National Development Plan Statue and Non-conventional Renewable Generation

November 2019

The Colombian Society of Engineers published its 946 edition of the Annals of Engineering Magazine dedicated to the topic of Renewable Energy. Markup Consultores contributed to this edition twith an article written by his partner José Plata Puyana.

The Grounds of the National Development Plan 2018 – 2022 (“Bases del Plan Nacional de Desarrollo 2018-2022”), incorporated an impulse regarding renewable energy as a strategy to advance in the field of sustainability and mitigation of climate change[1]. In this sense, Law 1955 of 2019, included incentives and control command regulations to implement this alternative, among which the obligation imposed on energy retailers to serve 8-10% of their regulated demand[2] with purchases of non-conventional renewable energy sources is highlighted[3]. Thus, the objectives of this document are: i) to analyze in depth this last obligation and its regulation through Resolution 40715 issued by the Ministry of Mines and Energy (hereinafter, Ministry of Energy) on September 10, 2019; and ii) to emphasize the how important it is for the market that the private sector absorbs negotiation of long-term contracts without the State intervention in the economy, so the market becomes more dynamic facilitating the entry of new competitors.

According to the OECD, a common reaction of a government with respect to a public policy problem is to forbid conducts or to oblige a market agent to do something, which is known as a command-and-control regulation. Another alternative is to resort to the imposition or reduction of taxes, provide subsidies or any other mechanism that changes economic incentives to influence the behavior of market agents[4], a strategy known as regulation based on incentives. In accordance with the above mentioned, Statue 1955 of 2019 incorporates instruments based on incentives and command-and-control, to boost renewable energies in Colombia. 

In the first place, the author remarks the extension of the income deduction tax incentive from 5 to 15 years for investments in generation with non-conventional sources, as well as the inclusion of VAT-free ratesfor solar energy projects items (Sections 174 and 175). Moreover, section 21 extends the duration of the Financial Support Fund for the Energization of Non-Interconnected Areas (“Fondo de Apoyo Financiero para la Energización de las Zonas No Interconectadas (FAZNI)”) until 2030, so that renewable generation projects may benefit as long as they supply energy to the most remote communities in the country. Furthermore, Section 289 of the aforementioned Statue sets forth that projects larger than 10MW that generate energy from non-conventional sources, an obligation to transfer 1% of its sales to local authorities compared to the 6% required for hydroelectric generation and to 4% of thermal power plants[5]

In addition to the incentives and subsidies discussed, section 296 of the National Development Plan Statue advanced in a command-and-control measure, which consists in imposing an obligation on energy retailers to acquire between 8% and 10% of their energy needs from non-conventional renewable sources through long-term contracts (article 296). Therefore, this academic article aims to explore further on this specific tool displayed by the Congress and the National Government. 

The Ministry of Energy supports the use of command-and-control regulation in the economic theory of the lock-in effect, based on the argument that “electrical systems shows characteristics of capital intensity and prolonged life of assets, this leads to the generation and entrenchment of dependency paths” in benefit of established and dominant technologies, such as hydraulic and thermal, and to the detriment of the entrance of new technologies such as non-conventional renewable sources. The existence of this entry barrier for energy transformation justifies a public policy intervention to break the inertia existent in the Colombian power market[6]. Indeed, the practice in the wholesale energy market in Colombia is to enter into bilateral contracts for terms ranging between 1 and 3 years[7], which makes it difficult for new projects to enter the market since it requires much longer-term transactions to achieve financial closure and bankability of the project, a fact that highlights the inertia argued by the  Ministry.

Subsequently, on September 10, 2019 the Ministry of Energy published Resolution 40715 “through which section 296 of Statue 1955 of 2019 is regulated”. According to this standard, from 2022 onwards, energy retailers must purchase 10% of the energy they need to serve their regulated clients, through contracts with a duration of 10 years or more coming from non-conventional renewable energy sources (Sections 2 and 3). Moreover, section 4 indicates the forums in which these contracts must be executed: i) renewable energy auctions organized by the Ministry of Energy; ii) exchange markets approved by the Colombian Regulator (CREG) in accordance with Resolution CREG 114 of 2018; and iii) public calls made by energy retailers, in accordance with the rules contained in Resolution CREG 079 of 2019. 

