IOVERVIEW

In past decades, the energy sector in Colombia has been one of the main pillars of development and growth of the country’s economy while contributing significantly to the national budget, which is devoted to infrastructure and social development, as result of the collection of royalties, taxes and dividends.

Although nowadays the country is a target for international investment, having extensive trade relations and an attractive business environment,2 it is undeniable that there is currently an environment of uncertainty in Colombia, which has had adverse effects on international investment and on the country’s credit rating. Nevertheless, some elements should be highlighted as providing a positive boost for the economy and investment: the ongoing implementation of the peace process with the Armed Revolutionary Forces of Colombia (FARC) ending an armed conflict of over 50 years3 and the election of the young right-wing former senator Ivan Duque as President of the Republic, who has actively promoted boosting investment as one of the government’s goals. However, one of the positive aspects discussed in last year’s chapter was the reactivation of the peace talks between the National Liberation Army (ELN) and the government, peace talks that were recently ended due to the ELN’s persistence in carrying out terrorist acts, including attacks on power lines and stations.

As result of the terms of the Colombian Constitution of 1991, the Colombian electricity sector has been transformed from a sector wholly owned by the government into a sector where there is a clear separation between the roles of service providers and utility companies, and regulators, policymakers and control and oversight agencies. Since then, this sector has existed on three main levels. First the Ministry of Mines and Energy (MME), which governs policy and establishes the long-term plans for the whole sector. Second, the Energy and Gas Regulation Commission (CREG), which sets out the rules and roles of each of the participating agents, while also focusing on quality and price for the end user. And third, the Superintendence of Domiciliary Public Utilities (SSPD), which is an inspection, monitoring and surveillance body that oversees operators and guarantees supply to the end user.

The main power source used in Colombia is hydropower, which represents 77.97 per cent of the installed capacity, followed by thermal power stations operating with coal and gas with a share of 14.62 per cent. The remaining energy is obtained and supported by other sources such as cogeneration, with a share of 1.22 per cent, and wind power, which adds 0.1 per cent.4

In terms of connectivity, the Colombian electricity sector is divided into the National Interconnected System (SIN), which comprises generation plants, the interconnection network, and regional and interregional transmission and distribution networks; and the non-interconnected zones, where electricity services are not provided by the national network but by independent small-scale systems.

IIREGULATION

iRegulators

The Colombian Constitution, issued in 1991, conferred legislative power on Congress and granted regulatory power to the national government, which in turn exercises such power through the regulatory entities that serve the energy sector via decrees and resolutions.

Specifically, the determination of policies and issuance of regulation is undertaken by several government entities, as follows.

On the one hand, the MME is the government entity responsible for formulating, adopting, directing and coordinating the policies, plans and programmes of the mining and energy sector in Colombia as well as the supervision of the electricity sector. The MME regulates generation, interconnection, transmission and distribution activities and is in charge of generation and transmission programmes.

On the other hand, the administration and issuance of regulations in the electricity sector is dealt with by the following technical entities:

  1. CREG, a special administrative body created in 1994, is responsible of the regulation and promotion of competition between the entities involved in the electricity sector and the regulation of electricity and gas utilities. Pursuant to Laws 142 and 143 of 1994, the following specific functions are assigned to CREG:
    • promoting fair market competition;
    • setting out the conditions for deregulation of the electricity sector regarding a competitive market;
    • determining and approving interconnection and usage charges and tariffs for the transmission and distribution of electricity;
    • defining the regulated and unregulated end-user markets;
    • setting out the regulations for the operation, planning and coordination of the national transmission system; and
    • issuing the technical regulations with respect to quality, reliability and security of electricity;
  2. the UPME is a special administrative unit attached to the MME in charge of planning the energy mining sector in coordination with other agents in the sector and supporting the MME in achieving its goals and objectives;
  3. the Institute for Planning and Promotion of Energy Solutions for Non-Interconnected Areas is responsible for the promotion, development and implementation of energy efficient, viable and sustainable solutions that meet the needs of non-interconnected zones; and
  4. the SSPD is a government agency that oversees public utilities companies that operate within the Colombian territory. Among other functions, the SSPD conducts:
    • supervising the quality and efficiency of all public service companies;
    • taking over public utilities companies when the companies are financially non-viable or when the service rendered is at risk; and
    • imposing sanctions on the companies subject to surveillance, and in particular with respect to electricity companies as result of a violation of the code of operations of the electricity sector.

