Renewable energy projects under the new Venezuelan Special Economic Zones Organic Law

Friday 30 September 2022

Simón Herrera Celis
LEGA Abogados, Caracas
sherrera@lega.law

Carlos García Soto
LEGA Abogados, Caracas
​​​​​​​cgarciasoto@lega.law

Introduction

The new Venezuelan Special Economic Zones Organic Law[1] opens up a wide variety of possibilities for the development of economic projects in the country. This legislation is certainly an invitation for private enterprises to bring capital, personnel and technology into special economic zones (SEZs). SEZs are geographically delineated economic areas set out by the government that are subject to different regulations and administration for the purpose of attracting investment that could not otherwise be accomplished.

Even though SEZs are not a new concept, either in Venezuela or the rest of the world, they can be seen as a pivotal change from a two-decade state policy in which state enterprises, not private investment, was supposed to be the driving force behind economic development. All evidence indicates that the state intervention model has had little to no success in this South American nation.

There is at present no regulatory framework in Venezuela to carry out renewable and alternative energy projects (solar, geothermal, wind and hydropower, among others) with the use of new technologies, in substitution of conventional energy resources (ie, fossil fuels). Nevertheless, it is important to mention that the National Assembly has been discussing a draft bill since December 2021 following a submission made by the Minister for Electrical Energy. The Rational and Efficiency Use of Energy Law[2] and the System and Electricity Service Organic Law[3] do not establish the legal grounds for renewable and alternative energy projects.

The necessary regulatory framework must establish the roles of the different state and private actors in renewable and alternative energy projects, as well as the mechanisms to promote investments on complex technology projects at an industrial level. As we see it, this must go hand in hand with an aggressive oil and natural gas export programme to generate financial resources for Venezuela, as the energy transition is under way, notwithstanding the unfortunate military events taking place in eastern Europe with dire consequences for the global economy.

In this short article we will attempt to contribute some ideas on the links between SEZs and renewable and alternative energy projects (‘renewable energy’ for simplification purposes), and the importance of having SEZs to develop such projects, in view also of the legal restrictions in Venezuela. Needless to say, the rule of law must govern all relationships among private and state actors, including procedural and legal transparency, to attract new investments and boost Venezuela towards a brighter future.

Main features of the Special Economic Zones Organic Law

After more than a year of discussions in the National Assembly, the Special Economic Zones Organic Law (the ‘Law’) was published. There were several versions of the draft law, which was subjected to a process of public consultations in several regions of the country. It was included in the legislative agenda approved in March 2021, and it is undoubtedly the most important law in economic matters since the installation of the National Assembly in January last year.

The Law sets out the legal grounds for the creation of SEZs and the requirements of a development plan for each SEZ encompassing the policies, programmes and projects for productive and social development, pursuant to the sectorial specialisations of the SEZs.

The National Executive has announced SEZs in: (1) Paraguaná (Falcón state); (2) Puerto Cabello – Morón (Carabobo state); (3) La Guaira (La Guaira state); (4) Margarita (Nueva Esparta state); and (5) Isla La Tortuga (Miranda Insular Territory). None is directly related to renewable energy projects. In any event, we have yet to see the administrative regulations governing these SEZs in the Official Gazette. 

SEZs are not a novelty in Venezuelan law. In 2014, the Law of Integral Regionalisation for the Socio-productive of Homeland Development was issued,[4] according to which the SEZs of the Palavecino municipality and the Iribarren municipality of Lara state were created by presidential decree. Moreover, Paraguaná has been a free economic zone for tourism since 1998,[5] and Margarita a free port since 1971.[6]

It is also important to point out that the National Constituent Assembly enacted the Anti-Blockade Constitutional Law for National Development and the Guarantee of Human Rights (LCA) in 2020.[7] Thus, in the context of changes in the Venezuelan legal environment, the LCA and the Law constitute the two essential pieces of legislation on which the government seeks to rely to increase national and foreign investment in the short term.

The Law establishes that SEZs are limited to the development of: (1) industrial activities; (2) technological activities; (3) financial services; (4) tourist services, hotels, recreation and entertainment; (5) agricultural, livestock, fishing and aquaculture; and (6) any other sector or activity that may be considered necessary. It expressly puts energy projects, in any category, within the classification of industrial activities. Thus, there is no reason why a renewable energy project cannot be executed in a SEZ designated for such a purpose.

According to the Law, SEZs shall be created by the president through a presidential decree. Their supervision and administration will be in the hands of the National Superintendency of SEZs, ascribed to the vice-presidency. The Single Authority in each SEZ shall be in charge of implementing the policies, plans and projects indicated in the relevant presidential decree. The Single Authority will be the responsible agency reporting to the National Superintendency of SEZs with respect to the policies, plans and projects entrusted to the former.

All public, private, mixed and communal investors must sign economic activity agreements with the National Superintendency of Special Economic Zones, acting with the cooperation of the International Centre for Productive Investment. These agreements must contemplate the economic, fiscal, tax, financial and other incentives in favor of investors, in accordance with the development plan for the SEZ.

