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Renewable and Sustainable Energy Reviews 56 (2016) 563–571

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How capacity mechanisms drive technology choice in power
generation: The case of Colombia
Yris Olaya a, Santiago Arango-Aramburo a, Erik R. Larsen b,n
Decision Science Group, Universidad Nacional de Colombia, Colombia
Università della Svizzera italiana, Switzerland

art ic l e i nf o a b s t r a c t

Article history: Colombia enacted its first legal framework for promoting alternative energies in 2001 and a second
Received 12 May 2015 framework in 2014. Since the generation technology mix has not changed since 2000, there is a need to
Received in revised form understand how regulation and market structure affect the adoption of technologies. In this paper we
30 October 2015
address the question of what has been the impact of the capacity mechanisms adopted during the 2000s
Accepted 22 November 2015
on technology choices for power generation in Colombia. Our approach is to analyze the evolution of
Available online 17 December 2015
market structure and regulation. We found that regulatory uncertainty and low prices drove a surge of
Keywords: small hydro plants during the 2000s. During the 2010s, the new regulatory focus on reliability of supply
Power generation mix has resulted in increased coal-fueled generation and large hydro. This increased reliance on hydro power
Capacity mechanisms
can further delay the entry of renewable technologies and the diversification of the Colombian portfolio.
Renewable energy
& 2015 Elsevier Ltd. All rights reserved.


1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563
2. Overview of the Colombian power system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564
2.1. From central planning to deregulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
3. Effect of capacity mechanisms in the Colombian power sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
3.1. Before deregulation (Before 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565
3.2. Market system and capacity charge (1994–2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566
3.3. Reliability charge or forward firm energy market (After 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567
4. From big to small hydro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
4.1. Role of (other) renewables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
5. Discussion and conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570

1. Introduction countries a desire to move away from nuclear generation [1–3].
Some of these changes are motivated by environmental concerns,
Technology choices for power generation determine to a large by technological uncertainty, economic changes, and perceived risk
extent the structure of energy supply and have lasting impacts on of nuclear power as well as ideological views, all of which play a
the environment. During the last three decades, we have witnessed role in establishing policy priorities.
a shift away from coal to gas-fueled power generation, the intro- The creation of power markets worldwide is the result of a
duction of renewable energy technologies, and recently in many broader energy policy aimed at increasing efficiency and attracting
private investments – with the goal of satisfying a growing
demand for electricity, particularly in the developing world [4]. In
Correspondence to: Via Buffi 13, CH-6904 Lugano, Switzerland.
E-mail addresses: (Y. Olaya), the early years of market reforms, increasing competition and (S. Arango-Aramburo), (E.R. Larsen). efficiency in generation were the main issues by regulators and
1364-0321/& 2015 Elsevier Ltd. All rights reserved.

The consequences of investment decisions a are complex as new capacity takes from some months (e. and creating that the right incentives are in place to achieve the right mix of commodity-like markets for electricity. in an effort quate electricity capacity [8]. often complex. Brazil. Section 4 presents the main insights and conclusions from and need to expand access to energy [5–9. it is common description of the Colombian power system. making it more difficult to ensure often unbundling utilities. than 65%. Section 3 describes and discusses the resource adequacy objective of regulation is to reduce them. Power markets. Achieving a long-term mechanisms used in Colombia. with the for expanding generating capacity. small. capacity mechanisms and the structure of the market have influ- cerns. 2015)b 47. Most markets solve it by using a sepa. capacity have been modified twice since deregulation. and thus the tion. Marginal cost-pricing. breaking monopolies up. several years (e. GDP (ppp) Billions US$ 526. reliability is one of the main concerns in liberalized markets [5–9]. Ensuring that such new investments are tions. availability of appropriate generation technologies and the enced technology choices for power generation in Colombia. While regulation has succeeded in In theory. capacity is often added in large chunks and has a long life-time e [23]. Market structure Bid based The contribution of new capacity to the system's reliability Installed generation capacity (MW). The aim of this paper is to illustrate how different regulatory In fact. and they only increase capacity margins when Wind 20 Residential 41% wind is available. however. Spain. Voltaic (PV)). Olaya et al.564 Y. Such fluctuations increase supply