Another law — or the electricity sector reform Honduras needs

Electricity tariffs in Honduras are similar to those in other Central American countries, but the quality of service is lower (Figure 1). In 2025, the average Empresa Nacional de Energía Eléctrica (ENEE) customer experienced 165.5 hours without electricity— nearly seven full days without service— across 82 outages during the year (Comisión Reguladora de Energía Eléctrica [CREE], 2025). To put this in perspective, the average customer in El Salvador experienced just 8.7 hours without electricity in 2024 (Superintendencia General de Electricidad y Telecomunicaciones [SIGET], 2024). The contrast is stark: Hondurans pay electricity tariffs similar to those in El Salvador, but spend nearly nineteen times longer without serviceFootnote 1^[1].

The quality gap carries an additional economic cost that does not appear on any electricity bill. For firms, each hour without electricity means halted production and economic losses. In aggregate, these costs amount to $133.7 million per year for commercial and industrial sectors relative to El Salvador, and $100 million relative to GuatemalaFootnote 2^[2]. When the value of unserved energy is included, the effective cost of operating in Honduras rises considerably. For example, an industrial firm that in June 2025 paid a tariff of 17.95 USc/kWh faced an effective cost of between 20.8 and 21.7 USc/kWhFootnote 3^[3]. This is equivalent to a tariff surcharge of between 16% and 21% over comparable firms operating in Guatemala and El Salvador (Figure 2). For households, each outage also carries costs: spoiled food, lost hours of study or work, appliance damage, and additional expenses to secure backup power.

The problem is significant: 69% of firms reported experiencing power outages, the highest share in the region, compared with 54% in Guatemala, 51% in Costa Rica, and 21% in Panama (Figure 3). Facing this situation, some users invest in backup generation. Between 2015 and 2024, electricity generation equipment under 375 kW accounted for an average of 3.1% of Honduras's machinery and equipment imports, the highest share in Central America and nearly double the regional average (1.7%)Footnote 4^[4]. Those who cannot afford this option absorb outages directly in their operations, recording average losses of 2.4% of annual sales due to service interruptions— translating into lower productivity and profitability and becoming an entry barrier for new firms in several productive sectors (Figure 3). Power supply interruptions therefore produce several adverse effects on business activity: they raise investment and operating costs, reduce competitiveness, and send negative signals to potential investors.

The electricity sector's inefficiency is reflected in its losses: Honduras’s transmission and distribution losses are among the highest in Latin America and the highest in Central America. It is also one of the few cases where these losses increased over the last two decades (Figure 4). National data confirm the scale of the problem: in 2025, an estimated 38% of available energy was not billedFootnote 5^[5], representing more than $500 millionFootnote 6^[6] or 1.3% of GDP — thirteen times the level observed in Guatemala and El Salvador (IDB, 2024).

Approximately 63% of total losses are non-technical — associated with theft, fraud, and metering errors — and are concentrated mainly in distribution. The remainder are technical lossesFootnote 7^[7], largely attributable to deteriorated and insufficient infrastructure resulting from years of underinvestment (IMF, 2023). Adding to the problem, obtaining a new connection can take more than 200 days (Manitoba Hydro International, 2023), encouraging unauthorized connections to the grid or leading applicants to give up on the process altogether.

Losses are present in both urban and rural circuits across the country, though not with the same intensity. The losses are geographically concentrated: the Northwest Region accounts for 60% of all unbilled kWh nationwide, with Cortés department alone accounting for 41% of the national total. At the circuit level, 37 of 183 circuits account for more than half of all unbilled kWh (28 of them in the Northwest). Notably, this pattern persists over time: 69% of the circuits with the highest losses in 2021 remain among the highest-loss circuits in 2025Footnote 8^[8] (Figure 5). This suggests that, in the absence of effective interventions, losses are not only sustained but tend to become entrenched and harder to reverse.

Beyond unbilled energy, ENEE also struggles to collect payments for a significant share of the electricity it does bill. In May 2026, ENEE reported accumulated arrears of $756 million, equivalent to nearly six months of billing, of which 87% was more than 120 days overdue (ENEE, 2026a). Breaking this down by customer type, the State itself is part of the problem: 26% of the oldest arrears — around $171 million — correspond to autonomous state entities, the central government and municipalities.

Between what is not billed and what is not collected, the system monetizes only a fraction of the energy it delivers. No firm in any sector could operate sustainably under these conditions. This creates a permanent fiscal gap for the ENEE and, by extension, for the State.

Every unit of electricity that is lost or not paid for creates a financial gap. Month after month, ENEE pays for electricity it cannot recover through revenues, generating a persistent deficit (Figure 6). To finance this shortfall, ENEE issues public debt — generally backed by central government guarantees— which has grown to more than $4.5 billion over the past decade, according to records as of April 2026. This is equivalent to one-quarter of Non-Financial Public Sector debt (Figure 7) or 11% of GDP. Given its scale, this debt has become a matter of national fiscal and financial concernFootnote 9^[9].

