Spotlight on Colombia: Balancing oil & gas and sustainability goals

This Insights article refers to our recent Energy Transition Compass report on the role of Colombia, the second most populated country in South America, in the global effort on climate change mitigation and adaptation, factoring unique aspects of the country’s existing energy system and its future potential. Despite its significant oil and coal exporting legacy, Colombia has landed at the forefront of accelerating the decarbonization of the global economy, especially since its particularly vulnerable to the adverse effects of climate change.  

Transport and hydrogen to emerge as key power sector drivers from 2035

Total electricity consumption in Colombia increased from ~30 TWh in 1990s to ~75 TWh in 2022. These numbers are defined in terms of final end-sector consumption. Over the past 30 years, growth in domestic electricity demand was led by all major consumption sectors with industrial and residential consumption doubling in the period, while consumption in commercial and other sectors (agriculture, forestry, and fishing) grew from only 6 TWh in 1990 to ~21 TWh currently. Nearly 100% of country’s population already has access to electricity, while energy efficiency trends in residential and commercial sectors are expected to reduce normalized electricity consumption metrics in the future.

Having said that, gradual electrification of industry, population and economic growth are expected to induce significant upward pressure on electricity demand from traditional sectors through 2050. Combined, traditional consumption sectors are expected to grow from ~75 TWh at present to ~120 TWh in 2050 (1.7% CAGR). Two new sectors are expected to emerge as significant drivers of electricity consumption – transportation and green hydrogen.

While we view the Colombian EV target for 2030 as ambitious, continuous strengthening of EV sales and consistent policy will induce tangible uptick in transportation electricity demand from early 2030s with consumption surpassing 35 TWh per year by 2050. In terms of magnitude, such electricity demand corresponds to the current consumption coming from the entire residential sector.

As new use cases for hydrogen mature and the country stays committed to its previously outlined Hydrogen Roadmap, we expect to see both blue and green hydrogen projects to capture significant market share. Green hydrogen will require 25-55 TWh of renewable electricity in 2050.

Abundant hydro power is the main driver of sustainable electricity today

Thanks to access to vast hydro power resources and historical decisions to pursue these as the major electricity source, Colombia’s power sector today exhibits very competitive carbon intensity –close to 150 grams of CO2 per kwh. In 2020-2022, hydro power accounted for ~70% of electricity generation in the country, while natural gas and coal were the second and third largest contributors with 13% and 11% market shares, respectively. Colombia is not the only country in South and Central America with significant penetration of hydropower, with some of its geographic peers considered in this report (e.g., Brazil, Uruguay), Paraguay, and Costa Rica having even lower carbon intensity for the power sector largely led by a high share of hydro power. Yet Colombia outperforms an average geographic peer on both the share of electricity generated by hydro sources and average carbon intensity of power generation. Colombian geographic peers averaged at 37% of their electricity coming from fossil fuels (coal, liquids and natural gas combined) in 2020-2022. Looking at Colombian economic peers from other parts of the world, we observe significantly higher share of coal (35%) and natural gas (42%) in power mix on average, which is the main reason behind the much lower carbon intensity of the overall economy for Colombia.

As nationwide electricity demand is set to double in the next 30 years, the country looks for economic power sources to satisfy incremental demand in a reliable and ideally sustainable way. Today Colombia has ~12 GW of installed hydro capacity, which represents <15% of theoretical capacity potential in the country. Having said that, there is strong consensus that most economic hydro locations have already been developed and accelerated deployment of intermittent low-cost renewable sources (solar, wind) could complement existing capacity.

Colombia offers top quartile solar economics in the global context

As of early 2023, Colombia has only ~0.3 gigawatts (GW) of operational utility-scale solar capacity. The country has been gradually progressing with its renewable power-specific policies and incentives since 2014, when Congress passed Law 1715 which intended to promote an accelerated development of solar and wind. Modified tax breaks and incentives became effective in 2021 (Law 2099), which currently make developers of non-conventional renewable energy projects eligible for the following benefits:
• Income tax deduction of 50% of the capital
expenditure over a 15-year period.
• Frontloaded depreciation schedule.
• VAT exclusion and tariff exemption.

A combination of policy support and a structural learning curve for solar, which reduced the global average levelized cost of energy (LCOE) for PV by more than 80% in the last decade, resulted in a healthy uptick for new utility-scale initiatives.

We track ~1.2 GW of mature solar projects in Colombia at present (construction or post-final investment decision phase), ~2.3 GW of projects which are already in permitting or application phase and staggering 17.6 GW from solar initiatives proposed as concepts but that have not moved towards tangible development progress yet. If all these initiatives become operational in the next 10 years, nationwide solar capacity will surpass existing hydro capacity by a factor of two. Having said that, the development of such potential relies
on a scenario with accelerated demand growth and successful expansion of transmission grid. Our granular renewable economics model reveals the presence of a strong investment thesis for solar in Colombia. We estimate an average internal rate of return (IRR) potential of ~12% for utility-scale solar in Colombia, competitive or average in the context of geographic peers and top quartile economics in a global context. The most solar potential that would complement existing hydro base from a seasonality perspective is found in the Orinoquia region.

Wind power project pipeline lags solar but offers attractive economics

The ranking of Colombia on the global cost curve for wind power looks even better than for solar economics. Our economic model suggests that Colombia (driven almost exclusively by projects in La Guajira region) makes it into top-three list on expected average wind IRR in South America and is among the best 20% countries globally on wind economics with the current cost levels and average resource potential. The same tax incentives on the back of the laws 1715 and 2099 discussed on the previous page are available also for wind power
developers. Having said that, the onshore wind industry in the country today is in its infancy with less than 50 megawatts (MW) of operational onshore wind capacity and less significant scale of mature project pipeline than for solar: ~0.9 GW in post-FID phase. Having said that, ~6.8 GW of onshore and ~1.7 GW of offshore wind initiatives are currently exist on paper in concept phase and consistent governmental policy coupled with economic attractiveness is likely to bring many wind initiatives over FID line in the next few years. We expected operational wind capacity in the country to surpass 3 GW by 2030 and reach 7 GW by 2035.

For solar, we observe 3.5 and 9 GW as realistically achievable capacity levels by 2030 and 2035, respectively, without negative implications for reliability of domestic grid as long as this low LCOE intermittent power source additions are still backed by reasonable base levels of hydro power and flexibility delivered by dispatchable fossil fuel sources.

Still, utility-scale lithium-ion battery storage capacity will need to accompany the growth in
solar and wind capacity with the total battery energy storage system (BESS) energy capacity of ~0.9 GW needed by 2035. Once again, this emphasizes the potential need to focus on local battery value chain as the country pursues non-conventional renewable energy expansion.

The quoted report "Energy Transition Compass – Colombia Energy Guidebook" is exclusively available for our Energy Transition Solution clients. If you would like to learn more about our solution, please contact us.