 5.18 ENEE's financial assumptions are optimistic and should be corrected. Specifically, ENEE's financial projections are based on: unrealistically high projected exports of electricity to neighboring countries (e.g., 760 GWh in 1986 which is equivalent to 65% of domestic sales and at an average of 87 MW, exceeds the mean interconnection capacity), prompt payments of government agencies' electricity bills, and by 5-10% higher domestic sales than projected b) ENEE's planning department. Payment of ENEE's electricity exports is also a major issue that needs to be taken into consideration, particularly in the case of 20/ The only major planned investment by ENEE is for expanding the distribution system (US$38 million). - 34 - Nicaragua (para. 5.23). A barter for electricity exports between Nicaragua and Honduras could be a possible solution for the short term. 5.19 New pro forma financial projections were prepared using lower exports to neighboring countries, and government-related sales revenues and domestic sales projected by ENEE's planning department. The simplified financial statements serve to highlight ENEE's principal problems regarding internal cash generation and debt service. Annex 8 shows the financial statements. 5.20 With respect to revenue, ENEE barely breaks even when interest charged to income is taken into account. Furthermore, without international sales, the net income would be negative. Return on assets is lower than the 9% stipulated by the Bank, but this is more due to an overestimated asset base, given that most thermal plants will be inactive in the near future. 5.21 The cash flow situation is very worrisome due to ENEE's inability, at least through 1988, to finance its future expansion to any significant degree through internal fund generation. Even worse, internal cash generation will continue to fall short of debt service, especially in 1987 (para. 5.17). Possible Solutions to ENEE's Financial Problems 5.22 Increased sales, both international and domestic, together with reduction or elimination of accounts receivables and improved operational efficiency (para. 5.30) would help to improve ENEE's financial position. In the short term, international sales may offer the only significant contribution to minimizing ENEE's financial problems, in view of El Caj6n's excess generating capacity. If international sales reached 400 to 500 GWh per year (El Caj6n's estimated surplus that could be sold internationally), the net annual increase in income would be about US$8 million, which would cover debt service and contribute to investment after 1987 (ENEE would still run a deficit in 1987). An evaluation of the feasibility of sales to the Central American markets should be done, based on a review of the electrical interconnection study carried out by ECLA, 21/ as well as the assessment of prospects of payments for services rendered. ENEE should seek commercial agreements with the neighboring utilities on basic principles for an interconnected operation. 5.23 The promotion of domestic sales should focus on: (a) authorizing ENEE to contract with the larger industrial users (e.g., the Standard Fruit Co.) for lower rates, set above a 21/ Perspectives on the Central American electrical interconnection, ECLA, December 1985. - 35 - given consumption lev-l, but limiting such contracts to the 1987-1990 period (para. 2.03); 22/ and (b) extending coverage through distribution investments (para. 5.13). Rural Electrification 5.24 Service coverage in Honduras' rural areas is extremely low, 14.5% of the population, compared to 65% in urban areas. Low coverage of rural areas is mainly related to the following constraints: (a) sparse rural population and low income levels which imply low potential for electricity consumption; (b) very few productive uses of electricity (small agro-industrial potential); and (c) dispersion of rural electrification responsibilities within ENEE. Preliminary Evaluation of Rural Electrification Projects 5.25 From the information available, 197 minor villages were identified without service or which are only partially supplied by small diesel plants. For the purpose of analysis, these villages were grouped to 62 small projects. The projects would include the construction of 2,000 km of subtransmission lines at an investment cost of approximately US$35 million (mid-1985) for the benefit of some 35,200 potential users. A preliminary economic evaluation of each project was made after verifying that each was the least-cost solution for the selected area compared to other local generation options such as small hydro, diesel or firewood plants. 5.26 The preliminary benefit/cost evaluation indicates that 24 of the 62 projects evaluated have an estimated ERR higher than 12%. The estimated investment for those projects is about US$17 million and they would benefit almost 24,000 potential users. The economic attractiveness of most of the projects lies mainly in user concentration and proximity to existing or future infrastructure. A sensitivity analysis carried out for the main parameters included in the evaluation (energy costs, investment cost and consumption levels) showed that: 22/ In February 1987, ENEE was close to reaching an agreemert with the Standard Fruit Co. - 36 - (a) changes of about 20% in energy costs did not modify the results in a significant manner; (b) a reduction of 20% in investment costs would allow 8 additional projects to be undertaken. 23/ for the benefit of 4,000 potential users; conversely, an increase of 20% in these costs would eliminate 6 projects (3,200 potential users); and (c) an increase of 30% in electricity consumption would add 14 new projects (5,500 potential users). Table 5.3 shows the projects with ERRs higher than 12% and Annex 9 presents the results of the 62 projects evaluated and the methodology utilized. Table 5.3: RURAL VILLAGE ELECTRIFICATION PROJECTS WITH ERR HIGHER THAN 12% Potential Projects Users Total Cost Cost per User (US$000) (US$) Southern Region Choluteca 1 562 468 833 Choluteca 3 1,488 1,026 690 Valle 1 690 660 957 Northern Region Cortes 1-1 583 448 769 Sta. Barbara 1 2,309 960 416 Sta. Barbara 2-1 1,271 1,075 846 Stas Barbara 3 641 499 779 Sta. Barbara 4 179 163 907 Sta. Barbara 5 319 211 662 Atlantic Litoral Region Atlantida 1 622 222 357 Northeast Region Yoro 1 973 643 661 Yoro 2 1,250 895 716 Olancho 1-1 1,543 1,300 843 Olancho 3-1 755 477 632 Central Eastern Region Eco. Morazan 3-1 1,515 928 613 Eco. Morazan 4 908 853 940 Eco. Morazan 6 442 440 907 El Paraiso 4 890 654 736 Western Region Lempira 1 421 301 716 Ocotepeque 1 3,615 2,276 630 Ocotepeque 3 346 237 684 Ocotepeque 4 721 675 937 Copan 1 1,490 1,143 767 Copan 2 287 270 948 Total 23,820 16,824 784 - 37 - 5.27 Based on the preliminary evaluation, the implementation of projects with ERRs greater than 12% are considered as the first priority for rural electrification investments. ENEE is already implementing about 10% of these priority projects. However, in order to define specific priorities, more detailed feasibility studies are needed. In addition, it is necessary to promote the adequate utilization of elec- tricity in rural areas and to improve inter-institutional coordination between ENEE and the public and private agencies in charge of rural development programs on productive uses of the electricity in rural areas. Institutional Issues 5.28 ENEE's institutional structure has remained unchanged since its creation in the late 1950s when it only provided electricity from a few small thermal plants. The financial management activities are still carried out by the Administrative Division. An organizational study carried out by A. D. Little recommended the creation of a Financial Management Division. ENEE accepted the recommendations but has not adequately staffed the Division. 5.29 The restructuring of rural and village electrification functions within ENEE is also recommended in order to make the institution more effective in identifying, promoting and executing the electrification projects. More emphasis should be placed on implementing projects oriented toward productive uses and on the connection of new users to the distribution grids. For such activities, it would be convenient to establish a group in ENEE and to seek the participation of the private sector represented by cooperatives and other types of local associations. 