Alternative Energy & Power 2019

Last Updated August 07, 2019

Colombia

Law and Practice

Authors



Baker McKenzie S.A.S. has the widest geographical coverage of the firms in the region, and includes multidisciplinary professionals who specialise in clients' industries. The firm's experts are technically and commercially skilled, and trained to anticipate risks in a permanently changing and globalised business environment. Baker McKenzie's global network facilitates a unique knowledge exchange with the most influential business centres in the world, enabling the team in Bogotá to maintain international service standards.

Since its restructuring in 1994 through the enactment of Laws 142 and 143 (hereinafter the “General Laws”), the Colombian power industry has been organised and operates similarly to the power industry in several other jurisdictions, being composed of four traditional segments: generation, transmission, distribution, and supply/retail (known as comercialización, in Spanish).

Aside from and based on the General Laws, the Colombian regulatory body – Comisión de Regulación de Energía y Gas, or "CREG", for its acronym in Spanish) – has issued and enacted vast regulations (composed of individual Resolutions) on technical, economic and competition matters (among others) for each of the segments mentioned above, with which agents participating in each activity must comply.

The power generation and retail segments are intrinsically free initiative markets, where private investors are able to participate without a specific licence or concession. On the contrary, due to historical and practical reasons (the main being the economic principle of natural monopoly), the transmission and distribution segments (which are, in essence, power transportation activities) have high entry barriers: the transmission system is dominated by Interconexión Eléctrica S.A. (known as ISA), which owns most of the transmission lines and manages the National Interconnected System (“STN”), and the distribution systems are mainly dominated by local distributors.

Private investment, however, is allowed without restriction in all of the different segments of the Colombian power market.

The General Laws contain a general mandate for activities from the different segments of the power industry to be disaggregated or unbundled, with the only possible combinations being (i) generation and supply/retail, and (ii) distribution and supply/retail. However, the National Development Plan in force for 2018-2022, enacted through Law 1955, included a provision allowing for public utility companies connected to the grid (STN) to integrate generation, distribution and supply/retail activities, while the regulator (CREG) issues differential rules to promote competition without blocking the development of commercial activities in the market. There are special provisions that can be elaborated further in terms of the overall participation of an agent in the same industry segment.

The main state-owned entities that currently participate and hold a majority or significant share in the Colombian power industry are ISA, which owns around 84% of the transmission lines and manages the STN, and ISAGEN, a generator that is a subsidiary of ISA.

The main private-owned agents participating and holding a significant share of different segments in the Colombian power industry are Empresas Públicas de Medellín ("EPM", for its acronym in Spanish), ENEL Green Power and AES, among others.

There are no restrictions (ie, thresholds) on foreign investment in any of the segments of the Colombian power industry. As a consequence, foreign investors that are interested in participating in the Colombian power industry are legally entitled to do so, and shall be treated equally as long as they observe and comply with the regulations applicable to each activity and segment.

Private investors are shielded by legal protections again seizure, confiscation and expropriation, regardless of whether they are domestic or foreign, which enables them to file for international investment arbitration against the Colombian government if it takes any of the aforementioned measures (seizure, confiscation or expropriation), which is highly unlikely in Colombia given the current state of things, and considering the legal system currently in force.

There are no restrictions under Colombian law that could prohibit or hinder the sale of power industry assets or businesses, or other transactions such as amalgamations, mergers and acquisitions. So long as the competition restrictions are observed and adhered to, the disposal of private-owned businesses and assets in the Colombian power sector can be negotiated freely at the will of the interested parties.

If the assets to be sold are part of the transmission or distribution infrastructure, the acquiring entity shall bear the same obligations formerly assumed and complied with by the seller, in terms of access-granting and reliability vis-à-vis third parties.

Several government bodies participate in policy-making, planning and the enforcement of regulation in the Colombian power sector, as follows:

  • The general policy on power matters is issued by the Ministry of Mines and Energy (“MME”), together with the President of Colombia, in accordance with the General Laws. This policy is materialised in Resolutions issued by the MME, which normally require further “elaboration” by the regulator, CREG.
  • In terms of planning, the MME relies on the Mining-Power Planning Unit (“UPME”, for its acronym in Spanish), which is the entity responsible for planning the expansion of the generation and transmission infrastructure in the STN. UPME works alongside the Institute for the Planning and Promotion of Power Solutions for Non-interconnected Zones ("IPSE", for its acronym in Spanish) and administers, among others, the competitive processes to allocate the right to build and operate expansions to the transmission infrastructure, and the new competitive processes for the allocation of long-term PPAs (ie, PPAs that can be entered into directly by generators/suppliers and purchasers, without the need to participate in the competitive processes administered by UPME).
  • Regulation on each and every segment in the Colombian power industry is issued by CREG, in the form of Resolutions and Circulares (a type of administrative acts aimed at clarifying CREG’s standing on a certain topic, always based on existing regulation).
  • The authority in charge of undertaking surveillance activities over those agents participating in the Colombian power sector is the Superintendence of Public Utilities ("SSPD", for its acronym in Spanish). The SSPD is the only authority with powers to impose penalties for a breach of the applicable regulatory obligations.
  • A private entity known as XM (its full name being XM S.A. E.S.P., a subsidiary of ISA) acts as the administrator of the wholesale electricity market. In this capacity, XM manages the centralised dispatch, and is composed of several different departments that ensure the proper operation of the power exchange.