risk.66 Average 2004–2008 3. Population (est. Bringing competition to the power market meant compared to other industries. big hydro) to come on-stream. Alberta.5% drive technology choices by investors in a particular area. and the UK [15]. are not exception of small hydro plants.18]. thus keeping enough capacity to macroclimatic phenomena of “El Niño South Oscillation” (ENSO). Jan. Because the share of hydro generating capacity is larger payments for capacity availability – known as capacity payments. using Colombia as a case study. Overview of the Colombian power system sufficient incentives for adding new capacity and increasing long- term security of supply [16]. As a result of the high This paper is organized as follows: Section 2 makes a brief uncertainty and the long lead times for new projects. Electricity demand profile depends on the size and timing of investments and varies widely 31 2013d (2012)e across technologies. Hydro 9875 Industry 31% plate capacities that are between 60 and 70 percent higher than Thermal 4598 Transport 0% their annual output. The first incentives (1996–2006) aimed at reducing the made in a timely manner is a challenge for power markets and it electricity system's vulnerability during dry periods. These might be an opportunity for introducing alternative generation incentives were modified in 2006 in order to provide signals for technologies. While markets in different jurisdictions have different price- setting mechanisms. the Colombian power system is vulnerable to weather The idea behind capacity payments is to recover capital costs that changes such as the prolonged and intense droughts caused by the are not part of the market price.16 Average 2008–2012 4.2 Perú.c been successful so far [17]. when capacity is scarce.g. Combined Cycle Gas Turbines c [21]. Photo [24]. the incentives and rules set by regulators TPES/GDP (toe/000 2005 0. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 researchers. a competitive market setting should give the right securing supply during dry periods. Australia.16 est. have name. In fact. including the capacity for power markets to observe cycles of over. and the USD) pace of the investment. In the next sections we examine how and investment decisions are constrained by environmental con.100 Commercial 0.6% of debate on whether capacity payments are needed. however. Furthermore. instead of the population [19]. Colombia. does not offer 2. Seasonal variations of power demand in Colombia are relatively ing money problem” [17].965. a proper mix of technologies increases Co-generation 66 Commerce and public 24% Total 14559 Agricultural/Forestry/ 4% the reliability of supply. use capacity payments or a related mechanism to increase the Demographic and economic indicators Electricity prices ($US/kW h) revenues of the generators and to incentivize their investment in 2012a new capacity.g. 2013)c electricity and have implemented energy-only markets that have GDP per capita (ppp) 2013 11. and New Zealand have complete commodities markets for (est. and high capacity margins are maintained as a reliability rate.g. there is a The interconnected power system provides electricity to 94. despite some disagreements with to adapt the regulation to shifting economic and market condi- these estimates [10]. satisfy demand at a given reliability level. Two decades later. the most common mechanism is prices based on marginal costs. Table 1 sum- relying on an energy-only market that rewards generating plants marizes the main indicators of Colombia's macroeconomic con- with scarcity rents [15. expansions of the system. Hydro power dominates the technology bid prices instead of bidding their marginal cost. . Chile. Nowadays. TPES/pop (toe/capita) 0. future technologies. future returns are highly uncertain [12] technologies is almost zero. Therefore. with high quality standards.5 Industrial 0.803 Residential 0.17.15]. That is the case of Argentina. the technology mix has signals at the right time for investors to choose the best technology remained basically unchanged since 2000. b [22].22 ERCOT. penetration of other renewable perfectly competitive [11]. for instance. the International Energy Agency (IEA) and European Union regimes affect technology choices. Alternatively. Wind technologies. (EU) estimate that EU countries need to invest Euro 1 trillion from Colombia is an interesting case as the incentives for adding 2012 to 2020 and a further Euro 3 trillion to 2050 to ensure ade.and under-capacity before deregulation and explains the events that led to deregula- margin [14]. set of rules for calculating and allocating strategy. and their impact on the generation security of supply (resource adequacy) at a low cost is particularly mix. regulators need to understand fishing the logic of investment decisions and tailor the resource-adequacy Energy intensitye Electricity demand growthe mechanisms to each particular case. Dec. a phenomenon known as the “miss. d [20]. (CCGT)) to a decade (e. Many electricity markets Macro-economic and electricity industry indicators in Colombia. Moreover. general future economic outlook [13]. Suppliers in an energy-only market dition and power system. the previous analysis. Price bids should include the capacity cost and they also increase during peak Table 1 demand periods. including capacity mechanisms’ implications for renewable challenging for developing countries that face increasing demand energy.0% To a great extent.

