Simulation of the Colombian

Firm Energy Market

Peter Cramton
(joint with Steven Stoft and Jeffrey West)
18 December 2006
1

Purpose
Assess supplier risk
Consider variations of market design
Evaluate alternative auction parameters

Simulation of market
Model 1
Historical prices
Simulated units

Model 2
Historical prices and output
Actual units

Model 3
Full simulation of auction and investment
decision
3

Model 3
4

Model 3
Full simulation of auction and investment
Can ask new questions
How does acquired firm energy differ from
firm energy target?
What is the impact of increasing the slope of
the demand curve around the target?
What is the impact of demand response?
What is the impact of higher scarcity price?

Key features of Model 3

Three project types
baseload, peaker, hydro

Stationarity

Random growth with mean 3%/year

Project sizes scale up with growth
All amounts in real US$
Scarcity price = $100/MWh

Duration
50 20-year simulations (1000 years)

Hourly load based on random year among 5

most recent, scaled for growth
6

Existing resources

New resources drawn from

distribution of existing resources
7

Resource characteristics

Hourly availability not modeled for peaker and

baseload
Hydro energy output from XM simulation
Interpreting the numbers
Exact values, such as FE price, no important
Rather focus on changes in values and variation in
values
8

Supply and price determination

in spot energy market
Units bid marginal cost
(opportunity cost for hydro)
Dispatch is efficient in each hour
Hydro opportunity cost calculated on a
monthly basis
Demand response at prices above $100
Constant elasticity of -.05
20% price increase causes 1% decrease in
demand
9

Monthly hydro opportunity cost

Shortage. MCH > MCP

Energy price = MCB or MCP or MCH

10

Monthly hydro opportunity cost

MCH

MCP

Demand

Supply

Hydro Opportunity Cost, MCH,

in a somewhat dry month
EP

MCB
EH

EB

Somewhat dry. MCH = MCP

Energy price = MCB or MCP
11

Monthly hydro opportunity cost

MCH

Demand

Supply

MCP
EP

Hydro Opportunity Cost, MCH,

MCB

in a normal month
EH

EB

Normal water. MCH = MCB

Energy price = MCB in all hours
12

Monthly hydro opportunity cost

MCH

Demand

Supply

MCP
EP
MCB
EH

EB

Hydro Opportunity Cost, MCH,

in a wet month

Lots of water. MCH = $0

Energy price = 0 in all hours
13

Obligation
Hydro sells maximum firm energy
resolution 071
Baseload and peaker sell long-run availability
New units take 10-year commitment; not 20
Thermal obligation is constant; hydro obligation
follows residual demand
Adopted procedure is slightly different:
Obligation follows dispatch
Obligations adjusted on monthly basis for
deviations between forward purchase and actual
load
14

Bidding in firm energy auction

Bids are competitive
Unit on margin expects to break even

Units profit depends on resource mix

Calculate bid as a function of resource mix
Determine winning type as a function of
mix
Add units in sequence until Supply > Target
Reject last unit if total cost is less with
Supply < Target
15

Model outputs
Each simulation year, determine entry
Examine sequence of entry, surplus over target
Each simulation year, compute components of
profit for each unit
Units assigned to one of ten companies to
preserve existing market structure
Examine distribution of annual profits
In aggregate (industry profits)
By unit type
By company
16

Scenarios

Each scenario takes about 2.5 days to run

through 1000 years (50 20-year simulations)
17

Scenario 2:
Change demand curve
Price of
firm energy
2 CONE

Price ceiling

Steep FE demand
curve
CONE
CONE

2%

Price floor

4%

0
Load not fully hedged

Target

Firm energy

CONE = Cost of New Entry (marginal unit)

18

Scenario 3: High demand response

High
demand
response

19

Most profitable type given mix

20

New entry by year and unit type

(benchmark)
1

unittype

yearadded

20

19

18

17

10

16

11

15

12

14

13

13

14

12

15

11

16

10

17

18

19

20

21

22

23

24

25

1
0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

SUM(FE)

