With a vision to turn Panama into an energy hub, the new administration is looking to strengthen the existing electricity and hydrocarbons market and its infrastructure, using both public and private investment, to place the country in the region’s spotlight. Multimillion-dollar investments in fossil fuel power generation, network infrastructure and renewables are in the pipeline over the coming five years. On the hydrocarbons front, various new terminals and special economic areas for oil are planned. With the added push of the upcoming Panama Canal expansion project, the country aims to regain lost ground in important markets.
Electricity Generation
To serve its 3.86m inhabitants, Panama has a total installed electric capacity of over 2500 MW. Most of this, about 60%, is comprised of hydropower from both run-of-river plants and dams. The remainder is accounted for by coal, thermal, bunker and diesel, with the last two each contributing 500 MW. In 2014 the 120-MW wind park Union Eólica Panameña in the Penonomé region was added to the network. The plant already produces 55 MW, and an additional 60 MW is scheduled to come on-line in 2015. This installed capacity brings the country’s capacity to a total of 1900 MW. However, Panama’s rapid population and commercial growth has given the energy sector a hard time keeping up. Energy use grew 4.4% in 2013, from 6.78 TWh to 6.93 TWh, and by around 6% from January to November 2014.
The administration has issued two tenders for fossil generation, which stem from a natural gas-fired plant tender that did not come to fruition. Each of the requests is for 350 MW, with the option for bidders to participate in a single project or a series of smaller-capacity projects. The tender can also be awarded to a combination of bids that provide the best price and comply with the minimum requirements. Panama differs from other countries in the region as it does not issue tenders for specific plants. Instead, the government buys capacity and energy at the best price. These two proposed blocks have different timelines. The first 350 MW are expected to be ready by the second half of 2018 and will be under a 10-year contract, while the second block is set to come on-line in 2019 and have a 15-year contract. The contract terms suggest that different technologies may be suitable for each tender.
With a 1900-MW capacity, the addition of 700 MW represents over 30% more firm capacity. This move came after two consecutive summers during which energy shortages affected the country due to a combination of high temperatures and a lack of rainfall. The aim is to reduce dependency on hydropower, especially during the summer. The combination of a lack of water resources and an increase in peak demand that comes from increased air conditioning usage has proven to be a challenge for a country where most of its energy comes from run-of-river hydro. Peak demand has been growing steadily in recent years, standing at around 1500 MW in 2013, a 50% rise over 2007 and an average year-to-year increase of over 10%.
Electricity Market
There are two types of contracts in Panama’s electricity market, the first being long-term bilateral contracts originating from tenders and the second, deals for the spot market. Moisés Cano, electricity market department chief at the National Public Services Authority (Autoridad Nacional de los Servicios Públicos, ASEP), told OBG the average participation for each kind of contract in the first half of 2014 was 81% and 19%, respectively. Long-term contracts normally buy on a power and energy basis, regardless of technology. However, the country has seen specific renewable tenders in which a reference price is set. Most open tenders have no price cap and are awarded based on economic efficiency. Under the second option, known as spot market contracts, any plant that complies with the necessary regulations can enter into a contract. The spot market is regulated by a marginal price system for power distribution. Prices are calculated on an hour-to-hour basis and renewables have priority in terms of distribution, meaning that the enerplants will be the first to reach the final user. After that point, the generation cost rules are applied, with coalcombined cycle power disbursed first, followed by bunker generation and, finally, turbo diesel.
At the end of each month the National Dispatch Centre settles the hourly generation figures depending on whether each plant fell under its contractually required generation amount (net buyers) or went over (net sellers), with the necessary transactions conducted via the central billing bank. Currently, the system is one node, but ASEP has stated that a multi-node system may be applied in the near future. Spot market prices can be used as reference for long-term contract prices. However, these prices can vary considerably, with spot market prices in the first half of 2014 averaging over $270 per MWh, while the maximum was $304 per MWh.
Nuclear
In an interview with OBG, Cano remarked, “Nuclear generation has always been a source for controversy worldwide. Traditionally Panama has not tried to adopt this type of generation technology, mainly because of the size of the market, which at 1500 MW total, makes nuclear hardly feasible. However, when regional lines like SIEPAC are integrated and the total aggregate demand is more than 6000 MW, nuclear generation becomes much more attractive. The installation of region-wide nuclear plants could be considered.” He added, “There has been talk of a plan of wide plants in El Faro, San Salvador, at 500 MW (LNG) and another one in Costa Rica for 1000 MW (hidro), but these projects have not yet materialised.” Panama’s Law 6 states that if nuclear energy generation is to be used, a specific set of rules and regulations would have to be developed before it could move forward.