external debt between 1970 and 1998. From central planning to deregulation generation-technology choices in Colombia. policy shifts. as we discuss next. Because of this expan- payments (see Fig. Y.35]. Colombia has separated transmission from distribution and generation. For this reason. Law 143 (Electricity Law) aims at increasing the efficiency and Fig. reflecting achieve resource adequacy. and 2019. there was a general agree- ment on the need for a reform of the power sector. [4. Capacity tural reforms. the Colombian government began planning 1960 to 2010 and the approved additions to enter between 2011 for the interconnection of the largest regional. Perú. their lack of efficiency and inability to make timely investments explain why. Nevertheless. by the end of the 1980s. where the mechanism was capacity payments. Expansion projects debt between 1970 and 1980. and water) to the Colombian quality of the electricity supply through market mechanisms. Bids are freely placed in the market. there The Colombian power sector has gone through several struc. The low economic growth continued through the 1990s. as well as on the effects of the initial technology mix on regulatory decisions. bids are to be based on variable operating costs (fuel) while hydro culties financing expansions and mismanagement was widespread generators' bids represent the value of water. Some companies had diffi. ISA. [28]. price is set in a day-ahead The issues before the reforms are illustrated by the fact that market in which all generators must participate. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 565 of the electricity sector's budget was allocated to pay back the loans. Contribution of public utilities (electricity. in which the regulator has adapted the strategy to payments have been modified three times since 1994. During this 1 ISA informes de operación 1970–1998. the first regulatory period focusing on resource adequacy expansion planning. coordi- erating plants which led to a 28% increase in Colombia's external nated the expansion of generating capacity. In this market. impact of regulation on technology choices. to improve its technical and administrative efficiency. Brazil. 2 shows the additions of generating capacity to the Colombian system from In the early 1960s. led to major blackouts from March of 1992 to April of 1993 [32]. As discussed above. vertically. power companies are sion and dispatch was created. Between 1970 and 1980 the public utilities. Monopolies in transmission and distribution were enter new markets in Chile. the government focused on financing new gen- Before 1994. in demand.1.1. was tricity sector went through major structural changes. as evidenced by their ability to guaranteed. as we show in the following sections. and open access to the grid was today in a good financial position. including regulatory and oversight achieved partial unbundling of generation and distribution. installed more than 1200 MW of generating ulatory period beginning in 2006. An bodies [25]. Law 142 created regulatory. To avoid power shortages. and was completed in 1994 by laws 142 [33] and 143 [34].1 to satisfy the growing demand. construction delays in new power plants and a strong El Niño in 1991–992. Following deregulation. Fig. the external debt origi- were selected using an optimization program that minimized nating from public utilities was 35% [28]. The severe financial problems of the utilities. the national grid company. and between 1985 and 1996 per capita electricity consumption in Colombia was one of the lowest in Latin America [31]. By 1985. 1). from the beginning. GDP grew on average less than 4% annually [30]. and these changes have produced distinct responses These changes provide us with valuable data and insights on the in capacity expansion that we examine next. motivations for the reform was the need to attract investment in These major blackouts made reforms easier to pass because they the generation needed to keep pace with the (forecasted) growth exposed the weaknesses of the existing monopolistic system. planning. among other conditions. We discuss these issues in further detail in the following section. corresponding to reliability capacity. and Guatemala. At this point. such delays led to power cuts in 1981 [27]. Thermal generators' Colombian external debt (see Fig. 1. improve the system's performance was not smooth and it has A pool-based market was created to increase competition in required major structural and regulatory challenges. Never- theless. nearly 40% capital and operating costs while satisfying expected demand and transmission constraints. period. gas. utilities (including ISA) were having trouble financing pro- jects and there were problems with completing projects on 3. sion. the national transmission company. the process to were opened for competition. ISA. hydro power was the preferred technology for expanding . among regulated. bodies for electricity and gas. The power industry's reform began with the new constitution in 1991. To foster competition. During the 1980s. Olaya et al. which led to a series of costly blackouts in