The Energy Regulation and Markets Review: Colombia
At the time of writing, the world is affected by the pandemic generated by the new coronavirus, and Colombia is no exception. Owing to the country being in a state of economic, social and ecological emergency, the Colombia government enacted Decree 457, which ordered mandatory preventive isolation throughout the national territory from 25 March to 13 April. As a result, various government entities have issued several regulations, most of which focus on protecting the continuity of public utilities and generating economic relief for customers. While it is still unclear how long the isolation will continue, it is evident that there will be economic and social consequences for the country in the short term and that further measures will be required in the future.
The electricity sector in Colombia has evolved significantly during the past 20 years and today is an efficient sector with world-class practices. This trend will continue to increase in the coming decades, both because of the growth of foreign direct investment in Colombia and as a result of the positioning and expansion of Colombian companies abroad.
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 the country is a target for international investment, having extensive trade relations and an attractive business environment, there is currently a sense of uncertainty, which has had adverse effects on international investment and on the country's credit rating. Nevertheless, some elements can be highlighted as providing a positive boost for the economy and investment: the continuing implementation of the peace process with the Armed Revolutionary Forces of Colombia (FARC) ending an armed conflict of more than 50 years, the election in 2018 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, and the sustained growth of companies dedicated to generating energy.
Under the terms of the Colombian Constitution of 1991, the electricity sector has been transformed from one wholly owned by the government into one in which there is clear separation between the roles of service providers and utility companies, and that of the regulators, policymakers, and control and oversight agencies. The sector now operates on three main levels: (1) the Ministry of Mines and Energy (MME), which governs policy and establishes the long-term plans for the whole sector; (2) 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 (3) 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 68.3 per cent of the installed capacity, followed by thermal power stations operating with coal and gas with a share of 30.7 per cent. The remaining energy is obtained and supported by other sources such as cogeneration, with a share of approximately 1.1 per cent.
In terms of connectivity, the Colombian electricity sector is divided into (1) the National Interconnected System (SIN), which comprises generation plants, the interconnection network, and regional and interregional transmission and distribution networks, and (2) the non-interconnected zones, in which electricity services are provided by independent small-scale systems.
i The regulators
The Constitution, issued in 1991, conferred legislative power on Congress and granted regulatory power to the national government, which in turn exercises its 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.
The MME is the government entity responsible for formulating, adopting, directing and coordinating the policies, plans and programmes of the mining and energy sector and the supervision of the electricity sector. The MME regulates generation, interconnection, transmission and distribution activities and is in charge of generation and transmission programmes.
The administration and issuance of regulations in the electricity sector is dealt with by the following technical entities:
- CREG, a special administrative body created in 1994, is responsible for 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;
- the Mining and Energy Planning Unit (UPME) is a special administrative unit attached to the MME that is in charge of planning matters for the energy mining sector in coordination with other agents in the sector and supporting the MME in achieving its goals and objectives;
- 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
- the SSPD is a government agency that oversees public utility companies that operate within the Colombian territory. Among other functions, the SSPD:
- supervises the quality and efficiency of all public service companies;
- takes over public utilities companies when they are financially non-viable or when the service rendered is at risk; and
- imposes sanctions on companies under surveillance, and particularly 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:
- National Operation Council, which is responsible for determining the technical standards for the efficient operation and integration of the SIN; and
- Commercialisation Advisory Board, created by CREG as an advisory entity to monitor and review 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, and authorising the mergers of companies operating within a single sector and market.
ii Regulated activities
From an environmental perspective, the development of works and activities relating 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.
Further, 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 a 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 International Labour Organization's Convention 169 and Colombian regulations, should ethnic communities be located within the area of influence of the project, a prior consultation process with those 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 by 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 ISA, as a transmission company with system and market operating functions, and ISAGEN, a new company for electricity generation.
Law 142 regulates all aspects relating to energy as a public service, and Law 143 sets out the legal regime applicable to generation, interconnection, transmission, distribution and commercialisation as well as the Wholesale Electricity Market, which came into operation in July 1995. Further, Law 143 of 1994 states that all the activities that involve the supply of electricity, from generation to commercialisation, are intended to satisfy primary collective needs permanently and thus are considered as mandatory public utilities, and essential in nature.
