**Abstract**

In the last 10 years, significant changes have been observed in the operation of electrical systems resulting from the increasing incorporation of Variable Renewable Energy (NCRE—Solar PV, WIND) characterized by strong volatility in its energy production, due to climatic effects, which affect the reliability in the operation of the electrical system. These technologies also show a significant reduction in their capital costs, which are currently competitive compared to conventional alternatives for energy production, with the advantage of contributing to reducing the production of greenhouse gases. Therefore, increasing reliability operational problems are expected in the future, which must be resolved to supply the demand safely and at minimum cost. LATAM's countries are making slow progress in updating their regulatory frameworks for the electricity sector to include changes that improve the integration of NCRE generation without reducing the quality of service. This document describes possible regulatory changes that could be implemented to promote a system safe operation including (a) intra-hours marginal costs, (b) day-ahead/intraday energy markets, (c) incentives to better forecast the NCRE generation production profile, (d) participation of NCRE generation in the capacity market, and (e) including BESS as ancillary service for frequency/ramp power control.

**Keywords:** electricity markets, reserves, economic signals, marginal costs, reliability, firm capacity, ancillary services, distribution rates

## **1. Introduction**

In the LATAM's countries, mainly during the 1990s, wholesale electricity markets were created as a means to ensure that the restructuring process of the electricity sector leads to private participation in the efficient development of the sector. The legislation and regulation of the markets establish economic signals for investment and operation decisions given by energy prices that seek to reflect the marginal cost of the system and other economical signals to promote the efficient expansion of the generation fleet.

The regulatory framework of each market (law and other regulations) establishes the objectives, criteria, and general rules that define the framework in which the market must be developed and the types of agents that can participate commercially. Likewise, they define the tariff criteria and update methodologies that result in the tariffs that are applied to energy transactions and transmission charges.

Generators have free access to the transmission network and thus to the spot market where they sell their energy production at prices that arise from competition for dispatch based on the variable production cost of each power plant. Market prices represent the short-run marginal cost of the market.

Within this conceptual framework, LATAM's electricity markets have shown great dynamism since their inception with strong private participation during the privatization processes of state-owned companies and in new generation investment projects.

The generation of electrical energy in these markets was traditionally carried out based on conventional generation (thermal, hydraulic, geothermal, and nuclear) characterized by production patterns known in advance, as a result of which the reliability of the electrical supply was high, and the events that affected the quality of electrical service limited to the unavailability of some generator/element of the transmission system due to forced unavailability resulting from an unanticipated failure.

In the last 10 years, significant changes have been observed in the operation of these electrical systems resulting from the increasing incorporation of nonconventional renewable generation NCRE (mainly solar PV and WIND) characterized by strong volatility in its energy production, due to climatic effects, which affect the reliability in the operation of the electrical system [1–5].

These technologies also show a significant reduction in their capital costs [6], which are currently competitive compared to conventional alternatives for energy production, with the advantage of contributing to reducing the production of greenhouse gases.

The electricity production based on NCRE is currently a key element in the energy transition that the electricity sectors must endure, in the following decades, toward an operation with low greenhouse gas emissions.

However, the penetration of NCRE technologies, given precisely their variability, can alter the functioning of the electricity markets. The particular characteristics of NCRE, considered non-manageable, produce technical-economic impacts on the operation of the system.

This situation, which should not prevent the development of these technologies to take advantage of their advantages, however, requires the introduction of reforms in the functioning of the market to efficiently assimilate the high levels of NCRE penetration that are forecast for the near future.

As NCRE penetration levels grow, many electricity sectors around the world are already facing new challenges and respective reforms are taking place to improve the integration of these technologies into the market.

Although the impact of renewable technologies varies according to the characteristics of the system and the regulatory environment, the main problems that arise are similar.

In recent years, a significant reduction in the cost of storage media, mainly batteries (BESS), has also been observed. The storage facilities could contribute to mitigating the volatility of the production of renewables by providing quickly managed

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

reserves. The reduction in the development costs of BESS also makes it possible to anticipate their rapid growth, helping to mitigate the operational problems of the electrical system.

In systems with variable renewable generation, the system reserves must compensate for random variations in demand and generation. The demand has daily cycles. Variable renewable generators add variation patterns to their production. Tracking variability may require more operational flexibility and more frequent dispatch adjustments.

In the particular case of LATAM's countries, given the growing participation of NCRE generation, restrictions have been introduced that tend to limit the participation of this type of technology in the market as a way of guaranteeing security in the supply of demand.

Some countries are making slow progress in updating their regulatory frameworks for the electricity sector to include changes that improve the integration of NCRE generation without reducing the quality of service.

This document describes possible regulatory changes that could be implemented to promote a system safe operation at minimum cost with high penetration of ERNC generation. It includes (a) intra-hours marginal costs, (b) day-ahead/intraday energy markets, (c) incentives to better forecast the NCRE generation production profile, (d) participation of NCRE generation in the capacity market, and (e) including BESS as an ancillary service for frequency/ramp power control.

The document is organized into three sections, which are as follows:

**Section #1:** Presents a general description of the operation of the LATAMs electricity markets. It includes how the generation fleet is dispatched and how is determined the marginal cost of energy, the composition of the generation fleet, and the growth of ERNC generation.

**Section #2:** Presents some observed operational problems that affect the security of supply resulting from the volatility in the production of wind and solar generation.

**Section #3:** Describe market rules that could mitigate the adverse effects of intermittent generation, favoring its participation in the electricity markets without affecting the reliability of the electrical system. It includes: (a) intra-hours marginal costs, (b) day-ahead/intraday energy markets, (c) optimization of system reserves, (d) incentives to better forecast the NCRE generation production profile, (e) participation of NCRE generation in the capacity market, (f) including BESS as an ancillary service for frequency/ramp power control, and (g) demand participation for increasing the system reserves.