5.30 ENEE has a collection period for receivables far above the norm for such utilities. Its collection period (excluding the public sector) is about 70 days. Good practice would indicate 35 days as an achievable target. Furthermore, ENEE has 16 employees per 1,000 customers, which is substantially higher than international standards (roughly 6 employees per 1,000 customers excluding generation). ENEE also suffers from staffing problems at the middle technical level, due partly to over- crowded offices and poor facilities in general. At the design level, certain practices offer possibilities for reform and cost cutbacks, such as using a combination of insulated and bare conductors for low voltage distribution instead of only insulated ones. With the operation of 230 kV lines, technical updating seems to be necessary at the operations level (e.g., live line maintenance). Certain apparent incongruities, such as ENEE's dependence on the Ministry of Communications, Public 23/ ERR will be above 12%. - 38 - Works, and Transportation do not seem to have a negative effect on the company and, from the sub-sector point of view, major rcforms in this respect are not necessary. Recommendations 5.31 The following actions, in order of priority, are recomended to be taken by ENEE: ta) analyze potential Central American export markets and take the necessary measures to take advantage of them; (b) improve the collection period of receivables and reach an agreement with the Government which will allow ENEE to collect public sector bills; (c) define an adequate distribution investment program within the country's economic constraints; (d) strengthen the Financial Management Division and establish a rural electrification group in ENEE; (e) carry out a rural electrification feasibility study; and (f) review the least-cost system expansion plan, taking into account changes in electricity growth and other critical assumptions, e.g., petroleum prices. - 39 - VI. OTHER ENERGY SOURCES 6.1 There are a number of other energy sources of interest for Honduras. These include small hydro, solar energy, biogas, bagasse, coffee pulp and skin, wind energy, ethanol, lignite, and geothermal. All of these have possible current economic applications in Honduras except for ethanol, lignite, and geothermal energy, which could be economically feasible in the more distant future. Small Hydro 6.2 The preliminary analysis shows that small hydro appears economically attractive for remote areas where it would be more costly to extend the interconnected system. Since 1977, ENEE has promoted the program for small hydroelectric plants (50-500 kW) with the purpose of supplying the electric power to meet the demand in small villages and rural areas, where grid extensions are neither technically nor financially feasible. In addition, with assistance from the Republic of China, ENEE identified 60 projects with a total potential installed capacity of about 60,000 kW. About 20% of these projects are the subject of prefeasibility or more advanced studies. 6.3 The investment cost of these plants is approximately US$3,000-3,400 per installed kW and US9-11¢/kWh, which is lower than the total cost of small wood-fired plants or diesel plants (estimated around US13¢/kWh and US14-19¢/kWh, respectively). 24/ The average inter- connection investment cost is estimated at US$13,000/km with the yearly operation and maintenance costs at 1.5% of the investment, and the long- run marginal electric energy cost at US5.5c/kWh in the interconnected system. The estimated limits of economic interconnection are shown in Table 6.1. Table 6.1: FEASIBILITY OF INTERCONNECTION TO THE MAIN GRID Number of Users 100 250 500 750 1,000 1,500 Interconnection Limit (km) 6.7 16.7 33.5 50.1 66.8 100.2 Source: World Bank estimates, 24/ At a 12% annual discount rate, 25 years useful life, and 0.5 plant factor; and a diesel price based on US$22-24/bbl. - 40 - Solar Energy 6.4 Applications for Water Heating. The preliminary analysis shows that some solar water heating appLications are economically attractive. The costs of locally made solar energy equipment, at US4.8-60/kWh for water heating, are competitive with electricity (US11.6¢/kWh) and LPG (US6.6¢/kWh). 25/ Given the economic appeal of solar water heating applications in Honduras, it is recommended that support be provided to implement pilot solar water heating projects in the country. Table 6.2 shows the fuel costs of water heating in Tegucigalpa, and Table 6.3 shows a summary of solar energy costs. Table 6.2: FUEL COSTS OF WATER HEATING IN TEGUCIGALPA Conversion Efficiency Net Cost Fuel Fuel Value Factor of Process Unit Price Useful Energy (%) (USS) (USt/kWh) Electricity (Residential) -- -- 90% 0.104/kWh 11.6 LPG (Residential) 5,745 kj/kg 3,600 kj/kWh 65% 0.312/lb 6.6 Diesel Oil (Industrial) 1,110 Kcal/kg 860 Kcal/kWh 65% 22/bbi 2.1 Source: World Bank estimates. Table 6.3: SUMMARY OF SOLAR ENERGY COST FOR WATER HEATING a/ Cost of Thermal Annual Energy Energy Supplled (kWh) (USA/kWh) Thermo-Siphon System (Residential) Solar Amcor (Israel) 1,738 11 Honduran Manufacture b/ 1,983 6 Honduran Manufacture c/ 1,983 4.8 Integrated System (Residential) d/ Hitachi 2 2,361 5.9 Typical Industrial (900 m2) 90,000 3.3-5.1 a/ 12% discount rate and 15 useful years of life. b/ Fiberglass tank. c/ Asbestos-Cement tank. d/ Requires pumps. Source: World Bank estimates. 25/ The mean 2lobal radiation 2n Honduras is estimated at roughly 450 cal/cm /day and 5.2 kWh/mi /day. - 41 - 6.5 Photovoltaic Applications. The application of solar energy for photo4oltaic generation of dlectricity is not economical compared to traditional alternatives for installed capacities in the range of 0.5- 1.5 kW. These applications should be restricted to remote areas and specific low-consumption situations, such as: telecommunications, tele- vision, radio, partial illumination, and small, low-power motors. The typical investment costs are approximately US$13/W/peak, and their useful life is estimated at 15 years. Table 6.4 shows the unit cost of solar applications of photoelectricity. Table 6.4: SOLAR APPLICATIONS OF PHOTOELECTRICITY Annual Unit Capacity Investment Energy Cost a/ (W) (USS) (kWh) (US$/kWh) 370 5,340 553 1.42 770 10,170 1,150 1.30 a/ 12% discount rate and 15 years of useful life. Source: World Bank estimates, 6.6 Other Applications. Solar applications have been carried out at an experimental level for: drying grains, fruits, and wood; distilling water; and producing salt. Those activities need to further demonstrate their financial and economic competitiveness. Biogas 6.7 In the period 1981-1985, a total of 64 Chinese type and 6 Indian-type biodigesters were installed, with 90% of them operating successfully. In 1986, there will be a demand for an estimated 200 additional biodigesters in Honduras, which will include 16 pilot biogas projects in 8 coffee areas, to be installed under a joint program supported by AHPROCAFE. 6.8 Biogas is economically attractive in rural areas whjch have an ample supply of cattle dung or biomass residues (US$6.2/10 BTU) 26/ compared to other fuels in Honduras, such as: kerosene (US$8.8/106 BTU), LPG (US$14.5/106 BTU), and electricity (US$30/106 BTU). T1e cost of firewood is generally lower in rural areas (roughly US$2/10 BTU) but 26/ Assuming an average 23 m3 biodigester unit with no fertilizer benefit. - 42 - taking into account the different efficiencies in cooking processes (50% for biogas versus 7-15% for firewood), biogas is a competitive fuel. Bagasse 6.9 There is an adequate utilization of bagasse residues in the country. Bagasse residues from the sugar industry in Honduras have been a significant energy source, dedicated mainly to the production of steam for sugar processing. Utilization of bagasse is 290-420 kg per ton of sugarcane processed, constituting a reasonable amount compared to typical figures from other countries. Coffee Pulp and Skin 6.10 Neither coffee pulp nor the skin is used as an energy source for drying the goffee crop. 27/ Instead, 48,000 tons of firewood per year (688.6 x 10' BTU) plus an additional amount of diesel fuel is used. 6.11 Preliminary estimates show that the production of dry pulp (30% humidity) associated with coffee production would be close to 50,000 tons per year and that of coffee skin would reach approximately 40,000 tons per yeir* This would provide a gross energy content of 384 x 10' BTU. 28/ 6.12 If the efficiency of drying the coffee crop could be improved by 50%, and the usage of pulp and skin together could reach 30%, approximately 24,000 tons of firewood per year could be saved, which would represent a savings of US$180,000 per year. A pilot program on the use of new and renewable energy sources in drying coffee is being promoted by SECPLAN, which should be supported by the Government. Wind Energy 6.13 Applications for Water Pumping. The windmills in Honduras are economically attractive in areas that are distant from the power grid, with wind velosities exceeding 3 m/sec. and pumping water at an average of about 15 m /day. Locations which have a good potential for water 27/ Estimated at 74,000 dry tons per year. 28/ Based on a conversion rate of 6,000 BTU/kg. - 43 - pumping applications are show¶ in Table 6.5, along with their cost. The average cost is US5.4-17.8c/m . 