A couple of very significant changes have been made to the laws and regulations governing the power industry during the last year. These represent material changes, and mainly concern the following:

  • the creation of a double-ended auction mechanism to allocate long-term PPAs, between private generators and offtakers. The second attempt at this auction will take place before the end of 2019;
  • the enactment of technical regulation aimed at facilitating the connection of renewable energy (mainly solar and wind) projects to the grid; and
  • the enactment of a provision, in the National Development Plan for 2018-2022, imposing an obligation on power suppliers to have a portion of between 8% and 10% of their power purchases stem from non-conventional renewable sources, through long-term agreements allocated through specific market mechanisms.

Another change worth mentioning is the enactment of new regulation governing small-scale self-generation (with the possibility for the self-generator to send power surplus to the system), cogeneration, and distributed generation.

There are no announcements other than those already mentioned above.

The Colombian power industry is very well structured and stable in terms of its governing regulations, the interaction between different authorities, and the protection of private interests and investments. It is very interesting to note that activities in the different segments of the power industry have been performed freely since the 1990s, with no need to obtain specific concessions or operating permits from the government, which limits the scope of its own activities to monitor compliance with compulsory regulations, normally focusing on matters related to residential public utility services (power supply) and the rights of end consumers.

When deals (in general) in the power industry take place between private parties, in equal conditions, and none of the parties is a “regulated user” in essence (ie, a residential user), the negotiation of the terms of the relevant deal are to be set freely, with virtually no restriction whatsoever.

This translates to the Colombian power industry being very flexible and functioning very well, from the perspective of private investors. Furthermore, the fact that the power market in general is managed by a specialised entity (XM) with exclusive devotion to such administration, is very relevant and valuable, considering that such specialisation allows for the actual administration of the system to be smooth and function properly.

The Colombian wholesale electricity market is administered by XM, whose main roles and responsibilities include those related to the National Dispatch Centre (which undertakes surveillance and control over the integrated operation of generation, interconnection and transmission assets that form part of the National Interconnected System), and those related to the administration of commercial exchanges taking place at the wholesale market or the bilateral (long-term PPA) market, through a department known as ASIC. Therefore, XM is in charge of administering the wholesale market, also known as the power exchange, which is competitive in nature.

The price of power at the wholesale market is set as a result of competitive offers placed by generators at the end of each day, for the following day (the structure of the market is a “day-ahead” one). The component of the overall tariff that is ultimately paid by end consumers (regulated users – ie, residential users) is composed by such price set at the wholesale market, plus regulated transmission and distribution    charges and a commercialisation margin. 

Imports and exports of electricity to and from other jurisdictions are permitted in Colombia, in the context of the Andean Community, and pursuant to regulations issued by CREG. Currently, Colombia only performs international transactions for the import or export of electricity with Ecuador (it has been doing so for the last 15 years), in the terms set forth in the regulation enforced by CREG. These international transactions are known as International Electricity Transactions ("TIE", for the acronym in Spanish).

The Colombian TIE market is a short-term surplus market. This means that the relevant countries (ie, Colombia and Ecuador) fix their prices for the generation not required to cover their domestic needs, on a daily basis, in amounts not exceeding the transportation capacity at the relevant node, and simultaneously define the price of import, which is the price they are willing to pay to purchase electricity from the other country.

If the import price of one of the countries exceeds the sale offer price from the other country (corresponding to its surplus), then an import transaction will be activated.

Colombia has been negotiating an international interconnection with Panama since 2009, but no agreement has yet been reached; a final agreement on the matter is expected in the near future.

Colombia’s current supply mix (in terms of installed generation capacity) is as follows:

  • hydro: around 66.6%;
  • thermal (fossil fuels – natural gas, diesel, coal): around 28.5%; and
  • other sources (including small hydro plants and renewable unconventional sources): around 4.9%.

