When you think of Colombia, two of the first words that come to mind are probably coffee and cocaine. There’s just something about the country and stimulants – but now it is the investors that are helping to stimulate the nation’s wind market.
Two recent deals show that the South American country is on the radar of wind investors.
German investor MPC Capital and developer Martifer Renewables formed a joint venture in March to build wind and solar projects in the country. And, last month, a joint venture of Colombian utility Celsia and Portugal’s Renovatio started developing two wind projects totalling 330MW in the La Guajira region.
These might seem small deals but, in a country with only 19.5MW of installed wind capacity, they signal that something is changing.
Colombia has massive wind potential and, in particular, the northeast region of La Guajira has strong winds that could support the installation of up to 21GW of wind farms. But, at present, 69% of Colombia’s energy mix is from hydro, 30% from fossil fuels, and only 1% from wind and solar.
Nicolas Navas, project finance director at Latin America-focused developer Jenner Renewables, says that Colombia is a “sleeping giant of renewables”. But he says there are three issues that have prevented Colombia from unleashing its potential thus far.
First, wind developments would require more investment in grid connections. Navas says the areas with the best wind resources are not linked to the rest of the country, and this means that government and developers would need to build adequate grid connection to make the largest wind projects viable.
Colombian utility Grupo Energia Bogotá won a contract in February to build and operate a 370km power line able to carry 1.4GW of wind capacity by 2022. However, the construction of long transmission links is often challenging and unpredictable in emerging markets. Problems at the Kenya’s Lake Turkana show exactly that.
Also, while the grid currently copes well with the existing capacity made up mainly of hydro, introducing wind and solar in the mix may require work on the capacity and transmission of the existing network.
Second, he says that legislation is “not really there yet” to support the development of a wind market. As the country heavily relies on hydropower, new laws to support wind and solar by, for example, giving priority grid access have not yet happened. Likewise, last November, the Colombian government announced its intention to hold its first renewables auction by the end of this month, but plans have stalled since.
Third, financing could present a challenge for inexperienced investors. Navas says: “Financing will happen mainly through local banks, for example… In an ideal world, there would be an auction in Colombia which leads to a long term PPA, key to any renewable project, which is denominated in US dollars. But I don’t think that would happen, the revenue generation will be denominated in Colombian peso.”
This means that developers would have to deal with a currency risk attached to their long-term financing, which would affect capital costs of wind schemes. This is highly relevant since there are very few investors in Colombia with the financial capabilities to assume high financing costs of renewables projects.
The picture looks challenging, so why are investors currently looking at the country?
Many investors now seem to be positioning themselves in the market as they expect favourable regulations to come. These would follow the new term for the Colombian president that is set to start on 7th August following elections this month and next.
Navas is confident: “After August, it is likely that legislations and auctions will be introduced. By the end of this year or the beginning of next one, there will be much more noise about legislation in Colombia and it would be the right time to invest.”
But much will depend on who succeeds incumbent President Juan Manuel Santos, who cannot stand again after serving two terms. The current favourite appears to be the right-wing pro-oil Ivan Duque, but other candidates are more pro-renewables – including the left-wing Gustavo Petro. This will be a key vote for wind in Colombia.
It has the resources, but it also needs the political will. One to watch.
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