ENEE’s arrears to private electricity generators average 10 monthsFootnote 10^[10]. To address these arrears, the State has issued debt to its suppliers: each issuance provides 12 to 18 months relief, increasing the long-term debt burden without meaningfully reducing short-term obligations. As of April 2026, outstanding liabilities to suppliers exceeded $920 million, higher than the debt issued in 2017 and 2020Footnote 11^[11] (ENEE, 2026b) (Figure 8). This has created both a liquidity and a solvency problem, making it increasingly difficult for the ENEE to raise financing on its own and forcing the government to act as guarantor or provide financing directly.

Under what conditions does ENEE buy energy from generators, and how does this mechanism deepen its deficit? Two features of the system point to higher energy purchase costs: the small number of successful competitive tenders for generation contracts and an excessive dependence on fast-installation non-renewable technologies. While these options address immediate supply needs, they carry higher and more volatile costs and have contributed to an energy matrix that remains excessively dependent on oil derivatives. Both factors raise energy costs above the levels that would be expected from a competitive, planned system.

In Honduras, competitive tenders have been rare and most ended with direct awardsFootnote 12^[12]. The standard approach —and the one required by lawFootnote 13^[13]— is to award contracts through competitive tenders in which several private generators compete for a long-term contract, allowing competition to reveal the lowest price the market can offer. The 2017 tender (LPI-No. 100-009/2017, 820 MW) illustrates the benefits of such a process: most contracts were awarded below the price cap, and where existing contracts were renewed, the new agreement secured lower pricesFootnote 14^[14].

Risk is also concentrated in a single insolvent buyer. ENEE is the sole counterparty for all generation contracts, so each generator prices at the risk of non-payment, delays, regulatory changes, or contract renegotiations — translating into higher costs across all the country's energy contracts. The recurring cancellation of tender processes and the reforms to those processes only deepens that risk perception (U.S. Department of State, 2023). The insolvency born of the deficit ends up making energy more expensive, further deepening the financial problem.

The absence of a steady pipeline of competitive contracting has forced ENEE to rely on costly short-term solutions as, the electricity generation deficit widens and existing contracts expireFootnote 19^[19]. To meet demand, ENEE has increasingly turned to the MEO (Mercado Eléctrico de Oportunidad, the spot market)Footnote 20^[20] and to emergency diesel generation leases.

The costs associated with these short-term solutions are significantly higher than those of technologies brought in through competitive long-term processes. For example, a leased diesel engine to address temporary deficits generates electricity at a levelized costFootnote 21^[21] close to 20 USc/kWh, versus roughly 6 USc/kWh for solar projectsFootnote 22^[22]. In 2025, 33% of acquired energy came from the MEO but accounted for 42% of total supply costs for the yearFootnote 23^[23], since the price per MWh was 26% higher than energy under contractFootnote 24^[24]. The difference is even more pronounced for thermal generation, whose MEO cost exceeded that of contracted thermal energy by 64% (Figure 9).

The MEO price tends to reflect the most expensive conditions in the system. Honduras still depends on thermal plants fueled by bunker and diesel — oil derivatives whose prices are determined in international markets and lie beyond the country’s control. When these plants are needed to cover demand, the cost of electricity rises for all generators selling in the spot marketFootnote 25^[25], including renewable producers. And when available supply falls short of meeting total demand, prices rise even further because the system also factors in the cost of the electricity that cannot be delivered.Footnote 26^[26]. As a result, hourly spot prices exceeded $0.40/kWh at various points between 2023 and 2024 — nearly double ENEE's average residential tariff in the capital ($0.21/kWh).

ENEE-owned hydroelectric plants reveal an additional system inefficiency by generating contradictory financial signals. These plants place their generation in the spot market and are settled at the system's marginal cost. Although their variable cost is nearly zero, that energy is paid at the market price. The difference becomes additional income for the ENEE and helps offset part of the distribution deficitFootnote 27^[27], while increasing the system's generation cost.

More efficient technologies require greater upfront investment but have lower variable costs and can use sources other than oil derivatives, offering better insulation from external shocks. In Honduras, however, the energy matrix remains insufficiently diversified (Figure 10). Sixty-seven percent of the electricity that can be guaranteed at peak demand (firm capacity) comes from thermal plants using oil derivatives, subject to international prices. When those prices rise, as in the recent period, generation costs rise with them, putting pressure on energy purchase prices (Sendas, 2026b). In addition, 25% of firm capacity comes from hydroelectric generation, subject to external weather factors, so nearly all the country's firm capacity depends on technologies vulnerable to conditions outside the electric system's control (Figure 11).