Renewables
With some of the most interesting projects in the pipeline in the region, Panama’s future in renewable energy looks promising. Today a large part of the country’s energy comes from run-of-river hydroelectric plants. The degree of reliance on this energy source becomes very obvious during the hot and dry summers, when the dual effect of a lack of water and excess heat brings generation down and overloads the system due to increased air conditioning usage.
The country has struggled to satisfy spikes in demand over the last two summers. Renewables such as solar and wind could be the answer for this recurring problem. The availability of solar and wind inputs hit their highest level during the country’s hot, windy summers. With almost 55 MW of wind power plants already operating, and over 200 MW expected to come on-line, combined with the 13 provisional licences for solar representing over 300 MW, renewable energy in the country is a promising new segment (see analysis).
Transmission
Panama currently has two high-voltage transmission lines, as well as a third one under development that will connect the country east-towest. The main use of the third transmission line would be to allow the run-of-river hydropower generated in the Chiriquí region to reach the main consumption centre in Panama City. Currently, capacity constraints make this unfeasible during high generation peaks, particularly in the rainy season. As the project has faced significant delays, state-owned Empresa de Transmisión Eléctrica has implemented a very strict construction timeline, with this 230-KV, 320-km line for 800 MW expected to be completed in 2017. The tender was won by Brazilian construction company Odebrecht for $234m. Delays in the tender and construction for this line have come at a high price for the government. Companies such as ENEL Fortuna and AES have filed for damages due to losses generated from the lack of energy capacity for their plants. To avoid problems in the future, the government is considering including a fourth line in plans for the transmission system expansion.
Cano told OBG, “Panama’s fourth transmission line will be out for tender soon and has received preliminary approval within our expansion plan. It is a 500-KV line that would run along the Atlantic coast. Today the maximum transmission voltage is 230 KV. This 500 KV would mean a direct connection from the generation point to the main load centre, Panama City, without having to stop at all substations. The 2020 timeline was chosen because the last reservoir hydropower plant, Chan 2, will be on-line by that time.”
Distribution
Three firms participate in the energy distribution market, all of which are public-private partnerships (PPPs), with the state holding a 48-49% stake. The original concessions were awarded for 15 years and renewed in 2013 for another 15. Distribuidor Elé ctrica de Metro-Oeste (EDEMET) and Distribuidora Elé ctrica de Chiriqí (EDECHI) are both operated by Spanish natural gas conglomerate Gas Natural Fenosa, and the third, ENSA, is operated by Grupo Empresas Públicas de Medellín. Between them almost 940,000 customers were served as of July 2014, with an energy delivery of 646 GWh in that month and income of $122m. EDEMET and EDECHI together hold about 57% of market share, serving Chiriquí, the central provinces and part of Panama City. All other customers residing in the remaining sections of Panama City and Colón are served by ENSA.
Distribution network operators are also charged with overseeing street lighting in each of their respective areas of operation. In order to serve areas without access to the electricity network, distribution companies have agreed to expand their coverage by at least 1 km per year. This strategy together with the Oficina de Electrificación Rural (Rural Electrification Office, OER) aims to extend access to electricity throughout the country. Since 2012 OER has controlled the distribution and commercialisation of energy in the Changuinola region, buying energy from AES Panama.
Network Coverage
The OER has the task of expanding the national electricity network. According to the National Secretariat of Energy, 91.1% of all Panamanians had access to the electricity network by 2012; however, this figure is lower in rural areas. The OER has developed a three-pronged programme, the aims of which include: expansion of the existing distribution network; installation of off-grid photovoltaic storage and photovoltaic-diesel systems for remote communities; and integration and internal wiring for the households covered under the first two goals. Currently, OER is aiming to expand rural access to electricity by 10% over the next four years, from today’s baseline of 71%. In order to achieve this the office has a $22.25m budget that comprises a $10m 25-year loan from the InterAmerican Development bank, a $10m loan from the China Co-financing Fund for Latin America and the Caribbean, and government contributions of $2.25m.
