Colombia Firm Energy Market

Peter Cramton, Steven Stoft
2007 2007 40th Annual Hawaii International Conference on System Sciences (HICSS'07)  
A firm energy market for Colombia is presented. Firm energy-the ability to provide energy in a dry period-is the product needed for reliability in Colombia's hydrodominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply
more » ... bility to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price. Since load is hedged from high spot prices, the market can rely on high prices to balance supply and demand during dry periods, rather than rationing. Summary This paper presents a market design for the Colombia firm energy market, which began on a transitional basis in December 2006 with an initial auction scheduled in November 2007. A fundamental characteristic of the Colombian electricity market is that it is hydrodominated. Roughly 80% of Colombia's energy is produced from hydro resources, and about two-thirds of its capacity is hydro. As a result, the reliability adequacy constraint in Colombia is having sufficient thermal resources and hydro reservoirs to provide firm energy during a dry period. The proposed firm energy market provides the investment and operating incentives for suppliers to build and operate the efficient quantity and quality of energy resources. The market both reduces supplier risk and improves reliability, resulting in reliable electricity at minimum cost to consumers. 1 This paper was funded by Colombia's Comisión de Regulación de Energía y Gas (CREG). We thank the commissioners and staff for many helpful comments. 2 Peter Cramton is Professor of Economics at the University of Maryland and Chairman of Market Design Inc. Over the last 20 years, he has published research on auction theory and practice in the leading peer-reviewed economics journals. During the last 12 years, he has applied this research in the design and implementation of auction markets worldwide. He has led the design and implementation of dozens of high-stake auctions in the energy and telecommunication industries. He has advised over 26 companies on bidding strategy in energy and telecommunication auctions. Since 1997, he has advised ISO New England on electricity market design, and with Steven Stoft led the design of the proposed forward capacity auction in
doi:10.1109/hicss.2007.133 dblp:conf/hicss/CramtonS07 fatcat:hw7lvjnedza3thnjnjgyqid64m