Double trouble: Why COVID-19 is not the only worry for Colombia's power sector

Alejandro Lucio, director and founder of Bogotá-based consultancy firm Óptima Consultores, spoke to BNamericas about the challenging times facing Colombia's electric power industry. This is the first of a two-part interview.

BNamericas: Gas companies in Colombia have been declaring force majeure and seeking emergency financing because of an inability to meet commitments with producers amid the coronavirus pandemic. In contrast, we have heard very little from electricity distributors. Are they finding it difficult to meet their contractual commitments with generators given the falling demand and mass non-payment of bills? 

Lucio: In the first month of the quarantine, the reduction in demand was around 15-20%, which is less than what happened in many other countries. This is because around 70% of Colombia's electricity demand is residential. In the United States and Europe, a far higher percentage of demand come from industrial consumers. 

Having said that, there has been a significant impact on demand as a result of the economic crisis. In addition, many users have been unable to pay their bills. That will have an effect on the entire value chain, from distribution to transmission and generation. You have to bear in mind that the government issued decrees setting rules for distributors to offer deferred payment facilities to consumers from April to June. Payments have been postponed by up to 36 months for lower income users and 24 months for the middle classes. Distributors are obliged to offer this and it will also have a financial impact. 

BNamericas: Colombia is also in the midst of a long drought which has hampered hydroelectric generation capacity. What impact is this having on the finances of distributors? 

Lucio: The low rainfall has meant that spot prices in Colombia have not fallen despite the drop in demand caused by the quarantine. That also brings financial stress to distributors because not all of the energy is hedged in contracts. There is a percentage of the contracts that is linked to the spot price. That being said, demand has increased by around 7% to 10% in the last few weeks due to the gradual restart of economic activities. The government is also facilitating funding packages for public service companies, offering lower interest rates.   

BNamericas: Are generators and transmission companies being affected in a similar way?

Lucio: Yes, because payments for generators are linked to the end user. If payments are deferred, distributors will have less money to pay the generators. The financing being offered by the government is for public service companies. That includes transmission and generation companies but most of the funds will go to distributors. 

BNamericas: The drought is forcing Colombia to ramp up generation from backup thermoelectric plants and to import electricity from Ecuador, despite the fall in demand caused by COVID-19. Does this show that Colombia needs to contract more renewable energy capacity?

Lucio: The generation matrix needs to be complemented. Thermal generation may not be enough and hydro generation cannot always be relied upon. That is evident now, just like it was in 2016 [Colombia's last drought]. The projects that had contracts assigned at the two auctions last year – for the reliability charge and renewables – should be sufficient to ensure the reliability of the system in the medium term. They are due to be ready in 2022 or 2023.