THE NEW COLOMBIA FIRM ENERGY MARKET

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THE NEW COLOMBIA FIRM ENERGY MARKET
Luis Alejandro Camargo S. Wholesale Market
Manager XM S.A. E.S.P.
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• Luis Alejandro Camargo S.
• Wholesale Market Manager
• APEx 2006, Seoul

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Due to the high Hydro component of supply, the
Colombian system is vulnerable to energy
shortages, while currently capacity is not an
issue
rationing
El Niño
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A centrally administered mechanism has been in
place for the last 10 years

• Capacity payment is assigned every year using a
  hydro-thermal generation model run for a critical
  hydrology defined by the Regulator, considering
  the costs and availability of the plants
• No explicit obligation for the generators who
  received the payment
• Verification of availability through random
  Audits

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A Firm Energy Market was designed to reach
multiple objectives

• In theory, these can be achieved through an
  energy only market, and some market have placed
  their bets on this approach.
• It implies a high variability in both cash flows
  for investors and energy prices for the demand.
• Others, opted for a capacity mechanism (market o
  administered), to ensure generation adequacy by
  allowing stable cash flows.
• A Firm Energy Market was the selection for the
  Colombian case.

RELIABILITY
INVESTMENT PERMANENCE
EFFICIENCY
COMPETITION
MARKETPOWERCONTROL
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The Firm Energy Market Proposal (1)

• The whole physical Demand buys the right to pay a
  maximum spot price defined by the Regulator
  (Scarcity/Strike Price)
• Generators receive an Option Price, which will be
  determined by the market in a descending clock
  auction

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The Firm Energy Market Proposal (2)

• A Generator with Energy Firm Options receives
  the Option Price and is subjected to a Reward or
  a Penalty
• (Q supplied Qobligation) x (Pspot PStrike)

Scarcity/Strike Price
Option Price
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A Firm Energy Market was designed to reach
multiple objectives
AVOID BOOM/BUST CYCLES AND REDUCE INVESTOR RISK
IMPROVE SPOT MARKET EFFIENCY AND REDUCE ITS
VOLATILITY
REDUCE MARKET POWER AND SCARCITY RENTS
ACHIEVE DESIRED RELIABILITY AVOID SHORTAGES
ATRACT NEW AND ENOUGH GENERATION INVESTMENT
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A new Firm Energy Market has been regulated from
December 2006, using a financial call option
backed by the physical capability to supply firm
energy

• Generators are allowed to offer firm energy up to
  a centrally verified realistic limit
• Hydro generators are constrained by their
  hydrological characteristics and history
• Thermal generators are constrained by historical
  capacity and fuel contracts

Aggregatesupply curve
starting price
descending clock auctions are held annually,
three to four years in advance
12.00 P0
excess supply
Round 1
P1
Round 2
P2
P3
Round 3
Round 4
P4
P5
Round 5
6.17 P6
clearing price
6.00 P6
Quantity
Demand

• Generators acquire a firm energy obligation
• An administered demand curve represents the
  marginal value of additional firm energy. Price
  Limits 2 x Cost of New Entry CONE- to 0.5 CONE

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The first auction will be held in May 2007 for
2010 commitments
2007
2008
2009
2010
2011
2012

2006
(Dec. - Nov.)
TRANSITION
Existingresources
2010 auction
New entrants
Up to 20 years
Existingresources
2011auction
New entrants
Up to 20 years
Existingresources
2012auction
New entrants
Up to 20 years

• During the transition (initial) period,
  generators will be assigned the obligation pro
  rata of their declared firm energies
• The Option price will be defined by the Regulator
  in this period

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Security mechanisms are provided to adjust
positions and to avoid shortages
Primary auctions
Reconfigurationauctions
Fail-safe mechanism for inadequate supply or
insufficient competition
Secondary market
Last Resort generators
Voluntary desconectable demand
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References

• Colombia Firm Energy Market. Cramton, Peter and
  Stoft, Steve. 15 September 2006
• Colombian Energy and Gas Regulation Commission.
  Resolution 071 and 079 of 2006. www.creg.gov.co

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Luis Alejandro Camargo S. lcamargo_at_xm.com.co