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New reliability charge incentives and structure in the Colombian electrical sector

Ensuring sector reliability has always been an important issue in electrical sector policy. However, the challenge could be even greater for hydro-dependent systems (as in the Colombian system) operating in the South-American equatorial zone, since climatic shocks such as the “el niño” phenomenon usually have a very strong impact on supply, thereby leading to market disequilibrium. Such systems thus require a very specific regulatory structure to assure generation units as “backup units'' which may generate electrical energy during critical moments. This paper examines the new reliability charge developed by the Colombian Commission for Regulating Energy and Gas (CREG), its characteristics and incentive mechanisms to ensure Colombian electrical system reliability under extreme weather condition. The new system promotes sector reliability during periods of scarcity and provides a clear incentive for new investment in backup generation. However, the instrument’s design could be improved if it included an explicit penalty for those units which do not honor their firm energy commitment. The instrument could thus encourage the non-entry of units which have either low reliability levels or speculative purposes.