Energy Economics 31 (2009) 443–449

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Energy Economics
j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / e n e c o

Gauging the future competitiveness of renewable energy in Colombia

Georg Caspary
Sciences-Po Paris, 197 Blv St Germain, 75006 Paris, France

a r t i c l e i n f o a b s t r a c t

Article history: This article aims to assess the likely competitiveness of different forms of renewable energy in Colombia over
Received 20 August 2007 the next 25 years. To this end, it compares the likely power production cost for a set of renewable energy
Received in revised form 2 December 2008 sources, and compares them to the likely long-run cost of traditional energy. Costs from global and local
Accepted 8 December 2008
externalities through the use of traditional energy sources are also factored into the analysis. The key
Available online 8 January 2009
conclusion of the article is that while solar PV will likely remain uncompetitive under any future cost
Keywords:
scenario, cost paths for small hydro, modern biomass or geothermal are already close enough to being
Renewable energy competitive, so that appropriate government intervention may make the decisive difference in making these
Competitiveness technologies competitive with conventional energy technologies.
Climate change © 2008 Elsevier B.V. All rights reserved.
Developing countries

1. Purpose and outline of this analysis
As the Fourth Assessment Report of the Intergovernmental Panel on
Climate Change confirms, the seriousness of the threat of global warming
is already well established (Intergovernmental Panel on Climate Change,
2007). Actions by governments will be decisive in containing or
increasing the climate change threat. Moreover, the fact that emissions
of carbon into the atmosphere tend to remain in it for a century or more
means that decisions made in the next two decades will have dramatic
impacts on the well being of the future generations (Mahlman, 1997).
The mix of energy sources is one such major decision. Colombia, as
many other developing countries, confronts very important strategic
decisions in relation to its energy sector. It has abundant coal and
hydropower potential, very important wind resources, but limited gas
reserves and some crude oil reserves (Ministerio de Minas y Energía,
Unidad de Planeación Minero Energética, 2007; Mejía Castro, 2006).
How to make rational use of these resources is a key strategic question
Colombia needs to deal with in the context of climate change and
multilateral treaties aiming at curbing greenhouse gases.
This article aims to support these efforts by assessing the likely
competitiveness of different forms of renewable energy in Colombia
over the next 25 years. To this end, it compares the likely power
production cost for a set of renewable energy sources, and compares
them in turn to the likely long-run cost of traditional energy. Costs from
global and local externalities through the use of traditional energy
sources are also factored into the analysis.
Decision-makers will thus have information as to when and which
type of renewable energy is likely to become competitive or close to
competitive with traditional energy in Colombia over the next
E-mail address: georg.caspary@gmail.com.
25 years — and may thus take this analysis as a basis for deciding on
relevant policy interventions in favor of a less carbon intensive energy
expansion path, by promoting certain types of renewable energy.
Comparing various energy generation technologies in this way was
chosen over other potential approaches that could have shed light on the
suitability of renewables in Colombia's future energy mix. Data Envelop-
ment Analysis (DEA), for instance, would have represented a non-
parametric alternative methodology. DEA allows the analyst to estimate
production technology frontiers (Seiford,1996) and would therefore allow
to establish the maximum output (in our example: power) that can be
achieved with different combinations of inputs (which in our example are
intimately related to the power generation technologies under examina-
tion). While one advantage of DEA is its ability to shed light on (and
possibly even quantify) inefficiencies/sub-optimal outputs, it does by its
very nature not allow for the comparative element (both between
renewables and fossil fuel-based generation, and among various renew-
ables-based generation options) that the current study allows for.
Moreover, there are methodologies that may not strictly represent
alternatives to the one employed but may help to shed further light on
the issue in future studies (but are not discussed further here for
reasons of focus). One is multi-criteria decision analysis, which aids
decision-makers to resolve “selection decisions” with multiple and
potentially conflicting (cost, environmental, …) objectives (Philips
and Bana e Costa, 2007), and have recently been applied to energy
technology selection in South America (Valencia, 2008). Another is
the effort by authors such as Pacala and Socolo to explore the potential
of different technologies for scale-up at comparable marginal cost to
make for a portfolio that meets future energy needs while limiting
atmospheric CO2 concentrations (Pacala and Socolow, 2004).
