Ecuador Takes Steps Toward a Stable Energy Future Amidst Crisis
Article written by the Energy Transition team at ThirdWay Partners.
Ecuador is grappling with a severe energy crisis, marked by daily power cuts lasting up to 12 hours. In a significant move towards stabilizing the nation’s energy sector, a new law aimed at promoting private investment in energy generation has been enacted. This legislation represents a major shift from Ecuador's traditional reliance on state-led energy initiatives, reflecting a new openness to private sector involvement. Below, we explore the root causes of Ecuador’s energy issues, the key elements of the new law, and why it marks a fundamental change in the country's approach to energy.
Roots of the Crisis
Ecuador, a small Andean country rich in biodiversity and natural resources, has been experiencing prolonged energy challenges. While fully dollarized and economically active in agricultural and commodity exports, the country’s energy sector has suffered from underinvestment and mismanagement. Under former President Rafael Correa, a socialist leader, Ecuador’s government enacted a new constitution that granted constitutional rights to nature (referred to as Pacha Mama in Quechua). The administration also implemented a state-controlled energy strategy that emphasized hydroelectric projects.
Key projects, including the 1.5 GW Coca Codo Sinclair hydroelectric plant, were launched with the intention of both ensuring sufficient local supply and positioning Ecuador as an energy exporter to neighboring Colombia and Peru. The Empresa Publica-Mixta (EPM) program, which allowed private entities to invest in projects but limited their ownership to a minority stake, was one of the government’s initiatives to attract investment. However, this program was only marginally successful. Coca Codo Sinclair has faced persistent and significant technical issues, preventing it from operating at full capacity.
In recent years, Ecuador has lacked a coherent energy strategy, adequate maintenance investments, and contingency planning. Compounding these issues, the country experienced its driest summer in 60 years, severely reducing hydroelectric output and exacerbating power shortages.
Government Response and Short-Term Measures
In response to the immediate crisis, the government has engaged in temporary agreements with companies such as Karpowership and Progen to help alleviate shortages. Additionally, Ecuador has sought to import electricity from Colombia, but due to Colombia’s own dry summer, supply from the Colombian State has been restricted. Ecuadorian officials are now collaborating with Colombia’s private sector, though regulatory hurdles have to be overcome.
A New Law and a Long-Term Vision
While short-term solutions are being implemented, the government of President Daniel Noboa has laid the groundwork for a long-term strategy with the passage of the “Law to Promote Initiative in Energy Generation,” published in October 2024. The legislation, approved unanimously by the National Assembly, marks a shift towards a more investor-friendly framework that aims to attract private capital to the energy sector. The new law permits private investment in renewable energy projects with capacities up to 100 MW, which will benefit from fixed-price tariffs and long-term power purchase agreements.
Key Provisions of the New Energy Law
The legislation is focused on transitional generation, non-renewable generation technologies with low environmental impact, intended to facilitate a gradual energy transition. The following are some of the primary provisions of Ecuador’s new energy legislation.
State Guarantees for Concessions: allowing for concession contracts may be backed by state guarantees, details of which will be outlined in future regulations.
A Priority Payment Structure: the regulatory agency (‘ARCONEL’) will have a payment waterfall that will prioritise payments to private generators, ensuring they are first in line for regulated demand transactions.
Development potential: private sector-identified projects can be developed up to 100 MW.
Preferential Pricing for Clean Technology Projects: Projects promoting clean energy and non-conventional renewable sources with storage capabilities will be given preferential pricing.
Transition Plans for Thermoelectric Generators: Thermoelectric facilities must develop plans to incorporate clean technologies and hybrid systems.
Decentralised Energy from Waste: Local governments must implement waste management systems that generate energy for the national grid.
Regulatory Deadlines: The Regulatory bodies and the Hydrocarbon Regulation and Control Agency must issue the various regulations by late 2024 to implement the new law.
Path Forward
Ecuador’s new energy law creates a favorable environment for investment in renewable energy, offering incentives and protections for private investors and developers. This legislative change is expected to foster a more resilient energy future for Ecuador, which has long relied on hydroelectric power but now seeks to diversify its energy mix. The law's passage reflects a paradigm shift in Ecuadorian energy policy, from a state-led model to one that embraces private sector engagement and renewable energy.
ThirdWay Partners, an advisory firm active in Ecuador, is leveraging its expertise and connections to assist companies in accessing the capital needed to support these energy initiatives. The Ecuadorian government, private sector, and citizens alike now look forward to a more secure and sustainable energy landscape.
Coca Codo Sinclair
