Electricity Projects & Regulation

Last verified on Thursday 10th August 2017

Ecuador

Hernán Pérez Loose and Fernando Pachel Yáñez
Coronel & Pérez
  1. 1.

    What are the principal power sources in your jurisdiction?

  2. The main power sources in Ecuador are thermal (50 per cent) and hydroelectric (49 per cent). Other sources such as wind, solar, etc, account for the rest (1 per cent).   

  3. 2.

    What are the current trends affecting the energy mix in your jurisdiction?

  4. The main trend is to increase hydroelectric energy sources. The goal set by the government is to reach 70 per cent. The government of President Rafael Correa, who came to office in 2006, put into place a massive programme of power plant construction intended to make the country self-sufficient and ultimately lead to lower energy costs. Out of the eight hydroelectric energy plants that the government offered, three started to operate during the last quarter of 2016. These three plants amount to 72 per cent of the expected megawatts production (2,832.4 megawatts). Thermoelectric plants and some wind power plants are also included, but hydroelectric power will retain its position as the principal source of power in the country.

  5. 3.

    What are the current forecasts for electricity demand in your jurisdiction?

  6. The current forecast is a 6 per cent annual increase. 

  7. 4.

    Is there an open electricity market in your jurisdiction? Are any activities in the electricity market reserved for the government only? Are private entities allowed to build and operate power plants and transmission and distribution lines?

  8. On 16 January 2015 Ecuador adopted a new Electricity Law (the Organic Law on the Public Service of Electricity, Electricity Law). The new law makes the state the key, and in some aspects, the most important actor in the electricity industry. The generation, transmission, distribution and commercialisation of electrical power are defined as public service, to be provided by the public sector only. However, under exceptional circumstances private companies are allowed to operate in the various segments of the industry. Private entities may build and operate power plants and transmission and distribution lines. Power plants may be operated by private companies as long as their generated power does not exceed 50MW. However, it is worth noting that, due to financial liquidity hardships, the government has explored the idea of licensing the operation of “Sopladora”, one of the three plants that started to operate in 2016, to a consortium made up by public and private entities. This agreement is available under the Organic Law of Incentives for Public Private Partnerships and Foreign Investment.  

  9. 5.

    What is the role and function of the regulator? Would you describe the regulator as being independent?

  10. The regulatory agencies have, basically, the following roles, aside from their general supervisory and control powers:

    • set out a 10-year Electricity Master Plan to direct investment and development;
    • issue authorisations and concessions to any party interested in participating in the electricity sector;
    • set rates; and
    • administer and liquidate all transactions through a national electricity operator.

    The chief entity governing the electricity sector is the Ministry of Electricity and Renewable Energies, which answers directly to the President of the Republic. The regulator is therefore not independent from the executive branch.

  11. 6.

    Is there an open market for off-takers in your jurisdiction or are there restrictions on the sale of electricity?

  12. Power purchase agreements (PPAs) are allowed, but their economics made them uncompetitive owing to state subsidy policies. As mentioned before, there is no open market for private off-takers, which can only participate in the electricity market on a case-by-case basis and only “exceptionally” according to the new Electricity Law. The largest utilities are located in Quito and Guayaquil.

  13. 7.

    If the sale of power is to a public utility as offtaker, are such entity's payment obligations backed-up or guaranteed by the government? 

  14. The current scheme is to sell energy, not power, or mixture of both, to the state at a fixed price (defined by regulation or contract) for 15 years or more (new power plants). There is no guarantee by the government, but there is a payment precedence where private power is fourth, making it very reliable, at least to date.

  15. 8.

    Does the market have an independent system operator? If so, what are the ISO’s tasks and duties?

  16. No, the ISO is not independent. It is government-controlled, and there is a single one for the country. It is called the National Operator of Electricity, CENACE, which is run for competent technicians. CENACE’s duties include establishing short-, mid- and long-term operative programmes to ensure the lowest possible operating cost and administering and liquidating all transactions in the electricity market. This means that CENACE determines the amounts payable and receivable by the participants in the market. 

