Colombia’s renewable energy auction will increase by 40 times the country’s actual solar and wind energy installed capacity.
The auction, carried out on October 22, assigned 10,186 MWh/day of energy contracts at a weighted average price of US $ 0.027 kWh (COP $ 95.65 kWh), approximately 34% lower than the current market prices of bilateral energy contracts. The contracts were awarded to 8 generation projects (5 wind and 3 solars) from 7 companies. These contracts will ensure long term energy purchases from 22 retail companies that participated in the process.
The auction’s results are a milestone for the country towards its objective of diversifying its energy matrix through the incorporation of Non-Conventional Renewable Energy sources (NCRE). The projects assigned in the auctions, plus the current NCRE projects under construction, will allow Colombia to reach a generation capacity of 2,250 MW with this type of energy, far exceeding the goal set by the Government to increase the NCRE generation capacity from less than 30 MW in 2018 to 1,500 MW in 2022.
Impact of the Renewables in Colombia’s energy matrix
Colombia has one of the cleanest energy matrices in the world, however, it is heavily concentrated in hydroelectricity (69%). This high dependence on water resources for power generation makes the Colombian electricity system vulnerable to critical hydrology scenarios, such as the El Niño phenomenon. In these cases, thermal generation from fossil fuels covers almost 50% of energy demand, which results in high generation costs and higher greenhouse gas emissions during El Niño events.
The incorporation of large-scale NCRE in the generation matrix will allow Colombia, among others, to:
- increase the resilience of the electricity sector in extreme weather scenarios;
- minimize greenhouse gas emissions; and
- reduce prices in the electricity market.
A success based on lessons learned
The October 22 auction was Colombia’s third energy auction conducted in 2019. The first auction, on February 26, was focused on long-terms contracts for increased generation that fulfilled criteria related to diversification of the generation matrix, reduced CO2 emissions, and regional complementarities, however the economic competition conditions established by the Energy and Gas Regulation Commission (CREG by its acronym in Spanish) were not met and the auction was unallocated.
The second auction held on February 28, known as “Reliability Charge” allocated Firm Energy Obligations (OEF). An OEF is a product designed to ensure the reliability of the long-term firm energy supply at efficient prices. This auction allocated firm energy for 164.33 GWh / day, equivalent to an additional net effective capacity of 4,010 MW for the system, of which 1,160 MW were wind and 238 MW were solar projects. This was the first time that NCRE projects were awarded in this type of auction and competed directly with traditional energy sources (hydro, gas, coal and liquid fuels).
The results of the auctions held in February 2019 showed investors’ interest in developing NCRE projects in Colombia and the competitiveness of these resources in the Colombian market. Taking advantage of this opportunity, the Ministry of Mines and Energy, with the support of the Inter-American Development Bank (IADB), among other entities, adjusted the renewable energy auctions considering the lessons learned from the first auction, the most important being:
- Extension of the contract duration from 12 to 15 years, reducing investors’ risk and cost of financing by extending the terms to amortize their investment.
- Definition of Time Blocks for the Allocation of Energy, allowing the supply curve to be adjusted to the characteristics of the NCRE projects and reducing the risks of the demand for intermittent energy dispatch. The tender was designed to buy energy 24 hours a day, but the day was divided into three time blocks 0-7, 7-17, 17-24, which allowed bidders to make their offers according to their generation curve, and encouraged the participation of intermittent energies, which are only committed to generating when the resource is available. This lesson was taken from the Chilean auction model.
- Double Auctions with uniform allocation price for all agents, which implies that both retail companies and generators had to present their economic offers for the purchase and sale of energy, respectively, to achieve the simultaneous award of both parties of the contract. In the Colombian case, the economic offers were presented in Colombian pesos per kilowatt hour (COP $ / kWh) through a digital platform set up for this purpose by the entity responsible for the implementation and administration of the auction (UPME).
- Financial Contract “take or pay”, so that the payment and supply obligations of the parties are defined in the contract and do not depend on their levels of generation or demand.
Renewable Energy Auctions Characteristics – October 2019
|Objective||Allocation of long-term energy contracts to non-conventional sources of energy projects to diversify the energy matrix|
|Technology||Aimed exclusively to non-conventional sources of energy (wind, solar, biomass, small hydroelectric, geothermal and tidal uses)|
|Type of Auction||Double Auctions|
|Allocation price||Uniform for all merit bidders|
|Type of Energy Contract||Take or pay|
|Price Adjustment Mechanism||Monthly adjustment with the producer price index|
The results of the renewable energy auctions in Colombia show that they are a competitive mechanism to attract clean energy supply by granting long-term contracts providing an accurate income stream to the generation projects. Latin America and the Caribbean was a pioneer region in the application of this mechanism (Brazil, 2006 and Uruguay, 2007) and 12 countries in the region have used them to contract energy.
The IADB has supported and will continue to support, these processes in compliance with the objective of guaranteeing the region’s energy security and the supply of clean energy that reduces greenhouse gas emissions.