CAPACITY PAYMENTS ORGANIZED AS A FINANCIAL COVERAGE The Colombian experience

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CAPACITY PAYMENTSORGANIZED AS A FINANCIAL
COVERAGEThe Colombian experience

• 2008 APEx Conference
• October 14th
• Sydney, Australia

Luis Alejandro Camargo S. Financial Operations
Manager XM S.A. E.S.P.
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Dealing with market imperfections
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• Spot market price should be the basic source of
  economic signals
• Financial OTC forward contracts for hedging spot
  price risk
• Resource Adequacy by partial fixed cost recovery,
  collected through the spot market

Forward Financialcontracts (13 years)
ReliabilityPayments (Up to 20years)
Futures Market (Few months)
Spot market (Day ahead)
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Reliability Payments insteadof Capactity
Payments
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Colombias high dependence of hydro generation
makes it necessary to count on enough firm energy
to attend demand even in scarcity situations.The
usual Capacity Payments was NOT the answer
Fossil Hydro
Generation share(scarcity)
Generation share (average)
Installed Capacity
When El Niño appears in the Pacific Ocean,
Colombia experienced extreme droughts affecting
of hydro reserves
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Then, Firm Energy is required. What is Firm
Energy?

• Energía Firme para el Cargo por Confiabilidad
  ENFICC-
• (Firm Energy for the Reliability Payments)
• Is the maximum electrical energy a given
  generation plant is able to produce in a
  permanent basis, under extreme hydrological
  conditions (drought) during a period of time (In
  Colombia, a year)

For aThermal plant
For aHydro plant

• Historic shortages
• Fuel availability

• Dryest years
• Capacity to store

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A set of objectives were set for the new
Reliability Payments Firm Energy Auctions

• Market mechanism
• Investment Incentives
• Firm Energy back up in critical situations
• Stability of the rules
• Long term reliability at efficient prices
• Peak Price hedging

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The new Reliability Payments Model
FIRM ENERGY
PARAMETERAUDITS
PROMOTION
PRIMARYAUCTION
PRO RATA ALLOCATION
GUARANTEES
GPPSAUCTION
PROJECTSAUDIT
Fail-safe mechanism
LAST RESOURCE UNITS
SECONDARY MARKET
RECONFIGURATIONAUCTIONS
DEMAND RESPONSE
FIRM ENERGYOBLIGATIONS
PAYMENT CALCULATIONS
WITHDRAWALREQUIREMENTS
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The new Reliability Payments was designed to give
incentives to investors in the long term in order
to guarantee an efficient supply adequacy for
scarcity events
PRODUCT
ALLOCATION
PRICE
Market mechanism Up to 20 year allocation for
greenfield projects
Price discovered using a descending clock Dutch
auction
Firm EnergyObligations (MWh)
Firm Energy Obligations with ballast (generation
assets and fuel contracts) Obligations honored
by the generators through the spot market (non
constrained ideal dispatch) when scarcity
conditions arise.
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The scarcity condition for the Firm Energy
obligation is defined in economic terms when
the spot prices reaches the scarcity price
PRODUCT
Spot price
Scarcity price
Firm EnergyObligations (MWh)

• The generator assumes the obligation to be
  dispatched in the spot market for a daily quota
  when scarcity arises.
• Firm energy will always be sold in the spot
  market at the scarcity price
• The scheme resembles a financial call option
  (scarcity price strike price).

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Any hour the option could be exercised ...
when the spot price is higher than the scarcity
price
Scarcity price
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Promotion for the auction looked for new investors

• Multidisciplinary team
• Energy Ministry Energy Planning Unit
• Regulator (CREG)
• Promoters
• Embassies support
• XM (market operator)
• Investors Profile
• Investment funds
• Electricity and gas utilities
• Infrastructure investors

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The first auction took place May 6th 2008 to
allocate firm energy obligations from December
2012 to November 2013, so that greenfield
projects could participate
ExistingFirmEnergy
New Firm Energy to be auctioned
Demand(TWh)
2007
2008
2009
2010
2011
2012

2006
2013
2014
2015
TRANSITION
Existingplants
FIRST AUCTION
New gen
Up to 20 years
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A descending clock auction with intra-round bids
was used to discover the price of the Firm Energy
Obligations
Negative supply excess GWh
Round 1
Round 2
Round 3
Closing price USD/MWh
How much ENFICC is allocated?
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A secondary Auction (GPPS) was also implemented
for longer contruction time projects
Initial dateof the obligation
Primaryauction
Short constructiontime projects








price
Up to 20 years
Pricetakers Sealedenvelopeauction if supply
excess
GPPSLong construction time projects (Hydro)



