Panama's quest for alternate energy sources
Alejandro Ferrer
Alemán Cordero Galindo & Lee
Panama City
Alejandro Ferrer (Bio)
Envisioning a future with scarce and costly supplies of fossil fuels, translating into expensive energy to its citizens, the Republic of Panama has embarked on establishing and implementing the country's long-term energy policy. This has been done, among other things, through the enactment of several laws and regulations to promote the development of alternative energy projects.
The first important piece of legislation enacted with this aim was Law 45 of August 4 2004 (Law 45) which establishes incentives for the promotion of hydroelectric and other projects for renewable, clean sources of energy generation.
Government authorisations
Among the numerous advantageous provisions included in this law, is that when there is only one applicant for a concession, the Public Services Authority (ASEP) can issue the corresponding hydroelectric generation concession without the need for a public bidding process. In addition to this concession, ASEP shall communicate with the National Environmental Authority (ANAM), in order for it to grant a water concession for the use of water to generate such energy, for the same period of time as that of the hydroelectric generation concession.
Energy placement benefits
Aiming to attract investors to develop hydroelectric projects, specially mini and small hydroelectric projects, this law contains a series of incentives ranging from flexibility to sell the produced energy, to direct fiscal benefits. Under this law the mini-hydroelectric power plants with an installed capacity of up to 10MW are allowed to enter into direct contract with energy distribution companies for the sale of energy, as long as these direct sales do not exceed a 15% limit of the maximum generation demand covered in the concession area of the distribution company.
In addition, there will be no distribution or transmission charges for mini-hydroelectric and geothermoelectric and other power plants of renewable energy sources with a maximum installed capacity of up to 10MW, whenever they sell their energy directly to the distribution companies or in the spot market, In this same sense, whenever the installed capacity of these power plants range between 10MW up to 20MW, they shall not be subject to distribution or transmission charges for the first 10MW during the first ten years of commercial operations.
Fiscal Incentives
Several fiscal incentives and exemptions have been set forth, including, among others:
(i) the exoneration from import taxes, tariffs, rates, contributions and charges, as well as sales tax (ITBMS) in connection with the importation of all the necessary equipment, machinery materials and spare parts for the construction operation, maintenance of new power plants, as well as for the power increase of already existing power plants, with installed capacities of up to 500KW;
(ii) a fiscal incentive of up to 25% of the direct investment in the development of a new power plant as well as for the power increase of those already existing power plants with an installed capacity of up to 10MW, based upon the yearly reduction of tons of carbon dioxide emissions during the term of the concession, can be used for the payment of the income tax in a given fiscal period during the first ten years commencing with the commercial operation of the project. Those power plants above 10MW may only use it for up to 50% of the income tax return. Any amounts that those projects receive for selling carbon credits certificates shall be deducted from the amounts to be received by this incentive.;
(iii) a fiscal credit equivalent to 5% of the total value of direct investment on the construction of infrastructure, such as roads, bridges, sewage systems and others of similar nature, that after said construction become public infrastructure, prior approval of the Ministry of Economy and Finance.
However, regarding item (i) above, it is important to note that without making reference to Law 45, Law No 6 of February 2 2005 (Law 6) established in article 39 that all the exonerations affecting the ITBMS (value added tax) which have been previously granted by virtue of special laws, are rendered null and void. This has generated a series of conflicting interpretations from the Tax authorities regarding the applicability of this incentive. Nonetheless, the incentives regarding the exoneration of the ITBMS tax in connection with the importation of all the necessary equipment, machinery and materials for the construction, operation, and maintenance of eolic power plants , as set forth by Law No 44 of April 5 2011 (Law 44) remains in effect as it is subsequent to Law 6.
The law also imposes upon the beneficiaries of the hydroelectric generation concession, the obligation of implementing measures against erosion and desertification caused by developing the projects.
More recently, Law 44, sets forth an incentives regime for the promotion of the construction and exploitation of eolic generation projects.
Licensing
Upon obtaining the licensing for the constructions and exploitation of wind-powered power plants, by the ASEP, the licensee shall constitute the required performance bond of $500 per MW to be installed.
Contracting of energy
The transmission company, Empresa de Transmisión Electrica (ETESA), the entity in charge of authorising the connection of wind-powered power plants to the National Grid, will set up the necessary regulations to guarantee a safe reliable connection.
Probably the most important incentive of this law is that ETESA will establish public bidding processes for the purchase of energy that will be exclusive to eolic power plants. Those contracts will be entered for a period of up to 15 years. Subject to an authorisation of the Executive Branch, the total energy to be contracted in those exclusive public bidding process cannot be higher than 5% of the national annual energy consumption.
Incentives
Pursuing the development of the production of wind powered energy, this law, has established several fiscal incentives: (i) exoneration from import taxes, tariffs, rates, contributions and charges, as well as of the sales tax in connection with the importation of all the necessary equipment, machinery and materials for the construction operation, maintenance of eolic power plants; (ii) accelerated depreciation of the equipment used to produce wind-powered energy; (iii) exoneration of all national taxes, for a period of 15 years applicable for companies engaged in the production of mechanic, electronic, electro-mechanic, and metallurgic equipment necessary for the production of eolic energy; (iv) exoneration from import taxes, tariffs, rates, contributions and charges, as well as of the sales tax in connection with the importation of all the necessary equipment, machinery materials and spare parts for the production of wind-powered energy by companies engaged in its commercialisation (iv) all incentives established by in Law 45 of 2005 (see above).