Ensuring Generation Adequacy With Firm Energy Call Options - A Case Study for the Hydro-Dependent Colombian System

Ensuring generation adequacy has been an issue for regulators all over the world. Guaranteeing the necessary quantities at an efficient price is not an easy feat in the electricity field. In Colombia, the situation is further aggravated by a generating sector mostly made out of hydraulic plants, representing close to 70% of the total capacity. These are highly susceptible to climatic shocks typical of the region, particularly the El Nintilde;o Southern Oscillation, which has, in the past, been the culprit of severe blackouts that have lasted for well over a year. The following paper evaluates the proposal made by the Colombian regulator which introduces a reliability call option with firm energy as the underlying asset as a means of ensuring generation adequacy