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M&A market: Colombian energy sector
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M&A market: Colombian energy sector

latam Energy
Colombian energy sector


Apr 20, 2023

The Colombian energy mix, still predominantly hydropower supplemented by various fossil fuels (mainly gas), has recently started a gradual shift towards the renewables sector, with the development of large-scale national projects.

New energy project auctions, longer-term contracts, income guarantees and tax reforms have already made a difference, with new M&A, particularly for solar projects, and growing interest from international investors.

Growing investments in renewable energy projects

  • April 2023. Enerfín, the Elecnor Group’s renewable energy subsidiary, announced they had obtained a $57 million loan for a 129 MW solar project, their first ever investment in Colombia.
  • May 2023. The renewable energy developer, Verano Energy, completed the purchase of three photovoltaic solar parks in Colombia, with a total of 296 MWp, under the new resolution of the UPME (Unidad de Planeación Minero-Energética), the Colombian regulator that delivers or assigns interconnections.

The second half of 2023 promises to be much more dynamic than the first 6 months of the year. New reforms and massive investment in energy transition, renewables, healthcare, digital transformation, agribusiness and tourism are on the horizon and promise to make Colombia an ever more attractive destination for foreign investment.

The Colombian M&A landscape in 2023

To provide its members with valuable insights into the latest developments in the Colombian energy market and a heads-up on likely investment opportunities in this dynamic sector, on 20 April 2023, the M&A Community, in partnership with iDeals, organized a round table discussion with three leading industry experts.

Oscar Parra started the discussion by explaining that hydro was an obvious choice for a country with so many large rivers and reservoirs and there are various tax incentives that make hydro projects more profitable. 

Government initiatives boost renewable energy

Traditionally hydro projects were sold via short-term power purchase agreements (PPAs) but, to facilitate the financing of new projects and stimulate renewables in the country, the government introduced auctions for 15-year contracts, which guarantee a predictable fixed income. 

Another new mechanism is reliability charge auctions, which allow projects to guarantee income. 

“We can see this as a clear demonstration of the government’s commitment to the sector,” commented Oscar.

And it is not only hydro that benefits. When UPME published its list of 2022 connection requests, there were 843 new projects with a total capacity of approximately 57,000 megawatts, 5,700 of which were solar. 

The fourth reliability charge auction, due to open next month, is expected to attract even more successful bids for solar projects.

All in all, the government has invested heavily in the renewable energy sector and this has encouraged many international players to invest

Oscar Parra

All of this would explain the growing interest of investors in Colombia. But are there other reasons to justify their focus on the country? 

Elena thinks that Colombia’s strong legal and judicial framework gives them confidence. There is also a clear appetite for risk: Colombia is seen as one of the most desirable countries to invest in LatAm and the January bond issue was four times oversubscribed. 

“Another super-important aspect is that the figures add up”, said Elena. Renewable projects in Colombia are profitable without the need for subsidies. Also, since the pandemic, energy prices have been going up and there is no sign of them falling any time soon, with international pressures such as the war in Ukraine and the rise in commodity prices exacerbated by local factors such as delays in issuing environmental permits.

There is also a new El Niño event due, and if hydro is affected and we have to rely on geothermal, prices will rise again

Elena Bugalla

The downside of the price rises is that the central bank has been raising interest rates to curb inflation. This is making short-term debt unaffordable and projects are being assessed in relation to a future scenario in 2-3 years when investors expect that both inflation and interest rates will have normalized.

“In the short term, higher interest rates are putting pressure on profitability and reducing the options for leveraging new projects, but Colombia has the right legal framework and conditions for investment. All in all, the appetite is there and I think the sector is super robust,” concluded Elena. 

Alejandro warned that while some brownfield projects have been refinanced, very few greenfield projects are in the financial closure phase. This is because the Colombian market is not as mature or as evolved in terms of market practices as, for instance, a country like Chile. 

“It’s also important to note that the auction PPAs mentioned at the beginning of the session are financial PPAs, with all the risks that implies,” explained Alejandro. 

Challenges and risk mitigation

Another challenge is that Colombia’s expertise in construction risks was mainly acquired on transport infrastructure projects, so there can be a disconnect when it comes to working with the more standardized international specs for a solar or wind project. 

The rapid drop in the exchange rate at the beginning of 2022, the fact that project revenues are in pesos, and also that most energy generation equipment is imported, are three factors that put financiers in the delicate position of having to find ways to mitigate exchange rate volatility.

According to Alejandro, there are two ways of mitigating the risk:

  • First. By building a cushion into your financial model, e.g. some type of derivative to cover the difference between revenue in pesos and funding in pesos. You can establish a disbursement schedule linked to the EPC or supply contract, where specific dates are set to exchange pesos for dollars at a fixed exchange rate.
  • Second. The company secures dollars at a fixed exchange rate that allows them to assume their commitments under the EPC, or whatever contract it may be, in dollars. At the same time, they can contain the funding in pesos from the bank and merge it into the long-term revenue of the PPA.

For Oscar, it’s also worth mentioning that the reliability charge mechanism is a way for some of these projects to access revenues in dollars. But it’s important to be aware of the risk faced by both financiers and investors.