The percentage of electricity supply that can be controlled in the market by a single entity is limited to 25% by Colombian regulation (more specifically, Resolution 128, 1996). The provision setting forth this limit is worded in a manner that suggests the 25% limit refers to the national market in general, and is analysed separately for (i) the regulated market and (ii) the non-regulated market. To calculate the actual participation of an agent in the power supply market, with the purpose of making sure that the restriction is not breached, both its direct and indirect (through controlling entities, affiliates or subsidiaries) participations or shares will be added up. If the 25% limit is exceeded at any point in time, the SSPD will grant the relevant agent (or corporate group) a term of six months to adopt the necessary measures to comply with the legal restriction (ie, divest).

Since the Colombian power market is competitive, there is an agency that conducts surveillance of the relevant activities, to detect anti-competitive behaviour and enforce the applicable obligations and restrictions.

Such agency is the SSPD, which has been granted sufficient powers to compel the delivery of documents and information, and to impose different penalties on agents that have been involved in anti-competitive practices, or that generally breach their regulatory obligations in a material way.

The main laws that prohibit anti-competitive behaviour and establish a market surveillance and enforcement process are Laws 142 and 143, 1994.

The penalties (which have recently been amended, through the enactment of Law 1955) that can be imposed by SSPD on agents that have breached their regulatory obligations or been involved in anti-competitive practices are as follows:

  • warning;
  • fines ranging from 1 to 100,000 minimum monthly wages (the specific amount being defined according to certain objective criteria related to the materiality of the relevant breach, such as its impact on the overall provision of the public utility, recidivism, etc);
  • an order to suspend all or some of the activities of the agent, and foreclosure of facilities where the activities take place;
  • an order to remove the responsible officers from their positions in the company of the agent, and the setting of a prohibition for such officers to occupy similar positions for a term up to ten years thereafter;
  • a request for the authorities that have granted concessions to the agent (if any) to declare the eminent termination of such concessions, and to revoke any licences granted;
  • prohibition on the relevant agent engaging in public utility activities for a term up to ten years; and/or
  • seizure (toma de posesión) of the relevant agent company, or temporary or definitive suspension of its authorisations and licences, whenever the previous measures are not effective or lead to damages to third parties.

The main general (not sector-specific) climate change law that has been enacted in Colombia is Law 1931, 2018, which contains general principles on climate change and the measures to assess and address it, which are applicable to different industries. The Law created the National System for Climate Change (SISCLIMA), managed by the Trans-sectoral Commission of Climate Change ("CICC"), which will be in charge of defining the overall national policy on adaptation to climate change (through the participation of different incumbent parties), including the issuance of orders for the different Ministries to take measures to reduce green house gases ("GHG") emissions in their respective sectors. Environmental authorities, in particular, have been given different tasks in connection with this matter.

In line with the general policy on climate change, Law 1819, 2016 (current Colombian Tax Statute) created a national carbon tax, levied on fossil fuels in general.

Regarding the power sector specifically, Colombia enacted the following:

  • Law 1665, 2013, which adopted the International Renewable Energy Agency ("IRENA") statute, 1844, 2017, which in turn adopted the Paris Agreement resulting from COP-21; and
  • Law 1715, which governs the integration of unconventional renewable sources of energy to the National Electric System.

Law 1715, which has been subject to further regulation elaborating on the matters covered therein, created certain tax, customs and accounting benefits and incentives for developers of projects based on unconventional renewable sources of energy (which in general terms covers generation projects and energy efficiency projects). In general terms, these incentives are as follows:

  • Deduction of investment – persons who make investments in projects based on unconventional renewable resources  (“FNCER, for its acronym in Spanish”) will have the right to deduct up to 50% of said investment from their income, for 15 years following the taxable year in which they made the investment, subject to the restriction that in no case may the deduction exceed 50% of the net income of the investor prior to subtracting the value of the investment. In order to obtain this deduction, it is necessary to obtain a certificate of environmental benefit from the Ministry of Environment.
  • Accelerated depreciation – depreciation is authorised for the machinery, equipment and civil work necessary for the pre-investment, investment and operation of the generator based on FNCER. The annual rate of depreciation may not be higher than 20% as a global rate, which may be changed by the project owner annually.
  • Thin capitalisation – these rules are not applicable to projects based on unconventional renewable sources of energy.
  • VAT – equipment, elements, machinery and services for the pre-investment, investment and power production of the generator based on FNCER (including investments in measuring resources), whether domestic or imported, are excluded from VAT. For this purpose, UPME issues a list of the equipment and services that are exempted. Those equipment and services are then certified by the Ministry of Environment.
  • Customs – all machinery, equipment, materials and consumables that are not produced in Colombia but will be exclusively used in works of pre-investment and investment in a FNCER project will be exempt from the payment of any customs upon import. An exception from DIAN (Colombian tax authority) must be requested prior to the import, accompanied by a certificate from the Ministry of Mines and Energy regarding the nature of the project.

