Table of Contents
Effects of Liberalisation on the Dynamics of Hydro Based Electricity Supply
Industries: The Case of Colombia
Authors: Gabrida Elizondo Azuela (Imperial College), Matthew Leach (Imperial
College) and Abhijit Mandal (London Business School).
Abstract
‘The objective of the investigation desatibed in this paperis to explore how the structure
of ownasship affects the sustainability of the Colombian liberalised power system which
is highly reliant on hydrodectric capacity and therefore highly vulnerable to seasonality.
To alae extent, investment behaviour, and its effect on the ownership structure of
electricity supply industries (ESIs), determine future capacity expansion petems as well
as seaunity of supply. One important aspect of investment behaviour under liberalised
markets is that it is indeed characteristic of different types of companies (i.e. private,
Public). Not only the demands on the reums to investment vary from firm to fim, also
their market share aims, portfolio devdogment goals, abil ity to dase a sound financing
scheme (eg. raise capital, leverage financing) and tisk tolerance among others, can be
essentially different.
The research framework focused on three methodological steps: a) a sezies of interviews
‘were conducted with relevant private and public companies operating in the Colombian
powersystem (i.e. public companies, IPPs, multinational energy companies) in order to
identify the key variables that drive their investment behaviour, b) a system dynamics
modd of the Colombian ESI that integrated the behaviour of different companies was
developed and tested, and c) a series of scenarios that could reflect different ownership
shares were designed in order to test the effect of ownership on systems expansion and
sustainability (Le. reserve margin).
‘The results of the investigation show two important aspects: 1) the libazlisation of the
market does not ensure the long term security of supply needs of the system (ie. the
resave margin sitinks with time, leaving the system highly vulnerable to seasonality),
}) the role of public companies is crucial since they play a key role in the maintenance
of minimum levds of reserve margin. The discussion of the paper then focus on the
need to devote more efforts to the development and strengthening of public companies
without necessarily divesting them This condusion could be extended to other Latin
American counties that are in going through the transitional stages of reform such as
Braal.
I Introduction
Over the last fifteen years, the power sectors of many nations of the world have been
‘tivetised and subsequently liberalised with various degrees of sucess from both the
technical and economic points of view.
Although the refomms from centrally plamed to market driven systems have
incorporated dements characteristic of the economic, institutional and political
conditions of each country, a few models of liberalization have emerged and evolved
withidativey well defined institutional structures and regulatory frameworks!,
The steps of the reformas wal as the sequencing followed towards full liberalisation
(Le. with regards to changes in ownership and regulatory frameworks) have playeda
key role in the definition and devedopment of today’s market-oriented power sectors.
Indeed, the devdopment of the libaalised electricity supply industies of different
counties have produced varied pattems of investment which have resulted in
characteristic ownership struciues (i.e. private, public, mixed).
To alage extent, investment behaviour and its effect on the ownership strucuure of an
dectricity supply industry determine future capacity expansion pattems with associated
levds of reliability, technology mix and carbon emissions hesdine.
One important aspect of investment behaviour under liberalised markets is that it is
indeed characteristic of different types of companies (i.e. private, public).
Many factors influence firm behaviour under liberalisation. Not only the demands on
the reumns to investment vary from firm to fim, also their market share aims, portfolio
devdopment goals, ability to dose a sound financing scheme (eg. raise capital,
leverage financing), risk tolerance and others can be essentially different.
In Latin American counties, the modds used to determine long term system capacity
expansion (eg. SUPER OLADE BIDS, EMEPODE) do not however capture this
important structural aspect of the market-oriented power systems. Rather, investment
decisions on capacity additions are aggregated and based only on the economic and
technical characteristics of projects (Le. as if only one type of firm was following a least
1 Models of liberalisation are described in Bacon and Besant-Jones 2002, Guash and Spiller 1999 and
Newbery 1999.
cost investment criteria). Other models consider either an exogenous expansion plan or
assume and inversdly proportional non-linear relationship between the price of
electricity and the reserve margin, which ultimately predict a sustained capacity
expansion.
Indeed, the differentiated investment and strategic behaviour of companies detamine
the long tem capacity expansion rates and pattems, as well as the type of investments.
Given the differences in the behaviour of different types of public and private finns it
seems necessaly to investigate its effect on ownership structure, capacity expansion,
resave margin and technology mix”
This paper explores the case of predominantly hydrodectric systems through the
analysis of the Colombian system The intention of this paper is to explore how the
structure of ownaship affects the sustainability of such type of system.
Accordingly, the next section focuses on the structural characteristics of the Colombian
dectricity supply industry. Based on empirical evidence, in section III, the behaviour of
different types of companies is described and discussed. Section IV analyses the effect
of different ownership structures on capacity expansion with a sequencing of scenarios
that resembles the steps followed after the liberalisation. Section V provides witha
discussion on the results.
II Ownership Structure and Investment Patterns Colombian ESI
The amalysis of the Colombian decticity supply incisty (ESI) is patioilaly rdevat
for the purposes of amlysing the evdlution of libedisaion ad in patiola the
dynamics of ownership share for the following reasons:
? Other authors have already explore this aspect of liberalized dectric markets. Derek Bunn and Erik
‘Larsen developed in 1992 a system dynamics model to analyse the dectricity market of England and
‘Wales. They investigated the sensitivity of reserve margin to factors influencing investment behaviour as.
well as therole of the capacity payment. Lateron, Bunn and Larsen used the model to test different
‘scenarios and expanded it to include the gas sector (see Larsen and Gary, 2000).
3
It is a fully liberalised system with an eight-year expaience in wholesale market
transactions and the application of seveal reguaions affecting investment
decisions and technology choice.
Colombia is a good example in which both public and pivde fins coexist and
thus comparisons on ther rdative behaviour and objective functions can be
canied out The sector is characterized by a 44 pacent sae of public
ownership and a 56 percent share of private ownership.
