INVESTMENT IN GENERATION CAPACITY PAYMENTS IN COLOMBIAN MARKET

1. INVESTMENT IN GENERATIONCAPACITY PAYMENTS IN COLOMBIAN MARKET Luis A. Camargo S. Wholesale Electricity Market Manager Colombia APEx 2005 - Orlando. October 30th - 2005

2. WHAT IS EXPECTED OF THE CAPACITY CHARGE? Spot market imperfections: mainly inelastic demand side price and spot market volatility make necessary a Capacity Payment / Market Demand: Energy Supply reliability Competitive prices Reduce Volatility Reduce Market Power Generators: Reduce Investor Risk Cash Flow stability Incentive Reserve investment

3. CAPACITY PAYMENTS AND MARKETS Fully Administered Hybrid Market Part of the charge is administered and the other part uses market mechanisms Bilateral Contrats between agents Colombian scheme has some particular characteristics Explicit Auctions

4. COLOMBIAN CAPACITY PAYMENT • It has been used for almost 10 years (1997 - 2006) • In 10 years $ 4,9 billion have been distributed • Capacity Payment is not charged directly to the final consumer • Instead it has been embeeded into the spot market, as a floor for the stpot market offers • All generators collect the Capacity Payments with their real generation • Afterwards, Capacity Payment is distributed by the Power Exchange based on previously determined Capacity rights • The present scheme is under review by the regulator THE METHODOLOGY AND SOME FACTS …

5. Energy Capacity Availability 105 % Demand E7 E8 E6 E5 E4 E3 E2 Critical Hidrology E1 Dec 1stprevious year April 30th Dry season CAPACITY PAYMENT RIGHTS CALCULATION Simulation of the System Operation to calculate the energy contribution of every generator during a dry season extreme event HIDROLOGY Provided by the regulator DEMAND Provided by the planning unit GENERATION Provided by the generators FUEL COSTS 63 USD/kW-year Transformation of Energy into Equivalent monthly power Theoretical Remunerateable Capacity (Dry season)

6. EVOLUTION OF OFFERS TO THE SPOT MARKET Monthly Average 19th hour Price Cap Minimum Allowed Offer Spot Price Preliminary information for October 2005

7. EVOLUTION OF COLOMBIAN SPOT PRICE AND FIXED COST INDEXES (*) CERE: Real Equivalent Cost of the Capacity Charge per kWh

8. COLOMBIAN EFFECTIVE CAPACITY EVOLUTION As of 2004 66% hydro 34% thermal 61% 42% As of 1995 77% hydro 23% thermal

9. OVERALL EVOLUTION OF CAPACITY PAYMENTS

10. EXTREME CASE 1: HIGH CAPACITY RIGHTS, HIGH DISPATCH

11. EXTREME CASE 2 : HIGH CAPACITY PAYMENT, LOW DISPATCH

12. SYSTEMIC MODEL OF THE CAPACITY PAYMENT ProjectedEnergyDemand ProyectedLoad Expected changes in capacity Calculation Fuel costs Thecnical parameters Installed capacity SUSIN hydrology Hidrología Envolvente Long term indexes Historical Availability of power stations Currency Exchange rate CRT(1) Rationing cost Short term indexes Maintenance Program Hydro reserves Minimal Operative levels Offers Settlement CRR(2) Commercial Availability Real Demand Centrally dispatchedActual Generation CERE VMC (3) Spot sales of non-centrally-dispatched plants Currency Exchange rate 1) CRT:Theoretical Remunerateable Capacity 2) CRR:Real Remunerateable Capacity 3) VMC: Equivalent value of the fixed monthly cost of an efficient generation technology

13. SOME CONCLUSIONS Capacity payments has been an effective mechanism for reducing investor risk in Colombia As a result, capacity reserve has increased from 42% to 61% in 10 years and natural gas and coal-fired plants increased participation form 23% to 34% However, concerns exits that, since there not exist an specific Capacity Target (entrance freedom), some companies could not be recovering their fixed costs This mechanism does not guarantee the final reliability of supply in the future The capacity payment is not useful for controlling market power This mechanism does not incentive the usage of improvements of the vertical demand curve problem