Currency Risk and the Colombian Solar Opportunity: A Framework for USD Investors

Executive summary

Foreign capital often evaluates Colombian solar on a persistent misconception: that a weak peso makes dollar-denominated returns fragile. The relationship is more complicated. Colombia's electricity prices are among the highest in Latin America and still rising, so the cash flows behind solar assets hold up in local terms and give some cushion against currency erosion. With disciplined structuring, selective hedging, and development finance partnerships, a USD investor can turn FX from an open-ended risk into one that is managed and quantified.

This piece covers mechanics and makes no return forecast. It explains where solar cash flows in Colombia come from, what FX does to them, and how an institutional investor should think about and diligence the currency question. Investors who need dollar-equivalent predictability should look elsewhere. The market rewards capital that can price emerging-market risk and use the structuring tools that already exist to address it.

I. The FX problem, stated plainly

Colombian solar projects earn pesos, through power purchase agreements, net metering credits, and consumer loan repayments. A USD investor deploying capital today at approximately 3,700 COP/USD faces a macro environment with meaningful depreciation risk over a 3 to 7 year investment horizon.

The structural drivers are documented. Colombia's 2026 fiscal deficit is projected at 8.1% of GDP, with the fiscal rule suspended and the budget effectively unfunded. Oil production has fallen to multi-year lows, which cuts into Colombia's main export revenue and its fiscal income at the same time. S&P and Moody's have both downgraded Colombia to their lowest investment-grade ratings, raising the country's external financing costs just as debt service pressure is elevated. The 2026 presidential election, and the change of government that followed in August, added policy uncertainty to COP assets.

FX matters a great deal here. A meaningful peso depreciation over a multi-year hold can erase a large share of an investment's local-currency performance once it is measured back in dollars. Any thesis for deploying USD has to deal with that risk directly.

II. The counter-intuitive case: high energy prices make the economics work

The peso is weak, and Colombians pay a lot for electricity. Both are true at once, and together they explain why solar economics here hold up even through FX stress.

Colombia's residential and commercial electricity price was approximately $0.231 per kWh in early 2025, well above its regional peers. Residential rates are 134% of the world average and 139% of the South American average. Commercial rates are 139% of the world average and 164% of the South American average.

At the market level, Colombia's average electricity price rose from approximately $165/MWh in 2023 to $227/MWh in 2024, a 38% increase in a single year. Hydro shortfalls, gas supply constraints, and the gradual removal of legacy fuel subsidies drove it.

Tariffs have risen by an average of 10% a year over recent years, ranging between 2% and 17% in any given year, pushed up by peso depreciation, high fuel costs, and environmental stress on a grid that depends heavily on hydro.

The forces that weaken the peso (energy import dependency, fiscal strain, hydrocarbon decline) also push electricity prices up. When the peso falls, grid power gets more expensive in peso terms, because Colombia's thermal backup generation is priced against dollar-denominated fuel imports. Solar is priced once, at installation, so it becomes more competitive as the grid rate rises. To a meaningful degree, the FX headwind and the revenue tailwind are the same underlying force.

Here is what that looks like for one project. A residential solar installation that offsets 300 kWh/month at the current ~884 COP/kWh grid rate saves roughly 265,000 COP/month in energy cost, or about $72/month at today's exchange rate. If the peso weakens 20% to 4,440 COP/USD and electricity prices track only half of that depreciation (reaching ~975 COP/kWh), the same installation generates 293,000 COP/month in value. The higher COP cash flow partly offsets what the FX move takes from a USD investor.

This offset is built into how Colombia's energy market works.

III. How FX moves through the return

The useful way to reason about currency is to separate the asset's local-currency performance from the exchange rate that translates it back into dollars. The two move for different reasons, and a USD investor is exposed to both.

The asset generates COP cash flows: loan repayments, PPA revenue, net metering credits. Those depend on the project, the off-taker, and the grid rate, and they have nothing to do with the dollar. The exchange rate sits on top, converting each distribution and the exit at whatever COP/USD level holds when the cash actually moves.

Two factors decide how much FX erodes a USD outcome.

The first is the size of the depreciation. A modest drift over a 5 to 7 year hold is very different from a crisis-scale move like the 2020 COVID shock. Entry timing matters too: deploying near a cyclical peso peak rather than a trough changes the starting point materially.

The second is the correlation between FX and the asset's own cash flows. Because Colombian grid tariffs rise when the peso weakens (Section II), COP cash flows partly grow into a depreciation instead of staying fixed against it. That softens FX drag rather than compounding it. How strong the offset is depends on each project and on the tariff and escalation terms in each contract.

To test a specific opportunity, run a scenario model on its own assumptions: entry rate, hold period, escalation clauses, and a range of exit-rate paths from appreciation through a severe-depreciation tail. An investor should look at how the modeled outcome holds up across that range, and how wide the local-currency buffer is before the dollar case breaks, rather than at a single headline number. Those figures belong in diligence on a specific vehicle, and any model is only as good as its inputs.

IV. Why structure matters as much as the asset

Two vehicles holding the same solar loans can carry very different risk for an investor, depending on how they are wrapped. In Colombian climate finance, the structural choices that matter most to an institutional or DFI allocator are the legal vehicle, the custody and administration arrangement, and how the vehicle handles Colombia's captación masiva (unauthorized deposit-taking) rules.