Tt presents an interesting case since this is a liberalised market strongly
influenced by seesorality.
Whilst the system is in need of firm capacity additions in the form of thermal
generation to avoid future Hack outs and lower price volatility, investors are
increesingly reluctant to participate given the prevailing low dectricity prices
and the lack of economic incentives.
There is still uncertainty as to what types of economic or market based
instruments could promote the additions of non- hydro besed capacity as well as
to what extent regulatory bodies should intervene and when.
Structure of the System.
The total net installed capacity of the Colombian National Intercomected System (SIN)
as of 2001 reached 13.167 GW. Most of this installed capacity is hydro-besed (about
66%) meking the sytem highly rdiat on hydopower availability The thenal
generating capacity is 75% ges based with the balance 25% conesponding to coal and
fuel oil fired generation.
Economic recessions in Colombia have affected the demand for decticity. Darand
gowths wee either very low or negative between 1996 and 1999. However after the
year 2000, and as the economy recoves’ the decticty davand les exhibited an
inceesing tend.
Seasonality
° The average annual growth for GDP in Colombia grew froma negative 4.1% in 1999 to a positive 28%
in 2000. Anaveragerale of 4.7% is expected for the period 2002 to 2004 (World Bank, 2002).
4
Given the high share of hydrodedtric capacity in the Colombian power system, the
systemis highly vulnerable to changes in rain pattems (i.e. seasonality). In the period
1990-2001, four dry years (1.e. with associated low hydrodectic utilization capacity)
affected the Colombian dectiaity supply industry (ESD, including the droughts of 1992
and 1997/1998 due to El Nitto phenomenon. During these droughts the water levels of
hydrodectic plants’ reservoirs dramatically lowered. The following graph shows the
evolution of the aggregated reservoir volume of hydrodedtric plants in the system.
FIGURE 1 Aggregated Reservoir V lume’ of Hydroelectric Plants in Colombia
(Annual Average) Period 1984-2001
©
Ss
Ps
s
=
3
2
Ss
Average is 62.17%
.
$
Aggregated Reservoir Volume (%)
a
g
w
S$
y
8
1984 1985 1986 1987 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
‘Sourves: www.creg.qov.00, WWw-uInMe.Gov.Cco
As shown in Kgue 1, Colombia bed a aitica drought in 192 (with asodated
Hackouts) and wet yeas in the paiod 1994-1996" with high aggregated resavoir
volumes. During wet years, the availability of hydrodecttic generation wes sufficient to
fulfil the demand in amost 100 percent for which thenmmel power plants wee hardly
dispatched over this pariod®. During dry seasons themmel power plants are called to
attend the portion of the demand that can not be supplied by hydrodectic genaation
(Le. mid maiit to peak load).
4 Includes all reservoirs in the country.
° Extremely wet years are known as La Nifia phenomena, as itis the opposite effect to El Nifio event.
© Hydroelectric generation serves the base load demand in the “merit order” structure of Colombia.
‘Thenel generators enter in mid or peak load depending on the system’s demand. The availability of
hydroelectricity therefore determines whether thermal generators are dispatched ornot.
However, during highly aitical evenis or drouhis thama genaains have not bom
ade to fulfil the damend gap sme they don't have enough firm cyatity in paw to
atend this need Inked the Coombian system with its low dechicty pices and
required resarve margin’ fora system with sucha high hydrodectric capacity share.
Economic Dispatch and Structure of the Wholesale Market
Hectricity generation pricing and meiit order dispatch in the Colombian power sector
are besed on "energy price hidding" by generators for a day ahead estimated hourly
demand. The price or hid offer of the last unit dispatched defines the "system marginal
}iice" of generation. For the particular cese of the Colombian pool market, the hids
reflect only the costs of production (i.e. the variable costs, comprising mainly fuel and
Operational costs) as mandated by the regulatory framework (CREG resolution 100 of
1997)®. All dispetched spot market participants are however paid the systems marginal
tice, hence allowing the recovery of capital investments, specially to those plants with.
very low variable costs and sunk investments (eg. suchas large hydroelectric plants and.
geneally those supplying the hase loaxl).
Capacity Payment in Colonbia
In Colombia a "capacity payment’ has been established to deal with the poblen of
recovering investments, and therefore having a better price signal for investing in new
Plants (especially for those that are generally dispatched at the peak and are vulnaable
to seasonslity, such as gas based power plants).
According to regulation CREG Resolution No.116, the genading agents that contibute
to the sytem with fim power, under esimated aitical hydology conditions dung the
dry season (summer time) receive the capacity payment which is equivelent to the
monthly fixed cost of the most efficient technology with lower capital costs. Since 1997
7 Reserve margin in a system with high share of hydroelectric capacity should be no lower than 30%.
® Evidence on hid prices can be found in www.isa.com.oo and www.cnd.comoo where historical data on
dispatching operations is kept. Participant agents might however exercise different pricing strategies
depending on the seasonality and other factors. These strategies are included in the model described
below, however, there are not the subject of discussion in this particular paper. For more information see
Hlizondo, Mandel, Leach (2003).
the capacity element has been set at 5.25USD/kW-month (ie. comesponding to
open-cyde ges turbine). The Capacity payment guarantees a minimum flow of revenues
to those generating agents that contribute with firm power to the system.
Payments and setlement is done in the Pool, invementing the pool decticity price to
buyers and transfering payment to generators on the besis of KWh sold.
Evolution of Electricity Prices
The Colombian decticity market has been aoquiring expatience year by year after the
liberalisation in 1995. The performance of the market in tems of decticity prices is
yrovided in Figure 2 bdow:
FIGURE 2 Spot and Contract Markets Monthly Average Price
Period July 1995-J anuary 2002
Spot Market
USD/ kWh.