In relation to projects, free private initiative is the general rule and thus, private and public-private partnerships may be involved in the generation, transmission, distribution and commercialisation of electricity without requiring a concession. In other words, Colombia will only be involved in the development of electricity generation projects when no private entity is willing to assume that activity.6
iii Ownership and market access restrictions
There are no limitations or prohibitions on foreign participation or investment in Colombia's electricity sector. However, foreign investment is prohibited in national security and defence, and the 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 an address in Colombia or to incorporate a Colombian entity. 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, under the supervision of the Superintendence of Public Utilities.
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. Further, Article 74 of Law 143 of 1994 expressly prohibits companies involved in the electricity sector from engaging in more than one activity except for commercialisation, which can be developed with other activities in the electricity sector.
In addition, CREG regulations have set out specific restrictions as follows:
- electricity generators shall not have an equity participation of more than 25 per cent in distribution companies;
- no company shall have more than 25 per cent of market participation in generation activities;8 and
- no company shall own, directly or indirectly, more than 25 per cent of the equity of a company involved in the commercialisation of electricity.9
iv Transfers 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 by or to be notified to the SIC.
Mergers require notice to the SIC when they meet the following conditions:
- 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;
- 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 more than 60,000 minimum monthly Colombian legal wages;
- whenever the companies involved in the transaction are dedicated to the same activity or participate in the same vertical value chain; and
- 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 by the SIC when they meet the conditions in points (a), (b) and (c), above, 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; clearance by the SIC is therefore a mandatory condition of proceeding with completion of the transaction.
In addition to the foregoing, 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 with obligations and imposing sanctions.
Transmission/transportation and distribution services
i Vertical integration and unbundling
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:
- utility companies incorporated before Laws 142 and 143 of 1994 can develop more than one activity under separate accounts for each business; and
- utility companies constituted after the enactment of Laws 142 and 143 of 1994 can only undertake, at one time, complementary activities such as generation retailing or distribution retailing and are prohibited to perform simultaneously activities relating to generation transmission, generation distribution, transmission distribution and transmission retailing.
With respect to horizontal integrations, as previously stated, pursuant to Resolution 128 of 1996 of the CREG, a single company may not own more than 25 per cent of the country's generation, commercialisation and distribution activities. Furthermore, Resolution 128 establishes that a generation company cannot hold more than 25 per cent of the shares in an energy distribution company. The same rule shall apply to distribution companies having share participation in generation companies.
ii Transmission/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 SIN;
- the regional transmission system; and
- 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 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 substations that operate at voltages lower than 220kV and do not belong to the National Transmission System.
With respect to third-party participation, the National Transmission System operates an open market, 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.
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.
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(1) of Law 142 of 1994 provides:
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 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.
Although each company negotiates its own rate, 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 calculating the rate, including associated costs. Thus, resolutions that set rates include the costs assumed by the provider of the service and the methodology used for regulating that cost.
Furthermore, Article 87 No. 9 of Law 142 of 1994 provides that the rates and formulas used to calculate the 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, and its modifications as provided by Resolutions 166, 67 and 43 of 2010, 98 and 42 of 2009, and 113, 135, 166 and 178 of 2008, among others.
iv Security and technology restrictions
While more recent developments regarding peace in the country have led to substantially fewer attacks on 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, named COPEI, for the protection of infrastructure, including pipelines, energy towers, oil platforms and infrastructure in general. The various outcomes of the implementation of COPEI included the creation of a special operation centre and the distribution of a daily report, including possible threats and events.
Nonetheless, currently there is a nationwide debate regarding whether the hydraulic fracturing technique (with horizontal drilling commonly referred to as fracking) should be permitted in the exploration and production of hydrocarbons from unconventional basins. A ban could represent a potential threat to energy security in the country, as it would limit substantially the production of gas from unconventional basins (e.g., coalbed methane). This debate has been presented not only in the legislative sphere but also before the judiciary, as various lawsuits have been filed challenging the legal framework under which this technique is deployed.
Renewable energy and conservation
i Development 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.
Law 1715 defines unconventional sources of energy as environmentally sustainable energy resources that are globally recognised but are not widely used in Colombia or are not widely marketed, such as nuclear or atomic energy, unconventional sources of renewable energy and those determined by UPME. Further, the Law defines unconventional sources of renewable energy as those that meet the aforementioned 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.
