The Organic Law for Energy Competitiveness is Published

On Thursday, January 11, 2024, the Organic Law for Energy Competitiveness was published in Official Gazette No. 475 (second supplement).

The Law introduces the following main reforms:

1. Reforms to the Organic Law for the Public Electric Power Service

a) Institutional Aspects and Structure of the Sector

• Mixed-ownership companies are included as part of the corporate structure that makes up the Ecuadorian Electric Power Sector.
• A new budget financing mechanism for the Regulatory Agency for Non-Renewable Natural Resources (the “Agency”) is determined, through contributions from companies in the electric power sector (state-owned and private) which cannot exceed 1% of the cost of the electric power service.
• The Agency has the power to take control actions regarding the administrative, operational and maintenance management of state-owned electric power companies, and control actions regarding the operational and maintenance management of private companies of the electric power sector.
• It is specified that the National Electricity Operator, CENACE, will not perform the business activities of generation, transmission or distribution and marketing of electric power.
• Mixed-ownership companies are permitted to take part in the Electric Power Service.
• It is established that the Agency will exercise environmental powers, subject to control and monitoring by the National Environmental Authority.

b) Aspects relating to Planning and Public Investment in the Electric Power Sector

• The investment required to execute generation, transmission and distribution projects of the Electrification Master Plan (EMP) by public companies and entities can be included in the cost study approved by the Regulatory Agency.
• The power to finance projects developed by state-owned companies with loans with own or State guarantees is eliminated.
• As regards the costs of the public electric power service: For state-owned and mixed-ownership companies, the determination of the cost will contemplate the “annuality of the assets in services”; for mixed-ownership companies, the recognition of a reasonable profit may be considered, according to a regulation to be issued. In the case of private companies, the costs will be determined based on the terms defined in the regulated contracts.

c) Aspects related to the Settlement of Commercial Transactions

• The definition of Short-Term Market is included.
• It is established that transactions of blocks of energy can be undertaken under the mode of short-term transactions.

d) Aspects related to Distributed Generation for Self-Supply

• It is established that regulated and non-regulated consumers may install distributed generation systems exclusively for self-supply, from the use of Non-Conventional Renewable Energy (“NCRE”). The distributed generation systems for self-supply may be owned by the consumer—regulated or non-regulated, as appropriate—or by third parties, as long as the energy produced by the system is intended exclusively to meet the demand of the end consumer. Likewise, they may contract with third parties for the financing, management, operation, monitoring, installation and maintenance of the system, respecting the principle of marketing exclusivity of the distribution companies.
• Residential end users, as well as educational and sports centers that have distributed generation systems for self-supply with NCRE technology up to 75 kW will only require a single bi-directional meter that records both the energy consumption supplied by the energy distributors and the energy surplus, and they will be exempt from any measurement system obligation to record the energy generated and self-consumed that is not injected into the public network.

e) Aspects related to Distribution Infrastructure

• The construction of new distribution networks and infrastructure to supply the demand for electric power to commercial and/or industrial customers who are isolated may be built by said consumers or other interested parties, provided that they have the approval of the distribution company of the area of influence as a result of a competitive selection process. Once the work is completed, all the infrastructure will become the property of the electricity distribution company of the area of influence.

f) Aspects related to Distributed Generation

• Distributed Generation is defined as small power plants installed close to consumption and connected to the distribution network.

g) Aspects related to Delegation, Private Initiative and Public Selection Processes

• It is specified that the activities that can be delegated to private companies on an exceptional basis include all activities of the public energy service, including the service of public lighting and electric power transmission. These delegations will have to be made via public selection processes (PSP).
• If the projects are identified by the private initiative and are not incorporated in the Electrification Master Plan, if it is in the national interests, the private initiative may develop the project at its own risk, with the prior express authorization of the Ministry of Electricity and Renewable Energy. This is provided that its power does not exceed 10 MW, otherwise the development will likewise be subject to a public selection process. The State will grant the project promoter the benefits for its participation in the PSP established in the qualification document and the applicable regulations issued to that end. Lastly, preferential dispatch and preferential pricing is established for NCRE projects of up to 10 MW.
• The possibility for investment contracts in the electric power sector to include an energy purchase price clause is eliminated.
• It includes the power to delegate the construction, operation and maintenance of general public lighting systems to mixed-ownership or private companies. At the end of the delegation term, the infrastructure implemented in these projects will revert to the State at no cost whatsoever.
• Any type of delegation to the private sector, subject to the Organic Law for the Public Electric Power Service, of existing infrastructure that has been financed with funds from the General State Budget is prohibited. It must be managed by state-owned or mixed-ownership companies.

h) General Aspects

• The line ministry must declare that electric power projects that are in the construction stage and at least 50% complete, and existing power plants that require maintenance, are in the national interest.
• Industrial users considered large consumers and own consumption will be guaranteed the delivery of active power generated by the self-generation power plant during the qualification period issued in the corresponding documents by the Competent Regulatory Agency provided they are directly connected to the transmission or subtransmission system.

