October, 2006

Todos los derechos reservados para XM S.A E.S.P.

Luis Alejandro Camargo S.Wholesale Market Manager

XM S.A. E.S.P.

THE NEW COLOMBIA FIRM ENERGY MARKET

October, 2006

Todos los derechos reservados para XM S.A E.S.P.

Luis Alejandro Camargo S.Wholesale Market Manager

APEx 2006, Seoul

3

Due to the high Hydro component of supply, the Colombian system is vulnerable to energy shortages, while currently capacity is not an issue

•0

•1,000

•2,000

•3,000

•4,000

• ene

-92

• jul-9

2

• ene

-93

• jul-9

3

• ene

-94

• jul-9

4

• ene

-95

• jul-9

5

• ene

-96

• jul-9

6

• ene

-97

• jul-9

7

• ene

-98

• jul-9

8

• ene

-99

• jul-9

9

• ene

-00

• jul-0

0

• ene

-01

• jul-0

1

• ene

-02

• jul-0

2

• ene

-03

• jul-0

3

• ene

-04

• jul-0

4

• ene

-05

Total Demand Total Generation Hydro Generation Thermal Generation

rationing El Niño

DEMAND VS CAPACITY (MW)

8637 8988

4378

PEAK LOAD CAPACITY

Demand Hydro Thermal

4

A centrally administered mechanism has been in place for the last 10 years

0

2

4

6

8

10

12

14

Jul-9

5

Nov

-95

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

Jul-0

2

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

US

cent

s/kW

h S

epte

mbe

r 200

6

• Capacity payment is assigned every year using a hydro-thermal generation model run for a critical hydrology defined by the Regulator, considering the costs and availability of the plants

• No explicit obligation for the generators who received the payment

• Verification of availability through random Audits

5

A Firm Energy Market was designed to reach multiple objectives

• In theory, these can be achieved through an energy only market, and some market have placed their bets on this approach.

• It implies a high variability in both cash flows for investors and energy prices for the demand.

• Others, opted for a capacity mechanism (market o administered), to ensure generation adequacy by allowing stable cash flows.

• A Firm Energy Market was the selection for the Colombian case.

COMPETITION

INVESTMENT &PERMANENCE

EFFICIENCY

MARKETPOWER

CONTROL

RELIABILITY

6

The Firm Energy Market Proposal (1)

0

2

4

6

8

10

12

14

Jul-9

5

Nov

-95

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

Jul-0

2

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

US

cents/kW

h Sep

tembe

r 200

6

• The whole physical Demand buys the right to pay a maximum spot price defined by the Regulator (Scarcity/Strike Price)

• Generators receive an Option Price, which will be determined by the market in a descending clock auction

7

0

2

4

6

8

10

12

14

Jul-9

5

Nov

-95

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

Jul-0

2

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

US

cents/kW

h Sep

tembe

r 200

6

A Generator with Energy Firm Options receives the Option Price and is subjected to a Reward or a Penalty:

(Q supplied – Qobligation) x (Pspot – PStrike)

Scarcity/Strike Price

Option Price

The Firm Energy Market Proposal (2)

8

A Firm Energy Market was designed to reach multiple objectives

REDUCE MARKET POWERAND SCARCITY RENTS

AVOID BOOM/BUST CYCLESAND REDUCE INVESTOR RISK

IMPROVE SPOT MARKETEFFIENCY AND REDUCE ITS VOLATILITY

ACHIEVE DESIRED RELIABILITY –

AVOID SHORTAGES

ATRACT NEW AND ENOUGHGENERATION INVESTMENT

9

A new Firm Energy Market has been regulated from December 2006, using a financial call option backed by the physical

capability to supply firm energy

• Generators are allowed to offer firm energy up to a centrally verified realistic limit

• Hydro generators are constrained by their hydrological characteristics and history

• Thermal generators are constrained by historical capacity and fuel contracts

$12.00 = P0

P1

P2

P3

QuantityDemand

Round 5

Round 4

starting price

clearing price

Aggregatesupply curve

P4P5

$6.17 = P6

Round 3

Round 2

Round 1 excess supply

$6.00 = P6’

descending clock

auctions are held

annually, three to four

years in advance

• Generators acquire a firm energy obligation• An administered demand curve represents the marginal

value of additional firm energy. Price Limits: 2 x Cost of New Entry –CONE- to 0.5 CONE

10

The first auction will be held in May 2007 for 2010 commitments

2007 2008 2009 2010 2011 2012 …2006

TRANSITION

Existingresources

New entrants Up to 20 years

2010auction

Existingresources

New entrants Up to 20 years

2011auction

Existingresources

New entrants Up to 20 years

2012auction

(Dec. - Nov.)

• During the transition (initial) period, generators will be assigned the obligation pro rata of their declared firm energies

• The Option price will be defined by the Regulator in this period

11

Security mechanisms are provided to adjust positions and to avoid shortages

Primaryauctions

Reconfigurationauctions

Secondary market

Last Resort generators

Voluntary desconectable demand

Fail-

safe

mec

hani

sm fo

r ina

dequ

ate

supp

ly o

r in

suffi

cien

t com

petit

ion

12

References

• Colombia Firm Energy Market. Cramton, Peter and Stoft, Steve. 15 September 2006

• Colombian Energy and Gas Regulation Commission. Resolution 071 and 079 of 2006. www.creg.gov.co

October, 2006

Todos los derechos reservados para XM S.A E.S.P.

Luis Alejandro Camargo S.lcamargo@xm.com.co