Exclusive Q&A on Energy & Natural Resources with Alvaro Durán


Posted: 29th May 2019 10:03

Can you outline the current energy & natural resources landscape in your jurisdiction? 
 
The energy sector in Colombia has been and still is primarily focused on the country’s abundance of fossil fuels and natural resources. Colombia is the fourth largest country in terms of oil production in America, with reserves of 1.782 million barrels and a share of 0.8% of the world’s reserves. Colombia is also the world’s tenth largest coal producer and the fourth biggest exporter of coal. Furthermore, Colombia’s energy sector is heavily dependent on hydropower, which provides 65% of the country’s annual consumption. In general, these industries have had a leading role in the sustained growth of the country in the past decades. By 2014, the mining and energy industries accounted for 10% of the overall GDP, 43% of the country’s foreign direct investment, and 70% of its total exports.
 
However, recent events including the El Niño phenomenon in 2016 and the incidents in the Hidroituango project have evidenced the need for decisive government action to achieve a sustainable and secure energy mix. Although the government has recognized the importance of increasing the levels of investment in the oil and gas sectors, it has also expressed its interest in attracting greater investment for the electricity sector, promoting the development and use of non- conventional renewable energy sources and supporting the development of regional electric integration projects. According to the Mining/Energy Planning Unit’s registry, by March 2018 there were approximately 530 initiatives for energy generation, 382 of which were for non-conventional energy sources. From these, 353 initiatives were for solar power, 16 for biomass and 13 for wind power.
 
Colombia is one of the strongest economies in Latin America, characterized by a high investment rating, controlled inflation, low perceived risk and sustained growth, that makes it a very attractive country for foreign investors. This strong economic situation and sustained growth is to a great extent a result of the performance of the energy industry in the country, which has resulted in a significant increase in foreign investment during the past decade.
 
Although there are still plenty of challenges for the country, including the need to increase its fossil fuel reserves, the diversification of its energy supply, and the development of non-conventional sources of energy, the country’s current political and economic environment is ideal for investors.  
 
Have there been any recent regulatory changes or interesting developments? 
 
The major regulatory changes in the energy and natural resources sectors in the past years have been primarily focused on promoting the development and use of non-conventional renewable energy sources in Colombia, in an effort to strengthen the resilience of the electricity generation matrix to events of variability and climate change, through the diversification of risk. With the implementation of Law 1715/2014 and the recent issuing of Resolutions 40791 and 40795 of 2018, Colombia is materializing these efforts with the first technology-neutral energy auction in Colombia, where there are great opportunities for renewable energy projects, particularly in solar, biomass and wind power. This Law also includes tax incentives for investors, the creation of a fund (FENOGE) to finance these types of projects, mechanisms to promote self-generation and efficient generation of

alternative sources of energy, as well as specific regulations to foster an environment suitable for the development of biomass, solar, wind power and geothermal energy.
 
Another major development that is expected to facilitate the expansion of energy and natural resources projects in Colombia is a bill currently in Congress, to modify the current legislation for prior consultation with indigenous and ethnic communities. With the approval of this legislation, several major issues that have obstructed the execution of infrastructure projects in Colombia could be resolved. Among other measures, the bill seeks to limit the community’s power to veto projects, to implement the registration of the ethnic communities to avoid the abuse of this right by opportunistic individuals, to regulate the specific periods for consultation and to limit the scope of the right to the individuals that will be directly impacted by the project.
 
Are there any barriers or restrictions to foreign investment for energy and natural resources in your jurisdiction?
 
From a legal standpoint, there are no limitations for foreign participation and investment in energy and natural resources sectors in Colombia. Pursuant to Colombian legislation, the only regulatory limitations for foreign investment in Colombia are in the national security and defence sectors, and in the processing and disposal of hazardous, toxic and radioactive waste.
 
Other than that, the Colombian Constitution and the existing investment regulations grant equal treatment to foreign   and national investors. The U.S Department of State has characterized Colombia’s regulatory framework for foreign investment as “for the most part transparent and consistent with international norms” (U.S Department of State, 2015).
 
In fact, the country has experienced a growing tendency in Foreign Direct Investment, from less than 1% of the country’s GDP during the 80’s, to 4.53% during 2017. Although FDI has recently begun to increase in the finance, transport and communications, and manufacturing sectors, among others, the growth in foreign investment in Colombia has predominantly been concentrated in the mining, energy and hydrocarbon sectors.
 
Particularly for the mining and hydrocarbon sectors, Colombian legislation does require the fulfilment of certain requirements for foreign investors to invest in Colombia, such as registration before the Superintendence of Corporations and the local chamber of commerce but said legislation in no way limits the amount of FDI in the country.
 
Can you outline the current merger & acquisition landscape?
 
M&A transactions have increased in recent years in Latin America and Colombia has maintained its position as one of the most attractive countries in the region for investors. The overall economic growth and stability of the country, its transparent and investor friendly regulations, and the overall performance of the economy has led to increasing interest from investors for these types of transactions in the country.
 