2. Amendments to the Organic Law for Energy Efficiency

• A delegate of the National Planning Secretariat, or the entity that performs its functions, is included in the National Committee for Energy Efficiency.
• The preparation of a procedure for the formation and operation of the National Investment Fund for Energy Efficiency (“FNIEE”) is included as a function of the National Committee for Energy Efficiency.
• The Decentralized Autonomous Governments are responsible for efficient construction standards and solid waste management.
• In addition, the Decentralized Autonomous Governments have a responsibility to report annually to the National Committee for Energy Efficiency on the actions taken to encourage and promote 100% electric and zero-emission transportation so that it can fulfill its responsibilities, including coordinating the running of the National Energy Efficiency System.
• It is established that from 2030, all vehicles that are incorporated into the urban and inter-parish public transport system as well as commercial transport in continental Ecuador, must be exclusively 100% electric or zero emission. From 2024, the Decentralized Autonomous Governments, in coordination with the National Committee for Energy Efficiency, will mandatorily develop the studies and implementation of the infrastructure required to guarantee what is described in this article. In the case of the Island region, this measure will be evaluated by the National Committee for Energy Efficiency.
• The generation of electric power using the organic fraction of solid waste (biomass) as a raw material will be prioritized as an energy efficiency measure in decentralized public planning.
• The creation of the National Investment Fund for Energy Efficiency (“FNIEE”) is reformed. This will be used to finance plans, programs, projects and any other activity aimed at contributing to the fulfillment of objectives and goals established in the Energy Efficiency National Plan (“PLANEE”); as well as programs and projects that diversify and enrich the options for the fulfillment of the objectives of the Organic Law for Energy Efficiency and the specific objectives of the energy efficiency planning instruments.

3. Amendments to the Internal Tax Regime Law

• It is proposed to incorporate an additional 100% deduction of the depreciation and amortization expense for the purchase of machinery, equipment and technology for the implementation of distributed generation systems for self-supply based on non-conventional renewable energy.
• The aim is to include as a new deduction for income tax purposes, expenses incurred in works for the construction of new distribution networks and infrastructure to supply the demand for electricity to commercial and industrial customers that are isolated from the electricity distribution network, which have the approval of electricity distribution companies in the area of influence and is intended for its operation and control.
• It is proposed to incorporate the possibility of deducting the total interest on unsecured and mortgage loans taken out with the national financial system and salaries of workers affiliated to the Ecuadorian Social Security Institute (IESS), provided that this obligation has been complied with as at the date of filing the income tax return.
• It is proposed to limit the application of the zero rate of VAT and the Excise Tax exemption to electric vehicles that are exclusively powered by and charged using electric power sources and that do not produce direct polluting emissions. Vehicles that have self-generation systems with an internal combustion source, regardless of their configuration, are expressly excluded.
• It is proposed to add equipment and accessories for solar photovoltaic generation to the goods taxed at the rate of 0%.
• A definition of “gross income” for purposes of the RIMPE is proposed. It includes the salaries of workers affiliated to the IESS in the items to be deducted from the taxable income of the taxpayer, provided that the taxpayer has complied with its obligations to the IESS as at the date of filing its income tax return.

4. Amendments to the Organic Law for Economic Efficiency and Job Creation

It is proposed to completely replace the First Transition Provision of the law approved in December 2023, which refers to the remission regime, with a new provision that would establish the following rules:

• The remission of 100% of interest, fines and surcharges is allowed not just for payments in full, but also for partial payments of tax obligations derived from taxes managed and collected by the Ecuadorian Tax Authority, which have been generated up to December 31, 2023. This is provided that the taxpayer makes the payment by July 31, 2024 (the December regulation establishes a maximum term of 150 days).
• If the taxpayer has made payments before the law comes into effect which cover the total principal balance of the obligations, then the interest, fines and surcharges will be remitted. If the payments do not cover the total principal of the obligations, the taxpayer may avail of the remission for the outstanding balance.
• The Ecuadorian Tax Authority is ordered to receive the payments as of the effective date of the law.
• It is proposed to eliminate the paragraph in the Transition Provision that states that if there are pending administrative, judicial, constitutional, arbitration or settlement proceedings, taxpayers must also submit the withdrawals of appeals or administrative, judicial, constitutional or arbitration appeals or actions, domestic and/or international. It is also proposed to eliminate the section of the Provision that states that taxpayers who avail of this remission cannot bring actions or appeals, ordinary or extraordinary, in administrative, judicial, constitutional or domestic or foreign arbitration proceedings against the acts or decisions related to the tax obligations addressed by this remission. Likewise, it is proposed to eliminate the section of the regulation that states that “any breach of this provision will render the remission granted null and void. In addition, no sum paid shall be subject to reimbursement.”
• The section of the provision that states that “the President of the Republic, Provincial and National Assemblymen, and their relatives up to the fourth degree of consanguinity and second degree of affinity cannot avail of the remission established in the first paragraph” is kept.
• Income tax for fiscal year 2023 is expressly excluded from the remission.

5. Reforms to the Code for Production, Trade and Investment

It is proposed to change the definition of free zone in article 34 of the Code for Production, Trade and Investment (“COPCI”), eliminating the section of the regulation that stated that the free zone “shall be considered a customs destination for customs purposes”.

6. Other tariff reforms

It is proposed to include a transition provision that will oblige the Foreign Trade Committee (COMEX) to include agricultural machinery that runs on clean energy sources with 0% tariff rates within a maximum of 120 days.

7. Reforms to the International Transfer Tax

The following International Transfer Tax (ISD) exemptions are limited exclusively to banks with private capital only, and for a period of one year from the publication of the law:

• The exemption applicable to payments for the amortization of principal and interest generated on loans granted by international financial institutions and specialized non-financial entities approved by the corresponding regulators in Ecuador; and
• The exemption applicable to international payments for financial returns, capital gains and capital of those time deposits or investments, with resources from abroad, at institutions of the national financial system.