Finally, the paper does not discuss generation issues in isolation but
considers welfare aspects with respect to environmental and social
impacts from the different technology options, introducing the costs from

0140-9883/$ – see front matter © 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.eneco.2008.12.007
444 G. Caspary / Energy Economics 31 (2009) 443–449
these externalities into the model. However, the paper does stay clear of
discussing broader welfare questions, as these are unlikely to depend on
technology choice but rather on the accompanying regulatory environ-
ment e.g. relating to energy access provision (Valencia, 2009).
The document is structured as follows:
Section 2 discusses the basis of the analysis — namely the com-
parisons between the declining production costs for renewable
energy technologies (henceforth CRET) on the one hand and the long-
run marginal cost of traditional energy sources in Colombia on the
other hand.
Section 3 brings global and local externality costs into the com-
parative competitiveness analysis of RETs.
Section 4 presents the final results for each type of renewable
energy technology, while Section 5 interprets these results.
Section 6 concludes.
2. Comparing declining production costs for renewable energy
and long-run marginal cost of traditional energy
Colombia is richly endowed with resources for energy production.
On the fossil fuels front, it is the 5th largest oil producer in Latin
America with proven oil reserves of 1450 Mbbl (203 MTOE) in 2005
(Mejía Castro, 2006), while the proven reserves of natural gas are
5813 Gft3 (Ministerio de Minas y Energía, Republica de Colombia,
2007) and coal reserves at 6886 MMT, the largest in South America
(Ministerio de Minas y Energía, Republica de Colombia, 2007).
As for renewables, hydropower already constitutes nearly 70% of
the country's installed capacity (Valencia, 2009), with estimates
indicating that total hydropower potential for the country is
93,000 MW (Pérez Bedoya and Osorio Osorio, 2002). Next, conditions
for wind power in some parts of the country are among the best in
South America. Regions of the northern part of Colombia have been
classified to have class 7 winds (over 10 m/s). It has been estimated
that Colombia has a wind power potential of 21,000 MW – in the
Guajira region – which would be enough to generate enough power to
twice meet the Colombian power demand (Pérez Bedoya and Osorio
Osorio, 2002). Colombia also has considerable resources for solar
power with a daily average insulation of 4.5 kWh/m2 (Valencia, 2009).
Finally, the annual existing potential of power generation from
biomass in Colombia is estimated to be over 16,260 MWh (1398 TOE)
(Universidad Nacional de Colombia et al., 2006).
The relative cost of renewable energy technologies, RETs, is key to
gauging the competitiveness of different RETs compared to fossil fuels.
Table 1 indicates, for a number of relevant technologies and electricity
generation options, the recent investment cost range in Colombia (with
precise costs within this range notably depending on the precise
location). As can be seen, large hydro is likely to be the most competitive,
closely followed by large-scale wind. Solar PV is to be found at the
bottom end of the scale, with Geothermal and Biomass in between.
Evidently, for new technologies initial investment costs decline with
time as the technology “matures”. Investment costs for well known
technologies, on the other hand, tend to remain stable or increase with
Table 1
Current investment costs for RETs in Colombia in US$ per KW.
Energetic source Technology Cost US$/KW
Large hydro Reservoir (Dam) 700–1700
Solar PV Photovoltaic solar systems 5000–10,000
Wind (on-shore) Electricity generation 800–2200 for large-scale,
otherwise up to 3000
Pump 1500–4000
Geothermal Electricity generation 3000–5000 small scale
1500–2500 large scale
Biomass Direct combustion 2800–5000
UPME (2003); For the case of hydroelectric power plants, the source is Bravo and Toro (2000).
