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| This is an informative document and does not replace the regulation issued by the CREG. |
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| What is Reliability Charge? |
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The electric energy in Colombia comes mainly from hydro-generation plants (77%) and a minor proportion from thermal-generation plants (18%) [ * ]. The dependency of the Colombian electricity market on hydraulic resources makes it necessary for the electric energy sector to have enough generation plants with firm energy to replace hydro-generated energy in dry periods that occur during phenomena like the El Niño [ ** ]. Without these alternative resources, demand would have to be rationed, implying high costs on the national economy and on the well being of the population.
One of the principles behind the price system that was designed for the Colombian MEM is to guarantee long term economic signals to encourage the expansion of the installed capacity of generation plants to meet the country’s development needs. By encouraging investments in power projects and guaranteeing supply reliability of firm energy in the long-run, price volatilities should be mitigated and the evolution of prices should reflect the end-users´ level of confidence on supply reliability and their willingness to pay for this firm energy.
The price volatility in the Spot Market (See Figure 1), largely explained by the huge hydraulic component of supply, the seasonal climate (7 months rain and 5 months dry period) and the periodic occurrence of the El Niño phenomenon in Colombia, poses a considerable risk for generation companies that need financing for its projects. This situation calls for the implementation of hedging mechanisms to mitigate the risks for generation companies or investors who engage in energy generation projects.
Figure 1. Spot Price vis-à-vis Contract Price
For these reasons, the CREG considered it fundamental to implement a remuneration scheme that promotes income stabilization, therefore making investment in generation resources viable to cover efficiently the demand requirements particularly during critical periods of low hydraulic supply. This objective is contained in the Colombian legal system, since the enactment of Law 143 of 1994 (article 23).
Following ten years of uninterrupted application of the Capacity Charge scheme, the CREG designed a new method based on a market mechanism denominated Reliability Charge, which has been in place since December 2006. This new mechanism preserves the essential factors of settlement, billing and collection that guaranteed the successful payment to generation companies in the previous scheme.
One of the essential features of this new scheme is the existence of the Firm Energy Obligation (OEF), which is a commitment on the part of generation companies backed by a physical resource capable of producing firm energy during scarcity periods. This new scheme aims to ensure the reliability in the supply of energy in the long-run at efficient prices.
To achieve this purpose, the OEFs needed to cover the demand are auctioned among generation companies and investors. The generator who wins the OEF allocation receives a transparent and stable compensation during a specific time period, and in exchange commits to deliver a determined quantity of energy when the energy spot price is higher than the pre-determined level, the Scarcity Price. Such compensation is settled and collected by the ASIC and is paid by all the end-users of the SIN, through the fees charged by commercialization companies.
The OEF of the new Reliability Charge scheme establishes a legal link between the demand (determined by the end-users of the SIN) and the supply (determined by generation companies) of the MEM. The legal nature of the OEF allows the generation companies as well as the end-users in the system to benefit from a stable scheme in the long-term, which provides signals and incentives for investments in new generation resources. This is vital in guaranteeing the supply of energy necessary to support the growing demand resulting from the country’s economic development.
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Source: XM. Composition of the Generation in the National Interconnected System in 2006. |
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This is also known as ENSO, which stands for El Niño Southern Oscillation. |
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