Expanding Distribution
Since the extension of existing distribution concessions, ASEP has included in its contracts a requirement for all companies to extend their reach by 1 km per year until they have each completed 5 km worth of extensions. This has aided OER in achieving its goals of increasing electricity access and eased the burden on the government by reducing the subsidies paid to distributors, which have historically been high. Randolph Gamett, executive director of OER, told OBG that before distribution company concession contracts were regulated a $200,000 distribution extension project may have received up to $100,000 in subsidies. “Today subsidies are only paid if a newly connected community does not reach the minimum energy usage level of 60 KWh per month per household in the first six months. In such as case, a subsidy is applied and re-evaluated every six months,” Gamett said. However, there are still challenges that need to be tackled, related to matching extension programme timelines with internal wiring and household usage.
Tariff Scheme
The tariff scheme has been set by analysing information in comparison with US companies. The most efficient firms are selected and compared, serving as a baseline for Panama’s tariffs. Adjustments are made every four years, with the exception of a fossil fuel cost adjustment, which occurs every six months. The final energy cost has three components: generation, transmission and distribution. Transmission and distribution are based on existing capital, i.e. the investments made by transmission and distribution companies. From there a return on investment (ROI) is set as a minimum guarantee, which ranges from 10% to 12%. Distribution companies collect tariffs and later distribute the revenues to the other two players. Generation tariffs are a pass-through cost, while generators and distributors are charged transmission costs.
Tariffs are classified by voltage and energy usage, not according to the type of consumer. There are low-voltage, mid-voltage and high-voltage tariffs. However, a series of subsidies are in place to cover low-energyuse households and pensioners, among others. Such subsidies are maintained by government funds and subsidies. The Fondo Estabilización Tarifaria (Tariff Stabilisation Fund, FET) went into effect in 2012 and grants customers using less than 300 KWh per moth a 33.3% reduction in their total monthly bill. In 2014 the subsidy limit was increased to 400 KWh per month, which meant that 82% of the over 900,000 customers are still receiving the subsidy. In addition to FET, the Energy Compensation Fund subsidises all ranges of consumers by compensating distribution companies for income not received and ROI goals not met.
Oil
The Panama Canal has long made the country an attractive port for re-supplying, including bunkering. Fuel oil trading is a growing business, with many companies maintaining bunker storage in the country. However, the sector is not limited to fuel oil. Terminals like Petroamérica Terminal, with a storage capacity of over 1.1m barrels, provide storage for marine fuels and clean products (gasoline, diesel, jet fuel and kerosene) alike in its 37 underground tanks. The terminal is located on the Pacific entrance of the Panama Canal. The former APSA terminal in Cristóbal and Balboa with its 66 tanks is now operated by Aegean Oil Terminals Panama since it was awarded in a direct concession in 2011. Additionally, Panama has the Pertroterminal de Panamá, a company that operates terminals in both oceans and a 131-km crude oil pipeline connecting them. The expansion of the canal has brought additional opportunities for the bunkering and refuelling business.
Bunkering
Once one of the most important centres for refuelling, Panama has seen its past fame slowly fade. Other locations such as Singapore or the US can offer more competitive prices, encouraging charterers and shipping companies to bunker elsewhere. A study by Panama’s Maritime Authority found that only 30% of the vessels that transit the canal refuel in Panama’s ports. In an interview with local news site Panama America, Gilberto Pérez, new projects manager at Petrobunker, stated that bunkering in the country reached more than 60m tonnes per annum (tpa) at its peak, but today stands at about 20m tpa. The upcoming opening of the widened canal has led a lot of positive expectations for the bunker market, and the opening of additional terminals and tax-free oil zones is expected to help the industry. José Antonio Hurtado de Mendoza García, country manager at Gas Natural Fenosa Panama, echoed these sentiments. He told OBG, “Once the expansion of the canal is completed, Panama can become a hub for [liquefied natural gas] bunkering and trading.”
New Infrastructure
New terminals are under way, such as Puma Energy and Duro Felguera-Vopak’s recent projects. A Geneva-based oil firm and one of the two major importers for locally marketed refined oil products, Puma Energy has participated in the domestic market since its purchase of Esso Standard Oil in 2012. Today, the company sells fuel for transport, lubricants and asphalt, and owns and operates convenience store chain Super7. The Swiss company, which controls 15% of the local market, is planning on building a 1.2m-barrel storage terminal for an estimated $80m investment.
The other player, DF Duro Felguera, is planning to build a storage terminal for Vopak, an international terminal operator, through its Felguera IHI branch. Priced at $99.6m, the terminal will be located in Bahía Las Minas, in the Colón region adjacent to the Atlantic Ocean. The project aims to revitalise the old refinery that belonged to Chevron and will include nine storage tanks for bunkers and clean products, with a total capacity of 376,000 cu metres. Construction is expected to start in mid-2015 and should conclude in the first half of 2017.
