Legal Framework

The following legal and regulatory amendments have been recently introduced in Ecuador in relation to alternative energy and power.

• The obligation to obtain prior authorisation for the use of renewable natural resources from the National Environmental Authority, in cases where such resources merit such authorisation.
• New provisions to establish subsidies related to electricity tariffs are seen insofar as, in general terms, it is stipulated that the Ecuadorian state will grant compensation, subsidies or direct and targeted reductions in the public electricity service to artisans, small producers, micro-enterprises and enterprises, which will be defined annually by the Ministry of Energy and Mines.
• Each year, the Ministry of Energy and Mines shall be responsible for informing the Ministry of Finance of the amount of compensation, subsidies or rebates indicated in the previous paragraph, applicable for the following year. For its part, the Ministry of Finance shall issue a favourable opinion based on the rules of public expenditure and principles of fiscal sustainability.

• It has become possible for private capital companies or foreign state-owned companies to participate in electricity transmission activities, provided that any of the following conditions are met:
1. when necessary to satisfy the public, collective or general interest; and
2. when the demand for the service cannot be met by public or mixed undertakings.
• Specific rights and obligations have been established, which state that the companies providing transmission services must, among other things: provide the transmission service with quality, safety and reliability criteria, preserving the integrity of people, facilities and the environment; provide the electricity transmission service allowing free access to its facilities to all participants; receive payment of the tariff set by the competent regulatory and control agency, which will be determined in the cost study; operate exclusively the transmission system for which it is responsible; provide the service of transmission of electric energy, allowing free access to its facilities to all participants; receive payment of the tariff set by the competent regulatory and control agency, which will be determined in the cost study; operate exclusively the transmission system for which it is responsible; provide the service of transmission of electric energy, allowing free access to its facilities to all participants; and receive the tariff set by the competent regulatory and control agency, which will be determined in the cost study.
• The public transmission company will sign commercial management contracts with the companies that have the enabling titles for the transmission activity, which must contain at least: the same term as that of the Enabling Title and shall be subject to its validity; they shall consider for their remuneration a monthly fee resulting from the public selection process and paid according to the availability of the transmission infrastructure made available.

Bankability issues

Concepts have been introduced to strengthen the bankability of renewable energy projects.

Regarding the payment of compensation for termination of the concession contract, the contract shall establish the mechanisms to determine the amount of compensation for each cause of termination, including the method or methods of payment, ensuring equitable conditions and an adequate allocation of risks; for such purposes, it shall proceed in accordance with the applicable regulations and good international practices.

This allows mechanisms used in other jurisdictions to be negotiated and applied, allowing each project to be tailored to its particularities.

In addition, it is established that in all cases, the concessionaire shall pay to the granting authority any amount due at the date of termination, including fines and penalties that have been imposed on the concessionaire prior to the date of termination and that are final.

Excluded from the obligation of reversion of assets in favour of the state are the assets of generators installed by the end user for self-supply, those of self-generators and co-generators.

The rights of the generator are expressly recognised as follows:

• joining the trust or fiduciary structure through which the resources of the electricity sector will be managed; and
• granting any security mechanism in favour of secured creditors or financiers, on the generation assets, as well as on the rights derived from the enabling title and the trust structure.

In this regard, it has been established that the holders of enabling titles to obtain financing for the execution of generation projects may, prior to notifying the granting entity, establish financing schemes in which the real estate comprising the project is delivered as collateral, which, once it enters into operation, will become property encumbered to the public electricity service.

No specific mention is made of transmission projects, which would therefore be implicitly excluded from this right.

Likewise, the granting entity, exceptionally and with the purpose of safeguarding national interests, may authorise the transfer of the rights and obligations of the enabling title to a third party that has a direct interest in the delegated activity or project, either because it is a creditor of the holder or because it is financing the project, observing the conditions and limitations of the public service allocation, thus allowing the conditional assignment of the concession in favour of creditors in the event of default.

Based on Executive Decree 788, concession contracts and any other modality of delegation of a public project to private initiative, both for their granting and for any subsequent reform or modification, must comply with, among others, obtaining a sustainability and fiscal risk report from the Ministry of Finance. The requirements, conditions and procedure for obtaining this report are regulated by Ministerial Agreement 018-2022.

