Bankability of Colombian projects
Colombia is in the process of awarding 1,500 megawatts of new power purchase agreements to buy renewable power.
The form of PPA it plans to use may make the financing of projects difficult for international lenders. Given the size of Colombia’s banking sector, it is hard to believe that local lenders will have the required liquidity to provide financing for most projects.
Colombia is determined to add more wind and solar electricity. It relies currently mostly on hydropower and is well behind its Latin American peer countries in terms of other forms of renewable energy.
There are only 19.5 megawatts of wind power installed capacity and 84 megawatts of solar power installed capacity. This puts Colombia among the countries with the least wind and solar installed capacity in the region.
The Colombian government recently launched a national development plan to promote wind and solar. One of its goals is that by 2022, 8% to 10% of Colombia’s energy will be produced from renewable energy sources.
In line with this goal, the Ministry of Mines and Energy is conducting an auction to award long-term power purchase agreements. The Ministry expects to add 1,500 megawatts of renewable capacity, representing a $1.5 billion investment, in an auction that is underway currently.
The Ministry of Mines and Energy was unsuccessful in its first attempt last February to award long-term power purchase agreements through a power auction. Other countries in the region, like Brazil, Chile, Mexico and Argentina, have successfully awarded in the last few years thousands of megawatts of long-term PPAs to private generators.
The first Colombian auction required the participation of both producers and offtakers. Only eight sale offers and 12 purchase offers were submitted, according to the Colombian government. The auction had certain technical and financial requirements that were not considered commercially attractive by several generators, and purchase offers submitted by offtakers were too low. In addition, antitrust conditions that had been put in place to avoid undue advantage by companies that were participants in both the sell and buy sides were not met. As a result, the government declared the auction unsuccessful and no PPAs were awarded.
The Ministry of Energy and Finance has redefined auction mechanics for the second auction in an effort to make it a success.
The rules to participate and the agreements to be awarded have been modified to address many participant and lender concerns. In contrast to the first auction, the second auction only allows the participation of new renewable energy projects with nameplate capacities exceeding five megawatts. Offers made by second-auction generators must be divided into three time blocks, with a price assigned for each time block, instead of having an annual reference price. Second-auction power purchase agreements will have 15-year terms rather than 12-year terms and will be financial pay-as-bid agreements and allow sellers to purchase energy from the market to compensate for any shortfalls.
The auction process is divided into two main stages. In the first stage, participants must register and submit technical proposals to become prequalified. In the second stage, participants may file their financial proposals.
Both foreign and local players are participating in the new auction after registering with the UPME. Potential purchasers and sellers had to submit their technical proposals in early September.
Seller requirements included the delivery of evidence relating to project capacity and interconnection feasibility. Also, prospective sellers had to submit a detailed development schedule with a commercial operations date no later than January 1, 2024. Offtakers had to submit evidence that they are authorized to participate in the wholesale energy market at least through 2038.
Participants had to post bid performance guaranties as a part of the prequalification stage. The guaranty amount is based on the maximum amount of energy that a participant intends to sell or buy on any given day. These guaranties must remain in effect for at least six months after presentation of a bidder’s financial proposal. The bid guidelines do not have other substantive financial or creditworthiness requirements for participants.
The UPME published a list of registered participants who have submitted technical proposals. The list indicates that 53 participants successfully registered for the second auction. Of those, 27 are prospective sellers with 56 renewable energy projects. The remaining 26 are potential purchasers.
Registered generators include Acciona, Canadian Solar, Cobra, EDF Renewables, Empresas Públicas de Medellín, Enel Green Power, Trina Solar and several other developers. Registered offtakers include Celsia, Ecopetrol, Empresas Públicas de Medellín, Enertotal and other local power marketers and distributors.
The names of prequalified purchasers were published on October 2, 2019.
Only prequalified participants may submit one or more financial proposals. The proposals are binding and may not be modified once submitted.
These proposals are based on the price per kilowatt hour in Colombian pesos at which each participant intends to sell or buy energy. Potential sellers can submit offers in any of the three available time blocks, which span from 12 am to 7 am, 7 am to 5 pm and 5 pm to 12 am. Buyer offers must indicate the maximum amount of energy that the relevant buyer wants to purchase per day and the average price per kilowatt hour in Colombian pesos.
The Gas and Energy Regulatory Commission will set maximum thresholds for the prices of energy per individual offer and in the aggregate. These thresholds will remain undisclosed until the award process has concluded. Offers exceeding the thresholds will be discarded.
Financial proposals will be submitted on October 22, 2019. They will be validated as they are filed after running a mathematical model. The model will solve an optimization equation and match sale and purchase offers while maximizing consumer benefits during each time block. Winning participants will be selected and matched with other participants regardless of their creditworthiness. The details of the model and its results will be published on that same date along with the names of winning participants and award details.
