IEEE Power & Energy Magazine - January/February 2021 - 72

table 1. Recommendations for improving several design elements in the wholesale market.

72	

Design Element Current Status in Latin America

Suggested Improvement

Wholesale
spot price
formation

In many cases, spot prices are
computed ignoring transmission
constraints and without the cooptimization of energy and reserves.

Spot prices should be computed considering all transmission and
generation constraints, plus reserves, simultaneously. This approach
ensures that all constraints are reflected in spot prices.

Temporal
granularity of
spot prices

Most countries in the region compute
prices at hourly time intervals, with the
exception of Peru (every 30 min) and
Brazil (three load blocks in weekly prices).

A time granularity of at least 1 h is recommended to allow spot prices to
better reflect the physics of the system, which is particularly important
for units that impart flexibility. Increasing the frequency of dispatch and
settlement intervals also decreases the need to activate reserve products.

Spatial
granularity of
spot prices

Some countries employ a simplified
version of nodal or zonal pricing using
merit-order curves to determine the
spot price for prespecified pricing
zones (Brazil), which can also be a
single large pricing zone that includes
the whole country (e.g., Colombia).

Countries should implement locational marginal pricing with
mechanisms to allow market participants to hedge congestion risks.
locational marginal pricing provides efficient signals for the entry and
exit of generation units by reflecting information about the incremental
value of generation at each location in the transmission network.

Cost- or
bid-based
arrangements
for dispatch
and price
formation

With the exception of Colombia, all
of the short-term electricity markets in
Latin America to date have been costbased markets.

Whenever possible (sufficient political will, human capital, and
competition), we recommend bid- instead of cost-based markets. Practical
experience indicates that having a central agency that relies on a single view
of the future to make decisions may lead to conflicts and legal disputes.
Concerns about the coordination of hydro units in cascaded systems,
multiple water uses, and market power concerns can be addressed with
a combination of property rights and active market monitoring.

Scarcity
pricing

Countries with lots of hydro resources have
a form of a scarcity-pricing mechanism
that reflects the administratively calculated
socioeconomic cost of curtailing demand
sometime in the future if hydro resources
are not available (as assessed by a
simulation model). To our best knowledge,
Mexico is the only country that has
implemented sloped ORDCs.

Although there is not enough demand response for scarcity prices
to naturally emerge, we recommend that the VoLL or cost of deficit
parameter used in simulation models should be at least equal to the
price at which demand would be willing to reduce consumption (in line
with the resource-adequacy target of the system). The use of a sloped
ORDC can also improve price formation during times when reserves
are scarce and prevent abrupt price drop offs.

Ancillary
services

In most countries, the provision of
ancillary services is mandated by
regulations that compensate units only
for the directly attributable costs of
providing the service (e.g., fuel costs).
In most cases, energy and reserve
products are not co-optimized.

We recommend migrating to schemes that co-optimize the provision
of energy and ancillary services. We also recommend remunerating
ancillary services based on uniform price, ensuring that all agents
providing the same service are remunerated equally. Mechanisms that
compensate only for the directly attributable costs of providing these
services are discriminatory and do not provide incentives for the entry
of efficient units in the long term.

Multisettlement
markets

Most countries use day-ahead
scheduling and only one settlement.
In both Chile and Colombia, for
example, day-ahead prices are not
used to settle any transaction; rather,
they rely solely on real-time prices.

We recommend implementing day-ahead markets that will allow
forward financial commitments to be settled against real-time prices
and evaluate the need for additional settlements.

Capacity
mechanism

Countries rely on different criteria to
define firm energy and firm capacity
values, both of which determine
remunerations for firms that contribute
to the system with these products.
Some countries also employ
administrative capacity payments
without necessarily aiming for an
explicit resource-adequacy target.

Countries that choose to rely on capacity mechanisms should pay attention to
the definition of firm capacity of renewables and energy storage technologies.
We recommend crediting firm capacity based on some reliability metric
that treats all resources, including demand-side ones, equally. We also
recommend that countries define a resource-adequacy target that is
aligned with the administrative estimate of the cost of unsupplied demand
used to price scarcity, ensuring consistency between value assessments
of additional transmission reinforcements (planned centrally) and the
profitability of new generation investments (based on market signals).

Centralized
auctions
for longterm energy
contracts or
minimum
contracting
requirements

Centralized auctions for contracts
are used in many countries as a
mechanism to ensure that distribution
companies will procure power at
the least possible cost for retail
consumers. Brazil also relies on
centralized auctions for contracts,
with physical backup as a resourceadequacy mechanism.

Countries should consider reducing the duration of mandated contracts
and explore options to introduce more liquidity into long-term financial
markets, fostering the participation of financial agents and retail aggregators.
Contracts of a long duration (e.g., 15-20 years) can be effective at
incentivizing generation investments, reducing risk for generation firms.
However, they also prevent customers from benefiting from cost reductions
due to technological disruptions in generation technologies, locking
customers into prices that might become too high compared to average spot
prices. Additionally, we recommend that regulators consider counterparty
and price risks as part of the selection criteria used in centralized auctions.

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