Effects of Incentives for Renewable Energy in Colombia

Renewable energy is becoming very important as a way to mitigate climate change and promote job creation. Colombia is not excluded from this reality, being a country with huge renewable resources and the challenge to give employment to thousands or rebels, signing the peace process. This paper studies the potential effects of the new regulation to promote the development of renewable energy technologies in Colombia. Two incentives are analyzed: tax deductions on the investment and accelerated depreciation on assets. The work also establishes a methodology to include the effects of tax incentives in the calculation of the Levelized Cost Of Electricity (LCOE). The results show up to 20% reduction in the LCOE; unfortunately, the regulation restricts small or new business to apply for all incentives. For this reason, two complementary mechanisms (granting five years as grace period for loan repayment and lower discount rate as subsidy from the government) are proposed in order to allow small business ventures such as forest biomass projects apply to incentives. As a result, 30% reduction in the LCOE is obtained for photovoltaics (PV) and 15% for forest biomass; being the last one a great opportunity in Colombia because of the huge amount of biomass resources and its potential to create new job opportunities.