What is Ecuador Doing to Diversify its Energy Matrix?

So far in 2019, 88 percent of Ecuador’s electricity comes from the country’s hydroelectric plants, Rafael Soria, Eduardo Rosero, Carlos St. James and Paulina Durango write below. // File Photo: Ecuadorean Government.

Ecuador is seeking $400 million in private investments for renewable energy projects as part of a broader plan to change the country’s energy matrix, Energy and Nonre­newable Resources Minister Carlos Pérez said in July. The government will award concession contracts to private firms to build one photovoltaic plant and two stages of a wind farm, the first two large-scale renewable energy projects in the Andean country. Does Ecuador’s government have the best policies in place to attract investment to its renewable energy sector? What portion of the country’s energy comes from renewable sources, and how much potential does it have to expand that percentage? What is President Lenín Moreno’s administration doing to diversify Ecuador’s energy matrix, and what else should it do to advance its goals?

Rafael Soria, specialist in energy planning and professor in the Escuela Politécnica Nacional (EPN) in Quito: “Ec­uador’s electricity sector is going through a good moment after a decade of investing heavily to develop hydroelectric plants, adding 2.8 gigawatts (GW) with eight large projects. Despite the serious technical problems in these projects, so far in 2019, 88 percent of electricity comes from hydroelectric plants. Yet the electricity contribu­tion of nonconventional renewable energies is still less than 1 percent in annual accumulated electricity. The situation is different when we analyze the primary energy matrix, in which 88 percent comes from oil, 5 percent from natural gas, and renewable energies total just 7 percent. Of the oil produced, approximately 60 percent is exported. Our finalconsumption matrix is made up of 76 percent fossil fuels, while electricity makes up 17 percent. Ecuador’s big problem lies in its transportation sector, which consumes half of the country’s total energy. There is a great challenge in terms of diversification of our general energy matrix, not just the electrical matrix. The announced projects of solar PV—El Aromo, with 200 megawatts (MW)—and wind—Villonaco II and III, with 110 MW—contribute to the electricity sector, but it is more urgent to plan strategies for development of renewable energy in other sectors. There is significant potential for bio­energy for fuel destined for transportation and medium-temperature solar concentra­tion, which can replace diesel in the industry. Finally, we must tend toward electrification in all sectors, for which the electric potential for geothermal energy (900 MW), wind (884 MW), centralized PV (18 GW), residual biomass (730 MW), urban waste (70 MW) and a remaining techno-economic and envi­ronmental potential of 13-GW hydroelectric plants, can help.”

Carlos St. James, board mem­ber of the Latin American and Caribbean Council on Renew­able Energy (LAC-CORE): “Last week, LAC-CORE took a group of interna­tional renewable energy investors to meet with energy ministry and off-taker officials to discuss the new tender’s structure. Ecuador is not short on power generation assets; in fact, it has too much hydro capacity. Last month, for example, 90 percent of power generated came from that source. Given cli­mate change, the country is at severe risk of droughts. So, the motivation for the tenders isn’t about being greener or even adding installed capacity: it is about diversifying the energy matrix to reduce risk. Lenders were also invited but, 1.) commercial banks will not lend in Ecuador under the current structure and were absent; 2.) development banks, which would be expected to lead the charge under the newly pro-Western government were also absent, perhaps significant in itself; and 3.) it seems export credit agencies are likely have to do most of the heavy lifting here since their mandate goes beyond simply earning interest. But it will be an uphill battle. The projects being offered were developed and are owned by the government and by law must remain that way; this auction is structured as long-term concessions. After the unusually long power purchase agreements expire, they’ll return to government hands. The government demonstrated very solid technical expertise and considerable willingness to listen to the battle-hardened investors. Investors, meanwhile, showed healthy skepticism. Un­fortunately, the weakest link wasn’t so much the lack of financing, but rather Ecuador’s inexperience in market mechanisms. While it might have been wiser to replicate a suc­cessful model, such as Argentina’s RenovAr program with features like soft guarantees from the World Bank, the government chose to go at it alone, and there are outstanding issues such as timelines, guarantees, priority dispatch, termination clauses and lenders’ rights that are significant and need to be addressed for this important auction to ultimately succeed.”

Eduardo Rosero Rhea, president of the Ecuadorean Association of Renewable Energies and Energy Efficiency (AEEREE): “The Ecuadorean government’s intention is to encourage national and international pri­vate investment in strategic sectors such as renewable energy generation, a sector that is considered a priority. For this purpose, the government has designed a series of tax incentives, such as income tax exemptions and advanced payment for a period of 12 years. In the case of the photovoltaic proj­ect, the Aromo in Manabí could extend this benefit for up to 15 years. Another important point to highlight is the strengthening of con­cession contracts with the possibility of dis­pute resolution through instances of regional arbitration, an option that until recently was not an integral part of the contracts signed by the Ecuadorean state. Electricity gener­ation from renewable energy reaches 80-85 percent, considering the large hydroelectric projects that have been incorporated during the last decade. However, the growth trend in demand determines the incorporation of renewable energy projects whose genera­tion is complementary and economically feasible, with respect to thermal power generation, which is expensive. Since last October, the government issued Regulation No. 003/18, which authorizes the new instal­lations of photovoltaic micro generators for self-consumption in residential, commercial and industrial sectors, determining the requirements and procedures for measuring energy in a net energy scheme. Since last year, the government issued a regulation that determines the conditions for producing en­ergy from waste, and another that allows the private sector to propose renewable energy projects for distributed generation and thus contribute to an effective reinforcement of distribution and subtransmission networks.”

Paulina Durango, infrastructure and energy partner at APREC Abogados in Quito: “Ecuador seeks to attract private invest­ment that promotes technological innova­tion, a change in its energy matrix and job creation. In fact, through its public selection processes of the 200-megawatt El Aromo PV project in Manabí and Villonaco II and III (45 MW and 56 MW, respectively) in Loja, it is strengthening a legal framework that brings legal certainty and confidence to investors. There will be three separate rounds, and the selected company will be the one that offers the most energy at the lowest cost. It will design, finance, construct, operate, maintain and deliver electricity through BOT and PPA contracts. Politics and laws are not enough to build trust—there is a complex long-term environment, and unfortunately the path has not been easy for Ecuador. Having the dollar as currency helps a lot. Incentives for private investors are primarily fiscal: first, income tax exemptions for 15 years at Manabí and 12 years at Loja, starting in the first year as long as there is new investment and net job creation; and second, exemption from ISD foreign exchange tax for import of capital goods, raw materials, financing, dividends and payments for purchase of shares with the signing of investment contracts. Accord­ing to the electricity regulator, ARCOTEL, so far in 2019, of the effective power gener­ation, 64.95 percent is renewable—62.59 percent is hydraulic, 0.26 percent is wind, 0.33 percent is photovoltaic, 1.69 percent is biomass and 0.08 percent is biogas. The big­gest efforts have been made in hydroelectric projects, and I believe there is a significant potential for expansion, as demand for energy use is constantly growing. Ecuador has changed course and now sees private investors as necessary and irreplaceable allies. We expect several complementary measures in the labor, environmental and productive fields, and these projects are a good opportunity.”

The Advisor welcomes comments on its Q&A section. Readers can write editor Gene Kuleta at gkuleta@thedialogue.org.

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