Todos los derechos reservados para XM S.A E.S.P. October, 2006 Luis Alejandro Camargo S. Wholesale Market Manager XM S.A. E.S.P. THE NEW COLOMBIA FIRM ENERGY MARKET

Todos los derechos reservados para XM S.A E.S.P. October, 2006 Luis Alejandro Camargo S. Wholesale Market Manager APEx 2006, Seoul

3 Due to the high Hydro component of supply, the Colombian system is vulnerable to energy shortages, while currently capacity is not an issue 0 1,000 2,000 3,000 4,000 ene-92 jul-92 ene-93 jul-93 ene-94 jul-94 ene-95 jul-95 ene-96 jul-96 ene-97 jul-97 ene-98 jul-98 ene-99 jul-99 ene-00 jul-00 ene-01 jul-01 ene-02 jul-02 ene-03 jul-03 ene-04 jul-04 ene-05 Total DemandTotal GenerationHydro GenerationThermal Generation 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. COMPETITION INVESTMENT & PERMANENCE EFFICIENCY MARKET POWER CONTROL RELIABILITY

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 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 The Firm Energy Market Proposal (2)

8 A Firm Energy Market was designed to reach multiple objectives REDUCE MARKET POWER AND SCARCITY RENTS AVOID BOOM/BUST CYCLES AND REDUCE INVESTOR RISK IMPROVE SPOT MARKET EFFIENCY AND REDUCE ITS VOLATILITY 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 $12.00 = P0 P1 P2 P3 QuantityDemand Round 5 Round 4 starting price clearing price Aggregate supply curve P4 P5 $6.17 = P6 Round 3 Round 2 Round 1 excess supply $6.00 = P6’ descending clock auctions are held annually, three to four years in advance 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 TRANSITION Existing resources New entrantsUp to 20 years 2010 auction Existing resources New entrantsUp to 20 years 2011 auction Existing resources New entrantsUp to 20 years 2012 auction (Dec. - Nov.) 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 Reconfiguration auctions Secondary market Last Resort generators Voluntary desconectable demand Fail-safe mechanism for inadequate supply or insufficient competition

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

Todos los derechos reservados para XM S.A E.S.P. October, 2006 Luis Alejandro Camargo S.