  17. 9.

    How are electricity rates set and what cost components affect such rates?

  18. Rates are set by the regulator based on the previous year’s costs for generation, transmission, distribution, commercialisation and public lighting. Generation costs are defined in the Electric Law as the amount the final consumer must pay to cover generation costs at “optimum” operation. In the case of private entities, this includes administrative, operative and maintenance costs, personnel and other costs for active assets, and costs associated with environmental compliance. Distribution, commercialisation and public lighting costs must cover  administrative, operative and maintenance requirements as well as quality and reliability standards. The rate is uniform for the entire country according to the amount of consumption and tension levels. 

  19. 10.

    What approvals are required to build and operate a power project? Are these easy to obtain? Please describe the salient features of the relevant licence conditions and the grounds for revocation. What levels of fines can be imposed for failure to comply?

  20. Private entities must bid for a concession contract with the Ministry of Electricity and Renewable Energy, and must obtain an environmental permit from the environmental authority. Permits are not easy to obtain since they require a series of studies and approvals by various agencies. Before a concession is granted, guarantees must be acquired to ensure both construction deadlines and quality of service.

    Revocation is seldom exercised. It may occur if:

    • the operation does not begin according to the agreement or is interrupted without cause for more than 60 days;
    • deliberate falsehoods are included in reports to the authorities;
    • there is a failure to make required investments;
    • there is fraud in the bidding process;
    • there is an assignment of concession or any rights pertaining to it without authorisation;
    • there is a change of control of licensee without authorisation;
    • there is any action which exceeds the scope of the concession;
    • sanctions by the environmental authority;
    • the project is abandoned;
    • fines are imposed exceeding the amount of the guarantee given by the licensee; or
    • generally, there is any attempt against the stability of the electricity network.

    Fines may be imposed, ranging from approximately US$7,000 to US$14,000. In the case of generation, fines are commonly established in the contracts. They usually amount to 0.2 per cent of the project cost per month. 

  21. 11.

    Is the government or the ISO conducting public auctions to award long-term power purchase agreements to public and private offtakers? Are the auctions open to any source of power, or are they focused on specific sources and technologies?

  22. PPAs are direct between private parties. The purchase of energy by the state is regulated by CENACE and distributed proportionally to each authorised distributor.

    The sale of excess energy is permitted for self-generators (ie, entities not dedicated to power generation but which produce it for their own needs). The specific terms of these transactions are subject to specific regulations issued by the competent authority.

  23. 12.

    What percentage of the country's power output comes from renewable power sources and does your jurisdiction have any specific targets or milestones for renewable energy projects?

  24. About half of the power generated in Ecuador comes from hydroelectric plants, with a very small percentage going to solar and other renewable sources. Our current regulations provide incentives for more investment in renewable power sources.

  25. 13.

    Is there a different regulatory regime for renewable energy projects? Are there any government programmes that foster the development of these projects?

  26. Previously there were different rates for power source (solar, eolic, hydro, etc). This changed and they are now subject to the same regulatory regime, but enjoy certain incentives, which need to be further specified in future regulations. It is expected that new regulations will be issued in the near future to reinstate different rates according to source.

  27. 14.

    Are there any tax incentives for power projects and, in particular, for renewable power projects?

  28. New projects have a five-year income tax exception as long as they are renewable. 

  29. 15.

    Are there any investment vehicles or structures that permit the maximisation of investment in a power company, such as tax equity, master limited partnerships, real estate investment trusts (REITs) or yield cos?

  30. No.

  31. 16.

    Are there any governmental subsidies, benefits (other than tax-related) or incentives for investment in power projects and, in particular, renewable power projects?

  32. No. It is expected that they will be established in the near future.

  33. 17.

    Are there any capital controls or other regulations in your jurisdiction that prevent investors from repatriating investments in a power project?

