Will the renewable energy auction in Colombia set a new bar for the market?


Colombia boasts a wealth of natural resources. Data from the National Mining and Energy Planning Unit of Colombia, UPME and the Institute of Hydrology, Meteorology and Environmental Studies (IDEAM) show that hydropower is estimated at 56 GW nationwide, while solar is close to 42 GW and wind is estimated at 15 GW in Guajira alone. Today, hydroelectric sources account for 65% of the energy mix, while wind and solar account for only 0.11% and 0.06%. Colombia has hardly scratched the surface of its renewable potential, as these figures underline. 

To this end, Colombia adopted Law 1715 in 2014 to promote the development of renewable energy, with energy security priorities, reductions in climate change and the stabilization of electricity prices. The law provides attractive tax incentives including an accelerated depreciation period of five years and exemptions from import duties and sales taxes. The government announced at the beginning of last year that it would carry out its first non-conventional energy auction for projects worth 1 GW or more than 10 MW. The auction was postponed in December 2018 and is now expected to take place in February 2019. Final details are published to assist participants in preparing their offers. 

Power stations, oil and gas platforms and homes in Colombia have played important roles in off-grid applications over decades. The negative effect of "El NiƱo "on hydropower plants and rising energy costs mean that Colombia must diversify its energy mix and use its other abundant domestic energy resources. For many, the time has long been overdue for Colombia to increase the development of its rich renewable resources. 

However, despite the unique set of market conditions in the country, there is a question of whether or not investors will flock to the auction with winning offers or whether they will choose to sit in hopes of more attractive terms in the future. This is a real question, as the renewable industry has recently surprised the world by setting new low bid prices at nearly every auction in the world. 

However, if the conditions of the energy contract do not match the investor's expectations, external forces such as low capital costs and technology pricing will have to bridge the gap in order to achieve the successful results of the auction, as seen recently, especially in Latin America. Chile, Argentina and Mexico have had very positive results in the last five years with their renewable energy auctions, with over-registered participation and prices below expectations. According to the November 2017 pv magazine report: "Chile's auction concludes with an average Chilean auction price of US$ 32.5/MWh, "the first round led to an average price of US$ 79/MWh in 2015. 

But, according to CENACE, the Mexican government agency responsible for organizing the auctions, Mexico moved the price bar even lower in 2017 by reaching US$ 20.47 USD / MWh in its third round. In fact, market participants and observers in Mexico argued that the second auction in the country could not overcome the extremely low price of US$ 40/MWh achieved in the first round. All three above mentioned countries boast of meeting their renewable energy targets. 

In the past five years, solar and wind equipment prices have fallen by double digits, and investor confidence in renewable technologies has increased, enabling bold pricing to benefit off-takers. In addition to clear and consistent rules and favorable contractual conditions, market conditions for equipment prices and availability have undoubtedly helped these three markets succeed. 

In the past five years, solar and wind equipment prices have fallen by double digits, and investor confidence in renewable technologies has increased, enabling bold pricing to benefit off-takers. In addition to clear and consistent rules and favorable contractual conditions, market conditions for equipment prices and availability have undoubtedly helped these three markets succeed. 

In contrast, contract terms have been twenty years in Chile, Argentina and Mexico, which is also the standard for large-scale renewable energy contracts worldwide. Mexico maintained its conventional 15-year contract for the sale of electricity, but added five years to the sale of the project's clean energy credits. At this stage, the first auction and terms in Colombia appear to add currency risk to many investors. However, the price of solar and wind equipment has fallen even lower since the last auction in Mexico, which could cover investors. 

Colombia may not see prices lower than Mexico and bidders may not swarm at the auction, but as long as the offered deals compete with current energy sources and acceptable bids totalling 1 GW, success is achieved. There can be a paradigm shift and renewable energy generators can demonstrate their flexibility on the market, assuming that investor confidence remains strongly dependent on low equipment costs to cover most of their risks. 

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