the early nineties. while generation and the unregulated retail market others [26]. Enactment of these laws was the first step towards mix for generation. One of the main [27]. Before deregulation (Before 1994) schedule. as it represents 65% of the 8525 MW of deregulation. regardless of their public utilities were responsible for more than 35% of the contracts. Effect of capacity mechanisms in the Colombian power which we give a short account of the events that shaped the sector present power system in Colombia. and had a market-oriented system. and a second reg- along with ISA. between 1960 and 2014 the elec- integrated public utilities. and oversight installed capacity [20]. the power market has sup. We divide our analysis into three periods: the period before the sector reform created in 1967 and was responsible for the system operation and in 1994. 2). were separate payments for energy and for capacity. independent system operator in charge of coordinating transmis- plied energy with virtually no interruptions. In this section we discuss the effect of capacity mechanisms on 2. reforms Since the reforms of the power sector in 1994. and to cover past deficits [29].25. in 3. whereas Law 142 establishes the role of the government as a regulator. power generation.

already been financed by multilateral bank credits and the public The new thermal capacity included 1230 MW from the govern- utilities' own resources. the government invested in refurbishing After some adjustments. as more than 5 GW were added. was suggested for promoting private investment [32]. the thermal/hydro share of the system (approximately 30%/70%). El Niño. the regulator used cost and critical hydrology data to run a GDP over the period [38]. The economic recovery was slow. The investments of this period changed the plants.40]. As shown in Fig. new generating capacity doubled the previous output sold at peak prices during dry seasons would not generate decade's capacity and the share of thermal generating capacity enough revenue to justify investments in thermal capacity. creating the Capacity payments were proportional to the fixed costs of a conditions for the pivotal 1992 blackouts. which supply during dry periods. the only hydro plant to come on securing financing for thermal projects that would decrease the stream in this period (340 MW) was also initiated by the emer- vulnerability of the system to extremely dry seasons. [36]. Power culated as the product of the capacity charge multiplied by the shortages began in March of 1992 and lasted over a year. however. power generating capacity at low cost. Furthermore. 2.2% in 1999. The scheme gency plan. there was particular interest in ment's emergency plan of 1993. In 1993. By 1990. thermal generation plant (capacity charge). the average share of capacity plants. caused no This scheme pays for the energy from. Another factor contributing to the delay of . and to a less degree by the government's push for a higher share of comprising: 750 MW of gas fired plants. Market system and capacity charge (1994–2006) [30]. only 1137 MW (62%) were operating [38. blackouts. the capacity payments for each plant were cal- capacity. To calculate the availability of plants in a dry programmed power cuts cost about one percentage point of the year. and 750 MW of new hydro capacity. The increase in thermal generating capacity achieved proposed to finance the thermal projects consisted of long-term its purpose as it made the system more reliable. capacity payments were applied from generating units and accelerated the construction of backup 1996 to 2005. 86% of the 1240 MW weather conditions. As a capacity. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 Fig. Chile. adding 400 MW of capacity. and the pressure for increasing reliability provided by result. The hydropower projects had which corresponds to an increase in thermal capacity of 2514 MW. thermal plants had been from the energy pool and were a lower cap for the electricity price poorly maintained. Data from ISA's annual operation reports 1980– 2005. which was stronger than the 91–92 El Niño. an payments awarded to thermal and hydro technologies is similar to investment strategy was devised to accelerate capacity expansion. In fact. 450 MW of coal-fired thermal generation. Capacity. the 97–98 power purchase agreements (PPA). while thermal plants provide relia. response from regulators was to create a capacity charge [39. Such charges had previously been applied in the UK. only 1050 MW were added to generating capacity between thermal generation continued after the power sector was 2000 and 2005. However. by the capacity payments mechanism Thermal plants accounted for more than 60% of the new capacity. and Argentina [15]. model of the market [41]. and growing at rates below 5% until 2003 3. When the blackouts ended. The same long-term PPA-with-guarantees scheme in previous dry seasons. explained. During the blackouts.25 US$/kW). By the late 1990s. Despite this surge in capacity. In fact. in particular for an extreme El Niño led to a blackout in 1983. More fraction of demand that each plant could supply