In addition to the above-mentioned entities, the following entities provide consultation and technical assistance in the electricity sector:

  1. The National Operation Council, responsible for determining the technical standards for the efficient operation and integration of the SIN; and
  2. the Commercialisation Advisory Board, created by CREG as an advisory entity for the monitoring and review of the commercial aspects of the wholesale energy market (MEM).

The Superintendence of Industry and Commerce (SIC) is the authority in charge of investigating and sanctioning commercial restrictive practices, as well as authorising the mergers of companies operating within a single sector and market.

iiRegulated activities

Environmental permits

From an environmental perspective, the development of works and activities related to electricity or nuclear energy requires a prior licence or environmental permit to be granted by the National Environmental Licensing Authority (ANLA) or regional entities, depending on the sector, type of project and area where it is developed.

Furthermore, the main regulation in relation to environmental authorisations is Decree 1076 of 2015, which, among other things, defines the environmental authority in charge of granting the environmental licence, depending on the type of project and the installed capacity (MW) of the specific project.5

Pursuant to Decree 1076 of 2015, an environmental licence is the authorisation granted by the competent environmental authority for the execution of a project, work or activity, which can cause serious deterioration of natural resources or the environment or introduce significant modifications to the landscape. Environmental licences include all permits, authorisations and concessions for the use of renewable natural resources throughout the duration of the project, work or activity, and any requisites for the initiation of the work, project or activity subject to an environmental licence.

Pursuant to the ILO Convention 169 and Colombian regulations, should ethnic communities be located within the area of influence of the project, a prior consultation process with such communities must be undertaken prior to the issuance of the environmental licence. Prior consultation suspends the proceeding with respect to the environmental licence.

Electricity: regulated activities

It is of utmost importance to note that, pursuant to the Colombian Constitution, electricity generation, interconnection, transmission and commercialisation activities are considered public utilities to be provided under Colombia’s authority and supervision and governed by the constitutional principles of free economic activity, free private initiative, free competition and private ownership.

The primary electricity regulation is contained in Laws 142 and 143 of 1994, which were enacted in a context of severe energy insufficiency and outages. Until 1995, electricity services were provided by the state through the company Interconexión Eléctrica SA (ISA) and other government-owned entities, with minor participation of the private sector. The power sector was reformed to introduce market economy principles, assigning the state the role of regulator. ISA was spun off into two companies: ISA the transmission company with system and market operating functions, and ISAGEN, a new company for electricity generation.

Law 142 regulates all aspects related to energy as a public service, and Law 143 sets out the legal regime applicable to the generation, interconnection, transmission, distribution and commercialisation as well as the Wholesale Electricity Market, which came into operation in July 1995. Furthermore, Law 143 of 1994 states that all the activities that involve the supply chain of electricity, from generation to commercialisation, are intended to satisfy primary collective needs on a permanent basis and thus considered as mandatory public utilities, essential in nature.

In relation to projects, free private initiative is the general rule and thus, private and public–private partnerships may get involved in the generation, transmission, distribution and commercialisation of electricity without requiring a concession. In other words, this means that Colombia will only get involved in the development of electricity generation projects when no private entity is willing to assume such activity.6

iiiOwnership and market access restrictions

In Colombia, there are no limitations or prohibitions for foreign participation or investment in the electricity sector. The only sectors in which foreign investment is prohibited are national security and defence and processing and disposal of toxic, hazardous or radioactive waste, as specified by Article 6 of Decree 2080 of 2000, further amended by Decree 2466 of 2007.7

Nevertheless, pursuant to Article 471 of the Code of Commerce, foreign companies willing to undertake permanent business in the country are required to constitute a branch with local address in Colombia. Moreover, according to Law 142 of 1994, enterprises providing public utilities, such as companies participating in the electricity sector, must be constituted as public utilities companies.

