Why Does Costa Rica Have Only 0.15% Solar Energy? The Averch-Johnson Effect and the 2026 Electric Reform

Costa Rica generates 69.74% of its electricity from hydropower and only a minimal fraction from solar, within a 0.53% combined share of biomass and solar (DOCSE 2023, via Delfino coverage, February 2024). The country has enough solar radiation to sustain a matrix with much more sun and much less water. The obstacle is not technological or geographic. It is regulatory. The cost-of-service tariff scheme established by Law 7593 produces a structural incentive in favor of large, capital-intensive projects, such as hydroelectric dams, and against distributed generation. This article explains how that incentive operates, what concrete cases demonstrate it, and what the Electric Harmonization Law (File 23.414) proposes to correct it. As of the end of May 2026, the project is under plenary debate and has not been approved, in the middle of a political debate where critics rebaptized it as the “Ley Apagón” (Blackout Law).

ICE is not the villain. The regulatory scheme is. And, surprisingly, in May 2026 the executive president of ICE himself, Marco Acuña, told the Legislative Assembly that the current model is obsolete.

Why Does Costa Rica Have Only 0.15% Solar in Its Electric Matrix?

The composition of Costa Rica’s electric matrix in 2023 was:

Source: Dirección Sectorial de Energía (DOCSE), MINAE, 2023, via Delfino coverage (February 2024). Total National Electric System (SEN) production in 2023: 11,939.72 GWh.

Of that combined 0.53% of biomass and solar, solar energy represents a minimal fraction (publicly available data ranges between 0.15% and 0.20% depending on the temporal cut). At the end of 2023, Costa Rica had only 3,528 distributed generators in the entire country, according to ARESEP data. In June 2024, the executive president of ICE, Marco Acuña, publicly acknowledged the need to diversify the matrix and contract new renewable capacity (Energía Estratégica, June 2024).

The figure is unusual because Costa Rica is among the countries with the highest solar radiation per square kilometer in the region. La República documented that the country wastes the third best solar potential in the American continent. The explanation is not in the sun. It is in the regulatory incentive that defines which projects the system’s monopoly operator chooses to build, and in a tariff structure that directly penalizes distributed solar generation.

What Is the Averch-Johnson Effect and Why Does It Reward Hydroelectric Dams?

In 1962, economists Harvey Averch and Leland L. Johnson published “Behavior of the Firm Under Regulatory Constraint” in American Economic Review (52(5), pp. 1052-1069). They identified that when a regulated company operates under a rate-of-return scheme based on a rate base, that is, when it is allowed to charge a percentage return on the book value of its assets, it has a structural incentive to overinvest in capital. The more expensive the assets, the greater the permitted return in absolute terms.

ARESEP confirmed in November 2024 that ICE operates under this rate-of-return scheme with a return on rate base (ARESEP, ICE tariff study, November 2024). The cost-of-service principle of Law 7593 translates, in practice, into the classic Averch-Johnson model formula: recognized operating costs, depreciation, and a return calculated as a percentage of the net value of productive assets.

In Costa Rican practice, this means that a 200 million dollar hydroelectric dam generates more permitted return than a 30 million dollar solar park producing the same amount of energy. The scheme does not reward efficiency or cost per kilowatt-hour produced. It rewards size and cost of the asset registered in the rate base. The consequence is predictable: ICE invests in large hydroelectric projects, not in distributed solar.

The effect has three consequences documented in regulatory economic literature for six decades:

1. Bias toward capital-intensive projects: large-asset projects are preferred over technologies with lower initial investment.
2. Sub-optimal resource allocation: the system ends up with more capital than economically efficient.
3. Disincentive to innovation: new and modular technologies, such as distributed solar and batteries, do not accumulate enough rate base to be attractive under this scheme.

Costa Rica exhibits all three symptoms. The visible consequence for the business sector is direct: the average industrial cost of electricity in the country is 13.8 US cents per kWh, versus 7.95 cents in the United States. Costa Rican industrial tariffs at the end of 2024 were 42% higher than US tariffs (Semanario Universidad, 2024). For industries where electricity represents more than 50% of energy consumption, this is the principal loss of competitiveness reported by the Chamber of Industries.

Why Did ICE Not Renew Private Contracts in 2020?