Contracts
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
Sources: Unided de Planeecion Mineo Enayeica (UPME), www.upmegov.co with anual
exchange rates fiom the Economist Intelligence Unit (EIU).
At present, and because of the high volatility exhibited by the systems maginal price
(SMP) in the pool, about 80% of the demand is supplied through oontads, with only
20% of the demand being transacted in the spot market (TERA, 2000).
Ownership Analysis
The owneship structure of the Colombian Electricity Supply Industry is described in
Table 1 below. In tenxs of electricity generation, the sector is characterized by a 44
percent share of public ownership and a 56 percent share of private ownership, as
shownin the table bdow.
Table 1 Market Size and Firm Participation in the Colombian ESI (2001)
Total
Name MWs Share % Hydro Gas Coal/Oil
PUBLIC COMPANES,
Empresas Publicas de Medellin (EEPPM) 2595.95 19.71 2125.95 470
ISAGEN SA 1695 12.87 1410 285,
Public Companies contributing with less than 3% 1537 11.68 119.73 266 582.
TOTAL PUBLIC 5828.68 44.27 4255.68 1021 552
PRIVATE COMPANES
EMGESA S.A. +Belania (ENDESA) 3036 23.06 2814 22
EPSA / Chivor (ABB, AES Corporation assets) 1520 1154 1520
Independent Power Producers (IPPs) 2596 19.72 2441 155
Co-geneators 76.1 0.58 9 67.1 152.78
Private Co's contributing with less than 1% 110.8 0.84 818 29
TOTAL PRIVATE 7338.9 55.73 424.8 2508.1 558.78
TOTAL
13167.58 100 8680.48 3529.1 1023.8
Sources: Private Participation in Infrastuctwe Data Base (Wold Bank 2001), Colombian Enagy
Planning Unit (UMPE 2002), various companies annual reports.
According to a study on market power for the Colombian ESI developed by Hagler
Bailly (TERA,2000), the generation activity in Colombia constitutes a moderate
oligopoly (i.e. about 30% of the market is served by many smell agents). The
Herfindhele Index (HHI) is indeed higher during ciitical hydrologic conditions.
Evolution of Private and Public Company Investments
After the refom of the power sector in Colombia, both private and public generating
companies invested in capacity additions in the dectricity supply industry. In the period
1995-2001, Independent Power Producers (IPPs) added a total of 2580 MWs of thennal
power generation. Public utilities on the other hand installed a total of 1310 MWs since
the libadliization in 1996 induding a 405 MW hydrodectiic plant in 2001.
Table 2 Private and Public Investment Period 1995-2001
Type IPPs Public Utilities
Hydro - 406
Coal 165 150
Gas 2415, TS
TOTAL 2580 1310
‘Sourve: FIPSI Data Base, World Bank, UPME and other
IPPs however have reduced the rate of investments in Colombia fora variety reasons
but mainly due to three events: a) an increase over the past years in the number of
guenilla attacks’ to transmission towers and other infrastructure assdis, b) a substantial
increment in the price of natural. gas after 1999 and most importantly due to c) the low
electricity spot and contract prices exhibited by the market. Regulatory unoattainty
regarding the capacity payment has also influenced the interest in further investments.
Public utilities on the other hand increesed their rate of capacity additions after 1997,
investing more in thenvel generation than in hydrodectric power plants. In fact, public
utilities have expressed their intention of increasing the thermal share of their portfolio
of power generating units within the next 5 to 10 years"®. The historical investment
behaviour of both private generators and public utilities set the basis for the expected
capecity additions to the Colombian ESI. This is described bdow.
° Guenilla attacks are included in the modd described bdow.
10 Tnterviews with Walter Navamro, Empresas Publicas de Medellin (EEPPM) and Ismael Concha, Unidad
de Planeacion Minero Eneryética (UPME).
III The Behaviour of Public and Private Enterprises
This section draws froma saiies of interviews with private and public firms operating in
the Colombian system and in Latin America conducted in the period 2000-2002",
The derents that influence the decision of companies on whether to invest or not in
capecity additions as wal as on the type of technology, timing and geographic location
of the investments ae divase Indeed the combimaion of demens affecting the
dynamics of deregulated enagy systems increases the complexity of the decision
Manages of energy firms however prioritise only a few of these dements besed on their
ownaship structure, size, portfolio composition ability to dose financing schemes as
well as their various corporate objectives and strategies.
In the oontext of liberalisation the characteristics that mark the differences between
Piivete and public firms have to some extent departed from the conventional wisdom.
For instance, despite the increese in guenilla attacks after 1996 and the relatively low
decticity demand rates exhibited at the time (05 to 2%), Endesa Spain’? sought to
increese its regional market share and invested in about 3,000 MW of divested power
enacting asses in Colombia in 1997.
Independent power produces (IPPs) have entered the vaious decticity makes of
Lain America despite their degree of libediisaion foasing manly on athieving
specified levels of retums to investment
Public utilities that were not divested and opaale uncer the mes of decticity markets
stive towards integrating commecia principles info thar busines prctics while
keeping some of the social objectives that have historically detemined their behaviour
(Le investments respond to the security of supply needs associated to the system).
Public monopolies, such as the Mexican Federal Commission of Electricity (CFE) have
undesiood the staiegic importance of impoving tanspaery and inendiisng
yiivate-like economics into their practices (eg. patiodically reporting the stas of ther
cash-flows).
"The interviews included managers of EEPPM, InterGen, AES Corporation and Endesa Corporation
among othas.
? Tn 1999, Endesa Spain (previously unrdated to Endesa Chile) secured control of the Chilean company
afteralong and complex process that involved first gaining control of Enersis, and then aggressively
compaiing with Duke Energy to obtain the additional shares needed for acquiring Endesa Chile (Del Sol
2002).
