colombian firm energy market: discussion and simulation peter cramton (joint with steven stoft and...

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Colombian Firm Energy Market: Discussion and Simulation Peter Cramton (joint with Steven Stoft and Jeffrey West) 9 August 2006

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  • Colombian Firm Energy Market: Discussion and SimulationPeter Cramton (joint with Steven Stoft and Jeffrey West)9 August 2006

  • OutlineDiscussion of issuesSimulation of marketPurposeModel 1Historical pricesSimulated unitsOutline of Model 2Historical prices and outputActual unitsOutline of Model 3Full simulation of auction and investment decisionConclusion

  • Issues

  • IssuesReducing risk in early auction yearsFurther protection from insufficient competitionLong lead-time projectsWhy not have a higher strike price?Repowering bids

  • Reducing risk in early yearsEarly years of auctionCeiling and floor on firm energy payment to existing suppliersSpread between ceiling and floor expand each yearSpread starts at 0 (transition years)Increases toCeiling = 2 CONEFloor = .5 CONE

  • Insufficient competition ruleAdd additional requirement to assure competition from non-dominant playersAt qualification, quantity of new projects from small players (less than 15% firm-energy market share) > 50% of required new firm energyOtherwise insufficient competition:Auction heldNew entry paid clearing priceExisting capacity paid 1.1 CONE

  • Long lead-time projects4-year planning period may be too short for large hydro projects (6-8 years to build)Allow large hydro projects to lock in auction price from 4-year ahead auction seven years (or less) aheadLarge hydro project is price takerDecides after auction a fraction of its firm energy to lock in at 4-year ahead auction priceTotal quantity of firm energy in years > 4 that load purchases is limited by a percent of new firm energy required in that year based on planning projections: Years ahead: 765 Percent limit:405060

  • Strike priceWhy not have a very high strike price? (US$250 or more)Benefits of call option are largely lostLoad hedgeMitigation of market power in spot energy marketNo reason to set strike price higher than marginal cost of an expensive thermal unit

  • Repowering bidsEasily accommodated in auctionTwo types:Quick switchovers (down time less than 1 year)Repower bid is a new entry bid and a conditional retirementExtended down time (more than 1 year)Retirement followed by new entry bid 1 or more years later

  • Simulation

  • Purpose

  • PurposeAssess supplier riskConsider variations of market designEvaluate alternative auction parameters

  • Model 1

  • Model 1Historical prices, simulated unitsSample: October 1995 through May 2006Scarcity hours: spot price > strike priceOne long dry period: thirteen months30 Mar 1997 to 21 Apr 1998One short period of high prices (start of market)21 Nov 1995 to 24 Dec 1995

  • Scarcity hours by year

  • Scarcity hours by month and yearAlmost every hour is a scarcity hour in long dry periods.

  • Thermal percent of loadThermal share of load much higher in dry periods. Hydro share is still large in long dry periods.

  • Model 1: Thermal unitRandom time until failureRandom time to repairBoth exponentially distributedLong-run availability: 70% and 95%Mean time to repair: 10 hours and 40 hours1000 simulations over entire time periodCalculate distribution of net firm energy payment

  • Firm energy paymentAll amounts in January 2006 US dollarsAuction not modeled so assume paymentFirm energy payment = $10.86/MWhShould be $13.045Exact value not relevant

  • Net firm energy paymentNet firm energy payment = Firm energy payment + reward for over performance penalty for under performanceIn hours where spot price > strike price, Reward or penalty = (Qactual Qobligation)(Pspot Pstrike)Qobligation = suppliers share of load

  • Energy rents$0Units marginal costStrike pricePeak energy rentEnergy rentUnit does not operateForward energy contractCall option (FEM)

  • Model 1 results: thermalNet firm energy payment roughly constantSome variation in dry periodsStandard deviation is small compared to meanVariation greatest for unreliable units with long mean repair timesSlight reduction in dry periods (about 10%)Thermals under perform on averageOver perform in low-load conditionsUnder perform in high-load conditionsSmall positive correlation between price and load

  • Alternative obligation:Thermal constantIdea: Make obligation more consistent with units actual dispatchGive thermal a constant obligation during scarcity hours (obligation = LR availability)Hydro follows residual demand (load minus thermal obligation)Can still treat as one productLoad following is not scareService is priced at zero in competitive market

  • Model 1: Hydro unitActual quantity of firm energy in dry period is a random variable (normal distribution)Unit sells its mean firm energy in dry period (mean availability = 30% or 50%)Actual firm energy has standard deviation (sd = 10% or 15%)Note: Probably too high. Will rerun with empirically fitted distribution from hydrology data from 1950s.

  • Thermal-constant alternativeNo impact on riskThermal: Higher mean in dry periodHydro: Lower mean in dry periodObligation better matches actual dispatchUnits enter spot market with balanced positionNo incentive to exercise market powerWith load-following approach:Hydro increases slope of supply curve (increasing price in high-load hours)Thermal bids higher (increasing low-load price)

  • Model 2

  • Model 2Historical prices, output; Actual unitsAssume each unit sells its firm energy certification (either reference or maximum for hydro)Calculate net firm energy payment for each unit in each hourAggregate over monthAggregate over yearAggregate over companys portfolioProvides some insight on supplier risk

  • Model 3

  • Model 3Full simulation of auction and investmentCan ask new questionsHow does acquired firm energy differ from firm energy target?What is the impact of increasing the slope of the demand curve around the target?Stationary modelThree project types: baseload, peaker, hydroBaseload and peaker: Capacity, FC, VCHydro: Capacity, FC, Firm Energy

  • Conclusion

  • ConclusionCall option reduces market riskLoad is hedged from high spot pricesHedge is not too costly for suppliers to offerPhysical asset covers obligationCall option reduces supplier riskGet nearly constant payment, rather than highly variable peak energy rentsCall option improves spot marketMitigates market power problem during scarcityBetter spot market improves forward energy marketSpot energy prices are more stable and predictableThermal-constant obligation is better than load-following obligation