Colombia’s new energy pricing: Short-term relief or long-term risk?

New ceiling prices for wholesale electricity in Colombia will not reduce costs for final users and could lead to market imbalances, experts have warned. 

A resolution published by the mines and energy ministry this week sets a two-tiered pricing regime for the spot, or short-term, market by lowering maximum rates for renewable and coal power plants while maintaining higher limits for costlier fuel-based generators. 

The energy ministry said the move aimed to protect consumers from "speculation and overpricing" by market players. 

But Alejandro Lucio, the CEO of Bogotá-based energy consultancy Óptima, said the changes would likely have the opposite effect.

"There are countless details behind this measure that will result not only in higher rates but in structural problems for the country and the electrical system," he wrote on social media platform X.

One of the biggest problems, according to critics, is that the rules only apply to new developments or existing plants assigned firm energy obligations in 2028 or beyond. 

Lower price ceilings for hydroelectric, solar and wind generators are seen as a disincentive for developers of these projects, jeopardizing the necessary expansion of generation capacity and placing the country's energy security at risk.

According to Lucio, the measure will "destroy" the little liquidity present in the long-term contract market for renewables while sidelining them from upcoming reliability charge auctions.

"It will be very difficult for new plants to enter the Colombian market with these rules of the game," he said. "In the end, it puts the system at risk because there will be less energy. It is possible that we will not be able to meet 100% of the demand and the cost of that is gigantic."

Former energy minister Amylkar Acosta highlighted that generators with firm energy obligations would not adopt the new price regime before 2028, given they are not obliged to do so.

“It is creating false expectations among long-suffering users who only see rates go up, contrary to the [government's] announcements,” he wrote in a newspaper column. 

To this end, there are fears that fragmented rules will discourage balanced competition among generators, ultimately making prices less predictable and more volatile.

Sandra Fonseca, the executive director of Asoenergía, expressed dismay at the absence of measures that promote efficiency for the entire generation segment.

"The differentiation by technology... will surely lead to a greater price distortion than the current one," she was quoted as saying by newspaper El Tiempo. 

Alfredo Trespalacios, an energy expert and economics professor at Universidad Eafit in Medellín, echoed Lucio's view that the economic viability of renewables would be threatened by the resolution.

This is because solar, wind and hydropower operators will be forced to pay a much higher price for energy on the spot market when their own generation falls short of commitments to offtakers. 

A consequence, according to Trespalacios, is that these generators are likely to raise prices for new long-term contracts to compensate for the additional risk assumed. Or worse still, solar, wind and hydropower developers could refrain from new projects altogether.

"I fear that this resolution, in search of short-term relief for users, will trigger market barriers and price increases in the long term," he said on LinkedIn.

See the resolution in the Documents box in the top-right corner of the screen.