What Colombia needs to jumpstart renewable energy investment

Summary: Colombia is lagging the region in attracting renewable energy investment.  Both public and private sector share the blame.  The sector is closer to Chile’s free market style that Peru’s government sponsoring, and smaller projects are more likely to succeed. But above all, it is time to stop talking and planning — and begin building.

Carlos St JamesAbout the AuthorCarlos St. James is an advisor to energy investors and developers in emerging markets. He founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and publishes the Latin American Energy Review in his free time.

 PrintHe was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida in October 2016.

===========================

I recently wrote about three Latin American countries missing out on renewable energy investment. Two were known “bad boy” countries: Venezuela and Argentina, the latter now in confessionals and looking to become the region’s new alter boy (remember: the Pope and God are both Argentine, so the odds are good); the former on its final binge before hitting skid row. The third country, though, was something of a mystery: Colombia. That initial comparative analysis can be found here.

This is especially confusing given that Colombia:

  • is investment grade;
  • places fourth-highest in the region in the “Ease of Doing Business” world rankings (after Mexico, Chile and Peru);
  • is considered to have strong institutions;
  • has low energy subsidy rates, as outlined in this brief analysis; and
  • lives from energy crisis to energy crisis because of increasing droughts: in Colombia, two-thirds of electricity comes from hydro sources.

This means it should be in the top tier of investment recipients along with Brazil, Mexico, Chile and Peru. In fact it has a lot of economic, resource and structural similarities with the last two — except that Peru recently completed its third renewables auctions since 2009 which achieved record-breaking low pricing for wind and solar deals and has attracted over a billion dollars in investment, as outlined in this analysis, and Chile has been attracting investment driven by favoring free-market principles and use of private sector PPAs — which is more like Colombia wants it.

Colombia hasn’t announced even a first auction and its renewables law (ley #1715) didn’t come out until 2014 – which doesn’t include specific targets. What gives?

Too much bickering, too much planning, not enough executing

Colombia’s renewable energy industry actually started earlier than most — but in biofuels, not power generation. Along with Brazil (sugarcane ethanol) and Argentina (soy oil-based biodiesel), Colombia has a competitive advantage in palm oil-based biodiesel. Biofuels make sense as a starting point in the region because all three countries have strong, professional and sophisticated agricultural sectors, with plenty of expansion capital available. Biofuels were simply another very promising link in the agricultural value chain. But while Argentina and Brazil met with early success in this area and later had challenges (see related analysis here), Colombia faltered from the start: palm oil biodiesel’s export appeal was offset by reasons ranging from ethical (food vs. fuel and land use change arguments) to technical (an undesirable “cloud point”*). Nonetheless the biofuels sector remains a strong actor and has been successful in building cogeneration power facilities.

The public and private sectors share the blame for the tardiness of the power renewable energy industry to take off; it certainly isn’t a lack of natural resources.

  • the legislative branch of government has been remarkably slow to establish the necessary legal framework or commit to specifics;
  • the executive branch dropped the ball on regulating the law and executing it;
  • the private sector hasn’t been able to organize and speak as one voice;
  • power (the Machiavellian kind) struggles persist: over four-fifths of all electricity is supplied by five companies, three of them state-owned, and they are quite comfortable being an oligopoly. (A law dating to the mid-1990’s grandfathered them into being the only ones that can work in more than one sector: they all generate, transmit and distribute electricity.)

Planning, planning, and some more planning

But it isn’t that government has been sitting on its hands. Last year the Plan Energetico 2050 was published by the government’s energy and mining planning agency (Unidad de Planacion Minero Energetica, or UPME), and last month they also published the 2015-2029 Generation Expansion Plan. An impressive document with eleven different possible scenarios of what the energy matrix might look like in about fifteen years. They all have a starting point in the current 15600 megawatts (MW) of installed capacity in Colombia, where hydro energy represents two-thirds of the total.

Given recent droughts, you’d think this analysis would look at scenarios aggressively diversifying the energy mix away from over-dependence on hydro. Yet the most ambitious of the eleven case studies only reduces hydro energy to 58% of the total energy mix, and one even has it increasing to 70%.

But here is where it becomes important to understand two additional key aspects of the Colombian energy market. One is that UPME and CREC, the regulatory body, prize dependability of electricity supply above all things, thus giving an advantage to those five companies and their large hydro dams — and which places intermittents like wind and solar at a disadvantage. The other is that Colombia has no state-owned utility with which to sign long term PPAs: it is more like the Chilean market than the Peruvian, where you have to find your own private sector off-takers.

Only four of those eleven 2029 scenarios envision any wind capacity at all, and only two include any solar or geothermal. The most matrix-diversified scenario shows 3131 MW of wind; 239 MW of solar PV, and 50 MW of geothermal by 2029. This would result in less than 14% of the matrix comprised of these three renewable sources (plus 58% of hydro as mentioned above). Compare this to, say, Argentina’s new goal of reaching 8% renewables mix within two years and 20% by 2020; or Chile’s goal of 20% by 2025 (which it will reach a couple years ahead of schedule).

These are not the bold goalposts of a country committed to matrix diversification and clean energy.