Regarding the electricity sector, as of the issuance of Laws 142 and 143 of 1994, generation, transmission, distribution and commercialisation of energy are considered as isolated activities. Furthermore, Article 74 of Law 143 of 1994 expressly prohibits companies involved in the electricity sector to engage in more than one activity except for commercialisation, which can be developed along with other activities of the electricity sector.

In addition, CREG regulations have set out specific restrictions as follows:

  1. electricity generators are not allowed to have an equity participation of more than 25 per cent in distribution companies;
  2. no company can have market participation above 25 per cent in the generation activity;8 and
  3. no company is allowed to directly or indirectly own more than 25 per cent of the equity of a company involved in commercialisation of electricity.9

ivTransfers of control and assignments

With respect to mergers and acquisitions, it is important to note that all companies involved in the electricity sector are subject to the general competition and antitrust regime provided for in Law 1340 of 2009.

Pursuant to Article 9 of Law 1340 of 2009 and Resolution 10930 of 2015 issued by the SIC, certain mergers, consolidations or integrations require either to be approved or to be notified to the SIC.

Mergers require notice to the SIC when they meet the following conditions:

  1. whenever the transaction creates any form of integration. Any transaction to acquire ‘control’ over assets or shares of other companies leading to the creation or reinforcement of market power constitutes a merger;
  2. the parties of the transaction in Colombia jointly or individually have, in the year prior to the transaction, a level of total assets or operational income equal to or above 60,000 minimum monthly Colombian legal wages;
  3. whenever the companies involved in the transaction are dedicated to the same activity or participate in the same vertical value chain; and
  4. whenever at the time of notice companies have:
    • 20 per cent or less market participation; or
    • 20 per cent or less participation in the same vertical value chain.

Notice must be submitted as a pre-completion requirement of the transaction. However, this filing does not constitute a merger clearance by any means. Mergers will require approval of the SIC when they meet the first three above-mentioned conditions and the market participation of the companies individually or jointly equals or exceeds 20 per cent of the relevant market under Colombian jurisdiction.

Approval must be submitted as a pre-completion requirement of the transaction; the SIC’s clearance is therefore a mandatory condition in order to proceed with completion of the transaction.

In addition to the above, Article 34 of Law 142 of 1994 mandates that companies involved in public utilities must avoid unjustified privileges and discriminatory acts and must refrain from undertaking any act or transaction that has the capacity, purpose or effect of generating unfair trade, restricting competition or abuse of dominant position. The SSPD is the entity in charge of monitoring compliance of the aforementioned obligation and imposing sanctions.

IIITRANSMISSION/TRANSPORTATION and DISTRIBUTION SERVICES

iVertical integration and unbundling

As indicated above, the electricity Law 143 of 1994 and CREG regulation establish unbundling rules restricting horizontal and vertical integration of utility companies that provide electricity services. Integration rules indicate the following:

  1. utility companies incorporated before Laws 142 and 143 of 1994 can develop more than one activity under separate accounts for each business; and
  2. utility companies constituted after the enactment of Laws 142 and 143 of 1994 can only undertake, at the same time, complementary activities such as generation-retailing or distribution retailing and are prohibited to simultaneously perform activities of generation transmission, generation-distribution, transmission-distribution and transmission-retailing.

With respect to horizontal integrations, as it was previously stated, pursuant to Resolution 128 of 1996 of the CREG, a single company may not own more than 25 per cent of country’s generation, retailing and distribution activities.

iiTransmission/transportation and distribution access

The electric power system consists of an interconnected grid – the SIN – that supplies about 95 per cent of the overall demand. The remaining demand (non-interconnected zones) is typically supplied by local small electricity generation plants that operate on fossil fuels (gasoline and diesel).

The SIN has a total length of 26,333.4910 kilometres comprising the following:

  1. the SIN;
  2. the regional transmission system; and
  3. the local distribution system.

The National Transmission System is a multi-owner network that has the unique characteristics of a natural monopoly, with ISA holding the largest share.