Table 2
Explanations on current and future cost developments for key renewable energy
technologies.
Technology Comment
Large hydro Technology mature — costs relatively stable. Only minor cost
improvements from further technological improvements or learning
economies to be expected. Best sites already used and increased
environmental and community sensitivity might change the trend
towards higher costs.
Small hydro Technology mature — costs relatively stable. Only minor cost
improvements from further technological improvements or learning
economies to be expected.
Wind Costs have declined by 12–18% with each doubling of global capacity.
(on-shore) Turbine capacity has increased from 600–800 kW a decade ago to 1–
3 MW nowadays. In recent years, boom in raw materials prices (steel,
copper) have driven up costs, but with strong decline now
readjustment downwards highly likely.
Future reductions from site optimization, improved blade/generator
design, potential economies of scale in production, and improvements
in electronic components. Manufacturing capacity bottlenecks that
have arisen may, however, slow these cost reductions.
Modern Costs have stabilized somewhat, but some decline still to be expected
biomass from technological improvements and learning economies. New
technologies are being explored.
Solar PV Costs have declined by 20% for each doubling of installed capacity, or
by about 5% per year. Future cost reductions due to improvements in
materials, design, process, efficiency and through economies of scale.
Geothermal Costs have declined since the 1970s. Costs likely to further decline
with improved exploration technology, cheaper drilling techniques,
and better heat extraction.
Source: Based on Renewable Energy Policy Network (2005).
time, as learning economies decrease and as the best sites are developed
(the latter is the case for hydropower plants, and in some case for thermal
plants due to increased restrictions on sitings as imposed by environ-
mental considerations and the need to obtain community acceptance.)
There are various factors that have lead and are expected to continue
affecting the trend in cost for RETs in the future. Some of these factors are
explained in Table 2.
The most important cost figure for our purposes is, of course, the cost of
energy production from RET, and how this cost develops over time. While
ideally such cost predictions would be taken for the specific Colombian
case, they are only available as global figures. Thus, the high and low ends
of global estimates for cost predictions for selected energy technologies up
to 2030 are shown in Table 3. The last column (“Example of current
Colombian generation cost”) allows us, wherever figures are available, to
gauge whether on each specific technology, Colombia currently rather
stands at the high- or low end of the global cost estimate.
As can be seen in Table 3, the global estimates indicate that large
hydro and wind power currently provide the lowest cost of electricity
production and are expected to continue being the most competitive
in terms of power production by 2030. Both will likely remain
competitive, while Modern Biomass, Solar PV and Geothermal would
have to follow the most optimistic cost improvement scenarios in
order to become competitive.
However, comparing these figures with the Colombian cost of
generation of the existing specified technologies (last column in Table 3
above) reveals that a medium sized-run-of-river plant may well be more
cost effective than large hydro and that wind power may be a mere 14–29%
more expensive1 per MWh than large hydropower. Similarly, large hydro
and wind in Colombia are already at the lower end of the global cost scale.
In the table above, it is clear that the production cost of energy
from certain types of renewables, CRET, – with the exception of large
hydro – is likely to continue declining in the future for various reasons
(most of which we may, however, group under ‘learning economies’
and ‘technological improvement’). Reviewing the reasons provided in
Table 3, CRET therefore declines over time.
1
Calculated on the basis on the basis of the cost ranges for both technologies, as
presented in Table 1.
 G. Caspary / Energy Economics 31 (2009) 443–449 445

Table 3
Global costs estimates of energy from renewable power generation, 2005 – 2030 (US/MWh, in 2000 US$).

