Summary: Despite its hydro-centric energy matrix, Colombia has yet to establish a true renewable energy sector. The government needs to address three key issues if investors are to take the country seriously: the capacity payment scheme needs restructuring; the transmission grid needs expanding into the Guajira peninsula; and the clubby oligopolistic nature of the electricity sector addressed. Until then, Colombia’s boast of a low carbon economy will remain more the result of fortuitous geography than of any concerted effort.
About the Author: Carlos St. James is a leading advisor to energy investors and developers in emerging markets. He co-founded and presided over the Argentine Renewable Energies Chamber from 2005-2011; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; and publishes the Latin American Energy Review in his free time to help generate debate on the industry’s issues.
He will speak at the LAC-CORE Clean Energy Finance Summit, June 13-15, 2017 in Miami, where the Colombian market and many other issues will be discussed.
A year ago I wrote about Colombia’s failure to establish a diversified renewable energy sector, making the case that the government was long on planning and short on action (read it here). One year later little has changed; it seems the government has a talent for coming up with plans that it doesn’t really want to implement. A closer analysis reveals the reasons for this lethargy, with conflicts of interest emerging and three key issues than need addressing if renewable energy investors are to take the country seriously:
- The Cargo por Confiabilidad – a fixed payment generators receive akin to paying for installed capacity – is badly designed, lacks transparency, and needs to be amended dramatically if it is to address the true energy needs of the country;
- The oligopolistic traits of the energy market need to be confronted once and for all and a solution found: the public sector controls the vast majority of generation and has a Don’t Rock the Boat mindset which keeps out new investors and any incentive for real change;
- The transmission grid doesn’t reach the Guajira Peninsula, where the best wind and solar resources are located. There are vague plans to expand there by 2023.
A green energy matrix — but no reason to boast
Colombia takes pride in the cleanliness of its energy production. The government is quick to point out how their commitment to hydro energy sources proves it. That’s partly true: hydro sources generated two thirds of the country’s electricity in 2016 and represents 70% of its installed capacity. (Click on charts, graphs and maps to enlarge.)
Yet this green-ness is not quite what it appears. Coal-fired electricity capacity has been the fastest-growing technology in Colombia’s energy matrix: from 6.3% of the total matrix in 2010 to 8% in 2016, reaching 1343 megawatts (MW) last year. An additional 220 MW is under construction.
And renewables like wind and solar? There are a mere 19 MW of wind energy and 6 MW of solar PV installed (offgrid), plus 10 MW of solar about to break ground – but tellingly, this single new project is not owned by any of the Big Five companies that dominate the electricity sector (addressed below).
“Colombia continues to add hundreds of megawatts of coal-fired energy capacity yet has only 19 MW of wind and 6 MW of solar operational.”
By this measure Colombia cares little about the environment. As a comparison, neighboring Panama has a similarly hydro-centric energy matrix and also increasingly suffers from droughts. Yet they have managed to install 271 MW of wind energy plus another 73 MW of solar PV — with an additional 361 MW of wind and 70 MW of solar under construction.
So for a country supposedly so good at planning, why the omissions?
1 – Cargo por Confiabilidad: Reliability Payments
A key element needing reform is the “Cargo por Confiabilidad”, adopted in 2006. It is a hard term to translate. It isn’t exactly a payment to electricity generators for having installed capacity at hand (although close); rather, they are payments made by the government to ensure that electricity can be on hand especially in times of crisis such as during the periodic El Niño-engendered droughts. Under the Cargo, generators receive fixed annual payments for up to 20 years regardless of their participation in the electricity market. In exchange for this payment they must ensure they remain available to provide energy when called upon.
But there are signs it has been mismanaged — and worse, not lived up to its goals. The energy sector is in disarray: there have been blackouts, calls for energy conservation, and raised tariffs: exactly what the Cargo payments are supposed to help avoid. The government paid out US$7.5 billion to generators between 2007-15 under this program, yet two of the country’s largest thermal plants ceased operations despite having received a combined $330 million from the Cargo. There have also been calls for audits given apparent irregularities in these payments.
Intermittents such as wind and solar PV energy are excluded almost by definition from accessing the Cargo payments. There are periodic auctions for them which, due to their long term nature, provide investors with some degree of long term cash flow stability given the lack of long term power purchase agreements (PPAs) in the market. The government should seriously consider scrapping the Cargo scheme in favor of transparent auctions open to all investors. The Mexican or Chilean models might be the best fit.
2 – Oligopolistic market traits
A topic that isn’t addressed as much as it needs to is the coziness of the energy sector within its self-contained cocoon.
Electricity generation is concentrated in five companies in a market comprised of 46 entities. As the pie graph shows in 2015 the five largest companies generated more than three quarters of the electricity supplied for the year — and significantly, three of the five companies are either government owned or public-private partnerships.
This is perhaps one reason why the Cargo por Confiabilidad has lasted as long as it has: the government is taking money out of one pocket and putting into the other one, keeping itself quite comfortable. Outsiders need not apply.
The solution is not to break down these oligopolies; rather, to find a political and regulatory solution that allows the market to have a handful of 800-pound gorillas while also allowing fresh investors to enter the market specifically to diversify the energy matrix. The only thing lacking is the political will to do it.
3 – Mismatch between the grid and location of renewable resources
Despite all the planning, the grid does not extend to where the best renewable resources are located. Plans to expand in that direction are tenuous.
In Colombia, the best solar radiation as well as wind are both located in the same place: the northern Guajira peninsula (see red circles on maps). Guajira has class 7 winds (over 10 meters per second); the only other South American place with something comparable is the Patagonia. Guajira also boasts solar radiation of close to 6 kilowatt-hours per square meter (kWh/m2); to put that in perspective, the Chilean Atacama Desert has radiation of about 7-7.5 kWh/m2, and the Mexican Sonoran Desert 6-7 kWh/m2.
The Guajira peninsula is largely undeveloped; it is mostly used for agricultural, cattle, and fossil fuel production. As this map shows, the grid does not extend there. Worse, UPME’s expansion plans do not include the Guajira peninsula — although in the last year it seems to have been added to the discussion with a goal of expanding into Guajira by 2023. That does very little for investors today.
The local industry association, Asociacion de Energias Renovables, states that there are two gigwatts’ worth of wind and solar projects ready to come to life — given the right regulatory framework and grid expansion. But investors are unlikely to enter until issues like these are addressed.
Colombia’s regulatory issues and investors’ concerns are among the topics that will be addressed at the regionally-focused LAC-CORE Clean Energy Finance Summit, to be held in Miami between June 13-15 this year. I look forward to seeing you at this critical event where bankers, government and developers meet to debate the key issues affecting the region’s renewable energy sector.
I’ll also be speaking at the Andean Renewable Energy Congress (ANDREC), held in Bogota, November 27-30.
© Latin American Energy Review 2017
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