Cristina Lewis and Salomón Joseph Behar of Galindo Arias & López in Panama City answer key questions about Panama and Central America’s energy systems
On a regional level, Panama utilises shared transmission lines with countries such as Costa Rica, Honduras, El Salvador, Guatemala and Nicaragua, in order to satisfy domestic energy demand. Let’s talk about the role of the SIEPAC transmission project. How well does the multinational grid operate in the eyes of most Panamanians?
SIEPAC (Central American Electrical Interconnection System) has a total length of 1789km through six countries, where its shortest 230KV transmission portion is located in Panama (150km from the Costa Rican border to the Veladero Substation in Panama). The system seems to be well operated and local generators do rely on SIEPAC to enhance their revenue given seasonal marginal cost cross-border opportunities or to satisfy contractual obligations during down times, to the extent pricing is convenient.
Panama’s peak capacity demand is 1,500+ MW, and hence, ostensibly and depending on congestion and energy availability, in theory SIEPAC could satisfy a bit less than 20% of our requirements, albeit in reality the current volumes are less significant. Furthermore, to the extent that cross-border seasonal availability does not match at any given time, countries must continue to rely on local installed capacity as a back stop to the growing demand.
Regardless of the above, the majority of Panamanians are not familiar with the operation of our energy infrastructure, and thus, generally have no opinion regarding SIEPAC.
Does a strong will exist, among the public and in the legal community, to overhaul or replace the current system?
In general, the public perceives energy to be expensive, and as a logical consequence, blames all system participants, including the regulator and the laws and regulations that it applies or enacts.
Currently, the new government is working to effect changes to the public bid process for the purchase of capacity and energy in order to enhance competition, as well as attempting to diversify the current energy matrix, through the inclusion of wind and solar projects which did not exist prior to 2013, as well as more traditional projects such as LNG and coal fired plants.
Concurrently, stricter regulations regarding the construction of new generation plants have been enacted and enforced, for example a new rule requiring construction bonds to insure the performance of the milestones set forth in the new or extended generation licenses, which the regulator believes will insure timely completion of new generation plant projects.
Although we agree that certain regulations and practices required amendment, we also believe that the applicable authorities must also beware of the uncertainty that repeated regulatory changes may cause to new investors, as well as the severe losses that may be suffered by existing projects as a result thereof, as was the case under the previous administration.
Do you see potential for Panama’s indigenous companies (companies headquartered in Panama) to take over a larger share of its energy market?
Given that, first, energy projects are capital intensive, and second, Panama is a small country with limited capital resources, the major projects will continue to be developed by multinational corporations. Nevertheless there is growing participation, which we expect to develop further Panamanian interest groups in smaller projects, mainly within the renewable energy sphere. Big local lenders have invested in financing some of these projects, but are now hesitant to continue doing so on the basis that their allocation allowance for power-related projects has been reached.
If so, what needs to happen and what role could local law firms play? (I.e. Do you think local firms could be instrumental in an expanded energy project finance market involving global lenders?)
Local law firms are actually a key component of the development of the local energy market and participate fully in all aspects of project finance that relate to local security package issues and recordation of security interests, as well as the verification of enforceability under Panamanian Law of the terms and conditions of loan agreements governed by foreign law, tax implications, regulatory issues, and all aspects of due diligence related to the development and permitting of the project.
Coal and biomass account for a relatively tiny percentage of Panama’s energy generation, with refined petroleum and hydroelectric power accounting for the lion’s share. Is there room for expanded coal and biomass production locally, or increased importation of such energy sources?
Panama is attempting to expand and diversify its generation matrix, having issued wind and solar energy public bids in an attempt to promote green energy. Currently, there are very few coal and biomass projects operating in the country; however, there is a coal project that is currently permitted and under development. Although we are not privy to the current status of development of that particular project, we do understand that coal generators are interested in participating in upcoming bids for the sale of capacity and energy into the grid totalling 700MW divided into two 350MW bids.
What are the implications of the historic expansion of the Panama Canal for the local energy market?
The Panama Canal expansion project may have diverse impacts on the local energy market. On the one hand, the project will increase the Panama Canal’s energy demand, and it is likely that under the Canal’s business model such a requirement will be satisfied with redundant auto-generation projects, which in turn sell the excess redundant capacity to the grid increasing demand cover.
Furthermore, the expanded canal will allow the transit of Q-Max LNG vessels which in turn may create opportunities for the generation of energy using LNG, supplied either by Floating Storage Units or, if demand warrants, by land based cryogenic facilities. Such LNG projects could also represent increased opportunities to export energy through SIEPAC.
Are further grants needed to bolster local energy distribution, or are regulations or operational inefficiencies the problem here?
Current Panamanian distribution grid constraints create inefficiencies in our market as there is insufficient transmission capacity connecting the major hydroelectric generation centre in the Chiriquí province on the Costa Rican border with the principal demand centre in Panama City, thus requiring partial satisfaction of demand with more expensive fossil fuel generation while exporting hydro power through SIEPAC. The constraint will be solved by an additional transmission line (commonly known as the “Third Line”), which has already been awarded and has a target commercial operation date on October, 2016, while a fourth line is already being considered.