Technology 2005 2010 estimate 2020 estimate 2030 estimate Example of current Colombian
Low cost High cost Low cost High cost Low cost High cost Low cost High cost generation cost
improvement improvement improvement improvement improvement improvement improvement improvement
Large hydro (dam) 80 20 70 20 70 20 80 20 Porce III: 32.12 US/MWh
Small/medium hydro 150 40 150 40 120 30 100 30 Amoya: 28.27 US/MWh
(run-of-river) (where Amoya is a medium-
sized plant of 80 MW)
Wind 100 30 70 30 60 30 50 20 Jepirachi: 38.35 US/MWh
Modern biomass 150 50 140 50 120 50 100 30 N/A
Solar PV 800 180 600 100 350 60 100 40 N/A
Geothermal 200 50 180 30 140 40 120 30 N/A

Source: Based on data quoted in: UNEP (2006).

2.1. Low, medium and high price scenarios
In the Colombian power generation sector, where a competitive model
has been implemented and is serving well, decisions for power expansion
are essentially made by private enterprises or agencies that behave as
private actors. In this context the competitiveness of a technology could be
measured against the estimated long run marginal cost of production for
the entire country (within the interconnected system or with feasible
connection to the national grid). The long run marginal cost, LRMCTrad,
represents the economic signal the sector is producing to induce
additional investments. If a particular technology produces goods
(electricity) below the expected long term price (here equated to the
long run marginal cost, as indicated by microeconomic principles) it is
likely that investors will select it for future expansions; there is money to
be made by producing at a cost below the price in the market. On the other
hand, if production costs are higher than the expected long-term price of
the good, producers will refrain from investing in that particular
technology. The Long-run Marginal Cost for energy in Colombia is
currently (and in most official analyses) equal to the Long-run Average
Cost of Combined Cycle Thermal Power Plants, LRAvCTherm. Moreover,
since the LRAvC represents a purely private cost (with external or social
costs not yet factored in), it is equivalent to the average of the long-run
price (LRAvP) the producer can expect to receive. Hence, LRAvCTherm =
LRAvPTherm, and hence
LRMCTrad = LRAvCTherm = LRAvPTherm :
As Fig. 1 illustrates below, once the CRET for a particular technology
has been determined (and for that technology in a particular location,
if data at that level of specificity is available), it is important to
determine at what point in the time axis the cost of renewables will be
equal or lower than the long-rung marginal cost of traditional
technologies (C RET = LRMC Trad = LRAvC Therm = LRAvP Therm ) for
Colombia. However, since predictions for LRMCTrad / LRAvCTherm /
LRAvPTherm are uncertain, various scenarios have to be considered.
Based on expert assessments, there appear to be three main
scenarios for LRMCTrad / LRAvCTherm / LRAvPTherm2:
- The High price scenario includes, among other assumptions, a price
forecast of ~90 $ per barrel of crude oil (Source: Figures provided by
Barclays Capital plc).
2 power availability, are modeled as being charged in the order of
Note that some authors have suggested that all of these figures should be revised
upwards to include a risk adjustment measure given the greater price volatility of all
fossil fuels compared to RETs. Others even suggest a balanced portfolio of power
generation units as a hedge against fuel price volatility. See e.g. Bolinger, Mark; Wiser,
Ryan; Golove, William (2004): Accounting for fuel price risk when comparing
renewable to gas-fired generation: the role of forward natural gas prices. Lawrence
Berkeley National Laboratory; Awerbuch, Shimon (2003): Determining the real cost:
Why renewable power is more cost-competitive than previously believed,' Renewable
Energy World, (March–April 2003).
- The Medium price scenario includes, among other assumptions, a
price forecast of 55–75 $ per barrel of crude oil (Source: Figures
provided by the Economist Intelligence Unit).
- The Low price scenario includes, among other assumptions, a price
forecast of 25–30 $ per barrel of crude oil (Source: Figures
provided by British Petroleum).
The medium-price scenario, based on calculations by the International
Energy Agency and Economist Intelligence Unit, appears most
authoritative, and possibly less biased, than the high-price and
low-price scenarios that were calculated by investment banks and
the petroleum industry, respectively. To reduce this possible bias,
the rest of the analysis is conducted along the medium-price
scenario proposed by the Colombian Government: namely a long-
run marginal cost (LRMC) of 35 US$/MWh, based on prices of all
relevant energy sources for Colombia in their relevant proportions
(UPME, 2006).
