REPORT:

COLOMBIAS HURDLES
TO DEVELOPING A
VIABLE RENEWABLE
ENERGY SECTOR

Author: Carlos St. James, Managing Director, Santiago & Sinclair LLC
SUMMARY
Despite its hydro-centric energy matrix, Colombia has yet to establish a true
renewable energy sector. The government needs to address three key issues
if investors are to take the country seriously: the capacity payment scheme
needs restructuring; the transmission grid needs expanding into the Guajira
peninsula; and the clubby oligopolistic nature of the electricity sector
addressed. Until then, Colombias boast of a low carbon economy will remain
more the result of fortuitous geography than of any concerted effort.
THE AUTHOR
Carlos St. James is a leading advisor to energy investors and developers in
emerging markets. He co-founded and presided over the Argentine
Renewable Energies Chamber from 2005-2011; has been a board member of
the Latin American & Caribbean Council on Renewable Energy since 2010; and
publishes the Latin American Energy Review in his free time to help generate
debate on the industrys issues.
He will speak at the LAC-CORE Clean Energy Finance Summit, June 13-15, 2017
in Miami, where the Colombian market and many other issues will be
discussed.
A year ago I wrote about Colombias failure to establish a
diversified renewable energy sector, making the case that the
government was long on planning and short on action. One
year later little has changed; it seems the government has a
talent for coming up with plans that it doesnt really want to
implement. A closer analysis reveals the reasons for this lethargy,
with conflicts of interest emerging and three key issues that
need addressing if renewable energy investors are to take the
country seriously:
1 The Cargo por Confiabilidad a fixed payment
generators receive akin to paying for installed capacity
is badly designed, lacks transparency, and needs to be
amended dramatically if it is to address the true energy
needs of the country;
2 The oligopolistic traits of the energy market need to
be confronted once and for all and a solution found:
the public sector controls the vast majority of
generation and has a Dont Rock the Boat mindset
which keeps out new investors and any incentive for
real change;
3 The transmission grid doesnt reach the Guajira
Peninsula, where the best wind and solar resources are
located. There are vague plans to expand there by 2023
 A GREEN ENERGY MATRIX BUT NO
REASON TO BOAST
Colombia takes pride in the cleanliness of its energy production. The government is
quick to point out how their commitment to hydro energy sources proves it. Thats
partly true: hydro sources generated two thirds of the countrys electricity in 2016
and represents 70% of its installed capacity.

Yet this green-ness is not quite what it appears. Coal-fired electricity capacity has been
the fastest-growing technology in Colombias energy matrix: from 6.3% of the total

Pie chart: Breakdown of Colombias Installed Capacity at year end 2016. Source: matrix in 2010 to 8% in 2016, reaching 1343 megawatts (MW) last year. An additional
Ministry of Mines and Energy 220 MW is under construction.

And renewables like wind and solar? There are a mere 19 MW of wind energy and 6
MW of solar PV installed (offgrid), plus 10 MW of solar about to break ground but
tellingly, this single new project is not owned by one of the Big Five companies that
dominate the electricity sector.

Colombia continues to add hundreds of megawatts of coal-fired energy

capacity yet has only 19 MW of wind and 6 MW of solar operational.

By this measure Colombia cares little about the environment. As a comparison,

neighboring Panama has a similarly hydro-centric energy matrix and also increasingly
suffers from droughts. Yet they have managed to install 271 MW of wind energy plus
another 73 MW of solar PV with an additional 361 MW of wind and 70 MW of solar
under construction.
Graph: Coal-fired electricity growth in Colombia, 2010 and 2016. Source: UPME
(Unidad de Planeacion Minero Energetica)
So for a country supposedly so good at planning, why the omissions?
1 CARGO POR CONFIABILIDAD:
TRUSTWORTHINESS PAYMENTS
A key element needing reform is the Cargo por Confiabilidad,
adopted in 2006. It is a hard term to translate. It isnt exactly a
payment to electricity generators for having installed capacity at
hand (although close); rather, they are payments made by the
government to ensure that electricity can be on hand especially
in times of crisis such as during the periodic El Nio-engendered
droughts. Under the Cargo, generators receive fixed annual
payments for up to 20 years regardless of their participation in
the electricity market. In exchange for this payment they must
ensure they remain available to provide energy when called
upon.