But at least the plan also indicates when this scenario’s green energy would become operational:

  • in the case of wind, 1381 MW would be generating before the end of 2019;
  • 54 MW of solar would be generating by 2020; and
  • the full 50 MW of geothermal would also be up and running by 2020.
“These are not the bold goalposts of a country committed to matrix diversification and clean energy.”

But there is good news, too

Decree #2143 came out in late 2015 and addressed tax incentives for renewables law #1715 — and they are solid:

  • the value added tax (VAT) of 16% is eliminated on capital equipment relating to renewable energy projects;
  • capital equipment is exempt from import duties;
  • there is an accelerated depreciation allowance on capital equipment;
  • and a 50% reduction on taxation in the first five years of the project (Colombia’s corporate tax rate is a hefty 30%).

Also, the private sector seems to be finding common ground and this very week is coming together to establish an industry association, the Asociacion Colombiana de Energia Renovable.

But there are also some hidden gems that may prove to make the wait worthwhile.

If you think of the Colombian market as if it’s Chile but with decent tax incentives, investors may find an opening.  Projects under 20 MW in size have priority to gain access to the grid. The spot price is roughly US$100/megawatt-hour. Local banks are well funded and sophisticated, and as in Chile you could get merchant PPAs for a third of your output and perhaps persuade bankers that the spot price is predictable enough to get long term financing.  A number of projects have gone this route successfully.

It has regulated net metering (Decree #2469 of late 2014) which jumpstarts smartgrid and offgrid solutions and further makes clear that Colombia is not the place for Chinese style mega-projects but rather smaller ones.

With energy planning all done, Colombia’s public and private sectors now need to make it a reality. Government will have to decide where it wants to be in all this and work with its obstructionist brethren. The new industry trade association must be united, strong, and make clear that if viable goalposts are established investors will come, jobs will be created, and energy will flow more consistently in the country. Together they must quickly hammer out an agreement on a scenario – then execute it as well as it was planned.

*simply put, palm oil-based biodiesel hardens into a gel (“clouds”) when the temperature drops a little.

© Latin American Energy Review 2016

 

About the Author:

Carlos St. James is the co-founder of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish); board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.

He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.

 

Please follow and like us:

2 thoughts on “What Colombia needs to jumpstart renewable energy investment”

  1. Hi Carlos,

    It’s a good analysis for sure – I am surprised at your knowledge of our power sector – but a few corrections are needed:

    1. UPME’s modelling efforts: I’m afraid that UPME’s modelling efforts tend to be overly optimistic or overly pessimistic on predicting demand growth in Colombia. For example, the country’s electric power sector was overinstalled during the 1990’s and the 2000’s, leading to privatizations, consolidation (especially on the distribution side) and very low power prices for a very long time. UPME’s top-down modelling may also not provide an adequate prediction of the adoption of rooftop solar in Colombia, which has a high economic forcing function due to the cross-subsidized electric rates for end users, some of which pay over $500 COP/kWh (>$18 cents/kWh) due to this effect.

    2. Subsidies: To say that Colombia likes its power sector without subsidies is not quite true. Thermal power obtains a capacity subsidy based on the fact that these sources are “firm”. Thermal power plants make more money idled than operating because of this capacity subsidy, which makes up about 25% of the price of long-term contracts in Colombia.

    In 2015, the Gas and Energy Regulatory Commission changed the methodology with which each plant’s Firm Energy Offering was calculated, essentially forcing all “minor” generators that used to be free from the dispatch order whose installed capacity was greater than 5 MW (and less than 20 MW) to predict their hourly generation for the next day to +/- 10% accuracy. If they fail to do this (which is hard for anything but high plant factor hydro and solar), they lose their Reliability Charge earnings for the next 6 months. This means that projects have to be kept below 5 MW to be free from the dispatch order without concern.

    3. Integration: Unlike Chile, which has three separate power grids, Colombia’s interconnected system is a whole. Thanks to this, there are substantial opportunities to install solar and wind (below 5 MW, see above) in areas of the country where logistics reduce the cost and risk of projects. Existing players with large hydro dams have shown interest in intermittent yet complimentary sources of power through renewable projects in order to ensure that they meet their Firm Energy Offerings during El Niño seasons, when power prices have reached upwards of $300 USD/MWh.

    4. Recent Developments: Price volatility in the power sector in Colombia may be reduced as a new LNG plant comes online, designed specifically to supply natural gas to thermal power plants during El Niño seasons. That said, no further large hydro projects will come online until Ituango, a 2400 MW behemoth, is completed around 2022. The privatization of Isagen and Enel’s recent experiences with El Quimbo also lead one to believe that the new private players in the Colombian power oligopoly will not add additional capacity until the market signals them that it is absolutely necessary. Because of this, high power prices (spot prices > $150 COP/kWh) can be expected until Ituango comes online.

    Summary: To reduce regulatory and market risk, clean energy investors should focus on rooftop PV on offices, hotels and schools, small-scale hydro with high plant factors and possibly wind power in areas where logistics and social issues are more conducive to development than Guajira. Securing areas for geothermal exploration could also be a interesting play, as the way Colombia pays for firm energy makes an operating geothermal plant an extremely interesting play due to its inherently high capacity factor.

Leave a Reply

Your email address will not be published. Required fields are marked *