Diagnosing the Causes of the Recent El Niño Event and Recommendations for Reform

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Program on Energy and Sustainable Development, page(s): 127

December 2016

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In this report we identify the key drivers of observed market outcomes in the Colombian electricity supply industry during the fourth quarter of 2015 and first quarter of 2016, the time period covered by the most recent El Niño Event. We analyze how effective the market rules and market structure of Colombian electricity supply industry are in managing El Niño Events. The performance of the Reliability Payment Mechanism (RPM) is a major focus of this report because of its designation as the primary mechanism for ensuring an adequate supply of energy at a reasonable price during El Niño Events. We find that the RPM creates a number of perverse economic incentives for supplier behavior, particularly if suppliers have a significant ability to exercise unilateral market power, that works against the RPM mechanism ensuring an adequate supply of electricity at a reasonable price during El Niño Events. We identify several features of the RPM that make it extremely challenging even for a modified version of this mechanism to achieve its goal. We propose an alternative mechanism for ensuring an adequate supply of energy at a reasonable price during El Niño Events that should be straightforward to implement under the current market design in Colombia.

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