All of this deepens the deficit while reducing the space to invest in what would, at least in part, break the cycle of losses and costly short-term generation contracts. Without adequate investment, the grid neither expands to meet a growing demand nor does it receive the maintenance required to operate efficiently. As a result it becomes overloaded and deteriorates over time: the transmission grid expansion plan itself acknowledges that distribution circuits that are too long or overloaded increase technical losses and affect service quality (CND, 2025b). This longstanding challenge is serious — investment demands have only accumulated over the years. In 2008, the World Bank warned that deferring transmission investments forced demand to be met with costly diesel generation in congested zones (World Bank, 2008). The lack of investment thus ceases to be merely a consequence of the deficit and becomes one of its causes.

If the sector faced a list of independent problems, we would expect some indicators to improve while others worsen. What we observe is the opposite: losses increased while they fell across the region, debt multiplied, the deficit kept growing, and the critical circuits of four years ago are still critical today. The simultaneous deterioration across all dimensions is the signal of a self-reinforcing dynamic: no single component can improve sustainably while the others drag it back down.

The problem is not new and cannot be attributed to any single administration. Over the past thirty years, legal reforms, physical investment, commercial outsourcing, a public-private partnership, and state loss-reduction programs were all triedFootnote 28^[28]. Some produced partial improvements but none held beyond two administrations (Figure 12). Each attempt was absorbed by the same dynamic, sustained by three forces operating simultaneously.

First, there are actors who benefit from the status quo. There are financial incentives to engage in energy theft. Part of the non-technical losses involves facilitated diversion, and there is a market for "fixing" meters and irregular connections. In June 2026, nearly 200 listings of this nature were identified on Facebook Marketplace in Honduras, something that was not observed that same month in other Central American countries or in the Dominican RepublicFootnote 29^[29]. Sector actors and reports in digital media attest to the participation of ENEE personnel in these activities, revealing a fraud cycle that reproduces from within.

The obstacle is not the absence of law but shortcomings in its design and enforcement. Honduran law classifies electricity diversion as fraud (Decree 130-2017, art. 369), but this classification requires proving the volume of electricity stolen. Evidence of tampering with a meter is not sufficient. This evidentiary burden makes prosecution difficult, unlike legal frameworks that classify meter tampering as an independent offense (OLACDE, 2026). Multiple sector stakeholders agree that coordination between ENEE and the justice system is weak, that sanctions are rarely imposed, and that therefore payment culture has eroded. As long as the probability of sanction remains low, stealing electricity will remain a rational option for those who can.

The way generation has been contracted has not produced the best results. Energy costs are affected by how contracting is done. The legal and institutional framework has favored direct contract awards or processes that lack competition and transparency, increasing the likelihood of favoring politically-connected firms over selections made through open, competitive, and transparent processes (U.S. Department of State, 2023). Each emergency purchase and each direct renewal is a rent-seeking opportunity for those involved — and an incentive for competitive contracting flows not to be restored.

Second, the long-run overcharge remains hidden. By not recognizing losses above 15%, the tariff prevents system inefficiencies from being passed through to users. Yet excess losses generate a financial gap that forces ENEE to borrow to meet its obligations to electricity suppliers. That borrowing incurs financial costs that are also not covered by the tariff, since they do not form part of distribution activities and stem from inefficient management. As a result, financial pressure grows and the problem worsens over time.

Subsidies ease the pressure on consumers in the short run. Their poor design, however, has reduced payment incentives, generated extraordinary costs through poor targeting, and added administrative complexityFootnote 30^[30]. For its part, the borrowing process defers responsibility and shifts it to the future. Thus, the average Honduran does not face the burden in their bill, but does face it in poor service, a less dynamic economy, and fewer public goods and services as fiscal space narrows.

Meanwhile, firms with sufficient financial resources can shield themselves from the problem. They are able to invest in their own generation plants and reduce their exposure to poor service quality: according to the latest World Bank Enterprise Survey, 53% of large firms do so, compared with 13% of small firms. Those who can afford this exit gain an advantage over firms that remain dependent on the system — and become less likely to push for its improvement.

Third, above the previous two forces lies a deeper problem: political turnover, which erodes institutional capacity. Each change of administration tends to replace ENEE's management. Even within a single government term, ENEE has had as many as four different administrations. Between 1990 and 2026, the company had 28 management teams, with an average tenure of under 20 monthsFootnote 31^[31], and only two spanning more than one presidential term. According to the World Bank (2008), those positions have operated as political rewards and as levers of influence over the company, and in some cases have allegedly served as conduits for financial flows between the State and private actors.

Turnover does not stop at management, but reaches technical positions where there is capacity to reduce losses. With each change of administration, the company loses collective knowledge and institutional capacity to sustain efficiency improvementsFootnote 32^[32] (World Bank, 2008). The problem is also the entry of political appointees who do not always have the required technical training or experience. The result is an overstaffed company with lower operational capacity and higher costs.

