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The Colombian Government is expected to award long-term renewable power purchase agreements (PPAs) by October 22, 2019. The Mining and Energy Planning Unit (UPME) announced that a total of 26 traders and 27 generators with 56 generation projects submitted their interest to participate in the auction and on October 2, 2019 UPME shortlisted 23 traders.
This auction is part of the Government’s strategy to tackle current uncertainties about a potential power deficit in 2021 and 2022 in a sustainable manner and follows an earlier auction carried out in early 2019 that concluded without making any award as a result of the limited number of participants (14 offers by potential off-takers and nine offers by potential project developers). In July 2019, the Colombian Ministry of Mining and Energy ordered that a second auction be launched for long-term PPAs, which only allows for participation of agents of wholesale power market, as power purchasers, and owners of power generation projects from non-conventional renewable sources, as sellers. The Ministry of Mining and Energy expects that by January 2022 at least 10 percent of power distributed by companies in the wholesale market should come from renewable sources.
Among the main changes between the first auction and the new auction that is expected to be awarded on October 22, are the following:
The improvements introduce in this second long-term power auction certainly helped to diversify the base of participant developers and allowed smaller projects to qualify for the auction (as a fact, the number of bidding developers tripled, from 9 to 27) and to maximize diversification even further, in this auction the Commission for Regulation of Energy and Gas (CREG) mandated that no seller should provide 50 percent or more of average daily power output.
The draft PPA for this second auction also preserves other key features from the first auction, such as the “take or pay” approach for the energy supply (which is a compelling feature that was not available in the successful auctions conducted in Chile), certain step-in-rights in favor of the lenders financing the construction of the new projects, the exchange of blank promissory notes (which is customary in the Colombian market), the delivery of a performance guaranty by seller (which under the new draft, will be equal to 20 percent of the annual price of the contracted energy)[1]and the delivery of a payment guaranty by the off taker (which for this second auction, will be equal to 30 percent of the annual price of the contracted energy)[2].
However, this second long-term power auction also faces several challenges that will be tested after the award date. Among the most notable hurdles that developers, off takers and financiers will need to overcome are the following:
According to a recent S&P’s report, Latin American countries may see major investments in renewable energy, particularly in Chile, Colombia and Brazil[3]. In this regard, during the 2019 United Nations General Assembly, President Iván Duque announced that Colombia, along with Chile, Peru, Ecuador, Costa Rica, Honduras, Guatemala, Dominican Republic and Haiti, is taking on a lead role towards accomplishing the collective target of 70 percent renewable energy use by 2030. According to President Duque, this is part of the region’s compromise to tackle climate change. The lower costs and abundance of natural resources is key for the region in implementing wind and solar projects and is attractive for key power players and international lenders.
There is no doubt that Colombia needs to continue improving its energy matrix and is trying to take a leading role in a region that shows a strong appetite for more renewable power sources. However, despite Colombia’s noble intention, the road to success on this endeavor will be challenging and a significant dose of ingenuity, pragmatism and careful consideration of the risks and mitigations will be required during the implementation phase of this undertaking by the relevant market participants, including the Government, developers, off takers, lenders, suppliers and contractors.
Please contact Christian Rudloff of Shearman & Sterling’s Project Development and Finance practice should you have any queries related with this matter.
Special thanks to visiting attorney Santiago Martinez Ojeda, who co-authored this publication.[1] The performance guaranty in the first auction was equal to 33 percent of the price of the median annual energy. Under the current PPA, it would be for 30 percent of the annual price until the effective date of supply, when it will decrease to 20 percent.
[2] The payment guaranty in the first auction was for 33 percent of the price of the median annual energy.
[3] Project Finance International, August 2, 2019, Americas: LatAm – S&P bullish on renewables.
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