This section is not applicable.

In addition to the incentives referred to under 3.1 Principal Climate Change Laws and/or Policies, above, the Colombian government created a double-ended auction mechanism for the allocation of long-term PPAs, exclusively for generators with projects sourced by unconventional renewable resources. While the details of this auction are still being defined by the Ministry of Mines and Energy and the regulator (CREG), the PPAs resulting therefrom will be entered into directly between generators and private offtakers (suppliers), rather than with the Colombian government as offtaker. This is very attractive for project developers, in terms of creating a possible additional, stable revenue that could facilitate the financing of the relevant projects. 

Finally, it must be noted that the Ministry of Mines and Energy has set a target for 15% of the energy produced in Colombia by 2030 to stem from unconventional renewable sources, leading to a reduction of greenhouse gases emitted by 20%. In terms of installed capacity, the goal has been set at 1,500 MW (from 50 MW) by 2022.

The regulation applicable to the construction and operation of generation facilities is diverse, considering that no specific licence is required for private investors to generate power in general. Furthermore, Article 85 of Law 143 refers to the voluntary risk-assumption that characterises the development of this kind of project, by indicating that decisions to invest in the generation, interconnection, transmission and distribution of power are the exclusive responsibility of the relevant developers, who assume the inherent performance and operation risks in their entirety.

Rather, several different types of requirement (technical, etc) shall be met by developers of generation projects, and the main governmental licence to be obtained for the construction and operation thereof is the environmental licence, in those cases where it is deemed applicable (for projects with an installed capacity of 10 MW and above). In these cases, the environmental licence will normally supersede and replace the need for an independent construction licence (from an urban planning perspective), which should be applied for if, in the contrary, no environmental licence is required due to the installed capacity of the facilities. Environmental licences can be granted by the national authority ("ANLA") for projects with an installed capacity of 100 MW or more, or by regional authorities (Corporaciones Autónomas Regionales –CAR) for projects with an installed capacity of between 10 MW and 100 MW.

General requirements to build a generation plant are conceptually divided into three different stages, as follows:

  • pre-construction;
  • construction; and
  • commissioning.

In reiteration of the above, the different requirements covered by each stage stem from different resolutions and guidelines issued by multiple authorities, and would need to be analysed jointly on a case-by-case basis.

Due to the dispersal of applicable regulation (see 4.1 Principal Laws Governing the Construction and Operation of Generating Facilities), this section cannot be answered.

Due to the dispersal of applicable regulation (see 4.1 Principal Laws Governing the Construction and Operation of Generating Facilities), this section cannot be answered.

Law 142, 1994 declared projects involving the construction of infrastructure (ie, generation plants or transmission lines and substations) to render public utilities (ie, electricity) as public utility and social interest projects, which entails a guarantee for the relevant developers to be able to access the land required for their construction and operation.

This allows for easements over the land required for the construction and operation of this kind of project to be forcefully imposed if a mutual negotiation with the relevant owner is not possible or does not lead to an actual agreement on the matter.

It also allows, as a measure of last resort, for the relevant lands to be subject to eminent domain or expropriation measures, to the extent the acquisition of the land by the project developers is deemed absolutely necessary for the project to be built and/or operated. This measure is, however, very rare, due to the requirements for it to proceed and the typical structure of energy projects, which can normally be developed with lease or usufruct rights, as well as easements.

Project developers who secure their rights over land by means of forcefully imposed (as well as voluntarily imposed) easements or expropriations are obligated to compensate the land owners through economic payments that are calculated by the relevant authority (administrative or judicial) based on the actual value of the plots involved. In any case, the relevant laws normally provide for direct negotiations to be attempted as a prerequisite to seeking the imposition of forceful measures.

The decommissioning of generation facilities is subject to different requirements, stemming mainly from the terms of the relevant environmental licence granted for the construction and operation of such facilities. Therefore, in order to be aware of the commitments that will need to be honoured and complied with by project developers upon decommissioning their facilities, the wording of the specific environmental licence covering them should be reviewed and observed.

In terms of disconnecting facilities from the grid, the relevant requirements set forth in the Operation Code (Resolution 025, 1995 by CREG) and the private connection agreements entered into with network operators shall be observed as well. 

The principal laws that govern the construction and operation of transmission lines and associated facilities in Colombia are Laws 142 and 143, 1994. Article 85 of Law 143 refers to the voluntary risk-assumption that characterises the development of this kind of project, by indicating that decisions to invest in the generation, interconnection, transmission and distribution of power are the exclusive responsibility of the relevant developers, who assume the inherent performance and operation risks in their entirety.

