Colombia’s Energy Decree Raises Credit Risk and Discourages Power Investment, Says Fitch Ratings

New power market regulations implemented by the Colombian government reduce commercial flexibility for power generators and could increase pressure on profitability and leverage, particularly during periods of low hydrological conditions, according to analysis from Fitch Ratings. The rating agency suggested that continuous policy shifts prioritizing short-term price control over financial predictability are likely to erode cash flow visibility and place downward pressure on credit ratings. Fitch further noted that the policies risk disincentivizing new power generation capacity ahead of the first quarter of 2026 firm energy auction, which increases the likelihood of future energy shortages.

The recently issued governmental decrees aim to reduce household electricity costs but limit mechanisms available to generators for balancing risk and cost across varying hydrology and market conditions. Specifically, the new policies introduce two key requirements: first, power generators are now required to sell at least 95% of centrally dispatched hydro output through fixed contracts; and second, the policies introduce new differentiated and capped Scarcity Prices. Under the new framework, Scarcity Prices for hydro, coal, and renewable generation are capped at 359 COP/KWh, down from approximately 900 COP/KWh, while thermal plants receive separate pricing.

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The Scarcity Price is a critical market signal, as spot prices exceeding this level trigger firm energy obligations (FEOs). By capping the Scarcity Price, the new regulation reduces the compensation paid to generators, which is intended to cover capacity availability during tight supply periods. This measure, according to Fitch, is expected to reduce returns on new firm capacity, thereby discouraging future investment. Simultaneously, the rule forcing generators to pre-sell 95% of centrally dispatched hydro output may reduce their flexibility to adjust contract coverage in response to changing hydrological conditions. This increased inflexibility raises the potential for costly spot purchases or penalties for generators during drought conditions.

The rated Colombian utilities with diversified assets, including Empresas Publicas de Medellin E.S.P (EPM)  (BB+/Negative), Isagen, (BBB-/Negative), Enel Colombia (BBB/Negative), and Celsia Colombia (BVC: CELSIA) (AAA(col)/Stable), have historically managed hydrology volatility through conservative commercial policies. Over the past four years, these companies have maintained an average of about 80% of sales via contracts, leaving approximately 20% exposure to spot prices even during price spikes. This discipline helped the companies navigate severe dryness conditions experienced in 2023–2024 without compromising credit strength. Fitch expects that if similar dry conditions recur under the new regulatory framework, higher energy procurement costs will weigh on profitability and cash flows, with limited scope for meaningful end-user tariff relief.

Signals for investment are especially critical ahead of the 2029–2030 FEO auction, which is scheduled to commence in early 2026. If these restrictive measures remain in place, auction outcomes could fall short of capacity expansion goals, as the reduced visibility on achievable returns increases developers’ hurdle rates and delays capital commitments. This trend could exacerbate the risk of future power shortages, given Fitch’s estimate that energy demand could exceed current FEOs by 4% to 5% between 2026 and 2028. Durable reliability depends on balanced market incentives that allow all technologies to recover costs and earn risk-appropriate returns. Designing scarcity pricing and contracting rules that preserve clear signals for investment, while enabling generators to manage hydrology risk, remains essential to sustain adequate firm energy and diversify the generation matrix.

Above photo: Electrical transformers en route to the Hidroituango Hydroelectric Dam in Northwestern Colombia. Each has a capacity of 112 MVA (million volt amperes) and will transform the generator output from 18 kilovolts to the grid distribution voltage of 500 kilovolts. Each is 4 meters high and weighs 110 tons when filled with oil. (Photo credit: EPM)