Central America View Crystallises Around Panama


BMI View: Our view that many Central American countries are over-reliant on expensive imported fuel and hydrop ower to generate electricity crystallises when looking at the situation in Panama. With the country declaring an emergency because of power shortages caused by drought, it is in desperate need of alternative ways of powering its fast-growing economy and is reportedly looking to the US to supply it with cheap natural gas.

Panama has declared an emergency across a third of the country after drought-hit hydropower projects stopped producing electricity. The power shortage is wreaking havoc in Central America's fastest growing economy, with the government ordering the closure of schools and telling retailers and government offices to reduce their opening hours.

The problems created by drought in Panama serve to highlight that some of our sub-regional views on the Central American energy sector are playing out: namely, that many of the countries in the region are overly reliant on expensive imported fuels and in this case in particular , unreliable hydropower. Furthermore, Panama's response - to talk to the US about the possibility of importing cheap gas - is an emerging trend we will be watching closely.

In 2013, 56% of Panama's total electricity generation capacity will comprise of hydroelectric power , a ccording to our forecasts, with imported oil -fired capacity accounting for the rest. Such reliance on two fuel sources highlight s the country's poorly diversified energy mix and demonstrates why the cost of importing oil is having such an impact on the country's balance of payments position .

Exacerbating these issues is the coun try's inability to cater to rapi dly growing power demand (we e stimate power consumption will grow at an annual average of 4.5% to 2022 ). Panama's economy is currently the fastest growing in Central America , with BMI 's Country Risk team forecasting that it is set to expand at 7.8% in 2013 and 7.0% in 2014 , thanks, in part, to the US$5.2bn expansion of the Panama Canal . Consequently, Panama will need to ramp-up electricity generation to ensure its tight supply- demand balance doesn't constrain economic growth. To this end is notable that the recent power shortages have affected the Panama Canal, which suspended some operations on May 9 due to power rationing. The impact of electricity shortages on such a pivotal part of the country's economy could add greater impetus to the government's plans to diversify.

Struggling To Meet Demand
Panama - Total Net Consumption, Generation And T&D Losses, 2012-2022

Could The US Ride To The Rescue?

To this end, we have previously highlighted that Panama has mooted plans to develop gas-fired generation, but have refrained (and continue to refrain) from including them in our forecasts until they have advanced farther along the project pipeline. Numerous projects have been mooted, including plans for a LNG import terminal and a US$130mn gas-fired power plant in the city of Colon, which would be supplied with Colombian LNG. While there have been few updates on these plans, President Ricardo Martinelli is believed to have discussed the possibility of importing cheap natural gas from the US during President Obama's first visit to Central America in May 2013 - lending some upside to gas-fired capacity taking up a position in the electricity generation mix.

Furthermore, we believe that the expansion of the Panama Canal could give Panama leverage when attempting to tap cheap US gas. Once it is completed, the canal will provide US natural gas producers on the Gulf Coast with a direct transit route to gas-hungry Asian markets. While the idea of the US transporting LNG abroad to Asia (or to Latina America) would have been unthinkable just a few years ago, the advent of shale gas has made this a real possibility. As a result, Panama is well positioned to strike a deal.

Infrastructure Still A Stumbling Block

Regardless of whether gas-fired capacity comes online, we believe one of the main problems for Panama is the inefficiency of its grid infrastructure. Supporting our view, Panamanian President Martinelli has highlighted electricity transmission as one of the most serious problems facing the country. With our forecasts indicating transmission and distribution (T&D) losses are running at around 14%, this is certainly exacerbating the country's already tight electricity supply-demand balance, and grid infrastructure will need to be upgraded - another common trend across Central America.

In response, Martinelli has said the government will seek bidders to construct new transmission lines; however, even though the government has outlined these ambitious plans, we believe that even if they are realised the benefits will take time to feed through to the power sector. Consequently, we expect such weakness to continue to weigh on the business environment in the short-term.

Opportunities In Renewables

Meanwhile, one positive from the Central America's reliance on hydropower is that it has boosted the region's green credentials. Strengthening these credentials still further, Panama is looking closely at wind power, with licences for a combined 976MW under review by public services regulator, Asep. Additionally, geothermal potential is also being explored and Panama has called for companies to register interest in geothermal concessions. We see tremendous opportunities for growth in the development of renewables across Central America and Latin America more broadly. Panama has already started trying to capitalise, as it tries to wean itself off reliance on hydropower and imported oil.

This article is tagged to:
Sector: Infrastructure, Power
Geography: Panama, Panama, Panama, Panama

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