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Some fail-safe measures were foreseen to
managemechanism risks
Primaryauction
Pending design
GPPSauction
Reconfigurationauctions
Secondary market
Last Resource Generators
Demand responseVoluntarily Disconnectable Demand
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May 6th 2008 Primary AuctionJune 21th 2008 GPPS
AuctionRESULTS
13 de noviembre de 2009
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Stages in the scheme filtered mature projects to
be developed
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INITIAL AUCTION SCHEDULE (actual web screenshot)
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The Primary Auction lasted six rounds
Initial ENFICC BID 72045 GWh/year
ROUND 1
ROUND 2
ROUND 3
ROUND 4
ROUND 5
ROUND 6
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Primary Firm Energy auction rounds (actual web
screenshot)
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Firm Energy was allocated to 42 existing plants
and to 3 greenfield projects (one of them owned
by a new market participant)
Effective capacity
201.6 MW

• Capacidad Efectiva

201.6 MW
Technology
Gas Natural / Diesel (Fuel Oil 2)

• Tecnolog

Natural Gas / Diesel (Fuel Oil 2)
ENFICC
4,596,475
kWh
/d
í
a

• ENFICC

4,596,475
kWh
/day
(1.678 TWh/a
ñ
o)
(1.678 TWh/year)
S/E Santa Marta 220 kV / 110 kV

• Conexi

S/E Santa Marta 220 kV / 110 kV
Connection
Commision date
Diciembre 1 de 2012

• Fecha de Entrada

December 1st 2012
Est
á
compuesta por 4 unidades con

• Informaci

• ó

• n Adicional

Four Westinghouse 501 turbines
Further info
Turbinas de Gas
Westinghouse
501
150 MW
Capacidad Efectiva
150 MW
Effective capacity
Carb
ó
n
Tecnolog
í
a
Coal
Technology
3,060,000
kWh
/d
í
a
ENFICC
3,060,000
kWh
/day
ENFICC
(1.116 TWh/a
ñ
o)
(1.116 TWh/year)
S/E
Cerromatoso
110 kV
Conexi
ó
n
S/E
Cerromatoso
110 kV
Connection
Junio 1 de 2012
Fecha de Entrada
June 1st 2012
Commision date
Effective capacity
78 MW

• Capacidad Efectiva

78 MW
Technology
Hidr
á
ulica

• Tecnolog

• í

• a

Hidroelectric
ENFICC
587,031
kWh
/d
í
a

• ENFICC

587,031
kWh
/day
(0.214 TWh/a
ñ
o)
(0.214 TWh/year)

• Conexi

• ó

• n

New S/E 230 kV (pending)
Connection
January 30th 2011
Commision date
Enero 30 de 2011

• Fecha de Entrada

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• Pescadero-Ituango

• Quimbo

• Sogamoso

• Cucuana

• Porce IV

• Miel II

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The verified Firm Energy covers demand forecasts
up to 2019However, allocations were granted up
to 2038
Allocated firm energy obligations
GWh/year
Verified Firm Energythe country cancount on
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GUARANTEES SUPPORTING THE SCHEME
13 de noviembre de 2009
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The whole mechanism is backed by a structured
scheme of financial guarantees
Obligationperiod up to 20 years
Construction and commissioning Guarantee
AuctionParticipation Guarantees
PaymentCollectionGuarantees
continuous audit by a qualified third party
Fuel availability Guarantee
Auctiondate
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Project construction and Firm Energy delivery are
backed up by liquid guarantees
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Any delay in the construction plan triggers
increases guarantee values
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CONCLUSIONS AND CHALLENGES
13 de noviembre de 2009
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• 2018-2019

• Firm Energy

• 90,419 GWh/y

• 65,804 GWh/y

• Installed Capacity

• 17,501 MW

• 13,251 MW

• Investments

• USD 6 billion

Bid excessin energy auction
The energy auction moves 800 million
Six Hydro Plants will be built in Colombia
2009 energy auction a task in the agenda
The energy auction has three winners
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Some lessons learned
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• Innovation learning market expansion
• Legal and financial stability a crucial issue
• convergence of the electricity sector with the
  national and international financial sectors
• Completing the market

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Dimensions of the Firm Energy Auctions Project
Legal aspects
Regulation
Riskmanagement
Contracts
Audit
Logistics
Firm Energycalculation
Parameterverification
Technology
Guaranteescheckup
Guaranteeexecution
Guaranteesmanagement
ProjectManagement
Auctiondevelopment
SystemAdministrator
IT development
Parameteraudits
Communications
Training, mock auctions and real auctions
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Some new challenges
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• Explicit consideration of Social and
  Environmental constraints immersed in the scheme
  as well as in the projects
• Demand response Demand Side Management and
  Voluntarily Disconnectable Demand
• Effective surveillance to construction to
  guarantee the Firm Energy real availability or to
  take the required remedial measures
• The new expansion strengthens Colombian Market as
  a reliable source of clean electricity at
  efficient prices

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• Calle 12 Sur N 18 168, PBX 57(4) 317 2929
  FAX [phone], Medellín Colombia
• www.xm.com.co