29/ 6.14 Applications for Electric Power Generation. According to the preliminary calculations, wind energy costs for electric power generation could be lower than diesel (US14-190/kWh) in favorable wind locations. 30/ The feasibility of this type of generation should be further investigated, in sites where connection to the power system is not feasible, along with other alternatives such as small hydroelectric plants. Table 6.6 shows the costs of electric power generation in locations with the most favorable winds. Table 6.5: PUWtPING WATER COSTS OF WINDMILLS IN HONDURAS Location Hours a/ Annual Output Cost (per year) (m3) (US¢/m') Pto. Lempira 7,511 5,198 5.4 GuanaJa 7,543 4,488 6.2 Amapals 6,441 2,909 9.6 Choluteca 6,156 2,690 10.4 Tegucigalpa 5,938 2,235 12.5 La Mesa 5,664 2,116 13.2 T*la 5,503 1,937 14.4 La Ceiba 5,422 1,880 14.8 Sta. Rosa 5,132 1,602 17.4 Catacamas 5,074 1,565 17.8 Assumptions: (a) windmill diameter: 6 feet; (b) effective pumping height: 100 feet; and (c) windmill tower height: 40 feet. Source: World Bank estimates. Table 6.6: WIND ELECTRICITY COSTS IN HONDtURAS Place Average Cost (USI/AWh) Puerto Lempira 9.4-15.4 Guanaja 10.6-17.3 Amapala 15.0-23.0 Choluteca 13.6-26.6 Source: World Bank estimates. 29/ The estimated cost for yall diesel (under 5 kW) pumped water in Honduras is about US250/m. 30/ Based on a diesel price of US$22-24/bbl. - 44 - Ethanol 6.15 In 1986, the production of ethanol from sugarcane to displace imported petroleum fuels is not an economic option in Honduras. The analysis, which considers an annexed distillery to the sugar mills, indicates that the cost of producing ethanol would be higher than the prevailing gasoline prices in the international market. The preliminary findings indicate that the production cost of ethanol alone in a Honduran sugarmill (5,000 short tons sugarcane/day) would be more than two times the cost of importing gasoline, and slightly less if ethanol is produced jointly with sugar. 31/ In addition, a capital investment of roughly US$8 million would be required to add an ethanol distillery to the existing sugarmill. Table 6.7 shows the preliminary benefit/cost analysis. Lignite 6.16 Although some lignite maniifestations have been reported in central and western Honduras, its extraction is not economicallv feasible as a result of the low quality of the product. In Ocotepeque, a lignite deposit of approximately 20 million tons has been identified by DGMH, with a sample heat value content of 900-1,500 kcal/kg and a high ash content. Another lignite deposit of about one million tons has been identified in Yoro. This is not considered an economic energy resource for the short- to medium-term in Honduras. Geothermal 6.17 Given the geological conditions, Honduras' geothermal potential is lower than that of the other Central American countries but may still be sufficient to provide for some geothermal developments with approximately 20-40 MW capacity. In the more distant future, this might complement the development of the costly hydroelectric resources. 31/ If ethanol is produced jointly with sugar, the distribution of costs is estimated at about 69X for sugar and 31% for ethanol. Table 6.7: BMEFITjCOST ANALYSIS FOR A 5,000 SHORT TOM OF SUGARCANE PER DAY HONDURAN SUGARMILL a/ Production per year Gross Annual Revenue per year b/ Production Net Revenue Sugar Molasses Ethanol Sugar Molasses Ethanol df Total Cost per year per year b/ tlO5 Short ton) t103 Short ton) tlO5 gal) ct10 USS) tlO3 USS ) lO50 USS) (1O3 USS) t103 USS) tlO USS) Cation A: Production of sugar and molasses 66.60 c/ 26.03 - 6,660 864 _ 7,524 14,822 -7,298 Optlon a: Production o. augar and ethanol Case I e/ 57.96 - 4,914 5,796 - 2,998 9,744 16,169 -7,425 Option C: Solely production of ethanol Case I ff - - 12,078 - - 7,247 7,247 16,501 -9,254 a/ Similar to the Santa Matilde or Acenca sugarmill whIch have the htghest sugarcane yield, and are the largest sugarmills In Honduras. b/ Correponds to the 1986 internatlonal sugar price at USSItOtT and least value market for molasses at USS37/xT. c/ ProvIdes 77S of the low value sugar sold In th- international market. d/ Ethanol price at USSO.60/gal equlvalent to gasollne CIF Puerto Cortes. e/ Ethanol production cost at USS1/gal. t/ Ethanol production cost at USS1.37/gal. Source: World aank estimates. - 46 - 6.18 In 1978, geothermal investigations were initiated by the World Bank and the United Nations. In 1984, extensive geophysical analyses were conducted by ENEE with the assistance of the Los Alamos Laboratory in Texas, and United States Agency for International Development financing. These works are concentrated in the most promising areas of Platanares, San Ignacio and Azacualpa, and are expected to be finished soon with the drilling of test wells in Platanares (500 m). Further drillings in San Ignacio and Azacualpa will be required to complete the prefeasibility phase in those areas. 6.19 In 1986, the geothermal investigations of an area covering 10,000 km2 in Central Honduras were initiated by the group DAL-Intesa/Geotermica Italiana, together with ENEE participation and UNDP/Italian Government assistance. This investigation will be conducted in coordination with and to complement the Los Alamos group investigations mentioned above. The works include the drilling of test wells to 3,200 m. - 47 - VII. ENERGY SECTOR COORDINATION Overview 7.1 There is no central entity responsible for the formulation and coordination of energy policy in Honduras. The lack of a leading organization in the energy sector is a well-recognized problem by the GOH. However, there has been little if any real movement towards greater integration of policy making and execution. This issue is of immediate priority, and a public entity should assume full responsibility for coordinating energy sector policies as well as the actions carried out by different government agencies. Institutional Framework 7.2 Although energy accounted for almost 50% of public investment expenditures in 1981-1985, the important role of energy in the national economy is not reflected in coordinated administrative actions. Six government agencies are active in the sector. SECPLAN lays down the broad objectives of national energy development. The Ministry of Natural Resources handles oil exploration; the Ministry of Economy handles petroleum distribution and pricing, refinery supervision; the Ministry of Public Works and Communications handles transport; ENEE handles electricity supply; and COHDEFOR handles wood/charcoal producers. Table 7.1 shows the participation and evaluation of institutions in the energy subsectors. Annex 11 presents the current organigram of the energy sector in Honduras. 7.3 Planning. SECPLAN's role in the infrastructure division is oriented toward macroeconomic planning. However, in practice, it is also involved in gathering and processing energy data (e.g., energy balances) and attempting to coordinate the activities in the energy sector. SECPLAN's participation in the energy sector has been weak, although its recent expansion to a Ministerial level could strengthen its position. 7.4 Petroleum. The lack of integration and coordination which prevails in the petroleum subsector has prevented the effective formulation and implementation of any cohesive energy or subsectorial policy. The main current spheres of influence may be defined as follows: ezploration is under the direct responsibility of the DGMH within the Ministry of Natural Resources; marketing of petroleum products and the relations and negotiations with the Texaco Refinery are under the responsibility of the Ministry of Economy and the CAP, chaired by the Minister of Economy, and comprising also the Minister of Hacienda y Cr6dito P6blico, and the President of the Banco Central; while crude refining, hydrocarbons' storage, transportation, and retail distribution are all managtd by private companies, with Texaco being prominent. - 48 - 7.5 Electric Power. With respect to the power subsector, ENEE has certain coordinating deficiencies, particularly at the level of distribution, rural electrification, and the isolated systems. ENEE's institutional structure needs to be updated to match company growth, as do its management techniques. 