Elena highlighted that last year, interest rates rose month on month and they’re now around 12-13%, with upper limits for long-term infrastructure projects around 8-9%, which gives a debt cost of around 20% or more, making the project unaffordable. But in recent months, the Colombian government launched some programs through development banks that allowed commercial banks to be funded at more competitive rates and this is now an alternative way of financing projects.

  • Rising energy prices and potential environmental factors impact profitability
  • Central bank’s interest rate hikes affect short-term debt affordability
  • Market practices and construction expertise pose challenges for greenfield projects
  • Exchange rate volatility requires risk mitigation strategies in financial models

Following the main discussions the panel was invited to participate in a Q&A session.

Elena, how do you see the outlook for investment, and is the delay in constructing the main distribution networks slowing investment?


I think the first thing to point out is that Colombia already has a fairly good network. What is happening, particularly in relation to wind projects in the isolated area of La Guajira to the north, is that construction of the collector transmission line has been delayed because they haven’t carried out the consultation required for the environmental permit. This isn’t just an issue for renewables, it affects several projects, and not just in Colombia. So, I think that any investor looking at Colombia needs to make sure they do thorough social and environmental due diligence and this will help mitigate the risks.

How does the El Niño phenomenon affect energy prices?


As we mentioned at the beginning, most of Colombia’s energy generation is from hydro, and because of its geographic location, the country is vulnerable to certain climatic phenomena, particularly the El Niño event, which generates droughts roughly every four to six years. When this occurs, the water levels in reservoirs and rivers decrease and we have to switch to other, more expensive, sources of energy generation. These are mostly thermoelectric plants that use fossil fuels to generate electricity. The higher generation cost is passed on to the spot price, leading to significant price increases.

Do forwards only cover the short term? What other instruments have been used?


We’ve always used forwards to cover the construction period, at least for projects with a construction schedule. The project cost is linked to the project risk so the use of forwards mitigates or even eliminates the exchange rate risk during the construction period. There may be other instruments but it’s a question of what the bank will accept, especially in Colombia where valuation is such a big issue. Unfortunately, like all risks, it’s ultimately the shareholders who carry it. 


It depends on what you are trying to fix, but you can only achieve so much. You could put in a derivative until the plant begins operating, so when repayments begin, you already have a fixed amount that will be repaid in pesos. Or, you have to resort to guarantees through a standby that you include in the EPC that covers this type of risk or assign it to the project shareholder. There are other options, such as long-term synthetic equity, but they aren’t really recommended because they use up the leverage capacity of the project and remove a lot of flexibility, i.e. if you are going to prepay the debt, you cannot refinance. So these are not solutions that we are seeing used for project finance in practice.

How do investors view the current government’s attempt to intervene in CREER and control the prices of generators?


I think that CREER has done a very good job so far. It seems to me that in Colombia, the most developed sectors are likely to be in the electricity industry. A pricing intervention doesn’t make much sense, because price increases often have nothing to do with generation. And when they tried to pass the decree it was overturned in the Council of State. So, I think ultimately this reassures investors that Colombia has a rule of law and that the rules of the game are respected. But in my view intervention is never a good thing.


And if I can add to that, from our experience in investment banking, we’ve seen that political risk generates a lot of noise, a lot of uncertainty, but the truth is that these projects have a lifespan of 25 to 30 years and an investor is not focusing on a 2 to 3-year period, but much further down the road. We’ve seen that there are players that are really interested in investing in Colombia. Only this morning we announced the financial closure of a 130-megawatt solar project, which I think demonstrates that international investors are willing to bet on Colombia, despite all the noise that is currently being generated.

Should coal-fired power plants migrate to renewable energies or stay with coal and gas to guarantee reliability?


The great thing about thermoelectric power plants is that they can produce continuous electricity because their energy generation is not contingent on the availability of a natural resource. Whereas a hydroelectric plant depends on the availability of water, so in a drought, it produces less electricity, making it an intermittent source of generation.

The downside is that a thermoelectric plant needs a continuous supply of fuel to produce the same amount of energy throughout the year. Some new renewable technologies are environmentally friendly, such as energy generation with biomass, where a new forest is planted that will capture carbon emissions as it grows and then the timber is used to produce energy. This could become an alternative, renewable fuel supply for thermoelectric plants.

How is the solar self-consumption market evolving in Colombia, how do you see appetite from investors, and what kind of foreign investors are there in this sector in Colombia?


This is a sector that is really starting to grow, mainly because of rising prices but also because of shortfalls in supply. For instance, in certain parts of the country, especially in the north, there are power outages which are a major headache for the industry. So, there is quite an appetite for solar self-consumption. If we go back to what we were discussing earlier: the challenge is how to leverage a project while dealing with the pressures of short-term interest rates. So, I think the appetite is there, and the investors are there, but the market is a bit complicated at the moment.


Yes, I would say that it’s a very interesting alternative for the end consumer since the generation cost of a solar panel will only be around 200 pesos per kWh, whereas the rate they would pay to a supplier could be as much as 500-700 pesos per kWh. So, this is a cost-saving opportunity for end consumers, and we have seen various international players investing in this type of project in Colombia.