I+A / FAQs SERIES / WTE

COLOMBIA ELECTRICITY
PROJECTS & REGULATIONS
By: Sandra Manrique, Juan Fernando Gaviria, Hernando A Padilla and Juan Jos
Angulo - Philippi, PrietoCarrizosa & Ura / Contributing Editors: J. Allen Miller
and Raquel Bierzwinsky - Chadbourne & Parke LLP. Editing by: I+A, 2016.
This brief isnt made for commercial purpose. I+A use the content only with
illustrative and conceptual intention in order to show investors the regulations
Colombia use in energy projects.

1.

What are the principal power sources in your jurisdiction?

Colombias power generation matrix is comprised mainly of hydropower (64
per cent) and thermoelectrics, which utilise natural gas, liquid fuels and coal
(31per cent).

2.

What are the current trends affecting the energy mix in your
jurisdiction?
Periods of seasonally dry weather, uncertainty of availability and the cost of
natural gas, as well as the cost of liquid fuels all have an impact on the
reliability and competitiveness of the energy market.
Law No. 1715 of 2014 provides incentives to use unconventional energy
sources and, as a result, it is expected that biomass, geothermic, solar, wind
and tidal will soon be introduced into the energy mix.

3.

What are the current forecasts for electricity demand in your

jurisdiction?
Growth in demand in Colombia is generally directly related to the growth of
GDP.

4.

Is there an open electricity market in your jurisdiction? Are any activities

in the electricity market reserved for the government only? Are private
entities allowed to build and operate power plants and transmission and
distribution lines?
We have a wholesale electricity market (MEM) in which all power producers
and traders are allowed to participate.
We do not have markets that are exclusively reserved for the government.
All of the activities within the chain of production are open to all agents. That
said, combining of activities is regulated and, in some cases, forbidden, unless
the agent was engaged in such activities prior to 1994.

5.

What is the role and function of the regulator? Would you describe the
regulator as being independent?
Colombia has a regulatory commission that oversees matters related to energy
and natural gas (CREG). This commission is a special administrative unit,
attached to the Minister of Mines and Energy. The role and function of the
CREG is to prevent and regulate monopolies and promote competence.
The CREG comprises the Minister of Mines and Energy, the Minister of
Finance and Public Credit, the National Planning Department Director and
eight experts, appointed by the President of the Republic.

6.

Is there an open market for off-takers in your jurisdiction or are there

restrictions on the sale of electricity?
Trading is an open, but regulated activity. Trading is generally carried out by
the public utility company. All producers and traders are allowed to
participate in the MEM. Colombia also has regulatory schemes in place for
independent power producers.

7.

If the sale of power is to a public utility as off-taker, are such entity's

payment obligations backed-up or guaranteed by the government?
Neither the government nor the Colombian state back up or guarantee
transactions between agents.

8.

Does the market have an independent system operator? If so, what are
the ISO
The energy market is centralised and is run by XM Market Experts SA ESP
(XM), an affiliate of Interconexin Elctrica SA ESP. XM acts as a national
dispatch centre, the administrator of the commercial exchange system, as the
liquidator of accounts and as the administrator. XM is responsible for
planning and coordinating the operations of the National Interconnection
System (SIN); managing the commercial exchanges in the MEM; and billing
for the use of the SIN.

9.

How are electricity rates set and what cost components affect such rates?
Electricity rates are set by the identification of the cost of the service and the
price to be charged to end-users (CU). CU is the efficient economic cost
which is the result of the sum of the trading base cost for the reimbursement
of the fixed costs of trading (CUf), plus the sum of the generation,
transmission, distribution and trading and other operational and management
charges (recognised losses, restrictions, CND, LAC, ASIC) (CUv).
The rates methodology is defined by the CREG. They are mandatory for
regulated final users. Agents and unregulated end-users are free to negotiate
the various components of generation and trading.