7.6 Woodfuels. The agency responsible for the forestry subsector, COHDEFOR, lacks an explicit mandate to address the energy aspects of forestry, although woodfuels are the largest energy resource in the country. In the current institutional framework, the President of the Republic is the chairman of COHDEFOR's Board, and its Executive Committee is chaired by the Minister of Natural Resources. Table 7.1: PARTICIPATION OF INSTITUTIONS IN ENERGY SUBSECTORS Petroleum Power Woodfuels Activities DGMH REFTEXA SECOPT ME CAP SECPLAN SECOPT ENEE SECPLAN COHDEFOR SECPLAN Exploration/ Identification of Resources / X Production/ Generation X X / Dist./Transm./ Transport X X X Regulation and Supervision / / / x / Planning / X / / Information Systems X / / x / Internal Prices Setting X X X / = needs improvement. X * adequate. Source: World Bank evaluation. - 49 - Options to Improve Coordination 7.7 Consolidation of responsibility for policy decision-making and coordination of activities in the energy sector within one entity would improve coordination in the energy sector. The entity should be assigned sufficient resources to provide technical and economic analysis to make policy recommendations to the appropriate decision-making authority. The entity should also be responsible for coordinating and monitoring the executing agencies (ENEE, CAP, DGMH, COHDEFOR) to assure that sector policy decisions are effectively carried out. 7.8 Four options to improve coordination of the energy sector in Honduras were analyzed: (a) reinforce the structure of the Ministry of Natural Resources bringing oversight for all agencies in the sector under its responsibility; (b) strengthen the Energy Unit of SECPLAN to provide technical support to the Economic Cabinet; (c) establish a National Energy Commission; and (d) institute a separate Ministry of Energy. 7.9 Because of the relatively small size and limited complexity of the energy sector in Honduras, the creation of a separate Ministry of Energy is not warranted. For the same reason, creating of additional bureaucracy, under whatever authority, should be minimized. Establish- ment of a National Energy Commission (consisting of the directors of agencies and departments in the sector) would lack the required political authority to take sector policy decisions. For the remaining options, (a) and (b), the capacity for technical and economic analysis for the sector as a whole would need to be strengthened; policy decisions would be taken by the economic cabinet based on the analysis provided by the technical group. The option to reorganize the entities of the sector under the Ministry of Natural Resources would unify the organizational structure of the sector under one ministerial authority, which may facilitate the function of monitoring the entities and assuring appropriate application of policy decisions and guidelines. The alternative of strengthening an energy unit under SECPLAN may have the advantage of drawing on the global planning perspective of that institution. All of the options should be evaluated in light of the recent reforms embodied in the Public Administration Law and the Law of the Ministry of Planning, Coordination, and Budgeting. Responsibility for the coordination of the energy sector has been assigned temporarily to SECPLAN. 7.10 In order to implement effectively the actions recommended with respect to the various subsectors, the issues have to be addressed in a - 50 - coordinated fashion with a comprehensive sector-wide approach in the macro-economic context. Lack of such coordination will not permit a consistent policy framework conducive to efficient resource utilization. Resolution of the institutional issues mentioned above is essential. The energy sector plays an important role in the Honduran economy, accounting for almost 50% of public investment expenditures in 1981-1985, with the electric power subsector alone accounting for about 40% of the country's public debt service in 1986. However, this critical participation of the energy sector in the economy is not reflected in coordinated administrative actions. Annex 1 HONDURAS-ENERGY BALANCE: 1984 ('000 toe) Primary Energy Secondary Energy Crude Hydro- Kerosene/ Fuelwood Bagasse Oil Energy Charcoal LPG Gasoline Jet Fuel Diesel Fuel Oil Electricity Totals Gross Supply Production 1,208 108 92 a/ 1,408 Imports 462 8 44 45 138 697 Stock Changes (37) 1 (2) (5) (5) (17) (65) Exports (31) (31) Available Supply 1,208 108 425 92 9 - 42 40 133 (48) 2,009 Transformation Centers Refinery (425) 3 58 32 158 (154) (20t Z; / Power Plants (92) (25) (20) 92 (45) b/ Ln Charcoal Kilns (25) 5 (20) b/ Energy Sect. Cons. (3) (11) (14) 1 Trans & Dist. Losses (15) (15) Statist. Discrepancy 4 (1) 9 12 8 7 39 Final Consumption 1,183 108 5 16 99 81 275 83 84 1,934 Household c/ 1,077 5 12 6 43 20 44 1,207 Industry 106 108 9 109 83 35 450 Transport 84 38 144 266 Agriculture 4 2 5 11 a/ 86 toe/GWh (the Honduran power system is basically hydro). b/ Represents transformation losses in the refineries, power plants and charcoal kilns. c/ Includes commercial and public sectors. Source: SECPLAN and World Bank estimates. Annex 2 HONDURAS-PROJECTED ENERGY BALANCE: 1995 ('000 toe) Primary Energy Secondary Energy Crude Hydro- Kerosene/ Fuelwood Bagasse oil Energy Charcoal LPG Gasoline Jet Fuel Diesel Fuel Oil Electricity Totals Gross Supply Production 1,369 120 208 1,697 Imports 22 108 96 391 101 718 Exports Available Suppiy 1,369 120 208 22 108 96 391 101 2415 Transformation Centers Power Plants (208) (10) (10) 190 (38) bl Charcoal Kilns (50) 10 (40) b/ Trans & Dist. losses (26) (26) Vs Final Consumption 1,319 120 10 Z2 108 96 381 91 164 2,311 1 Household a/ 1,200 6 22 7 50 27 100 1,412 Industry 119 120 4 10 151 91 50 545 Transport 91 46 203 340 Agriculture 14 14 a/ Includes commercial and public sectors. b/ Represents transformation losses in the power plants, and charcoal kilns. Assumptions: (1) 1986 - 1995 GOP Growth at 3% p.a. (2) Toe refinery will not be operational in 1995 with all the petroleum products being imported. (3) Demand increases (p.a.): Fuelwood 1%; Bagasse 1%; Charcoal 5%; LPG 3%; Gasoline 0.75%; Kerosene 1.5%; Diesel 3%; Fuel oil 0.75%; and Electricity 6.5%. (4) Hydropower will provide about 90% of electricity demand, and there will be no surplus capacity available for exports. Source: World Bank estimates. Annex 3 Page 1 of 5 ELECTRICITY LONG RUN MARGINAL COST ANALYSIS Background In order to study costs of service in a system such as ENEE's, where there has been a sudden change in the composition of generating plants, the only approach that provides the economic signals for consumers to make the best use of existing resources is the marginal cost perspective. In 1979-1980, ENEE commissioned a study with the French firm SOFRELEC to determine costs of service using a marginal cost approach. SOFRELEC's report, dated October 1980, is a classical Electricitede France analysis that contains valuable information, of which a substantial amount is still valid today. Unfortunately, the methodology as well as the recommendations were never implemented by ENEE, due in good measure to obscure writing within the report. The approach in studying ENEE's margin*il cost structure consisted of using as much of the SOFRELEC data as possible (especially as it relates to load characterization) and to update the cost structure according to 1986 expectations. The major disparity between the 1980 study and present (1986) conditions relates to load forecasts as shown in the following table: ENERGY REQUIREMENTS FORECAST (GWh) Year 1986 1987 1988 1989 1990 SOFRELEC's Projections 1,699 1,862 2,043 2,238 2,450 ENEE's Projections 1,280 1,350 1,440 1,530 1,640 Other sources of disparity concern unit costs of equipment for different network components (e.g., line and transformer costs). Finally, reduced demand growth rates in the 1980-1985 period resulted in smaller additions to thermal generating capacity during the pre-El Caj6n period relative to 1980 plans; as a result, thermal capacity in 1986 is 22 MW short of 1980 plans. Marginal Generation Costs The energy and demand balances of Table 5.2 show the following surpluses for 1986-1993: - 54 - Annex 3 Page 2 of 5 Year 1986 1987 1988 1989 1990 1991 1992 1983 GWh excess 720 650 560 470 360 250 120 - Z of Mean Hydro 36 33 28 24 18 13 6 - X of Energy Demand 56 48 39 31 22 14 6 - Reserve MW 255 245 225 187 167 147 150 150 Z of Load 106 98 83 67 56 46 44 41 Given that hydro generation has a standard deviation of around 225 GWh/year and that the El Caj6n reservoir provides a 1-year reserve, it becomes clear that marginal energy costs are zero at the generation level at least until 1990 when only internal demand is taken into account. However, the fact that potential exports are a real possibility, electrical energy becomes a traded good with a border price and an opportunity cost that hinges on the type of export contracts that can be negotiated. At present, the tariff for exports is around US40/kWh; if these sales are large with respect to the available surplus, there is a possibility that