Electricity sector trust

In this respect, the government has yet to execute the fiduciary mechanism to manage the resources generated by the collection of electricity sector revenues.

It is expected that this trust will act in conjunction with the provisions of Regulation 006/21, which establishes the order of priority for the payment of obligations in commercial transactions:

• costs of private generation and transmission;
• costs of administration and operation of distribution and commercialisation;
• energy import costs;
• state transmission costs;
• state generation costs;
• distribution and marketing expansion costs;
• generation costs of short-term transactions; and
• previous balances.

In the current order of priority, the payment of private generation and transmission costs is privileged, which benefits private projects to receive, in a first level, the payment corresponding to the tariff that has been established in each concession contract.

Regulatory framework

The regulatory and supervisory agency enacted the following regulations related to specific activities.

• Regulation 001/2023 “Regime for commercial transactions in the Ecuadorian electricity sector” – recognises the methodologies for the calculation and settlement of “Fixed Charge” and “Capacity Charge”. It also introduces the concepts of: (i) Primary Frequency Regulation (RPF); and (ii) Secondary Frequency Regulation (RSF).
• Regulation 002/2023 “Electricity generation from municipal non-hazardous solid waste” – establishes that the price for the sale of the energy produced by the generator that uses Municipal Non-Hazardous Solid Waste associated to the Biogas technology corresponds to 74.7 USD/MWh, which will be applied for a period of 15 years as a preferential term that will be counted from the subscription of the enabling title.
• Regulation 006/2023 “Regulatory framework for distributed generation for the self-supply of non-regulated electricity consumers” – provides that the nominal power must be less than 1 MW. In addition, the energy produced by a Distributed Generation System for Self-Supply shall have the sole purpose of self-supplying the electricity demand associated with the non-regulated consumer.

In addition, the agency is working on the development of specific regulations for energy storage projects.

Tax Incentives in the Renewable Energy Sector

Ecuadorian legislation provides for tax incentives aimed at the promotion of renewable energy and sustainable development. While some of those incentives have been eliminated in recent years in light of economic contraction, the tax law still holds interesting mechanisms for investors in the renewable energy sector or even those who are not in this business but produce through sustainable methods and technology.

Extra depreciation and amortisation costs

These costs corresponding to the acquisition of machinery, equipment and technologies designed for the implementation of cleaner production mechanisms, renewable energy-generation mechanisms (solar, wind or similar) or the reduction of the environmental impact of the productive activity, as well as the reduction of greenhouse gas emissions, will be deducted with an additional 100% deductible cost. This is the case, provided that such acquisitions are not necessary to comply with the requirements of the environmental authority to reduce the environmental impact of a specific project, or as a requirement or condition for the issuance of an environmental permit. In any case there must be an authorisation by the environmental authority.

This additional deduction shall also apply to the depreciation and amortisation of machinery, equipment and sustainable construction technologies, to the extent that they comply with the technical parameters and conditions established in the applicable environmental regulations.

Reduction of the income tax rate for the promotion of responsible and sustainable economic development of science, technology and innovation

Taxpayers who reinvest their profits, in Ecuador, in projects or responsible scientific research or technological development accredited by the Secretariat of Higher Education, Science, Technology and Innovation will have an income tax rate reduction of 10% if the investment is made in programmes or projects classified as priority by the higher education authority, and 8% in the rest of programmes and projects, under the terms and conditions established in the secondary tax regulations. This means that, for the first case, the income tax rate will be 15% and for the latter, 17%, as the current rate in Ecuador is 25%.

Investment Contracts

Ecuadorian law provides for a contractual form to guarantee investors’ rights for different types of projects, including renewable energy; this is the investment contract.

The investment contract guarantees the stability of the legal framework and tax incentives granted upon subscription, in such a way that they will remain unalterable for the term of the contract, unless they are revoked or voluntarily waived by the investor. Companies that enter into an investment contract (regulated in the Commerce and Investments Code and its regulations) after 30 November 2021, may take advantage of the 5% reduction on the corporate income tax rate for the term stipulated in such contract or until completing the amount of the investment, whichever occurs first. The reduction will be applied from the fiscal year in which the new investment begins to obtain operating income.