The grid system supply, provided by the National Transmission System, enables the coordination of the generators while reducing the amount of backup generating capacity and reserves. Pursuant to applicable regulations, transmission is defined as the transportation of electricity at a tension level equal to or greater than 220kV. Networks operating at less than 220kV are part of the distribution activity, the main function of which is to transport the electric energy to the end user. Moreover, the electric distribution system is integrated by networks, substations that operate at voltages lower than 220kV and do not belong to the National Transmission System.

With respect to third-party participation, it is important to note that the National Transmission System operates on an open market basis, and thus transmission operators must provide open access to customers on a non-discriminatory basis, while receiving regulated revenues using transmission system charges. These charges are regulated by CREG, paid by electricity consumers and further collected by retailers.

In addition to the above, Colombia is interconnected with both Ecuador and Venezuela, which has fostered the development of energy security standards while allowing these electricity markets to operate in a coordinated manner.

iiiRates

Pursuant to Article 23 of Law 143 of 1994, CREG:

c) Defines the methodology for the calculation of rates for access and use of electric grids as well as the rates for services related to connection and coordination which are carried out by regional dispatch centres and the national dispatch centre.

d) Approves the rates to be paid in relation to access and use of electric grids as well as the rates for services related to connection and coordination which are carried out by regional dispatch centres and the national dispatch centre.

Further, Article 88, numeral 1 of Law 142 of 1994 provides that:

Companies should adhere to the formulas that CREG periodically defines to fix their rates, except in the exceptional cases listed below. According to cost studies, the regulatory commission may establish maximum and minimum tariff caps which are mandatory for companies; while it may also define methodologies for determining rates and whether it is appropriate to apply the regime of regulated or supervised rates.

In relation to the regime of regulated and supervised rates, Article 11 of Law 143 of 1994 establishes a regulated liberty regime according to which rates for generation, interconnection, transmission, distribution and commercialisation of electricity within the national territory is set and limited by the criteria and methodology of CREG.

While each company negotiates its own rate, as mentioned above, rates are capped at the maximum rate established by CREG. For affixing rates to be charged for utilities, CREG establishes the methodology and procedure for the calculation of the rate including costs associated to such rate. Thus, resolutions that set rates include the costs assumed by the provider of such service as well as the methodology used for regulating such cost.

Furthermore, Article 87 No. 9 of Law 142 of 1994 provides that the rates and formulas to calculate such rates fixed by the CREG may be modified by the CREG every five years and when the law so provides. However, Article 126 of Law 142 of 1994 indicates that the formulas to calculate the rates will be valid for five years, unless otherwise agreed between the CREG and the utility companies. The current rates are those set by way of Resolution 097 of 2008 issued by CREG. While it is evident that such Resolution 097 of 2008 was issued more than five years ago, it should be noted that a modification and adjustment proposal has already been drafted and has not yet been approved.

ivSecurity and technology restrictions

The main concern in terms of security of the electricity sector in Colombia is related to physical security of the oil and energy infrastructure. For several decades, infrastructure was a common target for guerrilla groups related to the armed conflict within the country. Attacks to pipelines as well as energy towers were frequent; they implied serious damages, paralysis of some parts of the system and impacted production levels gravely, affecting vulnerable populations. A decrease and eventual halt in attacks to oil and energy infrastructure is expected as a result of the implementation of the peace process with FARC, and as a result of ongoing negotiations with the National Liberation Army.

While recent developments in terms of peace have substantially diminished attacks to oil platforms, pipelines and energy towers, in 2014, before the negotiation and subsequent implementation of the peace process with FARC, the Colombian government created a task force for the protection of infrastructure including pipelines, energy towers, oil platforms and infrastructure in general, which was named COPEI. Among the various outcomes of the implementation of such task force were the creation of a special operation centre and the distribution of a daily report including possible threats and events.

IVENERGY MARKETS

iDevelopment of energy markets

The Colombian energy market is based on a competitive market model that is accessible through the MEM. The MEM is a market in which generators, transmitters and wholesale energy consumers and unregulated users participate with the main purpose of trading energy blocks through the SIN.

The MEM is divided into long-term and short-term transactions, depending on the needs of those participating in the MEM and the terms for such negotiations. For example, long-term participants opt for bilateral agreements while short term agreements usually refer to next-day purchases between all the generators of the market, which are subject to explicit regulations. These kinds of transactions usually cover the spot market.