Each transition interrupts what was under way, leaving reforms half-implemented, loss-reduction programs halted, and tender processes interrupted. None of these processes fits within a single management term. All require continuity and clear political will. Reducing non-technical losses demands experienced staff, institutional backing, and follow-through over several years. When the team is replaced, the effort restarts from zero and the institution never consolidates its technical capacity (U.S. Department of State, 2023). New generation contracting operates on the same logic: a competitive process takes between two and seven years from announcement to entry into operation. With management teams averaging under twenty months, those cycles are rarely completedFootnote 33^[33].

The underlying problem is one of incentives and political commitment. Structural reforms carry immediate, visible costs — rising tariffs, canceled contracts, affected interests — while their benefits are diffuse and long-run. It is not that governments did not know what to do: in several cases the diagnoses existed and the reforms were designed. However, the incentives not to act were systematically stronger than the incentives to act. Until that changes, no institutional redesign will be sufficient.

The vicious cycle is not confined to ENEE: its cost travels to the rest of the economy through two channels: service, which raises operating costs and fragments the private sector, and public finances, which shrink the fiscal space that could be directed to public investment and increasing financing pressures.

Energy is a critical input across the economy: its cost affects the production, transportation, storage, and sale of goods and services. A system operating on a persistent deficit, with little investment capacity and a matrix heavily dependent on imported fuels, has no room to absorb external shocks. When oil prices rise, generation costs rise with them; those increases are fed into operating costs in industry, commerce, and logistics; put upward pressure on the general price level; and erode households' real income (Alvarez and Kroen, 2025). These secondary effects are part of the economic cost of sustaining an inefficient electric system.

What would happen if excess losses were fully reflected in the electricity bill? Surcharges of between 24% and 36% on the average tariff would be neededFootnote 34^[34]. The blow would be regressive, affecting lower-income households proportionally more. With a 24% surcharge, monthly electricity spending would equal 3.7% of disposable income for the poorest quintile, against 0.8% for the richestFootnote 35^[35]. With a 36% surcharge, the potential loss would reach 5.5% of the first quintile's income, against 1.2% of the fifthFootnote 36^[36] (Figure 13).

Among firms, the crisis produces a two-speed private sector. Those with financial capacity install their own generation — an investment of roughly $136,000 for a mid-sized industrial firm — and disconnect themselves from quality risk. Those who cannot afford it absorb the cost in their margins. If excess losses were passed through to the tariff at a 24% surcharge, gross margins would fall 5% in manufacturing, 4% in other services, and 2% in commerce; at 36%, the falls would reach 7.3%, 6%, and 3%Footnote 37^[37] (Figure 14). Reliable energy thus becomes a competitive advantage that depends on size, not productivity — and an entry barrier for new competitors.

The government, meanwhile, directs increasing fiscal space each year to sustaining ENEE rather than using those resources more efficiently. Between 2017 and 2025, ENEE's annual deficit represented between 0.5% and 1.4% of GDP — near or above the 1% NFPS limit set by the Fiscal Responsibility Law (LRF)Footnote 38^[38]. A single state-owned company is consuming nearly all the margin the LRF allows. Its persistent dependence on central government transfers and borrowing indicates that the company has ceased to sustain itself primarily from its operating revenues and operates, in practice, under a permanent fiscal support arrangement. If nothing changes, that deficit could rise from 1.1% of GDP in 2026 to 1.9% in 2035; under a higher fuel-price scenario, it could reach 2.8% (Figure 15).

Every year that passes without correcting course on the financial trajectory is another year in which social investment and infrastructure do not materialize. In health, ENEE's 2026 annual deficit would be equivalent to nearly 5 times the budget for medications and medical supplies, 10 times the budget for hospital equipment and furniture, 47 times the vaccine budget, and 176 times the oxygen budget. In education, it would be equivalent to 14 times the scholarship and social assistance budget. In social development, it could finance 13 times the transfers and grantsFootnote 39^[39]. The same volume of resources would be enough to build approximately 489.4 kilometers of two-lane hydraulic concrete roadFootnote 40^[40] — a distance greater than the roughly 251-kilometer stretch between San Pedro Sula and Tegucigalpa.

The problem also affects risk in the financial market through the electric sector's financial fragility. In April 2026, electricity generation and distribution concentrated 4% of the banking loan portfolio, equivalent to $1 billion; this exposure rises to 6.4% if we consider that the financial system additionally holds around $615.5 million in ENEE bondsFootnote 41^[41]. This is a significant exposure for a sector with few actors. Moreover, the risk is not evenly distributed — for some institutions, exposure to the sector reaches 10% of their portfolioFootnote 42^[42].

Redirecting toward public investment the resources currently absorbed by the annual increase in ENEE's debt could boost Honduras’s economic growth. If that annual deficit were directed entirely to infrastructure, real GDP growth could be up to 0.28 percentage points higher in 2026 and 0.48 percentage points higher in 2030Footnote 43^[43] (Figure 16). This difference matters because Honduras's recent growth has been driven mainly by consumption — fueled largely by remittances — while public investment has contributed little. Over the last ten years, out of cumulative GDP growth of 37.9%, public Gross Fixed Capital Formation (GFCF) contributed just 2.1 percentage points. Redirecting resources from financing recurring deficits toward infrastructure investment would strengthen the foundation for faster, more sustainable growth — less dependent on consumption and more supported by public capital accumulation.