According to the Regulations to the Commercial and Investments Code, the following investors are entitled to request and subscribe to an investment contract:

• investment involving new projects carried out directly or in association with other investors; and
• minimum investment equivalent to USD250,000 during the first year of planned investment, to be counted as of the signature of the investment contract, made through equity contribution, acquisition of equipment or other tangible or intangible assets or contractual rights, among others.

Additionally, if the investment is greater than USD100 million, the investor may obtain tax stabilisation through the term of the investment contract (equivalent to the project’s development schedule), provided that a technical report issued by the Ministry of Commerce and Investment supports the economic benefits that such an investment will signify for the country.

For projects over USD10 million, the possibility of national or international arbitration is established.

Public Selection Processes with the Ministry of Energy and Mines

In accordance with the Constitution of Ecuador, energy in all its forms is considered a strategic sector. Strategic sectors are those that, due to their transcendence and magnitude, have decisive economic, social, political or environmental influence. Consequently, the state has the right to administer, regulate, control and manage such strategic sectors.

The Electricity Master Plan (PME) is the planning document prepared by the Ministry of Energy and Mines, which contains the objectives, policies, goals, strategies, plans, programmes and projects for the required expansion in the generation, transmission, distribution and commercialisation of energy.

In this sense, those who desire to carry out projects or activities of generation, transmission, distribution and commercialisation of electric power and general public lighting which are included in the PME, must follow a public selection process led by the Ministry of Energy and Mines. In addition, a public selection process must be carried out for the sale of energy to the regulated demand, when the project is not foreseen in the PME, but is proposed by a private party.

The public selection process in the energy sector in Ecuador plays a crucial role in ensuring transparency, competition and efficiency in the allocation of energy resources and projects. The process involves various steps and criteria to identify and select the most suitable candidates or companies for energy-related ventures.

In Ecuador, the public bidding process begins with the issuance of public calls or tenders for energy projects. These calls are made by the government entity responsible for energy, which is the Ministry of Energy and Mines. Such Ministry will provide the bidding documents with the economic, financial, technical, legal and environmental conditions and specifications to be met by the bidders interested in participating in the public selection processes.

Interested parties, including private and foreign state-owned companies or their subsidiaries, mixed economy companies or consortiums in which such state-owned companies have a majority participation in the activities of the electricity sector, can participate by submitting their proposals and meeting the specified requirements outlined in the bidding.

For each public selection process, the energy requirement of the demand will be determined, in which the unregulated demand may also be considered, as well as term and price conditions.

The Ministry will award the project or projects or activities of the electric sector to the bidder that presents the best current and future offer in terms of economic, financial, technical and legal aspects, according to the evaluation conditions established in the bidding documents, safeguarding the national interest.

The selected bidder from the public process has the right to be granted the respective concession contract and, in turn, such bidder is obligated to sign the corresponding regulated contracts based on the price presented in the public selection process.

The Ministry reserves the right to declare the public selection process void in the event that the bidders do not comply with the established conditions, as well as if it is determined that it is not convenient for the national interests.

Alternative Procedures

In addition to public selection processes, the following alternatives exist for structuring and implementing a renewable energy project.

• Direct awarding without the need for PPS, for generation and self-generation projects that are not part of the PME and that have been awarded by direct delegation to private companies and foreign state-owned companies or subsidiaries of these. Prior to the subscription of the enabling title, the granting entity will grant a Qualification Certificate that will guarantee the exclusive right of the applicant with respect to the generation project for the development and execution of all feasibility studies and the subscription of the corresponding enabling title for the construction and operation of said project.
• The concessionaires of projects that are not included in the PME and that have been awarded without a PPS, to which a Qualification Certificate has been granted, in order to sign the concession contract, shall submit the following documentation within the term established for this purpose in the Qualification Certificate:
1. definitive and/or feasibility studies and designs of the project;
2. certificate of economic solvency, issued by a national financial institution and letter of intent for the financing of the project signed by a national or foreign financial institution, legally constituted and empowered to operate as such;
3. updated implementation schedule and estimated schedule of the project, including key control milestones;
4. authorisation for the use and exploitation of the resource, issued by the competent authority, where applicable;
5. approval of the Environmental Impact Assessment (EIA) and environmental license – environmental registry, issued by the competent authority; and
6. authorisation for connection to the transmission or distribution system, granted by the transmitter or distributor, as applicable.

