What are the possible outcomes of market liberalization in the electrical sector? Could be reduction in energy prices, increasing private participation, and an overall more competitive market. A recent policy brief by IDB examines the reform impacts from the perspective of market monitoring, measuring firms’ ability to influence prices in the spot energy market. The results indicate a highly competitive energy market in Guatemala and Chile, although firms’ ability to influence prices varies within each market.
In Chile, intensive electrical reforms have been lowering prices in both grid systems, and the spread between the northern (SING) and central (SIC) grids are decreasing as a sign of national electricity convergence (Figure 1). Specifically, The National Energy Commission (CNE) has been introducing changes in the transmission and generation system: with an integration planning of SING and SIC into a national electrical system expecting to launch in 2018, and a new tenders law (No. 20.805) established in 2015 to include more international competition in the bidding system.
With the introduction of the new bidding system, one desirable outcome in the generation sector will be a further reduction in price, ensuing from the decline in market power in a broader energy exchange market, which is also proved to be significant in the brief. Nonetheless, this outcome is conditional on the well-functioning of a national grid system, since currently, SING and SIC are still operating independently. This separation of market aggravates the power congestion in the northern part and discourages renewable energy for blocking its dispatch from SIC to SING (Figure 2).
Although the overall market is progressing towards a more competitive environment, firm-level market power still exists when the demand level is high in the spot market. And within those peak hours, generating companies with larger installed capacity, as well as more diverse generation mix, tend to have more space to influence electricity prices. Similarly, the largest generating company has the most potential to bid high in Guatemala, where its electrical system is already nationally connected. Combining the results of both countries, one possible policy advice is to direct more efforts into monitoring large generating firms in order to maintain a more balanced and competitive energy market.
Read the full report here.
 84 domestic and foreign generation firms entered into the competition for 12,430 GWh per year of energy supply in the national grid system 20 years from the year 2021.