The lack of investment also limits access to electricity. Nearly 830,000 Hondurans still lack access to public electricity supply, concentrated in rural households and lower-income quintiles (Figure 17). For them the problem is not service quality but the absence of service altogether. A system unable to cover its operating costs cannot finance the grid expansion that would connect them. Inaction is not neutral — it leaves them without access to a basic condition for carrying out their most essential activities.

If the current trajectory holds, debt will keep growing, ENEE will have less capacity to pay, generators will demand higher risk premiums, contracts will be more expensive, and the system will become progressively more fragile. The cost of reform is real and carries short-term political implications. The key question is: what kind of reform has a chance of holding over time, where previous ones did not — and what principles should guide it?

As this analysis shows, Honduras's experience demonstrates that institutional changes produce no results if the incentives that sustain the crisis remain intact. Over thirty years, reorganizations, legal reforms, and efficiency programs were tried, but none held. The problem was not the design but the forces that acted on it: political capture, costs that generated no electoral pressure, and government turnover that restarted every process before it could complete. Those forces do not disappear with a new law. The reform must choose instruments that better resist that pressure.

The public debate has reduced the electric sector reform to a discussion about privatization. But regional experience shows that ownership alone does not determine system performance. Chile distributes electricity through more than 30 private companies, with generation and transmission also in private hands; Uruguay does so through a single integrated state-owned company. Both countries, like others in the region with different ownership and management schemes, achieve near-universal coverage and far more reliable service than HondurasFootnote 44^[44]. Ownership matters, but it is not sufficient: without institutional quality to sustain it, no model produces results.

What keeps the system trapped are the structural failures that no model has corrected. Separating ENEE into three companies, as the draft law requires, is a necessary step precisely because it allows those failures to be isolated in the segment where they operate and for different instruments to be applied according to the nature of each problem: governance across all segments, loss reduction in distribution, competitive contracting in generation, planned investment in transmission.

Before debating who should own each segment, the reform must guarantee the conditions necessary for the system to operate well, deliver reliable service, and be financially sustainable. Without correcting those structural failures, the crisis will continue, whether under public or private ownership.

On those considerations, the reform must advance on five principles: governance shielded from political interference, a comprehensive financial solution, continuity of supply without sacrificing new investment, promoting competition, and political leadership capable of driving and sustaining the reform.

Governance is what allows a multi-year reform to be completed rather than restarted with each government. The electric sector reform must ensure that state-owned companies are governed with independence, technical capacity, and accountability.

The draft law orders the vertical separation of ENEE into three commercial companies for generation, transmission, and distribution, with segment-level accounting transparency and differentiated regulation. It places these three subsidiaries under a parent company: ENEE as a holding. However, maintaining ENEE as the parent company is functionally redundant and risky. The coordination it would justify is already covered: CREE on the regulatory side and the OSM (system and market operator) on the operational side. The parent, by contrast, retains a channel of political influence over the subsidiaries: removing directors, conditioning investments, intervening in contracting under a veneer of legitimacy. It can become a refuge for staff that efficient subsidiaries do not absorb. And it opens space for inter-segment coordination that distorts the market. For these reasons, shareholding should rest with an institution that has incentives toward financial efficiency and fiscal sustainability, without corporate loyalties that distort oversight. If the ENEE parent is retained, it must operate under strict conditions that prevent it from becoming an instrument of political control over the subsidiaries. Without professional governance, vertical separation can recreate the same problem across several companies rather than concentrating it in one.

The reform must establish clear rules for the ENEE parent and its new subsidiaries: who governs them, how their authorities are appointed, and under what conditions. The OECD Guidelines on Corporate Governance of State-Owned Enterprises (OECD, 2024) provide the reference standard: subsidiary boards must have a majority of independent directors selected through open merit competition, fixed and staggered terms that do not coincide with the presidential cycle, defined and procedurally regulated grounds for removal, a cooling-off period before and after the position, and an express prohibition on operational instructions from the parent to subsidiaries in regulated matters.

That protection must extend to the regulator as well. Professionalizing the state-owned companies will be insufficient if CREE — responsible for setting tariffs and enforcing sector rules — remains exposed to the same pressures the reform seeks to correct, without the independence, technical capacity, and resources its function demands. A strong, independent regulator is an enabling condition for the new rules to work in practice.

A transformation mandate, not a name change

The separation of ENEE will only be useful if the new companies are born with concrete improvement obligations. Separating generation, transmission, and distribution can bring order to management and allow differentiated regulation by segment, but without orderly and fair staff rationalization, professionalization, and verifiable targets, the reform may amount to a nominal change.

