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UPME decree doesn’t solve the disadvantages of new investments on renewables in Colombia.

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In an opinion column for Energía Estratégica, the lawyer and energy specialist, José Plata Puyana, analyses the Decree 829 of 2020 that grants tax benefits for the development of renewable energy. He points out that this layout preserve inequalities between new investors and existing ones when applying the rent deduction.

(GeorgeStigler Stigler defines entry barriers as a cost asymmetry between an entrant and an incumbent

In the case of renewable energy, the entrant is the foreign investor that wants to get into a market with a disruptive technology. Meanwhile, the incumbent is the traditional utility company that has been developing for years the generation, distribution, and/or retailing activities (and in exceptional cases also transmission) in Colombia.

Regarding the benefit of rent deduction of up to 50% of the total investment in a period no longer than 15 years, contained in the article 11 of Law 1715 of 2014 (modified by Law 1955 of 2019), it’s important to highlight that during the first years of the project the foreign investor won’t reach a liquid income (net income minus costs) from which the tax can be deduced, a situation that isn’t faced by a traditional service provider, who already perceives a liquid income from carrying out the generation, transmission, distribution, and retail activities.

Therefore, the article 11 of Law 1715 of 2014 provides a situation in which the utility company that has been in the market for years (the incumbent), has an artificial competitive advantage against a foreign investor (the entrant), reflected in the capacity of the incumbent to offer better prices in Power Purchase Agreements or PPAs.

Facing this entry barrier raises the question, if the Decree 829 of 2020 issued by the national government on June 10th of 2020, solves this situation. The mentioned decree improves the procedure that has to be used up to access the taxing benefits defined in the Law 1715 of 2014, by establishing the Unidad de Planeación Minero-Energética (UPME) as the only entity through which the process has to take place and removing the step in which the project promotor had to reach to the Environmental License Authority , as well. Because the UPME has been an entity historically characterized by its technical approach and its fast pace in the decision making, the centralization of the procedure has a positive outlook.

Nevertheless, this decree gives easier access to the taxing incentives of the Law 1715 of 2014 to both foreign investors (incoming) and traditional electric energy service providers (incumbents).

As a result, this decree doesn’t provide any specific solution towards the entry barrier, as it would have happened if, for example, the mentioned decree regulated in detail the figure of “tax equity partner” widely used in other countries. “tax equity partnet”, de amplia utilización en otros países.

Nevertheless, there are still other ways to speed up the activation of taxing incentives through trust and contractual schemes .

These alternatives could allow foreign investors to level the playing field by reducing the cost asymmetry that they face today towards the incumbents, only if this properly structured scheme allowed anticipating the monetization of the fiscal shield created by the Law 1715 of 2015.

*José Plata Puyana (jplata@markup.com.co) is a lawyer, focused on energy and competition, and is one of the founder partners of MarkUp Consultores.