Fitch Ratings-New York-29 October 2015: The weather phenomenon known as El Nino, which causes lower water precipitation in Colombia, is currently putting the country’s electricity regulatory framework to the test, according to Fitch Ratings.
A drought that could last until the beginning of next year has caused electricity spot prices in Colombia to rise more than tenfold. Regulators have had to enact temporary measures to preserve the viability of the system and avoid rolling blackouts. Between September and October 2015, electricity spot prices in Colombia have risen to more than USD400 per Megawatt hour (MWh) from a historical average of approximately USD30 to USD50 per MWh, forcing some thermoelectric companies to be unavailable.
Fitch believes major investment-grade players, including Empresas Publicas de Medellin E.S.P., Emgesa S.A. E.S.P, Isagen S.A. E.S.P., and AES Gener, are well prepared to weather the low hydrology with only marginal impacts on cash flow generation expected. These companies possess sufficient financial strength and a diversified enough asset base to withstand dry conditions in Colombia. AES Gener also has exposure in Colombia to the El Nino effect through its 1,000 MW hydroelectric powerplant, Chivor, which represented 27% of the group’s consolidated EBITDA. Chivor sells approximately half its generation volumes in the spot market, which may partially offset the negative effect from lower inflows to the Chivor basin.
Pure thermoelectric generation companies that receive capacity payments, or reliability payments as it is called in Colombia, are the companies most vulnerable to the current drought condition. These companies include: Termocandelaria Power Ltd, Termovalle S.A.S. E.S.P., and TermoEmcali I S.A. E.S.P.
The reliability payment acts as insurance for the system as well as for thermoelectric companies, allowing them to maintain financial viability with little operation during periods of normal hydrology. These companies are then called to dispatch during periods of lower hydrology. If spot prices surpass a theoretical strike price for an inefficient thermoelectric plant that would operate using fuel oil number 6 or bunker fuel, these plants are paid this price known as the scarcity price (precio de escasez) instead of the spot price. Currently, the scarcity price is significantly lower than the variable cost of liquid fuels fired thermoelectric plants, effectively forcing them to be unavailable as a result of the onerous costs of generating at a significantly higher cost than the scarcity price.
The Colombian government, through the Ministry of Mines and Energy and the regulator, has implemented several measures to facilitate thermoelectric plants availability and preserve reservoirs levels. It has also capped spot prices in order to curve rationing risk. These measures seek to facilitate fuels for thermoelectric plants and limit thermoelectric plants losses during this period by limiting their spot market losses. One of the measures is to cap the spot price at COP810 per Kilowatt hour (KWh) or approximately USD280 per MWh. According to the regulator, this is intended to keep contracted thermoelectric plants — that is, those receiving reliability payment — relatively financially viable during the drought. The government is also contemplating implementing an extraordinary charge for all end users in the country in order to compensate either all generation plants that make their capacity available or those more affected by the drought.
Although Fitch believes that the Colombian regulatory framework is strong, balanced, and independent from the central government, the current situation highlights some structural weaknesses in this country’s regulatory framework and the electricity system with regards to its peers in the region. Currently, the variable cost of the country’s diesel fired thermoelectric installed capacity surpasses the scarcity price despite the higher efficiency of these plants when compared to the theoretical inefficient thermoelectric plant use to calculate the scarcity price, which in theory would use bunker fuel. Furthermore, the country seems to lack the gas supply and transportation infrastructure needed to bring fuel to gas fired thermoelectric plants during periods of low hydrology, therefore forcing dual fuel capable plants to generate with significantly more expensive fuels. In late 2016, the entry of an liquefied natural gas (LNG) regasification import terminal is expected to significantly reduce the use of liquid fuels.
Colombia’s generation matrix is strongly dependent on hydroelectric generation. As of December 2014, installed capacity amounted to 15,985MW, 71% of which was hydroelectric. This condition exposes the sector to changing hydrological conditions, which translates to a high degree of price volatility in the spot market. As a result, generation companies’ cash flows are more volatile, relative to that of distribution and transmission companies. The degree to which electricity price volatility may affect generating companies’ EBITDA will depend on the companies’ exposure to the spot market relative to their mix of assets (hydroelectric versus thermoelectric) and the availability of thermal plants when water reserves fall.