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THE NEW COLOMBIA FIRM ENERGY MARKET

THE NEW COLOMBIA FIRM ENERGY MARKET. Luis Alejandro Camargo S. Wholesale Market Manager XM S.A. E.S.P. Luis Alejandro Camargo S. Wholesale Market Manager APEx 2006, Seoul. 4,000. 3,000. 2,000. 1,000. 0. jul-92. jul-93. jul-94. jul-95. jul-96. jul-97. jul-98. jul-99. jul-00.

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THE NEW COLOMBIA FIRM ENERGY MARKET

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  1. THE NEW COLOMBIA FIRM ENERGY MARKET Luis Alejandro Camargo S. Wholesale Market Manager XM S.A. E.S.P.

  2. Luis Alejandro Camargo S. Wholesale Market Manager APEx 2006, Seoul

  3. 4,000 3,000 2,000 1,000 0 jul-92 jul-93 jul-94 jul-95 jul-96 jul-97 jul-98 jul-99 jul-00 jul-01 jul-02 jul-03 jul-04 ene-92 ene-93 ene-94 ene-95 ene-96 ene-97 ene-98 ene-99 ene-00 ene-01 ene-02 ene-03 ene-04 ene-05 Total Demand Total Generation Hydro Generation Thermal Generation 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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 P4 Round 4 P5 Round 5 $6.17 = P6 $6.00 = P6’ clearing price Demand Quantity 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

  10. The first auction will be held in May 2007 for 2010 commitments 2006 2007 2008 2009 2010 2011 2012 … (Dec. - Nov.) TRANSITION 2010 auction Existingresources New entrants Up to 20 years 2011auction Existingresources New entrants Up to 20 years 2012auction Existingresources 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

  11. 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

  12. 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

  13. Luis Alejandro Camargo S. lcamargo@xm.com.co

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