Rapid economic growth in recent years has not left Panama’s energy sector unscathed. According to figures from Empresa de Transmisión Eléctrica (ETESA), the national electricity transmission company, demand for power will grow at around 7.5% per year until 2016 while annual averages of 5.6% are expected in the 10 years after that. Managing the balance between demand and supply, therefore, is a key concern of Panama’s energy policymakers. In other utility segments, such as water, rising consumption levels are exposing decades-long underinvestment in infrastructure networks. As a result, ambitious investment plans – from both public and private sources – are being rolled out across the utility spectrum.
Meanwhile, commercial oil finds in the country’s south-eastern region have triggered heightened debates among Panama’s policymakers, investors and environmental activists alike. After two years of back-and-forth, the government seems to have booked some recent successes in pushing through a preliminary set of rules and regulations that will govern oil extraction in the years to come.
Out of these three energy segments – electricity, water and oil – power leads the way by far in terms of investor activity and value. Across generation, transmission and distribution, investments are being rolled out at impressive speed in a bid to satisfy rising demand for power from commercial, industrial and residential classes. The unbundling and privatisation of the national utility company, Instituto de Recursos Hidráulicos y de Electrificación, in 1998 triggered a wide range of liberal market policies. Besides the privatisation of generation and distribution companies, a wholesale market and new tariff regulatory framework were established. In later years, the sector’s policy and development was centralised in the Secretaría Nacional de Energía (SNE).
Ageing fossil-fuel installations and spiking oil prices in the wake of the 2008-09 global financial crisis has driven most of the attention on generation expansion to water – an abundant source in Panama and, according to SNE, responsible for almost 80% of total additional capacity since 2008. At more than 60% it also takes a predominant share in the overall energy mix followed by bunker C, coal and diesel.
The mountainous western part of the country – made up of the provinces of Chiriqui and Bocas del Toro – is particularly ideal for hydroelectric installations and home to some 70% of its nationwide capacity.
The biggest facilities in this region include Fortuna which, at 300 MW, is the country’s biggest hydroelectric plant, and the 220-MW Changuinola I installation, brought into operation in November 2011.
Despite rising pressures from social and environmental activist groups and changing weather conditions, water remains a key factor in the segment’s expansion plans. At present, a total of 1030 MW has been awarded for construction over the coming few years while feasibility studies on an additional capacity of 2010 MW are ongoing. The most sizeable planned project is the 214-MW Changuinola II plant, which is currently undergoing bidding. Although signed into law in 1997, the National Public Services Authority ( Autoridad Nacional de los Servicios Públicos) withdrew the licence in 2011 to prevent the company from attaining a market share exceeding 40%, the maximum legal share any single private generating company is allowed to have. Despite several announcements by the regulator to put the project out for tender, the future of the project remains unclear thus far.
Expansion plans also include thermal capacity. In fact, a total of 1900 MW is slated to come into operation over the next decade. A notable share of 850 MW will be driven by natural gas, encouraged by a law passed in August 2012 introducing a range of fiscal incentives. At the time of writing, a total of 550 MW had been contracted for addition by 2017.
While the generation segment is fragmented over 24 players, almost half of the installed capacity is in the hands of three companies. The segment’s leading player is AES Panama, a subsidiary of US-based AES Corporation, which oversees 700 MW and a little over 30% of the market, according to SNE figures. AES’s operations are entirely hydro-based and include the reservoir plant of Bayano (260 MW) and the run-of-river plants Estí (120 MW), La Estrella (47 MW) and Los Valles (54 MW). In second position is Italian player Enel Fortuna, with 13% of market share, followed by Bahía Las Minas Corporacion, part of the GDF Suez group, at just under 12%.
The risks of the large share of water in the energy mix were highlighted at the start of 2013 when, due to a prolonged summer, reservoir water had fallen to such low levels that generation capacity was being compromised at the same time that peak demand reached a record 1445 MW. As a result, the government implemented emergency measures to reduce national energy consumption, particularly in the month of May when the water levels reached one of their lowest points in history.