10
Today, dectricity sectors are operated by different types of private and public fimms
with ownaship compositions that determine to a large extent their devdopment.
With the intention of gaining insight into the investment behaviour of power genading
companies opading in the Colombian ESI, sani-stucured intavviews were conducted
with both expats of the system and manages of a sample of companies playing a key
role in Colombia and in other Latin American counties. The results were incorporated
into the design of a system dynamics modd for the Hechicity Supply Incksty of
Colombia (see Annex I fora description of the modd).
In this section, the behaviour of different types of companies is described and discussed.
Section IV then amalyses the effect of diffeent owneship strucimes on capacity
expansion with a sequencing of scenarios that resembles the steps followed after the
A Investment Behaviour of Private Companies
To capure the behaviour of different private firms operating in Colombia various
managers of the following companies were interviewed:
i) ENDESA Corporation (with a market share of 23%)'3
ii) AES Corporation given its ownership share in EPSA, Chivorand
TexmoCanddiaria (combined share of 13.7%) as well as its relevant
regional partidpation,
iii) —_Intergen, a firm that operates as an independent power producer (IPP)
not only in Colombia (1e ThemmoEmecali) but also in various systems
of the Latin American region’,
ivy) Hl Peso Corporation, actively opating and investing in Brazil as an IPP.
The analysis wes complemented with the evaluation of the investment pattems of
itivale companies participating in the Latin American region (particularly those that:
13 Thterviews included managers with experience in the operation of both Endesa Spain and Endesa Chile
4 Manegers interviewed had positions at: the regional level rather than at the local level (e.g. managers of
EMGESA were not interviewed, rather various managers of Endesa Chile and Endesa Spain were
reached).
11
have invested in the Colombian ESI") and with the review of annuel reports and
relevant literature. To the extent possible and in order to preserve confidentiality, the
Tesults have been aggregated in teams of behaviour. Accordingly, the following sections
summarise the behaviour of two types of private companies a1) Multinational Energy
Companies (MNECs) and a2) Independent Power Producers (IPPs)
a.1) Multinational Energy Companies (MNECs)
Lage multinational utilities such as Endesa, Southem Energy, Duke Energy and CMS
Energy Corporation have followed investment pattems that are characterised by their
desire to expand their investments and operations at: both country and regional levds
(see Table 3 bdow).
While some of these firms have invested in greenfield or merchant power plants, the
majority such as Endesa Spain have mainly focused their investments on the purchase
of divested assets (sae Amex II). Indeed, the high demands for the retums to
investment set by some of these companies (which reflect their low levels of tolerance
to diverse sources of risk ) have prevented their participation in greenfield or merchant
capacity at the country and regional levels.
‘The interviews with various managers of Endesa-Chile and Endesa- Spain revealed the
following smple 1ules for the simulation of the behaviour of EMGESA in the
Colombian cortext”®:
EMGESA will sitive towards maintaining the maximum market share allowed
by the regulator
EMGESA will therefore invest in the amount of capacity required to maintain
this maximum allowed level of market participation.
technology available if the intemal rate of rem (IRR) associated to this type
of powerplant is equal or higher to the finm's pre-established levd of retum to
* For this analysis, the Private Sector and Infrastructure Data Base (FIPSI) of the World Bank (2001) was
used.
1© Fora empirical data (in the form of “quotes”) see Elizondo (2008) or the working paper Elizondo
(2008), Expansion and Behaviour of Energy Companies Operating in Latin America, Imperial College of
‘Science, Technology and Medicine, www.env.ic.ac.uk/research/epmg/GabridaCv him
12
investment, which is equal or higher to the hurdle tale associated to the
market.
Tt assumed that EMGESA has no restrictions in financing the amount of
Capacity needed to fulfil its market share goals.
+ _EMGESA has an investment plaming horizon of three years.
As aconsavative measure the firm considers “worse case” soenarios of
electricity demand, electricity price, fud prices and other relevant indicators
when calculating the reum to investment
TABLE 3. Private Participation in Latin American Power Sectors (Top 20) (2000)
‘Share in Region, Company MW
if 245 AES Corporation” 18,968
2 16.3 Endesa Corporation 12,662
3 97 Southem Energy Inc™™ 7,574
4 72 Duke Enagy” 5550.7
5 71 Trectebd 5518
6 68 Gener (Chilgene), 5282
Fi 53 CMS Enaryy Comp 4118
8 39 Enon Cop 3007
9 31 Iberdola 2413
10 28 Akasaka Corp 2180
11 28 Flectricite de France 2158
12 26 JATESA 2046,
13 23 Shell Corporation 1800
14 22 Ampoo 1732
15 27 ‘TransAlta Corp 1650
16 2 InterGen. 1534
17 19 AIP 1450
18 18 Chilquinta 1379
19 17 El Peso Energy Int 1343
20 17 ‘Argon 1320
Source: Elizondo, 2003
1” AS is one of the largest IPPsin the US, considered also a global power company.
18 Southem Energy Inc. is a subsidiary of Southem Company, the largest power generator of the USA. It
is in facta public utility holding company (EIA 1999).
19 Duke Energy is a subsidiary of Duke Energy Corporation, the 5" largest investor generator of the USA.
‘This company has embarked on an aggressive growth plan to become a leading energy company and is
now one of the largest combined electric power and natural gas companies in USA (EIA 1999).