  34. No, but there is currently a 5 per cent flat fee for transfer out of the country. The nation uses the US dollar as its local currency. 

  35. 18.

    Is there a market for emission reduction certificates or clean energy certificates in your jurisdiction?

  36. No.

  37. 19.

    Which renewable power sources have been most successful in your jurisdiction and what is the medium to long-term outlook for them?

  38. Hydropower source. The government is committed to increasing its role. 

  39. 20.

    Are there any non-regulatory factors that affect the development and financing of power projects in your jurisdiction, such as social, environmental, political or security concerns or rights of third parties?

  40. Key non-regulatory factors are social and political issues. Investors should take into consideration community relations and indigenous rights. 

  41. 21.

    Are subsurface rights separate from land rights? If so, what factors must a project take into consideration in determining whether an owner of subsurface rights could create issues for a project?

  42. Yes, subsurface rights are separate from land rights. Subsurface deposits are state owned. If owners of land set obstacles to a project, they risk expropriation of the land by the state. 

  43. 22.

    How are wheeling tariffs set and are there any differences based on the power source and technology used? Is there a postage-stamp wheeling tariff in your jurisdiction?

  44. No, there is a flat fee as defined previously.

  45. 23.

    Are there any open access rules for transmission? If so, how is access determined? Are there private transmission lines to which open-access rules don't apply?

  46. Power transmission is state owned. Access is defined in the prefeasibility study.

  47. 24.

    Are cross-border power exchanges regulated?

  48. No, all exports are state owned.

  49. 25.

    Are merchant power projects financeable in your jurisdiction?

  50. Yes. External debt with multilateral institutions (project finance) and local tender for loans. The high demand for energy is one of the factors that have made the projects financeable.

  51. 26.

    What are the biggest obstacles in obtaining debt financing for renewable power projects?

  52. Local tender for a loan requires a sales process with local banks and hence takes time.

  53. 27.

    What are currently the most significant obstacles to the growth of the electricity market in your jurisdiction?

  54. Economic unrest and instability owing to the political or economic situation, constant new laws and regulations.

  55. 28.

    What are the biggest growth areas in the electricity market in your jurisdiction?

  56. Hydro in the Amazonas region.
  57. 29.

    Please describe any recent trends observed in your jurisdiction affecting the structuring of investments and financings in power projects.

  58. Multilaterals find the current growth (before oil prices situation) very attractive owing to the economic growth experienced by the country, hence there is more interest in financing, but they retain their tight controls and requirements. In addition, the new Ecuadorian government has a different political approach towards multilaterals (ie, World Bank, etc) than its predecessor; therefore, there is a possibility of new investments and financing in projects that the government considers important, for example, electricity production.

  59. 30.

    Are debt offerings on the capital markets becoming a more common tool in your jurisdiction to refinance construction financing?

  60. More or less. Not many projects have started this way, but this is possible at a high interest rate – 8.5 per cent or above.

  61. 31.

    Are power purchase agreements in your jurisdiction denominated in local currency or US dollars?

  62. In US dollars. The Ecuadorean economy is dollarised.
  63. 32.

    Are there regulatory limitations on foreign investment in, or control of, electric generation, transmission or distribution assets?

  64. No.
  65. 33.

    How active in your jurisdiction is the M&A market for power assets?

  66. The M&A market is very limited. There have been some offers from overseas but at a high discount rate. Nevertheless, our answer to question 4 ought to be taken into account, as the government has expressed its interest in licensing one of the major hydro plants to a private-public consortium.

  67. 34.

    What are the most common dispute resolution mechanisms under local law-governed power purchase agreements in your jurisdiction?

  68. As a matter of policy the government prefers to have the PPAs subjected to local law and ordinary jurisdiction. In the case of import–export agreements one may find some flexibility in the use of international arbitration. Ecuador is no longer a member of ICSID.

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Questions

  1. 1.

    What are the principal power sources in your jurisdiction?