Each subsidiary must have an Institutional Transformation Plan approved and supervised by CREE, with targets, indicators, timelines, responsible parties, and mandatory publication. The plan must include the reorganization of personnel transferred from ENEE, integrity verification, efficiency staffing criteria, a code of ethics, a compliance program, and an integrity and anti-corruption unit with operational independence. The distribution company must additionally set annual, verifiable non-technical loss reduction targets.

Separating business management from public policy

The reform must clearly separate two functions that are currently conflated: business management and public policy. The new subsidiaries must operate on efficiency criteria: minimizing costs, recovering revenues through regulated tariffs, executing investments, improving service quality, and being accountable for financial and operational results.

But if the central government decides to apply a public policy that generates costs the tariff does not recover — for example a social subsidy or temporary relief to certain users — that decision must be formal, transparent, and financed from the General Budget, taking into account its fiscal balance implications. It must not be charged to the electric companies' balance sheets or allowed to accumulate as implicit debt.

This does not eliminate subsidies — it brings order to them. A social subsidy may be necessary to protect vulnerable households, but it must have identified beneficiaries, an explicit funding source, a budget appropriation, and adequate accounting. The subsidy must go to the person or household, not to consumption. Support directed at a fully identified household targets better and avoids the incentive to alter measured consumption to capture the benefit under a threshold-based subsidy approach, as has been done until now.

There will be no sustainable reform if the operational problem and the financial problem are artificially separated. ENEE's accumulated debt reflects years of losses, arrears, uncovered subsidies, and low revenue recovery. That debt in turn limits investment and erodes payment credibility with generators and investors.

Reducing losses without addressing the debt would leave the new companies operating with an inherited burden that could make them unviable. But consolidating or refinancing debt without reducing losses would only buy time, leaving the system's deficit operations unchanged. Both dimensions must advance together.

The first part of the solution is operational: mandatory loss-reduction targets, metering modernization, improved collection, user regularization, targeted intervention in critical circuits, and effective sanctions for theft. The second part is financial and requires ordering the inherited debt: analyzing its composition, maturities, creditors, and conditions; defining which obligations the State assumes, which remain with the subsidiaries, how they will be serviced, and what sources will be used to extinguish them. This process is especially complex because ENEE does not have auditable financial statements. The complexity is compounded because any restructuring of ENEE’s inherited labor and pension liabilities must begin with an independent actuarial audit to determine their true magnitude before assigning them to the new subsidiaries. Without that prior step, the new companies may be born with burdens that make them unviable from the start.

The sector's fiscal discipline needs a permanent responsible party. SEFIN (the finance ministry) should supervise ENEE's fiscal risk, establish financial management rules, and monitor system sustainability. That role must be maintained to prevent losses, debt, and company payment obligations from continuing to flow to the central government.

Without an effective criminal framework, loss reduction will not be sustainable

Reducing losses — the operational part of the solution — does not depend solely on the distribution company. The chain is direct: cleaning up the finances requires reducing losses, and reducing losses requires combating theft, which cannot be confronted without the State's capacity to sanction.

Non-technical losses are not merely a commercial inefficiency: they include theft, meter tampering, irregular connections, internal complicity, and networks that benefit from the system not collecting what it delivers.

Without consequences, non-payment becomes normalized. This erodes the payment culture of those who do comply and reduces the legitimacy of any collection effort. It is difficult to ask a household or firm to pay on time when other users — including economically capable actors or those with political connections — steal energy without effective sanction.

The reform must therefore incorporate a specific criminal and procedural framework. It must independently classify theft, electricity fraud, and unauthorized meter tampering, include aggravating factors when distributor employees or ex-employees, organized groups, or repeat offenders are involved, and establish liability for establishments or legal entities where applicable. It must also create streamlined procedures for cases with documented technical evidence, strengthen the evidentiary value of inspection records, ensure chain of custody, accredit independent experts, and allow precautionary measures in high-value cases.

Institutional coordination is equally important. A specialized prosecutor's office or dedicated unit is needed, along with binding coordination among the Ministerio Público, Police, ATIC, Secretaría de Seguridad, and CREE; a legal obligation to report in defined cases; and protection for internal whistleblowers. Without this support, even a well-managed distribution company would have insufficient tools to correct non-technical losses.

During any reform process, electricity supply must be assured. No institutional transformation justifies risking supply, but continuity cannot be achieved by deferring the investment the system needs. Cleaning up the finances makes the distribution company a reliable buyer: without a buyer that pays on time, there are no long-term contracts capable of attracting investment in new generation or of lowering costs.

Short-term contracts can help cover supply risks, but they do not resolve the underlying problem: Honduras needs new generation supply that is more competitive, less dependent on petroleum derivatives, and capable of reducing the system's structural costs.