in a critical than 2400 GW h were rationed and it is estimated that these hydrology scenario. as well as for capacity of. which kept The blackouts of 1992 led to the construction of thermal prices low making the return on investments less attractive. Charges were collected 17% in March of 1992 [37]. at least partially. The electricity added during the 1960s was hydro. Annual additions to generating capacity in Colombia from 1960 to 2010 and approved additions from 2011 to 2019. and a 400 MW hydro plant commissioned bility. market began operating in 1995. continued to grow at a slower pace than demand. The reference value for The year of 1991 had the lowest rainfall recorded to date and estimating capacity charges was the cost of installing 1 kW of an water reservoir levels dropped from 57% in September of 1991 to open-cycle gas generator (5.88 billion US dollars [32]. their operating costs are higher than hydro under normal before 1994 (see Fig.32]. However. and capacity margins increased to above 50%. thereby improving the power system's robustness by adding The thermal capacity expansion from 1996 to 2000 can be 1950 MW of generating capacity between 1995 and 1999 [32]. technology mix from 87% hydro in 1995 to below 70% in 2000.566 Y. although spot prices were about four times higher than the new plants. and of the 2100 MW of installed thermal [4]. of which 95% was hydro. 2). and from UPME. electricity demand growth stalled. 200 MW of small hydro.2. Each month. This included about reformed in 1994. guaranteed by the government. Colombia faced an economic crisis with GDP falling by 4. 3. and it became clear that thermal In the 1970s. power generation could not keep up which rewarded the contribution of each generator to securing with increases in demand as some projects were delayed. The increased to 40% of the total. making them less competitive. 8312 MW with 78% hydro and 22% thermal. Olaya et al. total generating capacity was event. estimated costs for the 1995–2000 expansion strategy were 1.

the regulator changed the mechanism for securing energy offered by thermal power plants must be backed by a long- generation adequacy in the Colombian system. which we discuss in the following section. appropriate for a hydro-based system such as the Colombian Although take-or-pay contracts help to pay for dedicated system [44]. there is an incentive for the generator to be this case.4]. constraints. as well as because less energy is traded at volatile spot prices [47]. The first auction took place in 2008. During this period. These problems led the regulator to introduce the capacity is hydro. Y. It was also argued that capacity charges contracts for 3420. generators argued that the optimization new generation capacity was added during this period. such as the UK. Data from NEON (www. In particular. Moreover. It also provides another example of how gas and elec- receives the spot price. This. awarded system's characteristics. In fact. both under central risk. Peru. reliability payments. Olaya et al. and that the technology The period 2006–2009 was designated as a transition period by used as a reference (GT) had low capital costs [42].8 MW of new generating capacity that will were only a source of revenue and that reliability was not guaran. power demand in Colombia grew at a being able to deliver is severe enough [44]. However. Before markets for natural gas were established around the that paying for firm energy instead of capacity would be more world. Other technologies. there might not be enough thermal capacity available for a dry Similar auction schemes are being used in Brazil. The new mechanism is called the reliability charge. able to deliver the agreed quantity as long as the penalty for not For the last 20 years. large-size hydro plants the most effi- the reliability mechanisms attract investment [46]. this mechanism shares some of the char- was studying alternatives for increasing capacity adequacy. but as discussed above. Contract length for yearly average rate above 2%. come on stream between 2013 and 2019. As a result. made mid.xm. Such long-term fuel contracts are not scheme (capacity charge) had worked well on thermal-based available at competitive prices. capacity payments were contested by both energy during periods where prices otherwise would have been thermal and hydro generators. investment decisions was general economic uncertainty. it was argued tracts. during the 2000s. A choice of generation technology observed in the past firm-energy generator that supplies more than its share during scarcity periods auctions. where about 90% of this teed [43. The regulator from sellers have resulted in a lower offer of firm gas contracts in auctions off sufficient obligations to supply firm energy (OEFs) to Colombia [50]. small hydro (less than 20 MW) is generation capacity so that adequate resources are provided when the only renewable technology that has a noticeable share of they are needed. The previous term fuel contract [49]. Reliability charge or forward firm energy market (After 2006) power plants. assets. and it is based on a forward market for firm energy. three years ahead. 