Designing Competitive Wholesale Electricity Markets for Latin American Countries

Frank A. Wolak

No 1003, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: This paper presents a general framework for electricity market design in Latin American Countries that addresses current problems in the region. First presented is a theoretical foundation for analyzing the electricity market design problem, based on a generic principal-agent model. The paper then describes five essential features of a successful wholesale electricity market: i) a sufficient number of independent suppliers; ii) a forward market for electricity; iii) the active involvement of as many consumers of electricity as is economically feasible in the wholesale market; iv) a transmission network to facilitate commerce; and v) a credible regulatory mechanism, established as early as possible. Subsequently addressed are challenges to electrical industry restructuring in the region, followed by country-specific discussions of problems facing Brazil, Chile, Colombia, Honduras, and Mexico. Some of these challenges exemplify general issues, while others are unique to the geography, natural resource base or legal environment in the country. The paper closes with a proposed market design that should serve as a baseline market designthroughout the region.

Date: 2003-07
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