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Colombia has lagged behind its neighbor countries in Latin America in regards to non-hydro renewable energy development, especially wind energy, despite its great resource potential. The country could be positioned among the most attractive wind growth markets in Latin America, together with Argentina and Peru, but instead remains mired in process planning, delaying project execution.
The country has not installed any wind capacity since 2004 when the 19MW Jepirachi project was commissioned in the La Guajira region. Colombia’s government approved legislation to improve the attractiveness of renewable power investment in 2014 and in 2015 the Department of Mining and Energy Planning - UPME, published its 15-year planning document outlining several scenarios with high wind power penetrations, but with no specific binding targets linked to it.
Colombian energy regulator CREG, provided hope to the wind energy sector last month with the release of its long awaited renewable energy regulation framework. The document presents 4 proposals for the integration of non-conventional renewable energy sources (FNCER) to the country’s power system. All outlined options are based on an auction scheme where the most competitive offers are selected with bidders signing PPAs for 15 years. That’s something new for the Colombian market as long-term contracts are currently nonexistent.
Consumers suffering from high electricity prices, with heavy volatility, would seemingly benefit from long-term PPAs given that electricity costs would be more predictable. However, this business model does not necessarily benefit the handful of companies that control the energy sector. The existing oligopoly is very comfortable with the current market structure, as they control the whole energy value chain, including the full scope of generating, transmitting and distributing energy.
Wholesale electricity prices have been rising fast in the last years, striking ~119USD/MWh on average in 2015 for regulated market users (70% of Colombia total electricity demand) from ~45USD/MWh in 2012. Besides diversifying the Colombian energy matrix, wind could in fact reduce what end users are currently being charged for electricity.
Recent auctions in LATAM confirm that renewables can be extremely cost competitive given the latest advances in technology and their impact on LCoE. In 2016, Mexico achieved wind energy bids as low as 34.7USD/MWh, with Peru and Chile not far behind at 37.7USD/MWh and 38.8USD/MWh, respectively.
Although CREG’s move to introduce auctions into Colombia are laudable, the current set of auction rules leave something to be desired. One of the more concerning elements of the auction is the means at which power prices will be set. Per the latest drafts, all winning bidders shall receive the price set by the last winning offer, meaning that the highest allowable power price accepted within the auction sets the market. MAKE believes this method represents an unnecessary cost/burden for the end user and can lead to unhealthy speculation activity. Developers bidding at low prices to assure a winning offer, expecting that another participant will bid at a higher cost, could find themselves committed to a non-profitable project. The probability that this kind of project will be built is quite low, and can send the wrong message to the market, jeopardizing the whole process and FNCER future development.
Along the same line, CREG’s “Prima Verde” option, which is essentially a feed-in-premium (FIP) represented by a fixed tariff on top of electricity price, also unnecessarily burdens consumers. Wind energy have proven they can compete equally with other technologies, especially in markets where wind resources are strong. The FIP could lead to a final power purchase price much higher than it is needed to be to drive investment. This method goes against the grain of the auction scheme’s primary purpose, which is to seek the lowest cost of energy.
The Energy Purchase Agreement (EPA) may be the most attractive option presented by CREG within the initial framework for the integration of FNCER. The model is more in sync with current regional dynamics and gives more business certainty to all market players. Generators have predictable cash flows, facilitating financing while the buyer gains binding commitments on the energy deliveries, as PPAs are based on an AEP (annual energy production).
There are however some points missing and additional considerations that must be addressed in order to provide more transparency to market participants and attract qualified investors. Priority dispatch for renewable energy sources is one of them. There is no clear reference to it in the current framework although MAKE is aware it is on the government’s agenda. Priority dispatch is key to make the FNCER integration proposals feasible. The lack of a centralized mechanism, separate from the aforementioned power oligopoly, would allow a more economic energy balance between supply and demand and avoid prioritizing dispatch from fossil generators to benefit entrenched power firms. This issue will for sure bring challenges to the technical and commercial integrity of the electrical system and needs attention. Would a virtual energy bank be the solution? Possibly, but who would pay for its roll-out if no subsidies are considered by the government at the moment?
Colombia is heading in the right direction and MAKE hopes to see signs of real market movement in the next few months. Argentina has surprised all of us with the speed that the legal framework went from paper to reality, showing the world it is possible to make things happen if there is political will and commitment from the right government institutions. MAKE cannot emphasize enough the importance of setting specific targets to renewable technologies. Real, tangible goals are crucial and should drive the regulatory framework process. It’s important that all market players feel they are moving together in the same direction, towards a common goal and speaking as one voice.
Colombia has almost all it needs to be successful in this journey: great wind resources, political will, RE incentives, a strong “EODB” ranking, and an initiated regulatory framework. The one most important missing part is the binding RE target.
Should the residential demand source a percentage of its electricity from renewables? Should the industrials? Should all regulated market users have a compulsory clean energy target? It’s up now to the Ministry to set the goals and finally get the Colombian renewable energy sector up and running.
By Leila Garcia da Fonseca, Consultant at MAKE