10. What approvals are required to build and operate a power project? Are
these easy to obtain? Please describe the salient features of the relevant
licence conditions and the grounds for revocation. What levels of fines can
be imposed for failure to comply?
From a regulatory perspective, no permit, licence, concession agreement or
the like is required to engage in any of the activities within the chain of
production of the energy market. However, in some cases, an environmental
licence may be required. The projects also must comply with real estate
regulations and local municipality regulations.
11. How is the sale of excess energy regulated?
The sale of surplus energy is a new option, which applies only to certain
producer agents known as self-power producers. Traditional power producers
are obligated to trade all of their energy in the MEM, and are therefore not
included among these self-power producers, as they do not have surplus
supplies.
Self-power producers satisfy their own power needs with the recently
introduced alternative for selling energy surpluses in the grid the energy
surpluses. Energy surpluses will be sold in the MEM, following the same
rules that apply to energy sold by traditional producers.
12. What percentage of the country's power output comes from renewable
power sources and does your jurisdiction have any specific targets or
milestones for renewable energy projects?
Should large hydropower be considered a renewable source of energy, then
approximately 69 per cent of Colombian electricity output comes from
renewable sources. If only small hydropower is considered, then less than 5
per cent is from renewable sources. Colombia currently has some wind
projects that produce power, but they represent less than 1 per cent of the
generation matrix.

13. Is there a different regulatory regime for renewable energy projects? Are
there any government programmes that foster the development of these
projects?
Colombia has funds established by law (PROURE, FENOGE) to finance
studies and some focused energy projects.
Law No. 1715 of 2014 provides incentive for the use of renewable energy
projects, through tax (income tax and VAT) breaks, accounting methods
(accelerated depreciation) and customs exclusion benefits.
Law No. 1715 of 2014 requires that the government sets and finances energy
efficiency milestones for all public buildings.
Law 1715 of 2014 provides incentive to use unconventional energy sources.
As a result, it is expected that biomass, geothermic, solar, wind and tidal will
soon be combined into the energy matrix, which would increase the amount of
power being obtained from renewable sources.
14. Are there any tax incentives for power projects and, in particular, for
renewable power projects?
As mentioned above, Law No. 1715 of 2014 provides for certain income and
VAT tax breaks for renewable energy projects.
15. Are there any investment vehicles or structures that permit the
maximisation of investment in a power company, such as tax equity,
master limited partnerships, real estate investment trusts (REITs) or
yield cost?
The Colombian tax legislation provides different alternatives for foreign and
local investors to invest in local projects and sectors. Depending on the
specifics of the investment project, there are alternatives for incorporating
local vehicles or making the investment through collective investment funds
and trusts (fideicomisos). When investing through a local vehicle (legal
entity), in general terms dividends distributed to the shareholders are tax-free
as long as they are paid out of profits that were taxed at the level of the local
entity; otherwise, such dividends would be subject to income tax at the
ordinary income tax rates. In the case of investing through local collective
investment funds (CIFs) they are subject to the tax transparency principle,
which means that they are not subject to income tax in Colombia, and the
investors, are deemed to directly receive the profits produced by the
investment projects as if the CIF did not exist. In this case, only when the CIF
distributes profits to its local and foreign investors, such payments would be
subject to income tax in Colombia and the corresponding income tax
withholding would apply depending on the type of income received by the
CIF, and whether the investors are local or foreign. In addition, when
evaluating the alternatives, the tax treaty network available in Colombia for
foreign investors is also considered.

In any case, for determining which alternative is more convenient and tax
efficient for investing in local projects, each alternative is evaluated on a case
by case basis, as there is not a fixed structure that is advised to be applied as a
general formula in the case of investments in power companies.
16. Are there any governmental subsidies, benefits (other than tax-related) or
incentives for investment in power projects and, in particular, renewable
power projects?
Law No. 1715 of 2014 provides incentive for the use of renewable energy
projects, through tax (income tax and VAT) breaks, accounting methods
(accelerated depreciation) and customs exclusion benefits.
Additionally, it permits a subsidy for power generation with liquefied
petroleum gas as a substitute for diesel.
17. Are there any capital controls or other regulations in your jurisdiction
that prevent investors from repatriating investments in a power project?
In general, foreign capital investments in Colombia are subject to foreign
exchange regulations, which provide certain obligations in regard to
registration of the investment before the Central Bank, annual notification of
changes related to the investment, and cancellation of the investment
registration. In addition, foreign exchange regulations subject the investor to
the control of the entrance and exit of income derived from the investment.
18. Is there a market for emission reduction certificates or clean energy
certificates in your jurisdiction?
Since Colombia is part of the Climate Change Convention and the Kyoto
Protocol, international treaties incorporated to Colombian legislation through
Law 164 of 1994 and Law. 629 of 2000, there is a market for emission
reduction certificates.
In order to explain how this market works, it is necessary to illustrate the three
mechanisms established by The Kyoto Protocol to achieve its purposes:

the market of emission rights

the Clean Development Mechanism (CDM)
the joint implementation

Additionally, this international Protocol classified the states that are part of in
two groups:

developed countries, which are bounded to reduce their air emissions

with quantifiable numbers (for example, Canada, Japan, and the EU)
developing countries, which do not have obligatory reduction goals
but have some commitments through which they may contribute and
obtain some benefits (for example, Colombia)