thermal generation may be necessary to honor them if they have a guaranteed character. In such a case, the marginal cost would be given by the expected thermal cost appropriately weighted by the probability of such an event. If, however exports have a non-guaranteed character, and thermal generation costs are above the export price, the opportunity cost of supplying a local customer would be given by the foregone export income and the marginal cost would therefore equal the export tariff. In order to quantify these concepts, a rough approximation to the marginal cost structure as a func;ion of export volume would be the following: Case 1: Low export volume 1986 1987 1988 1989 1990 GWh Exports 450 350 300 250 150 Marginal Cost 0 0 0 0 0 Case 2: Higher volume, guaranteed exports 1986 1987 1988 1989 1990 GWh Export Range 450-700 350-650 300-550 250-450 150-350 Marginal Cost t t t t t Where t= marginal thermal generation cost weighted by probability of use of thermal plants necessary to supply exports. Case 3: Higher volume, non-guaranteed exports, thermal cost below export tariff. Same costs as in Case 2. - 55 - Annex 3 Page 3 of 5 Case 4: Higher volume, non-guaranteed exports, thermal cost above export tariff. In this cace, the exp:ort range may be similar to Case 2 but the marginal cost is te=export tariff weighted by the probability of having to cut off exports due to hydrologic conditions. The conclusion of this analysis is that ENEE'S marginal costs cannot be determined without a clear picture of their export policy; additionally, the marginal cost will be determined by international oil prices in the Caribbean area and uncertainty with respect to this factor clouds the issue even further. Marginal thermal costs are essentially determined by diesel plants burning a mixture of diesel (approximately 20%) and bunker (80%) fuels. Specific consumption per net kWh is around 0.084 gallons/kWh. The resulting thermal cost can therefore be expressed by the formula Thermal Cost (US¢/kWh) = 0.04Pd + 0.16Pb where Pd = Diesel Cost in US$/bbl and Pb = Bunker Cost in US$/bbl As a reference value, it was assumed a Pd=$20/bbl and Pb=$15/bbl, with a resulting cost of US¢3.2/kWh. In order to get a marginal system cost for reference purposes, it was assumed a scenario of non-guaranteed exports in the range of 30 GWh/month for 1986-1990. The corresponding yearly demands in GWh become: 1987 1988 1989 1990 Internal Demand 1,350 1,440 1,530 1,640 Exports 360 360 360 360 Total Demand 1,710 1,800 1,890 2,C00 In years 1986 and 1987, the probability of having to use thermal generation for supply purposes is practically zero. In the 1988-1990 period, the probability of a dry year, together with the corresponding thermal cost, is around 35% based on SOFRELEC data. In consequence, the expected marginal energy cost has the following structure: 1986 1987 1988 1989 1990 Thermal Cost (USC/kWh) a/ 0 (1) 0 (1) 3.2(.35) 3.2(.35) 3.2(.35) a/ Values in parentheses indicate the probability of a dry year. The resulting time-weighed expected marginal cost for the period under study is therefore only about USO.6¢/kWh. - 56 - Annex 3 Page 4 of 5 In relation to generation capacity cost, the large reserve margin mentioned earlier shows that there will be excess peaking capacity in the near future. If thermal plants are not mothballed or taken out of service, the marginal capacity cost corresponds to the fixed O&M cost of these thermal plants, which is around US$15/kW-year. Network Costs As an appropriation to line and transformation costs, it was calculated incremental values based on ENEE's investment program as shown in the following tables: 1986 1987 1988 1989 1990 Transmission (Million US$) 23 12 1.8 0.7 0.7 Distribution (Million US$) 6.4 6.5 8.3 7.3 8.6 Peak Demand (MW) 236 251 265 282 300 Increment (MW) 15 15 14 17 18 The resulting NPV as of 1986 at 10% discount rate are: Transmission Distribution Investments (US$ Million) 36.4 30.5 Load Increments (MW) 65.3 65.3 Average Investment ($/kW) 557 467 Useful life (years) 25 20 Annualized Investment ($kW-year) 56 50 Annual O&M as % of Investment Cost 3 5 Annual O&M cost ($/kW-year) 17 23 Total Annual Cost ($/kW-year) 73 73 These figures present broad averages over the 1986-1990 period but they disguise intertemporal variations, as in the case of transmission costs, and scale economies, as in the case of distribution costs. In the transmission case, marginal cost is nil in the 1988-1990 period as the main 230 kV network will need no additional reinforcements in those years. However, the resulting costs are not out of line with comparable values obtained in other countries and can serve as a guideline for cost values obtained by SOFRELEC; the latter are calculated using essentially the same approach and are the weakest element in the study. ENEE has the elements to perform a much better approximation, especially in reference to distribution costs. Load Characteristics In order to obtain reference costs it is necessary to know how load is distributed during the day and how the different customer classes contribute to it. The load curve presents a morning peak (1000 hrs) and an evening peak (1900 hrs) and can be characterized by a set of "full" hours (0600-2200) and a set of "slack" hours (all other times) during a - 57 - Annex 3 Page 5 of 5 typical workday. Saturdays and Sundays present 10 and 4 full hours, respectively. This works out to approximately 4,760 full hours and 4,000 slack hours per year. As to the different customer classes, approximate load distribution is as follows: % of Energy Used Full Hours Slack Hours Residential 68 32 Commercial 68 32 Industrial 81 19 1986-1990 Reference Costs Based upon the preceding calculations, the reference costs for project evaluation or tariff structuring become: ENEE 1986-1990 REFERENCE COSTS Energy US¢/kWH Demand $/kW-year Ceneration 0.6 15 Transmission: Cost -- 73 Losses (5X) 0.03 0.75 Subtransmission, Distribution Cost -- 73 Losses (10%) 0.06 9 Total 0.7 171 Based upon the aforementioned full/slack hour distribution, Low Voltage costs in US¢/kWh become: Full Hours: 0.07 + 17100/4760 = US4.3I/kWh Slack Hours: US0.070/kWh By consumer class, these low voltage costs become: Sector Residential Commercial Industrial Cost (US¢/kWh) 3.15 3.15 3.62 - 58 - Annex 4 Page 1 of 2 TEXACO REFINERY ECONOMICS, 1985 The cost of purchasing and processing the crude oil in the Texaco refinery was compared with the alternative of importing directly those petroleum products. The analysis covers the following: Total Volume of Crude Imports in 1985 (Mbbl) Venezuelan 1,996 Mexican 606 Refinery Yield from the 1985 Crude Imports Mogas 95 186 Mogas 87 235 Kerosene 221 Avjet 35 Diesel 964 Fuel Oil 878 LPG 27 CIF Crude and Product Import Cost in 1985 a/ (US$/bbl) c.i.f. Venezuelan Reconstituted Crude b/ 30.74 Mexican Crude 28.56 Mogas 95 36.13 Mogas 87 34*37 Kerosene 35.81 Avjet 35.81 Diesel 35.18 Fuel Oil 22.50 LPG (bbl equivalent) 32.00 a/ CAP estimates. b/ A blend of Ceuta crude oil to which is added kerosene and diesel to reduce the fuel oil yield in the refinery operation. By taking into consideration the total volume of crude imports, the refinery yield, and the cost of importing both crude and products directly as indicated above, it was determined that in 1985, the cif cost of importing crude was actually higher than importing final products. In Annex 4 Page 2 of 2 1985, Honduras spent about US$78.7 million for importing crude. If Honduras had chosen to import products directly instead of processing them domestically, the import bill would have been slightly less at US$78.5 million as shown below. Total Crude and Product Import Costs - 1985 (Us$'000) Venezuelan Reconstituted 61,357 Mexican 17,307 Total c.i.f. crude oil import costs 78,664 Mogas 95 6,720 Mogas 87 8,077 Kerosene 7,914 Avjet 1,253 Diesel 33,914 Fuel Oil 19,755 LPG 864 Total c.i.f. petroleum product costs, instead of processing domestically 78,497 For 1985, it can be concluded that the GOH could have saved almost US$7.2 million by shutting down the refinery and importing the petroleum products directly. A net differential of US$167t,O was determined by comparing the direct cost of importing crude and equivalent final products. In addition, the refinery' e operating costs were considered, including the 20Z guaranteed rate of return on investment, and the facility maintenance and tetminal costs which would have to be paid even if the refinery were shut down. US$'000 Net Differential 167 Operating Costs 5,800 Return on Investment (20%) 3,200 Total Differential 9,167 Facility Maintenance and Terminal Costs 2,000 Saving with Refinery Shut Down 7,167 - 60 - Annex 5 Page 1 of 2 CENTRAL GOVERNMENT REVENUES FROM CRUDE OIL AND PETROLEUM PRODUCT OPERATIONS 1985 1. Indirect Taxes (a) Crude oil (2.602 million bbl imported) Million US$ Decree 54-81 4.40 Decree 85-84 3.93 Subtotal 8.33 (b) Product imports (1.985 million bbl) Gasoline tax 3.00 Diesel Tax 1.20 Other (consular tax) 5.2 Decree 54-81 7.7 Customs Fees 3.4 Subtotal 20.5 (c) Consumption tax Tax (US$/bbl) 1985 Demand M/bbl Gas 95 8.54 442.68 3.78 Gas 86 8.05 383.99 3.09 Kerosene 0.30 288.64 0.09 Jet Fuel 0.30 330.00 0.10 Diesel 1.05 2,040.83 2.14 Fuel Oil 0.14 762.82 0.11 Subtotal 9.31 (d) Total indirect taxes: 38.14 Annex 5 Page 2 of 2 2. Additional revenue from the price differential (Y - X) of petroleum products refined in Honduras (a) As estimated by the mission: x y R o------- Refinery -----o--------------------…o------------o X = Crude oil price ar.d refinery margin + guaranteed return on investment Y = Retail price - consumption tax - transport cost - distribution margin R = Retail price Additional Total Gas 95 Gas 86 Kerosene Diesel Revenue Y (US$/bbl) 67.41 63.97 42.21 42.11 X (US$/bbl) 36.13 34.37 35.81 35.18 Differential (US$/bbl) 31.28 29.60 6.40 6.93 Refinery Production (bbl) 186,000 235,000 221,000 964,000 Surplus (million US$) 5.82 6.96 1.41 6.67 20.86 (b) As accounted by the Central Bank: US$5.5 million. 