In the short term, as of the date, the author is aware of the presentation to the CREG of two exchange markets promoted by Derivex S.A. and by the Mercantile Exchange (Bolsa Mercantil S.A.), nonetheless, none of them have yet been approved by the CREG. Likewise, the Financial Superintendence (“Superintendencia Financiera”)  will play an important role in facilitating the power sector to achieve the desired purpose of migrating from an over-the-counter transactional scheme to transactional platforms of the financial sector, as in fact occurs in the most sophisticated international electric energy markets such as the United States and Europe. 

In addition to that, Resolution CREG 079 regarding public calls made by energy retailers is not yet in force so that it barely corresponds to a regulatory project published by it. This also raises expectations about the date on which the definitive resolution will be issued. In consonance with the above, for the moment the only way to comply with the obligation  to purchase 10% of the energy from non-conventional renewable sources is through the renewable energy auction organized by the Ministry of Energy for the month of October 2019, in accordance with Resolutions 40590 and 40591 of 2019. 

Following the above, the main concern that arises for the author in the long term is whether the renewable energy auction will be a stepping stone so that in the future the private sector will absorb the market needs to enter into long-term bilateral contracts of more than 10 years or if, on the contrary, it would be a public policy that would imply the constant intervention of the State in the economy to the detriment of the private initiative, which would be contrary to the spirit of the legislator incorporated in Statues 142 and 143 of 1994. In the author’s opinion, the renewable energy auction has proved to be an effective way to attract foreign investment and new market players as well as a game changer in the market regarding the negotiation of long-term contracts.  

However, the author considers that the Colombian market should go beyond the organization of periodic renewable energy auctions lead by the Government and move forward to exchange market mechanisms that encourage liquidity, facilitate hedging and provide incentives for the free entry and exit of these positions. Thus, the market should adapt itself to the needs of market agents through private initiatives such as the exchange market mechanisms established in Resolution CREG 114 of 2018.  

In conclusion, Colombia incorporated a public policy decision in section 296 of the National Development Plan Statue 1955  of 2019 (Ley del Plan Nacional de Desarrollo”) and in Resolution 40715 of 2019 of the Ministry of Energy, according to which energy retailers are obliged to buy 10% of their energy needs to serve regulated users of renewable sources through long-term contracts of more than 10 years. This is a command-and-control measure that implies a strong intervention of the State in the economy, which is justified by i) the need to advance in climate change actions; and ii) to overcome the inertia of market players used to enter into short-term contracts with periods between 2 and 3 years. Nonetheless, the concern that arises to the author is that these goals will not transcend in the long term if private initiative is not promoted by the CREG in the sense that exchange markets under Resolution 114 of 2018 shall be the ones in charge of absorbing this new market dynamic, reducing entry barriers and fostering  freedom of entry and exit of new competitors.

[1] National Planning Department (2019). Bases of the National Development Plan 2018 – 2022: Pact for Colombia, Pact for equity, p. 469. (Translated)

[2] Article 2 of Resolution CREG 131 of 1998 established the power and energy monthly limits so that the user contracts the supply of energy from the competitive market: “From January 1 of 2020, 0.1 MW o 55 MWh”. In practical terms it included homes and some users from the commercial sector, mainly”.   (Translated)

[3] The article 5 of Law 1715 of 2014 incorporates the following definition: “Non-conventional energy renewable sources ( “Fuentes No Convencionales de Energía Renovable (hereinafter, FNCER)), are the energy renewable sources globally available which are environmentally sustainable, however in the country they are not used or they are marginally used and are not widely traded. Examples of the FNCER are the biomass, small hydroelectric power plants, wind power, geothermal, solar and oceans. Other sources might be considered as FNCER, following what UPME determines”. (Translated)

[4] Economic Cooperation and Develpment Organization. Alternatives to Traditional Regulation: Report prepared by Mr. Glen Hepburn, who worked for the OECD Regulatory Policy Division, p. 10.  (Own translation)

[5] Section 45 of Statue 99 of 1993, amended by section 222 of Statue 1450 of 2011 and by section 24 of Statue 1930 of 2018.

[6] Ministry of Mines and Energy (2019). Project Resolution Supporting Document (“Memoria Justificativa del Proyecto de Resolución”) “through which section 296 of Statue 1955 of 2019 is regulated”, (p. 1).

[7] XM S.A. E.S.P. publishes monthly statistics related to long-term contracts pursuant to Resolution CREG 157 of 2011, in which the tendency in noticed.

Read original publication from the Colombian Society of Engineers

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