3.3. and noncompetitive behavior energy is the capacity to deliver energy in a dry year. Therefore. This is indeed supported by the the spot price is above a previously defined scarcity price [45]. A gen. a controversial practice in which buyers argued that these payments did not send clear signals for expan. the regulatory commission low. a centralized mechanism critiques from generators were about the model's validity and was used for assigning and pricing capacity. where firm changes in natural gas regulation. season. and improve coordination in investment [47]. have capital and Panama [15].com. the typical gas contract was a 20-year take-or-pay contract. OEFs required to have other fuel backups. ism. given the “bias” in the firm energy mechan- capacity [14]. in particular for natural gas con- systems. As we discuss next. Chile. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 567 100% 90% CC Thermo CC Hydro 80% 70% 60% 50% 40% 30% 20% 10% 0% Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Fig. The the expectation for a new regulation period beginning in 2005 [25]. Since fuel prices and supply can be seen as a call option. It was acteristics of mothballing. what is “bad” for gas would be “good” for electricity. The model used by the regulatory commission was not adequate for the expansion consisted of 57 MW of thermal and the rest of small reformed market because its parameters did not represent the hydro-power plants. By contrast. we argue that the mechanism for estimating erator receiving an OEF must supply a given quantity of energy if firm energy favors hydro power. For hydro- 3. Most of the the regulator [45]. the estimation of firm energy is based on an opti- mization model that considers critical hydrology. To some backed by physical capacity. Share of capacity payments awarded to thermal and hydro technologies in Colombia between 1997 and 2004. firm In 2006. Simulation analysis indicates that hydro power. concerns about security of gas supply. downside for the buyers is that they will have to pay more for the By the year 2000. are highly uncertain. that they favored hydro generators. The large share of hydro generation is explained by the mechanism for estimating contributions to firm energy. . Thermal plants are built to run feature is desirable. lower market cient option to satisfy a growing demand. A total of 138 MW of assumptions.and under. while a generator that supplies less is tricity markets are becoming increasingly interdependent and. in penalized. also pay for having less volatility [48]. along with the potential for new plants is currently 20 years. since lack of coordination in investment has during dry seasons or to supply zones that have transmission been related to undesired long-term cycles of over. The auctions of long-term supply contracts costs higher than hydro and there have been few opportunities to provide stable revenue and more certainty for the investors in new develop them. gas-fired power generators have been satisfy the system's forecasted demand. This latter planning and market rules (see [51]). forward markets lower risk for buyers capacity and that is profitable in the market. in particular renewables.

to integrate non-conventional energy into the national power they attracted no private investment during the first years of system. in the residential sector. and use of non-conventional necessary financial commitment over the long time horizon in a energy sources including: wind. which increases uncertainty for the investors. In Colombia. According to the scenarios. increasing the small hydro deployment. higher capital requirements and longer lead times than thermal In May 13th. such as feed-in-tariffs. MW 60 Small Hydro Plants in other countries.36]. investment costs are one of the barriers for large scale generation with RETs. almost exclusively on hydro resources and thermal power. Additions in 2000 include previously built plants that were energy means that these sources cannot compete for reliability rehabilitated. the best signal is given by the Colombian Energy tion technologies must have low operating costs. and obligations [61] are 50 not considered [62]. the provisions for RETs in Colombia's interconnected system are limited to tax exemptions and other alternatives used Capacity these plants are cation of possible future scenarios. From a reliability point of view. RETs' share in the 2028 generation matrix might be between 6% Colombia's potential for generating power with small hydro and 15% of installed capacity [36]. Furthermore.xm. We turn now to discuss renewables. The outlook for the future of renewables onmentally unfriendly because they disrupt ecosystems and live. development. and thus provides only an indi- small hydro.67].64]. in particular solar although at a smaller scale than wind power. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 80 compared to conventional technologies [60]. e. The system where nobody knew how the market might evolve. has focused its incentives for renewables on the electrification of most smart grid projects have been demonstration projects. As summarized in 70 Table 2. Olaya et al. always scheduled for dispatch at the spot price. To date. rural off-grid zones. 