In 2020, ICE decided not to renew expired contracts with private generators constituted under Law 7200 of 1990. ARESEP’s report IN-0021-IE-2021, published on February 25, 2021, compared the costs per kilowatt-hour of public and private generation in 2019:

Source: ARESEP, report IN-0021-IE-2021, February 2021.

ICE rejected energy whose average cost was less than half its own. The most efficient private plants produced at one-twelfth of the ICE Group’s cost. That decision was not irrational from ICE’s perspective under the then-existing regulatory scheme.

The explanation lies in the Law 7200 model. Under that regime, private generators could only sell to ICE. ICE was the sole possible wholesale buyer. Without a purchase contract, private plants had no market. For ICE, buying from a private generator meant recognizing that cost as an operating expense, not as its own asset. The purchase did not increase ICE’s rate base, therefore it did not generate additional return. By contrast, building its own generation, even though more expensive per kilowatt-hour, did increase the rate base and did generate return.

The system, consequently, rewarded ICE for displacing cheap private energy and substituting it with more expensive own generation. User tariffs went up. The system’s cost went up. ICE’s return also went up.

What Is the “Sun Tax” in Costa Rica?

Law 10086, the Distributed Generation for Self-Consumption Promotion Act, published in La Gaceta on January 7, 2022, together with ARESEP’s tariff methodology, establishes a grid use charge for distributed generators that inject surplus to the system. ARESEP formally calls it “access tariff”. The public knows it as the impuesto al sol (sun tax).

The technical reasoning for the charge is that distributed generators, by injecting surpluses into the grid, use transmission and distribution infrastructure without contributing to its fixed costs in the proportion that conventional consumers do. The charge seeks to recover that fixed cost.

The practical effect is severe. ARESEP’s methodology in force since November 1, 2024 establishes a charge of between ¢16 and ¢30 for each kilowatt-hour generated in the solar panel (not per kilowatt-hour consumed). CNFL applies the highest tariffs the formula permits, which has resulted in charges up to 400% higher for solar panel customers compared to their previous bill, according to coverage by La Nación and La República.

The documented operational consequence: users with installed panels have disconnected their plants because they stopped being profitable. Costa Rica registers a setback in distributed solar generation installation during 2023 and 2024, against the global trend. The payback period of a Costa Rican residential solar system extends to levels where the investment ceases to be attractive for most homes and businesses. The sun tax was not designed to discourage solar explicitly, but that is its observable operational consequence.

What We See in Practice

In our practice we consistently advise foreign investors who are surprised, when evaluating the opening of operations or the acquisition of properties in Costa Rica, by two data points: the absolute cost of electricity compared to their home jurisdictions, and the scope of the sun tax when they project own generation to mitigate that cost. The initial expectation is typically that Costa Rica, as a country of majority renewable energy, should offer competitive tariffs and accessible solar pathways. The operational reality is the opposite.

A concrete case: a client with an investment project in Guanacaste had to stop their investment when quantifying the limitations of the current regulatory scheme on own generation and energy purchase. The project, viable under other jurisdictional frameworks, ceased to be financially attractive under the combination of sun tax, wholesale purchase monopoly and current tariff cost. Similar cases repeat in hospitality, agro-industry and mid-scale commerce in Guanacaste and other areas with high solar exposure.

How Much Did ARESEP and ICE Overcharge Users?

Report DFOE-SOS-IAD-00002-2025 from the Comptroller General of the Republic (Contraloría General de la República), published in May 2025, identified two significant economic findings:

Finding 1: omissions in tariff liquidations. Users paid higher electricity tariffs than they should have during 2023 and 2024 because ARESEP failed to correctly recognize ICE’s liquidations:

• Overcharge in 2023: ¢28,820 million
• Overcharge in 2024: ¢29,056 million
• Total: approximately ¢58,000 million, equivalent to 108 million US dollars

Finding 2: change in frequency of the Variable Generation Cost (CVG). The change in CVG frequency from quarterly to annual, requested by ICE and approved by ARESEP, generated an accumulated cost of ¢128,000 million in thermal fuel purchases and energy imports. That amount was passed on to user tariffs.

Source: Comptroller General of the Republic, report DFOE-SOS-IAD-00002-2025; coverage in Semanario Universidad and Delfino.

The Comptroller detected errors in the control ARESEP should have exercised over ICE’s liquidations, and questioned specific decisions that increased both the system’s cost and the risk of rationing. The combined amount exceeds ¢186,000 million (~$346 million USD) of impact across two fiscal years.