3. To arrive at the US$5.5 million deposited in the Central Bank, Honduras had to purchase petroleum products from the refinery at US$45/bbl on average. (Y- Xd)Ql + (Y2 - X2)Q2 + ---(Yn - Xn)Qn = US$5.5 million (67.41 - X) 186,000 + (63.97 - X) 235,000 + (42.21 - X) 221,000 + (42.11 - X) 964,000 = US$5.5 million, when X = US$45/bbl - 62 - Annex 6 Page 1 of 2 PRELIMINARY PIPELINE ECONOMICS Puerto Cortes - San Pedro Sula The internal rate of return calculation at 31% used the following assumptions: Distance, km 40 Capital Cost, US$ thousand 8,000 Project Life, years 20 Road Transport Cost L/US gal/100 km, 0.05 Petroleum Product Demand Growth Rate, % 2.1 Discount Rate, Z 12.0 Capital Cost Breakdown US$ million Pipeline, 40 km 2.5 Right of way and land costs 2.5 Terminal Tankage, 70,000 bbls 1.4 Loading Facilities, Instrumentation, Buildings, Safety Equipment 1.6 8.0 Operating Cost Breakdown: Thousand US$/year Maintenance (3% of investment) 240 Operating Labor 120 Management and Overhead 140 500 - 63 - Annex 6 Page 2 of 2 CASH FLOW Petr. Prod. Road Transport Total Road Pipeline Year Volume Cost Transport Cost Operating Cost Cash Flow (Mbbl/yr) (USS/Mbbl) a/ (USS'O0O) (USS'OOO) (USS'000) 1985 4,178 598 2,498 500 -- 1986 4,266 616 2,627 515 -4,000 1987 4,355 634 2,763 530 -4,000 1988 4,447 653 2,906 546 2,359 1989 4,540 673 3,056 563 2,493 1990 4,636 693 3,214 580 2,634 1991 4,733 714 3,379 597 2,782 1992 4,832 735 3,554 615 2,939 1993 4,934 758 3,737 633 3,104 1994 5,037 780 3,930 652 3,278 1995 5,143 804 4,133 672 3,461 1996 5,251 828 4,347 692 3,655 1997 5,361 853 4,571 713 3,858 1998 5,474 878 4,807 734 4,073 1999 5,589 905 5,055 756 4,299 2000 5,706 932 5,316 779 4,537 2001 5,826 960 5,591 802 4,788 2002 5,948 988 5,879 826 5,053 2003 6,073 1,018 6,183 851 5,332 2004 6,201 1,049 6,502 877 5,626 2005 6,331 1,080 6,838 903 5,935 2006 6,464 1,112 7,191 930 6,261 a/ Takes into consideration an inflation of 3% p.a. - 64 - Annex 7 Page 1 of 5 PROPOSED ENEE DISTRIBUTION PROJECT Background ENEE intends to obtain a loan in order to finance future investments, mainly in the area of subtransmission and distribution during the 1986-1990 period. The project consists of the following investments: US$ Million Transmission 3.4 Distribution 31.5 Other Investments 3.0 Total 37*9 The values quoted above include contingencies and exclude price escalation as well as financial costs. The project is oriented towards incorporating new users to the system in urban areas as well as remodelling distribution circuits. The transmission component is associated with some elements necessary to channel El Caj6n energy to the IS. Other investments refer to general equipment (vehicles, maintenance elements). As such, the project can be visualized as being oriented towards opening new markets for surplus energy; in the project brief prepared by ENEE there is also an emphasis on loss reduction measures that would not be justified given the low cost of energy at least until 1990. Project Investment Plan: the following is a tentative investment schedule that may vary according to short term demands and the typical difficulty of planning distribution in any detail o.. a long or medium term basis. Investment Plan (US$ Million) Year 1986 1987 1988 1989 1990 Transmission 0.08 0.077 1.8 0.74 0.74 Distribution 0.8 6.5 8.3 7.3 8.6 The proposed outlays account for 100% of ENEE's distribution investments in the 1987-1990 period. Economic Evaluation An economic evaluation of the project was undertaken using the following assumptions: - 65 - Annex 7 Page 2 of 5 (a) The analysis was limited to the distribution component that accounts for the major disbursements; also, the transmission component has a more ancillary character and cannot be considered a "project" by itself. (b) Project benefits were identified as the producer and consumer surpluses that would be associated to the additional consumption made possible by the distribution investments. (c) Most beneficiaries are assumed to be residential or commercial and that new industrial users can probably finance their connections to the distribution network. Although, as noted above, the distribution project outlays account for all ENEE investment in this area during 1987-1990, it was assumed that there is a portion of new users that can be incorporated to the network without having to depend on the project itself. New users to be incorporated into the system as well as those associated with the project are as follows: Year 1986 1987 1988 1989 1990 Total new users 12,000 13,000 14,000 15,000 17,000 % associated to the project 20 60 80 80 80 New users of the project 2,400 7,800 11,200 12,000 13,600 Accumulated new users 2,400 10,200 21,400 33,400 47,000 GWh consumption a/ 6.7 29 60 94 132 Full Hours GWh 4.6 20 41 64 90 Slack Hours GWh 2.1 9 19 30 42 a/ Based on a mean residential/commercial consumption of 2800 kWh per year. For years 1991-2006 it was assumed that consumption will remain constant at 132 CWh/year. Costs associated to the new users, apart from the distribution investments themselves, are those calculated in Annex 2.1 for the 1986-1990 period excluding the distribution component: Full Hours (US¢/kWh): 0.63 + 8,875/4,760 = 2.5 Slack Hours (US¢/kWh): 0.63 For the 1991-2006 period, these costs change due to the addition of new generation. It was assumed the following values for this period. - 66 - Annex 7 Page 3 of 5 1991-2006 Costs US¢/kWh US$/kW-year Generation 3.2 a/ 70 b/ Transmission Costs -- 73 Losses (5%) 0.2 3.5 Totals 3.4 146.5 a/ Bunker-burning diesels b/ Combustion Turbines With these values the corresponding costs of service down to the transmission level for 1991-2006 are approximately Full Hours: 3.4 + 14650/4760 = US6.5C/kWh Slack Hours: US3.40/kWh Project costs, excluding investments in distribution, become: Year 1986 1987 1988 1989 1990 1991-2006 Costs in US$ million: 0.12 0.50 1.03 1.60 2.25 5.85 Slack Hours 0.01 0.06 0.12 0.19 0.26 1.43 Total 0.13 0.56 1.15 1.79 2.51 7.28 A rate of return can now be calculated for KNEE using net profits (producers' surplus) as the measure of benefits: Year 1986 1987 1988 1989 1990 1990-2006 Sales (US$ Million) 0.59 2.56 5.29 8.29 11.6 11.6 Investment (US$ Million) 0.8 6.5 8.3 7.3 8.6 0.0 Costs (US$ Million) 0.13 0.56 1.15 1.79 2.51 7.28 Net Profit (0.34) (4.5) (4.16) (0.8) 0.49 4.32 The resulting rate of return is 25%, a very high value due to the low costs in the initial years of operation. If consumers' surplus is taken into account as an additional benefit, the rate of return is even higher: assuming a -0.5 price elasticity of demand, consumers' surplus becomes approximately equal to sales. The corresponding rate of return would be higher than 502. These calculations show that, within the allowable precision of such estimates, the project is viable and profitable for ENEE. The principal critique addressed to the project concerns the drain it places on the country's resources and the fragility of ENEE's finances. With respect to the former, the problem lies in allocating - 67 - Annex 7 Page 4 of 5 resources at a country-wide level and the priority of extending electrical service vis-a-vis other demands in different (non-energy) sectors; as such the problem lies outside the bounds of this analysis. Concerning the second factor, the following considerations must be taken into account: (a) Distribution investments, although usually relegated to a secondary role as far as planning is concerned, lie at the center of an electrical utility's business and ENEE is no