Renewable energy
Colombia made some changes to its renewables auction program after the first round failed. They don’t go as far as developers would like. But how power buyers respond will be more important to its success
by Tom Nelthorpe
Colombia’s renewable energy auction program suffered a setback in February when it failed to persuade electricity buyers to participate. Since then the Ministry of Mines and Energy has made some changes to the auction process for power purchase agreements (PPAs). Even though some critics say the changes don’t go far enough to make the auction more popular, the next auction has already been scheduled.
The first auction, which matched bids from power buyers and project developers, was cancelled because it didn’t attract enough buyers, and the Colombian Commission for the Regulation of Energy and Gas (CREG) was worried that awarding any contract with an insufficient number of PPA buyers wouldn’t produce enough competition in the energy distribution market. In fact, the results would have violated the country’s antitrust rules, according to Mining Minister Maria Fernanda Suarez.
The auction failure was a bit of an embarrassment for Colombia, which deregulated its energy market in the 1990s. It worked well with hydroelectric power, which accounts for 70% of the country’s energy. But when poor rainfall exposed the weakness of depending on hydro power, Colombia decided that it would have to encourage the development of other renewable sources. The auction was designed to make this happen without undermining deregulation.
The ministry had suggested that it would make changes in advance of the second round scheduled for June. But in May the ministry postponed the auction until September and made modest changes to the bidding process.
Then in July, the ministry pushed back the bidding to Oct. 22 and made some more substantial changes to the bidding process. For starters, bidders are required to produce fixed amounts of power at various times of the day, rather than an average over the year. This could be popular with developers because of the sharp swings in wind and solar production over the course of the day.
When poor rainfall exposed problems with hydro power, its main source of energy, Colombia decided to encourage the development of other renewables with a PPA auction that wouldn’t undermine deregulation.
Another technical tweak to the PPA changed the contracts to resemble the take-or-pay agreements that are common in renewables energy development. Previously, a buyer would only have to pay for power that they could sell on to consumers. Now, they have to pay all invoiced amounts.
The new PPAs are now 15 years in length, compared to 12 years in the first round. The extension is likely to improve returns from successful projects and is a distinct improvement on the 10 years that the ministry first proposed in 2018. Meanwhile, the government reduced the minimum project size for bidders from 10MW to 5MW, to improve participation from smaller developers—including those proposing rooftop projects.
The changes probably will not increase the willingness of international banks to support developers. The government is still not offering any form of dollar indexation, so foreign banks will either have to lend in Colombian pesos, or offer cross-currency swaps, and so are unlikely to be competitive with local banks. Local banks will also be more familiar with potential buyers. Since developers won’t know until after the auctions who they are matched with, banks that can lend to the widest variety of purchasers will enjoy an advantage.
Equally importantly, the Colombian national infrastructure development lender Financiera de Desarrollo Nacional, might provide some sort of liquidity facility to help bridge revenue shortfalls. In May, FDN approved its first financing for a solar project, a Ps24 billion loan to Trina Solar’s 27.2MW Bosques de los Llanos 1 solar park.
But the key to the success of the auction will be in persuading buyers to participate, and here, the most important changes are taking place outside the auction. The ministry has made it clear to buyers that they will need to source a higher proportion of their power requirements from renewables even if the auction fails again.
This might persuade buyers, such as utilities and large industrial users, to cut bilateral deals with developers rather than go through the auction process. Developers, which dislike not knowing their counterparty ahead of the auction, might prefer the certainty of bilateral arrangements. Taken together, the changes might not save the auctions process, but they might give renewable energy in Colombia the boost it needs.
