Avoiding the implosion of the energy sector – Sectors – Economy

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

(Also read: Colombia enters a state of ‘urgency’ for fewer natural gas reserves)

They are aimed at eliminating independent regulation (with the majority of internal experts who, by accepting this condition, signal their submission to the will of the executive branch); to return to the country 30 years to turn Ecopetrol and its controlled company ISA into ‘spearheads’ of the Government’s energy agenda, to wither the presence of natural gas in the energy basket; to change the price formation rules in the generation market to remunerate for audited costs; to propose reductions in end-user fees through 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 that are financially unfeasible.

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

In articles published in Portafolio, he stated that, with laws 142 and 143 of 1994, the country freed itself from public investment and management without responsibility for financial results in electricity generation, and from the absence of incentives to recover costs and improve quality. of the distribution service. 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: According to Gilinski and the GEA, Bancolombia was put on the table)

The achievements of this reform are positive, on balance. The State, in good time, is no longer responsible for sectoral investment. Coverage and quality of service have improved, and the country has overcome all episodes of the El Niño phenomenon in almost 30 years, without rationing. Colombia has assigned more than 2,000 MW in non-conventional renewable source 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 checks and balances in the formulation of energy policies.

First question: What principles should the energy transition of

At a global level, it can be affirmed that the goal of reaching carbon-free economies in 20 years ignores the depth of the required decarbonization and the needs for greater energy consumption in developing countries. Intermittent and low-density renewable electricity, hydrogen and batteries cannot quickly or universally replace final consumption for long-distance transportation nor the direct and indirect thermal uses (furnaces and boilers) in industry and commerce.

Conversion to electricity in uses of high energy or power density is not commercially viable in the medium term. It is a mistake in 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 energy 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, the forestry sector, and land use change (AFOLU , in English).

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

(Also: ‘If we don’t have reserves, the energy transition is at risk’: says the USO)

Second question: What issues must the electricity sector face?

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

This is problematic because the country’s hydrology would experience 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 market for contracts that introduces greater competition in generation. In general, the costs of the distribution and marketing components have risen to levels that are difficult for the lower strata to pay.

The recovery of the costs of the losses accumulated in the distribution companies of the departments of the Caribbean Coast has been tried to solve 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 to grant their benefit from communities that anticipate that the Ministry of the Interior and the Ministry of Mines and Energy they 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 may occur in a few months, of unknown duration and intensity, and this forces us to take concrete and effective measures, beyond suggesting that there could already be high amounts for reliability charges paid and that these are unlimited insurance against everything weather shock level.

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 strength in electricity generation at low costs and fewer emissions than generation with other fossil fuels; support a policy of scrapping urban transport fleets; support an energy efficiency policy; develop petrochemical products with high added value, such as urea, and reduce energy poverty.

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

The components of a balanced energy formula – 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, instead of a problem, and also with concerns of a drastic reduction in hydro generation next year.

Fourth question: What would be the consequences of the government’s energy policies?

The regulatory or de facto subordination of the Creg to the executive branch would run aground on part of the existing investments and the change in the formation of prices on the stock market would threaten the remuneration of the existing plants. The presidential request of May 19 to Congress to modify article 74 of Law 143 of 1994 so that Ecopetrol can carry out a vertical integration in electricity generation with ISA it would not solve any failure in the generation market and it would displace-displace investment that can be enabled through already proven competitive procedures.

If these announcements materialize, the energy industry would be left in flight conditions by consolidating Ecopetrol as a kind of ‘Enercolombia’ with unjustified vertical integration in electricity generation and transmission, which would also consolidate itself as a public monopoly in gas production (Ecopetrol and its subsidiary Hocol concentrates about 90 percent of gas production), with a vocation to vertically integrate gas transportation. The energy sector would implode with negative consequences for the economic performance of the country. Consumers lose to a single ubiquitous public energy company.

Fifth question: What should the Government and civil society do regarding energy?

To grow and reduce poverty, Colombia must increase per capita energy consumption, both at the household level, and to expand built capital (infrastructure of all kinds). The energy sources must form a portfolio that, without vetoes to any energy company, Respect the following restrictions: (i) fiscal, (ii) profitability of investments, (iii) speed of technology adoption, and (iv) assurance of security and continuity of supply in an environment of growing uncertainties in the climate and global energy markets.

Colombia must focus its energy transition on profitable interventions on the demand side, such as energy efficiency and the electrification of urban mass transport, mainly due to its extensive co-benefits on competitiveness and public health. Additionally, no matter how deep the problems of the electricity sector are, there is a range of institutional solutions to face them.

At this time, there is no managerial capacity, knowledge, or willingness to find a solution and agreement within the Ministry of Mines and Energy, and the CREG is under threat. By design, there will be no learning curve (something that some sector unions still do not understand)playing Chamberlain 1938 against the German invasion of Czechoslovakia).

The intentions of ineffective institutional dismantling and market architecture, of renationalization and vertical public integration must be counteracted with a scheme of checks and balances 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 that recommends technically sound public policies aimed at maximizing well-being, and carry out pedagogy, which is the vacuum of economists and public policy makers

* The author is part of the Board of Directors of Grupo de Energía de Bogotá; His opinions are totally personal.