Environmental licences are typically required to build and operate transmission facilities, and normally supersede and replace the need to obtain a separate construction permit (from an urban planning perspective). Environmental licences can be granted by the national authority (ANLA) or by regional authorities (Corporaciones Autónomas Regionales – CAR).

Rights to build and operate transmission infrastructure are typically awarded by the planning authority attached to the Ministry of Mines and Energy, UPME, as part of its own plans on projected expansions to the grid.

These rights are awarded as a result of public bidding processes in whcih any private investors are able to participate, so long as they meet the required technical and legal capacity requirements set forth in each case, and based on the prices of their respective economic offers (expressed in terms of annual expected income).

This section is not applicable.

Law 142, 1994 declared projects involving the construction of infrastructure (ie, generation plants or transmission lines and substations) to render public utilities (ie, electricity) as public utility and social interest projects, which entails a guarantee for the relevant developers to be able to access the land required for their construction and operation.

This allows for easements over the land required for the construction and operation of this kind of project to be forcefully imposed if a mutual negotiation with the relevant owner is not possible, or does not lead to an actual agreement on the matter.

It also allows, as a measure of last resort, for the relevant lands to be subject to eminent domain or expropriation measures, to the extent the acquisition of the land by the project developers is deemed absolutely necessary for the project to be built and/or operated. This measure is, however, very rare, due to the requirements for it to proceed and the typical structure of energy projects, which can normally be developed with lease or usufruct rights, as well as easements.

Project developers who secure their rights over land by means of forcefully imposed (as well as voluntarily imposed) easements or expropriations are obligated to compensate the land owners through economic payments that are calculated by the relevant authority (administrative or judicial) based on the actual value of the plots involved. In any case, the relevant laws normally provide for direct negotiations to be attempted as a prerequisite to seeking the imposition of forceful measures.

Transmission entities have natural monopoly rights to provide the transmission service within their respective geographical territory. Currently, the agents that have transmission rights over specific infrastructure forming part of the Colombian system are as follows:

  • INTERCOLOMBIA (ISA): 70.994% share;
  • TRANSELCA: 9.809% share;
  • EEB (Bogotá): 8.015% share;
  • EPM (Anqioquia): 6.492% share;
  • EPSA (Pacifico): 2.658% share;
  • ESSA (Santander): 1.319% share;
  • DITASA: 0.361% share;
  • CENS (Norte de Santander – part of the EPM group): 0.185% share; and
  • EBSA (Boyacá): 0.168% share.

As a correlative obligation to their legally acknowledged natural monopoly rights, transmission companies are required to grant free access to their infrastructure in equal conditions, to all other agents that are interested in connecting to and using such infrastructure (ie, generators, distributors and suppliers), in exchange for the payment of certain regulated fees.

Rights to build new transmission infrastructure (ie, lines and substations) are granted by UPME through public competitive processes (see 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities).

Power transmission activities are governed by Law 143, 1994, and by vast regulation issued by CREG referring to the applicable regulated charges, terms of service, and the overall obligation to grant access to the public in equal conditions, among many other subjects.

One of the main norms governing transmission in Colombia, in terms of the technical aspects of such activity, is the Code of Operation, contained in Resolution 025, 1995.

In terms of tariffs (charges), transmission activities are subject to a regulated income methodology, based on which the tariffs that apply to the infrastructure of each agent are set by CREG, and reviewed every five years.

The General Annex to Resolution 011, 2019 contains provisions referring to the terms and quality of service, including topics such as the maximum hours of unavailability acceptable for each transmitter.

Transmission charges are established based on a regulated income methodology, which is set in Resolution 011, 2009 by CREG. This methodology takes into consideration the base assets to be remunerated to each agent, and considers factors such as annual income, replacement cost, overheads, operation and maintenance costs, etc. The annual income acknowledged for each transmission agent is liquidated and paid monthly by the system administrator, XM.

Transmission charges are revised every five years.

Transmission services in Colombia are provided on an open-access and non-discriminatory basis, which means that agents devoted to rendering transmission services (ie, owners and operators of transmission lines, substations and other assets) must allow access to all parties interested in connection (ie, generators, distributors or suppliers), under equal conditions.

The authority undertaking surveillance over the general conduct of operations in the power sector – namely the SSPD – has powers to impose penalties on any transmission agent that breaches its obligation to grant free access to its networks.