What Does the Electric Harmonization Law (File 23.414) Actually Do?

File 23.414, the National Electric System Harmonization Law, under plenary debate in the Legislative Assembly as of the end of May 2026 and not yet approved, proposes to modify the regulatory scheme on five fronts (Delfino, May 2026; La Nación, May 21, 2026; El Observador, May 2026):

What it does

1. Creates a wholesale National Electric Market. Energy is to be commercialized in an organized market, with prices that reflect real supply and demand, instead of administrative tariffs calculated on the basis of assets.
2. Allows private producers to sell directly to large consumers. ICE’s wholesale purchase monopoly is eliminated. Companies with high consumption can contract energy directly with private generators.
3. Separates commercial administration from the system operator. The functions of technical dispatch, market administration and commercialization cease to be concentrated in a single entity.
4. Introduces binding dispatch by economic merit order. The system dispatches the cheapest plants first, not those of the dominant operator. This creates real pressure on the system’s cost.
5. Creates ECOSEN. A new autonomous public entity that assumes the functions of system planning, dispatch operation, wholesale market administration and coordination with the Regional Electric Market (MER). These functions are transferred from ICE to ECOSEN.

What it does not do

It is equally important to delimit what the reform does not propose:

• It does not privatize ICE. ICE continues operating as a generator, distributor and commercializer, retaining its assets.
• It does not sell public assets. The plants, transmission lines and ICE infrastructure remain in state ownership.
• It does not eliminate the service universality principle. The obligation to serve all users, including rural and low-density areas, is maintained.
• It does not remove ARESEP regulation. ARESEP retains its regulatory powers over final user tariffs and over system operation.

Opposing positions in May 2026

The debate on File 23.414 has ignited significant crossfire:

In favor of the reform: the Chamber of Industries, the Chamber of Commerce, export-oriented business sectors, the ruling party (PPSO), and ICE’s own executive president, Marco Acuña, who declared before the Legislative Assembly that the current model is obsolete.

Against: critics rebaptized the project as “Ley Apagón” (Blackout Law). Opposition includes the National Liberation Party (PLN), Broad Front, PAC and PLN youth groups, ICE unions, FECON, the National Civic League, and former First Lady Claudia Dobles. They argue that the reform may bring tariff increases, weakening of ICE, increased risk of rationing, and pressure on rivers and indigenous territories.

Parliamentary arithmetic at the time of the debate is uncertain. The reform requires a qualified majority of 38 votes in second debate, and at the end of May 2026 the coalition in favor did not have those votes secured. The project remains unapproved. The outcome of the vote is the open variable of this legislative moment.

The debate also revives a discussion that has lasted twenty-five years in Costa Rica: opening of the electric sector was discussed for the first time in the nineties, with Law 7200 of 1990 as a partial expression of that opening.

Legislative drafting objections

Beyond the political debate, the project received concrete observations on the wording of its articles. It is worth noting, without polemic, that Costa Rican legislation carries a recurring pattern of legislative drafting deficiencies: laws whose underlying intent is reasonable but whose wording produces interpretive friction, gaps in competence delimitation or very broad regulatory delegations. File 23.414 does not escape that tradition. Three articles were pointed to with particular insistence:

• Article 6 (creation of ECOSEN). The project creates the new operator and planning entity as a maximum deconcentration body attached to MINAE, but does not repeal or adjust the correlative powers that the ICE Organic Law (Law 449) attributes to ICE over national planning and dispatch control through CENCE. The simultaneous coexistence of both attributions, without a transition table or express delimitation, leaves a risk of functional duplicity that administrative doctrine has historically advised against.
• Article 14 (Wholesale Electric Market Regulation). It defers to the Executive Regulation the definition of operating conditions, auction mechanisms and financial liquidation criteria of the market. These elements belong to the essential core of the economic regime and, under the principle of statutory reserve, are typically recommended to be fixed in the law itself. Such an open delegation concentrates regulatory authority in the Executive, whose legal stability would be better anchored at the legislative level to protect the contractual predictability of the new market.
• Article 22 (positive silence on interconnection). It sets a thirty-business-day deadline to resolve requests for interconnection to the transmission or distribution grid, with positive silence in favor of the applicant if the administration does not respond. The studies needed to authorize an interconnection — load flow, dynamic stability, short-circuit capacity — typically require simulation timelines that exceed that horizon. Automatic positive silence in a sector with physical cascade risk raises legitimate questions about the operational stability of the National Electric System.

