The electric energy industry in Latin America has faced a ... Transmission and distribution have open access reg- ulations, with ... IEEE Power Engineering Review, August 2002 ... assure free entry to the market of generation, avoiding market.
Hugh Rudnick
California Crisis Influences Further Reforms in Latin America he electric energy industry in Latin America has faced a profound transformation, with no parallel worldwide. New electric sector regulations were set in Chile in 1982, Argentina in 1992, Peru in 1993, Bolivia and Colombia in 1994, and the Central American countries in 1997. Brazil also joined the group, and Venezuela, Mexico, and Ecuador have initiated actions. Most of the countries of the region have followed the Chilean model (Peru, Bolivia, and Argentina in a first stage), while Colombia followed the English approach. Challenges are diverse in the region, all countries requiring high investment to respond to very large growth of demand. Figure 1 illustrates the yearly growth for Chile, an average around 8%, with the need for generating capacity to double every 10 years. With governments urged to focus on more basic problems, education and health, creating competitive energy markets to incorporate the private sector was seen as a necessity for further economic development. Reform schemes have very much been conditioned by the mainly hydroelectric characteristic of the systems. Over 70% of installed capacity in the region is hydro, with combined cycle natural gas plants growing at a rapid pace. All country deregulation models have constituted centralized pools (poolcos), based on a monopolistic coordination of generator operation and market clearing, seeking to emulate perfect competition conditions based on marginal costs, with a centralized planning of their operation. Poolcos have developed in different shapes, with different schemes for dispatch. Chile, Bolivia, Peru, Brazil, and Central America use a centralized economic dispatch based on audited costs, with Argentina using bids with caps, and only Colombia accepting unrestricted bids. All except Colombia use nodal pricing, and all incorporate a capacity payment (as an adequacy signal), besides the energy one. Transmission and distribution have open access regulations, with a global allocation of network costs, within a “use of system” approach. Incentive-based regulation is used in distribution (either a yard stick competition model or a price cap one). In general, all markets have been successful in emulating competition and discarding market power. Contract financial markets have developed in parallel between generation and large consumers. Private investment has flown to the region,
Hugh Rudnick is with the Catholic University of Chile, Santiago, Chile. 12
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prices have declined significantly in most markets, and security and quality of supply has increased.
Need for Second-Generation Reform and the California Paradigm
Those successes in Latin America have coupled with market design problems, with struggles in the governing of the independent operator, conflicts on wholesale market energy prices and capacity prices, difficulties in transmission open access, and in distribution pricing.
0272-1724/02/$17.00©2002 IEEE
IEEE Power Engineering Review, August 2002
Thousands of Clients in Distribution
Load Yearly Growth
Most recently, concern has grown on signals of a decreased interest by the private sector in continuing 12.0% the high rate of investment both in generation and 10.0% transmission. This has been worsened in recent years with supply deficits in Chile and Brazil, affected by 8.0% severe droughts. 6.0% The need to reform the market regulations and increase competitive conditions has been seen as a ne4.0% cessity. Argentina, Chile, and Brazil, among others, 2.0% have been searching for alternatives. The California line of thinking arose as a new paradigm that was 0.0% studied with interest. Criticism had arisen on the 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 centralized poolcos, formulating the need for a second stage of reform, establishing highly flexible Figure 1. Yearly load growth in Chile mechanisms of decentralized exchanges, and achieving real market mechanisms with wholesale 13.190 and retail competition. 12.288 The defined objective was, within the California paradigm, to replace the centralized pools and to force “perfect” competition with the laissez faire 9.528 model of the power exchange (PX), coupled to an independent system operator (ISO) that dispatches essentially based on long-term bilateral contracts plus short-term unrestricted bids. Critics of the Latin 4.600 4.143 American schemes argued that commercial agreements should determine the dispatch through successive markets, with supply and demand independently 420 considering all relevant variables in their decisions, including business uncertainties. They argued that EdF Enron Southern Co SLdE AES Corp Endesa this would also allow development of markets for all types of transaction of the electrical product (ancillary services, reserves, load shedding, etc.), including Figure 2. Market control of main players in the region in 2000 financial derivatives. ● Be aware of the need to balance threats to the environment Within the new line of thinking, nodal price schemes were with environmental threats to electricity supply. discarded, as well as explicit capacity payments (they would ● Recognize the importance of contracts for volatility hedghave to be incorporated, if needed, in energy bids). Chile first and Argentina later formulated reforms to their ing. regulations along these lines. Nevertheless, the California crisis ● Recognize (and use) the price elasticity of demand for stopped the changes and questioned the new reform proposals. market development and control of market power. On the other hand, Latin America has conditions that may California Crisis and Its worsen what took place in California. Concentration of ownerLessons for Latin America ship is higher; the long-term trend is for just a few operators to With the California crisis developing and its PX being closed, manage the region, both at the generation level and the distributhe concern arose in Latin American countries about the validity tion level. Figure 2 illustrates the market control (thousands of of this new paradigm for second-stage reforms. They questioned clients in distribution) of the main players in the region. In such themselves as to whether or not they were seeking a “remedy conditions, it may be more difficult to develop mechanisms to worse than the disease,” assuming that unregulated bid-based assure free entry to the market of generation, avoiding market spot exchange markets that also drive system operation were power or cartel agreements. simpler than their counterpart. They also wondered about the Another unparalleled condition is the predominance of hydominant positions that may develop in highly horizontal and droelectricity. There is little knowledge worldwide on market vertically integrated conditions. power playing in predominantly hydroelectric systems, nor on California provided, at least, the following basic lessons for its impact on an adequate reservoir usage and on price volatility. Latin America. ● It is essential to recognize the basic difficulties in electricBefore and After California ity market design; it is not a cash and carry market. Thus, reforms that were formulated along the California model ● It is fundamental to achieve a fully independent market were rethought, and middle-ground proposals have arisen. Table governing. 