During that month, schools and universities were ordered to close for three days, workdays for public servants were shortened and usage of air conditioners was restricted. Meanwhile, supermarkets, cinemas, bars, restaurants and nightclubs operated under limited opening hours. While these measures managed to reduce overall consumption by some 30%, Panama still resorted to imports from neighbouring countries such as Nicaragua, Honduras, El Salvador and Costa Rica, which, at the most pressing moment, supplied up to 80 MW per hour.
Diversification & Renewables
Volatility of fossil fuel prices, technological development, and an increasing environmental and socio-economic awareness have raised ambitions for modernisation of thermal plants and diversification of the energy mix. The government’s plans feature wind, solar and biofuel-driven facilities. Meanwhile, the country is keen to turn its fossil fuel-generated supplies to cleaner and cheaper resources such as gas and, to a lesser extent, coal. Panama’s stated objective is to reach an energy mix composed of 80% of renewable resources and 20% fossil fuels over the next six years, with a significantly higher portion of non-hydro sources. The country is currently boosting the contribution of liquefied natural gas (LNG) to the mix.
“Panama is an unstable country if we speak about energy generation – hydro fails when droughts arrive, for example – thus there is a need of stability through a reliable and considerable generation source: LNG can be this source,” Rodolfo Barniol, director-general of LNG Group Panama, told OBG.
According to ETESA’s figures, up to 17% of produced energy is lost due to faulty transmission lines, while in other areas the grid suffers from insufficient absorption capacity, leading most hydroelectric plants to operate at less than full capacity. Dealing with these issues is ETESA’s primary two-folded priority. Issues are exacerbated by the distance between the centres of generation in the west and high consumption levels in the urban centres of the country’s central-eastern regions, with regular drops on the 230-KV and 115-KV networks spanning the country as a result. In a bid to overcome these issues, ETESA will be investing more than $700m into nationwide transmission infrastructure by 2024, according to its own projections, while more than half of the funds will be allocated in the next three years.
The entity’s biggest agenda point is the addition of a third national transmission line which will run over a distance of 320 km from the town of Veladero in the Chiriquí Province to Panama City with a carrying capacity of 800 MW. After years of back-and-forth on the project, the bid for the line’s design and construction was awarded to Brazilian engineering firm Norberto Odebrecht in October 2013, for a price of $234m. While details of the contract have not been announced, ETESA expects operations to begin over the course of 2016. Additional grid expansion primarily intertwines with ongoing investments in the generation segment, notably those in the Chiriquí and Colón Provinces. As such, work is ongoing on the reinforcement of the 115-KV line connecting Bahía Las Minas on the Atlantic coast with the capital in the south, while a line between the border town of El Progreso and Mata del Nance in the Chiriquí Province is scheduled for completion in 2015. In the longer term some of these lines are scheduled for replacement, especially on the 40-year-old Bahía Las Minas-Panama connection, where additional thermal capacity will require modernised infrastructure. Provided generation expansion plans unfold as expected, required works should commence in 2017.
Besides work on its national grid, Panama is eyeing regional connections in a bid to ensure consistent and efficient power flows, lower energy costs, increase domestic competitiveness and attract foreign investment. Two major initiatives are unfolding in this respect.