Under public-private partnerships, it is expressly recognised that for the development of projects or activities in the electricity sector by private investment, the benefits and incentives established in the Organic Law on Incentives for Public-Private Partnerships and Foreign Investment may be granted, for which purpose the provisions established in these regulations must be complied with.

Under strategic alliances, under the attributions contained in the Organic Law of Public Enterprises, public enterprises are empowered to develop associative processes with private companies for the development of projects.

For this purpose, in the case of the management of strategic sectors or the provision of public services, the public company may participate in these with a non-majority percentage. In contrast to the joint venture, in which the public company must have a majority shareholding in the mixed economy company formed by the public company, the public company must have a majority shareholding in the joint venture.

It is important to note that no requirements or procedures other than those established by the board of directors of the public company shall be required to perfect the partnership.

In this regard, the Strategic State-Owned Enterprise Corporación Eléctrica del Ecuador (CELEC EP) has identified a first portfolio of projects. These projects total around 1,200 MW, which take advantage of different technologies: wind, hydro, photovoltaic and geothermal.

Identified Projects for Investments

Ecuador is embracing a new era of investment opportunities with non-conventional renewable energy projects. The Ecuadorian government recently signed the concessions for the El Aromo project, which is a significant solar photovoltaic (PV) plant located in the province of Manabí, which will produce at least 200 MW, and for the Villonaco III wind project located in the province of Loja, with a capacity of 110 MW. Both projects were awarded through public selection processes. 

Two other relevant projects are the Santiago and Cardenillo hydroelectric projects, both part of the Electricity Master Plan. The Santiago hydroelectric power plant will have eight power generation units with an installed capacity of 2,400 MW. It will have an approximate production of 14,613 GW-hours per year. This promises to be the largest in Ecuador. It has an approximate capex of USD3 billion. Similarly, the Cardenillo hydroelectric project has a potential of 596 MW for which an investment of approximately USD1.3 billion is needed.

On the other hand, as mentioned above, CELEC EP has identified several projects where investors have the opportunity to form a strategic alliance with CELEC in the following projects:

Hydroelectric

• Abitagua – located in the east of Ecuador, with an estimated power of 165 MW and a referential investment of USD489 million. 
• Chontal – located in the north east of Ecuador, with an estimated power of 194 MW and a referential investment of USD389 million. 
• La Unión – located in the south of Ecuador, currently in production with a maximum power of 92 MW and requires a referential investment of USD274 million. 

Photovoltaic

• Flotante Mazar – located in the south of Ecuador, with an estimated power of 201 MW and a referential investment of USD160 million.
• Matala – located in the south of Ecuador, with an estimated power of 100 MW and a referential investment of USD93 million. 
• La Ceiba – located in the south of Ecuador, with an estimated power of 200 MW and a referential investment of USD170 million. 

Wind

• Pimo – located in the south of Ecuador, with an estimated power of 150–200 MW and a referential investment of USD225–USD300 million.
• Ducal Membrillo – located in the south of Ecuador, with an estimated power of 80.5 MW and a referential investment of USD120 million, this project already holds an environmental licence. 

Geothermal

Chachimbiro – located in the north of Ecuador, with an estimated power of 50 MW and a referential investment of USD250 million.

The hydroelectric, photovoltaic, wind and geothermal projects identified by CELEC offer a diverse range of renewable energy options that align with Ecuador’s sustainable development goals. These projects not only hold the promise of clean and reliable energy generation but also pave the way for innovation, job creation and economic growth. As CELEC continues to advance its ambitious energy agenda, the potential for strategic alliances in these projects represents a significant step towards new investments in Ecuador.