4.568 Y. for inte- generation contributes only 8. research. mid to large-sized hydro plants have attractive as a generation technology. this can be inferred not only for the new share of renewable technologies that do not depend on water capacity being installed but also from the rehabilitation of more might help during dry seasons [51. The plan is not mandatory.59. This law provides a new legal framework to promote deregulation. is developing a roadmap [59]. [51. as shown in Fig. Furthermore. and bian spot market price. the Colombian generation technology mix relies be facilitated by the development of smart grid technologies. Considering of the year. they are profitable at the Colom.g. outside the dry seasons. as emissions from the power sector are low InterAmerican Development Bank. Since Smart grids in Colombia are envisioned as support for energizing hydro plants generate most of the electricity in Colombia. projects (scenarios 9 and 10) could substitute between 24% and There are currently 95 small hydro plants in the interconnected 86% of the 1050 MW of coal capacity required in the base high- system. and biomass. Small-hydro generating plants built between 1960 and 2011 and connected to the power grid. payments in the firm energy auctions [65]. in Colombia is uncertain. 4. even though they have low could influence the future adoption of RETs making them more emissions. a surge in small hydro-power projects was observed projects beyond the reliability framework of the Spot prices are expected to decrease with a higher share of renewables. a low value compared to the 2012 world average of developing an electric car sector [67]. of this capacity (387 MW) came on stream between 2001 and The results in Fig. Colombia is to integrate smart grids with the wholesale market. in fact. 2014.5% of the total CO2 emissions in grating renewables to the national energy system [69]. Finally. i. 2). and under the current regulation. expansion of renewables is expected to Currently. PV. From big to small hydro years [61]. The challenge for regulators 42% emissions from power generation and heating [58]. and the costs of renewable technologies (RETs) are high for the promotion of smart grids but results are not yet available. outweigh their costs [66]. the mechanisms for integrating 0 RETs with the interconnected system are not clearly defined. IADB. and competitive genera. More than 50% demand scenario (5). the competitiveness of wind power in the Colombian wholesale The reforms to the power sector have had a positive effect on market [64. and wind. .1. 30 The institutional design has not taken RETs into account. no private firm was willing to make the investment. proposed wind centrals is estimated to be between 8000 and 25000 MW [55]. as. but several steps have been taken that lihoods of communities [52–54]. power isolated rural areas using renewable generation [68]. The large base of hydro mechanism is still not fully agreed. The exact during the 2000s. so currently we cannot foresee capacity means that electricity prices in Colombia are low for most the effect it will have on the future generation mix. high Source www. while solar and wind plants are not further developing this technology would diversify energy supply. this uncertainty. because the lack of a methodology and rules for calculating their contribution to firm Fig. with a combined capacity of 643 MW [20]. develop- than 20 MW of small hydro plants installed before 1960. 5 shows. a new Law (1715/2014) was issued in order plants. their decrease has not yet facilitated their adoption in Colombia. 5 are consistent with previous research on 2010 (Fig. This 1971 1995 1960 1963 1966 1968 1973 1975 1977 1979 1981 1983 1985 1987 1991 1993 1997 1999 2001 2003 2005 2007 2009 2011 2013 is a problem for wind and other power sources. In general. and for Colombia [57].e. law creates tax incentives for developing renewable generation Instead.65]. the benefits of PV do not Large hydro-power plants are frequently perceived as envir. Role of (other) renewables implying that an increase in renewables will make future thermal expansions harder. As Fig. The consequence of this structure is that renewables other than small hydro play a minor role in the 40 Colombian electricity supply. While costs of wind and PV have decreased in recent 4. and African palm biomass is currently competitive [64. Since ing wind resources in the Guajira region could relieve some of the small hydro plants have low operating costs and their capital costs current transmission constraints [67]. which 20 means they must compete against conventional generation tech- nologies whose environmental and social costs are not fully 10 internalized [63. and Planning Unit. In Colombia. 4. which would particularly affect thermal generation. Generation from sugar cane are lower than solar and wind. (UPME) in its 2015 generation and expansion hydropower plants with less than 20 MW capacity are classified as plan.56]. As discussed. geothermal.

