1. Issues involving Contract and Spot Sales of Hydropower in Peru

2. IN A MARKET FOR DIFFERENCES THE SPOT PRICE REMAINS RELEVANT EVEN IF ALL ENERGY IS SOLD UNDER CONTRACT IF THE CONTRACT MARKET IS CONSISTENTLY LOWER THAN THE SPOT MARKET THEN EITHER THE MARKET IS DRIVEN BY THE NEED TO FIRM UP SALES OR IT IS BEING MANIPULATED DOWNWARDS OR BOTH SANTA RITA DOES NOT NEED TO FIRM UP SALES SO IT DOES NOT DERIVE ANY BENEFIT BY SELLING BELOW SPOT MARKET. THERMAL PLANTS CAN FIRM UP SALES AND HAVE POSITIVE REVENUE WITH CONTRACTS WELL BELOW SPOT MARKET LEVEL WITHOUT ANY RISK OF NEGATIVE REVENUE AS LONG AS THEY ARE AVAILABLE EVEN IF NOT DISPATCHED IF SANTA RITA CONTRACTS ITS FULL MEAN ANNUAL ENERGY PRODUCTION RUNS A RISK OF NEGATIVE REVENUE EVEN WHEN FULLY AVAILABLE DUE TO HYDROLOGIC DEPENDENCE THE UNAVAILABILITY OF A THERMAL PLANT WITH CONTRACT CREATES A RISK OF NEGATIVE REVENUE BUT THE CORRELATION BETWEEN FORCED OUTAGE AND MARKET PRICE IS SMALL SO THE RISK OF NEGATIVE REVENUE IS ALSO LOW THE CORRELATION BETWEEN FORCED OUTAGE AND MARKET PRICE FOR SANTA RITA IS HIGH SO THERE IS NEARLY A CERTAINTY OF NEGATIVE REVENUE IF THE PLANT BECOMES UNAVAILABLE WHILE HOLDING A CONTRACT KEY POINTS

3. MARKET FOR DIFFERENCES

4. MARKET BEHAVIOR

5. NET REVENUE OF A THERMAL PLANT

6. NET REVENUE OF HYDROELECTRIC PLANTS

8. When a thermal plant does not inject the full contract power of its PPA it will generally be because the spot prices are below its own variable generation cost and therefore below its contract price. When a hydroelectric plant does not inject the full contract power it will generally be during times when hydrology is low, the spot price is above average and very likely above its contract price. As a result run-of-river hydroelectric plants are competing for PPA’s at a serious disadvantage while competing for spot sales at a great advantage. At equal spot and contract market levels the revenue risk is lower under spot sales which are stabilized by the inverse relationship between hydroelectric production and system price than under contract sales which carry a high risk of negative revenue A hydroelectric project has better prospects of both revenue magnitude and revenue risk selling in the spot market than under contract. In addition, the negotiation of contracts for a plant without firm financing places the burden of risk on the buyer and therefore a low contract price must be expected. If at all possible the best strategy is to seek financing under spot sales alone, even without the most favorable terms, then seek the most attractive PPA and finally consider refinancing the debt once the PPA has been secured. Conclusion Recommendation