UPDATE 1-Mexico, Guatemala electricity link completed

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MEXICO CITY, Oct 26 (Reuters) - Mexico and Guatemala inaugurated a $50 million electricity link on Monday that will allow the Central American nation to buy cheaper power from its northern neighbor, the Mexican government said.

The line, which cost $55 million, runs from Tapachula, a Mexican town on the southern border with Guatemala, to the city of Retalhuleu near Guatemala's Pacific coast.

Mexican President Felipe Calderon hailed the project as the start of an effort to link up the power grids of all of Central America with Mexico and Colombia.

Backers of the regional power grid say it will cut energy costs for the impoverished countries of Central America and make investments in new generating capacity more attractive.

The proposed interconnection of the power grids of Central America with Colombia and Mexico was expected to cost $395 million in a January 2008 study.

Guatemala will purchase 120 megawatts of power from Mexico's Federal Electricity Commission, or CFE, the state power monopoly.

The CFE has considerable surplus generating capacity after demand growth in Mexico earlier this decade fell far short of projections.

The system integration should be completed in mid-2010 but significant regulatory issues need to be resolved before the network will attract major new investments, Eurasia Group analysts Heather Berkman wrote in a research note.