But there are signs it has been mismanaged and worse, not
lived up to its goals. The energy sector is in disarray: there have
been blackouts, calls for energy conservation, and raised tariffs:
exactly what the Cargo payments are supposed to help avoid.
The government paid out US$7.5 billion to generators
between 2007-15 under this program, yet two of the
countrys largest thermal plants ceased operations despite
having received a combined $330 million from the Cargo. There
have also been calls for audits given apparent irregularities in
these payments.
 Intermittents such as wind and solar PV energy are exclud-
ed almost by definition from accessing the Cargo payments.
There are periodic auctions for them which, due to their long
term nature, provide investors with some degree of long term
cash flow stability given the lack of long term power purchase
2 OLIGOPOLISTIC MARKET
agreements (PPAs) in the market.
TRAITS
The government should seriously consider scrapping the
Cargo scheme in favor of transparent auctions open to all A topic that isnt addressed as much as it needs to is the coziness
investors. The Mexican or Chilean models might be the best fit. of the energy sector within its self-contained cocoon.

Electricity generation is concentrated in five companies in a

market comprised of 46 entities. As the pie graph shows in 2015
the five largest companies generated more than three quarters
of the electricity supplied for the year and significantly, three
of the five companies are either government owned or
public-private partnerships.

This is perhaps one reason why the Cargo por Confiabilidad has
lasted as long as it has: the government is taking money out of
one pocket and putting into the other one, keeping itself quite
comfortable. Outsiders need not apply.

The solution is not to break down these oligopolies; rather, to

find a political and regulatory solution that allows the market to
have a handful of 800-pound gorillas while also allowing fresh
investors to enter the market specifically to diversify the energy
matrix. The only thing lacking is the political will to do it.

Pie chart: Concentration of power generation in too few hands in Colombia. Source:
Informe annual de XM: Operacion del SIN y administracion del mercado en 2015
3 MISMATCH BETWEEN THE GRID AND
LOCATION OF RENEWABLE RESOURCES
Despite all the planning, the grid does not extent to where the best renewable
resources are located. Plans to expand in that direction are tenuous.

In Colombia, the best solar radiation as well as wind are both located in the same
place: the northern Guajira peninsula (see red circles on maps). Guajira has class
7 winds (over 10 meters per second); the only other South American place with
something comparable is the Patagonia. Guajira also boasts solar radiation of
close to 6 kilowatt-hours per square meter (kWh/m2); to put that in perspec-
tive, the Chilean Atacama Desert has radiation of about 7-7.5 kWh/m2, and the
Mexican Sonoran Desert 6-7 kWh/m2. Map: Colombias Average Multiyear Solar Radiation (left) and Wind Density (right).
Source: Ministry of Mines and Energy

The Guajira peninsula is largely undeveloped; it is mostly used for agricultural,

cattle, and fossil fuel production. As this map shows, the grid does not extend
there. Worse, UPMEs expansion plans do not include the Guajira peninsula
although in the last year it seems to have been added to the discussion with a
goal of expanding into Guajira by 2023. That does very little for investors today.

The local industry association, Asociacion de Energias Renovables, states that there
are two gigwatts worth of wind and solar projects ready to come to life
given the right regulatory framework and grid expansion. But investors are unlikely
to enter until issues like these are addressed.

Colombias regulatory issues and investors concerns are among the topics that will
be addressed at the regionally-focused LAC-CORE Clean Energy Finance Map: Colombian electric
Summit, to be held in Miami between June 13-15 this year. I look forward to transmission grid. Source: Sistema
de Transmision Nacional Electrico
seeing you at this critical event where bankers, government and developers meet
Colombiano: Nuevas obras y planes
to debate the key issues affecting the regions renewable energy sector. de convocatorias. UPME (Unidad
de Planeacion Minero Energetica),
December 2013.
 JUNE 13 - 15 I MIAMI

CLEAN ENERGY FINANCE SUMMIT

LATIN AMERICA & THE CARIBBEAN

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