exception: demands for service have to be answered sooner or later and a scenario where distribution outlays are scrapped for an extended period of time is practically inconceivable; at most, these investments can be marginally delayed. (b) In a country like Honduras with excass energy and a low degree of service coverage everything (i.e., common sense and marginal costs) points towards promoting consuh.ption. (c) The large expenditures associated with El Caj6n have made the electrical sector a scapegoat for consuming limitless resources. Whatever the a posteriori regrets for having constructed a 300 MW plant in a 200 MW system, such costs are sunk and should not hinder rational decision making at present. Notwithstanding the preceding arguments, a question that must be answered is whether the distribution project has a substantial impact on ENEE's finances and whether delaying it could provide a way towards solving the company's problems. The main effect of a delay in the project would be to change the sources and uses of funds statement. The following table provides a comparison between the net cash flow with the project vs. the net cash flow with a two year delay. CASH FLOW COMPARISON (Values in USS Million) 1986 1987 1988 1989 1990 Current Projection (Table E-2) (57) (31) (14) (8) (55) Two Year Delay: I-Change in internal Cash Generation: Increinental Sales (current) 0,59 2,56 5.29 8,29 11.60 Incremental Sales (delayed) 0,59 2.56 5.29 Net Change (0.59) (2.56) (4.7) (5.73) (6.31) 2-Change in Investment Program Current Investment Program 6.4 6.5 8.3 7.3 8.6 Delayed Program 5.6 0 0,8 6.5 8.3 Net Change 0.8 6,5 7.5 0.8 0.3 Funds Released by Delay 0,2 3,9 2,8 (4,9) (6.0) Percent of Current Projection 0.3 13 20 (60) (11) - 68 - Annex 7 Page 5 of 5 This is only a rough approximation to the total effects of the project on ENEE's financial statements: depreciation, operating cost and debt service effects have been neglected. However, it shows how a 2-year delay of the project would have a relatively mild effect on ENEE's cash flow in the near future: at most it would release US$3.9 million in 1987 that would reduce the cash flow deficit by 13%. It would also create a cash flow problem in the future, as evidenced by the negative released funds in 1989 and 1990. The conclusion is that delaying the project will not solve ENEE's financial problems insofar as sources and uses of funds are concerned. - 69 - Annex 8 Page 1 of 3 ENEE'S FINANCIAL ANALYSIS The analysis was based on ENEE's proforma financial state- ments. They were compared to current projections as of January 1986 and found no significant differences in ENEE's assumptions. In particular, concerning revenues, ENEE's financial analysis assume slightly higher sales (5% to 10% more) than the planning department. The statements also project exceedingly high exports to other countries (e.g., 760 GWh in 1986 equivalent to 65% of internal sales and equal to an average of 87 MW which exceeds the mean interconnection capacity); they also assume that the government agencies will start paying their bills punctually starting in 1986. These three factors lead to overly optimistic financial projections and, at least for planning purposes, a more conservative approach would be more reasonable. In order to correct for ENEE's assumptions, the proforma financial statements prepared used the planning department's projected sales, no government-related sales revenues and lower exports. The latter are lower than the values used in the marginal cost analysis (200- 250 Glh vs. 360 GWh) in order not to rely on excessively optimistic estimates. The differences between ENEE's assumptions and the estimated figures are the following: 1986 1987 1988 1989 1990 Internal Sales (GWh) 1,101) 1,170 1,240 1,330 1,420 Corrected Figure 1,126 1,183 1,254 1,345 1,436 Exports (GWh) ENEE projection 763 672 555 431 303 Corrected Amount 200 200 250 250 250 Tables 1 and 2 show simplified projections for Revenue and Cash Flow Statements using the alternative assumptions. - 70 - Annex 8 Page 2 of 3 Table 1: ENEE--PRO FORMA REVENUE STATEMENT 1986 1987 1988 1989 1990 Sales (GWh) Interconnected system 1100 1170 1240 1330 1420 Isolatad Systems 26 13 14 15 16 Exports 200 200 250 250 250 Unit Prices (USSOOOhWh) Interconnected system 88.2 88.2 83,2 88.2 88.2 Isolated Systems 173 173 173 173 173 Exports 39 39 39 39 39 Revenues (US$ million) Interconnected system 97 103 109 117 125 Isolated systems 4.5 2 2 3 3 Exports 8 8 10 10 10 Other Revenues 0.4 0.5 0.5 0.5 0.5 Fuel Clause AdJustment (6) (15) Government Bills (5) (5.3) (5.6) (6) (6.3) Total Revenue 105 108 116 119 117 Expenses Charged to Income (USS million) Operations 34 32 34 37 39 Depreciation 35 38 43 48 50 Interest 41 37 35 33 31 Total Expenses 110 107 112 118 120 Net Income Excluding Interest 36 38 39 34 28 Including Interest (5) 1 4 1 (3) Fixed Assets in Operation (USS million): 748 1174 1260 1363 1454 Rate of Return from operations C%): 4.8 3e2 3.1 2,5 1.9 - 71 - Annex 8 Page 3 of 3 Table 2: ENEE--SOURCES AND USES OF FUNDS STATEMENT (USS million) 1986 1987 1988 1989 1990 Assured Sources of Funds a/ Income Before Interest 36 38 39 34 28 Depreciation 35 38 43 48 50 Total Internal Cash Generated 71 76 82 82 78 Uses of Funds b/ Debt Service 91 85 81 78 81 Investments: Generation 1.2 0 0 0 38 Transmission 23 12 1.8 0.7 0.7 Distribution 6.4 6.5 8.3 7.3 8.6 Other 5.6 3.1 4.5 3.5 4 Total Investment 37 22 15 12 52 Total Uses of Funds 128 107 96 90 133 Net Cash Flow (57) (31) (14) (8) (55) Contribution to Investment USS Million 0 0 1 4 3 As Percent of Investment 0 0 7 33 6 a/ Excludes sources stemming from assets or funds contributed by users (e.g. urban developers). 0/ Excludes increases in working capital. - 72 - Annex 9 Page 1 of 6 RURAL ELECTRIFICATION: RESULTS OF THE 62 PROJECTS EVALUATED AND METHODOLOGY The benefit/cost evaluation of electrification projects has been made using the basic parameters applied to the following studies in Honduras: "Estudio TUcnico-Econ6mico Linea de Transmisi6n La Florida- Copan Ruinas" and "Estudio Tecnico-Econ6mico Electrificaci6n de Ocotepeque." For long range projection of the residential demand, unit consumptions and percentages of new connections on the same basis as similar regions in other countries have been used (e.g., Paraguay, Costa Rica, Ecuador). (a) Physical Quantities Potential Users: According to estimations obtained from projections of the 1974 census data. 34.5 kV line lengths: according to geographic maps on 1:50000 scale. 220/110 v circuits lengths: 20 m per urban user and 150 m per rural user. Transformer capacity: 0.400 KVA per user. Luminaries: 1/100 m of secondary circuit. (b) Unit Prices (Market prices US$1985) 34.5 kV lines: US$13,000/km 220/110 kV secondary circuit: US$9,000/km Distribution Transformer: US$60/KVA Luminaries: US$85/unit Meters and connection: US$32/unit (c) Residential Users, Unit Consumption and Unit Benefits The residential unit conLwumption was estimated with 2% annual increase and equal to the 65% of the expected consumption in similar areas in other countries (e.g., Paraguay) due to the lower income in rural Honduras. The benefits were estimated with a tariff of USO.10/kWh and US$0.22/KWh of old user's substitution benefit, with the following results: - 73 - Annex 9 Page 2 of 6 ESTIMATED BENEFITS NEW USERS OLD USERS SUBSTITUTION ADOITIONAL CONSUMPTION Year Connection Consumption Benefit Consumption Benefit Consumption Benefit X (Kwh/user) (USS/user) (Kwh/user) (USS/user) (Kwh/user) (USS/user) 50 490 79 800 176 205 26 3 60 840 172 800 176 300 41 5 70 1005 227 800 176 395 59 10 80 1100 261 800 176 520 86 15 80 1195 298 800 176 665 122 Source: World Bank estimates. (d) Total Consumption and Benefits Total consumption was estimated as follows: Present self-generation: 25% of users Commercial consumption: 13% of residential Industrial consumption: 10% of residential Public lighting: 145 kWh/potential user/year Total benefits consist of estimated residential, commercial, industrial and public lighting benefits. Residential benefits were estimated according to the "willingness to pay" theory, commercial and public lighting benefits were calculated with the same unit benefit per kWh as residential benefits and industrial benefits as the equivalent to the selfgeneration substitution (US22¢/kWh). (e) Total Cost and Net Benefits Total cost was estimated adding to the investment cost together with operation and maintenance cost calculated as follows: Subtransmission lines--1.5% p.a. of investment Distribution Billing --- US$ 5/user/year Administration --- US$ 5/user/year Maintenance --- US$10/user/year Total US$20/user/year 74 Annex 9 Page 3 of 6 The energy cost was estimated with 12% energy losses and US5.5¢/kWh as