Colombia energy oversupply bad for prices

Colombia's energy industry is heading toward a price fall because of oversupply of electricity, a development that bodes ill for the fast-expanding power generation sector. Economic growth in the Latin American country has surpassed expectations but also landed economic strategists with a problem. Colombia is likely to be producing more electricity than its domestic and industrial consumers need and that can only depress prices and prove a disincentive for power generation companies. Last year the government embarked on a major energy expansion program but the capacity built or under construction as a result is more than the economy can absorb. Future Colombian electricity prices could face downward pressure as the country expands its capacity with lower marginal cost plans, Fitch Ratings said in a report. Plans for the expansion of electricity generation could experience revenue decline because of the short-term contractual nature of their commercial strategies, the rating agency said. Fitch called it "a significant risk" for hydroelectric generation companies in Colombia. Volatile spot market prices for electricity could add to the problem. The electricity generation sector in Colombia has seen major expansion in recent years while growth in electricity demand has been unresponsive. This development exposes the energy sector to overbuilding and overcapacity, both of which have the potential to discourage investors and depress prices. Although the risk is still low, "it holds the potential to significantly pressure electricity prices," Fitch said. Despite those potential issues, the regulatory framework for Colombia's energy sector remains well defined, independent from the central government and balanced between end users and producers. The regulators are responsible for overseeing the market and designing and implementing initiatives to correct potential supply and demand imbalances, Fitch said in the report, "Colombian Electricity Sector: Market Dynamics and Risks." Colombia's electricity expansion is part of a trend of rising investment in the country's diversified energy industry. Foreign and domestic companies broke investment records by pouring millions of dollars into all major energy sectors, including petroleum and coal mining. BHP Billiton Ltd., Anglo American Plc. and Xstrata Plc. together are investing more than $1.3 billion to develop the Cerrejon, the world's largest open-pit coal mine, mainly for exports. Compared to the 1990s, when international investment in Colombia averaged $500 million a year, annual investment in the energy sector is estimated to exceed $5 billion a year. Interconexion Electrica S.A. and Public Businesses of Medellin are among key players investing to develop hydroelectricity and grid modernization and increase access to rural areas.