This Law classifies activities relating 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, among other things. It also assigns competence to entities such as the National Environmental Licensing Authority and regional autonomous corporations to implement rapid evaluation cycles for projects relating to non-conventional sources of energy, and for matters pertaining to this Law.
Law 1715 is especially relevant as it authorises small-scale 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. These credits may be negotiated with third parties, in accordance with the regulations issued by CREG. A 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.12 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 also 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 income tax for five years after the taxable year in which a company 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 (MESD). In addition, nationally sourced or imported equipment, elements, machinery and services for use in the pre-investment and investment stages of production and use of energy from unconventional sources and for the measurement and evaluation of potential resources will not be subject to value added tax (VAT). For these purposes, a certification from the MESD must be provided, declaring 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 involving 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 using 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 those sources, provided that they have been acquired or constructed exclusively for that purpose, and after the validity of this Law.
For full implementation, Law 1715 needs to be regulated by the different government entities affected by the measures of the Law. Thus, to date, the following aspects have already been regulated,13 in line with information published on the MME website:
- Decree 0570 of 23 March 2018 of the MME, 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 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
- reducing greenhouse gas emissions by the electricity generation sector, to comply with the commitments made by Colombia at the 2015 Paris Climate Change World Summit.
- Decree 1543 of 16 September 2017 of the MME, which regulates the FENOGE;
- Resolution 1670 of 15 August 2017 of the MESD, which adopted the terms of reference for the preparation of the environmental impact study in projects for electric power transmission systems;
- Resolution 1312 of 11 August 2016 of the MESD, 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;
- Resolution 1283 of 8 August 2016 of the MESD, which establishes the procedure and the requirements of the certification of environmental benefit to obtain the tax benefits granted by law;
- Resolution UPME 045 of 3 February 2016, which establishes the procedures and requirements for issuing certification and endorsing projects from non-conventional energy sources to obtain the benefit of VAT exclusion and exemption from the tariff levy; and
- Decree 2143 of 4 November 2015, issued by the MME in relation to the definition of the guidelines for the application of incentives established in Chapter III of the Law.
ii Energy efficiency and conservation
The energy efficiency section 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, with the MESD 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, and to promote campaigns on the use of renewable energy sources.
In addition to the foregoing, Law 1715 provides that the national government and public administration should establish energy efficiency objectives in public buildings and plans and actions for efficient energy management.
iii Technological 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. Nevertheless, it cannot be ignored that the country is considered one of the most promising markets for foreign investment in terms of non-conventional renewable energy.14 Therefore, large projects in this area are being planned in Colombia, and there are others at the implementation stage.
i Development of energy markets
The Colombian electricity sector is comprised of a system of interaction between retailers and large consumers, who conduct their transactions in a market of large energy blocks. This market operates freely according to supply and demand conditions. This competitive model is accessible through the MEM, 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 the negotiations. For example, long-term participants opt for bilateral agreements while short-term agreements usually refer to next-day purchases between all the generators on 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 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.
ii Contracts for sale of energy
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 with hourly availability. The prices at which electricity is offered reflect the variable costs of generation and 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 create a daily amount of electricity. When the stock market price exceeds the price of shortage, the OEF price is determined by descending clock auctions. The purpose of these auctions is to allocate OEFs (between the generators and investors), thus ensuring reliability in long-term firm energy supply at efficient prices. 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 ranges from one to 20 years.
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. These 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 these agreements is that the contract specifies the amount of energy that will be used per hour. 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 the agreements. Energy purchases made through these contracts, intended for regulated users, are governed by rules that guarantee competition between generators, while the prices and conditions on contracts intended for non-regulated users are freely negotiated and agreed by the parties.
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 it is finalised by the National Dispatch Centre. It considers real demand and availability, but not the 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.
The year in review
In 2019, the Colombian energy sector was shaped by the milestone of carrying out (and awarding) the first auctions for renewable and clean energy projects, 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 authority15 and the first renewable energy auction was carried out by the government. This first auction did not result in any awards, as the proposals presented would have resulted in market concentration in excess of the limits set forth in the applicable regulation.
Therefore, the UPME decided to receive new proposals for the purchase and generation of energy within the framework of a new renewable energy auction to be held in October 2019. In this second auction, the target-determined demand established by the MME was 12,050.5MWh per day, with 10,186MWh per day being allocated. In the auction, eight energy generation projects were awarded to seven companies and 22 energy commercialisation projects were awarded to 22 companies. The allocation for purchase had a weighted average of 95.65 COP kWh.
