**2. LATAM's market operation**

#### **2.1 Generation dispatch**

Each of LATAM's electricity markets has particular characteristics concerning the mechanism used to perform the generation dispatch. Even so, there are common criteria that are summarized below.

The generation fleet is dispatched based on the variable production cost (VPC) of each generator. The VPC is equal to the sum of variable fuel cost plus O&M cost.

$$\text{VPC} \left[ \frac{\text{USD}}{\text{MWh}} \right] = \text{Efficiency} \times \text{Fuel Cost} + \text{O\&M} \tag{1}$$

The generator with the lowest VPC is dispatched first (typically renewable generators (hydro, solar, and wind) followed by clean thermal generation (geothermal, efficient cogeneration, and nuclear) and lastly conventional thermal generation based on coal, natural gas, and liquid fuels (fuel oil and diesel). The generation dispatch order is called LIST OF MERIT.

The LIST OF MERIT may be changed due to technical requirements associated with the security of supply (reliability constraints).

**Figure 1** shows (on the right) a simple example of building the LIST OF MERIT following the criteria indicated above. Each rectangle represents one particular power plant. The height is the available power of the plant, and the width is 1 hour, so the rectangle area represents the available energy of the power plant in each hour.

The generators with the lowest VPC, typically renewables (in green) are located first followed by hydro generation (in blue), and lastly, the thermal generators (T1–T5 in brown) that are ordered by their variable production costs (VPC) the cheapest first.

**Figure 1** shows (on the left) the hourly demand of the system. Typically, the demand is minimum in the early morning hours and maximum in the afternoon/night hours.

The demand for 1 hour in particular (hour 23, red dot) is supplied by the generators with the lower VPC of the LIST OF MERIT: renewable generation plus hydro generation and thermal power plants T1, T2, T3, and partially T4. The T5 generator is not dispatched because it is the one with the highest VPC.

When demand is reduced, the dispatch of thermal generation is reduced. In the figure, at hour 7, only generators T1 and T2 (partial) are dispatched.

The marginal cost of generation in each hour is equal to the VPC of the generator with the highest VPC that is dispatched according to the aforementioned methodology. In the example, the marginal cost at hour 23 is equal to the VPC of generator G4, and the marginal cost at hour 7 is equal to the CVP of generator G2.

Therefore, the marginal costs are higher when the demand is higher (and therefore the lower the reserve margin), resulting in the marginal cost being an economic signal that promotes the availability of generation as a way of achieving maximum profitability of the generation business.

**Figure 2** shows a typical generation dispatch by type. The figure shows the generation dispatch for each hour, for a typical day of each month (12 24 matrix) in the Mexican Electricity Market (MX).

**Figure 1.** *Generation dispatch methodology (LIST OF MERIT).* *Variable Renewable Energy: How the Energy Markets Rules Could Improve Electrical System… DOI: http://dx.doi.org/10.5772/intechopen.107062*

**Figure 2.** *Energy production by type. 12 24 matrix. Source: Own elaboration based on CENACE, MX.*

Hydro generation is maximum at night, which compensates for the zero solar generation in those hours. Thermal generators with the lowest VPC are dispatched as baseload (typically geothermal, nuclear, combine cycle running with natural gas and coal thermal plants). High expensive thermal plants (conventional thermal running with liquid fuels) are dispatched last, as peaking units.

Generation dispatch includes the system support resources (RSS).<sup>1</sup> They are generators that are dispatched to maintain the reliability of the power system.

#### **2.2 Addition of new generation capacity**

In the LATAM's electricity markets, the expansion of the generation fleet that arises from the initiative of private investors is mainly based on natural gas combined cycle type thermal plants (distributed by networks or LNG type) and WIND and SOLAR PV renewable plants.

The main reason for the development of those kinds of projects is because their development cost (CAPEX + OPEX) is minimal and they allow compliance with renewable generation participation quotas imposed by governments.

As an example, **Figure 3** shows the installed generation capacity in MX by type, period 2017 to 2020. In this period, the ERNC generation increases by 9072 MW and CCGT generation by 11,490 MW. The other technologies show minimum changes (**Table 1**).

<sup>1</sup> For example, generators required to run out-of-merit to provide security or reliability in a given area.

#### **Figure 3.**

*Production of WIND/SOLAR PV generation. Source: Own elaboration based on CENACE, MX.*


#### **Table 1.**

*MX installed capacity by type [MW].*

It is expected that in the coming years the aforementioned trend in the expansion of the generation fleet in all LATAM's countries will continue, as a result of which is to be expected growing participation of WIND/SOLAR PV generation in the generation mix that supplies the demand.

## **3. Reliability in the operation of the electrical system**

The LATAM's countries supply the demand with a mix of conventional generation plus a growing share of NCRE generation.

From the point of view of reliability in the supply of demand, countries with a high share of hydro generation (BRA, COL) use the energy stored in reservoirs to provide reserves for rapid management, contributing to the system reliability even against the high intermittence that characterizes the NCRE generation.

*Variable Renewable Energy: How the Energy Markets Rules Could Improve Electrical System… DOI: http://dx.doi.org/10.5772/intechopen.107062*

**Figure 4.**

*Events with high volatility in the operation of the market.*

On the other hand, countries with a low share of hydro generation must have another type of quickly managed reserves to guarantee the security of supply in the face of sudden changes in the production of NCRE generation.

**Table 2** shows the participation of hydro, thermal, and renewables in the generation mix of LATAM's countries.

The MX electrical system has a minimum participation of hydro generation in the generation mix (9% in 2020). In this system, the reliability problems increase because thermal generation is mainly composed of conventional thermal generation (steam turbines) and the available gas turbines are very limited (3700 MW in 2020), so the dispatched thermal generation cannot follow the fast variations of ERNC production.

The aforementioned characteristics of the MX electrical system, together with the growth observed in NCRE generation, were responsible for serious reliability problems registered in two events during 2020.


**Figure 4** show both events. On the left, it is observed very high marginal prices observed in the event of November 8. On the right, it is observed a sudden reduction in the demand in the event of December 28.



#### **Table 2.**

*LATAM's countries—generation by technology (2020).*

availability of thermal generation, as a result of which, upon a fault in the transmission system, the power system had not enough generation capacity (reserve), which led to a frequency drop in the system with the subsequent load loss to restore the dynamic balance of the power system. **Figure 5** shows the production of renewables during the event of instability mentioned. The figure includes the marginal cost (local marginal prices—LMPs). During the week, it is observed high variations in renewable production (5000 MW of solar production and 3000 MW of wind generation) resulting in very high variations of marginal prices that show low reserve in the system.

As a result of the aforementioned events, the Government of President Andrés Manuel Pérez Obrador (AMLO) enacted new rules for market operation meant to preserve the power system's reliability, safety, and continuity. The most relevant are as follows:


*Variable Renewable Energy: How the Energy Markets Rules Could Improve Electrical System… DOI: http://dx.doi.org/10.5772/intechopen.107062*

**Figure 5.** *Hourly NCRE generation (wind, solar PV). Source: Own production based on CENACE, MX.*

The new rules introduce severe restrictions to the integration of NCRE generation in the system, resulting in higher energy prices and higher greenhouse gas production as a result of increased production of thermal generation replacing NCRE generation.