13
Figure 3 presents the loops characteristic of this type of behaviour. The balancing
feedback loops A and B denote the wholesale market. The reinforcing feedback loop C
(ie STI-ICA-CC-TRC-PRC-STI or STI-ICA-OC-TRC-PRC-MS-MSG-ST1)) denotes
the strategic decision of MNECs, which leads to investment in capacity. Additionally,
the moda considers guenilla attacks as the number of bombed transmission towers (Le.
at specified levds EMGESA would either increase its demand for retum to invest or
consider not to invest)°,
Figure 3 Loops Characteristic of EMGESA s Investment Behaviour
—-
Contracts Price CP + Refumto
Investment, IRR}
x
Gucnilla tacks
‘System Marginal at
Price SMP
+
A
Demapd DOE pesired| Retum to
Bidding Price BP) Investment, DIRR}
we
B
Reserve Margin,
ORM + Total Registered
Capacity, TRC
vie pe
Capacity Uj
‘Sourve: Elizondo (2003)
29 After 1996 the number of bombed transmission towers increased dramatically reaching about 400in
2000. In interviews with managers of Endesa Spain, this proxy was established. For a empirical data (in
the fom of “quotes’) see Elizondo (2008) or the working paper Elizondo (2008), Expansion and.
‘Behaviour of Energy Companies Operating in Latin America, Imperial College of Science, Technology
and Medicine, www.env.ic.ac.uk/research/epmy/GabridaCv himl
14
a.2) Independent Power Producers (IPPs)
IPPs investment inflows to the decticity generating segment of the Colombian power
system started before the privatisation in 1998 with the instalation of a merchant 100
MWs ges-fired power plant built and operated by KMR power onrporaion, (ie later
aoquired by AES Corporation) and the participation of other financing groups. With the
opening of the wholesale decticity market in 1995, other IPPs entered the system with
ges or even ooal-besed power generding plants adding a total of 2160 MWs of thenmal
capecity in the petiod 1995-1997 (i.e more than 15% of total installed capacity at the
time) (see Figure 4 bdow). An amlysis of the investment pattems of IPPs in the Latin
American region has demonstrated the paticipaion of IPPs in manly geeanfidd
IPPs were not only attracted by the liberalisation and the fact that Colombia wes in need
of firm capacity to avoid rationing during dry years or extreme events such as El Nifo,
also the spot and contacts dectricity prices, dthough siill volatile were well above the
region's compaitive average. These conditions were considered positive signals for
investment. IPPs investments after 1996 were however affected mainly by the following
circumstanoes: a) consecutive wet years that affected the dispatching of thenvel plants,
b) regulatory inconsistencies (eg. nontansparent dlocation of capacity payment
among generators offering finn energy), and c) extremely low electricity prices.
At the globel levd, events such as the Enron financial collapse and the energy crisesin
Califomia provoked a lack of confidence from the part of banks and financial
institutions on energy developers. After 2001, IPPs faced serious baniers in acquiring
equity and thar required levds of deb".
21 Tn the past, IPPs aimed at maximizing the debt of a project as banks required debt to equity ratios with
at least a 70/30 weight. Indeed, the ability to raise debt or opening lines of credit was seen as an indicator
of the confidence of banks and other lenders on eneryy companies. However, after the Enron's fall
lenders became more cauitious and companies are expected to finance their businesses witha higher
proportion of capital (Le. debt to equity ratios are about 60/40 at the moment) (Elizondo, 2003).
15
Figure 4 Investment Pattems as a Percentage of Total Installed Capacity
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0,000 +
Percent Added to Total Installed
1995 1996 1997 1998 1999 2000 2001
‘Soutves: Elizondo (2003)
The modd represents the behaviour of IPPs (eg. Intergen, AES Corporation, ABB)
besed on the following premises:
IPPs have demonstrated to be willing to add high percentages of capacity needed if
the conditions of the system are such that allow them to recover their required
minimum res to investment
IPPs are willing to add capacity when the expectations on rationing (or tight
resave margins) are high
TPPS will only invest in the most economically compatitive tecology (ie.
generally those with low capital costs such as combined cycle gas turbines)
Based on the interviews conducted, it is assumed that IPPs demand on retums to
investment are lower than those demanded by multinational utilities such as
Encesa, but higher than those demanded by public utilities.
Figure 5 presents the loops characteristic of IPPs’ behaviour. The balancing feedback
loops A ani C, as well as the reinforcing feedback loop D” denote the wholesale
2 tn this diagram it is shown that demand of dectricity (DOE) not only affects the contracts price which
reflects long term consumers demand dasticity, it also affects the system marginal price (SMP) since this
is set througha leest cost dispatching or merit order. The SMP is in fact a function of the demand (see
Manual Model System Dynamics of Liberalised Colombian Power Sector as well as the powersimmoda.
at www.ew icac.uk/research/epmgyGabridaCV him).
16
market. The balancing feedback loop B denotes the strategic decision of IPPs which
lead to investment in capacity. In effect, the investment decisions of independent
power producer are mainly affected by the potential retums to investment that the
system can provide.
Figure 5 Loops Characteristic of IPP’s Investment Behaviour
—
Contacts Pew
maianent Cpetity <4 Resuied RR 7 :
‘dition, ICA
cuenta ans ke
Aktion PP
x
1A.
copy in 7
constieon CC
Biking Pace BP a.
Mihumcancity
+ Regis
Nn. Capea, TRC Project Avaltle
valley Cpa, PAC
eT
‘Sourve: Elizondo (2003)
B Investment Behaviour of Public Companies
b.1) Public Utilities (EEPPM, ISAGEN)
Although limited by capital funds and the possibility of govemment outflows, some
public companies that have survived the process of liberalisation and that are
commercially sustainable (i.e. positive cash flows) such as Empresas Publicas de
17
Meddlin (EEPPM) or ISAGEN, will play an important role in the future capacity
additions to the Colombian dlechicity system.
This is because although these finns have intemalised commacial principles into their
investment decisions to behave more like private firms competing in market oriented
schemes, they have also kept some of the social and environmental objective functions
characteristic of their behaviour before the liberalisation. For instance, despite its low
yofitability EEPPM is in the process of building a 19.5 MW wind besed power
generating plant which is participeting in the intemetional carbon emissions market.
