Analysis / Avoiding the implosion of the energy sector

The current government is promoting measures for the energy sector that destroy value and institutions created by the Colombian society during the last three decades.

They are aimed at eliminating independent regulation with a majority of interim experts who, by accepting that condition, signal their submission to the will of the executive power; to give back to the country 30 years to turn Ecopetrol and its controlled company ISA into 'spearheads' of the Government's energy agenda, to wither away the presence of natural gas in the energy basket; to change the rules of price formation in the generation market to remunerate for audited costs; to propose reductions in end-user tariffs with the use of discretionary price indexers; to create energy communities within a just energy transition enigma; and to promote continental integration projects that are not required and are financially unfeasible.

Government proposals do not solve any sectoral problems, do not capture opportunities, or are occurrences without content. They are bad ideas from A to X, and capturable by special interests from Y to Z. These proposals are processed through multiple channels, from the articles of the National Development Plan 2022-2026, by issuing decrees or sending letters to parliament, or simply through announcements-threats in international forums.

In articles published in Portafolio I have stated that, with laws 142 and 143 of 1994, the country was freed from public investment and management without responsibility for the financial results in electricity generation, and from the absence of incentives to recover costs and improve the quality of service in distribution. The model of potential competition in generation, incentives in transmission and distribution, independent regulation and indicative planning, was an international benchmark in the second half of the 1990s.

Other issues:

The achievements of this reform are positive, on balance. The State, in good time, is no longer responsible for sectorial investment. Coverage and quality of service have improved, and the country has overcome all the El Niño episodes in almost 30 years, without rationing. Colombia has allocated more than 2,000 MW in non-conventional renewable energy parks through auctions. These advances do not imply the absence of problems to be solved, which are listed below.

The rest of the article answers five questions that include a proposal to strengthen the scheme of weights and counterweights in the formulation of energy policies.

Question 1: What principles should the energy transition follow?

Globally, it can be argued that the goal of reaching carbon-free economies in 20 years ignores the depth of decarbonization required and the increased energy consumption needs of developing countries. Intermittent, low-density renewable electricity and hydrogen and batteries cannot quickly or universally replace long-distance transportation end-use and direct and indirect thermal uses in industrial and commercial furnaces and boilers.

Conversion to electricity in high energy or power density uses is not commercially viable in the medium term. It is an error of perspective and a great ignorance of the history of technology to think that all final energy consumption and energy supply will be electrified, and that all electricity will be produced with non-conventional renewable energies in less than three decades. At the country level, Colombia consumes little total and per capita energy, has low total and per capita greenhouse gas emissions, and most of these emissions come from agriculture, forestry and land use change AFOLU.

The burden of decarbonization in Colombia must come from the AFOLU sector and not fall on the energy sector. The country lacks the resources and impact capacity to embark on leading the massive reduction of greenhouse gases at the planetary level.

Second question: What issues must the electricity sector face?

The political cost of passing the 1994 reform was to maintain the vertical integration of firms that were already integrated. This created an uneven playing field from the outset. The 1994 reform and the reliability charge mechanism have failed to reduce systemic supply risk, as electricity generation remains at percentages close to 70 percent before and after the reform.



This is problematic because the country's hydrology would suffer extreme events with greater frequency and severity in the future. The wholesale electricity market is concentrated and there is limited competition. There is no liquid contract market to introduce greater competition in generation. In general, the costs of the distribution and commercialization components have grown to levels that are difficult for the lower strata to afford.

The recovery of the costs of accumulated losses in the distribution companies of the Caribbean Coast departments has been attempted to be solved with a transfer of payments to the consumer, an unsustainable decision when compounded with any shock in indexation or in the fundamental variables of the business. Renewable energy projects located in La Guajira are facing increasing demands for approval from communities that anticipate that the Ministry of the Interior and the Ministry of Mines and Energy will tacitly or openly take their side in consultations with investors, as can be deduced from the suspension of the execution of a wind project in La Guajira by Enel Colombia.

An El Niño phenomenon could occur in a few months, of unknown duration and intensity, and this makes it necessary to take concrete and effective measures, beyond suggesting that high amounts have already been paid for reliability charges and that these are an unlimited insurance against all levels of climatic shocks.

Third question: Why is natural gas becoming increasingly important?

Reiterating what was stated in Benavides, Cabrales and Delgado 2022, natural gas has become the fastest growing fuel projected worldwide. In Colombia, natural gas has the capacity to provide robust electricity generation at lower costs and lower emissions than generation with other fossil fuels; support a policy of scrapping urban transportation fleets; support an energy efficiency policy; develop high value-added petrochemical products, such as urea; and reduce energy poverty.

More recently, the pandemic and the disruption of value chains, the war between Russia and Ukraine, the threat of cutting energy exports as a political tool, the vulnerability of energy-importing countries, and rising energy and food prices have triggered a readjustment in energy markets, across all fuels and in all geographies.

The components of a balanced energy equation-energy security, supply diversification and low-carbon transition-are under severe pressure or face a 'trilemma' of concerns. Natural gas is part of the solution, rather than a problem, and with concerns of a drastic reduction in hydro generation next year.

Question four: What would be the consequences of the government's energy policies?


The regulatory or de facto subordination of Creg to the executive branch would strand part of the existing investments and the change in stock price formation would threaten the remuneration of existing plants. The May 19 presidential request to Congress to modify Article 74 of Law 143 of 1994 to allow Ecopetrol to vertically integrate in electricity generation with ISA would not solve any flaw in the generation market and would displace-drive away investment that can be enabled through proven competitive procedures.

If these announcements materialize, the energy industry would be in a runaway condition by consolidating Ecopetrol as a sort of 'Enercolombia' with unjustified vertical integration in electricity generation and transmission, which would also consolidate as a public monopoly in gas production. Ecopetrol and its subsidiary Hocol concentrate close to 90 percent of gas production, with the vocation of vertically integrating into gas transportation. The energy sector would implode with negative consequences on the country's economic performance. Consumers lose with a single omnipresent public energy company.

Question 5: What should the government and civil society do about energy?


To grow and reduce poverty, Colombia must increase per capita energy consumption, both at the household level and to expand capital built infrastructure of all types. Energy sources must form a portfolio that, without vetoing any energy source, respects the following restrictions: i fiscal, ii investment profitability, iii speed of technology adoption, and iv ensuring security and continuity of supply in an environment of growing uncertainties in the climate and global energy markets.

Colombia should focus its energy transition on cost-effective demand-side interventions, such as energy efficiency and electrification of urban mass transportation, mainly because of their broad co-benefits on competitiveness and public health. In addition, no matter how deep the problems of the electricity sector are, there is a range of institutional solutions to face them.

At this moment there are no managerial capacities, knowledge or willingness to solve and coordinate within the Ministry of Mines and Energy, and the Creg is threatened. By design, there will be no learning curve, something that is still not understood by some sectoral unions, who play Chamberlain 1938 in front of the German invasion of Czechoslovakia.

The intentions of dismantling institutions and market architecture, of re-statization and inefficient public vertical integration must be countered with a scheme of weights and counterweights that encourages society to defend the achievements and design useful proposals to face the problems. A modest contribution to the creation of this scheme consists of building a shadow cabinet of experts to recommend technically sound public policies aimed at maximizing welfare, and to carry out pedagogy, which is the void of economists and public policy makers.

* The author is a member of the Board of Directors of Grupo de Energía de Bogotá; his opinions are entirely personal.