To make for better comparability among RETs and between RETs
and conventional energy technologies, the analysis includes a specific
feature of the Colombian case: namely, the recently adopted ‘Cargo
por Confiabilidad’. This ‘Reliability Payment’ remunerates an energy
producer for guaranteeing the continuous capacity to dispatch
energy as needed, thus being able to meet user demand even during
critical conditions. Those that can guarantee firm energy by
participating in the bids receive the reliability payment. Those that
cannot, and sell their energy in the wholesale energy market, pay the
Charge.
After an initial transition period, the price for this payment has
been established May 2008 at the comparably high level of US$13.9/
MWh until 2013. However, for this study, an assumption about the
medium to long-term price for the Charge has to be made, and in the
mind of the author the medium- to long-term level will tend to be
substantially lower as the current price arguably skews incentives
too much towards conventional technologies. Hence, in what
follows, and based on consultation with relevant experts, the author
assumes the long-run Charge to be US$ 7/MWh. Hence,
- large hydro, modern biomass and geothermal energy are modeled
as receiving payments in the order of 7 US$/MWh. Therefore, the
LRAvP for the graphs for these technologies is augmented by 7 US
$/MWh (to yield 42 US$/MWh).
- small hydro, wind and solar PV, which can offer little guarantee of
7 US$/MWh. Thus, the LRAvP for the analysis of these technologies
is reduced by 7 US$/MWh (to yield 28 US$/MWh).
2.2. Cost differentials between RETs and traditional energy technologies
As argued above, the competitiveness of renewable energy tech-
nologies in Colombia can be analyzed by comparing their energy
446 G. Caspary / Energy Economics 31 (2009) 443–449
Fig. 1. Three Scenarios for LRAvPTherm.
Fig. 2. Cost analysis with global and local externalities.
production cost with the estimated expected market long run price.
This is presented in Fig. 2 for the general case.
Plotting the energy production cost function, CRET, for each
technology of interest and the expected price of the energy produced,
LRAvPTrad, yields in each case an area ‘D’ that indicates the
development over time of the cost difference between that renewable
energy source and expected price under the assumption that
the Colombian government will continue regulating the electricity
sector with the traditional energy technologies historically used in
Colombia.
3. Internalizing global and local externalities
Thermal power plants produce emission of pollutants. The impacts
of such air contamination are frequently not accounted for, and
Colombia is no exception in this respect. Air pollution has local and
global impacts that must be recognized and internalized in the
regulatory structure of the electric sector in Colombia, if such damages
are to be verified and reliably quantified. In the case of global impacts
the emission of greenhouse gases are related to global warming,
and the emerging carbon trading schemes developed through the
Kyoto Protocol, serve to assess the expected costs of such emissions.
Moreover, given the development of the carbon market, the energy
producers could be paid for emissions reductions. Local externalities,
however, require local data. Although such data are not yet available
for each thermal power plant in Colombia, available health related
costs provide the basis for a preliminary assessment.
Thus, to internalize the externalities associated with traditional
thermal energy options, two steps are followed3:
- Firstly global externalities are estimated by quantifying the
marginal damage cost avoided through reductions in greenhouse
gas emissions;
- Secondly, local externalities are estimated by quantifying the cost
savings for health or local environmental budgets from e.g.
reduction of respiratory-related illnesses and deaths from con-
ventional pollutants; or reduction of local environmental effects.
Both steps are illustrated in Fig. 2.
3.1. I1 — Internalizing global externalities4
This is quantified through the damage cost of carbon dioxide
emissions in US$/tCO2 and excludes other greenhouse gases, which
would further drive up the damage cost. While there has been a surge
in studies on the costs of climate change, we take the most recent
figures from the Stern Review on the Economics of Climate Change
(2006) (HM UK Treasury Office / UK Cabinet Office, 2006), which
gives a value of 25 US$/tCO2 for stabilization of the concentration of
carbon dioxide in the atmosphere at 450 ppm CO2e; 30 US$/tCO2 for
3
A more complete analysis would also discuss grid reinforcement costs.