These observations do not invalidate the project’s substance, but they illustrate that the quality of legislative drafting is, in itself, a success factor for any structural reform. A possible second iteration of the bill could correct these points without abandoning the general direction of market opening.

Our reading from the firm

The current administration is testing the resistance to change of sectors that have historically entrenched themselves in social welfare discourses to prevent transformation in specific areas. This occurs across multiple sectors of the country, not only in electricity. We expect that the executive, using its legislative majority, will be able to advance the structural changes pending.

The Electric Harmonization Law represents a non-aggressive solution that proposes a gradual and controlled opening of the market, without dismantling the public institutional framework of the sector. For that reason we consider it appropriate for the country’s current moment.

What Changes for Costa Rican Businesses and Consumers?

For large businesses with high consumption

Once the wholesale market is operational, companies with high consumption will be able to negotiate direct supply contracts with private generators, including solar and wind. This allows them to reduce the energy cost from the current 42% differential over US industrial cost, and to commit to clean energy purchases with stable long-term prices. Direct negotiation also facilitates structuring contracts by specific demand. For industries where electricity represents more than 50% of energy cost, the potential competitive improvement is direct.

For generation investors

Private producers, including new solar and wind entry, will no longer depend exclusively on ICE as buyer. This radically changes the financial viability of projects: with a wholesale market, the business model approaches that of jurisdictions with competitive electric markets such as Colombia, Chile or Peru. Law 7200 limited private entry to 15% of national capacity under contracts with ICE. The new regime eliminates that cap and opens the market.

For residential consumers

In the short term, direct changes will be limited. In the medium term, greater competition in generation should reduce the total cost of the system, which can translate into lower future tariff increases. The net impact will depend on the speed with which the wholesale market matures and on how ARESEP passes the system’s costs to final tariffs. Critics argue the opposite effect: tariff increases under a new commercial regime.

For distributed solar generation

Reform 23.414 does not directly address the sun tax of Law 10086. Residential and commercial distributed generation remains subject to the grid use charge under ARESEP’s current methodology. To unblock distributed solar generation, additional reform is required, possibly modifying Law 10086 or the tariff methodology. Deputy Kattia Cambronero Aguiluz convened in 2025 a forum at the Legislative Assembly specifically on this topic, without it being translated into a formal bill so far.

Key Definitions

Service at cost. Principle of Law 7593 according to which public service tariffs must cover the economic costs of the service, including a reasonable return on invested capital.

Rate base. Net value of productive assets on which the permitted return to the regulated company is calculated.

Permitted rate of return. Percentage of return that the regulator authorizes to be calculated on the rate base. In Costa Rica, set by ARESEP in periodic tariff studies.

Wholesale market. Platform for wholesale energy transactions between generators, commercializers and large consumers. Reform 23.414 creates it for the first time in Costa Rica.

Dispatch. Order in which the system operator activates generation plants to cover demand in real time. Under binding dispatch by merit order, the cheapest energy is dispatched first.

Distributed generation. Electric generation connected to the system at low voltage levels, typically solar panels on residential or commercial rooftops.

Variable Generation Cost (CVG). Component of the electric tariff that recovers variable dispatch costs, mainly fuels for thermal plants. Historically quarterly, it was changed to annual at ICE’s request, a decision questioned by the Comptroller.

ECOSEN. National Electric System Coordinator (Ente Coordinador del Sistema Eléctrico Nacional). New autonomous public institution that File 23.414 creates to administer the wholesale market, execute dispatch and coordinate the technical operation of the interconnected system. It assumes functions currently held by ICE.

Legal Basis

Regulation of the Costa Rican electric sector is built on the following norms:

• Law No. 7593 (1996), Public Services Regulatory Authority Act. Establishes the service at cost principle and ARESEP’s competences.
• Law No. 7200 (1990), Autonomous or Parallel Electric Generation Authorization Act. Allowed private generation entry up to 15% of national capacity under contracts with ICE. Limits individual projects to 20 MW.
• Law No. 8345 (2003), Cooperatives and Municipal Companies Participation in the Electric Sector Act. Enables rural electrification cooperatives and municipal companies as authorized providers.
• Law No. 10086 (2022), Distributed Generation for Self-Consumption Promotion Act. Published in La Gaceta on January 7, 2022. Legal basis of the grid use charge known as the sun tax.
• File 23.414 (2026), National Electric System Harmonization Law. Under plenary debate as of the end of May 2026, without approval yet.