Indeed, portfolio diversification is seen as an important aspect of EEPPM's long-team.
growth strategy.
Tnackition, due to theirlocal knowledge and contacts network (i.e. which lowes
infonmetion asymmetry), public firms appear to be less risk averse than intemational
firms. Based on the interviews conducted with manager of EEPPM and ISAGEN, the
behaviour of Colombian public utilities is represented with the following mules:
It is assumed that PUs are more flexible than IPPs and MUs in their demands for
retums to investment.
This behaviour will however change with time, since the expectation of these
public utilities is to become financally and organisationally more similar to private
companies.
For the particular case of Colombia, in which PUs have historically had portfolios
with high hydrodectric shares, PUs will strive for an increase in technology
diversification mainly in the fommof themnel generation.
PUs are willing to invest in renewable source based power generation even though.
their eum to investment is not compatitive but as long as the retums to investment
are not lower than cattain specified limit
PUs tend to be more concemed (and involved) with social and environmental
issues, hence their more active participation in the installation of renewable based
power generation and emissions trading.
PUs in Colombia tend to add capacity as a response to a) certain degree of lowering
of the system's “optimal” reserve margin (expectations), b) financing capacity
18
restrictions (eg. cattain public utility in Colombia could not increase its market
share to more than 21% due to financing restrictions”).
Forits forecast, PUs consider the conservative scenarios of demand (e.g. average to
‘worse case) provided by the planning unit to account for the fact that the UPME’s
reference scenario has been historically overestimated (Navarro 2002).
Figure 6 presents the loops characteristic of PUs’ behaviour.
Figure 6 Loops Characteristic of PU’s Investment Behaviour
tt
2g
penn
mon
“ wpe
rig ae —*
‘ Pi oes
sen gt
sce MF
ae
nipeimeaseien
Crates
‘Magen, ORM
‘Sourve: Elizondo (2008)
The diagram integrates the wholesale market loops (as shown in Figures 3 and 5 for
MNECs and IPPs), however, the fact that their investment decisions induce portfolio
diversification (Le induding wind besed generation given the potential for this type of
23 This is recorded in the form of “quotes” in the working paper Flizondo (2008), Expansion and
Behaviour of Energy Companies Operating in Latin America, Imperial College of Science, Technology
and Medicine, www.env.ic.ac.uk/researchYepmg/GabridaCV .himl
19
eneweble energy) makes the diagram visually more complicated. Additionally, public
utilities consider the levels of reserve margin when considering long tem investment.
IV Effects of Ownership on the Dynamics of Capacity Expansion
This section analyses the effect of different ownership structures on capacity expansion
‘with a sequencing of scenarios that resembles the steps followed sinoe the beginning of
the liberalisation. These scenarios are the following:
Scenario I: Pre Liberalisation: Participation of only Public Finns
Scenario II: Post- Liberalisation: Participation of a mix of Public and Private Finns
Scenario III: Post Liberalisation: Participation of only Private Fins
All other assumption regarding exogenous variables and parameters have been kept the
same for the three scenarios and have been also chosen with the criteria most
conservative (eg. most probable or conservative scenario of fuel costs rather than high
cost scenarios).
‘The intention of the exatise is to explore how the structure of ownership affects the
sustainghility of the Colombian liberalised power system whichis highly reliant on
hydrodectiic capacity and therefore highly vulnerable to seasonality.
ScenarioI Pre Liberalisation: Only Public Finys
Tnarderto explore how would the system have evolved in tens of capacity expansion
should liberalisation have not occurred, the system dynamics model was run with the
participetion of only Public Utilities. Indeed, in the early 1990s the goverment realized
thet public utilities alone could not ensure the long tam sustainability of the system
given the govemment' s budgetary constraints.
With this scenario we would like to explore what would have happened if the
Colombian govemment had not decided to liberalised. The results are shown in Figures
7, 8and9 bdow.
Figure 7 Evolution of Capacity Expansion (Scenario I)
-
x
8.000: rans
7.000 Pa ae
6.000: 2 yy 1 777" “ectricity_Demand
ff Mi ¥ LL. 2 77! *vailable_Capacity_REAL
1.995 2.000 2.005 2.010 2.015, 2.020
Time
‘Note: The scenario of rain applied delivers two extreme climatic events (Le. severe droughts or Nifio
phenomena) in the years 2002 and 2012. This can be appreciated in line 2 of this graph.
Figures 7 and 8 show how public utilities would have been able to sustain minimum.
levds of security of supply (ie. reserve margin above 20%) for at least up to 2010.
Figure 8 Evolution of Reserve Margin (Scenario 1)
rgin_Available
°
uh
Reserve_Ma
&
S
1.995 2.000 2.005 2.010 2.015 2.020
Time
21
Figure 9 Evolution of Spot Electricity Price (Scenario I)
0,3.
2
SMP_SMO
0,1
1.995 2.000 2.005 2.010 2.015 2.020
Time
As shown.in this graph, a dramatic lowering of the reserve margin is registered after
2010 with zetioning events occuring only after 2017. Indeed, increased demand and the
financing restrictions imposed on Public Utilities do not alow them after 2010 to
maintain the optimal reserve margin for which they strive (i.e. no lower than 20%).
The spot market price of electricity responds to the reduction of available hycrodectric
Capacity (see spikes in years 1997-98, 2002, 2007 in Figure 9) and the reduction of the
reserve margin after 2012. Under this soenario (no market or monopoly) however, the
market price is meaningless, in other words, the price would exhihit this degree of
Scenario II: Post-Liberalisation: Participation of both Public and Private Firms
As shown in Table 1 and Figure 4, after the libalisation in 1995, both public and
[iiveie firms have secured a degree of participation in the Colombian decticity supply
inctsty (Le. 44.27% public and 55.73% private as of 2001).
