Cost Recovery and Investment Incentives in Electricity Markets

Given the characteristics of electricity and the reforms that this sector has undergone, there is still a lot of discussion regarding the best way of ensuring adequate supply in such an environment. The situation is even more critical for countries like Colombia with high dependence on hydro resources and susceptibility to drastic climatic events typical of the region. This paper analyses how generators recover their costs in competitive electricity markets, how the necessary incentives are set and the different ways in which the regulator can ensure generation adequacy. Among these are market derivatives as well as administrative mechanisms. As it will be shown, a market mechanism is capable of ensuring the necessary reliability at an efficient price