Security of electricity supply at the generation level: problem analysis

Abstract

Since the very beginning of the restructuring process, back in 1982 in Chile, the ability of an electricity market to provide the system with the required level of security of supply has been put into question. The mistrust on the ability of the market, left to its own devices, to provide sufficient generation availability when needed, is more and more leading to the implementation of additional regulatory mechanisms. This matter is undoubtedly gaining importance and it has taken a key role in the energy regulators’ agendas. In this paper, we develop a renewed discussion of the nature of the so-called market failure in the context of real electricity markets after thirty years of electricity market experience. We show that, although ideally the market itself should be enough to provide adequate production resource management and investment incentives, there are several factors that prevent this result from being achieved.