DIEGO MESA

Colombia 2021 | ENERGY | VIP INTERVIEW

TBY talks to Diego Mesa, Minister of Energy and Mines of Colombia, about state support for the industry, carbon neutrality and the energy mix, and expansion of the national electricity grid.

How is the government supporting the development of the mining industry, and what policies are in place to this extent?

There are a number of policies focused on making capital-intensive industries much more attractive for investors. One of our main policies is the diversification of the mining matrix. Colombian mining exports are dominated by thermal coal, but we have significant potential in metallic minerals, in particular gold and copper, which happen to be two of the minerals critical for the energy transition. We have a competitive process to award mining blocks or contracts. We started with five blocks for copper in La Guajira and Cesar. They have incentives for investors because the licensing process will be expedited, both for mining and environmental licenses. We started the diversification process last year with the Buritica mine, the largest underground mine in Colombia. It is a gold mine and produces around 240,000 ounces of gold per year. Gold production will increase about 20% as a result. The second important project is the Gramalote mine in Antioquia, whose construction phase will start in the second half of this year. The investment for this phase was roughly USD1 billion, and the mine will add around 180,000 ounces of gold per year, which amounts to another increase of around 22%. The demand for gold has been spiking by about 5% worldwide because it is purchased as a secure asset in times of crises. The production of gold increased by 40% and in 4Q2020 we produced around 13.9 tons of gold, the highest production of gold in the last four years. We also have a strategy of three corridors of gold and copper. There are potential projects starting in the southern part of the country going to Antioquia, Chocó, Bolivar, Córdoba, Cesar, and La Guajira. In terms of the general policies to increase investments, we will gradually reduce tax rates from 33% to 30%, and we fixed the VAT payment on fixed assets 100% creditable to corporate income tax; basically, we eliminated VAT on such investments. Similar arrangements were made to other taxes like the Industry and Commerce Tax (ICA). The copper market will tighten over the next decade as energy transitions accelerate. Copper is needed for solar panels, wind turbines, large scale batteries, and electric vehicles.

What is the country's strategy to diversify the energy matrix and reach carbon neutrality?

What Colombia has achieved over the past few years in sustainable mobility is remarkable. In 2019, as a result of the national electric vehicle law, Colombia became the number-one country in Latin America in sales of EVs, with almost 1,000 units in that year. We were able to surpass Chile and the Dominican Republic, which were leading the ranks in Latin America. Fast forward to 2020, and despite the pandemic, Colombia increased its sales of electric vehicles and hybrids by 90%, and for the second year we had the highest EV sales in the region. In March 2021, we sold 998 electric vehicles and hybrids, an increase of 206% compared to March 2020. In the quarter as a whole there was an increase of 160%. Colombia has taken off as the leader of EVs and hybrids in Latin America, and we expect to reach about 10,000 in 2021 alone. The fiscal incentives include a reduced VAT rate of 5%, no import duties, a maximum 5% tax on vehicles, commercial discounts on insurance and other services, and exemption from restriction of mobility like Pico y Placa or day without a car. However, electric mobility only works if the electricity that we produce is clean; otherwise, the EVs would not make a difference. Colombia has one of the cleanest matrices in the world because we depend on hydropower, but we have significant potential for solar and wind. This was one of our priorities when we took office, because that potential was unexploited. In 2018, less than 0.5% of the power matrix was made up of renewables. We improved fiscal incentives in the national development plan. We did an auction for variable renewables in October—the first double-sided auction in the world where both generators and buyers of electricity came to a platform and made bids on the price and quantity of energy—because we decided to let the private industry join the platform. We ended up with 2,500MW, which means we will go from less than 0.5% of the power in the matrix made up of variable renewables in 2018 at least 10% by 2022. We multiplied the installed capacity of these sources of energy by seven times, 10 solar farms came online across the country, and in 2021 we will have 37 projects. Our goal is to go to 1,000MW. We will have the first wind project in La Guajira in December.

How is the ministry working to widen access to energy resources and bring energy to communities?

We still have a significant gap in energy coverage, around 2-3% of the population, which amounts to 400,000-500,000 households that lack access to electricity. It is one of our main policies as well. The goal for this government was to reach 100,000 families that do not have energy in the coming four years. The past administration reached about 67,000, so we increased that significantly. We just reach in April half of the goal: 50,000. We have about 15,000 homes with solar panels, especially in remote, rural places that cannot connect to the grid. Roughly 28,000 are in places affected by the conflict, so it is part of our equity strategy. By the end of 2021, the timeline is to reach 70,000 new homes. This will also be complemented by efforts by the private sector.

What is in store for Colombia in the matter of renewable energy options?

We will leave the regulatory framework for offshore wind farms. Finally, we are deploying advanced metering infrastructure in Colombia, which will replace the traditional electricity meters in households and businesses. The goal is to reach 75% of all customers by 2030. This is the first to digitalize the electricity market, which will be transformational for the sector, and it will be an investment of roughly COP5 billion. Aligned with the vision to structure reactivation around forward-looking technologies, Colombia will open an auction for renewables in the second half of 2021. We expect more than 5,000MW to participate in this auction, the bulk of them solar farms. We are conducting in 2Q2021 the first large-scale energy storage auction in Latin America. Colombia has significant potential for hydrogen energy provision because it is extremely rich in renewable water resources. We also have the three ingredients for hydrogen: solar, wind, and water. In this roadmap, we are identifying the markets domestically and for exports to build this industry for the next 30 years. We have partnerships with countries like Germany that are already choosing which countries can provide them with hydrogen over the next 30 years. The second investment opportunity is geothermal resources. We started the first pilot in March with Parex resources, which is already using it to power its oil fields. Ecopetrol will also have a pilot project toward the end of the year.