In the first of a two-part interview, BNamericas speaks to Colombia's deputy energy minister, Diego Mesa, about the major challenges facing the country's power sector as it makes a transition toward non-conventional renewable sources.
BNamericas: What are the key issues facing the power sector in Colombia as the country begins to embrace renewable sources such as wind and solar?
Mesa: One of the main challenges that we have at the moment is that we have a power generation matrix that is heavily reliant on hydropower. That's okay because we have the sixth cleanest matrix in the world but at the same time we're exposed to climate change phenomena such as El Niño. So one of the things we want to do is make sure that the matrix is much more diversiﬁed and part of that objective is to incorporate non-conventional renewables such as wind and solar into the matrix.
We have a number of objectives that we plan to pursue to complement the matrix, to diversify the matrix and to make it more resilient. I think we also have a challenge to make sure that the sector is much more competitive with a better price formation system in place.
The auction that we tried to launch in February that we're going to relaunch in the second half of this year tries to pursue two objectives. One is to make sure that we have much more non-conventional renewables in the matrix but at the same time that we have a competitive process in place for long-term PPAs.
BNamericas: What went wrong in the ﬁrst auction?
Mesa: We did the auction in late February and part of the whole process included that there were some competition indicators that had to be met. Those are designed by the regulator, CREG, and those indicators included concentration, participation and dominance.
And two of those - concentration and dominance - were not met and as a result of that the auction was not successful, even though when you look at the bids from the demand and the supply side there was a cut in the curve and potentially we had an assignation of contracts. But when we looked at the indicators we had to declare the auction unsuccessful.
BNamericas: Was the imbalance on the supply side or the demand side?
Mesa: It was mostly on the demand side but when you look at the indicators you look at the supply side. It's a bit difficult to explain but what happened was that we didn't have enough participation from the demand side and the participation was not with the prices that we were expecting.
On the supply side the prices were very competitive. As part of the process there is a ceiling price that the regulator set. All the prices that came into the auction were below that price so that was very encouraging.
However on the demand side the prices were not what we were expecting and when we did the analysis in the aftermath we realized that it was a bit unusual that some companies that have a portion of their energy purchases exposed to the spot market - in which the price is much higher - didn't bid a price that was competitive enough to be assigned energy during the auction. So I think the failure of the auction is explained in large part by lack of participation from the demand side, from energy buyers.
BNamericas: It has been said that changes for the next auction could include time blocks and contracts in US dollars to attract bidders. Is that correct?
Mesa: After the auction we went through a process of reﬂection and we wanted to understand what happened. Why the demand [side] didn't participate as expected and I think the lessons learned were that the product that we were auctioning wasn't attractive enough for the demand side.
The reason for this is that in Colombia most of the contracts are of a ﬁnancial nature. The contract was more of a physical nature. So we decided that we needed to migrate towards the type of contract that the demand [side] is much more used to in Colombia.
That's one of the main changes. We went from obliging generators to commit to supplying energy over the course of a year to hourly blocks. In this sense the contracts become ﬁnancial in nature and the generators will have to commit to provide an amount of energy during certain hours of the day, which we divided this into three blocks.
It will be very similar to the auctions that Chile introduced about ﬁve years ago. We think that with that change the uncertainty on the demand side about the viability of non-conventional renewable energy is going to be reduced signiﬁcantly.
The second point that you mention is the currency. On that front, we realized that if we have the product either in US dollars or in a combination of pesos and dollars, that's going to attract much more ﬁnancing from abroad, which will make the system much more competitive in a market sense. So what we published late last month, which is out for consultation, is a resolution that has the product prices in pesos but 60% of the product price will be indexed to the exchange rate between the US dollar and the Colombian peso.
The remaining 40% will be in Colombian pesos. We've discussed this with international banks and they think that it's a step in the right direction. We think that the generators are also happy with this hybrid system.
BNamericas: Does the fact that contracts will be assigned time intervals open up more opportunities for gas-ﬁred thermoelectric generators given that renewable energy can't be generated on a 24/7 basis?
Mesa: Natural gas plants have a critical role in what we call this energy transition because obviously due to the viability of these sources, natural gas is a backup source that we need to make sure is in the system. One thing that we are exploring is how these generators that have these natural gas plants can offer coverage for renewables that are intermittent.
So I think there is a role for thermal plants based on natural gas going forward. But not in this auction, which will only be for renewables, including small hydropower dams.
BNamericas: Do we know when the new rules will be conﬁrmed and when the auction will be held?
Mesa: In the resolution that was published for comment, we've said that the auction will take place before September 30th this year. We've been talking to different agents in the market.
There is one request that the agents have made. That is that they would like to have at least two months from the time that all the rules are set to the time that the auction takes places. They want to have that time to prepare offers, to get the ﬁnancial guarantees, the ﬁnancing and so forth.
So our goal is to have all the different rules in place - including the different resolutions and the contract model - with the tender published and set by June 30th.
If we think June 30 to September 30 we have three months but obviously the agents will have to submit their offers before September 30. We're thinking of between two and three months for them to prepare their offers.