In 2011, electricity generation in Panama comprised 55 percent hydropower plants and 45 percent thermal plants. Although hydropower represents more than half of the total installed capacity, high oil prices, along with high electricity prices and a nearly 7 percent increase in electricity consumption last year, are laying the ground for other technologies to enter the market.
Recently, government support pushed forward new regulation favoring renewables, putting the country on the fast track to attract new renewable energy investments. In April 2011, Panama enacted Law 44, which aims to diversify the country’s energy matrix by promoting wind power. The law mandates “wind-only” long-term power purchase tenders, recommending contracts for up to 15 years to ensure developers a constant revenue stream while delivering a stable stream of renewable electricity to retailers. Law 44 also provides fiscal incentives (mainly tax and import tariff deductions and accelerated depreciation of equipment used to produce wind power), making the development of wind projects more competitive in the energy market. In addition the Law holds the state-owned transmission company, Empresa de Transmisión Eléctrica, S.A (ETESA), responsible for organizing the “wind-only” tenders.
Panama has previously gained ample experience in carrying out long-term power auctions. However, successful auctions have not been achieved without setbacks. In the early 2000s, after a five-year period in which ETESA managed power tenders, distribution companies conducted their own power tenders following rules and regulations established by the government. This process created a number of inefficiencies, resulting in a lack of new investment and new installed capacity, as well as high electricity prices between 2004 and 2007. This situation prompted new rules aimed at establishing minimum levels of contracting in the future, long-term contracts, and the adoption of clear, stable, and standardized power-purchasing processes. Under the new procedures, ETESA resumed organizing the centralized procurement of power on behalf of energy distributors (after consulting on their power needs), and contracts are now signed directly between generators and distributors.
In November 2011, a few months after the enactment of Law 44, Panama successfully carried out its first-ever renewable energy tender. ETESA, on behalf of three electricity distribution companies, auctioned a total of 121 megawatts (MW) of wind energy for a period of 15 years (2014–28). As part of the tender, bids were based on monthly energy requirements that ranged from 11.47 gigawatt-hours (GWh) in June up to 61.63 GWh in January, which is equivalent to a minimum of 24 MW and a maximum of 121 MW of capacity.
This range in power generation capacity is related to the seasonality of hydropower production in Panama. During the dry months, rivers run low and hydropower production decreases, thus increasing the demand for fossil fuels. However, the dry season also brings with it stronger winds, making wind power the ideal complement to hydropower. Replacing fossil fuel consumption with wind energy would result in significant financial and emissions savings.
As part of this “wind-only” tender, ETESA received eight different bids from four companies. The lowest bid was at $0.09 per KWh while the highest was at $0.12 per KWh. In particular, Unión Eólica Panameña (UEP) presented four bids for a total of 161 MW, with offerings starting at $95 per megawatt-hour (MWh). These prices are comparatively lower than other technologies such as hydro, with reference prices of $101 per MWh or thermal energy with prices up to $250–300 per MWh. As part of this auction, four new projects were awarded to UEP for a total of 158 MW.
The high level of competition of this tender reflects the growing interest in promoting renewable energy in Panama. Clean energy auctions, backed by renewables-friendly legislation and coupled with fiscal incentives and relatively high energy prices, offer investors an attractive opportunity to start new renewable power generation projects. Yet government tenders are not the only option for wind developers. Currently, the Autoridad Nacional de los Servicios Públicos (ASEP) has approved licenses for more than 564 MW of capacity from wind projects, and 17 more licenses are being processed.
In July of this year, UEP began construction of the 220 MW wind farm in Penonomé, a province of Coclé. The project, with an estimated investment of $440 million, will be commissioned by the end of 2013. It is expected to produce between 6 and 7 percent of electricity consumption in Panama, enough to power more than 500,000 people. The project is also expected to replace the use of 145,000 tons of oil per year for power generation.
The Panamanian experience provides an example of the successful use of tendering schemes to meet specific renewable energy mandates. This mechanism can be replicated in other countries in the region with similar market characteristics as a way to promote specific renewable energy technologies. In Guatemala and Nicaragua, which also have competitive electricity markets and high levels of regulatory intervention, auctions could be introduced to fulfill the requirements of distribution companies in contracting their expected peak demand and margins of reserves.
Ramon Palencia-Calvo is a Central America Fellow on the Climate and Energy team at Worldwatch Institute.