Additionally, mid-2014 saw a $52m concession for an oil free trade zone. The area in the Colón province includes a storage terminal and pumping stations assigned to Telfer Tanks. The facility will include docks, pipelines, tanks and pumping for crude oil and products such as gasoline, diesel, petrochemicals and LNG. The 20-year concession contract stipulates that the 5000-sq-metre terminal should be operational before the end of 2015. The free trade area has a zero tax policy for all products that only pass through Panama.
Water
Panama’s potable water network is overseen by three entities: the National Commission for Sustainable Development (Consejo Nacional para el Desarrollo Sostenible, CONADES), which is in charge of project development; the Institute of Aqueducts and Sewers (Instituto de Acueductos y Alcantarillados Nacionales, IDAAN); and the Ministry of Health (Ministerio de Salud, MINSA), which is part of the network. IDAAN operates the network and plants for areas with a population of more than 1500, while MINSA manages services for smaller communities. The three entities have a goal of 100% portable water coverage in the next five years.
Manuel Soriano, executive secretary of CONADES, explained to OBG that urban populations like Panama City have a coverage rate of over 90%, while rural populations average 80% and more remote populations in mostly indigenous areas average 45-50%. A sanitation strategy is being put in place that aims at integrating and upgrading all unsanitary WC installations, as well as bringing running water to all these communities during the 2017-19 period. The government’s strategy includes implementing improvements in overall service quality, enhancing storage capacity, increasing water catchment, drilling more wells and maximising treatment plant capacity. According to Soriano, “We have over 50 water treatment plants in operation today under IDAAN’s administration, together with about 3000 rural aqueducts.” He also said that around 30% of towns in central provinces are served by wells. Rural villages in mountainous regions are served by gravitydriven aqueducts, and urban populations of over 50,000 inhabitants are served by rivers and lakes. Soriano told OBG, “Water for Panama City comes from the Alajuela Lake, higher up in the same system as Gatun Lake. Water is taken from the Changres River and treated in the Chilibre plant. This system serves around 92% of Panama City. The rest comes from the Miraflores plant, serving the old part of the city and as well as Colón.”
Water treatment is mostly a public service, and only one private plant is in operation today. The plant is a concession given to Aguas de Panama for Laguna Alta in the Chorrera region. The fast-paced urbanisation of the country may require further private sector or PPP projects for potable water in the near future. Water tariffs are also highly subsidised, with individual meters in place for industrial customers, but only a few households. Soriano explained that residential water tariffs for the country’s provinces are usually $5-6 per month, while Panama City residents pay $8-25 per month.
Wastewater
Wastewater treatment has also become a major issue in recent years. The Panama Bay clean-up project aims to treat 100% of the raw waste-water that was previously discharged directly into the ocean. Efforts have been made to increase treatment levels to 40% utilising an existing 2.2m-cu-metre-per-second plant. Plans are already under way to double capacity to bring the treated water percentage up to 80%. Private participation in wastewater treatment is very common, as all larger housing developments require developers to include their own wastewater treatment plant. The scheme includes a three-year operation period by the developers followed by a hand-over to IDAAN.
Outlook
With the challenge of providing services to a growing population as energy consumption rises, the electricity segment is poised to undergo significant expansion in the coming years. The 700-MW extension of the fossil fuel generation base should allow for more flexible operations. Furthermore, the addition of power through renewables and connectivity to networks in Central America and South America may drive Panama to become an energy hub for export in the region.
While the Panamanian oil and gas sector’s competitiveness has diminished in the last decade, it may be looking at a rebound. Greater storage capacity and new players will help the country regain its importance in this market, which has turned to Singapore for bunkers, or Jamaica and Trinidad and Tobago for oil products. The possibility of larger vessels crossing the canal, like LNG carriers, has generated renewed interest. In fact, the Panama Canal Authority will be conducting a study to explore the possibility of building an LNG import terminal with a grant from the US Trade and Development Agency. The grant is aimed at helping Panama define its strategy regarding LNG by setting priorities and planning infrastructure development. One of the greatest domestic challenges the country faces is the distribution of drinking water and wastewater treatment, but the current administration has made this issue a priority, as can be seen in the high levels of investment allocated to the sector. Such investment, although undervalued, is key to the country’s continued growth.
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