Short-term tenders, one to three years, must therefore be maintained as a means of ensuring continuity, but they must be complemented by an obligation to run medium- and long-term tenders, eight to twenty years, oriented toward new investment and linked to projected demand growth. A new generation project requires three to five years to reach commercial operation and long-term contracts to amortize the investment. Tenders with one-year or shorter entry timelines will attract only existing generators or fast-build projects, likely at high cost.

Medium- and long-term tenders for new generation must be run under reliable tender processes, in a timely manner, with sufficient lead time for new investors to enter, bringing new technologies and lower-cost generation sources, as has been observed in Guatemala and Panama.

Investment in transmission and distribution must accompany them. This includes executing, through competitive tenders, the Transmission Grid Expansion Plan prepared by the system operator. That investment is also needed to expand electrification and connect the new generation contracted. The backlog is considerable: the system requires around $900 million in transmission and more than $800 million in distribution over the next ten years.

Competition should be the unifying thread of the reform. When producers compete for contracts and buyers have options, the system has incentives to be efficient: lower costs, improve quality, and honor commitments. In Honduras that has been the exception: tender processes have been rare, frequently canceled before completion, and most generation has been contracted directly or under emergency conditions. The draft law lays important groundwork for reversing that trend.

The reform must choose an institutional architecture that expands competitive space and reject arrangements that reproduce monopolies in new forms. A structural obstacle the reform must correct is that today ENEE is the sole buyer of all the country's generation. That concentration raises contract costs: each generator prices in the risk of dealing with an insolvent counterparty carrying ten months of arrears, and that discount translates into higher prices for the entire system. Enabling commercial trading companies and incorporating qualified consumers as market actors introduces alternative buyers, distributes that risk, and forces generators to compete on the demand side as well.

Competition only works if the rules are neutral. Any preferential treatment for a given technology introduces distortions that the system pays for in higher prices and wrong investment signals. Promotion instruments are valid when a technology needs support to develop in a new market. Their justification weakens when that technology is already price-competitive under normal market conditions. The relevant criterion is not the energy source but the maturity of the technology and the market. Regional evidence shows that in well-designed competitive processes, renewable technologies win on price without needing special conditions to compete.

Reducing losses, collecting from those who do not pay, and rationalizing internal structures carry real political costs. A reform of this magnitude requires a dedicated leader with sufficient autonomy, a clear political mandate, and no conflicts of interest. This person must report directly to the President, coordinate the institutions responsible for implementation, enforce the timelines established by law, and maintain coherence across the financial, regulatory, operational, and investment measures. They must report on progress publicly and regularly. This role is distinct from an inter-institutional coordination committee: it is not a consultative body or a dispute-resolution mechanism between institutions, but an executive leader with direct accountability to the President for reform results. Sustaining the reform also requires political will to advance the legal and institutional changes that restore rule of law to the sector.

Implementation roadmap and defense against backsliding

Reform continuity must not depend on a single person or government. To prevent each change of administration from restarting the process, key decisions must be fixed in law.

Technical details can be developed through regulation, but with binding objectives, maximum timelines for issuance, and clauses that prevent the substance of the law from being hollowed out. The approach must be mixed: enough legal detail to protect decisions that should not be easily reversed, and enough regulatory flexibility to adapt technical instruments to sector evolution.

The reform must also protect itself politically. Reversal of the separation should require a specific act of Congress. Key decisions by the new companies, such as removal of directors, material changes to investment plans, or modification of corporate structure, must require reinforced majorities and transparent procedures. Publication obligations must carry sanctions for non-compliance.

The sustainability of the reform also depends on its social legitimacy. Comparative experience shows that electric sector reforms that lose public support become politically reversible regardless of their technical soundness. That legitimacy is not automatic: it depends on the reform maintaining a clear and visible distinction between those who cannot pay and those who can but do not. For vulnerable households, the response must be formalization, a social tariff, payment facilities, and energy efficiency programs. For users with payment capacity, firms connected irregularly, or organized fraud networks, the response must be effective law enforcement. Without that distinction, collection and enforcement measures lose social legitimacy and become vulnerable to political reversal. With it, the reform can build a citizen coalition that sustains it beyond an electoral cycle.

The law can order the reform, but cannot guarantee its execution. The challenge will be to sustain the political momentum, issue the regulations, meet the deadlines, and make the decisions that convert the legal mandate into real change. Commitment to execution will determine whether this reform manages to be different from the 2014 law — a well-designed statute whose structural transformation was never carried out.

Whether public or private, ENEE will keep failing if the country does not correct the problems that prevent the sector from functioning. The reform is not an abstract discussion about ownership. It is a decision about which structures can hold against the forces that have destroyed previous efforts. Every year without reform is fiscal space that does not reach health or education, higher costs of producing and competing, and nearly one million Hondurans who remain without access to the service.

Without a functioning electricity system, Honduras will keep financing the crisis instead of financing its development.

