IEEE Power & Energy Magazine - January/February 2021 - 83

Since no market design can solve structural concentration issues,
structural changes, such as the separation of functions or legal limits
to market share, should be priority activities.
Conclusions and Recommendations From
Developing Banking Practitioners
Implementing market reform and the appropriate market
design for developing countries needs to be viewed in the
overall context of the institutional capacity, market structure,
social acceptability of fluctuating prices, and many competing objectives, such as effectiveness in bringing needed supply
and the efficiency of the different mechanics. With that said,
some general messages and recommendations from more than
30 years of market design in LAC can be drawn, looking forward to grids with ever-growing shares of renewables.

Market Design and Institutional Design
Should Be Considered Together
Institutional capacity is at the core of achieving good results
of many market reforms in the power industry of the developing world. Market design should always be adapted to local
realities and consider the needed institutional arrangements
and capacities to execute, supervise, and generate social
acceptance of the implementation and outcomes of a market
design. Price fluctuations at the retail level tend to be less
socially acceptable in developing countries since expenditures in energy can represent a larger share of consumers'
total expenditures and also due to other local social and political realities.
Market design should not be separated from the institutional design process and other regulatory aspects, such as
the effectiveness of price formation at the retail level. Some
market designs, e.g., energy-only markets, would be more
difficult to implement in a context where retail price stability is an objective and attracting low-cost investments is a
primary objective.

Prioritize Design Options Based on
Specific Objectives
Over the past few years, developing countries faced rapid
demand growth. Attracting new investment in competitivecost generation to supply the demand in a timely manner is
a priority objective. Some market designs are more effective
at achieving such objectives than others, and a clear set of
goals should be used to weigh different options. If demand
growth were zero or negative, as happened over the past
few years in leading developing countries with more mature
market designs, then the efficiency objective may be more
important. Usually, design options will be weighed based on
effectiveness versus efficiency objectives, which run counter
to each other in many cases. Therefore, defining and priorijanuary/february 2021

tizing a clear set of measurable objectives is critical in the
choice of market design process.

Do Not Underestimate Structural Limitations
and the Need for Fair Play
Structural limitations, such as vertical and horizontal integration or a high level of concentration in any of the segments
such as generation and retail sales, make it difficult to achieve
results using many market design models. Since no market
design can solve structural concentration issues, structural
changes, such as the separation of functions or legal limits to
market share, should be priority activities. Likely, the necessary changes include full separation and independent governance of system operation functions, which have not been
fully achieved in many developing countries.
In addition, where government-owned entities such as
utilities are key actors, the importance of institutional governance is of utmost importance. It is necessary to ensure that
state-owned entities have private-like orientation or at least
the public sector goals are stated clearly and financed properly, without affecting the level playing field, proper efficient
cost recovery, and price formation in wholesale markets.

Transmission Continues to Be a Bottleneck
In many developing countries, transmission is the least costly
part of electricity infrastructure. Despite the fact that practices
have been put in place to speed up transmission investment
via, for example, better planning, the expansion of grids in a
timely and nondiscriminatory fashion continues to be a recurrent challenge in many markets. Wholesale markets need
robust transmission grids to function properly, especially with
a large share of renewables. It is crucial to maintain a pace
of investment aligned with the growth of generation and continuously improve access procedures. Transmission should be
seen as a barrier that needs to be reduced as fast and costeffectively as possible, with clearer and more effective expansion and execution instruments via multiple actors as well as
simple, yet effective, cost-recovery mechanisms.

Stable Revenues via More Flexible Contracts
Continue to Be a Key Design Feature
Capacity payments, such as those in Chile, provide a secured
revenue stream for peaking power. Long-term contracts also
provide such stability for energy and capacity projects. Markets may reduce costs by continuing to attract investments
with a long-term amortization period. In developing markets that have large price-regulated retail segments, this will
ieee power & energy magazine

IEEE Power & Energy Magazine - January/February 2021

Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - January/February 2021