This scenario simulates the oo-existence of public utilities, independent power
yproduoers (IPPs) and multinational energy utilities. The results are show in Figures 10
to 22:
Figure 10 Evolution of Capacity Expansion (Scenario II)
hac Pan
2 4
8.000. 2 *) oes % 2
vuy Wf . af
7.000: af ‘
2 1 777 Tectricity_ Demand
Vv
6.000 { F 2 Tot yailable_Capacity_ REA
exes Gia sgt |
1
=
ee ; + t :
1.995 2.000 2.005 = 2.010» 2.015 «2.020
Time
‘Note: The scenario of rain applied delivers two extreme climatic events (Le. severe droughts or Nifio
phenomena) in the years 2002 and 2012. This can be appreciated in line 2 of this graph.
Figure 11 Evolution of Reserve Margin (Scenario II)
Reserve_Margin_Available
F t t t t t
1.995 2.000 2.005 2.010 2.015 2.020
Time
As shownin graphs 10 to 12, the participation of both public and private enterprises
ddlays a possible dectricity supply crises to the year 2017. The financing limitations of
Public Utilities which lead to a reduce reserve margin with associated increase of
2
electricity spot price are complemented with private investment. Private companies
however are, as explained before, also limited by their own restrictions in terms of
market shares and demands on retums to investment.
Figure 12 Evolution of Spot Electricity Price (Scenario II)
0,3
SMP_SMO
°
B
1.995 2.000 2.005 2.010 2.015 2.020
Time
The price of dectricity reacts accordingly (Figure 12).
‘The results show that the liberalisation of the system does not ensure the long tam.
sustainability of the system The reserve margin lowers with time until it becomes zero
at around 2017.
Scenario III: Post-Liberalisation: Participation of only Private Firms
This scenario explores weather the operation of only private companies would ensure
the long tam sustainability of the system.
Accordingly, in graphs 13 and 14 it is shown that under this scenario minimum levds of
reserve margin are provided up until the year 2010, after which the system exhihits tight
Tesarve MaIyins.
Figure 13 Evolution of Capacity Expansion (Scenario III Only private Firms)
z
9.000: ‘
a,
1
8.000 ee
* 2
7.000 ise ¢ ae
ral Wf YY 17‘ Vectricity_Demand
6.000" 2 *-*-' *yailable_Capacity_REA
ys A 2 - S
vy gee
1
x
t t : t t t t
1.995 2.000 2.005 = 2.010» 2.015 2.020
Time
Figure 14 Evolution of reserve Margin (Scenario III Only private Companies)
S
@
Reserve_Margin_Available
©
=
1.995 2.000 2.005 2.010 2.015 2.020
Time
The evolution of the spot price exhibits the same degree of volatility as in Scenario
IL(e with spikes due to either extreme hydrologic conditions or very low reserve
margins).
Figure 15 Evolution of Spot Electricity Price (Scenario II, Only private Companies)
0,3
hod
SMP_SMO
0,1.
1.995 2.000
Sunmary of Results
The results show that the co-existence between different types of private and public
fins ensures minimum levds of rdiability of supply up until at least 2016. The other
two soenatios (i.e. only private companies or only public companies) do not however
2.010 2.015 2.020
Time
delivers acceptable leve’s of resarve margin after 2010.
Table 4 Smmry of Results.
SCENARIOS Long Term System Sustainability (Reserve Margin)
Participating Finns Period of Sustained. Reserve Margin Negative Reserve
Minimum Resave Margin Bdow Minimm Margin (Ratioring)
1 Only Public Firms 2010 2010-2017 After 2017
TI Both Private and Public Fims 2016 2016-2019 After 2019
TI Only Private Firms 2010 After 2010 None
Note: Public Finns are public utilities (e.g. ISAGEN, EEPPM), Private Firms are IPPS (eg. AES, InterGen) and.
MNECs (eg. Endesa).
Indeed, financing restrictions on Public Fis, regulatory restrictions on market share
and the high demands on the retums to investment affect in combination the long tam.
sustainability of the Colombian Electricity Supply Industry, given the different
strategies sought by each type of firm.
V Discussion and Conclusions
Several conclusions can be drawn from the simple analysis provided in this paper
Tt has been shown that market liberalisation do not ensures the long tenms needs of
the system in tems of reliability, a condition that is necessary for the maintenance
of a system that has a high share of hydrodectric capacity and itis therefore highly
vulnaable to seesorality.
Public fins in Colombia however play a key role in the maintenance of a
minimum rdiahility of supply in the sytem.
Public firms alone however would not be able to maintain an optimal orevena
minimal levd of reliability for a long period due to budgetary constaints.
The Colombian govenment should continue working on the financial
independence of its public firms in order to increase their ability to invest in
Capacity expansion.
‘The ciitezia for investment considered by private finns is not aligned with the long
term needs of a system such as the Colombian one . Their sole participation in the
market, as shown, would not ensure the maintenance of a minimum reserve margin.
Rather private firms investment is mainly tiggered at very tight ornegetive
(rationing) reserve margins.
Complex stochastic models such as the Super Olade Bids and the EMEPODE or
those that do not consider the differences in the behaviour of companies can not
capuure the possibility of a crises after 2012. Rather, this modd’s either consider an
exogenous expansion plan or assume a inversely proportional non-linear
relationships between the price of dectricity and the reserve margin, which might
no be always consistent with the behaviour of playas.
New incentives have to be designed to increase both private and public investment
(Le. the use of innovative financial and contractual tools such as futures, options,
swaps and others).
27
At the mactoecononic levd, the goverment of Colombia should seek to lower the
tisks associated to investing in the country through incentives that benefit or
improve the financial structure of projects.