Regarding the first mechanism, the market of emission rights, the developed
countries that have extra emission units can sell that available extra capacity
to those countries that need it as the latest already exceed their emission
limits. It allows developing countries to achieve the emissions goals without
infringing the treaty.
According to the second mechanism, the Clean Development Mechanism, the
developed countries may acquire credits from projects performed in
developing countries territories to fulfil the commitments before the treaty.
Thus, developing countries obtain important benefits from developed
countries investment and technology transfer because both types of countries
can commercialize either future or existent emissions reduction certificates on
this market.
Finally, the third mechanism, joint implementation, works in the same way
than CDMs but only between developed countries.
Colombia as a developing country, may participate in the second mechanism
through getting emission reduction certificates by developing emission
reductions projects in its territory, in order to become those in securities that
may be commercialized on the international carbon market.
In order to regulate those said emission reductions projects, the Ministry of
Environment acted the Resolution No. 2734 of 2010, which states the
guidelines that a company or person interested in developing a clean
development must fulfil before the said Minister to get the approval:

the Project Design Document (PDD)

the Reporting format to assess the contribution to sustainable
development projects for reducing emissions of greenhouse gases,
or the requirements and evidence of contribution to sustainable
development of the country for approval of national emission
reduction project of greenhouse gases, depending on the kind of
project.
as it is usual, documentation related to the person or company
interested in applying to the mechanism.

In effect, the implementation of this strategy has obtained successful

achievements in Colombia since many companies, mainly in energy sector,
have undertaken these initiatives in order to get economical and tax benefits
from the carbon market. Even, the Grantham Research Institute on Climate
Change and The Environment of London School of Economics has
recognised that Colombia has been successful in leveraging funds under the
CDM and the government has tried to establish a system of payment for
environmental services for climate change mitigation through the CDM.

19. Which renewable power sources have been most successful in your
jurisdiction and what is the medium to long-term outlook for them?
Law 1715 of 2014 provides incentive to use unconventional energy sources.
As a result, it is expected that biomass, geothermic, solar, wind and tidal will
soon be combined into the energy matrix, which will increase the amount of
power being obtained from renewable sources.
20. Are there any non-regulatory factors that affect the development and
financing of power projects in your jurisdiction, such as social,
environmental, political or security concerns or rights of third parties?
Bureaucracy when obtaining social and environmental licences is a frequent
issue. Most of the time, the timing of projects and meeting of milestones are
affected by red tape issues within the public entities that issue permits and
licences. For example, public records are not always updated or accurate, and
certain legal terms are mandatory for private parties but not for public servers.
Colombia is currently carrying out a peace negotiation, but has been
experiencing internal armed conflict for the past 50 years; hence, terrorism,
violence and public disorder are common issues throughout the country.
Although communities do not have veto powers, as a legal requirement they
must be consulted prior to any environmental licences being issued. As there
are several local communities affected by the energy sector, this may also
delay processes.
21. Are subsurface rights separate from land rights? If so, what factors must
a project take into consideration in determining whether an owner of
subsurface rights could create issues for a project?
According to the Colombian Constitution, owners of surface land do not have
subsurface rights. The subsurface is a public interest good, owned by the
Colombian state. Public utility companies have been provided titles, under
certain laws, to provide easements against the will of the surface owners.
However, the standard practice is to negotiate the use of the required land
with the owners. Energy projects must take into consideration the subsurface
ownership, as well as necessary airspace, as these are owned by the state.
22. How are wheeling tariffs set and are there any differences based on the
power source and technology used? Is there a postage-stamp wheeling
tariff in your jurisdiction?
According to article 45 of Law 99 of 1993, as amended by article 222 of Law
1450 of 2011, hydroelectric power plants with a total installed potency higher
than 10.000 kilowatts, shall transfer 6 per cent of the electricity sales
according to the tariffs set forth by the Regulatory Commission of Energy
(CREG) to the entities listed by Law 99 of 1993. For this purpose, as of 1995,
the CREG provided that the applicable tariff would be COP$20.93 $/kWh. As
of January 1997, this tariff has been annually increased according to the