Oversight of the MEM is led by the SSPD, which created the Oversight Committee of the MEM in 2006.

A substantial amount of electricity that is generated in Colombia is traded through the MEM via wholesale transactions, as all the generation companies are obliged to participate in the MEM with all of their generation plants and units that are connected to the SIN.

Retail companies that sell directly to end users are also required to carry out their electricity transactions through the MEM.

iiContracts for sale of energy

As explained above, the MEM is divided into long-term and short-term transactions. While long-term transactions usually involve bilateral agreements, short-term transactions (referred to as ‘on spot transactions’) usually involve negotiations of daily price offers along with hourly availability. The prices at which electricity is offered reflect the variable costs of generation as well as opportunity costs.

Firm energy obligation auctions

Allocation of firm energy obligations (OEFs) between the different generators and investors is effectuated through dynamic auctions. OEFs are the resulting links from the auctions, according to which generators must generate a daily amount of electricity, as long as the obligation is in force. When the stock market price exceeds the price of shortage, the OEF price is determined by descending clock auctions.11 The purpose of such auctions is to allocate firm energy obligations (between the generators and investors), thus ensuring reliability in long-term firm energy supply at efficient prices.12 Auctions are held three years prior to the date when the firm energy is required. The time between the announcement of the auction date and the end of the obligation term consists of three stages: (1) the pre-qualifying period; (2) the planning period; and (3) the obligation effectiveness period, the total of which varies from one to 20 years.13

Bilateral contracts

The bilateral contracts market is primarily a financial market, as its function is to reduce exposure of the generator and end user to short-term price volatility. Such contracts are freely agreed commitments acquired by generators and commercialisation companies to sell and buy electricity. Energy is delivered though the spot market by the generator indicated in the contract, or by another generator as determined by the ideal dispatch (see below). The only requirement in such agreements is that the contract specifies the amount of energy that will be used on an hourly basis. Aside from that requirement, there are no restrictions on the electricity that a generator or commercialisation company may specify in the contracts, or the time frame covered by such agreements. Energy purchases made through such contracts, intended for regulated users, are governed by rules that guarantee competition among generators, while the prices and conditions on such contracts intended for non-regulated users are freely negotiated and agreed by the parties.14

Spot market

In the spot market the transmission network is neutral, thus implying that the generator makes its price offer for each day and its availability declaration for each hour, without considering the state of the transmission network. The resources that will be dispatched in order to comply with the hour-by-hour demand are selected according to the most economic offers. This dispatch is known as the ideal dispatch, as it diverges from the real dispatch, which considers the restrictions that may affect the transmission network. The ideal dispatch is determined once finalised by the National Dispatch Centre. It considers real demand and availability, not considering physical and technical restrictions imposed by the transmission network. Price offers presented by the generators must reflect the variable costs of generation and opportunity costs. The spot price is the price of the last resource used to meet the total energy demand every hour, which establishes the price at which all submarginal resources in the same hour will be remunerated. The part of the energy demand from commercialisation companies not covered by bilateral contracts must be paid at this spot price.15

VRENEWABLE ENERGY AND CONSERVATION

iDevelopment of renewable energy

Most of the developments in terms of renewable energy have been a result of the issuance of Law 1715 of 2014, which aims, inter alia, to promote the development and use of unconventional sources of energy, mainly renewable energy, in the national energy system, as a means to achieve sustainable development, reduce greenhouse gas emissions, ensure the country’s energy supply and promote efficient energy management. This law establishes the legal framework and instruments required to take advantage of unconventional sources of energy and renewable energy, while promoting investment, research and development of clean technologies for energy production, energy efficiency and demand response.

The law defines unconventional sources of energy as environmentally sustainable energy resources that are globally recognised but in Colombia are not widely used or are not widely marketed, such as nuclear or atomic energy, unconventional sources of renewable energy and those determined by UPME. Further, it defines as unconventional sources of renewable energy as sources of energy that meet the above characteristics and are also renewable energy resources, such as biomass, small hydroelectric, wind, geothermal, solar, sea and solid waste that is not susceptible to being reused and recycled and which UPME has deemed to be environmentally sustainable.