Furthermore, the country is in the process of becoming a member of the Organisation for Economic Co-operation and Development – OECD – and, pursuant to that end, it has been implementing a series of recommendations based on peer reviews that may favour the foreign investment environment in M&A transactions in Colombia.
 
According to recent reports, in 2017, 56 M&A transactions were executed in Colombia, which represents 6% of the total M&A activity in Latin America for the same year and positions Colombia as the sixth economy in the region in this aspect. The M&A transactions were mainly focused in the manufacturing industry (39%), followed by the consumer goods industry (20%) and the energy and renewable resources (13%).
 
During the first months of 2018, Colombia’s M&A transactions increased by 14.53%, with a total value of USD 1.304 million, outperforming all the economies in the region except for Mexico. This included major transactions like the acquisition of Old Mutual by China Mingsheng Investment Group, Rappi’s investment round, and the transactions involving Sura, QBE Seguros and Argos.
 
The M&A landscape in Colombia is generally favourable, considering the strong economic situation of the country and its low risk perception internationally, the pro-market and pro-investment stance of the current Administration and the investor-friendly regulations of the country.
 
Have there been any notable innovations in renewable or alternative energy sources in 2018?
 
In an effort to promote the use and development of non-conventional and renewable sources of energy in Colombia, Congress approved a bill (sanctioned as Law 1715/2014), aimed at stimulating private investment in large renewable or alternative energy projects in Colombia, to be incorporated to the national grid system. This Law includes tax incentives for investors, the creation of a fund (FENOGE) to finance these types of projects, mechanisms to promote self-generation and efficient generation of alternative sources of energy, as well as specific regulations to foster an environment suitable for the development of biomass, solar, wind power and geothermal energy. These measures are specifically aimed at reducing the country’s dependence on hydropower (66% of the country’s installed electric generation capacity is hydro-based), gas and coal.
 
Furthermore, Hidroituango, Colombia’s largest hydroelectric project, that was set to begin commercial operation in 2018 and supply 17% of the Nation’s energy, was delayed due to a series of landslides that resulted in major floods that put at risk the project as well as the neighbouring communities.  Several measures were put in place to avoid the dam’s overflow and the situation was eventually contained, however this resulted in major cost overruns and a delay of approximately 3 years for the project.
 
As a result of the aforementioned, the Government adopted its Plan for the Expansion of Energy Generation and Transmission through 2031, identifying the need to generate 2.886 MW of non- conventional renewable energy if Hidroituango is salvaged, and 4.312 MW in the unlikely event that it isn’t. To that end, the Government issued Resolutions 40791 and 40795 in 2018, that set the general guidelines for the first energy auction involving renewable energy in Colombia, particularly solar, biomass and wind power. This auction will be held in early 2019 for projects with over 10 MW of installed capacity, and the winning bidders will be granted 10 to 20 years PPAs that are expected to generate 3,443 GW per year, amounting to approximately 1GW of installed capacity.
 
Are there any barriers to renewable energy and if so, how can companies overcome these challenges?
 
In 2015, the Mining/Energy Planning Unit published a report assessing, among other things, the barriers for the proper implementation of non-conventional renewable energy (NCRE) sources in the country. In its analysis, this entity identified the typical obstacles that different countries had faced in their efforts of implementing NCRE projects.
 
Amongst the main obstacles common to all NCRE projects, UPME identified the following: (i) inappropriate or erroneous incentive allocation, favouring conventional sources of energy, (ii) higher initial investment costs of NCRE projects, (iii) higher financial costs as a consequence of the financial sector’s lack of experience and perception of risk, and (iv) barriers to entry resulting from the dominant position of a limited number of energy companies.
 
From the previous obstacles, it is important to note that the Colombian Government has made serious efforts towards levelling the playing field between conventional and non-conventional sources of energy. For the upcoming energy auction, the Government, in accordance with Decree 1073/2015, has given a prevalent position to low emission sources that complement and diversify the energy matrix and that contribute to sustainable economic development.
 
Furthermore, renewable power generation costs have fallen significantly in the last decade. According to information provided by the International Renewable Energy Agency, solar photovoltaic modules are 80% cheaper than in 2009, the cost of SP energy dropped by almost three quarters between 2010 and 2017 and wind turbine prices fell by around half during this period. The same agency found that biomass, hydropower, geothermal and onshore wind projects commissioned in 2017 had similar generation costs of fossil-based electricity and that, following recent trends, electricity from renewable sources would soon be consistently cheaper than most fossil fuels.
 
Although the local financial market is still inexperienced in financing these types of projects, increasing access to foreign financial markets will gradually reduce the elevated financial costs traditionally associated to NCRE projects.
 
Finally, although the energy generation market in Colombia is regulated as a free competition market, the market share is heavily concentrated in a limited number of companies. EPM, ISAGEN, EMGESA and GECELCA control over 70% of the energy generation market, and over 86% of the energy supply is provided by 7 major players.
 
Although there are still several obstacles to be faced in the implementation of NCRE projects in Colombia, there is a positive outlook and generalized optimism towards the development and use of non-conventional renewable energy sources in Colombia.

Alvaro Durán, Managing Partner at Durán & Osorio Abogados Asociados can be contacted on +57 1 317 7011

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