4
A key factor that might impact upon these cost predictions is the nature of
eventual global greenhouse gas emission regimes post-2012.
 G. Caspary / Energy Economics 31 (2009) 443–449
stabilization at 550 ppm CO2e; and 85 US$/tCO2 for the business-as-
usual scenario. Taking these values and applying an Emission Factor5
of 0.33 tCO2e/MWh yields values of 8.25 US$/MWh for the 450 ppm
CO2 scenario, 9.90 US$/MWh for the 550 PPM CO2 scenario; and
28.05 US$/MWh for the business-as-usual scenario respectively.
Hence,
- when global externalities are internalized and the 450 ppm CO2
scenario is used, the LRAvP increases by 8.25 US$/MWh (hence-
forth named internalization I1′);
- when global externalities are internalized and the 550 ppm CO2
scenario is assumed, the LRAvP increases by a further 1.65 US$/
MWh (9.90 US$/MWh–8.25 US$/MWh, henceforth named inter-
nalization I1″); and
- when global externalities are internalized and the business-as-
usual scenario is followed, the LRAvP increases by a further
18.15 US$/MWh (28.05 US$/MWh–8.25 US$/MWh–1.65 US$/
MWh, henceforth named internalization I1″′).
3.2. I2— Internalizing local externalities
A World Bank study (World Bank Mexico Air Quality Management
Team, 2002) estimates the sizeable benefits from reducing air
pollution in metropolitan Mexico City. The paper takes into account
a wide range of relevant benefits, including: reduced cost of illness,
reduced losses in productivity, willingness to pay for reduced acute
and chronic morbidity effects, and willingness to pay for mortality
effects associated with acute and chronic exposure. Results vary by
scenario and income elasticity, but reach a 2010 value of US
$7.636 billion per year for the highest estimate.
For Colombia, estimated annual cost of emissions-related morbidity
from urban air pollution (all sources) by type of cost amounts to a total of
Col$520 billion pesos annually (US$227,481,000), most of which come
from the value of time losses (World Bank, 2005) (Table 4).
However, neither of these quantifies local externalities in monetary
terms per MWh (or per t/C, or per t/CO2, both of which could be
converted into per MWh-terms). One of the most authoritative studies
that does this, i.e. that quantifies the local benefits from pollution
reduction in Latin America in monetary terms per unit of carbon
emissions, exists for Santiago de Chile (Dessus and O'Connor, 2003).
Estimates there range from US$150 to US$265 benefit (BA) per ton of
carbon. The overall mean value of BA/tC for the nine scenarios is roughly
US$205, which lies at the high end of the range of estimates for European
countries.
Using a “bottom-up” engineering approach, one of the few other
studies of this kind for Latin America, equally conducted with data on
Santiago, Chile (Cifuentes et al., 1999), yields a broadly comparable
result, viz., a value of US$189/tC in 2020. Clearly, such a figure appears
intuitively relatively high. As an explanation, the study points to e.g.
possibly unfavorable deposition patterns vis-à-vis e.g. the US (where
similar studies explain lower BA/tC values by the fact that much air
pollution in the eastern half of the United States is transported out to
sea) (Burtraw and Toman, 1997). Controlling for population density6
due to the fact that these studies took place in urban areas with much
higher population density rates than in the existing locations of the
thermal power plants in Colombia yields the conservative indicative
estimate of $15.10 BA/tC. Converting this figure from payment per ton
of carbon to a payment per MWh ($/MWh) yields 1.360 $/MWh, and
this is the value used to internalize local externalities in the remainder
of the analysis.
5 Cost of time lost to illness
Emission Factor of 0.33 is taken from World Bank (2006).
