Retail consumers and risk in centralized energy auctions for indexed long-term contracts in Chile
File(s)Risk in long-term auctions_R1 (2).pdf (560.21 KB)
Accepted version
Author(s)
Reus, Lorenzo
Munoz, Francisco
Moreno Vieyra, R
Type
Journal Article
Abstract
Centralized energy auctions for long-term contracts are commonly-used mechanisms to ensure supply adequacy, to promote competition, and to protect retail customers from price spikes in Latin America. In Chile, the law mandates that all distribution companies must hold long-term contracts—which are awarded on a competitive centralized auction—to cover 100% of the projected demand from three to fifteen years into the future. These contracts can be indexed to a series of financial parameters, including fossil fuel prices at reference locations. Drawing from portfolio theory, we use a simple example to illustrate the difficulties of selecting, through the current clearing mechanism that focuses on average costs and individual characteristics of the offers, a portfolio of long-term energy contracts that could simultaneously minimize the expected future cost of energy and limit the risk exposure of retail customers. In particular, we show that if the objective of the regulator is to limit the risk to regulated consumers, it could be optimal to include contracts that would not be selected based on individual characteristics of the offers and a least-cost auction objective, but that could significantly reduce the price variance of the overall portfolio due to diversification effects between indexing parameters.
Date Issued
2018-03-01
Date Acceptance
2017-12-18
Citation
Energy Policy, 2018, 114, pp.566-577
ISSN
0301-4215
Publisher
Elsevier
Start Page
566
End Page
577
Journal / Book Title
Energy Policy
Volume
114
Copyright Statement
© 2017 Elsevier Ltd. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Subjects
MD Multidisciplinary
Energy
Publication Status
Published
Date Publish Online
2018-01-04