Law 1715 of 2014 classifies activities related to the production and use of non-conventional energy sources (mainly non-renewable energy) as matters of public utility and social interest, with the purpose of facilitating certain requirements, processes and access to benefits in urban planning, territorial planning, environmental planning, economic development and the right to compulsory expropriation, etc. It also assigns competence to entities such as the ANLA and regional autonomous corporations to implement rapid evaluation cycles for projects related to non-conventional sources of energy, and for matters pertaining to this Law.

This Law is especially relevant as it authorises small and large-scale energy self-generators to surrender their surplus to the distribution and transport network, in accordance with the regulations of CREG, and the allocation of energy credits to small-scale energy self-generators using non-conventional sources of renewable energy. Such credits may be negotiated with third parties, in accordance with the regulations issued by CREG. The fund for non-conventional renewable energies and the efficient management of energy (FENOGE) has also been established to finance programmes and projects in this area.

In relation to the above, in February 2018 a change was introduced to the energy sector with regard to the generation and distribution of energy: CREG ruled that users of the electric power service in the country could produce energy and sell it to the SIN.16 This refers to small-scale self-generation, up to 1MW, and distributed generation, by means of which all residential users, as well as commercial and small industrial users, who produce energy mainly to meet their own needs, can sell the surplus to the interconnected system.

Law 1715 of 2014 sets out important fiscal, customs and accounting incentives for companies investing in projects of non-conventional sources of energy.

In fiscal matters, it offers an annual reduction in the income tax, for five years after the taxable year in which it makes the investment: 50 per cent of the total value of the investment made, without exceeding 50 per cent of the net income of the taxpayer determined before subtracting the value of the investment.

For these purposes, the taxpayer must obtain a certification of environmental benefit issued by the Ministry of Environment and Sustainable Development. In addition, national or imported equipment, elements, machinery and services that are intended for the pre-investment and investment for the production and use of energy from unconventional sources and for the measurement and evaluation of potential resources will be excluded from the VAT. For these purposes, a certification from the Ministry of the Environment must be provided stating the equipment and services that will benefit from this award, according to the list established by the UPME.

With respect to custom incentives, Law 1715 provides that those who import machinery, equipment, materials and supplies destined exclusively for pre-investment and investment in projects from non-conventional sources of energy are entitled to obtain an exemption with respect to tariff duties.

Finally, as an accounting incentive, companies participating in generation activities with non-conventional energy sources can enjoy the accelerated depreciation benefit, at a depreciation rate of no more than 20 per cent per annum, applicable to machinery, equipment and civil works necessary for pre-investment, investment and operation of such sources, provided that they have been acquired or constructed exclusively for that purpose, and after the validity of this law.

For its full implementation, Law 1715 requires regulation in different governmental entities affected by the measures of the law. Thus, to date, the following aspects have already been regulated, according to the information published by the Ministry of Mines and Energy on its website www.minminas.gov.co:

  1. Decree 0570 of 23 March 2018 of the Ministry of Mines and Energy, which establishes the public policy guidelines to define and implement a mechanism that promotes long-term contracting for electric power generation projects and that is complementary to the existing mechanisms in the MEM. Additionally, it indicates that the aforementioned mechanism shall endeavour to comply with the following objectives:
    • through the diversification of risk, it will strengthen the resilience of the electric power generation matrix during events of variability and climate change;
    • it will promote competition and increase efficiency in the creation of prices through long-term contracting of new or existing electric power generation projects;
    • it will mitigate the effects of variability and climate change through the use of the potential and complementarity of available renewable energy resources that manage the risk of supplying for future electricity demand;
    • it will promote sustainable economic development and strengthen regional energy security; and
    • reduce greenhouse gas emissions of the electricity generation sector, to comply with the commitments made by Colombia at the 2015 Paris Climate Change World Summit.
  2. Decree 1543 of 16 September 2017 of the Ministry of Mines and Energy, which regulates the FENOGE;
  3. Resolution 1670 of 15 August 2017 of the Ministry of Environment and Sustainable Development, which adopted the terms of reference for the preparation of the environmental impact study in projects for electric power transmission systems;
  4. Resolution 1312 of 11 August 2016 of the Ministry of Environment and Sustainable Development, which adopted the terms of reference for the preparation of the environmental impact study in projects for the use of wind energy sources and other aspects;
  5. Resolution 1283 of 8 August 2016 of the Ministry of the Environment and Sustainable Development, which establishes the procedure and the requirements of the certification of environmental benefit to obtain the tax benefits granted by law;
  6. Resolution UPME 045 of 3 February 2016, which establishes the procedures and requirements for issuing certification and endorsing projects from non-conventional energy sources in order to obtain the benefit of VAT exclusion and exemption from the tariff levy; and
  7. Decree 2143 of 4 November 2015, issued by the Ministry of Mines and Energy in relation to the definition of the guidelines for the application of incentives established in Chapter III of the law.