21

Number of entries by year and type

22

Number of entries per year

23

Firm energy and output shares

Mix of plants does not vary with

Steepness of FE demand curve
Demand response
24

Price, scarcity, and supply

Steeper FE demand curve results in

Greater surplus above target
Fewer scarcity hours

Higher demand response implies much

lower spot price in scarcity hours
25

Excess supply and FE price

26

Scarcity hours and scarcity price

27

Frequency of
scarcity months in year

28

Firm energy price

1

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

4.0

3.5

Benchmark

AVG(Firm Energy Price)

3.0

2.5

2.0

1.5

Occasional drops caused by large lumps followed by years of surplus.

Adopted resolution avoids this problem.
FE price in surplus year = FE price in last successful auction.

1.0

0.5

0.0
4.0

3.5

Steep FE demand

AVG(Firm Energy Price)

3.0

2.5

2.0

1.5

1.0

0.5

Average of Firm Energy Price for each year broken down by sim vs. Case. The view is filtered on Case, which keeps Benchmark and Steep FE demand.

29
8

0.0

Energy price
1

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

400

Benchmark

AVG(Energy Price)

300

200

100

0
400

Steep FE demand

AVG(Energy Price)

300

200

100

0
400

AVG(Energy Price)

High demand response

300

High demand response greatly reduces spikes

200

100

Average of Energy Price for each year broken down by sim vs. Case.

30
8

Profit per MWh of firm energy

1

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

10

Benchmark

SUM(profit)

-5

5
SUM(profit)

Steep FE demand

10

-5

5
SUM(profit)

High demand response

10

Sum of profit for each year broken down by sim vs. Case.

31

-5

Distribution of annual profits

per MWh of firm energy

Bids do not take lumps into account

Surpluses cause drops in firm energy price and lower
energy rents
Hence slightly negative profit

Hedge dramatically reduces risk

Energy rent primary source of risk

32

Distribution of annual profits

per MWh of firm energy

Impact of higher scarcity price

Profit distribution shifts toward no hedge case
Large increase in energy rent risk
Small decrease in hedge payment risk
Large increase in profit risk overall
33

Profit by unit type (benchmark)

1

10

11

12

13

14

15

16

17

18

19

20

20

Baseload is highest risk.

15

SUM(profit)

10

-5

-10
20
15

Hydro has moderate risk.

SUM(profit)

10

-5

-10
20
15

Peaker is lowest risk.

SUM(profit)

10

-5

16

10

16

10

16

10

16

10

16

10

16

10

16

10

16

10

16

10

Sum of profit for each year broken down by sim vs. unittype for Benchmark. The view is filtered on sim, which keeps 20 members.

10
16

16

10

16

10

16

10

16

10

16

10

16

10

16

10

16

10

16

10

16

10

-10

34

Annual profits by unit type

35

Profit by company (benchmark)

1

10

11

12

13

14

15

16

17

18

19

20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

SUM(profit)

40
20
0
-20

10

SUM(profit)

40
20

36

0
-20
6

16

16

16

16

16

16

16

16

16

16

Sum of profit for each year broken down by sim vs. ownerid for Benchmark. The view is filtered on sim, which keeps 20 members.

17

16

16

16

16

16

16

16

16

16

Profit by company (benchmark)

37

Profit by company (steep FE demand)

38

Profit by company (high demand response)

39

Conclusion
40

Conclusion
Hedge remarkably successful in reducing risk
Industry risk reduced by a factor of 7
Company risk reduced by a factor of 4.5 in benchmark

Higher scarcity price increases supplier risk

Lumps can cause multi-year surpluses
To reduce FE price variation, in surplus years, set FE
price = clearing price from last successful auction
(as in adopted resolution)

Even with limited demand response, rationing is

not needed to balance market in shortage years
41