1 highlights previous regulatory arrangements and change pro● It is risky to predict market development and regulate acposals before California and after (based essentially on what has cordingly; do not over regulate based on predictions. taken place in Chile). ● Be alert of the hidden potential for market power and gamNevertheless, this is a dynamic process, and further changes ing, even with many players. may develop. The path is still being defined, but clearly the na● Recognize the risks of bad decoupling of the different ive approach to an ideal unregulated bid-based spot exchange stages of market operation and physical operation. market has been discarded. IEEE Power Engineering Review, August 2002
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Table 1. Changes in Chile before and after the California crisis Previous Regulatory Changes Considered Changes Considered Arrangements Before California After California Financial contracts do not drive operation
Bilateral contracts drive operation
Poolco model
PX-ISO model
Cost-based dispatch Nodal pricing Capacity pricing
Unrestricted bids Single bus pricing No capacity pricing Simple transmission (postage stamp) pricing, generators and consumers
Use of system transmission pricing by generators
Financial contracts do not drive operation Hybrid poolco-based model (along PJM lines) Restricted bids (until competitive market develops) Nodal pricing Capacity pricing Hybrid use of system, generators and consumers
Acknowledgments
Acknowledgments for the support from Fondecyt project 1000517.
References [1] S. Borenstein, “The trouble with electricity markets (and some solutions),” Power Working Paper PWP-081, Univ. California Energy Institute, January 2001. [2] J.D. Chandley, S.M. Harvey, and W.W. Hogan, “Electricity market reform in California,” Cambridge, Mass, 22 November 2000.
[3] P. Joskow and E. Kahn, “A quantitative analysis of pricing behavior in California’s wholesale electricity market during summer 2000,” 15 January 2001. [4] R. Kelman, L.A. Barroso, and M.V. Pereira “Market power assessment and mitigation in hydrothermal systems,” IEEE Trans. Power Syst., vol. 16, no. 3, pp. 354-359, Aug. 2001. [5] W. Read, I. Newman, I. Pérez-Arriaga, H. Rudnick, M. Gent, A. Román, “Reliability in the new market structure (Part I),”. IEEE Power Engineering Review, vol. 19, no. 12, pp. 4-14, Dec. 1999. [6] H. Rudnick, H. Varela, and W. Hogan, “Evaluation of alternatives for power system coordination and pooling in a competitive environment,” IEEE Trans. Power Syst., vol. 12, no. 2, pp. 605-613, May 1997. [7] H. Rudnick and J. Zolezzi, “Electric sector deregulation and restructuring in Latin America: lessons to be learnt and possible ways forward,” IEE Proc. Generation, Transmission and Distribution, vol. 148, no. 2, pp. 180-184, Mar. 2001.
About the Author
Hugh Rudnick was born in Santiago, Chile, and graduated as an electrical engineer from the University of Chile, later obtaining the M.S. and Ph.D. degrees from the Victoria University of Manchester, U.K. He is Fellow of the IEEE and a professor of electrical engineering at the Catholic University of Chile. His research activities focus on the economic operation, planning, and regulation of electric power systems. He has been a consultant with the World Bank and with utilities and regulators in Argentina, Bolivia, Brazil, Canada, Central America, Chile, Colombia, Peru, and Venezuela, as well as in Europe.
California’s Electricity Crisis (continued from page 7)
This worked when there was a surplus but the efficiency savings were overwhelmed by increased costs measured in tens of billions of dollars when the market stopped functioning. The government has stepped in to provide price stability and reliability. The new industry structure is still evolving. California’s experience is a reminder that the physics of electricity, whereby production and consumption must be perfectly coordinated in real-time, is testing economics and free market principles. There must be flexibility and will to adjust market rules and operations in light of market performance. Competitive electric markets must be designed in recognition of the fact that electricity is different from other commodities (no storage, network effects, short time constants) and that market economics and engineering realities have to be harmonized.
About the Author
Vikram S. Budhraja is president of the Electric Power Group, LLC and chair of the Consortium for Electric Reliability Technology Solutions. He has extensive senior executive experience in the electric power industry in the areas of operations, manag14
ing business units, strategy, industry restructuring, investments, technologies, startups, and venture capital. Previously, he was with Edison International, where he held senior executive positions, including: president, Edison Technology Solutions and Edison Capital Ventures; senior vice president, Southern California Edison, with responsibility for Edison’s Power Grid business unit; vice president of Planning and Technology; vice president of System Planning and Operation; and vice president of System Planning and Fuel Supply. He led industry efforts on reliability and creation of competitive electricity markets, including the formation and startup of the ISO and PX for California’s competitive electricity market. He is an expert on the electric power industry, power system operations and planning, research and technology development, startup ventures, business development, and strategy. Prior to joining Edison, he worked in the consulting field. He received his B.S. degree in mechanical engineering from the Indian Institute of Technology, New Delhi, and his M.S. degree in operations research and system engineering from the University of California, Los Angeles. He also serves on various boards. IEEE Power Engineering Review, August 2002