In addition, a Decree that intends to develop Law 1715 of 2014, by regulating and providing the guidelines for defining a mechanism for the long-term contracting of generation projects with non-conventional sources of energy (FNCER), in relation to the promotion, development and use of FNCER is yet to be issued.

iiEnergy efficiency and conservation

The energy efficiency area of the MME developed the Programme for the Rational Use of Energy and the Use of Renewable Sources of Energy, which aims for energy efficiency and establishes targets for unconventional renewable energies in the SIN, as stated in Law 697 of 2001.

The most recent regulatory advance can also be found in Law 1715 of 2014, which, among other things, orders the MME, together with the Ministry of Environment and Sustainable Development and the Ministry of Finance, to jointly develop an action plan for the development of technical regulations with respect to renewable energies; consumer information on the energy efficiency of processes; facilities, services, products and manufactured products; and information; as well as to promote campaigns on the use of renewable energy sources.

In addition to the above, Law 1715 provides that the national government and public administrations should establish energy efficiency objectives in public buildings and plans and actions of efficient energy management.

iiiTechnological developments

In addition to the tax and customs incentives created by way of regulation issued in response to Law 1715 of 2014, and certain programmes to provide electricity and the use of unconventional renewable resources in remote areas, no significant regulatory additional developments have been made in the areas of renewable energy and conservation.

However, it must be highlighted that renewable and clean energy projects became especially relevant during 2018 and the first months of 2019, to the extent that it was the first time that in an OEF auction, solar and wind energy were incorporated into the electricity matrix (1398MW installed, representing 6 per cent of installed capacity); the first environmental licence for the generation of photovoltaic energy was granted by the environmental authority;17 and the first renewable energy auction was carried out by the government. This auction did not result in any awards, since the proposals presented would have resulted in market concentration in excess of the limits set forth in the applicable regulation. The government plans to hold an additional renewable energy auction in the course of 2019.

VITHE YEAR IN REVIEW

In 2018, the Colombian energy sector was strongly influenced by an event related to the biggest developing energy project in the country, the Ituango hydroelectric plant, Hidroituango. Hidroituango is designed to be capable of providing 17 per cent of Colombia’s electricity supply, and it was supposed to enter into operation by the end of 2018. However, due to structural damage during the construction process, it is now expected that the project will be subject to at least a three-year delay before it is finished and fully operating.

As a consequence, the government called an OEF auction specifically for the reliability charge.18 Initially, this auction was planned for the allocation of OEF for the 2022–2023 period. However, due to the urgent need to generate electricity as a result of the delay in Hidroituango’s construction – which could lead to an energy shortage, the CREG established incentives for projects that could commence operation before December 2021, the point at which it is estimated there may be an energy deficit.

The reliability charge auction was held on 28 February 2019 and 70 of the 80 projects submitted were awarded. From the awarded projects, 47 were presented by existing plants (electric power generation plants already in commercial operation at the time of the auction), and the remaining projects were presented by new plants (electric power generation plants that have not started construction or that were in this process at the time of the auction). The closing price of the auction was 15.1 US dollars/(MWh), which represents a decrease of 11 per cent compared to the price defined in the last reliability charge auction.

VIICONCLUSIONS and OUTLOOK

The Colombian electricity sector has come a long way since the power outages during the 1990s. Privatisation, promotion of investment as well as implementation of regulations have transformed the Colombian electricity sector into an attractive and competitive market in the region.