For consultation of the official text of these laws, the Costa Rican Legal Information System is the authoritative source.

Frequently Asked Questions

Does Costa Rica produce clean energy?

Yes. 94.91% of Costa Rica’s electric matrix comes from renewable sources (DOCSE 2023). The problem is not the cleanliness of generation, but its composition and cost. The concentration in large hydroelectric generates vulnerability due to dry season and elevated capital cost, in addition to blocking solar development.

Does the reform eliminate ICE?

No. ICE continues operating as generator, distributor and commercializer. The reform removes its wholesale energy purchase monopoly, transfers planning, dispatch and market administration functions to ECOSEN, and allows direct contracts between private producers and large consumers. Service universality and ARESEP regulation are maintained.

Why is it called “Ley Apagón” (Blackout Law)?

Critics of the reform rebaptized the project as “Ley Apagón” arguing that its approval could increase the risk of rationing by fragmenting the system’s operational coordination, weaken ICE and transfer critical functions to a new entity without operational track record. Defenders reject that diagnosis and argue that binding dispatch by economic merit improves system reliability. The designation is political, not technical.

What happens if I am a residential consumer?

In the short term, little direct change. In the medium term, greater competition in generation should reduce system costs, which can translate into lower future tariff increases. The net impact will depend on the speed of wholesale market implementation and on how ARESEP passes the lower costs to final tariffs. Critics argue the opposite.

Can private producers generate freely under the reform?

Yes, with conditions. The reform allows direct contracts with large consumers and participation in the wholesale market. ARESEP regulation, SETENA environmental permits and system planning continue applying. The reform changes the commercial model, not the technical and environmental conditions to install new capacity.

Does the reform eliminate the sun tax?

No. Law 10086 and ARESEP’s tariff methodology on grid use charges for distributed generation remain in force. The reform of File 23.414 operates on large-scale transactions, not on the residential and commercial distributed generation regime. Transforming the sun tax would require additional reform, either modifying Law 10086 or the tariff methodology applied by ARESEP.

When does the reform enter into force if approved?

File 23.414 remains under plenary debate at the end of May 2026 and has not been approved yet. If the plenary approves it in second debate by qualified majority (38 votes) and the executive signs it, the application regulation will take between six and twelve additional months before the new regime fully operates in practice. The transition will have phases. The constitution of ECOSEN as an autonomous entity is also an institutional process that requires time.

What happens to existing Law 7200 contracts?

Existing contracts maintain their terms until expiration. The reform is not retroactive. New contracts, once the wholesale market is operational, will be negotiated under the new regime. Private generators whose contracts expired without renewal between 2020 and 2025 could resume operation under the new framework, subject to technical and commercial viability.

Will Costa Rica remain dependent on hydroelectric?

Not necessarily. Once the wholesale market operates, private solar and wind projects will have real financial viability because they can contract directly with large consumers. Diversification is structurally likely under the new regime, although the speed will depend on how much private capital enters the Costa Rican market and on whether reform 23.414 is approved.

Is it true that Costa Rican industrial tariffs are 42% above US levels?

Yes. The average industrial cost of electricity in Costa Rica is 13.8 US cents per kWh, versus 7.95 cents in the United States at the end of 2024. The Chamber of Industries identifies the cost of electricity as the principal factor of loss of competitiveness for Costa Rican industries (Semanario Universidad, 2024).

For the complete analysis of File 23.414 and the next chapters of this series on Costa Rica’s electric reform, follow the author’s Substack. For legal consultations on investment in the Costa Rican energy sector under the current or the proposed regime, please contact Mora, Yglesias & Asociados.

Article written by Lic. Manuel Yglesias Mora, Bar No. 27673, Costa Rica Bar Association, with AI assistance. All content was personally reviewed, edited, and supervised by the author.

This article is for informational and analytical purposes only and does not constitute legal advice. For the execution of any action related to the topics discussed, please contact us.

Manuel Yglesias Mora

myglesiasm@morayglesias.com More articles by author