Simulation of the Colombian Firm Energy Market

We present a simulation analysis of the proposed Colombian firm energy market. The mainpurpose of the simulation is to assess the risk to suppliers of participation in the market. We alsoare able to consider variations in the market design, and assess the impact of alternative auctionparameters.Three simulation models are developed and analyzed. The first model (Model 1) useshistorical price data from October 1995 through May 2006 to assess the performance risk ofhypothetical thermal and hydro generating units. The second model (Model 2) uses historicalprice and operating data to assess performance risk of the actual generating units in Colombiaover the same period. This analysis allows us to assess company risk. The third model (Model 3)differs from the other models in that it explicitly models the firm energy auction and investmentsgoing forward. Thus, the model is able to assess how the distribution of firm energy purchasesdiffers from the firm energy target, and how this distribution depends on the firm energy demandcurve. Model 3 also studies the investment decisions of suppliers, the impact of lumpyinvestments, and the impact of a higher scarcity price.