The principal laws that govern the construction and operation of distribution lines and associated facilities in Colombia are Laws 142 and 143, 1994. Article 85 of Law 143 refers to the voluntary risk-assumption that characterises the development of this kind of project, by indicating that decisions to invest in the generation, interconnection, transmission and distribution of power are the exclusive responsibility of the relevant developers, who assume the inherent performance and operation risks in their entirety.

Environmental licences are typically required to build and operate transmission facilities, and normally supersede and replace the need to obtain a separate construction permit (from an urban planning perspective). Environmental licences can be granted by the national authority (ANLA) or by regional authorities (Corporaciones Autónomas Regionales – CAR).

Power distribution activities in Colombia are subject to the natural monopoly principle, and therefore the regulation does not foresee the granting of rights to build and operate new distribution infrastructure within the territory of the country that is already connected to the grid. What can happen, instead, is that the current owners/operators of existing distribution assets decide to divest, by selling such assets to a third party, in which case the requirements scattered in the regulation for the sale to be perfected are to be observed.

This section is not applicable.

Law 142, 1994 declared projects involving the construction of infrastructure (ie, generation plants or distribution/transmission lines and substations) to render public utilities (ie, electricity) as public utility and social interest projects, which entails a guarantee for the relevant developers to be able to access the land required for their construction and operation.

This allows for easements over the land required for the construction and operation of this kind of project to be forcefully imposed if a mutual negotiation with the relevant owner is not possible, or does not lead to an actual agreement on the matter.

It also allows, as a measure of last resort, for the relevant lands to be subject to eminent domain or expropriation measures, to the extent the acquisition of the land by the project developers is deemed absolutely necessary for the project to be built and/or operated. This measure is, however, very rare, due to the requirements for it to proceed and the typical structure of energy projects, which can normally be developed with lease or usufruct rights, as well as easements.

Project developers who secure their rights over land by means of forcefully imposed (as well as voluntarily imposed) easements or expropriations are obligated to compensate the land owners through economic payments that are calculated by the relevant authority (administrative or judicial) based on the actual value of the plots involved. In any case, the relevant laws normally provide for direct negotiations to be attempted as a prerequisite to seeking the imposition of forceful measures.

Distribution entities have natural monopoly rights to render the distribution service within their respective geographical territory. Currently, the agents that have distribution rights over specific infrastructure forming part of the Colombian system are as follows:

  • Codensa: 26% share;
  • EPM:26% share;
  • Electricaribe: 22% share;
  • Emcali: 7% share;
  • EPSA: 4% share; and
  • Otros: 15% share.

As a correlative obligation to their legally acknowledged natural monopoly rights, distribution companies are required to grant free access to their infrastructure in equal conditions, to all other agents interested in connecting to and using such infrastructure (ie, generators, distributors and suppliers), in exchange for the payment of certain regulated fees.

Power distribution activities are governed by Law 143, 1994, and vast regulations issued by CREG referring to the applicable regulated charges, terms of service, and the overall obligation to grant access to the public in equal conditions, among many other subjects.

One of the main norms governing distribution in Colombia, in terms of the technical aspects of such activity, is the Code of Operation, contained in Resolution 025, 1995.

In terms of tariffs (charges), distribution activities are subject to a regulated income methodology, based on which the tariffs applicable to the infrastructure of each agent are set by CREG.

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Trends and Developments


Colombia's Energy Landscape and Legislative Changes

The Colombian energy sector has experienced significant changes throughout the last 25 years. Laws 142 and 143 of 1994 transformed the electricity sector in the country by changing a fundamental precept of the system: electricity services would no longer be provided by the state. Instead, the state would regulate the electricity market, but it would be the private sector that would generate electricity for the country. Deep changes in the Colombian power sector followed these regulatory modifications, including the privatisation of a number of state-owned utility companies. Over a period of years, the energy market in Colombia became an increasingly attractive target for private investment, resulting in a substantial improvement in supply and access for a significant portion of the population.

Despite these decidedly positive changes, Colombia is facing concerns that power generation will fall short of expected demand in the coming years. Colombia has historically relied on hydropower, with approximately 70% of the country's energy being produced from this source. As hydropower is heavily dependent on aggregate rainfall and other weather conditions, this has led to periods of shortage in the expected production in recent years due to drought conditions in the country. The current crisis is also partially caused by significant delays in the commencement of operations on the Hidroituango project, a new hydropower generation project being developed in the Antioquia department of Colombia. The project was scheduled to commence power generation operations in 2018 with an installed capacity of 2.4 GW, however, Hidroituango has experienced significant delays to the planned schedule due to major incidents arising during the construction of the project. The effects of the delay are expected to be exacerbated by probable drought conditions expected in 2022.