The first is a connection with Colombia through the construction of a fourth cross-country transmission line running from Panama City to the Darien area on the Colombian border. While the project was proposed in 1981, the first notable signs of progress did not surface until 2007, when the Interconexión Elé ctrica Colombia-Panamá was established with efforts to more vigorously pursue the initiative, including a dedicated structure to study and resolve economic and social constraints that had been key reasons for the project’s slow uptake. While exact plans are being drafted, the total length of the line is estimated at 614 km, 274 km of which will be running on Panamanian territory. It will have a carrying capacity of 300 MW and an overall estimated value of $420m, to be spread equally among both countries. Mindful of the project’s impact on integration of Andean and Central American energy markets, international development agencies, such as the Inter-American Development Bank (IDB), have backed to project since. However, despite the progress and continued enthusiasm from the Colombian side, the Panamanian government has recently been considering its position on a commitment to follow through. In March 2013 President Ricardo Martinelli announced the project would be “sidelined due to lack of resources” and “the need to invest adequately” in light of the various other priorities for the power sector. Suggestions from Colombian private players, including some generation firms, to take over the financial commitments were not pursued. Instead, Panamanian sources continue to claim their interest and ongoing analysis. As such, in October 2013, Fernando Marciscano, general manager of ETESA, told local media that his company was still studying the project “which would lead to a more efficient system and one which is consistent with the energy demand that will arise in the future“.
Another regional project, and one that is subject to significantly fewer constraints, is the Sistema de Interconexión Eléctrica de los Países de América Central (SIEPAC), a 300-MW grid linking more than 37m Central American consumers from Panama to Guatemala over a distance of around 1800 km. The total cost of the project – estimated at around $500m – has been divided among the individual member states with financial and technical assistance coming from the IDB and the Central American Bank for Economic Integration since the project’s start in 2006.
Development of the network was overseen by the Empresa Propietaria de la Red, a multilateral public-private partnership grouping the national electricity companies of each of the six member countries, Colombia’s ISA, Spain’s ENDESA and Mexico’s Federal Electricity Commission, each holding equal shares.
With the exception of a connection in Costa Rica, construction of the grid has been complete and operational since the start of 2013. In fact, in its efforts to alleviate the impact of the dry season, Panama was able to call on power supplied from El Salvador, Nicaragua and Honduras.
A public tender for Panama’s three distribution concessions held in August 2013 saw the incumbent operators maintain their shares for the next 15 years. In a public bidding process that attracted no contenders, Spanish player Gas Natural Fenosa maintained its 51% share in the Distribuidora Elé ctrica de Metro-Oeste and Distribuidora Eléctrica de Chiriquí concessions at a price of $570m and $230m, respectively. Similarly, Colombia’s Empresas Públicas de Medellín, retained its majority share in Elektra Noreste for which it paid $150m. The government has shares of up to 48% in both companies while the remainder is in private hands.
With around 88% of the national population connected to the electricity grid, Panama is somewhat behind on other growing economies in the region, such as Colombia (97%) and Brazil (98%). While mandatory network investments for distributors will help close the gap, the majority of connections are developed under the auspices of the Oficina de Electrificación Rural (OER). The agency experienced a milestone in 2013 when the Rural Electrification Fund (Fondo de Electrificación Rural) was established, generated by 1% mandatory allocations of the revenues of distribution and generation companies in the country. This, in addition to funding from the national budget and the IDB, provides the OER with an annual budget of around $25m, allowing for investments in network expansion and solar panels. The latter are considered a key tool to provide access to electricity to some of the most remote communities.
As part of the government’s efforts to balance supply and demand of power, energy efficiency has significantly climbed on the policy agenda over the past three years. According to World Bank figures, per capita consumption has increased from 1663 KWh in 2009 to 1829 KWh in 2011, a high number compared to other emerging economies in the region like Peru (1248 KWh) and Colombia (1123 KWh). Efforts thus far have culminated in the establishment of the Law on Rational and Efficient Energy Use, targeting the promotion and regulation of efficiency standards. The government’s overall objective is to improve efficiency by between 10% and 25%, depending on the level of investments made. Effective since mid-2013, this will be the first year the law’s impact will be felt. While the SNE continues to work on adaptation of the law to Panama’s most-energy demanding sectors, the public sector will be the first targeted. Up to 70% of energy consumption by private and public entities derives from air-conditioning systems. As a result, the law will seek to promote the use of efficient cooling technologies, integrating efficiency standards in public procurement processes. In addition, the National Assembly of Panama in 2012 approved exemptions on taxes applicable to the importation of equipment, as well as a credit equal to 5% of the value of civil works that are considered to be for public use. Accompanying the roll-out, educational programmes on efficiency techniques and measures for government officials have been rolled out, while the Universidad Tecnológica de Panamá plans to create a laboratory designated to trials for equipment certification of products in lighting, air conditioning, refrigeration and electric motors.
