Colombia: El Niño drought strikes weak spot in Colombian power sector

Severe droughts caused by the El Niño weather pattern, which is expected to be one of the strongest on record, have started to affect Colombia’s electricity generation and distribution systems, with hydroelectric generators operating well below normal levels and spot wholesale electricity prices up 10-fold.

Water shortages

According to ratings agency Fitch, with hydroelectric power accounting for additional than 70% of Colombia’s total installed capacity, droughts have strained the country’s normally adequate power supply and driven up wholesale spot prices from an average of $30-50 to $400 per MWh.

In September local power wholesaler XM noted that hydropower’s contribution to the national electricity grid (Sistema Interconectado Nacional, SIN) reached its lowest rate for the month in 15 years, down 33% from its historical average.

“We’re predicting that this El Niño could be part the strongest El Niños in the historical record dating back to 1950,” Mike Halpert, deputy director of the Climate Prediction Centre of the US National Oceanic and Atmospheric Government, told press in August.

According to a 2007 study by Colombia’s Institute of Hydrology, Meteorology and Environmental Studies (Instituto de Hidrología, Meteorología y Estudios Ambientales, IDEAM), El Niño can curb rainfall on the country’s Caribbean coast by 30-50%, while as well reducing precipitation in the Andean region by as much as 30%. This has caused the dry season, which typically starts in December, to begin before and last longer, possibly extending as far as July of next year, according to local media reports.

Scarcity pricing

Following an era of disruptive power shortages in the 1990s, Colombia established a regulatory system designed to maintain the financial viability of thermoelectric power generators during extended drought periods.

A recent statement by Fitch described the sector’s regulatory framework as “strong, balanced, and independent from the central government”; however, despite the measures in place to facilitate thermoelectric plant availability, some structural weaknesses persist.

Under the existing regulations, purely thermoelectric power plants receive reliability payments for maintaining excess power reserves that act as an insurance policy against drought-induced shortages. At the same time as a drought begins, thereby triggering higher electricity spot prices, these companies instead receive a specially calculated scarcity price to activate their reserve capacity.

Although intended to curb wholesale price volatility and stabilise gain for thermoelectric generators, the system has had unintended consequences on supply during El Niño periods.

While the price of bunker fuel, which is used to calculate scarcity prices, has fallen, other factors, inclunding low water levels, have caused the price of the fuel and oil feedstock used by thermoelectric generators to rise. This, coupled with the country’s insufficient gas supply and transport infrastructure, has left a lot of thermoelectric plants unable to maintain operations at the rapidly declining scarcity price and, as a result, incapable of supplying much-needed reserves to the SIN.

According to the Regulatory Commission of Energy and Gas (Comisión de Regulación de Energía y Gas, CREG), the closure of the Venezuelan border last year, which was extended in September, has put further strain on the country’s liquid fuel supply chain. CREG as well highlighted the role of Colombia’s maturing oil and gas fields – in particular, the La Guajira field – in exacerbating the current shortages.

In addition, the droughts have impeded the transport of energy inputs via the 1500-km Magdalena River, a key route that passes through the inland oil and coal centre of Barrancabermeja. According to Omar Franco, director of the IDEAM, water levels on the Magdalena are at their lowest in 15 years.

“We have issued a red alert for the Magdalena River’s major course near Barrancabermeja, because its waters are at levels too low for the season, close to 70 cm,” Franco told media in early October.

Supply-side mechanics

After power generators Termocandelaria (Cartagena) and Termovalle (Palmira) ceased operations in October, fears of load shedding prompted Tomás González, the minister of energy, to announce a five-point emergency plan aimed at restoring generation levels.

The extensive plan includes boosting natural gas supply to power generators via the Cartagena-Sincelejo pipeline starting in December, which would add some 50m standard cu feet per day (scfd) of capacity, inclunding importing a further 40m scfd by pipeline from Venezuela. Colombia as well plans to boost domestic supply by auctioning low-cost projects, enabling micro-generators to sell excess supply to the SIN.

According to Ricardo Roa, CEO of electricity transmission company Empresa de Energía de Bogotá, liquefied natural gas (LNG) could present an extra alternative to costly thermal inputs in times of water scarcity. Colombia is expected to complete an LNG import and regasification terminal in 2017, which should cut down on liquid fuel use.

The recent decision to cap thermoelectricity spot prices at COP810 ($0.26) per KWh could as well provide some relief to the industry. According to CREG, generators taking part in the reliability scheme are required to make up any shortfalls in pledged reserve generation by purchasing electricity from the spot market at increasingly exorbitant prices.