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Colombia’s Forward Energy Market

Colombia’s Forward Energy Market. Peter Cramton University of Maryland 5 November 2007. Purpose of market. Improve efficiency of bilateral market for forward energy Limited competition and high transaction costs Local, fragmented markets Non-standard contracts

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Colombia’s Forward Energy Market

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  1. Colombia’s ForwardEnergy Market Peter CramtonUniversity of Maryland5 November 2007

  2. Purpose of market • Improve efficiency of bilateral market for forward energy • Limited competition and high transaction costs • Local, fragmented markets • Non-standard contracts • Self-dealing between utility and affiliate supplier • Centralized market with standard product

  3. Two products, one auction • Regulated customers (68% of load) • Small customers without hourly meters • Passive buyers in auction • Nonregulated customers (32% of load) • Large customers with hourly meters • Active buyers in auction

  4. Regulated product:Energy share of regulated load • Pay as demand contract • Supplier bids for % of regulated load • Supplier that wins 10% share has an obligation to serve 10% of regulated load in each hour • Deviations between hourly obligation and supply settled at the spot energy price

  5. Price coverageof regulated customer Old market New market >$500 >$500 Firm energy market Price risk Full price hedge Bilateral energy contracts and spot market Little market power Market power $260 High transactioncosts Low transactioncosts Forward energy market $0 $0

  6. Price coverageof nonregulated customer Old market New market >$500 >$500 Firm energy market Price risk Full price hedge Bilateral energy contracts and spot market Little market power Market power $260 High transactioncosts Low transactioncosts Forwardenergymarket As bid $0 $0

  7. Regulated demand participation • Participation is mandatory and passive(no active bidding of demand) • Regulated customer may decide to become a nonregulated customer • Purchase hourly meter • Actively participate in auction • But switch to nonregulated status is permanent

  8. Nonregulated demand participation • Nonregulated demand participates in the same auction • Single nonregulated product • Product: expected energy, not actual energy • Hourly, but based on expected energy demand • Hedges expected energy demand, but exposes customer to spot price on the margin • Requires hourly meter (and demand management) • Participation benefits both regulated and nonregulated customers, as well as suppliers • Improved liquidity and price formation

  9. Quarterly 2-year contracts, annual rolling

  10. Descending clock auction Descending clock auction Price Price Aggregate supply curve Aggregate supply curve starting price starting price $120.0 = P0 $120.0 = P0 excess supply excess supply Round 1 Round 1 P1 P1 Round 2 Round 2 P2 P2 P3 P3 Round 3 Round 3 P4 P4 Round 4 Round 4 P5 P5 Round 5 Round 5 $61.7 = P6 $61.7 = P6 $60.0 = P6’ $60.0 = P6’ clearing price clearing price Demand Demand Quantity Quantity

  11. Activity rule • A bidder can only maintain or reduce its aggregate quantity as price falls(aggregate supply curve upward sloping) • Allows full substitution between Regulated and Nonregulated products • Bidders can express any linear substitution between products • Any price separation reflects difference in serving regulated load and nonregulated load

  12. Handling differences among nonregulated customers • Customer forecasts demand for every hour • Customer rate is auction clearing price scaled by quality factor of each nonregulated customer • Quality factor reflects expected cost difference (at spot price) for particular customer • Each supplier receives its share of payments • Supplier obligation is its share of aggregate nonregulated expected load

  13. Demand curve for nonregulated product is submitted before auction by each nonregulated customer Price $75 Determined by summing bids of all nonregulated customers $70 $60 Nonregulated demand $50 0.0% 10.0% 12.5% Quantity Demandtarget

  14. Administrative demand curve for regulated product addresses insufficient competition • Demand curve determined by two prices: • High price: Only 1/10 chance clearing price is higher. • Very high price: Only 1/100 chance clearing price is higher. Price $90 99% chance price in this range $60 90% chance price in this range Regulated demand 0.0% 12.5% Quantity Demandtarget

  15. Market design is important • Simplify, improve liquidity • Address potential market failures • Motivate demand response with forward contracts that hedge expected load • Customer exposed to spot price on margin • Yet enjoys all the risk benefits of forward contracting

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