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[Opinion] The Role of Renewables in Colombian Energy Security

The Role of Renewables in Colombian Energy Security

 

By: Carlos Urueta and Farah Mohammadzadeh Valencia

 

Wind, Solar and other non-hydro renewables are essential to transform energy security and corporate competitiveness in Colombia.

 

Hydropower accounts for 70% of Colombia’s current energy matrix, and is Colombia’s cheapest source of energy. By definition, hydropower is susceptible to water levels and thus extremely vulnerable to droughts. Furthermore, while it is considered “clean”, it is not always sustainable due to the devastating impact it can have on land use and natural habitats.  It is in this context that Colombia now evaluates its energy security. Encouraging broad development of wind, solar and other non-hydro renewables (NCRE) could prove a far more compelling solution to address Colombia's energy supply concerns.

 

El Niño exposes chronic inefficiencies in the energy market design. As a hydro-heavy country, Colombia depends wholly on the availability of backup thermal generators to supply energy during dry periods. Since thermal generation is costly and commodity prices volatile, consumers pay a surcharge called cargo por confiabilidad as part of their electricity bills to finance backup thermal plants that promise to generate electricity on demand. This subsidy scheme seemed to work for years when climatic conditions did not reach the severity of the current Niño. But the recent need to increase energy prices to provide further support to these thermal generators has left consumers distraught. With generators like Termocandelaria reporting financial losses and underinvestment, Colombians are frustrated and demand greater government scrutiny into how the cargo por confiabilidad is managed questioning also why the original surcharge was not enough. What is clear is that Colombia’s ongoing climate crisis has tested the current system to its limit.

 

Renewables are a cheaper and more reliable alternative to thermal generation. Colombia boasts exceptional non-conventional energy resources like solar, wind and biomass. In fact, solar is among Colombia’s most abundant resources given its proximity to the equatorial zone. By making better use of these renewable resources, the government could make Colombian energy supply more reliable and cost effective.

Colombia has a daily average solar radiation of 4.5 to 5 kWh/m2 and extraordinary levels near the Guajira Peninsula that surpass 6 kWh/m2. Likewise, the Guajira region is endowed with one of the highest wind potentials in South America. These resources could be better utilized in light of the decreasing costs that renewables offer. Global solar production costs for instance have fallen 95% in the past decade, meaning solar can now deliver a savings to most Colombian consumers; commercial, industrial and residential alike. Although not as dramatically, wind energy costs have also become cheaper, making wind a viable alternative to fossil fuels in the region like in Peru. In fact, it is not uncommon today to see wind energy projects around the world deliver electricity as low as USD 0.04/kWh.

 

Law 1715 of 2014 first step in the right direction. In May 2014, the Colombian government took a significant step and passed Law 1715 to establish the legal framework and instruments to actively promote and integrate NCRE into the national energy system. Law 1715 outlines the incentives that make non-hydro renewables economically feasible. These incentives include (1) 50% income tax exemption for up to 50% of the initial investment, (2) accelerated depreciation of assets, (3) Value-added-tax exemption on goods and services related to the investment and (4) import duty exemption on raw materials and components for the development of non-hydro renewable projects. The new law also envisages credits for energy injected to the grid or net-metering though the mechanics of this commercial incentive have not yet been fully outlined.

The Colombian government sees Law 1715 as an opportunity to improve its overall economic competitiveness. Investments in renewable energy will allow Colombia to develop skills and jobs in a globally budding market. As the study on “Integration of non-traditional renewable energy in Colombia” illustrates, Colombia has a unique opportunity to play an important role in the NCRE sector and much to benefit.

 

 The regulation published in conjunction with Law 1715 [1] is a good first step. The law addresses key tax provisions and size of self-generation or distributed energy initiatives. And while these are important measures, future laws could go further to accelerate the transformation of Colombia's energy sector.

For example, Law 1715 does not incorporate the feed-in-tariff [2] and competitive net-metering models that have enabled regional neighbors like Chile and Peru transform their energy supply. If Colombia is to reach a meaningful transformation in energy generation, the government could consider sponsoring utility scale auctions. Thanks in large part to this model, in Chile at year-end 2015, NCRE accounted for 11.4% of its installed capacity compared to 2.4% in 2005. In the case of Peru, this number reached 6.2% at year-end 2015 versus 4.8% in 2009. In Colombia, NCRE represents less than 0.1% of total energy generation. The pace and nature of the growth in these neighboring countries is due to concerted efforts to implement explicit auction timelines for technology-specific (e.g. wind, solar, biomass, small hydro) supply. The result for Chile and Peru has been cleaner, environmentally friendly, reliable and less expensive energy.

 

Near-term perspective still encouraging. With the new regulations, combined with Colombia’s strong record of sound economic policies, nearing accession to the OECD and safe stewardship of investment friendly corporate laws, Colombia is attracting the attention of a growing number of renewable energy developers and investors. Their presence in Colombia should help to maximize the potential of the current regulatory environment and pave the way to further deregulation and modernization of the energy system. Further liberalization of a controlled market is not new to Colombia. It has happened in telecom and hydrocarbons, and is now much needed in the power sector. With climatic changes exposing the weaknesses of stop-gap measures like the cargo por confiabilidad, Colombia should finally follow a path to a diverse, clean, modern energy supply matrix.

 

 

[1] Ministerio de Minas y Energía Decree 2469, Comisión Reguladora de Energía y Gas 0-16 and Unidad de Planeación Minero Energética Resolution No. 28

[2] Government guaranteed rates for large-scale NCRE development