What do we need to finance the energy transition?

This transformation requires monetary resources, but they will only reach Colombia if we strengthen the trust and protection of private and foreign investors.

Hemberth Suárez Lozano
Partner at OGE Legal Services

The levelized cost of energy −Levelized Cost Of Electricity, LCOE, in English− of generation projects for the energy transition has decreased, especially for photovoltaic solar projects, which, in principle, allows us to affirm that it is profitable to develop this type of renewable energy initiatives in Colombia. However, the costs of the energy transition consider an aspect that the country must maintain for the sustained profitability of this transformation, namely, the trust of private investment.

What is the energy transition

The current energy transition is a process by which a country and its citizens complement their main energy sources and supply structure, with the aim of minimizing dependence on fossil fuels and reducing greenhouse gas emissions.

Therefore, the transition implies that a nation and its main sources of consumption gradually migrate towards a matrix in which cleaner energy sources with low emissions and that are sustainable have a relevant participation: solar, wind, hydroelectric energy, and other forms of energy production with lower emissions, such as that obtained from combustible gas.
But, the energy transition also implies decentralization in energy production, which is achieved through the participation of investors via distributed energy resources, such as self-generation, whether on a small or large scale, cogeneration, distributed generation, and energy communities, among others.

Costs

The energy transition entails several main costs, which can vary depending on the magnitude and focus of the transition in each region or country. Some of the most significant include: investments in infrastructure, research and development, taxes or changes in fiscal rules, as is the case with transfers from the electricity sector, which increased from 1 to 6 percent in the National Development Plan 2022-2026. And I continue to add social and employment costs, as well as waste management and recycling.
In this sense, for an effective implementation of the energy transition, it is advisable to identify the ways in which the costs involved in this process can be financed.

Financing

The energy transition is financed through various sources and strategies. Some of the most common are:

• Public investments: governments often allocate public funds for projects related to the energy transition.
• Private investments: companies and private investors play an important role in financing renewable energy projects and
• clean technologies. This can include investments in wind farms, solar panels, hydrogen, energy storage, and other sustainable initiatives. Private investment begins to weaken if there is no legal certainty.

International financing: international organizations such as the World Bank and the Inter-American Development Bank offer loans and financing for sustainable energy projects in developing countries.

From the above, it is concluded that private investment along with access to international credits are the most realistic ways to achieve the energy transition in Colombia.

This transition does not only mean generating clean energy, because if that were the case, in Colombia, we have reached that point for 26 years, given that our main source is hydropower generation. In other words, it also implies decentralizing energy production by strengthening the participation of new investors and new production schemes with distributed energy resources.

What we must avoid are at least these two aspects. First, that investors in renewable energy projects face high capital costs. For this, Colombia should maintain or improve its risk rating, Fitch Ratings. Today we are at BB+, which corresponds to a stable country. The ideal is to be at AAA, AA, or at least A. Second, we must avoid weak institutional fundamentals, which translates into legal certainty.

Therefore, what we need to finance the energy transition is for the institutional framework of the energy sector to preserve rules and take measures to increase access to international financing channels at good interest rates, which is achieved by strengthening the timelines for obtaining permits, increasing security in areas, and maintaining technical independence in the Energy and Gas Regulatory Commission (CREG).

In general terms, the energy transition requires monetary resources, but they will only reach Colombia if we strengthen the trust and protection of private and foreign investors.