6 Disability-adjusted life years (valued at GDP per capita)
The population density in Santiago is 2500/km2 vs an estimate of 230 inhabitants/
km2 in states with thermal power plants in Colombia (Source: WRI Earthtrends
database and Atlas de Colombia, IGAC, 2003).
447
4. Illustration of final results for each RET
This section discusses for each type of RET the graphs comparing CRET
and LRAvPTrad, based on the above cost figures. For each RET, two graphs
are provided: one for a high cost improvement scenario and one for a
low cost improvement scenario. Comparing the areas labeled D, the cost
differential between RET and traditional technologies, in each pair of
graphs offers an indication of how strong the case for government
intervention is for each RET. Dintern in the graphs below illustrates how
the cost differential is reduced once global and local externalities are
internalized. For example, Fig. 4a in the Appendix, indicates that the cost
of Small Hydro technology could decline to 30 US$/MWh by 2030 under
the high cost improvement scenario, making small hydro very
competitive at that time. Yet, as Fig. 4b in the Appendix shows, the
cost would only decline to US$100/MWh under the lower cost
improvement scenario. In this example, then, even fully internalizing
local and global externalities would not make small hydro competitive
(as the area Dintern would nonetheless remain substantial).
In the section below the figures, there are explanations comparing
the scenarios for each technology and explanations on the significance
of all findings for the Colombian RET market.
Table 5 summarizes the significance of these figures, by showing
for each of them the relative size of the resulting areas D and Dintern.
The relative size of ‘D’ corresponds to the cost difference between that
renewable energy source and expected LRAvP. These conclusions form
the basis of the technology-specific conclusions drawn from our
analysis, outlined in the subsequent Section 5.
5. Interpretation of the results
The information collected and processed in the previous sections
provides the basis for the following specific conclusions for each
technology:
- The economic signal provided by the Government of Colombia
to energy producers favors thermal power plants and large hydro
power developments, as per the recently approved Reliability
Charge. Promoting “firm power”, a reasonable and adequate strategy
for the country short term electricity sector, also promotes a more
carbon intense electricity expansion path.
- Favoring in particular thermal power plants also does not utilize the
export potential that “free fuel” technologies such as geothermal or
wind power offer. After all, these technologies allow for long-term
power purchase contracts and long-term (arguably up to 20 years)
fix-price contracts as cost consists mostly of capital costs.
- The existing economic signal for the electricity market does not
include local and global externalities, associated with air pollution
and the emission of greenhouse gases into the atmosphere. Local
externalities were preliminary assessed in the order of $1.36/MWh
(or nearly 4% of the estimated long run marginal costs). Global exter-
nalities depend on multilateral coordinated actions to avoid potential
devastating effects of climate change. Such decisions are elusive at this
time, and are likely to remain so for the near future. If such exter-
nalities are properly taken into account, the economic signal will favor
a low carbon intense expansion path for the Colombia electricity
sector. The magnitude of the global externality economic signal for
Table 4
Estimated annual cost of emissions-related morbidity in Colombia.
Cost category Annual cost (billion pesos)
Cost of medical treatments (doctors, hospitals, clinics) 80 (16%)
245 (47%)
195 (37%)
Total 520
Source: World Bank (2005).
448 G. Caspary / Energy Economics 31 (2009) 443–449
Table 5
Magnitudes of D and Dintern for each RET.
Large hydro (dam) Small/medium hydro Wind
(run-of-river)
Cost Improvement Scenario High Low High Low High
Size of D (No D) Medium Medium Large Small
Size of Dintern (No Dintern) Small Medium Medium Small
renewable sources has a lower bound of $8.25/MWh, or 23.5% of the
estimated long run marginal cost. That is, if this externality is
internalized in the existing market-based regulatory system in
Colombia, renewable sources of energy would enjoy an increase in
the perceived price of their output, while carbon intense technologies
would not.
- Large Hydro power developments present a broad range of total
production costs, from $20/MWh to $80/MWh. The competitiveness
of this technology rests more on the existence of suitable sites (low
cost) than on the price of the final goods. For this renewable energy
technology no additional economic signal is required. To promote
this technology the Government of Colombia could support efforts to
identify promising sites (pre-feasibility and feasibility studies), as
basic information seems to be a major barrier.