A Colombian Fondo de Capital Privado (FCP) administered through a licensed fiduciaria addresses these concerns directly. It puts the assets inside Colombia's established collective-investment framework, with the legal protections and regulatory oversight that come with it, and it resolves the captación masiva question, a common barrier in early-stage Colombian climate finance. A fund that hasn't resolved that question brings it into investor diligence as friction or risk.

At the structure level, an investor should diligence:

• The legal vehicle and whether it sits inside a regulated collective-investment regime
• Who acts as administrator or custodian, and whether that party is licensed and independent
• How the vehicle complies with captación masiva rules
• The reporting an investor will actually receive: loan performance, collections, and generation data, at what frequency and through what system
• The terms, target size, minimum ticket, and fees, which are disclosed to qualified investors through a private placement memorandum rather than in marketing material

Headline economics only mean something once the structure underneath them is sound, so diligence the wrapper before the return.

V. A mitigation framework

5.1 The local-currency buffer is the first line of defense

Emerging-market solar pays a wide spread over developed-market solar in local-currency terms, and Colombia is no exception. That spread is compensation for emerging-market risk, FX above all. For an investor, the local-currency buffer is what absorbs FX drag before the dollar case breaks: the wider the COP cash-flow margin over a developed-market benchmark, the more depreciation the position can take and still clear. FX risk exists either way. What an investor has to decide is whether the compensation for taking it suits their mandate, and that judgment depends on a specific vehicle's terms and a specific view on the peso. This article can't make it on anyone's behalf.

5.2 Real assets hold value through currency cycles

Solar infrastructure (panels, inverters, racking, grid interconnections) has a 20 to 25 year productive life and holds value independent of peso fluctuations. A future acquirer, local or foreign, prices the asset on its COP income in the local economy. Holding peso bonds or cash deposits is a different kind of exposure.

5.3 Inflation linkage is a partial hedge

COP depreciation and Colombian inflation are correlated. When the peso weakens, import costs rise, domestic inflation follows, and that feeds into electricity tariff escalation. PPA and loan agreements with IPC (consumer price index) or UVR escalators partly offset the loss of purchasing power, which builds a soft FX hedge into the revenue itself. Whether a given portfolio carries inflation escalation across all of its agreements is worth confirming in diligence.

5.4 USD-indexed off-take is available

A meaningful subset of Colombia's C&I solar market (multinational manufacturers, export-oriented agribusiness, logistics and port operations) has natural USD revenue. Structuring PPAs with these counterparties in USD, or indexing tariffs to the TRM, removes revenue-side FX risk entirely for those projects. The Colombian market underuses this segment, which gives developers with the right commercial relationships a structural advantage.

5.5 NDF hedging is available for major cash flow events

Colombia's non-deliverable forward market lets investors lock in a future COP/USD rate for specific cash flow events: dividend distributions, fund repatriations, exit proceeds. NDF hedging has a cost (typically 4 to 7% annualized given the interest rate differential), but it can be applied only to the cash flow moments that matter most instead of to the whole position. That keeps the cost down while protecting those events.

5.6 DFI blended finance absorbs residual tail risk

Development finance institutions (IDB Invest, the U.S. International Development Finance Corporation, FMO, Proparco) have explicit mandates to bring private capital into emerging markets by absorbing risks that commercial investors can't price efficiently. Currency risk is one of the most established uses of blended finance. First-loss tranches, FX guarantee facilities, and local currency lending shift residual FX exposure to patient capital and improve the risk-adjusted profile for commercial co-investors. Using these instruments is what development finance was designed for.

VI. The mitigation stack

No single tool eliminates FX risk. Used together, they turn an open-ended, unmanaged exposure into a layered one that can be quantified. How much drag remains after mitigation depends on each portfolio and each hedging program, and it is one of the main things an investor should model before committing.

VII. The 2026 election

Colombia held its presidential election in two rounds, a first round on May 31, 2026 and a runoff on June 21, 2026. The new government took office on August 7, 2026. Investors should treat post-election FX moves as uncertain and model a range of exchange-rate paths rather than assume a direction.

VIII. Conclusion

The case against investing USD in Colombian solar usually stops at the exchange rate, which leaves out most of the picture.

Colombia's electricity prices are among the highest in Latin America and still rising, driven by the same structural forces that pressure the peso. Solar assets generate COP cash flows that move with the cost of grid energy, a partial hedge that comes from the market's structure rather than from a financial contract. High nominal COP yields give a wide buffer. Real asset backing, inflation linkage, selective NDF hedging, and DFI partnerships cover the rest.

The investors best placed to evaluate this have emerging market mandates, patient capital, and the analytical depth to tell unmanaged FX exposure apart from structured EM positioning with adequate compensation. For them, the currency question in Colombian solar is something to underwrite deliberately. Whether a specific vehicle fits a given mandate is a question for diligence on that vehicle's terms.

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By John Crye, founder of Nuentero.

April 2026 | Bogotá

Contact: john.crye@nuentero.com

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Disclaimer. This article is for general informational and educational purposes only. It does not constitute investment, legal, tax, or financial advice, and it does not take into account the objectives or circumstances of any particular person. Nothing here is an offer to sell or a solicitation of an offer to buy any security or interest in any fund, and no such offer or solicitation will be made except through definitive offering documents (such as a private placement memorandum) to qualified investors in jurisdictions where permitted. Any examples are illustrative of how solar project economics work and are not projections, forecasts, or guarantees of performance. Past or modeled performance is not indicative of future results, and no return is promised or guaranteed. Investments of this kind involve significant risk, including currency risk, regulatory risk, and possible loss of capital. Readers should consult their own professional advisers before making any investment decision.