However, the rapid expansion of the sector and the ongoing dependence on resource-driven sources of energy such as hydroelectric power, still have the capacity to bring the system to a halt, as the ‘El Niño’ phenomenon showed in early 2016.

In addition to the foregoing, foreign investors have adopted a more cautious attitude towards the country because of the environment of legal uncertainty generated by certain governmental and judicial decisions, especially by the Constitutional Court. Nonetheless, the new government has openly encouraged foreign investment and is creating a positive environment for investors.

The main objectives and challenges faced by the Colombian electricity sector to develop and secure the Colombian market include:

  1. providing greater legal security to investors;
  2. attracting greater investment in the electricity sector;
  3. promoting unconventional renewable resources, aiming to achieve self-sustainable and permanent energy sources;
  4. advancing regional electric integration;
  5. increasing the installed capacity and effective generation and reliability; and
  6. drafting and issuing the necessary regulations for supply and projects of non-conventional renewable energy.

Footnotes

1 José Vicente Zapata is a partner and Daniel Fajardo Villada is an associate at Holland & Knight.

2 Colombia’s official investment portal – PROCOLOMBIA, ‘Why invest in Colombia?’ Available at: www.investincolombia.com.co/why-colombia.html#attractive-business-environment, accessed on 18 March 2018.

3 PricewaterhouseCoopers, Doing Business in Colombia 2018, available at: www.pwc.com/co/es/publicaciones/doing-business/doing_business_2018.pdf, accessed on 15 March 2018.

4 Colombian Mining and Energy Planning Unit (UPME), ‘Monthly Report on Generation Variables and the Colombian Electricity Market – August 2018’. Available at http://www.siel.gov.co/portals/0/generacion/2018/Informe_de_variables_Ago_2018.pdf. Accessed on 18 March 2019.

5 Article 2.2.2.3.2.1, Decree No. 1076 of 2015.

6 See Article 56 of Law 143 of 1994.

7 Compiled in Article 2.17.2.2.3.1 of Decree 1068 of 2015.

8 See CREG Resolution 60 of 2007.

9 See CREG Resolution 128 of 1996 and Resolution 24 of 2009.

10 XM, ‘Líneas de trasmisión por agentes operadores’, available at: http://paratec.xm.com.co/paratec/SitePages/transmision.aspx?q=lineas, accessed 18 March 2019.

11 Article 2, CREG Resolution 071/2006.

12 CREG, ‘Características generales del Mercado Mayorista: Transacciones en el MEM: Subasta de OEF’.Available at: www.creg.gov.co/cxc/secciones/mercado_mayorista/subasta.htm, accessed 5 May 2017.

13 CREG, ‘Subasta para la asignación de OEF: Generalidades y etapas de la subasta’. Available at: www.creg.gov.co/cxc/secciones/subasta_asignacion/generalidades.htm#notas, accessed 5 May 2017.

14 CREG, ‘Características generales del Mercado Mayorista: Transacciones en el MEM: Contratos bilaterales’. Available at: www.creg.gov.co/cxc/secciones/mercado_mayorista/contratos.htm, accessed 5 May 2017.

15 CREG, ‘Características generales del Mercado Mayorista: Transacciones en el MEM: Bolsa de energía’. Available at: www.creg.gov.co/cxc/secciones/mercado_mayorista/bolsa.htm, accessed 5 May 2017.

16 See CREG Resolution 30 of 2018.

17 ANLA, ‘ANLA aprueba primera licencia para generación de energía fotovoltaica. Available at: http://www.anla.gov.co/Noticias-ANLA/ANLA-aprueba-primera-licencia-para-generaci%C3%B3n-de-energ%C3%ADa-fotovoltaica, accessed 16 March 2019.

18 Defined as: the maximum amount of electric energy that a plant is able to generate on a continual basis during a year, in extreme conditions of hydro inflows. CREG. ‘Firm Energy Obligation’. Available at: http://www.creg.gov.co/cxc/english/obligacion_energia_firme/obligacion_energia_firme.htm, accessed 17 March 2019.