  2. 2.

    What are the current trends affecting the energy mix in your jurisdiction?


  3. 3.

    What are the current forecasts for electricity demand in your jurisdiction?


  4. 4.

    Is there an open electricity market in your jurisdiction? Are any activities in the electricity market reserved for the government only? Are private entities allowed to build and operate power plants and transmission and distribution lines?


  5. 5.

    What is the role and function of the regulator? Would you describe the regulator as being independent?


  6. 6.

    Is there an open market for off-takers in your jurisdiction or are there restrictions on the sale of electricity?


  7. 7.

    If the sale of power is to a public utility as offtaker, are such entity's payment obligations backed-up or guaranteed by the government? 


  8. 8.

    Does the market have an independent system operator? If so, what are the ISO’s tasks and duties?


  9. 9.

    How are electricity rates set and what cost components affect such rates?


  10. 10.

    What approvals are required to build and operate a power project? Are these easy to obtain? Please describe the salient features of the relevant licence conditions and the grounds for revocation. What levels of fines can be imposed for failure to comply?


  11. 11.

    Is the government or the ISO conducting public auctions to award long-term power purchase agreements to public and private offtakers? Are the auctions open to any source of power, or are they focused on specific sources and technologies?


  12. 12.

    What percentage of the country's power output comes from renewable power sources and does your jurisdiction have any specific targets or milestones for renewable energy projects?


  13. 13.

    Is there a different regulatory regime for renewable energy projects? Are there any government programmes that foster the development of these projects?


  14. 14.

    Are there any tax incentives for power projects and, in particular, for renewable power projects?


  15. 15.

    Are there any investment vehicles or structures that permit the maximisation of investment in a power company, such as tax equity, master limited partnerships, real estate investment trusts (REITs) or yield cos?


  16. 16.

    Are there any governmental subsidies, benefits (other than tax-related) or incentives for investment in power projects and, in particular, renewable power projects?


  17. 17.

    Are there any capital controls or other regulations in your jurisdiction that prevent investors from repatriating investments in a power project?


  18. 18.

    Is there a market for emission reduction certificates or clean energy certificates in your jurisdiction?


  19. 19.

    Which renewable power sources have been most successful in your jurisdiction and what is the medium to long-term outlook for them?


  20. 20.

    Are there any non-regulatory factors that affect the development and financing of power projects in your jurisdiction, such as social, environmental, political or security concerns or rights of third parties?


  21. 21.

    Are subsurface rights separate from land rights? If so, what factors must a project take into consideration in determining whether an owner of subsurface rights could create issues for a project?


  22. 22.

    How are wheeling tariffs set and are there any differences based on the power source and technology used? Is there a postage-stamp wheeling tariff in your jurisdiction?


  23. 23.

    Are there any open access rules for transmission? If so, how is access determined? Are there private transmission lines to which open-access rules don't apply?


  24. 24.

    Are cross-border power exchanges regulated?


  25. 25.

    Are merchant power projects financeable in your jurisdiction?


  26. 26.

    What are the biggest obstacles in obtaining debt financing for renewable power projects?


  27. 27.

    What are currently the most significant obstacles to the growth of the electricity market in your jurisdiction?


  28. 28.

    What are the biggest growth areas in the electricity market in your jurisdiction?


  29. 29.

    Please describe any recent trends observed in your jurisdiction affecting the structuring of investments and financings in power projects.


  30. 30.

    Are debt offerings on the capital markets becoming a more common tool in your jurisdiction to refinance construction financing?


  31. 31.

    Are power purchase agreements in your jurisdiction denominated in local currency or US dollars?


  32. 32.

    Are there regulatory limitations on foreign investment in, or control of, electric generation, transmission or distribution assets?


  33. 33.

    How active in your jurisdiction is the M&A market for power assets?


  34. 34.

    What are the most common dispute resolution mechanisms under local law-governed power purchase agreements in your jurisdiction?


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