INVESTMENT IN GENERATION CAPACITY PAYMENTS IN COLOMBIAN MARKET Luis A. Camargo S. Wholesale Electricity Market Manager Colombia APEx Orlando. October 30th

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

© All rights reserved XM S.A. E.S.P. 3 CAPACITY PAYMENTS AND MARKETS Fully AdministeredHybridMarket Colombian scheme has some particular characteristics Part of the charge is administered and the other part uses market mechanisms Bilateral Contrats between agents Explicit Auctions

© All rights reserved XM S.A. E.S.P. 4 COLOMBIAN CAPACITY PAYMENT It has been used for almost 10 years ( ) 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 …

© All rights reserved XM S.A. E.S.P. 5 CAPACITY PAYMENT RIGHTS CALCULATION HIDROLOGYHIDROLOGY DEMANDDEMAND GENERATIONGENERATION FUEL COSTS Theoretical Remunerateable Capacity (Dry season) E1E1 E2E2 E3E3 E4E4 E5E5 E6E6 E7E7 E8E8 Critical Hidrology Capacity Availability Dry season 105 % Demand Energy Dec 1st previous year April 30th Simulation of the System Operation to calculate the energy contribution of every generator during a dry season extreme event Transformation of Energy into Equivalent monthly power Provided by the regulator Provided by the planning unit Provided by the generators 63 USD/kW-year

© All rights reserved XM S.A. E.S.P. 6 EVOLUTION OF OFFERS TO THE SPOT MARKET Monthly Average 19th hour Preliminary information for October 2005 Minimum Allowed Offer Spot Price Price Cap

© All rights reserved XM S.A. E.S.P. 7 EVOLUTION OF COLOMBIAN SPOT PRICE AND FIXED COST INDEXES (*) CERE: Real Equivalent Cost of the Capacity Charge per kWh

© All rights reserved XM S.A. E.S.P. 8 COLOMBIAN EFFECTIVE CAPACITY EVOLUTION As of % hydro 23% thermal As of % hydro 34% thermal 61% 42%

© All rights reserved XM S.A. E.S.P. 9 OVERALL EVOLUTION OF CAPACITY PAYMENTS Capacity Charge Contracts 1,1391,0701,1001,2971,6871,7111,5711,171 Spot

© All rights reserved XM S.A. E.S.P. 10 EXTREME CASE 1: HIGH CAPACITY RIGHTS, HIGH DISPATCH

© All rights reserved XM S.A. E.S.P. 11 EXTREME CASE 2 : HIGH CAPACITY PAYMENT, LOW DISPATCH

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

© All rights reserved XM S.A. E.S.P. 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