ASSESSING THE DYNAMICS OF ENERGY MARKETS UNDER
LIBERALISATION PROCESSES
Ricardo A. Smith, Isaac Dyner, Santiago F. Montoya and Carlos J. Franco
Universidad Nacional de Colombia, Sede Medellin.
Abstract
The new liberalisation and privatisation trends now taking place world-wide have
influenced government policies on electricity utility management. Some countries in the
Latin American region are moving away from central planning, vertically integrated
regional monopolies and heavily biased hydroelectricity generation schemes towards
more liberalised set ups. The specific structure chosen in the Colombian case have
important variations whit respect to those advocated by main stream economic thinking.
Recent technology developments for power generation and extensive gas use in the
household sector have stretch further relationships between electricity and gas industries.
In this paper we present a System Dynamics model specially built as part of larger project
to study and assess the effect of market forces into the power generation sector, at the
light of a large scale plan which intends to supply natural gas to an important portion of
the household sector and the power generation industry. With the aid of the model, we
examine a number of economic signals to induce capacity investments to secure
appropriate reserve margins for the Colombian electricity system.
1. INTRODUCTION
After years of crisis in the power supply sector, the Colombian energy policy gears towards the
creation of appropriate measures leading to a) the financial recovery of the electricity utility
industry and b) the provision of economic signals for adequate capacity investment. To this
respect, three major factors have had an important effect on the system: tariffs only cover about
80% of the operational costs, unacceptable non-technical loses (almost 12%) and overall
management inefficiencies. However, new legislation has been introduced to create a British-style
market pool, stimulating competition between regional generation utilities and eliminating entry
barriers to private investors. This possess questions with respect to the system ability to deliver
appropriate signals to capacity building. This papers builds upon ideas expounded in Bunn et al
(1992a, 1992b, 1993, 1994), Garcia and Dyner (1996), Ku (1995) and Smith (1995),
2. MODELLING THE ELECTRICITY SUPPLY INDUSTRY
In Colombia there are over 20 public generation companies, five of which account for about 90%
of the system net capacity. Although the supply industry is heavily hydroelectric based (almost
80%), it also includes gas, coal, firewood and oil power plants. It is important to note that almost
10% of the total capacity will be private by early 1997, as new gas fuelled plants being built in the
Caribbean and Southwest regions of the country, and no less than 15% should be privately owned
by the end of this decade (even if no national assets are sold).
The supply model, Figure 1, considers linkages between six large modules, that allow interesting
feedback effects in a way that investment decisions in economic markets go hand in hand with
tegulation mechanisms.
Electricity
Demand
a ON
Capacity Energy
Reserve Prices
Encouragement
investment
Loop
Generation aa
Capacity Investment
information Loop Ng
Regulation Loop
Total
Costs
Regulation
Policies
Figure 1 General causal loop diagram
The system aim is to provide clear signals of the margin gap between total system capacity and
electricity demand, in a way that energy availability is guaranteed. The relationship between
regulation, information and investment is suppose to provide here the appropriate system balance.
Soh
In this model we represent explicitly the major electricity utilities ISAGEN, EEB, EPM,
CORELCA and EPSA, with some of their important characteristics, specially with respect to cash
flows, broad financial figures and credit possibilities.
3. RESULTS
Present electricity tariffs will undoubtedly produce underinvestment and rationing. With better
prices, the system margin should fluctuate around slightly safer values as illustrated in Figures 2a
and 2b. Other simulations results, not exhibited, here show that ISAGEN and EPM preserve a
high market share, because of their present solid performance, while EEB y CORELCA, at the
moment with no financial capacity, loose market share as they are only financially capable of
building few small plants (unless projects are undertaken with associates).
30,000,
4.
aed 25,000}
. 1
20,000}
1 ~4-TOTAL_CAPAC
ae -4-MARGIN q
15,000] ~p~ELEC_DEM
0.05 10,000}
Sat
1995 2000 2005 2010 2015 1995, 2005 2015
TIME TIME
(a) (b)
Figure 2. Simulation of a) system margin, and b) total capacity and electricity demand.
4, CONCLUSIONS
Currently, the electricity market need adjusting its regulation mechanism. Simulations suggest that
modifications need to be implemented in the area of payments for capacity availability. This model
may support policies to this end. Furthermore, new legislation is also required to facilitate
substitution of both new and conventional energy sources.
The incursion of private investors will provably bring benefits to the gas-base power generation
technologies, making the system more competitive and reliable, and less vulnerable to power
blackouts. This is shown in an extended version of this paper.
So3
Finally, the difficulties involved in finding adequate information for better modelling purposes, has
been partially overcome by making parallels with other similar situations elsewhere. SD has been
helpful to this respect.
ACKNOWLEDGEMENTS
The authors wish to acknowledge the support of the Mines-Energy Planning Unit (UPME),
Ministry of Mines and Energy and COLCIENCIAS.
REFERENCES
BUNN D.W.. LARSEN, E.R.,1992a. Assessment of the Uncertainty in Future UK electricity
Investment Using an Industry Simulation Model. Electricity Planning Project. Research
Paper Series. London Business School.
BUNN D.W.. LARSEN, E.R.,1992b. Sensitivity of reserve margin to factors influencing
investment behaviour in the electricity market of England and Wales. Energy Policy, may
1992, Pages 420-429.
BUNN D.W., Larsen E.R. y Vlahos K., 1993. Complementary modelling approaches for
analysing several effects of privatization on electricity investment. Journal Oper. Res.
Soc., Vol. 44, No.10, pages 957-971.
BUNN D.W., 1994. Evaluating the effects of privitizing electricity. Journal Oper. Res. Soc., Vol.
45, No. 4, pages 367-375
GARCIA M., Mario. DYNER R., Isaac. Reform and regulation in the Colombian electricity
sector. Submitted (in Spanish).
KU, Anne. 1995. Modelling Uncertainty in Electricity Capacity Planning - Part One. Thesis
submitted to the University of London for the degree of Doctor Philosophy. London
Business School, February 1995.
SMITH, Ricardo A. 1995. Elements for power capacity planning expansion in competitive
environments. II Seminario Internacional sobre Planeamiento Energético. XII Jornadas de
Energia. Bogota, Septiembre 13 al 15 de 1995 (In Spansh).
cH