the LRMC after the fourth year of operation; (USO¢/kWh for the first four years due to the surplus energy in the interconnected system). The economic rate of return was estimated with the corres- ponding stream of net benefits during its 25 years of useful life but maintaining the benefits constant after year 15 (the usual design life of the projects). The shadow pricing factors used were 0.5 for domestic non-skilled labor and 1.4 for exchange rate. VILLAGE ELECTRIFICATION PROJECTS ProJe':t Potential Subtrans. Distrib. Transf. Luminaries Investment Unit Invest- Internal Conpetttive Users Lines Clrcults Capacity No. Cost ment cost rate of Electrificatton NO. km km KVA USS x 103 USS Return Alternative a/ _a/ b/ SOUTHERN REGION Choluteca 1 562 25 11.3 225 113 468 833 High Chotuteca 2 336 23 6.7 135 67 384 1142 Medlim Small l4dro Choluteca 3 1468 S0 2).7 600 297 1026 690 Hlqh Valle 1 690 37 14.3 275 143 660 957 High Valle 2 460 29 8.2 185 82 463 1051 Medium TOTAL 3536 164 70.2 1420 702 3021 854 LA HIGH FRIORITY 2740 112 55.3 1100 553 2154 786 1 CENTRAL WESTERN REGION La Paz 1 166 14 3.3 70 33 224 1350 Medium Small Hydro La Paz 2 168 15 3.4 70 34 238 1417 Medt m Snall Hydro or Diesel La Paz 3-1 206 15 4.1 85 41 249 1206 Medium Smell FtVdro La Paz 3-2 112 11 2.2 45 22 171 1526 LOW Small Hrdro or Diesel La Paz 3-3 140 la 2.8 60 28 270 1926 LOw Small HVdro or Olesel La Paz 3-4 205 43 4.2 90 42 612 2987 Low Small Hvdro or Dlesel La Paz 4-1 287 17 5.8 tl5 58 294 1025 Medimu La Paz 4-2 146 17 2.9 60 29 258 1766 LOW Small *ydro or Dlesel Intibuca 100 8 2.1 40 21 130 1300 MedIum Small *tdro Inttbuca 2 50 25 1.0 20 10 337 6753 LoW Small Hydro or Diesel Intibu a tO40 86 21.6 415 216 1389 1336 NedIuIm Small Hdro TOTAL 2620 269 53.4 1070 534 4172 1592 x HIGH PRIORITY --- -- --- --- __ 0 a/ Invstment cost at mrket prices (mld-1985). b/ High: more than 12%; Medium 7-12%; Low: less than 7%. Project Potential Subtrans. Di strIb. Transf. Luminarles Investment Unit Invest- Internal Competitive Users Lines Circuits Capacity No. Cost ment cost rate of Electrification No. km km KVA USS x 1o3 USS Return Alternative a/ a/ b/ NORTHERN REGION Cortes 1-1 583 23 11.8 240 tl8 448 769 Hlgh Cortes 1-2 167 3.9 70 39 334 2000 Le LoW Small l*dro or Diesel Sta. Barbara 1 2309 29 46.1 925 461 960 416 High Sta. Barbara 2-1 1271 58 25.4 500 254 1075 846 High Sta. Barbara 2-2 50 10 1.0 20 10 143 2854 LOeW Small Hiydro or Diesel Sta. Barbara 3 641 26 12.7 260 127 499 779 Hlqh Sta. Barbara 4 179 9 3.6 70 36 163 907 High Sta. Barbara 5 319 10 6.4 130 64 211 662 High TOTAL 5519 187 110.9 2215 1109 3833 695 HIGH PRIORITY 5302 155 106.0 2125 1060 3356 633 ATLANTIC LITORAL REGION Colon 1 229 50 4.5 90 45 707 3087 LoW Small Hydro or Diesel Colon 2 100 8 2.0 40 20 129 1290 Medium Small Hydro Atlantida 1 622 5 12.4 250 124 222 357 NORTHERNS REGION Yoro 1 973 40 7.0 390 70 643 661 High Yoro 2 1250 45 24.4 500 244 895 716 Hlgh Clancho 1-1 1543 70 30.8 620 309 1300 843 High 1 > Olancho 1-2 332 30 6.7 135 67 475 1430 Medium Small Hydro or DOesel t3 Olmncho 2 164 12 3.3 65 33 198 1205 Medum Small Hydro Olancho 3-1 755 22 15.1 300 151 477 632 Hiqh X Olancho 3-2 308 45 6.2 125 62 663 2154 Low Small Hydro or Diesel 0 Olancho 4 83 13 1.6 35 16 190 2283 Los Small Hydro or Dlesel TOTAL 5408 277 95.2 2170 952 4841 895 HIGH PRIORITY 4521 177 77.4 1810 774 3315 754 Project Potentlal Subtrans. DistrIb. Transt. Lwulnarles InvestMent Unit Invest- Internal Competitlve Users Lines Circuits Capacity No. Cost cent cost rate of Electrlflcatlon No. km km KVA US$ x 10 USS Return Alternative a/a/ b_ CENTRAL EASTERN REGI ON Fco. Morazan 1-1 454 34 9.0 200 90 557 1227 Medium Small Hldro Fco. Norazan 1-2 91 9 1.8 40 18 140 1539 La$ Smil Hydro or Dlesel Fco. Morazan 2 223 19 4.8 90 48 313 1045 MIdimu Small Hydro Fco. Morazan 3-1 1515 42 30.2 600 302 928 613 HIgh Fco. Morazan 3-2 173 18 3.4 70 34 277 1603 Lw Seall HRdro or Diesel Fco. Morazan 4 908 48 18.1 370 181 853 940 High Fco. Morazan 5-1 84 11 1.7 35 17 165 1976 Law Smll lHdro or Diesel Fco. Morazan 5-2 80 18 1.6 35 16 254 3t80 LW Small Hydro or Diesel El Paroalso I El Peralso 2 326 30 6.5 130 65 472 1449 Meditu Smll ldro El Paralso 3-1 471 43 9.5 190 95 679 1442 Medium Small Hydro El Paralso 3-2 99 22 2.0 40 20 3'1 3144 LOW 5ii Hfdro or Dtesel El Paralso 4-t 890 33 17.8 360 178 654 736 High El Paralso 5 832 51 16.6 335 166 873 1050 Medlium El Peralso 6-1 769 52 12.0 310 120 837 1089 Medium S El Paralso 6-2 135 16 2.7 55 27 242 1794 Law Small Hldro or Diesel TOTAL 7492 490 146.5 3040 1465 7955 1062 HIGH PRIORITY 3755 145 174.9 1S10 749 2835 755 WESTERN REGION Lenpira 1 421 15 8.4 170 84 301 716 High Lenp Ira 2 288 29 5.8 115 58 450 1563 Lw Small Hfdro or Diesel Leappira 3 1434 201 27.0 540 270 2954 2200 Lcw Small Oldro or Diosel Lenpira 4 962 62 19.2 385 192 1049 1090 Medium Octcpeque 1 3615 130 39.0 1445 390 2276 630 Hlgh Octcpeque 2 263 20 5.3 105 53 327 1243 ledIum Small IHydro Octopeque 3 346 13 4.9 140 49 237 684 High Octcpeque 4 721 38 14.3 290 143 675 937 High Copan 1 1490 59 29.7 600 297 1143 767 High Ccpan 2 287 16 4.7 115 47 270 942 High TOTAL 9737 583 158.3 3905 1583 9682 994 HIGH PRIORITY 6880 271 101.0 2760 1010 4902 713 GRAND TOTAL 35263 2033 653.4 14200 6534 34562 HIGH PRIORITY 23820 865 427 9555 4270 16784 - 78 - Annex 10 ORGANIZATION OF THE ENERGY SECTOR IN HONDURAS EOOI C~ CAINET SECPLAN SEOOPT ~~~~MRN ME COHIDEFOR ENEE G4 1/Also under the Minister of Hacienda y Cr6dito Ptiblico,, and the President of the Banco Central. HONDURAS 1984 Basic Energy Flow (roe x 1O0) Statistical | Adjustrrents AgWAnVlL HWdroenergy 92 _ 7 5 Sector 235 ~ ~ ~ ~ ~_ , 6 / ~~~~CagsTcImports 3 tc \ Statisical__ dsrl Stock Charges TX S Acqustmen Consumption E6xp.rts 108 ~~ ~~14 31.M __ Bame 1l 1C _ _ 106~ ~ ~ ~~~~ol Bn-03 / H O N D U R A S MIWN SEDIMENTARY BASINS Basin boundares + Eporatory wells A Reported oil or gas shows C Oil seeps and geochemical analysis locaos I s~~~~~~~~~~~~~~ AsphW tsows B E L I Z E Unauthenticated repots of seeplshows * * Natlona cepipd -tTmaHol bodmclbs | / \ / ~~~~~~~~~~~~~~~~7EfA BASIN < -+\ BASIN ~ ~ ~ ~ ~ ~ ~ +++ . AMADQUE \ / + + + > / + + GUP+TE +t/n MOSQUIMIA BASIN + GU6-. LL +. g ~~~~~~ULUA-OLANCHO BASIN /+/ 0 ~~~~~~~~~~~~+ 9\~~~ ( 0t/ |* + + / AG~ ~~ S \+\ BASIN / 1,4T e)ucigalpa + 14 )-'- 2 ~~~~~~~~~~~~~N I C A R A G U A/ EL SALVADOR 10 50 150 ICtLOMtETERS ¢E>tt.<+ C ~~~~~~~~~~~~~~~~~~~~~~~~~~~~o, *eAO, b- #e- uSecl of -r w _ t_ 88a *'__-_---- --'---- &t' - B BEtlE s i, 4 , D US~E - I ___ .bi *^>_____ r, ~< _ .-. .- . . < g; v , \ < > <- 1J 4 > = .C.>- ., r cr Cib ( ~HONDURAS !Teguclgalpa 7~L& ~42-~~6>~>LAND USE 1 . ;t,, S w F C k S ~~~ ~3~' '~ 1XM o ag- . .t';i rL4_ :wo. . , 1 , - Scjrvubn -C .'%iS r~~~~- *. f> . r'zvo ;- x~'' * ;"zor V_ensc byj'('3 CA:, A~~~~ C,' ! 018+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ i jROATA -16- Puetlu Unlt6s E~~~~~~~~~~~~~~~~~~~~~~~~T L1 SALADR 5r4§o tmotnO CEiBA \ El Pvrvnfr .dE~~- e W_. seeA. Fla~~~~~~~~~~~~~ de nio ~~~~~~~~~~~~~~de Flores Son t~~~Cncpio e ai /ro eo6 IERD 19771 86' nas rpo am bdds rv or ~~~~~~~M EX I CO _r r i os hadh .rBr_ \ h~~ELIZE.D prd rv Lr5onatonol Ehnrnh /. _. J _ ~~~~~~~B E L I Z ED CEporoon nedS {GUATEMALA orr"pflbaotv onr (HONDURAS , ''' . =rwrpbrx os ~EL SALVADOR JNIICARAGUA ow.I~~~~~~~~c Lb - > " °> _ 1= '-< | ~~~~~~~~~~~~~~~~~~~~~~~~~~~G U A T E M A L A ;-.f 6 R ai A lpot E I SA A A D IO PREFT LEMPIRA , N ICARAGUA @ MainPods t t\ '^41 C*1/. @ NahonalCopital ni °~~-~4\ / / El HONDURAS ~ ~ ~~ 14 9 S__' S~~~~~~~~~~~~~~~~ae 86 d 4 Gravel~~~~~~~~~~~~~~~JN Roads 6 IBRD 20342 Ths nrap has oeen ptepered by The HbrAd Hak's staN 0ts"m* ' #rt~~~~~~~~~~~~~~~~~~~~~~h thtY& Caskrhtnit ofe.rs' to, tMe celoenetw of the t ,rtders t 's eocks'Meet to, tle .enOial uset oh rtA W,id eank F end the hWomiwtl tare MEXICO Co,pva"kon The desoonmat.fls 'Z!BELIZE u OMd Sod the bomdaes rio, I on ths -ap eo not e en the n _ I. ptat ot tw Wodd aanek ren thw ,GUATEMALA I hternwnkonal fsasce Corp,oats . HONDURAS _._ aot ludgatey eOn the keel status -1 _ of any tertory r ase i EL '. *Teguvc,qaIpa endorsement or arrepxtan of SALVADOR1, . rstw fts ) 6" - NICARAGUA COSTA RICA, J PANAMA * , B~~~~~~onito Orientalr I 0 __. 84° ''a ¶ ~' r b Cuyomel Juticalpa 'Piedros Amorillos HONDURAS INTERCONNECTED POWER SYSTEM AND PRELIMINARY IDENTIFICATION OF RURAL ELECTRIFICATION PROJECTS Future Existing Tronsmission Lines 3 * - 230 kV 140 138 kV 69 kV I' - J-------- 34.5 kV Power Plants: Hydroelectric 0 U Thermal * Substations Rural Electrificotion Projects: F2Z2~ Not to be connected to the main grid To be connected to the main grid * Community connected to the main grid 4 Order of investment priority Rivers National Capitol 0 2,5 __O 7,5 lOo_-_ _ Internotional Boundories KILOMETERS 86° 85° 8 4' 13 OCTOBER 1986