IEEE Power & Energy Magazine - January/February 2021 - 73

mechanisms to procure power from renewables and support the development of these technologies, thus promoting
robust investment markets.
Despite the success of auction mechanisms in Latin
America, there is now evidence indicating that some aspects
of the original design elements of these auctions could be
improved. For instance, some of the first contracts were auctioned for periods that were excessively long, which led to
rigid commitments that ended up allocating too much risk
to customers. Other design and implementation issues are
related to the bundling of energy and reliability in a single
product, contract enforcement, and selection criteria used
in centralized auctions when contracts incorporate different
sources of risk, such as indexation clauses (e.g., fossil fuel
price risk, renewable generation profile risk, and spot price
risk). Administrative definitions of firm capacity and firm
energy could also result in biases against emerging technologies and impair them to compete on equal footing against, for
instance, conventional generation technologies.

Nevertheless, the experience in Latin America (Brazil, in
particular) shows that many hydro systems in the region have
operated with large amounts of generation with zero or nearzero marginal cost for decades and have still managed to incentivize investments in new generation capacity. However, in those
situations, long-term markets for sufficiently liquid financial
contracts are essential to secure generation financing, allowing
investors to reduce their exposure to the high volatility of spot
prices. Additionally, some types of long-term contracts can also
provide insurance against both policy uncertainty and political
risk, which can be large in some countries in the region.
Finally, from our perspective, the experience of some
countries in Latin America that have relied on markets for
long-term contracts offers some learning opportunities for
countries with advanced short-term markets (e.g., the United
States and Western Europe). This experience could be useful if the volatility of spot prices due to increasing shares of
generation from renewables becomes a barrier to incentivize
investments in new generation capacity.

Improvements Needed in Latin
America to Accommodate High
Shares of Renewables

Acknowledgments

Even though current market designs in Latin America have
served their purpose, they were not originally tailored to
accommodate increasing shares of generation from variable
and unpredictable resources in short time intervals. As introduced previously, hydro-dominant systems, although with
their own share of challenges, have relatively high short-term
flexibility compared to systems with high shares of generation from renewables (e.g., wind and solar photovoltaic). This
explains why, in general, most markets in Latin America
have rather simple mechanisms to settle imbalances in the
short term, while they lack most of the advanced features of
more highly developed electricity markets. Going forward,
we recommend improving several design elements in the
wholesale market as described in Table 1.

Conclusions
There are several aspects of the electricity markets in Latin
America that could be improved. Some of the needed en---
hancements will require mirroring features of short-term
markets in the United States and Europe, such as increasing
the temporal granularity of real-time prices, opening wholesale markets to demand-side resources as well as emerging technologies, and introducing multisettlement systems.
Long-term markets could also be improved by ensuring that
contracting requirements and auction mechanisms allow for
all technologies to compete on equal footing. Reducing the
duration of contracts would also allow consumers to benefit
from technological disruptions in generation technologies
in the coming decades. It is also possible to introduce more
liquidity into markets for long-term contracts by implementing marketplaces for these instruments and opening them to
financial agents and retail aggregators.
january/february 2021

This research was supported by CONICYT FONDECYT
1190228, ANID/PIA/ACT192094, ANID/FONDAP/15110019
(SERC-Chile), ANID-Basal Project FB0008, and the Complex Engineering Systems Institute (ANID PIA/APOYO
AFB180003).

For Further Reading
G. De Maere d'Aertrycke, A. Ehrenmann, and Y. Smeers,
" Investment with incomplete markets for risk: The need for
long-term contracts, " Energy Policy, vol. 105, pp. 571-583,
June 2017. doi: 10.1016/j.enpol.2017.01.029.
S. Mocarquer, L. A. Barroso, H. Rudnick, and B. Bezerra, " Balance of power, " IEEE Power Energy Mag., vol. 7, no.
4, pp. 26-34, 2009. doi: 10.1109/MPE.2009.933417.
F. D. Munoz, S. Wogrin, S. S. Oren, and B. F. Hobbs, " Economic inefficiencies of cost-based electricity market designs, " Energy J., vol. 39, no. 3, pp. 51-68, 2018. doi: 10.5547/
01956574.39.3.fmun.
H. Rudnick, L. A. Barroso, R. Moreno, R. Ferreira, and E.
Pereira, " Facilitating the integration of renewables in Latin
America: The role of hydropower generation and other Energy storage technologies, " IEEE Power Energy Mag., vol. 15,
no. 5, pp. 68-80, 2017. doi: 10.1109/MPE.2017.2708862.

Biographies
Luiz Barroso is with the Institute for Research in Technology, ICAI, Comillas Pontifical University, Madrid, Spain.
Francisco D. Muñoz is with the Universidad Adolfo Ibáñez,
Santiago, Chile.
Bernardo Bezerra is with PSR, Brazil.
Hugh Rudnick is with Pontificia Universidad Católica de
Chile, Santiago.
Gabriel Cunha is with PSR, Brazil.
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