Electricity market design for low-carbon and flexible systems: Room for improvement in Chile

Francisco D. Muñoz, Carlos Suazo-Martínez, Eduardo Pereira and Rodrigo Moreno

Energy Policy, 2021, vol. 148, issue PB

Abstract: Chile was the first country that privatized all generation, transmission, and distribution services, and introduced competition in the generation segment. Nearly four decades after its creation, many features of the original electricity market design remain unchanged. In this paper, we provide a brief history of the Chilean electricity market and explain its main limitations going forward. Some of these include the use of a cost-based mechanism for spot transactions based on a merit-order curve, low temporal granularity of spot prices, missing forward markets to settle deviations from day-ahead commitments, inefficient pricing of greenhouse gas emissions due to administrative rules, and a capacity mechanism that does not reflect a clear resource adequacy target. Many of these limitations are also present in other electricity markets in Latin America that, when privatized, mirrored many features of the electricity market design in Chile. Failing to address these limitations will provide distorted incentives for the efficient entry and operation of resources that could impart flexibility to the system, increasing the cost of decarbonizing the power sector.

Keywords: Market design; Electricity; Flexibility; Decarbonization (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:148:y:2021:i:pb:s0301421520307084

DOI: 10.1016/j.enpol.2020.111997

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