Sendas thanks the various specialists and representatives from the Honduran electricity sector, government, and civil society who participated in the consultative process carried out between March and June 2026, including José Manuel Arriaga, Luis Cosenza, Wilfredo Díaz, Carlos Roberto García, Karla Martínez, José Morán, Salomón Ordoñez, Gilberto Ramos, and Erick Tejada, along with former officials of Empresa Energía Honduras (EEH) and the National Loss Reduction Program (PNRP). Finally, Sendas thanks the Secretaría de Finanzas (SEFIN), the Asociación para una Sociedad más Justa (ASJ), and the local office of the International Monetary Fund (IMF) for their valuable contributions.

Annex 1.1. Imports of generators under 375 kW as a percentage of machinery and equipment imports, (%)

Annex 2.1 Selected direct contracts and tenders, 1990–2026

The contracts presented correspond only to processes of which we have knowledge. Honduras does not have a centralized, publicly accessible repository that allows verification of the complete universe of current or historical electricity generation contracts.

Annex 2.2 Results of the 2017 competitive tender (LPI-No. 100-009/2017)

Annex 2.3 LCOE (Levelized Cost of Energy) by technology

Annex 2.4 Generation by technology and market type, 2025

Annex 3.1 Reforms applied to the electric sector, 1994–2026

The Ley Marco del Subsector Eléctrico of 1994 opened generation to private investment. The reform included establishing an independent regulator, opening generation to private investment, and privatizing distribution networks and setting cost-based tariffs. In practice, distribution was neither separated nor privatized: the ENEE continued operating as an integrated public company and de facto single buyer. Other Central American countries — Guatemala, El Salvador, Panama, and Nicaragua — granted concessions or privatized distribution in the same period.

The Seven Cities Project (1994–1999) rebuilt distribution networks in the main urban load centers and established modern design standards that the ENEE adopted. As population centers grew, lack of financing for new works forced abandonment of the standards the project had introduced; the consequence was greater circuit overload and higher technical losses. Its limitation was one of sustainability, not technical design (World Bank, 2007).

Commercial outsourcing through the Servicio de Medición Eléctrica de Honduras (SEMEH) — active from the late 1990s — covered metering, billing, and collection, but did not include responsibility for loss reduction. Between 1996 and 2000, distribution losses fell from 27% to 18.5%. However, they began rising again from 2000 onward. Outsourcing operational functions can improve certain processes, but does not guarantee lasting corrections if incentives are not aligned with the final outcome. In terms of institutional design, SEMEH was part of the operational solution: it could help detect fraud and improve commercial management, but it was not responsible for sustainably reducing losses, strengthening cash flow, or ensuring necessary investment.

The Proyecto de Mejora de la Eficiencia del Sector Energía (PROMEF), in the 2010s, also failed to reverse the trend. Its components — commercial management, network rehabilitation, institutional strengthening — were technically sound, but losses rose from 20% in 2008 to 31.2% in 2013 during the period in which it was being implemented. PROMEF was designed to modernize an integrated ENEE while sector reform was advancing toward separation of activities; that tension between optimizing the existing company and preparing a different architecture reduced the clarity and continuity of the process.

The Ley General de la Industria Eléctrica of 2014 revived the idea of activity separation and sector reorganization. The law contemplated beginning the separation of the ENEE into generation, transmission, distribution, and commercialization, creating a market operator, and establishing a new regulatory structure. However, operational separation was never consolidated. The distribution and losses problem was transferred to the trust fund arrangement and the public-private partnership contract with Empresa Energía Honduras (EEH). In that sense, EEH does not appear as the origin of the problem but as an attempt to resolve the commercial and distribution component that earlier reforms had not managed to fix.

The EEH case shows that setting contractual targets is not enough if effective operational control, aligned incentives, and executed network investment are absent. The contract established an explicit loss-reduction trajectory: moving from a 29% baseline to 12% in seven years. However, results diverged from the first period and the gap widened year after year. Although Manitoba Hydro International, the contract's supervising firm, identified relevant instruments — circuit prioritization, large-customer verification, irregularity management, adapting the network to demand growth, and improving billable information — these were not translated into systematic execution. The main failure was not the absence of objectives but the lack of effective mechanisms to convert those objectives into timely corrective actions, targeted investment, and operational accountability for results.

After the EEH contract crisis, the Xiomara Castro administration returned the State to a direct role in loss reduction through the National Loss Reduction Program (PNRP), ENEE Distribución, and the Technical Distribution Control Unit (UTCD). However, the change of control did not by itself resolve execution and coordination problems. The ASJ evaluation (ASJ, 2024) reported low execution against approved budgets, additional staff hired, and the purchase of more than half a million meters, of which only around a third had been installed. It also noted the coexistence of several structures with resources and staff assigned to the same objective, including the trust fund that was still financing EEH. By 2025, losses remained above one third of energy distributed.

Annex 3.2. Subsidies applied to ENEE users

Annex 3.3. Chronology of ENEE administrations, 1990–2026

Annex 4.1 What the ENEE's 2026 annual deficit could represent in public expenditure

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