Indeed, in order to maintain the markets without destroying them, companies have
to balance investor's demands with social and environmental needs.
Public utilities in Colombia are in fact anew type of hybrid company: they have
intemalised commercial principles into their investment behaviour without leting
other socially and environmental considerations go. The development of this type
of companies have to be studied in more depth, given their behaviour which is key
to the maintenance of nininum levds of reliability.
Themodd devdoped simply shows that the mix of ownership in a particular
liberalised system matters due to the differentiated behaviour of companies. Of
course, this depends very much on the conditions of the public utilities operating in
the system and the incentives for investment that the system itsdlf provides.
For the patticular case of Colombia, intemational interconnections (regional
interconnections) will play an important role in the future. For instanoe, the
transmission line Puebla(Mexioo)- Panama can be joined to the interconnected.
Andean region increasing the efficiency of supply-demand balancing operations
(eg. counties in Colombia with high shares in hydrodectric capacity can be
supplied by countries such as Mexico with high shares of theamal generation). The
impact of the lack of capacity investment in the medium to long tems can bein
part buffered by the complementarities between hydro, thennal and wind resources
inthe region.
There is a need to develop in depth case studies on the behaviour of public and.
Jiivete firms with high shares of ownership at the regional and national levds.
Indeed, their behaviour has changed after more than a decade of libedisationsin
the region and they can’t be categorized any more as simply private or public.
‘Sourves
Bacon R.W., BesantJones J., 2002. Global Electric Power Reform, Privatization
and Liberalization pf the Electric Power Industry in Developing Countries. The
World Bank Group, Weshington D.C.
Guesh Luis, Spiller Pablo; 1999. Managing the Regulatory Process: Design,
Concepts, Issues, and the Latin America and Caribbean Story, Ward Bank Latin
American and Caribbean Studies, Washington USA.
Newbery, David M; 1999, Privatisation, Restructuring, and Regulation of
Network Utilities The Walras- Pareto Lectures, The MIT Press, Cambridge
Massachusetts.
Dd Sol, Patricio. 2002. Responses to Electricity Liberalization: the Regional
Strategy of a Chilean Generator. Energy Policy, Vol. 30, pp 437-446.
Bum Derk W., Larsen ER.; 1997. Systems Modelling for Energy Policy, John
Wiley & Sons, England.
Bum DW. Larsen ER. and Vlahos; 1998. Complementary Modelling Approaches
for Analysing Several Effects of Privatisation on Electricity Investment Joumal of
the Operational Research Society, Vol. 44, No. 10, 957-971.
Bum D.W., LarsnE.R.; 1992. Sensitivity of Reserve Margin to Factors
Influencing Investment Behaviour in the Electricity Market of England and Wales,
Energy Policy, May, Vol. 20'No5, 420-429,
Bum D.W., Larsen E.R.; 1994. Assessment of the Uncertainty in Future UK
Electricity Investment Using an Industry Simulation Model, Utilities Policy, Val. 4,
No. 3, 229236.
Bum D.W;; 1998 Evaluating the Effects of Privatising Electricity, Joumal of the
Operational Research Society, Vol. 45, No. 4, 367-375.
Gay S,, Larsen ER. 2000, Improving Firm Performance in Out of Equilibrium,
Deregulated Markets Using Feedback Simulation Models, Energy Policy, Vol. 28,
845-855.
Private Participation in Infrastructure, 2001; PPI Project Data Base for Power
Sector in Latin America, The Word Bank, Washington D.C.
WordBank 2002, J epirachi Carbon Off Set Project Baseline Assessment,
Wwww.pototypecarhonfunc.oom
Hizoncb, Gabrida. 2008. Effects of Regulation on the Dynamics of Power Sector
Liberalisation in Latin America. PhD Thesis, Imperial College of Science,
Technology and Medicine, London UK.
Hlizonth, G, Mandal A. Leach M. 2008. Pricing Strategies by Generators in the
Colombian Wholesale Electricity Market, Working Paper
www.nw.icacuk/research/epmy/GabridaCv him)
31
Annex I System Dynamics of the Colombian Electricity Supply Industry
‘Variable Costs, VC}
Gap MSG +
RN
‘wi to
Invest, WIC
Ae
wf i
Projected Capacity
perCompany Investment Capaci
‘Load Factor LE} ‘a ICA
Projected Registered g
Cec. PRC = <
Construction, CC
Reservoir Level, RL
. Wind Velocity
+ a Total Registered
. “OSS anueaas x TRC
+, capacity Uj
+
Capecity Factor, CE} Projected Available
Capacity, PAC
+
Projected Reserv
Margin, RM
24 For a detailed description of the modal including equations, assumptions and diagrams, see document and powersim® modd in the following web site:
‘www.av.ic.ac.uk/research/epmg/GabrielaCv him.
2
Annex II ENDESA SPAIN, INVESTMENTS IN THE PERIOD 1989-2001
Degree of Liberalisation
18Generation 2™ Generation In Progress NonLiberalised
Angentina Chile Peu Colombia Brazil Veranda?
Ownership (MWs) Greenfield (G) vs Divestitures/A cquisitions (D/A)
D/A G D/A G D/A G D/A G D/A G D/A
1990 - - -
1991 - - - -
1992 211G : : :
1993 - - - -
1994 - - - - -
1995 2000 : : : :
5206H
281.3H
1996 161G : : : :
1997 - 2.270 -
222.C
1998 - - -
1999 : : :
2000 ss ss ss
2001 - - - - - -
Total 21 1129 : 2,499 -
TOTAL 2u1 - 11629 2,499 -
Note: Gis gas, Os diesel/oil, C is coal and His hydro.
2 Endesa Spain had a 7.86% participation in Electricidad de Caracas, however in the year'2000 the Company sold these shares (http //www.endesa sp).
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