Years of underinvestment in the water infrastructure lead to a severe water shortage in the capital city in 2010. This has helped to trigger an all-out investment campaign in the improvement and expansion of water treatment, transportation and supply networks. According to government figures, investments will approach $2bn and are generated from the national budget and multilateral development agencies such as IDB, Andean Development Corporation and the World Bank. The plans are overseen by Consejo Nacional para el Desarrollo Sostenible (CONADES), an agency created to coordinate the investments and reinforce the Ministry of Health and Instituto de Acueductos y Alcantarillados Nacionales, which are the designated supervising agencies for water supplies to rural and urban areas, respectively.
One notable project on the agency’s agenda is the sanitation of the bay of Panama City, which together with the town of La Chorrera, receives most of the attention. The project will increase the percentage of residual depurated waters from the current level of 5% to 50% over the course of 2014. As part of the activities, more than 135 km of the city’s sewer network will be renovated, and an 8-km tunnel will be built connecting one of the city’s waste water treatment plants with a pumping station. The project is part of a wider effort to expand and rehabilitate the Panama potable water supply system. While the infrastructure is in place throughout much of the project area, it fails to supply the required capacity either due to the demand that has risen strongly in past years or through faulty installation. The main component of the project concerns the construction of three supply lines forming a circle around the city and connecting with transversal pipes. Work on the three “legs” is under way and expected to be completed early in 2014. The overall ambition is to make supplies consistent, including in times of high demand, by increasing the capacity and effectiveness of the network. As such, the ring will ensure that, if a segment breaks down, water can flow via alternative ways. A second priority has gone to addressing disproportionate consumption rates. Illegal tapping of water has been a big and growing issue over the years. One of the ways CONADES is approaching this is by installing digitalised meters at end-user locations, allowing for monitoring and billing of quantities consumed.
While significant attention is focused on power and water developments, Panama’s hydrocarbons sector is on the verge of a revolution of its own. After Venezuelan-firm OTS detected oil deposits of some 900m barrels in mid-2011, the government has gradually been paving the path towards commercial exploitation. Located in the environmentally pristine Darien region, close to the Colombian border, extraction of the reserves is a delicate affair. Partly due to this reason, to date commercial operations have yet to take off. The first priority lies with the definition of an adequate regulatory framework that will stipulate environmentally protective measures as well as fiscal and royalty arrangements. Such progress was booked in August 2013 when a proposal defining the legal and fiscal framework applicable to on- and offshore oil was passed by the National Assembly. Among others, the piece of legislation defines the manner in which royalties – estimated at more than $15bn according to SNE – will be paid to the government. Other measures provided for the mandatory deposit by operators of the equivalent of 50% of the total project before commencing operations.
In the month thereafter, more regulations were passed on the building and operating of associated infrastructure such as refineries, pipelines, storage tanks and telecommunication systems, paving the way for private investors to enter the scene.
Strong macro-economic growth has forced the Panamanian government to upgrade its utility sectors. Besides catching up on years of underinvestment, renovation and expansion plans also have to anticipate short- to medium-term demand developments, which are set to be significant.
While the sizeable pool of domestic and international financing is set to significantly alter the public utility landscape in years to come, Panama will not be out of the woods for some time. Diligent management of network maintenance and expansion will be needed to ensure utility infrastructure stays ahead of economic developments. Ongoing reforms of the power and water segments are providing optimistic signs of physical and organisational upgrades and, with presidential elections around the corner, Panamanians are hopeful this will not be short-lived.
Meanwhile, both the local and international community are keeping an interested eye on the roll-out of the country’s hydrocarbons story. Provided all goes to plan, Panama may just look forward to an earlier than expected return on its energy investments.