A second round will immediately follow the first award round to compensate for any shortfall capacity.
Agreements to cover shortfall capacity will be awarded to prequalified participants that were either only partially awarded or not awarded at all during the first round. Agreements awarded in this round will follow the same principles as those awarded during the first round, including pay-as-bid terms.
The awards will take place on October 22, 2019 and will be followed by a period allowing participants to challenge the ministry’s decision. Once this period has elapsed, the ministry will officially finalize the auction. Awarded agreements must be executed within 20 business days after conclusion of the auction. The parties to each agreement must deliver their performance guaranties before executing the agreements. The guaranties must be approved by each of the counterparties to an agreement. Sellers must also deliver a commercial operations performance guaranty based on the maximum amount of energy that a seller intends to sell.
Sellers must begin supplying energy no later than January 1, 2022, even if their projects have not reached commercial operation. Energy shortfalls may be covered by purchasing energy in the market. Projects must commence commercial operation no later than January 1, 2024 or risk forfeiting their contracts and their commercial operations performance guaranties.
Payments under power purchase agreements will be made in Colombian pesos at the prices offered by generators during the auction process. In addition to the contract price, payments to generators will include the payment of CERES, a tariff to compensate generators for the availability of their generating assets on a firm basis.
Contract prices will be adjusted on a monthly basis to reflect variations in the Colombian producer price index. There is no indexation for exchange rate fluctuations, which will be of concern for anyone using foreign sources to finance awarded projects.
Supply and payment obligations are established on a firm basis. Hence, sellers must deliver all committed energy at the offered price, while purchasers must pay for all purchased energy, regardless of whether they consume. To validate these commitments, either party can register the power purchase agreement with the ASIC, the Colombian governmental body in charge of settlement and invoicing market transactions.
Both purchasers and sellers are required to provide a first requirement bank guaranty (aval bancario) or a stand-by letter of credit as performance guaranties. These guaranties must be for 30% of the annualized hourly committed energy, multiplied by the contract price per kilowatt hour. However, a seller may reduce the amount of its guaranty from 30% to 20% once its project reaches commercial operation.
A blank promissory note with an instruction letter must be delivered by each party to the other. This is a mechanism to facilitate collection of any unpaid amounts at termination of the agreement. A promissory note is not a liquid security, so collections still will depend on the value and availability of the issuer’s assets. For financing purposes, it will be important to confirm that repayment of financed debt will take precedence over the enforcement of the promissory note, including in the event of a bankruptcy or insolvency.
A defaulting party must pay 20% of the total contract value as liquidated damages if the PPA is terminated due to default. Hence, the guaranties delivered by power purchasers for 30% of the annual contract price could fall short of what is needed. The sufficiency of purchaser guaranties, together with the blank promissory note, will be closely evaluated for financing purposes.
The PPA has standard periods to cure events of default. However, no cure period is available to the seller if it fails to supply contracted energy; the power purchaser can terminate the agreement immediately.
In case of a force majeure event or third-party actions, neither seller nor purchaser will be excused from complying with its supply or payment obligations. Given the financial nature of the power purchase agreement, the inclusion of this provision seems reasonable as sellers may remain in compliance with their supply obligations by purchasing energy in the wholesale electricity market. However, sellers must cover any difference between the contract price and market price, even if the force majeure event or third-party interference is due to an act or omission of a governmental authority.
The power purchase agreement requires the power purchaser’s approval for any assignment of seller rights, including any collection rights. This could prove an obstacle to financing projects.
Lenders are allowed to take control of the seller if the seller defaults under the financing documents or the power purchase agreement. An extended cure period is usually required by lenders to allow them the ability to cure or mitigate events of default by a seller under the power purchase agreement and prevent the agreement from being terminated. These lender rights are either included in the agreement itself or in a direct agreement between the offtaker and lenders. It is not clear from this power purchase agreement whether purchasers have an obligation to enter into direct agreements with project lenders.
In case of a dispute, the alternative dispute resolution mechanisms available to the parties include direct negotiations, friendly composition and arbitration pursuant to the regulations of the Arbitration and Conciliation Centre of the Bogotá Chamber of Commerce. Friendly composition can be helpful for resolving technical disputes, but it is not a commonly accepted dispute resolution mechanism by international lenders for legal disputes, as arbitration is usually preferred. Most importantly, friendly composition is an ad hoc process that may not be enforceable in certain jurisdictions.
Neither party is protected against risk of a change in law. There is no obligation in the power purchase agreement on either party to negotiate changes to the agreement to restore balance after a change in law. This will be a concern for lenders, as it is an unquantifiable risk.