Law 1715 of 2014 was enacted with the purpose of promoting the development and increased use of non-conventional sources of energy, mainly renewable, in the national energy system, through their integration into the national electricity market with the purpose of achieving both energy efficiency and adequate supply for the country's increasing demand for power. This law serves as a general legal framework for the state to develop specific actions within the energy system. For instance, Law 1753 of 2015 marries some of the same principles with specific actions to promote the development of non-conventional sources of energy. In particular, this law focused on the need to increase electricity access and quality, promote unconventional renewable resources such as solar, wind, biomass, small hydropower and geothermal energy, with the goal of achieving universal energy access and more security in the system, fostering energy efficiency and boosting new international power connections. It was hoped that Colombia's newly obtained energy experience could be leveraged to gain leadership in international organisations and as a tool to improve bilateral co-operation. The CONPES 3934 document titled 'Policy for Green Growth' issued by the former president of Colombia and its ministries in July 2018 also sets forth a number of measures to be undertaken by the government. The document highlights the importance of balancing the need to produce new energies with the imperative that such energies be produced in a sustainable way. All of these legislative developments take into account the important relationship between renewable non-conventional energies and climate change, as the government promotes a more stable, diverse and emissions-free energy matrix.   

Renewable Energy Auction

Based on the above legal framework, and facing the concerns of insufficient power generation for 2021, the Ministry of Mines and Energy of Colombia has developed a new regime in an attempt to promote long-term energy contracts through the implementation of a long-term auction for supply contracts for non-conventional renewable energy. Colombia's first renewable energy auction was held in February 2019 and was managed by the Mining and Energy Planning Unit (UPME), a special administrative unit of the Ministry of Mines and Energy. Power generation projects, with expectations of commencing activities in 2021, along with distributors, were able to participate in the auction process provided that they met certain pre-qualification requirements. Although this long-term renewable energy auction was technically open to any type of generation technology, such as hydro and thermal, the criteria according to which projects were assessed favoured renewable energy technology. That is, projects were assessed according to the following criteria:

  • resilience criterion – this criterion was intended to promote the diversification of energy generation by awarding higher points to projects that involved new or less prevalent methods of electricity generation in Colombia;
  • complementarity of resources criterion – this criterion assessed the ability of generation projects to complement existing hydropower generation assets throughout Colombia;
  • regional energy security criterion – this criterion assessed the ability of projects to improve the imbalance between electricity supply and demand in Colombia in the long term; and
  • emissions reduction criterion – this criterion reflected the push to pursue methods of electricity generation that reduce emissions, awarding higher points to projects which would produce less carbon dioxide.

The auction was intended to assist in re-balancing the country's reliance on hydropower by diversifying power generation assets, particularly favouring energy generation from wind, solar and biomass.

Mechanics of the Renewable Energy Auction

The renewable energy auction was intended to result in long-term energy supply agreements between awarded generators and awarded distributors. Contracts were intended to have a 12-year duration and any generation projects were required to demonstrate the ability to commence energy generation activities by 1 December 2021. If successful, the auction would have resulted in the award of contracts for an aggregate energy supply of 1.18 TWh annually.

The mechanism involved a closed envelope auction in which long-term energy supply agreements would be awarded according to supply and demand offers made by participating generators and distributors. During the auction process, generators were required to make a supply bid including details of the amount of energy being offered annually, the minimum commitment requirement and bid price. Distributors were required to make a demand bid indicating the maximum amount of energy they offered to purchase and the maximum price. Following the award of contracts, it was intended that successful generators would be obliged to sell energy to distributors who made offers to purchase energy at prices which equalled or exceeded the supply offers made by the relevant generator. Similarly, distributors would be obliged to purchase electricity from generators who made supply offers at prices equal to or less than the demand offers made by that distributor. As part of the auction process, an undisclosed maximum ceiling price was imposed, above which bids would be omitted from the process. The auction process also imposed competitive conditions that had to be met, failing which, the auction would be abandoned.

Results of the Auction

The results of the first long-term renewable energy auction, which were announced in February 2019, failed to instil confidence in the ability of the government to improve the outlook for the Colombian power market as, following completion of the auction, the government failed to award any contracts.

Qualifying projects in the auction included 22 generation projects and eight distributors. The qualifying generation projects consisted of 17 solar plants, four wind farms and one biomass power plant. Although the auction resulted in a number of bids, the failure of the auction was due to the low prices tendered by participating distributors, which would have resulted in too few generator participants being awarded a long-term energy contract. This meant the bids failed to meet the requirements of the auction process, which were designed by the Commission for the Regulation of Energy and Gas (CREG) to ensure sufficient competition. If those competition conditions were not met, the rules of the auction process provided that the auction would end with no long-term contracts being awarded, as was the case in the February auction. According to government officials, on the supply side, the prices were very competitive and were below the ceiling price set. However, on the demand side the prices were not what the authorities were expecting.

