Cristina Lewis and Salomón Behar of Galindo Arias & López speak with Rani Mehta about the development of Panama’s new National Energy Plan and how it may change the country’s energy consumption in the future
What drove Panama to develop its National Energy Plan?
The National Plan (PEN 50) is the result of country-wide public forums and research undertaken by the Secretary of Energy. The intention is to both create a national conscience regarding the rational use of energy as well as identify the aggregate energy needs (electricity, transportation, household use) to define long-term energy policy and strategy with a 35 year outlook, instead of requiring every new administration to develop its own short-term plan. The program analysed the base case scenario, assuming historical projected growth without the implementation of any regulations intending to curb demand, and contrasted said base case with other alternatives which consider both consumption efficiency and responsibility – for example, through the expansion of mass transit solutions and high efficiency refrigeration and other home appliances – and the incorporation of renewable energy and cleaner fuels (such as solar, wind and LNG generation) in order to decarbonise the Panamanian energy matrix.
With regard to electricity, the results of the base case scenario led to the realisation that if Panama continued on its current path of demand growth and satisfaction thereof purely on the basis of the marginal generation cost, by 2050 a significant portion of its new power would be coal based, which would increase pollution levels; while under an ambitious scenario, the country could achieve a 70% renewable energy matrix in the next 35 years while meeting growth in demand.
What are some of the challenges that the country could face in the implementation of the plan?
As with every ambitious policy framework, the devil is in the implementation detail. Laws and regulations must be presented and approved by the appropriate governmental entities. As individual policies go through the approval process and the specific tradeoffs and costs are analysed, there could be modifications to the ambitious scenarios, either in scope or timing, or both. For example, since refrigeration accounts for approximately 55-60% of electricity consumption in the country, one of the ways in which demand could be reduced or kept in check would be through to the enactment of regulatory requirements mandating that high efficiency equipment be installed. In that regard, the implementation horizon would depend on whether the government is willing to assume the cost of replacement in the short term, or if the transition will be effected through attrition and obsolescence, or a combination of both.
What other questions were discussed when the plan was being drafted?
The current status of net metering project penetration as well as the need for studies, regulations and infrastructure which could promote decentralised generation within the distribution grid (mostly through individual or community solar generation) was also discussed as a way to create a smarter grid while broadening the spectrum of smaller scale generation possibilities. It remains to be seen if such feature will be adopted as part of the PEN 50 implementation.
Let’s discuss the role of wind and solar energy in this plan. What role are these renewable sources expected to have in Panama’s future energy matrix?
Panama wants to bring electricity to small remote rural communities, which it plans to do both though the expansion of the distribution grid as well as through isolated solar projects for areas where it is not feasible to extend the grid. The country hopes to make significant progress between 2017 and 2019. The goal is to cover 80% of the remote small communities primarily using solar power. Since PEN 50 was just adopted a month ago, and given the short timeline set for the implementation of this specific phase, this will be a real test of the political will to move from policy to action.
On a utility scale, Panama inaugurated the second and third phases of the Penonome wind farm, which is the largest wind generation project in Central America, with a current installed capacity of 270MW out of a total of 336.8MW. Such diversification of the energy matrix, which created a natural hedge to deal with Panama’s seasonality, has significantly impacted the volatility of spot prices during the dry season where hydro generation is drastically reduced. There are other licensed solar and wind projects which may come on line in the short or mid-term as demand and regulations permit.
How will these solar projects be financed?
There are currently a couple of solar projects under development as result of the award in January 2015 of a public bid for the purchase of solar energy. However, given the current and forecasted average spot market price levels resulting from the oil price crisis, coupled with the absence of any indication from regulatory authorities that another solar bid in the foreseeable future, it has become more difficult for sponsors of several other utility scale solar projects, which are otherwise fully licensed, to meet the requirements for project financing. As a result, sponsors have shifted their business model, seeking out private major customers (i.e., those which demand more than 100KW at a given metering point) as long term off-takers to provide the revenue stream required for project finance. To date, customers have expressed significant interest, so hopefully several projects will be able to advance to financial closing on the basis thereof, thus providing another opportunity for the expansion of renewable energy.
As with every change which requires the customer to leave its comfort zone, an obstacle for the success of this alternative business model (which has had success stories elsewhere) is convincing clients to trust that individual generators will be able to fulfill their commitment to supply energy on a twenty-four seven basis for the duration of the supply agreements.
What obstacles could arise in these financing agreements? Do you expect significant interest in solar energy from clients?
Other challenges faced by the major client as off-taker structure are the size of the market and need for diversification of risk, as well as the absence of international or local credit rating requirements for most of the otherwise credit worthy potential clients, whose credit risk must ultimately be acceptable to lenders.
However, as is the case with new concepts, we expect that if and once the first project gets underway, several other customers as well as lenders will be willing to join in short order, especially if there is a rise in international oil prices with the resulting increase in the regulated energy rates through PPA price indexation.
Galindo Arias & López
Cristina Lewis’ practice focuses on commercial and administrative law, with an emphasis on M&A and capital markets activity, and a focus on the aviation and energy industries. She heads the capital markets practice group, advising clients on the structuring and issuance of public offerings. Additionally, Cristina regularly advises airlines, financial institutions, and repair stations on aircraft and engine acquisition, finance and leasing, and regulatory compliance. Her work in this area has led to her recognition as one of the world’s finest in aviation law.
She is currently involved in the development of what is the largest wind energy project in Central America, acting as one of the leaders of the Panamanian counsel team for Unión Eólica Panameña and UEP Penonomé I.
Salomón Behar has managed GALA Services, a Galindo, Arias & López subsidiary, since 1994. In addition, his private practice focuses on commercial, corporate, and administrative matters, with an emphasis
on project development and financing, M&A, and a focus on the energy, real estate, and hospitality industries. He provides counsel to key renewable energy-market players Unión Eólica Panameña and
UEP Penonomé, and led the Panamanian teams on the financing of the Panama Canal expansion project and on the development of the first wind energy project in Panama, the largest project of its kind in Central America. Furthermore, Behar possesses extensive experience in public bids for the power generation sector.