- In Colombia Small Hydro power projects are already financially
attractive, and global trends indicate that improvements are
expected. As in the case of large hydroelectric plants, the electricity
production costs from small scale projects are site specific. This
implies a very wide range of possible costs. The internalization of
environmental externalities would improve the financial perfor-
mance of this RET and help to overcome many other existing barriers
as indicated in the main text of this report.
- Wind Power is currently competitive in Colombia under the high
cost improvement assumption, as well as for the low cost im-
provement scenario, although it may take few years (around 5 to
8 years) to achieve financial feasibility under the long run price
scenario corresponding to technologies with limited contribution
the energy reliability. Especially if externalities are factored in
(via payments for not contributing to air pollution), this RET could
become an important source for future electricity production in
Colombia. It would therefore be wise for the country to continue
developing this type of technology in order to be prepared (insti-
tutionally and otherwise) for a time in which wind would be as
competitive as any other energy technology source.
- The costs of electricity production from Modern Biomass plants
are remarkable similar to that of Small Hydro: the high cost
improvement scenario indicates that total production cost for this
RET is expected to be competitive in interconnected system
in Colombia in 15 to 20 years (with current anecdotal evidence
suggesting, however, that e.g. some sugar cane cogeneration appli-
cations may be ready earlier). Under the low cost improvement
scenario, however, modern biomass would not be nearly competitive
in the near future. Modern biomass technologies should also be an
alternative technology for non-connected or off grid systems. For
such systems modern biomass could be an attractive option in the
short term (~next 5 years), if the Government of Colombia develops
a clear and focused research and development policy.
- Solar PV is among the RETs farthest from being competitive. Only under
the most optimistic cost development assumptions would competi-
tiveness be anywhere within reach in the timeframe up to 2030.
- The case of Geothermal Energy cost projections is similar to that of
Small Hydro: in the high cost improvement scenario the costs for
this RET soon could be competitive. Nonetheless, costs are highly
site specific, with science and technology playing a secondary role.
Under the low cost improvement scenario, however, Geothermal
Energy would not be nearly competitive during the planning
Modern biomass Solar PV Geothermal
Low High Low High Low High Low
Large Medium Large Large Very Large Small Very Large
Medium Medium Medium–large Medium–large Large Small Large
horizon here contemplated. Thus, any decisions to promote
geothermal fields should be based on site specific surveys and
experienced technical advice.
6. Conclusion
If decision-making between energy choices in Colombia is to
benefit from these findings, two key points emerge for the immediate
research agenda.
Firstly, the results differ greatly between the higher and the lower
cost improvement trajectory. Hence, in order to use the result here
presented, researchers need to establish for which technologies
Colombia finds itself more on the lower cost improvement trajectory,
and for which it finds itself more on the stronger cost improvement
trajectory. This study of course already indicates current Colombian
costs for each energy source where such cost figures are already
available (i.e. where the relevant technology has recently been applied
in Colombia) — but these would need to be confirmed as nation-wide
averages as the relevant technologies are rolled out on a larger scale.
Moreover, for a number of technologies that are only starting to be
applied in Colombia, indicative cost figures are urgently needed.
Secondly, research needs to lay the basis for informed government
choices between investments in renewable vs. traditional energy
technologies. This necessitates, in particular, research on future cost of
technologies where, according to the above analysis, government
intervention could make a strong difference to how quickly the
technology can become cost competitive. For instance, while solar PV
will likely remain uncompetitive under any scenario, government
intervention through e.g. support for local learning applications may
push small hydro, modern biomass or geothermal on the lower cost
path — leaving government with the choice of which of these latter
technologies to promote, and how.
Appendix A. Supplementary data
Supplementary data associated with this article can be found, in
the online version, at doi:10.1016/j.eneco.2008.12.007.
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