inflation rate. In the case of thermoelectric plants, they shall transfer 4 per
cent of the electricity sales to the entities listed by Law 99 of 1993.
In addition, the generation of electricity is subject to a municipal turnover tax.
In this case, all revenues derived from the generation of electricity are subject
to turnover tax in the municipality where the power plant is located. Specific
contributions may also apply in the case of power generating companies, for
instance article 85 of Law 142 of 1994, regarding the public services regime,
provides a mechanism for the Public Services Superintendence to recover the
expenses incurred in the control and surveillance activities. In order to recover
such expenses, the Public Services Superintendence may collect a special
contribution from the entities subject to its surveillance. The special
contribution is annually determined on the operational expenses incurred by
the entities that provide public services at rates between 0,1 per cent and 1 per
cent.
Regarding special wheeling tariffs for renewable power projects, even though
Law 1715 of 2014, provided certain benefits for promoting the development
and use of non-conventional renewable energy, it did not include special
wheeling tariffs.
23. Are there any open access rules for transmission? If so, how is access
determined? Are there private transmission lines to which open-access
rules don't apply?
Yes. Owners of networks, transmission and distribution lines are obligated to
grant access to any requesting party, so long as the connection is technically
feasible and the line has technical capacity. This principle applies to all
networks, not just energy transmission lines.
24. Are cross-border power exchanges regulated?
Colombia has international energy exchanges (TIEs) with Ecuador and it is
expected that it will soon have an agreement with Panama. These agreements
create a bilateral spot market where members of the Andean Community of
Nations trade hourly energy blocks.
Colombia also has an energy trade agreement with Venezuela, though this is
not considered a TIE, as there is currently no regulatory agreement between
the countries, rather, only a physical delivery of electric energy.
25. Are merchant power projects financeable in your jurisdiction?
In general terms, merchant power projects have been financed by means of
corporate loans, as opposed to project finance. These corporate financings
have been usually linked to large generation companies with various
generation projects and, thus, with large balance sheets.

26. What are the biggest obstacles in obtaining debt financing for renewable
power projects?
Renewable power projects (wind, solar) have not been developed in Colombia
on a large scale and therefore no financing has been sought in respect of them.
27. What are currently the most significant obstacles to the growth of the
electricity market in your jurisdiction?
Environmental and social issues are the most significant common obstacles.
28. What are the biggest growth areas in the electricity market in your
jurisdiction?
Almost all the country is considered attractive to energy projects. Depending
on the type of project, some areas will be more suitable than others. In regard
to generation, the central and northern regions have the most concentrated
installed capacity.
Transmisson and distribution are more likely to expand near the
interconnected system, however, there remain a number of unconnected zones
where there is little development of transmission and distribution, for
example, southeastern areas (Llanos Orientales, Amazonia), part of the
southwest (Choc) and some areas right in the north in the Guajira peninsula.
29. Please describe any recent trends observed in your jurisdiction affecting
the structuring of investments and financings in power projects.
Perhaps the major trend in Colombia is the acquisition of thermoelectric
power plants by private equity funds. In terms of hydro, private BOT
developments are becoming more popular. This is a trend that could continue
in respect of projects owned by departments and municipalities.
30. Are debt offerings on the capital markets becoming a more common tool
in your jurisdiction to refinance construction financing?
No. In the power generation sector most financing comes from the banks,
including multilaterals. However, major holding companies with power
generation assets have issued bonds as a way to finance their general
corporate needs.
31. Are power purchase agreements in your jurisdiction denominated in local
currency or US dollars?
Most of the plants that have been project financed have PPAs with payments
denominated in US dollars in order to have a natural hedging against
indebtedness in foreign currency.

32. Are there regulatory limitations on foreign investment in, or control of,
electric generation, transmission or distribution assets?
No.
33. How active in your jurisdiction is the M&A market for power assets?
The M&A market in Colombia has been highly active for power assets.
Recently, two major thermal power assets were sold to private equity
sponsors. Furthermore, the national government is in the process of selling its
57 per cent interest in Isagen, one of Colombias largest power generators.
(Sold to Canadian Private Equity Fund).
34. What are the most common dispute resolution mechanisms under local
law-governed power purchase agreements in your jurisdiction?
We have seen disputes being resolved both by way of arbitration, as well as
by formal processes in the national courts. Arbitration is frequently used, but
currently very few PPAs are. These types of resolutions had been utilised
regularly in the 1990s as a finance mechanism to build most of the installed
generation assets. However, the stable MEM and the existence of a reliability
charge, which is a fixed payment for up to 20 years, have enabled the
continuous expansion of investments in electricity projects without
necessarily executing PPAs.

6/03/2016 / I+A