6 challenges facing Colombia's new energy minister

Electrical engineer Andrés Camacho was last week sworn in as Colombia’s mines and energy minister amid rising uncertainty in the country's electric power and hydrocarbons sectors. 

The 42-year-old replaced Irene Vélez, who tendered her resignation after it emerged that she was under investigation by two state bodies for alleged influence peddling.

Camacho's in-tray is already filled with tasks – many of them urgent – related to Colombia's stuttering energy transition, gas supply fears, El Niño and growing investor anxiety, among other challenges.

Here are six themes that investors will be watching closely as Camacho (pictured), a self-confessed admirer of Fidel Castro and Hugo Chávez, settles into his new position.     

1. RENEWABLE ENERGY PROJECT DELAYS

Arguably Camacho's top priority will be addressing delays to a series of renewable energy projects – and their associated grid connections – in the country's north. 

According to renewable energy association SER Colombia, around two-thirds of wind and solar projects due online in 2023 and 2024 are behind schedule. 

Industry observers have cited social unrest and environmental licensing requirements – including a need to conduct exhaustive consultations with individual communities – as a major reason for the delays. 

In addition, the viability of some projects has been threatened by changes to the tax regime, including a 15% minimum duty that now applies to non-conventional renewable energy developers and new sales taxes for solar and wind generators.

"Some projects will be canceled and others will be forced to change their prices because of rising costs," Ricardo Sierra, the CEO of Medellín-based developer Celsia, said in a statement in May. 

The highest profile project suspension has been Enel's 205MW Windpeshi onshore wind farm in La Guajira department amid protests that impeded construction. 

2. E&P MALAISE

Public order and political risk concerns have also afflicted the oil and gas sector. President Gustavo Petro has kept a pre-election promise to halt licensing rounds for new exploration contracts while raising taxes on producers. 

A growing number of E&P stakeholders have halted their operations in recent months, despite attractive prices driving robust international demand. According to hydrocarbons agency ANH, at least six E&P contracts were suspended in the first half of the year, while another three entered the termination process.  

Companies that have sought to relinquish E&P acreage include ExxonMobil, GeoPark, Emerald and Frontera. 

In late May, the government announced measures aimed at helping stakeholders, including deadline extensions for exploration projects and greater flexibility related to how acreage is used. 

However, industry players have called for more concrete steps to kick-start activity and have continued to pressure the government to lift its ban on exploration bid rounds. 

Maintaining the status quo could put energy security at risk as the lifespan of current oil and gas reserves falls to alarming levels, according to industry association Acipet. 

3. EL NIÑO

The subject of energy security will also be a pressing issue for Camacho in the electric power segment. 

According to grid operator XM, electricity consumers in northern and western Colombia are facing the threat of outages in the coming months as rising demand strains transmission capacity.

The Medellín-based entity warned that power lines and substations were operating near safety limits in the departments of La Guajira, Cesar, Magdalena, Córdoba, Sucre, Bolívar and Chocó. 

XM said the looming supply deficit was caused by years of underinvestment and delays to myriad power infrastructure projects.

The situation has been exacerbated by the arrival of El Niño, a climate phenomenon that could severely reduce the availability of hydroelectric power while driving up demand from consumers seeking relief from the heat. 

Hydroelectricity accounts for more than two-thirds of Colombia's installed power capacity and during droughts the country relies on back-up plants fired by gas, coal or liquid fuels.

4. THE FUTURE OF NATURAL GAS 

The country also faces rising demand for gas and tightening supply. According to energy ministry planning unit UPME, Colombia could lose its natural gas self-sufficiency within 18 months unless new reserves are incorporated. 

The grim outlook has led to plans to expand the Cartagena LNG import terminal, Colombia's only existing regasification facility. It also prompted officials to raise the prospect of reactivating a disused pipeline that would allow for gas imports from Venezuela. 

In addition, the government continues to seek investors for the Pacific LNG terminal, which is expected to require investment of up to US$1bn. Bids in the latest tender process are due this month, but potential developers have raised concerns about who will bear the cost of the project and if it will be profitable. 

There have been whispers that the looming supply crunch could force the government to back down on its decision to shelve auctions for new E&P contracts, even if it is just for natural gas exploration.

This, however, might be wishful thinking, given an absence of oil and gas sector experience on Camacho's resume and a pledge during his induction to “reduce the environmental impact of fossil fuels.”

5. LEGAL CERTAINTY

It remains to be seen how far the government will go in its stated effort to limit electricity price rises for final consumers. 

A decree signed by Petro paves the way for regulator Creg to adopt "technical procedures that detect abusive behavior" from market participants, the energy ministry said in June. 

Critics claim the move threatens to undermine confidence in the sector's regulatory framework. In addition, there are fears that arbitrary rate cuts would have financial implications for generators, potentially impacting their ability to carry out new investments, according to industry association Acolgen. 

"Although the intention may be to seek solutions to the issue of rates, the decree could have an effect contrary to what was proposed, putting at risk supply signals ... and the reliability of the market in the medium term," Acolgen president Natalia Gutiérrez said in a statement.

Fitch Ratings warned the decree would represent a "clear sign" of market intervention by the government.  

6. AUCTION DOUBTS

The government is due to hold two capacity auctions later this year: one for standby energy contracts from all sources and another exclusively for offshore wind projects. 

In addition to the political risk concerns, there have been misgivings from some quarters regarding how the auctions are being structured. 

"Adjustments are required from the point of view of firm energy remuneration so that the complementarity offered by renewables to the system is better recognized," SER Colombia president Alexandra Hernández told BNamericas in July. 

The outcome of the offshore wind bidding process, meanwhile, will hinge largely on whether developers are able to trust the regulatory framework, according to Hernández. 

"We hope that clear rules will be determined for fiscal and commercial aspects, for connections, and in particular, for the qualification criteria of the companies. The feasibility of offshore projects must be ensured, taking into account the lessons learned from previous renewables auctions," she added.