Furthermore, there are several localised problems in rural areas where, as is usual in developing countries, it is a slow process, but the distribution companies and government are making headway in that regard. For example, regulations requiring quality standards were recently revamped in the renewal of the distribution concessions, which will apply for the 15 year life of the concession.
How open is Panama’s current government to the cultivation of independent, local energy suppliers?
The Panamanian government is attempting to diversify the energy matrix through the promotion of renewable energy projects, and in general supports a market that is open to participants of nationalities without discrimination. In fact, historically Panama has not favoured local over foreign investment and usually advocates that projects include both, such as cross border joint ventures. Furthermore, the Panamanian Government does not grant direct subsidies for energy projects, but rather provides tax incentives and wheeling charge exemptions in support of renewables.
Are regulatory reforms needed at the moment? If you could change or abolish one local law or regulation, what would it be?
Law 6 of February 3 1997 is the legal framework which regulates the Panamanian energy market and infrastructure.
Although the law was essential in order to establish the Panamanian Energy Sector, gaps and grey areas left during its implementation have been filled by dozens of norms, paving the way for a convoluted system. In addition, in the past, the regulator’s decisions have been politicised and constant changes in the applicable rules have created uncertainty in the market.
In our opinion, gaps and grey areas in the implementation rules should be closed, and distortions created in recent years need to be reversed through a comprehensive review and indexing of applicable norms by the regulator that will foster investment and give comfort to market participants, and the general population, while ensuring compliance with the law by all parties involved.
We hear a lot of talk about clean energy, but what might work as a boutique project in a wealthy part of the world might not be an ideal method to supply energy to hundreds of thousands of consumers in a less wealthy country. Is clean energy the way forward for Panama?
Panama currently boasts the largest wind generation project in Central America (336.8MW of which 270MW are either in operation or in the final stages of construction) as well as multiple small run-of-the-river hydro projects.
Furthermore, conventional market wisdom indicates that, save for a 200+MW reservoir project under development, Panama has almost exhausted is accessible hydro potential, and hence, it seems inevitable that growth will come, at least in part, from clean energy sources such as additional wind or new solar projects. However, given Panama’s seasonality and the fact that wind and solar projects do not provide firm capacity, required for grid stability, it is likely that further thermal projects will be developed, hopefully fuelled by cleaner fuels such as LNG.
What are the criteria the sponsors and developers need to keep in mind when hiring a law firm to do an energy deal in Panama? What should borrowers be looking for?
The main criteria is the firm’s commitment to the success of the project and hence, the fulfilment of the sponsor’s goals, especially in a tight market where each additional MW is essential in order to meet growth.
Furthermore, firms need to have a thorough knowledge of the energy laws and regulations and ample experience in dealing with sponsors, banks, regulators and the distribution companies.
These qualities are decisive when carrying out the different aspects of the negotiation, development, implementation and financing of a particular project, which are always time critical and labour intensive, and therefore require a law firm with sufficient resources, experience and commitment to carry the project forward.
Let’s talk about your vision for Panama’s energy sector. What do you see happening in the next three to five years?
In the future, we see the Panamanian energy market continuing to develop renewable energy. There is a tendency to move away from hydroelectric projects, not only because these are sometimes problematic when built in indigenous reservations or special designated areas, but also because, as previously stated, Panama’s accessible hydro resources have been almost fully developed, according to the consensus in the industry. It would also seem that Panama will be inextricably tied to some form of thermal generation in order to continue to satisfy its firm capacity requirements, and there is keen interest in having such thermal generation being supplied though cleaner and cheaper fuels such as LNG, butane, or ethane, for which the logistics of importation, storage, and transportation, as well as creating a critical mass that would support the construction of the related infrastructure, are key. If this becomes a reality, Panama’s capacity will be successfully covered without having to revert back to the use of bunker or diesel fuels, which are less reliable and more contaminating.
Furthermore, Panama has been discussing and negotiating a regional energy interconnection project with Colombia, which has both, proponents and adversaries. While proponents typically point to the fact that added capacity will enable Panama to stabilise its spot market prices and PPA prices at a lower level, translating into cheaper energy, opponents are concerned about the environmental consequences, as well as the impact that the interconnection will have on the development of new projects in Panama. This last group believes that the interconnection could inhibit new projects in Panama, making Panamanians reliant on Colombian generation and creating adverse conditions in the future, where reliance could translate into higher prices and other practices which would be prejudicial to the market.
Galindo Arias & López
About the author
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’s to be 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 Joseph Behar
Galindo Arias & López
About the author
Salomón Behar manages GALA Services (BVI) Ltd., a Galindo Arias & López’ subsidiary, since 1994. In addition, his private practice focuses on commercial, corporate, and administrative law, with an emphasis on project financing, M&A, and a focus on the energy, real estate, and tourism industries. He provides legal counsel to key energy-market players Unión Eólica Panameña, UEP Penonomé I, and Petroport, and leads the Panamanian counsel 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, Mr. Behar possesses extensive experience in public bids for the power generation sector.
Salomón Behar has also served as Director of Térmica del Noreste, and is a former Director of Banco Universal.