New law needed for renewable energy projects

The System and Electricity Service Organic Law (the ‘Electricity Law’) sets out the legal basis for the national electricity system and the provision of electricity services, under the principles of universal access and the reservation and domain of the Venezuelan state, in accordance with the Constitution.[8]

The Electricity Law establishes state monopoly in the electricity sector along with the reservation of the generation, transmission, distribution, commercialisation and dispatch activities for reasons of security, defence, strategy and national sovereignty. The state-owned company Corporación Eléctrica Nacional SA (Corpoelec) was appointed the operator and service provider along with its wholly owned affiliates. These companies run the state monopoly in the electricity sector in Venezuela. Hence, at the present time, there would be serious limitations for the private sector to develop a project for the generation, transmission, distribution, commercialisation and dispatch of electricity through renewable sources of energy, since such activities are reserved to the Venezuelan state, in accordance with the Electricity Law.

In view of such legal limitations, Venezuela requires a new law by the National Assembly with the rank of ‘organic law’ such as the Electricity Law to carry out renewable energy projects. As mentioned, there is a draft bill under discussion. This new legislation for renewable energy projects (the ‘Renewables Energy Law’) must establish the key principles for the development, regulation and promotion of renewable energies, both in electricity generation and other activities.

The Renewables Energy Law must set forth that in renewable energy projects the participation of the state will not be required in generation, transmission, distribution, commercialisation and dispatch activities. Hence, it has to be clearly stated that these activities can be carried out by previously qualified private companies, mixed companies and state companies under a competitive regime.

Development of renewable energy projects in SEZs

We believe that renewable energy projects can be carried out in SEZs once the Renewables Energy Law enters into force. In addition, there must be a presidential decree establishing the SEZs, and relevant economic activity agreements between the National Superintendency of Special Economic Zones and the investors, as explained.         

To create incentives for private capital, the Renewables Energy Law should establish certain economic, fiscal and tax incentives, such as granting exemptions and refunds for income tax, value added tax and customs duties. Such incentives are also part of the basic scheme already proposed under the Law, still requiring further administrative measures by the government.

Conclusions

There is a general assumption that the Venezuelan economy will continue to rely heavily on the sale of hydrocarbons in international markets, even more so in recent months given the global energy market is in a rebuilding process in which the United States and Europe are presumably in need of fossil fuels to replace Russian supplies.

Nevertheless, Venezuela cannot turn its back on the commitments in the Paris Agreement[9] and other international treaties for the preservation of the environment and the goal of reducing greenhouse gas emissions. Renewable energy consumption should continue to increase in the global path to the energy transition. And with renewable energy projects, Venezuela could reduce its dependence on fossil fuels while cutting carbon emissions, creating a new energy matrix for the country and helping to stabilise the deteriorated power generation system.

Unfortunately, Venezuela lacks  a Renewables Energy Law to surpass the state intervention model set forth under the Electricity Law. The Renewables Energy Law must provide a real space for private actors, both national and foreign. In this sense, we believe that the electricity system should gradually move towards a model in which the private sector assumes most of the generation, transmission, distribution, commercialization and dispatch activities, along with self-consumption models.

In accordance with the recently promulgated Special Economic Zones Organic Law, SEZs should become a public policy tool to develop certain regions and activities, and energy projects are not an exception to this rule. SEZs are designed to accelerate the economic development of specific regions, generate new jobs and attract investors with state-of-the-art technologies. We truly think that renewable energy projects fit the purpose of SEZs. But for this to work, renewable energy companies located in SEZs must be granted tax and other economic incentives. 

At the time of writing, the National Executive had not yet formally created any SEZs. Discussions about the Renewables Energy Law in the National Assembly were still in the process of consultations. Of course, it is not only a question of having a new legal framework for the energy sector and the development of SEZs, but also a general regulatory framework that attracts private investments, abiding by the rule of law at all costs, with clear and coherent policies aimed at achieving economic and social progress.

 

[1] Official Gazette of Venezuela No 6,710 (E) dated 20 July 2022.

[2] Official Gazette of Venezuela No 39,823 dated 19 December 2011.

[3] Official Gazette of Venezuela No 39,573 dated 14 December 2010.

[4] Official Gazette of Venezuela No 6.151 (E) dated 18 November 2014.

[5] Official Gazette of Venezuela No 36,517 dated 14 August 1998.

[6] Official Gazette No 37,006 dated 3 August 2000.

[7] Official Gazette of Venezuela No 6,583 (E) dated 12 October 2020.

[8] Official Gazette of Venezuela No 5,908 (E) dated 19 February 2009.

[9] Official Gazette of Venezuela No 40,819 dated 30 November 2015.

Join the IBA

Expand your international network, gain new business and learn about the latest legal developments through IBA digital content and events, with IBA membership. Available for individuals, students, law firms, bar associations and corporations.

Find out more