Incentives for wind power investment in Colombia Javier Contreras a , Yeny E. Rodríguez b, * a University of Castilla-La Mancha, E.T.S. de Ingenieros Industriales, 13071 Ciudad Real, Spain b ICESI University, Financial and Accounting Department, Cali, Colombia article info Article history: Received 24 June 2014 Received in revised form 26 September 2015 Accepted 11 October 2015 Available online xxx JEL Classifications: G28 Keywords: Decentralized level Wind power Bilevel programming Auctions Moral hazard abstract This paper develops an energy policy measure for renewable sources in Colombia, in particular wind generation. The proposal is done at the decentralized level, in isolated areas of the country, where electricity coverage is below 12% and wind speed is suitable for power generation. The goal of this policy is focused on increasing electricity coverage in those remote areas of the country that have high winds in order to develop clean generation investments that can represent a benefit for low-income users. Thus, a mechanism for financing these kinds of investments is proposed, involving the private sector and using the mechanism known as Public Private Partnerships e PPPs. PPPs are mechanisms used by the public sector to establish a contract with the private sector. The private sector provides capital and ability to develop projects, while the public sector holds the responsibility in service delivery. To model the relationship between public sector and private investors, a bilevel programming method for efficient resource allocation, combining an auction mechanism and moral hazard, is presented. A case study is shown in the Colombian context. © 2015 Elsevier Ltd. All rights reserved. 1. Introduction The development of new technologies and fuel price uncer- tainty have motivated the search for an energy portfolio of mini- mum cost and risk, to improve energy security and reduce CO 2 emissions. These energy portfolios include the participation of renewable sources as stated by Refs. [4] and [32]. Among the fastest growing renewable technologies worldwide, wind is prevalent. In 2012 wind power capacity in the world increased by 45 GW, for a total of 282 GW installed. Wind power electricity production accounted for 2.5% of the global electricity demand (IEA, 2013). In literature, the discussion of the biggest share of renewables in the energy mix has focused on measures to define an acceptable penetration level and determine regulatory instruments to encourage their use. The number of countries that had some type of policy to promote the use of renewable energy increased from 48 in 2005 to 109 in 2012. This was motivated primarily to reduce CO 2 emissions and dependence on fossil fuels [22]. The Latin American case is different. Few countries (Chile, Argentina, Brazil, Peru, Mexico and Uruguay) have policy measures which promote the use of renewable energy [3]. In the particular case of wind energy, the absence of regulation and incentives and the abundance of resources, such as water and coal, stand out as major barriers to the development of this technology in Colombia [26]. Regarding how to implement policy measures that promote renewable energies in an effective way, the two most important factors are: i) definition of clear policies by governments and ii) regulatory stability for market participants (investors and utilities) [22]. However, it must be noted that the use of renewable energies, in particular wind energy, will not reduce the need for conventional power plants. This is because the demand for electricity is contin- uous, and wind power is intermittent and more expensive to pro- duce most of the time, making it difficult to store on a large scale. Also, according to [33]; electrical system integration of intermittent power at levels of penetration below 5% does not have a significant impact on system reliability. 1.1. Electricity generation in Colombia In Colombia, the market architecture is centralized and is characterized for having a market operator (XM) responsible for managing market bids and subject to the technical constraints of the system. * Corresponding author. E-mail addresses: Javier.Contreras@uclm.es (J. Contreras), yerodriguez@icesi. edu.co (Y.E. Rodríguez). Contents lists available at ScienceDirect Renewable Energy journal homepage: www.elsevier.com/locate/renene http://dx.doi.org/10.1016/j.renene.2015.10.018 0960-1481/© 2015 Elsevier Ltd. All rights reserved. Renewable Energy 87 (2016) 279e288