octubre 3, 2023

Changes to Ecuador’s Renewable Energy Policy

Por: Carlos Espinosa Gallegos-Anda

In recent years, Ecuador has reformed its renewable energy policy. New legal framings and policies have gradually been incorporated since 2015 legislative reforms to the Ley Orgánica del Servicio Público de Energía Eléctrica (LOSPEE) – Ecuador’s Electricity Law.

Convergence of technical, meteorological, macroeconomic, and political conditions, predicted for the final quarter of 2023 and first semester of 2024, will levy considerable strains on Ecuador’s electricity market. The foreseeable consequences of “El Niño” weather phenomenon, operational difficulties at various hydroelectric power plants, energy distribution losses, aging infrastructure, rising commodity prices and the political uncertainty generated by Ecuador’s current presidential elections, demand swift and assertive policy responses.

In a previous note https://rb.gy/8p5lx we discussed some of the structural conditions and challenges facing Ecuador’s electricity market. A central point of our analysis was that “under the current conditions, Ecuador’s key export industries must limit their exposure to energy price fluctuations. Local industries supplying Ecuador’s domestic market will face the same challenges”.

Our analysis suggested that, although certain regulatory and policy reforms to Ecuador’s energy market had been introduced, targeted efforts were still needed by both public and private interests.

On 14 September 2023, Ecuador’s Ministry of Energy and Mining or MEM, sanctioned Ministerial Decree MEM-MEM-2023-0017-AM to “Generate Optimal Conditions for the Inclusion of Self-Supply Generated Distribution in Ecuador’s Electric System”.

Ecuador’s MEM is the country’s National Energy Authority. The recently sanctioned policy framing serves as a sort of “blueprint” for upcoming technical regulation reform. Wielding of such powers by MEM is clearly stated in the Ministerial Decree’s First Transitory Disposition which grants, Ecuador’s Electricity Regulator or ARCERNNR, 30 days to draft and present regulatory reforms under the new policy guidelines.

The urgency and necessity of such reforms is confirmed by the Vice-minister of Electricity and Renewable Energy’s February 2023 orders to ARCENNR, urging it to expedite changes “in order to minimize the risk of electricity supply shortages for the 2023 – 2024 drought”.

These new policy guidelines cannot be understated. MEM ordered ARCERNNR to prepare the necessary regulatory updates required to “increment self-supply mechanisms”. Central features of these “updates” required surgical tweaking of two technical regulations: (i) ARCERNNR Regulation 001/2021 regarding the “Legal Framework for Self-Supply Generated Distribution by Regulated Electric Energy Consumers”; and (ii) ARCERNNR Regulation 006/2023 regarding the “Legal Framework for Self-Supply Generated Distribution by Non-Regulated Electric Energy Consumers”.

Overall, the new policy framework sanctioned by MEM, orders the ARCERNNRR to address these key issues:

  1. Rated Power Limits:
    • Self-supply by Regulated Consumers: must be connected to the consumers electric meter and not applying monthly energy averages will limit their demand to the maximum nominal rated power and the connection capacity approved by the corresponding energy distribution company.
    • Local or Remote Self-supply: individual nominal rated self-supply systems for regulated consumers applying monthly energy averages is limited to 2MW. Allowing regulated consumers, with various contracts, to develop one or more projects, if each project does not exceed 2MW.
    • Self-supply by Non-Regulated Consumers: rated power limits will vary in accordance with the proponents maximum rated power demand and the connection capacity approved by the corresponding energy distribution company.
  2. The new guidelines establish five modalities differentiating regulated customers: (i) Local Individual Self-Supply; (ii) Local Multiple Self-Supply; (iii) Remote Individual Self-Supply; (iv) Remote Multiple Self-Supply; and (v) Condominium Self-Supply.
    • Modality (v) is of special interest for the construction industry, as it paves the way for commercial and residential projects to incorporate self-supply energy grids.
    • Modality (v) will also benefit from attractive tax incentives derived from the Ministry of Environment of Ecuador’s Ministerial Decree authorizing double depreciation of all investments incorporating renewable energies
  3. Permits: under the proposed guidelines installation and operation permits are to be issued: (i) for regulated consumers by the distribution company to which the consumer is connected; and (ii) for non-regulated consumers by the ARCERNNR.
  4. Electric Distribution “Tolls” or Peajes: self-supply distribution networks are exempted from any toll or surcharge incurred for usage of infrastructure. This provision will surely relieve project developers as Ecuador’s “Peajes” represent an elevated operational cost. This will in turn, incentivize private investment in renewable energy technology.

Many other policy and normative reforms for self-supply energy generation are still required. Ecuador’s overt preference for hydroelectric power generation between 2013 and 2020, will come under heavy stress as El Niño weather patternushers in drought and decreased water volume to the country’s main power plants. Operational conditions and limitations, that must also, navigate the complexities of decreased public spending supporting public works. 

Despite the complex scenarios facing Ecuador, efforts by the Central Government incentivizing private investment in self-supply networks are welcomed. Whilst the scope and viability of the new self-supply policy guidelines will largely depend on the regulations proposed and presented by ARCERNNR, the overall scheme favors renewable energy deployment.

These “favorable” policy settings, represent an opportunity for renewable energy providers (excepting hydroelectric power) and private businesses hungry for cheaper electricity. Particularly, export orientated industries such as shrimp, flowers, banana, fishing, or canned goods may benefit from the current regulatory landscape. Two key “incentives” for investing in renewable energy are: (i) tax incentives amounting to double depreciation of renewable energy investments; and (ii) adherence to Green House Gas measurement, reduction and neutrality policies that commence on 1 October 2023, and will gradually come-into-effect throughout the European Union, one of Ecuador’s main export destinations.

Until ARCERNNR expedites the revised regulations the full scope of these reforms is unknown. However, policy signals are clear: private investment in renewable energy will most likely be a cornerstone of Ecuador’s current and future electricity policy. Additionally, political risk associated to such reforms, as a new government may limit their rollout, must be analyzed in purview of the overall challenges looming over Ecuador electricity market.

In other words, natural phenomena, political conditions, macroeconomic limitations and increasing demand will beneficially “pressure” renewable energy deployment.

*For more information please contact: cespinosa@apolo.ec or spetersen@apolo.ec

Carlos Espinosa Gallegos-Anda oversees Apolo’s renewable energy advisory. His experience includes public appointments such as Undersecretary for Climate Change, Undersecretary General for Anti-Corruption, country advisor for Ecuador before the Green Climate Fund and National Designated Authority before the Adaptation Fund. Carlos holds a PhD in Politics and International Relations and an LLM on Renewable Energy Projects and Law.