In view of there being a difference between the target-determined demand and the amount awarded, the UPME decided to hold an additional auction to award the remaining 1,864.5MWh per day, which resulted in 168 contracts for the supply of electricity. Of these, three projects correspond to electricity generation, while the other 165 contracts correspond to commercialisation and were assigned to 28 companies. The average allocation price was 106.66 COP kWh. The results were published by the UPME on 24 October 2019. The UPME indicated that all the awarded projects will be in operation from 1 January 2022, for a period of 15 years.
According to the Office of the President of Colombia,16 the awarded contracts are the 'pay as you go' variety, implying that the buyer is obliged to pay the seller for the contracted energy, regardless of whether the seller consumes it or not, and that the generator commits to supplying a fixed amount of energy to the buyer during the hourly block.
Additionally, in 2019: (1) energy consumption increased by 4.02 per cent, which is solid evidence of a sustained increase in electricity demand in the country; (2) besides the renewable energy auction that contributes to the expansion and diversification of the electricity supply, obligations in the order of 900MW of thermal power and 160MW of hydraulic power were allocated;17 and (3) experts have stated that Colombia continues to consolidate its position as a major player in renewable energy sources, owing to the diversity of energy sources that can contribute towards ensuring greater energy security.18
Conclusions and outlook
The Colombian electricity sector has come a long way since the power outages during the 1990s. Privatisation, promotion of investment and the implementation of regulations have transformed the sector into an attractive and competitive market in the region.
However, the rapid expansion of the sector and the continuing 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 electricity sector to develop and secure the Colombian market include:
- providing greater legal security to investors;
- attracting greater investment in the sector;
- promoting unconventional renewable resources, aiming to achieve self-sustainable and permanent energy sources;
- advancing regional integration;
- increasing the installed capacity and effective generation and reliability; and
- drafting and issuing the necessary regulations for the supply of non-conventional renewable energy and related projects.
1 José Vicente Zapata is a partner and Daniel Fajardo Villada is a senior counsel at Holland & Knight.
2 PROCOLOMBIA (Colombia's official investment portal), 'Why Invest in Colombia?', at www.investincolombia.com.co/why-colombia.html#attractive-business-environment (last accessed on 29 April 2020).
3 See PricewaterhouseCoopers, Doing Business in Colombia 2018, at https://www.pwc.com/co/es/publicaciones/doing-business-in-colombia.html.
5 Decree No. 1076 of 2015, Article 22.214.171.124.2.1.
6 See Article 56 of Law 143 of 1994.
7 Compiled in Article 126.96.36.199.3.1 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', accessed at http://paratec.xm.com.co/paratec/SitePages/transmision.aspx?q=lineas (last accessed 29 April 2020).
11 CREG Resolution 071/2006, Article 2.
12 See CREG Resolution 30 of 2018.
14 El Espectador, '¿Colombia tiene potencial en fuentes de energía renovables?', at https://www.elespectador.com/noticias/medio-ambiente/colombia-tiene-potencial-en-fuentes-de-energia- renovables-articulo-877125 (last accessed on 29 April 2019).
15 Portafolio, 'Aprobada la primera licencia para la generación de energía solar', at https://www.portafolio.co/ economia/aprobada-primera-licencia-para-la-generacion-de-energia-solar-527487 (last accessed on 26 May 2020).
16 Presidency of the Republic, Press release of 22 October 2019, 'Con nueva subasta, Gobierno Nacional superó en más del 50% la meta en energías renovables', at https://id.presidencia.gov.co/Paginas/prensa/2019/Con-nueva-subasta-Gobierno-Nacional-supero-en-mas-del-50-la-meta-en-energias-renovables-191022.aspx (last accessed on 19 March 2020).
17 La República, 'El consumo de energía en Colombia creció 4,02% en el transcurso del año pasado' (19 February 2020) at https://www.larepublica.co/especiales/colombia-potencia-energetica/el-consumo-de- energia-en-colombia-crecio-402-en-el-trascurso-del-ano-pasado-2966316.
18 La República, 'Colombia sigue consolidándose como una potencia en fuentes de energías renovables' (19 February 2020), at https://www.larepublica.co/especiales/colombia-potencia-energetica/colombia-sigue- consolidandose-como-una-potencia-en-fuentes-de-energias-renovables-2966300