Innova Capital Partners

By Jonathan Carmody

Investors are waiting at the gates of Colombia’s emerging solar and wind market – impressed by recent sector reforms, but in need of clarification on the business case for developers. The country could well prove to be Latin America’s richest source renewables source.

Keen to participate in Colombia’s nascent solar and wind energy, domestic and international investors are eagerly awaiting con rmation on how the government will incentivize renewables generators.

Since 2006, Colombia has been paying generators to guarantee delivery of energy at a xed price when electricity from hydroelectric sources is scarce, and spot prices are therefore high. All electricity users pay the reliability payment as part of fees to power generators, which won these guarantees in auctions carried out by the Energy and Gas Regulation Commission (CREG).

But setting a price guarantee for renewables is impossible because wind, solar and hydroelectric energy is less predictable, Alejandro Lucio, director of the Colombian Association of Renewable Energy (SER) told Inframation.

As a result, the CREG has submitted four new pricing and contract mechanisms, which the energy industry is reviewing. The CREG plans to choose the winning mechanism within the next three months. Each option includes 15-year contracts for the winners of renewable energy tenders, Camilo Tautiva, the director of regulation at the Ministry of Mines and Energy, explains.

SER is pushing for a mechanism that pays 20 years to winners that commit to guarantee a median of annual energy production delivered within a year.

According to Innova Capital’s head of Latin American business development Patricia Rodríguez, Colombia adopt mechanisms that enable investors to create predictable long-term cash ows. This applies both to large-scale projects and smaller scale projects such as net metering, which credits the owners of solar systems for the energy they provide to the grid.

“Often people tend to think that these projects are purely technological endeavors, but they are actually a nancial exercise,” Rodríguez says. “In order for that nancial exercise to work, you need to have a clearer picture of the make-up of those components, especially the price at which the electricity will be paid because that is your revenue, and the term or length of time that you will receive those revenues. The proposed contract mechanisms will help investors have a clearer picture.”

Lucio predicts that once the CREG announces its reimbursement mechanism, private investors will begin spending money to reach nancial close on projects,.

“Every day, investment bankers come to my of ce to say `I am ready to invest`, but until the regulator de nes how to remunerate plants, we will not invest,” he noted

Potential investors such as Innova say law 1715 (approved in 2014, and to date re ned with a further 11 resolutions and decrees) – which establishes the broad legal and regulatory framework for renewables – may also deter private equity funds because it forbids the transfer of tax incentives to a new investor until the fth year.

Colombia wants to reduce its current 70% reliance on hydroelectricity – which has a negative impact on water availability during droughts – and take advantage of its enormous solar and wind resources.

In terms of wind, the government’s Mining and Planning unit UPME estimates that the northern department of La Guajira has the potential to produce 21,000MW of capacity, enough to meet current national energy needs. Winds there reach an annual average of nearly ten meters per second, making it one of Latin America’s two windiest locations.

In solar, the country has the potential to generate around 40,000 MW of capacity, with the sunniest areas being La Guajira province, San Andrés Islands, and the eastern plains of Orinoco near the Venezuelan border, according to UPME.

Lucio says that conscious of Colombia’s renewables potential, companies are going ahead with projects, and are betting that the government will soon approve the reimbursement mechanisms.

Taking advantage of existing tax bene ts, nine wind farms with a total capacity of 1,451MW are underway in La Guajira. Lucio says public utility company EPM, Enel Green Power and an additional company that the government declined to identify are nancing the nine farms with USD 2.5bn from their own cash ow, he added. They projects are due to become operational in late 2022, when the government plans to conclude a 500Kv transmission line, Tautiva says.

EPM, which owns the country’s only wind farm, plans to build two new farms: Ipapure (201MW) and Mauripao (201MW). Enel Green Power is planning three wind farms: Windpeshi (200MW), Kuisa (200MW) and Urraichi (100 MW). A Colombian promoter, Jemeiwaa, meanwhile, aims to build ve farms with a combined capacity of 549MW.

“Those projects will come online for sure,” Tautiva says, noting that the projects are in the stage of detail engineering. “Companies have already submitted banking guarantees which ensure that they will get connected (to the electricity system) once the transmission line is ready.”

UPME acting director Ricardo Ramirez also told Inframation, investors have registered some 4,000MW in renewables projects with the country’s mining and energy planning unit (UPME) to secure a technical certi cate, and obtain tax exemptions,.

“At the beginning of the year, we asked the market if they were interested in other renewable projects beyond those of La Guajira, and we received a response that we hadn’t
anticipated,” Ramirez said. “Companies expres building around 9,000MW in renewables, for which 4,000MW have advanced studies,” he added.

Ramirez says that in response to this interest, UPME will in October carry out a wide-ranging, long-term national energy study to determine whether future electricity demand requires new infrastructure such as renewables plants and transmission lines to connect to the grid,.

UPME has approved technical certi cates for solar projects in the Caribbean province of Cesar (220MW) and the Magdalena department (29.8MW). Enel Green Power plans to build a 70MW solar generator and Latam Solar expects to build a 150MW solar plant in Cesar. Those projects will connect to the national interconnected system using existing transmission lines.

Multilaterals support renewables

Multilateral banks including the World Bank, the International Finance Corporation (IFC), Inter-American Investment Corporation (IIC) and Latin American development bank CAF are pushing the CREG to make a decision on the best mechanism to remunerate generators to give them a clearer picture on future revenues, SER noted.

They also want the mechanism to guarantee an annual median level of energy generated, as a means to pay generators, Lucio noted.

Multilaterals including the World Bank through national development bank FDN plan to invest at least USD 500m in renewable energy, Tautiva notes. The World Bank and FDN declined comment.

But based on the 4,000MW of capacity developers have registered, at least USD 6bn of investment would be required – with multilateral banks nancing as much as 30% [their standard level of investment in renewables], Lucio notes.

Demonstrating its interest in the country, the World Bank Trust Fund Committee approved USD 40m for the Colombia Clean Energy Development Project (CEDP) on.

10. Working alongside FDN, the project will help increase electricity generation from renewable sources and foster energy savings in the industrial sector using private investment.

“The rst USD 40m is a credit enhancement through which we seek to build ( nancial) instruments that provide schemes of guarantees to improve nancing,” Clemente del Valle, President at FDN told Inframation, adding that the guarantees may resemble those of roads. Of the redesign, Del Valle said: “We are just in the initial phase of designing the possible instruments to reduce risks for concessionaires,” he added.

Lucio concludes that developing renewable energy will depend on the remuneration mechanism, and that until the government decides this, the country’s renewables industry will be delayed.