The next step in the reform process involves establishing starting contractual relationships between newly formed entities. Generally, these will include: generator supply contracts between generation companies (gencos) and the retail supply arm of distribution companies (distcos); generator contracts for use of the transmission system; and contracts for any shared services (e.g., human resources, engineering, accounting, compliance).
Initially, it is common for the retail supply function to be housed within distribution companies, and subsequently divested from them. Because developing competitive wholesale markets takes time, and is best accomplished gradually with a focus on the largest consumers first, a well designed unbundling process incorporates a series of starting contracts between the newly created gencos and the retail supply arm of the distribution companies. These initial power purchase agreements (“PPAs”) may run for five or more years, and serve to stabilize both the revenues of the generators and the costs of generation supply to final consumers.
The amount of power covered under the PPAs needs to be synchronized with the pace of market opening, if a competitive wholesale market is envisioned immediately.
- Thus, in the initial years, 90-100% of generation may be under contract.
- However, if market opening is focused first on industrial customers, and industrial customers are 40% of load, the contracted capacity may fall to 60%, to free generation to be traded in the wholesale market with industrial customers or sold under contracts directly with them.
- If we presume that an additional 35% of load is commercial, and that commercial customers are to be allowed to enter the market a few years following industrial customers, then contracts between gencos and retailers would fall to 25% [100%-40%-35%].