Regulators often intervene in the market with of small hydro plants has been observed during the 2000s. the financial position of companies in the Colombian power sector. / Renewable and Sustainable Energy Reviews 56 (2016) 563–571 569 Table 2 State and incentives for renewables in Colombia until 2014. actual choices to differ from optimal choices. observed between 1995 and 1999 resulted from government plan. Alternatives for capacity expansions 2019–2028 in a high-demand scenario. we can actually observe that twenty years after dereg- capacity contracts in 2008 displace thermal generation to the right ulation the system has less thermal generation than in the initial of the supply curve. so far. have been effective in the sense that they (more than 400 MW). Many interventions. Y. hydropower has environmental costs that intervene in the system as this creates additional uncertainty and are not fully accounted for. lead to unintended consequences [71] as the market always dispatched in the market (guarantee of generation). the high uncertainty in costs. a boom eration capacity.g. increase resource adequacy. A more diverse mix of generation technologies could tainty by delaying decisions until new information is available. e. This is important because. The power market created in the 1990s has greatly improved ning and market intervention rather than from market rationality. Capacity payments.70]. thereby avoiding black outs. the conditions in Colombia: uncer. 5. and make eco. c Isolated capacity. With the advantage of hindsight. but there are proposals for Large hydropower plants dominate the portfolio for power supporting these technologies with capacity payments similar to generation in Colombia. the companies are or solar power to the interconnected system is one of the chal. low environ. Sources: [55. Although competitive markets. period. such as the ones thermal plants. It is also important that the regulator does not constantly nomic sense. The hydropower plants expected changing weather has not been achieved by the process of dereg- to enter between 2014 and 2019 are supported by the new capacity ulation. in the case of The additions of hydro power that were awarded long-term Colombia. The experiences in other demand. Electricity demand is expected to continue have added generating capacity. Discussion and conclusion countries suggest that renewable technologies require non-market incentives such as feed-in-tariffs. and adding hydropower capacity The goal of diversifying the technology mix for generation in keeps carbon emissions and electricity prices low – provided that order to make the Colombian power system less vulnerable to the market behaves competitively. Along with the new large hydropower plants. demand and the mechanism allows the installation of any technology that technologies. Olaya et al. the debt levels are far hydro power [70]. known as reliability charge or firm energy. and the imperfections of power markets may cause increases resource adequacy. and it is also vulnerable to weather Colombian case evidences. investors respond to regulatory uncer- changes. expected to set up clear and stable rules for investing in new gen- power plants. make the power system more reliable. might not always respond in the foreseen way. and by the number of units retired during the 2000s applied in Colombia. Source: elaborated from [36]. These incentives that are intended to move the system towards what is. growing as the country develops. the need for thermal power was There is evidence of the ability of the power system to satisfy overestimated. Although technology diversification can be attained in mechanism. as the and the local environment. RETs: geothermal. favor large hydro. 2014 installed capacity (MW) FIT Electric utility quota/obligation Tax exemptions Surplus energy and energy sales Wind 20a No No Yes Biomass – Cogeneration 206a No No Yes At market price Biomass – Other 26b No No Yes At market price Geothermal 0 No No Yes At market price PV 9–11c No No Yes Regulated prices a Interconnected capacity. for example. seen as the desirable state.36]. 5. However. mental impacts and the fact that all power plants under 20 MW are however. The expansion in thermal capacity the reliability charges [65. there is enough capacity to satisfy lenges for the next regulation periods. Regulators are tainty in gas markets and a large base of hydro. as evidenced by the low share of production by demand with efficiency. relatively healthy today and. that moment. by using the The impact of the different periods of regulation in Colombia increase of winds during dry seasons to offset the decrease in shows that the power system has improved. Fig. Adding intermittent technologies such as wind from what we observed before the deregulation. such as the impacts on communities risk for long-term investments. solar (PV) and Wind. at small plants take advantage of their low capital cost. From this point of view we conclude that the changes in . b Data for 2010 [55].

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