Lessons from the implementation of the reliability payment mechanism in Colombia as an incentive for electricity generation

Abstract

The long-lasting consistency of a regulatory framework is essential for the proper functioning of incentives, particularly in industries such as electricity generation, with high sunk costs where different schemes have been developed to guarantee a long-term supply. In this respect, the instability of the regulatory framework can both impede the proper functioning of such incentives and, on occasion, violate the legitimate expectations of the agents involved. The purpose of this paper is to study the stability of the regulatory framework in terms of the long-term incentive mechanism for power generation applied in Colombia, known as “Cargo por Confiabilidad.” The findings of this paper sug-gest the independence of the regulatory agency must be strengthened and that the instability of the regulatory framework has generated redistribu-tions of income among agents. This study observes that among these agents, the best-organized pressure groups benefit the most from such a redistribu-tion of incomes.