Among Central American countries, Panama is extremely attractive to investors, not only because it has a stable government and uses the U.S. dollar as its currency, but also because the government is currently deploying a range of fiscal incentives to support the PV industry, including tax exemptions and Import tax measures.

Regarding the growth of the Panama solar market, PV Tech Premium spoke to Fernando Zúñiga, general manager for Central America and the Caribbean at MPC Energy Solutions, an independent power producer that has been operating in Panama for more than six years and also develops, invests and operates the photovoltaic project. MPC is active in many Central and South American countries, including Guatemala and Jamaica.

Zúñiga said that perhaps the only limiting factor for Panama’s PV industry is its small size, which prevents it from competing with larger regional markets such as Mexico, Brazil, or Chile. Panama, on the other hand, has a very active financial services industry, the Panama Canal facilitates transportation and logistics and is becoming an attractive tourist destination, making it particularly interesting to solar developers.

"In the past few years, we have seen a large influx of immigrants from different countries into Panama. This means that the electricity demand is increasing year by year. With all these factors combined, Panama is undoubtedly a very worthwhile location in Central America for investors Market to watch."

Replace dependence on coal with 70% renewable energy

According to Blackridge Research and Consulting, Panama will have 522MW of installed solar capacity by the end of 2022. As of July this year, photovoltaic power generation accounted for 11% of Panama’s national power generation. Panama’s National Energy Plan 2015-2050 aims to have 70% of its installed capacity come from renewable energy sources by 2050.

Panama has historically relied heavily on coal for its energy needs, so photovoltaics have a short history. In 2013, Panama developed and built its first commercial solar photovoltaic power station. There is growing interest in Central America's solar industry, with the Central American country now home to significant and growing projects attracting developers.

However, Panama has held only two energy tenders focusing on solar and wind since 2013. To date, there have been few projects driven by governments or local distributors. On the other hand, since Panama is an open market in the electricity sector (one of its biggest advantages for developers), PPA model projects have emerged in the private market.

"You can always negotiate private power purchase agreements with large off-takers," Zúñiga said.

Fiscal incentives: tax relief

At present, the incentives provided by Panama for solar projects include exemption from import taxes and exemption from value-added tax on imported or locally purchased equipment, parts, or materials required for the construction, operation, and maintenance of solar projects. Projects also receive a 5% tax deduction, applicable to income tax or corporate tax. The deduction is based on the total direct investment in public infrastructure projects such as roads or bridges and accelerated depreciation of equipment.

Especially in the field of renewable energy, power generation systems below 10MW can receive income tax deductions of up to 25% of the project investment. Generator units above 10MW can enjoy a 25% financial discount and an income tax exemption of up to 50% of the project investment.

The law also exempts small renewable energy projects under 10MW from transmission and distribution fees, and projects between 10-20MW do not need to pay transmission and distribution fees for the first 10MW for 10 years.

Many of these economic interests follow the blueprint set by the U.S. Inflation Reduction Act, which provides financial incentives for the development of renewable energy in Brazil. There are other links between Panama and the U.S. solar industry. Last year, Arizona-based module manufacturer Universal Solar announced that it would build a 600MW module production plant in Colón, Panama to supply the US market.

The company said, "Products from Panama are exempt from Section 201 trade tariffs that affect Asian components, and the United States and Panama have signed a long-term free trade agreement. This agreement promotes imports and exports and solves labor and environmental protection issues."

Panama’s state-owned electricity company ETESA is also currently discussing new incentives to avoid import tariffs on solar modules. Following the 2020 renewable energy tender, Zúñiga expects a government-led renewable energy tender to be held late this year or early next year. The tender will be open to other technologies, not just solar, and photovoltaic projects are expected to be very competitive.