Reform

Colombia has announced a second long-term energy auction which will be held during the second half of 2019. The terms of the auction are yet to be finalised, but the Ministry of Mines and Energy has proposed a number of changes which are designed to prevent a repeat of the result of the first auction. Proposed changes include the potential for partial remuneration in US dollars and the ability to bid for electricity in time blocks rather than on an annual basis. Under the proposal, electricity generators will be able to submit bids for the supply of electricity during three blocks of time during any given day. Pricing is also proposed to be partially indexed to the US dollar in an attempt to encourage foreign financing for the projects. 

The second long-term energy auction represents the continuing commitment of the Colombian government to seek out non-conventional renewable energy projects to improve the outlook for the energy sector. This commitment represents a positive opportunity for potential investors and developers who are willing to explore the development of non-conventional renewable energy projects in the region.

Other Renewable Projects in Colombia

The government intends for non-conventional renewable energies that currently represent around 2% of the energy matrix to become between 9% and 10% in the following four years. This is an ambitious goal that is estimated to require investments of around USD1.8 billion from the private sector.

Achieving such goals will require that a wide range of projects are successfully implemented throughout the country. Particular opportunities for wind and solar power plants exist in the La Guajira region of Colombia, the northern peninsula bordering Venezuela which experiences unprecedented levels of wind and solar. A project is currently being developed to position La Guajira as the main wind farm region of the country. The project is intended to start producing energy by 2022 and is expected to have 65 wind farms by 2031. Special considerations are being analysed, as the La Guajira region is occupied by large indigenous communities whose concerns over the expected development will need to be addressed. Naturally, Colombian environmental authorities will be deeply involved in the project ensuring that minimum standards are complied with and feasibility studies will need to be completed in order to determine technical, financial, cultural and environmental issues to be addressed as part of such proposals.

Apart from the focus on the generation of energy, Colombia is working towards various regional co-operation projects. For instance, a bidding process for the Colombia-Panama electricity link could be launched in 2020. According to press releases, Colombian authorities are preparing the terms of the tender so they can be launched next year. According to the information available at this stage, the link would run from the Cerromatoso substation in Colombia to the Panamá II substation in Panamá province. This link, as well as other interconnection efforts with other countries in the region, would serve as an introduction to renewable energy exports from Colombia, in particular the La Guajira region, to the Interconnection System of Central American Countries (SIEPAC), significantly expanding the demand for Colombian electricity. Other regional co-operation projects with Venezuela and Ecuador have been considered in the past years, although there is presently no clear prospect of when these projects will be developed.

Other measures also focus on augmenting the transmission capacity of the country in parallel with the proposed expansions in renewable generation capacity. For instance, the Copey-Fundación and Copey-Cuestecitas transmission lines, which are currently under construction, are expected to start operations by the end of 2020. The Mining and Energy Planning Unit (UPME) awarded these projects to Interconexión Eléctrica S.A. (ISA) through public auction for the design, construction, operation and engineering of transmission lines in the north of Colombia. These projects will assist in the incorporation of energy produced by wind farms in La Guajira and nearby regions into Colombia's transmission grid as part of a joint strategy of diversifying the energy matrix and developing better interconnection infrastructure generally.

Colombian generator companies such as Empresa de Energía del Pacífico are also currently working on upgrades to substations in La Guajira department and Cesar department which are already in operation. This is part of Plan5Caribe, a set of measures that seek to optimise and strengthen the electrical power service across the Caribbean region of Colombia, including La Guajira. Plan5Caribe contemplates the construction of new transmission lines and five new substations in the north of Colombia, strategically located to improve the reliability and safety of the system, as well as intervention in 11 existing substations for the improvement of the system.   

A New and Strengthened Energy Market

The Colombian government has set clear goals in terms of development of the local energy market. These efforts require a strong legislative and regulatory framework to provide sufficient guarantees to the private sector to be confident enough to invest and engage in these efforts as part of their business plans. Switching to a more diverse energy matrix has demanded a great effort by all the different actors in the system and a combination of different initiatives which are currently in motion. The results and benefits of these efforts will not be seen immediately, but Colombia has started to benefit from this long-term strategy, which has combined efforts in terms not only of alternative generation sources, but also of transmission and a wider vision towards potential integrated regional markets. Without doubt, this hard work will result in a better quality service, more stability in the electrical energy system and greater capacity to meet the new energy demand of the country and the region. It is a joint effort that will require that all those involved keep paddling in the same direction in the years to come.

Herbert Smith Freehills

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